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IPE notes jan 18--some helpful bolded words

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University of Toronto St. George
Political Science
John Haines

LECTURE 2 TERM 2 World Political Economy January 18 • Financial meltdown 2008- • reminder of globalized world • Planet finance larger than planet earth • Every day roughly 3 trill. Dollars exchanged in foreign exchange market • 1980s new financial instruments created-individual debts (mortgages) are sliced and packaged and for sale Volume of derivatives (contracts derived form securities) exploding • • 1990s attempt at regulation largely unsuccessful • 2007-bubble burst • Housing market had been good for a long time b/c loans =cheap • Ppl.Assume they can repay loans b.c house could be sold for more than they paid • Some borrowers started deferring on their payments, US house market exploded • What followed? • Dramatic chain reaction • All kinds of securities slumped • Lack of liquidity • Small banks couldn’t borrow money from other banks • Iceland-entire banking sector of country went bust-banking sector 200% of GDP • Iceland had to negotiate loans form IMF World trade decreased • • Conclusion: US house market incident had world wide impact--globalized world • • OACD defines globalization as process in which markets and production becoming increasingly interdependent due to trade, good and services flows, technology • Specialization and increases in transnational companies also can be added to this definition • Even local production might not be local at all • Lower production cost-lower with lower transportation costs • The financial melt down is a great example of how connected things are • Hard to understand inequalities between wall-street and a main street in a little developing country • Key: 1 Poverty is much more due to the lack of financial institution • • 2 the financial system reflects and magnifies what human beings are--animals with bounded rationality and productivity, and with high emotional volatility • On the one hand this crisis demonstrates that state economic policies might be dwarfed by international happening • On the other hand, reinforced the state as a lender of the last resort, the bail out • The state is the “fiscal menagerie”, the ultimate printer of money • ex: China’s achievements are extraordinary • The financial crisis have shown the limits and importance of the china case in the world economy: • 1. The crisis demonstrated the economic policies of the state may be dwarfed compared to world etc 2.Also asks us questions about the regulator of currency • • It has reinforced the role of the state as the ultimate printer of money...As a guarantee of money supply • Lastly the crisis emphasized the need for international cooperation • Key consequence of crisis is that it clearly shows the obsolesce of the g7 group and necessity to move to a g20 institution • As this introduction has shown, we are not immune from the world of finance • ...though of course some countries are doing better • Ex. N. Korea doesn’t suffer too much from the financial crisis but your standard of living is very different there • China has attempted to shape the rules of the game in its own way • Notably by having copyrights; trying to play with the value of its currency • But if you are a modern democracy you have to answer to the constrains and the opportunity of the financial sector of the world • • DifferentApproaches to world economy academically: • Fundamental institutions: • 1st modern corporation as we know it= • 1602 invented in netherleands--united east india company • For the first time this company offered stocks of limited liability • ^ absolutely crucial development • Gov. Sponsored enterprise • Monopoly on all dutch trade in a region • That system of shares/stocks with limited liability allowed the company to raise an enormous amount of money • With that system of limited liability stocks--very quickly first stock market developed Investors who wanted to have their investments back had to sell their share • • Ppl. Started to gather in streets of amsterdam to trade; city decided to build a stock market so ppl. Could trade • Dutch banks started to accept shares as guarantees for loans • Shares could be purchases with credit • ^ is start of modern capitalistic economy • Capitalism/stock market very intertwined with state power • Devep. Of free capitalism, the first bubble occurs • 2 decades later in france-famous bankruptcy - the bubble effected other country financial systems • Through 17 18 19th century trade fueled by overseas empires and constant wars among euro powers • Every monarch in europe had own banker to finance conflict and wars • Economic globalization intertwines with policies • Mercantilism developed as set of practices geared towards increased military powers • Economic activities constrained by state power Eventually state limited trade flows-restricted trade flows among euro countries by setting up • monopolies • International payments became more difficult • Mercantilist policies didn’t last forever; challenged by liberal economic policies • Technology-transport and communication, commerce expansion • After napoleonic wars, the UK was the first to dismantle mercantilist laws • By end of 19th century what we know today as globalization was a reality for europe and the atlantic • By 1919 about half of the volume of trade between north and south--mostly manufactured goods from industrialization in exchange for raw materials from south • Today that exchange is around 20% • In 1919 (just before ww1) there were of course differences with todays globalization; transnational production was rare; foreign indirect investments rare and limited to a narrow kind of industry; mostly railroad • This first wave of globalization seemed to have produced more inequalities among the rich countries and LESS inequality in the poor countries • The south north trade was actually highly beneficial for south unanimously • By ww1 economic globalization was a reality • By south--we mean south asia, some africa, s.America • Ww1 came and with it EVERYTHING CHANGED • Even before ww1 tariffs becoming higher, immigration restricted • After ww1 all these elements were generalized • Indeed trade buyers in the 20s and 30s raised dramatically • Showed globalization can be reversed • PROTECTIONISM started to be heard again • Canada took serious offense to the BUY american clause recently Lesson: globalization can be reversed • • State policies can change dramatically the shape of globalization • After ww2 crucial intern. Institutions set up to evolve mistakes of interwar period • Two concerns: • 1 to provide the solution to the great depression of the 1930s • 2 rebuild destroyed europe economically • Evolve economic collapse of europe • Bretton woods- IMF created to ensure stable exchange rate mechanism • To provide assistance to countries facing a crisis in their balance of payments • The ghost in the room at that time was inflation • The rate of inflation in germany in 30s destroyed german economy and caused hitler to take power • Imf ensured financial stability that Hitler could never come to power again (ppl. Like him) • IMF has since lent money to many countries to encourage financial stability • 2. They also created WORLD BANK--about helping private investments • 1944-the main target was europe Very rapidly it expanded to affect other countries • • Mission is to assist development in developing countries • 3. 1947 countries agreed to set up at time called GATT--general agreement on tariff and trade • Stop high tariff bargains and to help trade and the flow of commerce • The GATT which become WTO is all about liberalization of trade • Hwr, the restock of the world economy in 40s and 50s essentially an american endeavor • The first pillar was the marshall plan--process of lending money To help europe rebuild • 2nd pillar: dollar as the fixed rate currency--dollar to value of gold ratio; lasted till 1971 when US decided to let dollar float • Problem at time for us about trade/balance deficit • Problem of US competitiveness So at that moment (1971) they decided to let dollar flowAND impose a 10% surcharge on • imports to balance trade imports • The 1971 shock to the system followed readily by another series of shocks • 1973-shock--western economies basically couldn’t cope • Also early 70s the developing countries started to demand a new inter. Economic order • Behind that claim was assessment that the world economy was structurally fixed against devel. Countries • This agenda for change presented at UN where the third world had a slight majority • The new inter. Economic order never took hold • Failed also because end of 70s, early 80s there was the rise of the washington consensus • Washington consensus is a set of ideas about how to unregulate economies--neoliberal framework • --the smaller the state is the better, the market can take care of its self, less regulation, privatization all seen as good things • The Washington consensus lasted till 2008 and some of roots of financial meltdown found in the consensus • After shock of 70s--consequences about increased inflation; triggered a series of debt crisis in developing countries and IMF started to take centre stage to regulate these debt crisis by trying to impose very strict guidelines • Despite all these hiccups the globalization of the world economy gave a radically diff. Picture • Europe back on its f
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