POL208 2nd Term Exam Notes

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Political Science
Lilach Gilady

POL208: Jan 14 th Modern Theory of Trade - David Ricardo, Adam Smith - The Absolute Advantage of Free Trade – Smith Per worker production Wheat (tons) Iron (tons) Britain 100 250 USA 200 150 o Opportunity cost:  Price of ton of wheat in UK = 2.5 tons of iron  Price of ton of wheat in US = 0.75 of iron  Price of ton of iron in UK = 0.4 tons of wheat  Price of ton of iron in US = 1.33 tons of wheat o Why trade? To get 4 tons of wheat in the UK  give up 10 tons of iron, if there is trade with the US, for 10 tons of iron the UK can buy 13.33 tons of wheat. It should specialize and trade! o The world would benefit too, both production of wheat and iron increase by 10,000 units Comparative Advantage of Free Trade - David Rocardo says, “gains from trade” o States differ in ability to product certain goods o No need for absolute advantage in productivity Absolute vs. Comparative Advantage - Daniel Craig vs. Betty White - Food and shelter - Specializing is important Ricardos Comparative Advantage - Global welfare is maximized if everyone chooses free trade - Each nations welfare is maximized by unilateral free trade - However, some countries “win” more than others - Relative vs absolute gains - Similarly – within a country f4ree trade benefits some and hurts others Domestically who Wins and Loses - Factors of production: capital, land, labor - The Hackscher-Ohlin Theorem: a country has comparative advantage in producing goods that make relatively intensive use of the country’s relatively abundant factor - The Stolper-Samuelson Theorem: owners of relatively abundant factors of production benefit from free trade; owners of relatively scarce factors of production benefit from protectionism - For example: free trade raises wages in labor abundant countries and lowers wages in labor scarce countries Stolper-Samuelson: Implications - Economic implication: the scarce factor is made worse off under free trade - Political implication: owners of scarce factors are likely to seek barriers to free trade (In Canada: should labor be against NAFTA? How about capital?) - Trade generates coalitions of winners versus coalitions of losers to lobby for free trade/protection - It generates a clash between aggregate benefits from free trade and private/individual benefits/losses  this generates “sectoral” politics - What happens when we look within factors of production: e.g skilled vs unskilled workers International Winners and Losers - Winners and losers: o Domestically: stolper/samuelson o Internationally: terms of trade - Terms of trade: the ratio of the price of an export commodity to the price of an import commodity. For example: raw materials vs processed goods - An improvement in a nation’s terms of trade is beneficial for that country because it has to give up less exports for the foods it imports Protectionism: Tariffs, Subsidies, VERs, NTBs, and Dumping - We often try to measure free trade through general lvels of tariffs and/or the colume of trade (exports/imports and GDP) - While important, tariffs are not the only protectionist measure - Subsidies – the Doha Round - Dumping – when a country sells products abroad below market value (not profitable, but drive the industries of other countries out of business) – THIS IS ILLEGAL (oh snap) - VERs = voluntary export restraints (not really voluntary, hurp) - NTBs = non-tariff barriers (tricky tricky!) see: Good Things Grow in Ontario, eating locally - Manipulating of exchange rates Logic of Protectionism - Domestic politics: the relative advantage of pro protectionism coalitions - Tariffs as a source of income - Interdependence: o Trade generates interdependence o Interdependence increases sensitivity and vulnerability o It can generate social strife and instability - International politics o Strategic implications of trade o The problem of relative gains - See: Prisoners’ Dilemma (Canada vs. Japan) Free Trade (C ) Tariff (D) Free Trade (C) Both trade freely Canada exports freely; Japanese exports are taxed Tariffs (D) Japan exports freely Canadian Mutual protectionism; limited exports are taxed trade Free Trade makes WAY more economic sense. But protecionsim makes WAY more political sense. WOP WOP Free Trade Under Anarchy - There is no guarantee that trade partners will adhere to the principles of free trade and will not try to exploit us by imposing tariffs/subsidies/other forms of protectionist measures o Implications: protectionism (Nash Equilibrium) - Can we escape the sub-optimal conclusion? Under what conditions? The Repeal of the Corn Laws - All grains. Damn. - The industrial revolution: capital vs land - 1832 – the Great Reform Act  capital gets more representation - 1842 – the introduction of income tax in the UK (Robert Peel); new forms of taxation allow governments to lower tariffs - 1946 – the Repeal of the Corn Laws – the first significant shift towards freer trade: the anti-Corn law league; the potato famine; ideology - A unilateral act – the UK opens itself up for potential exploitation Explaining the Rise of Freer Trade - Reduced transaction costs: better and cheaper transportation and communication - Very technologically reliant - Growth in industry and in banking - Increased political power of capital and labor/less power for the landed aristocracy - Pax Britannica  hegemonic stability theory o 2 periods of hegemony (late 1800s, UK. Late 1900s US) o When we have a hegemon we have stability, stability produces free trade. No hegemon means no trade Hegemonic Stability Theory (Krasner) - Realist theory - Assumption 1: states prefer to avoid vulnerability o Small states cannot afford the cost of protectionism – they have no choice but to open up o Large states can choose to opt for stability and security over the benefits of free trade o A hegemon takes up such a large share of the world’s market that it can enjoy the benefits without compromising stability - Hypothesis 1: the presence of a hegemon generates freer trade; when a hegemon declines free trade declines and vice versa - A hegemon enjoys comparative advantage – would benefit from free trade - Hegemony suggests stability and security: beneficial for trade - A hegemon would set trade rules that benefit its interest - A hegemon could use its power to force other countries to open up o See: the opium war - A hegemon solves the prisoner’s dilemma by institutionalizing freer trade - Evidence: pax Britannica - pax americana Jan 21, 2013 POL208 nd Obama’s 2 inauguration International Trade - Economic theory: free trade (absolute advantage) benefits all (Smith); comparative advantage (Ricardo) - Winners and losers o Domestically: stolper/samuelson o Internationally: terms of trade - History o 19 century; the industrial revolution: the repeal of the Corn Laws; a dramatic growth in international trade Hegemonic Stability Theory - Power distribution matters o Hegemony  free trade o No hegemony  protectionism o Structural variable (power)  economic/political outcomes (neorealism) Why? - Hegemons are “too big to fail” - Hegemon enjoys comparative advantage – would benefit from free trade - Hegemony suggests stability and security – beneficial for trade - A hegemon would set trade rules that benefit its interest - A hegemon could use its power to force other countries to open up - A hegemon solves the prisoner’s dilemma by institutionalizing freer trade – enforcing the rules and preventing defection - In times of crisis – a hegemon can prevent “beggar thy neighbor” policies - Since the hegemon benefits from the stability of the current system it will be willing to pay the cost of preserving it thus paying for ‘collective goods’ – policing, enforcing rules, providing safety nets etc Hegemonic Stability: The Evidence - 1840-70: Pax Britannica - 1870-1900: Decline in trade - 1900-14: Increased trade - 1914-45: World Wars and Great Depression - 1945-?: Pax Americana - Elegant and parsimonious; however the evidence is inconclusive, static, how does it work in practice; the role of institutions Lessons from WWII - The Great Depression o Deflation and laissez-fair didn’t work  more unemployment  social and political turmoil - Government Response o Protectionism  made things worse - Rise of extremist political movements  war The Institutional Solution: Bretton Woods - 1944, 44 united nations - Harry White (US) and John Maynard Keynes (UK) - Creates 3 new institutions o International monetary fund o International bank of reconstruction and development o General agreement on tariffs and trade/World trade organization The Logic of Bretton Woods - Support international trade; provide low tariffs, stable exchange rate, growing markets through investment and development aid - Lender of last resort: IMF - Rebuild Europe - US: Marshall Plan - Capital controls to alleviate trade-related vulnerability and volatility - US plays a key role – a new ‘gold standard’ ($35); an expensive role over time; (1971 Nixon pulls US out – the monetary leg of Bretton Woods collapses) Did It Work? - World exports have consistently grown more than world GDP (output) during the post-war period. During the last 45 years world merchandise output was multiplied by a factor of 5.5 while trade was multiplied by a factor of 14 - Trade is not 22.5% of world output, up from 15% 2 decades away - Manufacturing goods trade still accounts for about ½ of all trade - Services, where total exports are 1/3 of manufacturing, is increasingly important. 1971 Onwards – After Hegemony? - Floating exchange rate - IMF and WB changed their focus - Increased capital mobility (the volume of daily capital international transfers is 40 times greater than the volume of trade) - Increase globalization - Why didn’t we see a decline in free trade? o The institutions are still there: institutions are sticky (Keohane) o Us still a hegemon Defining Globalization - Globalization is the process by which nationality and geographic location become increasingly irrelevant for economic activities - Which factors drive this process? - How should society/state respond to it? - How should businesses respond to it? Is Globalization a new thing? - Trade and subsequently interdependence are not new - What is new: combination of goods, capita and maybe labor - Reduced transaction costs - The volume of transaction Sources of Globalization - Decisions by states o Serves state interest o Serves the interest of a coalition of winners within the state o Institutional dimension: facilitated by institutions there were created by states - Systematic factors o Hegemonic interests: serves the interest of a hegemon or a group of rich countries o Technology/the logic of economics: dictated by the technological and economic reality – imposed on the state - Reversibility: the future of the nation state – justice and opportunities for redistribution (economics) Empirical Evidence: Foreign Direct Investment - FDI stocks have risen dramatically. In 1980, they equaled about the annual trade flow. In 1991, they were 75% larger - More than 37,000 companies have some amount of FDI Race to the Bottom - In a globalized society capital can ‘exit’ and move to a more profitable location - Taxation, labor laws, environmental regulations etc can induce capital to move elsewhere - Canadian workers compete with child labor in LCDs - The government has less autonomy to set policy according to local values, needs and tastes - Will there be a convergence on the lowest form of regulation POL208 Lecture Jan 28, 2013 Integrated international economy (global federalism) mass politics (Bretton woods) nation state  (neoliberalism, golden straight jacket) integrated international economy Remember: - The race to the bottom The State and the MNC - Powerless state - Ethical implications - Does it force us to re-evaluate the winners/losers and with it the theory of free trade? - Anti-globalization: collection of different interest groups with a variety of converns and agends; focus on distribution etc - Regulation from below? Think Fair Trade - Is there an alternative? - Rodrick’s article – structural, democracy etc - Rodrick’s Trilemma Economic Integration Race to the bottom global federalism Trade off: A growing democratic deficit Trade off: the loss of the nation state Nation State Mass Politics Bretton Woods Trade off: limited economic integration - A rising tide lifts all boats (oh snap so deep. There’s a painting of boats on the slide) Factor Price Equalization - When market forces are allowed to work and compete freely, they will push towards equilibrium - Factor price equalization Theorem (Samuelson): free trade will eliminate price differences for commodities across countries; subsequently the prices of the factors of production related to those commodities (capital and labor) will also equalize - For example: following the implementation of NAFTA unskilled labor wages gradually fell in the US, at the same time as they gradually rose in Mexico - Does it work in practice? It depends on the index of measurement Some STATZ on Africa - 65% live on under $1/day - 40% do not attend primary school - 28 million have HIV/AIDS - 40% of wealth belonging to Africa is held overseas - Most LDCs are in Africa - Average GDP per capita of $420 Modernization Theory - An optimism theory that predicted post-colonial growth and development - Industrialization  urbanization  rise of middle classes  democracy and adoption of modernity  growth - The new countries will follow an accelerated version of the European model of modernization - Minimal government intervention; free trade - In practice: stagnation; a series of coups; instability; economic decline Salvaging the Modernization Theory - The theory is valid but the countries failed to follow its prescription and hence flopped. The ‘blame’ is with local conditions in the LDCs o Economic policies o Institutions o Wars o Natural environments Economic Policies - Import substitution industrialization (ISI): an economic policy that attempts to enable a developing country to substitute products which it imports, mostly finished goods, with locally produced substitutes o A mercantilist approach o Protectionist o Seeks improved terms of trade o Little regard for comparative advantage o Latin America until 1980; Africa; India until the late 80s - Export Led Industrialization (ELI): an economic policy that aims to speed-up the industrialization of a developning country through the export of goods in which it enjoys a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries o Neo liberal o It can still involve a certain level of protectionism (infant industries) o NIC’s (Newly Industrialized Countries): Asian tigers, Latin America following the Washington Consensus, India  this works better than ISI The J-Curve of Economic Reform - Economic reforms (such as moving from ISI to ELI) are politically challenging especially when political institutions are weak and their legitimacy low - This is why institutions matter! - A reform will be successful when the citizens BELIEVE and when the government FOLLOWS THROUGH Feb 4 The Quinoa Controversy North & South: under and developed countries Modernization theory – Africa should start developing J-Curve of Economic Reform - Economic reforms (such as moving from ISI to ELI) are politically challenging especially when political institutions are weak and their legitimacy low Why Weak Institutions - Colonial legacy o No institutional infrastructure; no modern self-rule tradition o A nation state o Traditional authority structures; culture; geography o Instability  weak institutions  instability - The curse of natural resources o The Dutch disease (selling a valuable natural resource, stronger currency, exports are damaged, manufacturers can’t continue because home prices are high, home economy is hurt) o Government does not rely on taxation  weak accountability o Corruption - We can`t expect modernization theory to work in a place of constant war Geography and the Poverty Trap - War – poverty, poverty – war - Tropical regions (poor soil, disease), remote locations (large transportation costs), land-locked (transportation costs, border costs) - This is not a problem with modernization theory - See: Jeffery Sachs - Given the fundamental geographic inequality, won`t the third world always be poor? - See: number of natural disasters Salvaging The Modernization Theory - The theory is valid but the countries failed to follow its prescription and hence flopped. Underdevelopment is Structural - The south is playing is an unleveled playing field: o Colonial legacy, imperialism o Late industrialization o Unfavorable terms of trade o Dependency on few commodities; volatile price o Neo-colonialism – the exploitation continues post-independence; even more efficient than colonialism Solution 1: Political Power - 1955: Bandung Conference: 29 participants  emergence of the 3 world rd - The Non-Aligned Movement; Organization of African Unity (63); the UN General Assembly - UNCTAD – United Nations Conference on Trade and Development - Group of 77 NIEO - Raul Prebisch (The Singer-Prebisch thesis) term of trade between the north and the south deteriorate over time o ISI o Development will not occur without direct intervention in the market: the north needs to give the south access to its markets; need to maintain stable and high price for some raw materials (cartels) - Better to sell finished products instead of raw materials - New International Economic Order - The Debt Crisis: Prebisch admits that IS was a failure Dependency Theory - Alternative to modernization - We need to understand the world economy as one system and uncover the power relations within it; core/periphery (Wallerstein) - The system if built in a way that prevents the south from developing; the rules of the game actively perpetuate a state of dependency - The south provides the raw materials the north needs; the north sells goods to southern markets - Stable structure yet dependent - Any attempt to break free will lead to sanctions, military intervention, coup etc - The north colludes with the capitalist elites in the south and thus dependency becomes institutionalized in the domestic political and social systems of the southern countries - Solution: stop playing the game; break the rules Economic Implications - ISI - Protectionism - Rejection of FDIs - The creation of cartels (OPEC) o Oil crises 1973, 1979  deprive the north of the raw materials until they change Radical Variants - The only way to break the cycle is to get rid of the corrupt southern governments and elites and stop their collusion with the north o Revolutionary movements in Latin America - Shake capitalism at the core o The New Left The 80s and 90s - Disappointment and frustration - Growing diversity within the southern bloc (NICs) - The end of the cold war – reshaping the geopolitical map - Adoption the rules of the game - New issues; more modern and relative Can We Help Solve Underdevelopment? - Millennium goal: 0.7% GDP donated - Canada: 0.34% donated Has Foreign Aid Been Successful? - yes : Europe, s.korea, Indonesia - no: Tanzania, sudan, zaire, Mozambique, nigeria, zambia, haiti - empirically, no relationship between economic growth and aid - differentiate between emergency/crisis relief and long term goals - different forms of aid: food, loans, direct investment, debt relief, etc An Ethical Choice - Peter Singer, 1996, “Living High and Letting Die” - Bob is close to retirement, invested most of his savings in a very rare and valuable old car o Save the child or the car o $200 in donations would help a sickly 2-year-old transform into a healthy 6 year old – offering safe passage through childhood’s most dangerous years o Are we therefore obliged to keep giving until we too are left with nothing? o Singer says that anything which is not used towards necessities should be given away Governing the Global Economy - Border crossing (and domestic) economic interactions require a complex set of institutions - For example o Markets o Roads o State o Currency o Banks o Courts o WTO, IMF, World Bank etc - In fact: almost any cross-border co-operations equates some level of governance and hence requires institutions - Governance (and institutions) are important even under anarchy - Governance is possible even in the absence of government - Coordination for cooperation International Institutions - Benefits: increased cooperation, stability, prosperity, the emergence of governance - Cost: decreased sovereignty, new dimensions of local needs and values as well as to rapid changes and shocks, vulnerability to exploitation - How can we understand institutions under anarchy POL208 Feb 11 The Canadian American Price Gap - 11% average gap - “The federal gov intentionally shields telecom services, such as internet and telephone; airlines; banking and the dairy and poulty industries from the full weight of foreign competition” - Tariffs: “hockey pants that are brought into Canada manufactured in china, have an 18% tariff. In the US it’s 2.9%” - “tariffs are obviously sources of revenue, as well, and I have revenue concerns as finance minister but as a general rule we would like to eliminate tariff going forward” - Recommendations: integrating Canada-US safety standards Institutions - A set of customs, practices, relationships or behavioural patterns of importance in the life of a community or society; institutions are the rules of the game, the norms that regulate behavior; they generate repetitive and predictable behavior; they define the social constraints and opportunities that actors face - Institutions define the ‘menu of available practices’ – they constrain choice and establish predictability - Sovereignty; balance of power; reciprocity; negotiations - Specific: UN General: multilateral diplomacy Additional Types of International Institutions - International organizations: IGOs and NGOs - International regimes: a set of formal/informal rules, norms or behavior and at times, organizations set around a specific issue area in international politics o Regimes are often but not always, codified in international treaties and managed by international organizations (governance without government) - All IOs are institutions; not all institutions are IOs - All international regimes are institutions, not all institutions are international regimes - Can we think of institutions/organizations/regimes as actors? - Puppet/Frankenstein Why Have Institutions in IR? - A rationalist/realist explanation: “the permanent interest of states to put their normal relations on a stable basis by providing for predictable and enforceable conduct with respect to these relations” (Morgenthau) - Reducing “transactions costs” (a cost incurred while making an exchange or transaction) through: the provision of information, coordinate expectations; increase the probability of iteration and enable enforcement through reciprocity - If there were no benefits from cooperation – there would be no institutions; if cooperation were easy (I.e did not involve cost or risk of exploitation) there would be no need for institutions (keohane) The Stag Hunt Cooperate (Hunt Stag) Defect (Hunt Rabbit) Cooperate (Hunt Stag) 5,5 (NE) 0,2 Defect (Hunt Rabbit) 2,0 1,1 (NE) Payoffs – read in order of row, then column Player A = row / Player B = column Solutions - Repeated iterations o Tit for tat o The ‘shadow of the future’ o Reputation - Monitoring - Improved communication and increased levels of information - External side-payments and punishment (carrot and sticks) Empirical Predictions - Institutions are created where problems of cooperation exist - The structure of the institution will reflect the functions that are needed in order to support (gather information; monitoring etc) - It is easier to create stable and lasting institutions to solve coordination game than to solve non- cooperative games - Realists: actors will cooperate with institutions as long as those serve their interests and will stop doing so once those institutions no longer fulfill this purpose o Institutions then are a reflections of actor’s interests and their balance of power have little if any independent role (puppet) o A neo-liberal variant: institutions are sticky, once created they can persist for a while even when interest and power distribution changes (Breton Woods; UN Security
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