Finals - I.PE

1.1 Demand and Supply What is economics? Economics - study of how society administers scarce resources Scarcity - life is finite, all natural resources are finite, only consume finite number of goods Major economic principle - not to maximize profits rather how to administer scarce resources in an...

1.1 Demand and Supply What is economics? Economics - study of how society administers scarce resources Scarcity - life is finite, all natural resources are finite, only consume finite number of goods Major economic principle - not to maximize profits rather how to administer scarce resources in an efficient way No free lunch - everything has a price prices allocate scarce resources > asset goes to individual that gives up most other things for it Taking decisions requires different goals; - working vs. free time - on what to spend: ex: defense or food - efficiency vs equity: both foals cannot be achieved simultaneously: ex: unemployment subsidy, progressive tax rates, public health system Economic decisions require cost-benefit analysis Opportunity costs - the cost of a good is what you renounce to get Incentives - if we change incentives out behavior will most likely change (predict behavior) - Public policies modify incentives by changing cost and benefits of certain actions - when designing public policy both direct and indirect effect have to be taken into account Economic as a social science Wealth of Nations (1776), Smith argued that competitive markets would harness self-interest as creative force Invisible hand: prices lead the market to equilibrium by reflecting the value and cost of goods and services, = everyone better off Sometimes invisible hand is malfunctioning: - when governments impede that prices adjust according to demand and supply (monopolies,etc.) - when markets are inefficient and government intervention is desirable (externalities) Economics = social science - individuals interact within existing social structure Economic models simplify reality in order to understand effects between different variables Ceteris Paribus “all else equal” Individual taken to be rational, self-interested, utility maximizing - concept of the homo economicus Markets and market attributes System of voluntary exchange, scarcity is reflected in prices Market prices are result of buyers and sellers interaction Behavior of buyers is reflected in demand Behavior of sellers in supply Perfectly competitive markets: - homogeneous good - many buyers and seller, no one can influence the marker price individually - All participants are price-takers - The absence of significant barriers to entry or exit - Perfect and complete information - No transaction cost - Externalities and government intervention is usually linked to the absence of one or more of these conditions Law of demand Demand - quantity of a good which consumers are willing to buy at a given price - function which depends on price - This function is decreasing Market demand is sum of individual demands for a good or service - aggregate demand function The law of demand - when price of a product falls people will demand larger quantities of it Distinguish between change in demand and change in quantity demanded in case determination of demand change, the demand curve shifts up or down (change in demand) Determinants of demand: income of consumers: - normal good: positive relation between demand and income  - (inferior good: decreasing relation between price and income) Price of related goods: - substitutes - complements Preferences/tastes Expectations - future price If factors changes, quantity demanded at a given price will also change (change/shift in demand) Law Of Supply Supply is quantity a producer is willing to sell at a given price - function depends on price - it is increasing - bc marginal production cost are increasing for firms, and higher prices lead to greater overall supply Market supply is sum of individual producer’s supply of a good or service - aggregate supply function Law of supply: when price of a product rises, firms will offer more of it sale Distinguish change in supply and change in the quantity of supplied Determinants of supply change, the supply curve shifts up or down (change in supply) Determinants of supply: Factor prices: - labor, capital, etc - eg. raw materials prices increase due to higher Chinese demand Technology - technological progress increases supply )at given price) Expectations Number of suppliers - many firms means an elevated level of supply Weather (in agriculture) The Market Equilibrium Demand equals supply - markets clear Equilibrium quantity and price How to reach the Market equilibrium = Excess supply - the price decreases Excess demand - the prices increases Once buyers and sellers are satisfied, prices do not change further and markets clear - excess and scarcity are temporal until prices adjust accordingly Excess supply: Price exceeds the equilibrium level - producers supply more than consumers demand - prices fall until they reach the equilibrium Analyze new market equilibrium after an (economic) shock 1.2 Externalities and public goods Market failure Market failure: markets do not work as should, they do not achieve efficiency Different Reasons for Market failures: - presence of externalities - public good properties - Asymmetric information - Abuse of market power (monopoly,etc) 1. Externalities: sometimes market outcome in distorted by externalities, not reflected in market price - markets do not reflect the real cost (or benefit) of a good: eg: pollution, overfishing, research, etc.  2. Public goods: public good is consumed by everyone, although it is not clear who should pay for it - markets do not provide for the good or only in insufficient quantity - eg. public radio, national defense, public roads Externalities Production of a good has side-effects for consumers, but these side-effects are not reflected in the price Examples: - loud music/ noise that bothers music - cigarette smoke - research that could lead to cure for cancer - volunteering Negative Externalities Negative externalities - market outcome produces more quantity than what is socially desirable (pollution) Positive Externalities Positive externalities - market outcome produces less quantity than what is socially desirable (education) Remedies to externalities:  - Legal intervention: forbid (mandate) production of the externality (seldomly effective) - Pigou tax (or subsidy): increase the marginal cost (benefit) of the agent causing the externality to achieve the socially optimal solution - Coase theorem: Assign property right to either of the parties (right to pollute, right to bother neighbor, etc.) the other party pays to stop the externality Pigou Tax - government can force producer to internalize externality by applying tax that is equal (or similar) to the externality - government can incentivize the producer to supply more of the good by paying a subsidy Coase theorem Ronald Coase (1910-2013) - Nobel prize in economics 1981 - “clearly define property rights and no transaction costs, the negotiated solution between two parties is equal to the socially optimal solution” In seminal contribution, Coase (1960) predicted that externalities will be voluntarily internalized, provided that legal rights have been specified, that transaction coasts are not too high (or absent) - has been since become known as Coase theorem  - resolution of externality problems can be voluntary when rights have seen assigned - eg. negotiating the number of cigarettes smoked in a public space - transaction costs stand in the way of mutually beneficial Coasian bargaining Solution Public goods Main properties of pure public goods are that its consumption is: - non-diminishable (there is no rivalry in consumption) - non-excludable (no one can be excluded from consuming the good) - eg. sun, rain, national defense, etc. Impure public goods either excludable, or diminishable - not both - congested highway, streaming platforms; Private goods always both: excludable and rival/diminishable - eg. ice cream, personal computer, etc. Principles of public goods apply to negative benefit - eg. environmental damage is a public good for which benefit is negative; - word ‘good’ is not necessarily associated with “goodness” Once (pure) public good is paid for, there is no rivalry in consumption - individual has no incentive to contribute, because he/she cant be excluded from consumption In economics we call this a free-riding problem - consumers want to consume specific good, but no one wants to be sole contributor bc of free riding public goods cannot be provided by the market in the same quantity as consumption goods - gov provides these goods - history of gov and reason for its existence can be interpreted as history of providing public goods - cf. Thomas Hobbes and the Leviathan (tyranny vs. anarchy in the prisoner’s dilemma) Pure public goods are often natural monopolies (lighthouses,national defense, etc.) - public good natural monopoly, the average cost per person for pure public good declines  - creates a powerful logic to institutionalize the provision of these goods under responsibility of government Government pays for public goods through texes Taxes are forced contribution to provided public goods and avoid free-riding problem - gov coerces people into paying for public goods and institutionalizes their provision - history of gov itself and reason for existence can be interpreted as a history of providing public goods when exclusion is viable, in the case of club-goods, private initiative can also create public goods (eg. swimming pools, toll roads, gated communities) The tragedy of the commons english spanning and cloth-making industry in 19th century created an increased demand for wool - Shepherds usually grazed their sheep in common areas that belonged to the community - communal land arrangements of the type were very common throughout pre-modern Europe - sheep eat more grass than cows, increasing demand for wool meant more sheep Result = over gazing - for each additional sheep, herder receives benefits, while community shared damages to the commons - if all herders made this individuality reaction economic decision, the common could be depleted/ even destroyed to the detriment of all Following Hardin (1968) tragedy of the commons when owners of domesticated animals graze them on commonly owned land - owners only internalize the externalities among their own animals Table 1 shows tragedy as a prisoners dilemma - nash equilibrium is at (2,2), efficiency at (3,3): Many environmental problems of the modern world can be interpreted as commons problem, where potential agreements involve the Coase theorem - overfishing,climate change, etc. Table 2 shows the prisoner's dilemma for emission reduction negotiations 1.3 GDP and economic growth The National Accounts Aggregate measures used to track performance of economy GDP(most important measure) = calculated from national income and product accounts These work very similar to double entry accounts of a private firm, at national level All countries of the world calculate national income and product accounts to keep track of flows of money between diff parts of the economy ^ Demonstrated in an expanded circular flow diagram Households earn income via factor markets from wages,interest bonds, dividends on stocks and rent on land - stock = share in ownership of a company held by a shareholder  - bond = borrowing in the form of an IOU that pays interest households receive transfers from government Disposable income = total household income minus (-) taxes: is available to spend on consumption/save Private savings = equal to disposable income minus (-) consumer spending: disposable income that is not spend on consumption Financial markets = channel private saving & foreign lending into investment spending, government borrowing, & foreign borrowing Final goods and services = goods and services sold to the final/end users Intermediate goods and services = goods and services bought from one firm by another firm - that are inputs for production of final goods and services Disposable income not saved is spend on consumption ( c ) Government purchases of goods and services (g) paid for by tax receipts & by government borrowing Exports (x) generate inflow of funds into countries from the rest of the world Imports (IM) lead to an outflow of funds to rest of the world Investment spending (I) spending on productive physical capital, such as machinery & construction of structures Gross domestic product Gross domestic product (GDP) measures total value of all final goods and services produced in economy during given year - does not include value of intermediate goods It can be calculated three ways: 1. add value added of all producers 2. add all spending on domestically produced final goods and services - results to equation: GDP = C + I + G + X - IM 3. add up all income paid to factors of production Included - domestically produced final goods and services (including capital goods) - new construction of structures - changes to inventories Not included - intermediate goods and services - inputs - used goods - financial assets like stocks and bonds - foreign-produced goods and services reference not to GDP, but to gross national product/GNP GNP = total factor income earned by citizens of a country - excludes factor income earned by foreigners, like profits paid to foreign investors - includes factor income earned abroad by domestic firs Not much difference which measure is used for large economies: eg: USA Smaller countries - GDP and GNP can diverge significantly - Ireland’s industry owns by foreign corporations; those profits must be deducted from Ireland’s GNP - 20210 Ireland’s GNP was only 82% of GDP National accounts owe creation to Great Depression Simon Kuznets developed a first set & presented to congress in 1937 in research report titled National Income - won him nobel prize 1971 Push to complete national accounts came during world war II, when policy makers were in need of comprehensive measures of production Federal gov began issuing estimates of gross domestic product in 1942 GDP & quality of life (2010) Real vs Nominal GDP To know if change is due to increases in production or prices - calculate realGDP Real GDP shows change in output, not prices Real GDP total value of final goods and services produced in the economy during a given year calculated using the prices of selected base year Nominal GDP value of all final goods and services produced in the economy during given year - Calculated using prices current in the year in which the output is produced Economic growth Long-run economic growth is sustained upward trend in economies output over time Country can achieve permanent increase in standard of living of citizens through long-run growth  - central concern is what determines long-run economic growth % of homes in 1905 that owned everyday products by today's standards, life for many Americans/Europeans was rather primitive - become able to afford many more material goods over time thanks to long-run economic growth Long- run growth = modern phenomenon Year 1000-1800, real aggregate output around the world grew less than 0.2% per year, with population rising at about same rate Economic Stagnation = unchanging living standards - information on prices and wages from historical sources show that workers in england were not significantly better off in the early 18th century than had been 5 centuries later Long-run economic growth increased significantly since 1800 Long run economic growth can be measured using increase in real GDP per capita - change in GDP divided by total population] Key to long-run growth is labor productivity, which is driven by physical capital, human capital, and technological progress - factors explain growth rates differ so much among countries, but they are in turn determined by good governance Growth varied among diff regions of world and economically advanced countries converge in average living standards Question of sustainability poses important challenges to growth, due to scarcity of natural resources & environmental degradation Economic growth in US, PR China and India Real GDP per capita from 1900-2010 measured in 1990 dollars, shown for USA, India, & CHina India & China currently have higher growth rate than USA China only attained the standard of living achieved in USA in 1900, while India was still poorer in 2010 than USA was in 1900 Economic growth and development World economy contains ex of success and failure in effort to achieve long-run economic growth: East Asian economies have done many things right and achieved very high growth rates Latin America, some important good governance conditions are lacking growth generally been disappointing Africa, real GDP per capita has declined for several decades, although there are some signs of progress now 2.1 Theories of the global political economy One event, three interpretations The Economic Nationalist Perspective Historical origins: - evolved from mercantilism in Europe during 15th- 18th centuries - dominant economic doctrine until british liberal revolution in mid 19th century - alexander hamilton & friedrich List as key advocates Key actors: - Nation-state, political community - markets are shaped by, and subordinate to political power Key dynamics: - struggle for power and wealth; - global economy reflects the interests or, and thus favors, the dominant political power Conflict and cooperation: - Anarchy - or lack of central authority, as underlying dynamic for interaction between states - Realism as the equivalent in IR theory - International economic relation as zero-sum game Economic Nationalism today: - Brexit and take back control idea - America First policies under former President Donald Trump - Economic ideas underlying the program of most right-wing populist parties The Liberal Perspective Historical origins: - liberalism evolved in 18th and 19th century Britain, alongside the Industrial Revolution - Adam Smith and David Ricardo as key figures - Although imperfect in practice, Western-led international order since 1945 is mainly based on liberal principles Key actors - individuals as the center piece of analysis and key actors; - Firms are mostly seen positive & as expression of individuals - Freely engaging in economic exchange - State power is often viewed with skepticism; Key dynamics: - Wealth creation in free and open markets with minimal intervention by the state Conflict and cooperation: - positive-sum game through interaction in markets, spills over into the political realm (free trade=peace) - Comparative advantage & interdependence Liberalism today: - Neoclassical economics as the dominant doctrine in fields of economics & business, despite internal debates on the role of the state in the economy - Neoliberalism vs. welfare capitalism The Critical Perspective Historical origins: - Marxism and its body of theory evolved in 19th century Europe as a reaction to rise of Liberalism - Greatly influenced by ideas or Karl Marx - sometimes called Critical theories, bc of it’s tendencies to question the current organization of society Key actors: - Society is composed of groups (classes, genders, ethnicities, species, etc.) - Powerful groups exploit other weaker groups - Firms and states as instruments in this process Key dynamics: - economic and political dynamics as driven by exploitation and dominance - due to process, international order viewed as inherently unstable Conflict & Cooperation: - Zero-sum game where weaker groups, states, wtc. are exploited by the powerful - transformation of the system is viewed as necessary Critical approach today: - Neo-Marxism & Dependency theory in economics and political science; - more radical versions of Feminism & Environmentalism Comparing the perspectives Why do radically different theories on global political economy persist over time & what the relationship may be between them? - each has diff goal in mind (security vs. cooperation vs. equality) - hard to compare - diff theories could be seen as advocating interests/different groups - empirically rest on different interpretations of same events = ideology The field of IPE and its development Began in US and UK universities in 1970s in response to developments in global economy - eg. Oil crisis, inflation, unemployment, etc. Originally part of political science but now located in several disciplines: Economics - focus on allocation of scarce resources - key theories on functioning of markets & international trade - liberal IPE theories draw heavily on ideas of economics Political Science - Power and politics as key themes - focus on institutions and the operation of government Political economy - traditionally term denoted the field of economics - can specify 2 interrelated analytical views: mutual influence of politics and economics vs. the economics of politics International relations - analyses relations between state, with questions of war and peace as central issues - efforts to include economic issues into IR led to IPE Term GPE more adequate than IPE, highlight the important nature of globalization for the field Methodological Issues Question of methodology, how events will be studied? - choice complicated by several factors: - dif methods demand different skills - methods seem independent of values, but often based on certain underlying theoretical assumptions - adherents of methods may bout validity of other methods Scholars fear certain methods becoming too dominant in field of IPE Case studies and large n studies Case studies: - detailed investigation of particular event/issue - descriptive,least likely, most likely - useful for generating theory, how representative is the case really? Large n studies: - uses database to find common features across large no. of cases, employing statistics &/ econometrics - good for testing, whether propositions hold across large no. of observations - potential pitfalls: selection bias, casually (eg. democracy & high income), etc. Rational choice Rational choice explains political outcomes as result of individual rational decisions good example is the analysis of lobbyism, where smaller specific interests have been shown to often out-organize large more diffuse groups (eg. trade program) Rational choice - highlighted problem of collective action in public goods: - enjoyed by more than one person, difficult to exclude - problem of free-riding Important offshoot of rational choice is game theory: - actors influenced by other actions and the rules of the game Institutionalism Formal and informal institutions shape political & economic outcomes Focus on contrasting (beneficial) impact of rule on individual behavior Varieties of capitalism literature as a good example Constructivism Constructivism begins from the premise, that that is a reciprocal relation between humans and social world This method holds that beliefs, values, and interests need to be explained, not assumed in rational choice Role of ideas,norms,identities in influencing behavior eg. economic development & the values attached to prosperity vs. poverty 2.2 The evolution of the world economy: 1400-present Intro: outlines evolution of global economy from early 15th century to present day - covering phase of European expansionism & construction of worldwide economy Religions of the world economy Diversity of developed regional economies existed in word before year 1500 - group of 10-12 developed regional economies existed, w long-distance trade in luxury goods between most of them Little indicates that Europe would wield large global influence European expansionism resulted in variety of interactions with already existing political & economic structures ranging from trade-genocide European sea-based empires encountered land-based empires in Africa, Americas, Asia Middle East: - Gateway between Europe and Asia - Trade with Europe, Africa, India, Asia - Long history of rivalry & cooperation w Europe, w Ottoman Empire (1683) China: - Largest and most powerful civilizations - World’s largest cities, advanced technology, strong military, highly, centralized government - Silks and Ceramics high demand by trading partners (eg. Silk Road) - Ocean voyages by Zheng He India: - Contained no. of kingdoms; Muslim north vs. Hindu south - Active commercial trade along coasts Africa: - Trade in gold & pepper across Sahara to Europe - north african states as part of varying islamic empire, varying states in Southern and Eastern Africa - East African trade with Indian ocean Américas: - Advanced Incan Empire in Andes, Aztecs in Mexico - Lack of beasts of burden made long-distance trade costly - tribute empires w no real centralized authority Europe Economically backward region, Europe created series of institutional innovations between 13th &15th century, set the stage for its later expansion 1. Financial innovation, eg. banking & credit 2. Rise of sovereign territorial state - efficient in mobilizing resources and waging war - absences of dominant power, and constant, intense, military competition as primary source for revenue development and state formation Growing north-south trade in Europe with Asia - Money drained from North - South - Middle east & Asia - Europe needed new sources of silver/products to sell European expansion (1) Seeking direct route to access Asia & markets: spanish cross atlantic, portuguese sail along Africa into Indian ocean Ecological imperialism (ie. diseases, livestock, arms) devastate the Americans in relatively short period of time Mercantilist and Imperialist economy is established to serve needs of colonizer, principal the extraction of raw materials Spanish elite essentially uses American silver to buy Asian goods Current land inequalities and racial hierarchies in Latin America can be traced to this era Africa, early expansion mostly confined to coast by diseases and well-organized states (except South Africa) Increasing colonization of Americas, demand for slaves to work in plantation economies of Americas rises drastically Estimates, between 9-13 million Aficans were enslaved in triangular trade Consequences visible in many African states to present day, eg. trust and tribalism, settlement patterns, etc. Triangular trade European expansion (2) Vasco da Gama reaches India via. Southern Africa between 1497 & 1499 Asia, Europeans encountered powerful land empires and an establish Muslim trade network, initially confining them to coast  - little interest to trade w portuguese, due to lack of luxury goods on offer - attempt to control strategic pressure points (eg. Goa, Hormuz, Malacca) & use naval superiority to breach into lucrative Asian trade British and Dutch follow Portuguese strategy to gain foothold in Asia 1602 Dutch invent the joint stock company w tradable shares & limited liability to control risks from long-distance trade British and Dutch East India Companies; - voyages could take up to 3 years - profits realized over several voyages - costs high due to military expenses British East India Company gradually takes over India - british state takes over in 1857 British sell opium to China in effort to reverse trade deficit - opium wars mid- 1800s European expansion and Industrial Revolution Joint stock companies & related institutional innovations (eg. property rights) from colonial trade played a significant role in facilitating Industrial revolution - First in Great Britain, later in other parts of Europe what was it? - Application of machinery to production - new energy source to power machines - labor force concentrated in factories Industrial revolution and corresponding productivity increases massively shifted global power balance in Europe’s favor, eventually leading to renewed imperialism Industrial Revolution: Why Britain? Why then? Although there is debate, scholars agree on underlying factors: 1. European enlightenment led to unprecedented expansion in knowledge and technology 2. rise of the liberal state that advocated limited government, property rights protection, and laissez-faire policies with respect to markets 3. International factors, which include Great Britain’s role as colonial & naval power The catch-up effect: what did others do? Other european states imported/stole technology in initial phases of industrialization Germany & US partially used tariff barriers to industrialize - friedrich list (1789-1846) and economic nationalism - precursor of dependency theory and strategic trade theory Japan as only non-European state that is able to industrialize in late 19th- early 20th century - state-led industrialization that would become a role-model for the rest of Asia in 20th century The Pax Britannica Rise of British industrial and military power led to a form of the international system that became known as the Pax Britannica Limitedly, it produced one hundred years of European peace (1815-1914), with some brief wars fought between major powers - basis for British-led liberal international order that ignores large scope of violence outside of Europe in colonial wars Based on 3 elements:  1. Gold standard 2. Free trade 3. Balance of power Gold Standard Major issues for all countries participating in international trade is how to establish an international monetary system so currencies can be exchanged Gold Standard under leadership of Great Britain offered practical solution to this question: - countries fix value of their currency to a certain amount of gold - allow for currencies to change value against eo - allow for movement of gold across state borders Has advantage that this system will automatically correct balance of payments in mid-run by deflationary policies - cost of definition are born by low-income groups via. unemployment Free Trade Britain advocated free trade system on international stage ever since domestic repeal of corn laws in 1846 - 1846-1870 the golden era - europe's relations with its colonies were not based on free trade David Ricardo’s theory of comparative advantage provided the intellectual case - contradicts absolute advantage ideas of economic nationalism US did not participate, nor did imperial Germany after it’s founding in 1871 The case is often made that current economic openness is not unique, with this era constituting an important historical precedent Balance of Power The almost 100 years between end of Napoleonic wars in 1815 and onset of WWI in 1941 went by without a major war involving all European powers - violence not ruled out, but system-wide war was to be prevented; - eg. Crimean war (1853-56), Franco-Prussian war (1870-71), etc. - lasting peace greatly supported liberal economic system Shifting alliances based on common interests (concert of Europe) rather than Ideology; - possible bc of limited democratic input into foreign policy ; Britain used its navy and financial power to ensure that no European state became dominant Renewed Imperialism That the era of renewed imperialism accompanied the industrial revolution raises question of their relationship: - imperialism as consequence of capitalism or fueled by European strategic competition Old European empires expanded during this era (Portugal,Britain) with exception of Spain New European countries quickly joined race for imperialism (Germany,Italy,Belgium) US and Russia engaged in continental expansion that presented many factettes of colonialism Japan becomes a colonial power in East Asia, seizing Taiwan in late 19th and Korea in early 20th century Berlin conference (1884-85) and Scramble for Africa Scramble for Africa (1870-1914) War and economic disorder The 19th century liberal and imperialist order would only come to an end with onset of WWI - over 30 years would pass until new order was established in 1945 under the leadership of US First world war - destroyed liberal international system - weakened European states - Discredited balance of power ideas Interwar political & economic failure - attempt to re-established rigid monetary & financial system failed  - popular mobilization & new forms of state (communism vs. fascism) - limited US role & retreat into protectionism after 1930 > Road to WWI Allied lessons from WWI 1. need for stable international financial system & lender of last resort (IMF) 2. trade protection eventually lead to conflict, so effort should be made to keep international markets open (GATT/WTO) 3. workers need benefit from economic growth, & security provisions in times of crisis to prevent populism on left/right (eg. welfare state) 4. arrangements needed to avoid security dilemmas between states & deep peace (eg. NATO) 5. US power & leadership as vital to maintain the system The Cold War Era (1945-1989) Characterized by world wide trade rivalry between US and USSR on all levels (military,political, economic) Many developing countries served as war zoned (vietnam, Algola, etc.) while Europe remained peaceful throughout Some East Asian state heavily benefited from US aid & involvement (Japan, South Korea, Taiwan) China’s opening to West and slow turn towards state-guided capitalism in 1979 Collapse of Soviet Union in 1989 ended confrontation between NATO and Warsaw Pact The Western economic system US used its unparalleled dominance after 1945 to construct set of institutions to manage the world economy - these largely reflect US interests but attempt to strike balance This system based on ideas of liberalism, legalism, and multilateralism, but with clear role for gov intervention in economy - IMF for reconstruction and development - GATT and later the WTO for trade - Marshall plan for European reconstruction - European Economic Community and later the EU - US nuclear weapons for security The communist political economy Based on central planning of economic activity rather than private property & market allocation of resources Soviet union model imposed on large parts of Eastern Europe after 1945 Revolutions & wars brought central planning to China,Cuba,Vietnam,North Korea, Ethiopia, & Angola Some success in industrialization, women's rights, literacy, health, but these usually came at tremendous social costs - eg. large scale violence in Russia and China Unable to produce sustainable economic growth, most central planning systems collapsed in 1989 The Southern political economy in wake of superpower rivalry, another historic process was taking place in countries of Global South Decolonization - Dozens of countries in Asia & Africa secured independence between 1950s & the 1970s greatly increasing the no. of sovereign states - changed the balance of power in international orgs. Development successes and failures - impressive achievement in some East Asian newly industrializing countries (eg. south Korea, Singapore, Taiwan, Hong kong, etc) - some success, but also many setback in China,India, Indonesia, Latin America, and Africa that continue to this day The post Cold War era (1990- present) 3 trends have become increasingly visible as Cold War fades into history: 1. competition between rival forms of capitalism and its extension to emerging powers 2. the pervasive impact of the information revolution in practically all aspects of political and economic life 3. ongoing developments in the field of international organizations Trends in state models Anglo-American vs. Continental European vs. East Asian models of capitalism - diff financial institutions, welfare mixes, labor relations The emergence of Chinese Model - Authoritarian state,labor control, export oriented Brazil, Russia, India are developing own distinctive models - Russia authoritarian & rent-seeking capitalist - Democracies in Brazil,South Africa, and India Rise of ‘offshore’ regions - tax havens - export processing zones The information revolution As significant as industrial revolution Technological - application of information & knowledge - diffusion of AI Economic - disrupts old business, creates new ones - effects on employment & political mobilization Social - networks not limited by geography Military - US advantage in high tech warfare & force projections - possibility of new arms race; Lack of cooperation to rain-in this trend International Organization The UN system - security council - specialized agencies (eg. WHO) International economic institutions - IMF - World Bank - WTO - Regional (EU, ASEAN, MERCOSUR) Questions on how continued rise of new powers and renewed international conflict will affect IOs: - internationalism vs. regionalism? - populism in gov as a threat from core-members itself? 3.1 International Trade Definitions International trade refers to exchange of one commodity for another across state borders Political barriers to trade erected wherever authorities restrict access of citizens to foreign goods and services barriers to trade often referred to as protectionism: - tariffs - quotas - subsidies - currency controls - administrative regulations - voluntary export restraints Theoretical perspectives questions on benefits and drawbacks of free trade hv long history in political economy, and in the era of globalization one can argue got increased relevance Proponents of free trade usually highlight the following points: - liberal theory provides positive sum view of international exchange - comparative advantage, factor endowments, and specialization as key concepts - idea that all benefit from greater material wealth & greater variety of goods - protectionism hurts consumers, but creates class of protected business interests that benefit disproportionately creating strong incentives to influence political process (eg.lobbyism) Critics of free trade often makes their case a combination of following arguments: - infant industry protection to jump-start industrialization; - problem of deciding, which sectors need to be supported - National security considerations in certain sectors (eg. military, food, energy, etc) - Strategic trade theory arguments to protect sectors with high-value added (eg. aerospace industry) - cultural industries as relevant to national identity - unequal exchange as Marxist critique of origins of existing trade patterns (eg. colonial structures) - environmental concerns Trade: Achievements and challenges Major developments 2 notable developments hv characterized the world trading system since the end of WWI: 1. Growth of volume in trade and new forms of protectionism: - growth in trade outpaced growth in production - growth has been even over time & between regions - increase in intra-industry trade and trade in services - protectionism increasingly comes in from of non-tariff barriers (NTBs) 2. Creation & transformation of institution governing world trade: - creation and evolution of GATT and WTO Major developments: GATT Following failure to create an international trade organization, the GATT was created in 1947 to reduce tariffs, not necessarily to abolish them - ex of embedded liberalism - principles of non-discrimination, reciprocity, transparency - major contribution to be keeping tariffs within certain levels, & to the creation of an international body of economic law - not an IO; no multilateral dispute settlement - limited success to control development of NTBs Major developments: WTO WTO created as successor in Uruguay round of 1995 - ex of deep integration to address NTBs and domestic trade policies - strong dispute settlement mechanism - new issues of intellectual property rights and services - conflicts between developed & developing country interests hv stalled evolution since Doha round 2001-2008 - agriculture vs. services, IPRs, & investment - Rise of populist govs has further hindered development  - eg. blockade of dispute settlements mechanism by the trump administration - Recent international conflicts (ie. Ukraine-russia, US-China, Middle East) hv made further negotiations practically impossible Parallel to slow and steady demise of WTO, has been dramatic rise of regional trade agreements Regional organizations (and global conflict) Regional Trade Agreements (RTAs) can take 2 forms: - Regional free-trade agreement (eg. NAFTA/USMCA,etc) - Customs union (eg. EU, Mercosur, etc) If a regional org is able to form some effective form of trade agreement, usually also established a customs union thereby,RTAs have substantial threat to continued success the multilateral trade system of WTO and its non-discriminatory goals - often the case in practice, despite regional integration being legally covered by rules of WTO - contrary to ‘global’ nature of WTO, RTAs have overarching goal of regional integration not necessarily trade liberalization Generally, 3 waves of RTA emergence hv been identified: 1. Early 1950s to mid 1970s - european economic community (1958) - economic community of west african states (1975) - overarching goals: economic integration, development, peace 2. 1992 - 2008 - treaty of maastricht (1992) - EU + Eastern Europe agreements (1992-1997) - NAFTA (1994) 3. 2008 - ongoing - development of mega-regional agreements (TTIP,TPP,RCEP) Little unclear what might explain RTA trend, and variety of potential explanations have been forwarded:  - Access to markets: eg: canada and NAFTA, EU expansion waves - Reform commitment signaling: eg: Mexico & NAFTA, Eastern Europe & EU - Bargaining power in WTO & other IOs: eg: USA &TTIP, TTP, etc - WTO & impasse of Doha Round since 2001 Trade policy mixes heavily with geopolitical rivalries and associated political calculations, making for 2 principally different future scenarios: 1. An Optimistic scenario, RTAs eventually lead to more global free trade. here, RTAs complement the WTO 2. in Pessimistic scenario, creation of 3 large RTAs, in the American hemisphere, Europe, and Asia, could increasingly organize trade along lines of geopolitical rivalries. Each block would compete with other, employing tariffs to discourage inter-regional trade, essentially making WTO rules irrelevant The WTO, Trade, and Globalization All of this important, bc WTO has substantially shaped process of globalization during last 30 years, system seems to be reaching limits 20 years prior - when politics of globalization seemed relatively straight forward: - collapse of USSR & opening of Eastern Europe to democracy & free markets - integration of PR china to WTO (2001) - Reversal of inward-looking & state-led development strategies of Turkey, India, & many Latin American countries Globalization was largely unchallenged & WTO among other IOs was regarded as fundamentally underpinning this process - free markets, democracy, & international cooperation seemed to have prevailed over its rivals - all else regarded as question of time (cf. Fukuyama 1992) This contrasts, w current situation, where globalization & multilateral trade system are seriously challenged from within and outside - eg. Donald trump, ‘America first’, and US foreign policy - eg. Putin’s Russia as type of rogue state - eg. UK withdrawal from EU That many tensions around globalization are played out in the trade regime of WTO. Underlying many of these are legitimacy issues: - Concern about impact on social, environmental, and labor policy - Concerns about influence of business and elites According to Stolper-Samuelson Theorem, free trade should increase the returns to physical & human capital, while it relatively reduces the return to labor (cf. Piketty 2013) - most probably, effect is partially behind the increase in income inequality of high-income countries In addition, technological change contributed via process that economist call skill biased technological change, where automation increasingly substitutes for low-skilled workers some argue that this is creating dual economy, where insiders are being rewarded by process of globalization, while outsiders are bearing relative costs, while potentially offsetting social connections between both groups are also getting less - at present, unclear how serious all these challenges are to the future of global economy Political Trilemma by Rodrik (2011) offers an interesting lens through which one can view these developments: Here, states can only realize 2 of 3 desirable objectives at once Rodrik & other have suggested some 21st century version of Bretton Woods Compromise, where globalization is rebalanced through coordinated multilateral cooperation Decision to rein in globalization through coordinated multilateral restrictions would probably be better than its destruction through unilateral action such an endeavor would face major unknowns: - Can states agree on such a wide-ranging compromise in an increasingly multipolar world? - could such compromise successfully address central issues that drive the political backlash against globalization and multilateralism? 3.2 The Global Financial System Definitions and background international monetary system (IMS) - governs how one national currency is exchanged for another A sound IMS is necessary for economic activity across state borders Post WWII system has undergone 2 dramatic changes: 1. move from fixed to floating exchange rates 2. growth of regional currencies Gold exchange established at Bretton Woods Conference of 1944, with the US dollar fixed to gold - other currencies were fixed to the US dollar but not gold - idea of a system w strong stability anchor & sufficient flexibility to adjust changes ine economic performance - eventually undetermined by Triffin's dilemma: rest of the world needed dollars to participate in global transactions; but outflow of dollars undetermined US attempts at keeping its currency fixed to gold Monetary system was to be supported by the International Monetary Fund (IMF) - purpose was to help countries that experiences temporary balance of payment problems Global credit system - determines who gets to borrow money and on what terms the international bank for reconstruction and development (IBDR), now part of world bank, created following the bretton woods conference - original goal was to assist with long-term lending aimed at reconstruction - transition from mainly financing large infrastructure projects, to focusing on sustainable development Together with IBDR, the Marshall Plan transferred large financial resources to Europe in the 1940’s and 50’s - creation of the OCED to manage funds Theoretical Perspectives on theoretical level, the Mundell-Fleming model stresses the tension between capital mobility, stable exchange rates, and monetary policy - 2 of these three desirable objectives may be pursued at one, but not all 3 - eg. US monetary policy, Malaysia during Asian financial crisis of 1997, Eurozone member countries Major Developments IMS: From fixed to floating exchange rates - US unilaterally broke the link with gold in 1971;  - artificially low exchange rates of European countries and Japan as main cause - attempt at restoring competitiveness led to the Nixon shock - main lesson: fixed exchange rates in the face of increasing capital mobility and low international cooperation are not feasible Volatility in exchange rates did not result in financial chaos but it did greatly affected trade balances over time - US trade protectionism in early 1980s partially linked to an overvalued dollar - attempt lower overvaluation of the German Mark partially led to the first attempts of creating a European currency Currencies are also traded for profit under floating exchange rates, not only to finance international trade and investment Creation of the Euro - partially response to currency fluctuations, but also driven by desire of deepening economic & political integration of EU; ( cf. Zollverein of 1834 and German unification in 1871) - currency stability traded for national monetary autonomy - operation is overseen by European Central Bank (ECB) in Frankfurt ongoing concerns about single interest rate for a continent, lack of labor mobility, low level of transfer funding, & continuation of a national independent fiscal policy Credit: innovation and risk - rise of unregulated ‘offshore’ markets - technology facilitates rapid movement of capital - barriers between financial sectors reduced in 1970s and 80s - international capital flows liberalized during 1980s and 90s - creation of derivatives to insure against price fluctuations - sovereign wealth funds, hedge funds, etc. - many of these innovations have greatly facilitated cross-border investments and insurance against market fluctuations, but may have incentivized greater risk taking & occurrence of financial crisis 1980s debt crisis - Developing states borrowed to fund industrialization, often relying on import-substitution policies - Oil crisis and high interest rates made debt unstable - Mexican liquidity crisis of 1982 as starting point of Latin America debt crisis - many other countries in latin america and sub-saharan africa followed suit - IMF called in to negotiate and monitor structural adjustment policies - greatly expanded role of IMF, now tasked with overseeing structural adjustment programs based on ideas of Washington Consensus - ‘Triumph of neoclassical economics’ - laid the ground for future debt crises (eg. Argentina 2001, Greece 2010, etc.) - Lost decade of development Key Issues Global Credit Crisis of 2008 - Began in 2008 as US housing bubble burst; - Investors had purchased bad mortgages bundled with good mortgages - original risk was not visible for many investors - Crisis quickly spread throughout US financial sector - ie. Bankruptcy of Lehman Brothers on 15.09.2008 - Real economy followed suit as credit dried up - states w developed banking sectors suffered disproportionately (eg. UK, iceland,ireland) - Governments initially bailed out financial institutions & subsequently pursued austerity policies - Great Recession of 2007-2009 as crisis of mainly high-income countries - legacy of slow growth, high public debt, & reduced public services in many Southern European countries European sovereign debt crisis - following 2008, no. of countries experienced problems w serving their debt - 2009 new greek gov announced that its debt war larger than previously thought - cost of greek debt skyrocketed, bringing country close to default - due to construction of Euro, put entire currency at risk - Greece adopts structural adjustment programs in return for loans from EU and IMF - Unable to devalue, unwilling to leave Euro, Greek economy temporarily collapses - Long and partially ongoing road to recovery - Long-run stability of Euro is only partially assured Future of the US Dollar - The US dollar as world’s reserve currency, which means that it is held by many central banks as reserve asset, and is the principle means of international exchange - reflects international confidence in US economy & gov institutions - Provides important benefits to US, mainly in terms of being able to pay lower interest rates on loans - in many ways, US nowadays relies on China to funds its deficits - No real possible alternatives - Chinese currency has ‘too much state’ - Euro ‘not enough state’ - Plan of a BRICS + currency for trading purposes at present very unclear - Loss of faith in US Dollar could lead to financial crash 3.3 Economic development Definitions Development: - process: societal transformation to self-sustained growth - condition: reached by societies that made successful transition to self-sustained growth - Economic growth in Europe was never seen in terms of development - Kuznets curve & trickle down effect - Human development: income, equality, life expectancy, education, etc. Kuznets Curve Human development Index (HDI) Theoretical Perspectives Theoretical views on development can be divided acc to vision on two fundamental issues 1. importance of internal vs external factors: Internal - stressed failure to mobilize national resources to achieve productivity gains - Modernization theory - liberal approaches - underdevelopment as a consequence of inadequate structures and values - neglects external factors to large extent External - stresses constraints of international system and colonialism for development - dependency theory - critical approaches & some economic nationalist approaches - underdevelopment as condition created by development of others - neglects importance of national decisions 2. Importance of state vs. Market as primary vehicle of promotion economic development Neoliberal approach - stresses the export oriented industrialization (EOI) of east asian states - rejection of state led import substitution industrialization (ISI) with use of high tariff barriers Developmental state approach - stresses success of state in guiding east asian economic miracles - highlights importance of switching from ISI to EOI at right moment Importance of cultural values in process of development  - eg. protestantism and early economic development of northern & central europe, confucianism in development of east asia, etc. Developments 2 broad historical periods can be identified in evolution of development: 1. Development and national capitalism (1947-1981) - modernizing elites in newly independent states launches development projects - industrialization seen as key & supported by growing world economy until mid 1970s - policies pursued too guided towards cementing the hold on power of new elites often failing at producing economic transformation to alleviate poverty - following oil crisis, 3rd world coalition campaigns for new international economic rules w little success 2. Development, neoliberalism & beyond (1982-ongoing) - 1982 debt crisis shifts development approach leading to importance of structural adjustment policies supported by IMF and world bank - new paradigm known as washington consensus which assigns increase role to importance of markers in development process - Governance and democratic decision-making also recognized as important elements of search for development - starting in 1992. UN establishes idea of sustainable development as new paradigm - eg. development that meets needs of present generation wo jeopardizing needs of future generations (Brundtland commission) - Remittances take on larger development role Remittances Key Issues Main issue of analysis for GPE/IPE is the international org of development The world bank functions as the world's most important multilateral development agency - Comprises 5 different orgs (IBRD,IDAD,etc.) - Main roles: provides loans to countries, develops international development norms, resolves investment disputes  - IDA provides long term 0% interest loans to poorest states (capital from member state contributions) - mainly to Africa & South Asia - IBRD provides loans to middle income countries at market rates (capital raised on private markets) - europe, east asia, latin america World Bank controversies: - turn to SAP lending in 1980d with IMF - Liberal economic vision, focused on market processes as basis for economic growth - governance controlled by riches countries trough weighted voting, in accordance with countries financial contributions to organization - US always appoints president & becomes source of debate, esp for powerful developing countries - eg. David Malpass (2019-2023) - Challenge from new regional entities - Asian Infrastructure Investment Bank & PR China Debt and debt relief - debt sustainability been serious problem for developing countries since 1980s debt crisis - resources go to creditors rather than domestic development initiatives - Highly Indebted poor country initiative (HIPC) & Multilateral Debt Relief initiative (MDRI) hv provided some debt relief - HIPC launched in 1996 by IMF & World bank to bring tgt creditors & provide partial debt relief to eligible developing countries - MDRI created in 2006 by IMF, World Bank, Inter-American Development Bank, & African Development Fund. Provides full debt relief on past loans from these orgs to series of low-income countries 3.4 Global environmental change Definitions Environmentalism vs. Ecologism - environmentalism retains human interests at center of analysis - ecologism focuses on interrelationship between humans and nature in non-hierarchical manner - Light green vs. Dark green - Technocentric/Anthropocentric vs. Ecocentric global environmental change linked to national and international systems of production, distribution & consumption - not all are global in nature, or outcomes are unequally distributed, meaning interests of participants may differ quite substantially (eg.climate change) Theoretical perspectives Traditional IPE approaches do not focus on environment Progressive incorporation of environmental topics to IPE has focused on possibility of establishing international cooperation to address degradation in meaningful manner - recently, there is also focus on topics related to sustainable development Realists assume international environmental cooperation (sustainable development policies) possible in situations where states perceive to be in their interest - such cooperation represent interests of dominant states - feasible if policies don't significantly collide w economic growth - eg. Kyoto Protocol (1997) & US failure to ratify Liberal theorists international cooperation on the environment arises from recognition of interdependence & mutually shared interests - eg. ratification of kyoto protocol by 192 states, even w/o US Sustainable development is a question of incorporating market failures (externalities) into price system - economic growth & sustainable development are compatible, & problem is resource intensive forms growth has taken to date Critical perspectives see international cooperation on environment likely but ineffective bc collides w interests of capitalist ruling class sustainable development under capitalism seen as impossible bc of exploitative nature of system limitations of traditional IPE approaches regarding incorporation of environmental issues, much of literature can be summarized under headinf of technocentrism vs. ecocentrism technocentric perspectives based on assumptions implicit in western values & transformational capacity of capitalism - environmental degradation arises from market failures can be solved via state intervention/appropriate market designs - accommodation of economic growth & long run sustainable development is possible Ecocentrist perspectives focus on rejection of continued economic growth & critique of global capitalism - human need to balanced those all living organisms - economic system sub-system of natural world Developments