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Chapter 3

PSCI 2602 Chapter Notes - Chapter 3: Voluntary Export Restraints, International Political Economy, Nash Equilibrium


Department
Political Science
Course Code
PSCI 2602
Professor
Supanai Sookmark
Chapter
3

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(week 6) Chapter 3 Cooperation and Conflict in the Global Political Economy
Globalization and the need for international cooperation
Worldwide economic openness has clear benefits. (53)
Integrated world markets help to ensure an optimal allocation of factors of production
and therefore help to maximize both aggregate world welfare and individual national
welfare. (53)
Sealing off national borders fosters economic inefficiency and has negative
consequences for poverty alleviation and development prospects. (53)
Yet, in practice, the benefits of globalization cannot always be realized by states
pursuing independent policies; cooperative action is required. (53)
The changing distribution of costs and benefits from trade liberalization can result in
strong political opposition, both for and against further liberalization. (53)
Ultra-specialization by some countries in specific commodities has therefore, on the one
hand, brought severe adjustment costs and, on the other hand, failed to provide stable
and increasing revenues and significantly hurt their growth prospects. (53)
Developing countries that rely on the export of manufactures have also faced significant
adjustment challenges.
o Example: Latin American countries have increasingly faced a loss of market share
in the United States and Europe with the rapid rise of the Chinese export
juggernaut. (53)
Developing countries, in particular the poorest among them, often have a pre-industrial
economic structure. (54)
As a consequence, economic openness has brought about a radical transformation of
their socio-economic structures, particularly in rural areas, leading to massive migration
flows to urban areas. (54)
The state structures of developing states are often simply unable to cope with such a
rapid and radical transformation. (54)
This has led to chaos and, in many instances, to famine and violence as well as to further
political instability and insecurity. (54)
Rich countries often face strong domestic lobbies in agriculture, textiles, steel, and other
older sectors of the economy, creating pressure for trade distorting restrictions of
various kinds including subsidies, tariffs, quotas, voluntary export restraints, and the
like. (54)
Facing political difficulties, some countries may no longer view international economic
cooperation as beneficial and will adopt a national mercantilist approach, relying on
selective domestic economic closure while pushing for market access abroad. (54)
Rengaging on economic liberalization mostly comes from the difficulty of resisting
domestic demands for some protectionism or from the hope of levelling or tilting the
international playing field in their favour. (54)
In the latter case, the temptation by some countries to slow or halt liberalization may
induce others to reconsider their commitments, leading to an action-reaction cycle that
slows global integration and decreases economic welfare. (54)
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International cooperative action may therefore be required to avoid the unfortunate
effects of this temptation to free ride. (54)
This temptation varies according to sociopolitical organization of countries and to their
degree of economic flexibility. (54)
The temptation to free ride also depends on the economy of countries and on its
flexibility, particularly regarding labour markets, as well as labour skill levels. (54)
Countries with deregulated markets, and few and lean state-owned companies should
be less tempted to free ride on the globalization process because adjustment would be
less costly. (54)
Although countries may be convinced that liberalization will yield benefits, they may be
hesitant to risk the instability that might come from the ebb and flows of the
international market. (54)
In contrast to trade integration, financial integration has produced sudden and violent
shocks to national economies. (54)
International cooperative action in the financial realm may reassure countries by
promises of assistance either by individual states or international institutions before or
during difficult times. (55)
As with trade, the need for international support varies across countries depending on
the sociopolitical and economic characteristics. (55)
Whe outies addess the issues of teptatio to fee ide ad ihiitig fea, the
may encounter a third problem how to negotiate the distribution of gains and losses
from a possible agreement. (55)
Example: as part of the bargaining over the creation of a common pool of resources to
support financial stability, there is likely to be considerable debate about the criteria for
which country should contribute how much. (55-57)
The US has often accused Japan and China (and other East Asian states) of manipulating
exchange rate to gain a competitive advantage in trade. (57)
Burden-sharing problems may also be part of the problem of trade liberalization. (57)
International cooperation: a strategic interdependence approach
A game-theoretic approach to examine interdependent decision-making. (57)
A outs hoie depeds both on its cost-benefit evaluation of the various outcomes
and on its expectations regarding the choices of other actors. (57)
Ke featues of atos iteatios ae aptued though gaes that desie the
choices available to actors (players in the game), their evaluations of potential
outcomes, as well as the information they have when they make their choices. (57)
Free ridig teptatio: The Prisoers Dilemma
They key point of the PD game is that actors may face a structure of interaction that
prevents them from reaching a cooperative solution even though such a solution would
be optimal for both of them. (59)
Nash equilibrium is an outcome in which none of the players can improve his (or her)
situation by changing his (her) individual strategy. (59)
Pareto-optimal outcome (Pareto-efficient outcomes are defined as outcomes from
which no actor could become better off without worsening the pay-offs to another
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actor), is unstable because each actor can improve his or her own welfare by individually
switching strategy to the cells in the upper-right or lower-left corners of the matrix. (59)
Within international political economy, the PD has been widely used to illustrate the
problem of reciprocal trade liberalization. (59)
This argument particularly applies to countries with large domestic markets, as these
countries are less dependent on the success of trade liberalization and such countries
can also positively affect the world prices through their tariff policy (imposing a tariff on
imports lowers the price that other countries will receive for their exports). (59)
Typical application of the PD in international political economy has been in examining
the collective management of resources. (59)
Whereas countries producing particular commodities traded on world markets would
prefer a situation where they all manage production so as to keep prices sufficiently
high by forming a cartel such as OPEC individual countries face the temptation to
heat  ieasing extraction or production of these commodities so as to maximize
their individual income. (59)
Ihiitig fear: assurae gaes
In stag hunt, players share a single most preferred outcome i.e. Pareto-optimal Nash
Equilibrium but they do not have dominant strategies. (60)
As a result, there is a second, Pareto-deficient, equilibrium outcome. (60)
Financial globalization has features of a stag hunt game. (60)
Fear of the potential negative impact of such a destabilization may lead countries to
implement measures to slow down or restrict capital movements. (60)
Suh a oe a lead to hages i othe atos epetatios ad uickly drive the
world, or at least a region of the world, to a much lower level of integration.
This new situation could have the advantage of being less risky for countries but is
unlikely to bring as many opportunities for investment and therefore reduce growth
prospects. (60)
Where to eet: coordination games
The difficulty is that there are often many ways to supervise amrkets and countries may
differ on their preferred coordination point because potential solutions vary in their
costs and benefits. (60)
In IPE, efforts by developed countries to choose mutually compatible macroeconomic
policies typically reflect games of coordination. (60)
Couties esotig to lage stiulus teded to adopt atioalist o potetioist
policies to channel government funding to national firms. (61)
To offset this suboptimal dynamic, major economies have promoted the use of a new
informal grouping the G20 as a forum in which heads of states have repeatedly
committed to concerted plans of action and pledged to refrain from protectionist
measures. (61)
The USA and Great Britain
o Although both countries agreed on the absolute need for coordination, they
fought over the details of the new order, with each trying to impose its own
plan. (61)
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