POL 208 2 ndSemester Vocabs
interactions between economics and politics. Polity-Market overlapping area.
Guns vs. Butter:
each society has different balance of how much guns/butters to hold. Limited resources
equals to limited choices. It is also a metaphor for PPF (Production Possibility Frontier).
an intense, coercive disturbance of the economy of an adversary aimed at diminishing its
power. It could be separated from military warfare (sanctions), or combined (strategic
bombing, siege, blockade, etc).
Cost of war:
share of GDP used on military expenses/costs
1. Direct costs – tanks, aircrafts, bombs, personnel, damaged infrastructures
2. Indirect costs – higher oil prices, borrowing money, healthcare for veterans, etc
3. Opportunity costs – economic impact for the war vs direct war costs (ex. US war
during 2002-2009 $1.6 trillion for the economic impact, $804 billion for direct
economic benefit of a decrease in defense spending. If “guns” harm the economy, peace
must lower the demand for “guns” hence generate more “butter”. Guns and butter are
predicts that the welfare could be maximized through increased efficiency and growth.
Means of efficiency (equilibrium and stability) is based on free market with minimal
government intervention. Trade is an effective method as it achieves peace through
yielding absolute gains. Main actors are individuals and firms.
Considers wealth to be the source of power, and economic competition for primacy.
Imperialism, mercantilism, realism and protectionism all forms components of economic
nationalism, as it favors the argument for government to intervene, protect their security
and acquire more power. It sees trades as relative gains through processes of;
Trade interdependence vulnerability potential conflict (autarky)
state must engage in trade strategically, only with non-threatening partners and a
guarantee that the trade benefits herself more than the trading partners. Lec 13-International Trade
costs of trade (including transportation but also risk etc).
amount of some other good that is lost in order to obtain unit of given good.
the price of good in terms of other goods (the barter price).
Ricardo’s comparative advantage:
global welfare is maximized if everyone chooses free trade, and nation’s welfare is
maximized by unilateral free trade. Trade creates “winners” and “losers” globally and
domestically. Political question of free trade “who” gets “what”, “when” and “how”?
Factors of production:
capital, land and labor that are required for any production.
states that a country has comparative advantage in producing goods that make relatively
intensive use of the country’s relatively abundant factor. (ex. US – capital intensive
goods; China – labor intensive goods)
states that owners of relatively abundant factors of production benefit from free trade, and
owners of relatively scarce factors of production benefit from protectionism.
Ex. Free trade raises wages in labor abundant countries and lowers wages in labor
Economical implication suggests that scarce factor is made worse off under free
Political implication suggests that owners of scarce factors are likely to seek
barriers to free trade.
Coalitions of winners/losers formed to fight for free trade/protection.
Generates “sectoral” politics as country experiences clash between aggregate
benefits from free trade vs. private/individual benefits and losses.
Factors of production can divide labor into skilled/unskilled workers.
Terms of Trade:
the ratio of the price of an export commodity to the price of an import commodity. (Ex.
Raw materials vs. processed goods.) Types of protectionism:
tariffs, subsidies, Voluntary Export Restraints, Non Tariff Barriers, and Dumping
Tariff level is major tool to evaluate free trade (exports + imports / GDP)
Subsidies allow certain sectors of economy to receive protection from government.
VER’s is a government imposed limit on the quantity of goods that can be
exported. (Ex. US threatens Japan for car export by saying that increase in exports
will result in harsh protectionist measure Japan voluntarily restricts export.)
NTB’s are non-tariff measures to facilitate domestic product sales (no other
methods explained in lectures)
Dumping is driving industry of other country’s business out by flooding their
market with products that are much cheaper (it is illegal).
o Tariffs = source of income for the government and has very strong impact.
o Trade generates interdependence that increases sensitivity and vulnerability. (Ex.
EU interdependence led to countries being vulnerable due to Greek crisis) It could
also lead to social strife and instability.
o International politics concerns about relative gains, so countries need to engage in
Prisoner’s dilemma on free trade:
Defect-defect result most likely to occur. If countries stick with protectionism, countries
Player A – Japan, Player B – Canada. Choices: Free trade or Tariffs.
Free Trade Tariffs
Free Trade Both trade freely Canada exports
freely; Japanese exports
Tariffs Japan exports Mutual
freely; Canadian exports protectionism; limited
are taxed trade
o Under anarchy, there is no guarantee that trade partners will follow the principles
of free trade. They could exploit another by protectionist measures. How can we
escape from sub-optimal conclusion from the free trade game?
o Rise of free trade after the industrial revolution can be explained through reduced
transaction costs through;
1. better (cheaper) transportation/communication.
2. Improved industry and banking to support trade.
3. Increased political power of capital/labor (less power for the land owners) Hegemonic Stability Theory (Krasner):
Analyzes how the hegemonic power prefers free trade due to its advantageous position to
small states. It consists of assumptions and hypothesis as following;
Assumptions: States prefer to avoid vulnerability, but also recognize that the
protectionism is costly.
o Small states – cannot afford the cost of protectionism. Only choice = open
o Large states – can choose to opt for stability/security over free trade
o Hegemon – due to large share of the world’s market, it can enjoy the
benefits of trade without compromising stability.
A hegemon is not vulnerable, therefore sees no obstacle for free trade.
A hegemon could set trade rules that benefit its interests.
A hegemon could use its power to force other countries to open up.
A hegemon solves the prisoner’s dilemma by institutionalizing freer trade.
Hypothesis: The presence of a hegemon generates freer trade, and when hegemon
declines free trade also declines.
*Application* (Lec 14)
Hegemony leads to free trade, and no hegemony gives more chances of protectionism.
Neorealism takes into consideration the economic aspects as part of states’ “power” in
realists’ terms, and it analyzes through narrow scope of domestic economic structure;
prisoner’s dilemma is solved by hegemon, because it will institutionalize freer trade
by enforcing rules and preventing defection through using is power as a fear.
hegemon can enforce rules even in crisis situation, and prevent “beggar-thy-neighbor”
policy because it has strong power over any other countries. No vulnerability.
hegemon is wiling to pay the costs of maintaining the free trade system because it is
benefitting more out of it. Willing to pay for collective goods such as policing, enforcing
rules, providing safety nets, etc.
1945 - ???
*Application and Question*
Pax Britannica/Pax Americana are the evidences of hegemonic stability theory. However,
how do they actually work in place? Why do hegemons rise and fall? How does the
translation happen? What is the role of institutions? What happens in near future? Lec 14-Hegemonic Theory
Foreign policy magazine rankings:
Criteria of technology level, political openness, economic integrations, etc.
Top ones are all small countries because when they are exposed to IR, they are
small/weak so they have to make changes to adapt. In contrast, US sees less vulnerability
as it is one of the biggest powers in the world with huge markets.
The Kindleberger Spiral:
States that the situation after WWII was a negative spiral of policies and events. Financial
crisis more protectionists policies less markets higher unemployment/less
exports decreased trade levels.
The Great Depression created deflation, and it didn't allow Laissez-faire idea to
contribute on fixing the situation. More unemployment was seen, and it led to
Government responded naturally to protect its own country, implementing
protectionist policies. This in fact made things worse as stated by Kindleberger.
Countries also experienced the rise of extremist political movements that
eventually evolved to war.
The Bretton Woods Conference:
Took place in 1944, involving 44 countries. It created 3 institutions;
1. International Monetary Fund (IMF)
2. International Bank for Reconstruction and Development (later becomes World
3. General Agreement on Tariffs and Trade (GATT, which later becomes WTO in
The Bretton Woods System and its logic:
Low tariffs, stable exchange rate, higher investment and development aid to
facilitate market growth.
Although free trade is important, sustaining is hard because in order for trade to
be equally beneficial for countries, governments must recognize some
vulnerability. Capital controls must be limited to allow free money flow with less
or no control.
Therefore, Bretton Woods saw the best way of free trade system to be by making
the financial institutions strong, and giving them strong control over the
movement of money.
Floating exchange rate, increased capital mobility (complied by increased
risk/vulnerability) across borders led to globalization. Although the Bretton Woods collapsed after failing on setting the US$ as a new
gold standard, the institutions stayed to play important role.
Institutions are sticky, meaning that once they are created by the hegemon, they
operate themselves with no big change even if the hegemon declines.
The process by which nationality and geographic location become increasingly irrelevant
for economic activities.
Trade and interdependence itself are not new concept, but;
the combinations of goods, capitals, and labors
reduced transaction costs
the volume of transaction and higher ratio of cross-border transaction
Globalization occurs because;
It serves state interest and domestic interest from coalition of winners
Facilitated by institutions created by states
Hegemonic interests benefits rich (powerful) countries
Technological and economic logic imposed on the state (better efficiency)
Reversibility (justice and opportunities for redistribution)
Foreign Direct Investment:
A direct investment from foreign country/company into production or business in order to
expand operations of an existing business in that country. FDI stocks have risen
dramatically since 1980s-1990s, between developed countries. It is important factor to
consider as the capital now has a viable exit option when disliking the local environment.
Race to the Bottom:
A phenomenon in which a globalized capital exits and move to a more profitable location.
This is induced by taxation, labor laws, environmental regulations, etc. (Ex. Canadian
workers compete with child labor in LDCs)
An example of FDI could be Toyota building factories to North America to sell it to
foreigners. Race to the bottom can take place domestically, as the increase in numbers of
auto plants in the US made some states such as Michigan adopt legislation to limit the
power of union. This led Michigan to be more competitive place to sell cars.
Benefits/losses of this limitation depends on people in Michigan… Lec 15-Economic Modernization
Cooperation registered and operating in more than one country. These MNC’s influence
Government needs to consider ethical implications for both individuals/private
Government fears the anti-globalization (focus on redistribution, externalities and
democracy) to occur among the collection of different interest groups with
varieties of concerns, which leads to loss of investments.
Triangle consisting of economic integration, mass politics, and nation state. Only 2 can
be achieved at the same time, with trade off of 1 aspect.
Race to the Bottom – trading off mass politics. This leads to capital leaving and
government being threatened Very slow response to the public opinion and
MNC’s set the rule instead of citizens.
Global Federalism – trading off nation state. We do not consider national borders
anymore, and countries like China/India (high population) will set the rules.
Bretton Woods – trading off economic integration. It keeps certain industries
closed through finding compromise between countries. It leads to limited
economic integration and slower economic growth.
Factor Price Equalization:
States that when market forces are allowed to work and compete freely, they will push
Samuelson developed a theorem, stating that free trade will eliminate price differences
for commodities across countries, as well as the factors of production related
(capital/labor). (Ex. Implementation of NAFTA led US to gradual decrease in wages of
unskilled labor, but increase in Mexico)
An optimist theory that predicted post-colonial growth and development, as the
independence was believed to bring prosperity and growth quickly. The theory predicted
Industrialization urbanization rise of middle classes democracy and adoption of
This was believed to be done as new countries would follow European modernization
model. However, in practice these new countries experienced stagnation, series of coups,
instability and economic decline. The mismatching between theory and reality in LDCs
could be blamed on economic policies, institutions, wars and natural environment. 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.
It is mercantilist approach with protectionist aspect, as it seeks to improve terms of trade
and puts little regard for comparative advantage. (Ex. Latin America until 1980s)
Export Led Industrialization (ELI):
An economic policy that aims to speed-up the industrialization of a developing 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.
It is a neo-liberal approach with leaving certain space for protectionism (such as infant
industry protection). (Ex. NIC’s such as Asian tigers)
Mozambique, a producer of half of the world’s cashew nuts, banned the export of raw
cashew to stimulate domestic processing by 1980. Then it liberalized cashew sector early
1990s as advised by World Bank.
Ban on cashew exports domestic price of cashes hurt farmers / helps processors.
Instead of importing the processing services, Mozambique banned them so they could
keep cashew-processing industry at home. This is an example of ISI, and it was highly
disliked by the World Bank as the farmers were the poorest in Mozambique, and
processing plants employed only small ratio of the population.
The World Bank conditions assistance on deregulating the cashew market, but the
processing industry eventually collapsed.
An extreme policy bias against the countryside. Governments frequently tax the rural
poor to subsidize urban industries.
World Bank’s advise led Mozambique to engage in ELI. Raw cashew exports increased
and processing declined. It created urban unemployment and political unrest…
Although there was an additional farm income, large numbers of urban workers remain
Short-term gains from liberalization, yet reset in the long-term.
Conclusion – Political institutions matter! Farmers in Mozambique believed that the
government would persist with liberalization because of political importance of urban
workers/industries. People thought government was not trustworthy after seeing no one
really benefitting… Lec 16-Development
J-curve Economic Reform:
The curve shows that economic reforms (such as ISI ELI) are politically challenging
especially when political institutions are weak and their legitimacy is low. In a place
where institution is weak, policies are always reversed and the situation gets worse.
Institutions can be “weak” due to;
Having no institutional infrastructure or no modern self-rule tradition. Some states
formed differently from that of European states, therefore might face difficulties
such as traditional authority structure, culture, and geography to become an actual
“nation-state” free from state legitimacy imposed by colonial powers.
Spiral of - Instability weak institutions instability.
It could also be due to;
Many LDCs (especially in Africa) depending their economy on natural resources.
It leads to weak institution, backward politics and instability.
Government relying on natural resources lack wealth accountability through
taxation. Taxation is important as it returns services for what is paid. Government
needs to maintain certain level of effectiveness to collect tax, however if natural
resources satisfy and enrich government enough, governments earnings will not
be directly connected to the will of population whom pays tax. (Ex. Guns and
butter balance could be unpleasing)
Situation in which the resources are not used to their full-potential, therefore leading to
The South is often underdeveloped due to their systems and characteristics such as;
Unfavorable terms of trade (raw material exports always complied with importing
more expensive industrial products from the North)
Dependency of few commodities and volatile price
Neo-colonialism which states that the exploitation has never left since post-
independence, as the North always get cheap materials from South but never give
back enough to them. North is using South as efficient means of acquiring self-
Movements in the past such as Bandung Conference (1955) and UNCTAD aimed for
seeking joint interest and more important position in IR for the Third World. Issues of
development and justice were new concepts, and many commitments took place to give
poor countries more political power. Some argues that the terms of trade between the North and the South will not equalize
unless intervened actively.
One solution is ISI, although criticized in Modernization theory. The North must
give more access in the market for South, and maintain stable/high price for some
raw materials, because North is responsible for exploiting South. Organizations
can be established to set the pric