GEH Summary - Auste Gecaite PDF

CHAPTER 1 -- Introduction ========================= **Great Divergence** -- the discrepancy in growth between the West and the Rest (turning point: 1820 IR) **Economic globalization** - the increasing [interdependence] of world economies as a result of the growing scale of cross-border trade of co...

CHAPTER 1 -- Introduction ========================= **Great Divergence** -- the discrepancy in growth between the West and the Rest (turning point: 1820 IR) **Economic globalization** - the increasing [interdependence] of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies (and a high mobility of workers?) Stages of economic globalization: - (Before: trade networks between Roman Empire and Asia e.g.: silk routes, however, they had no actual impact nor contributed to economic growth.) - 1500-1800 **Early modern globalization** (1492 Columbus; trade of luxury goods, silk, silver, pepper ALSO human trafficking (slave trade); violent system: colonialism - europeans extended political control over the rest of the world.) - 1850 -- 1914 The first global economy - 1918 -- 1945 **De-globalization** (wars and the Great Depression) - 1980 -- now **Neoliberal globalization** (based on deregulation and global systems of lowering trade obstacles, for instance, the World Trade Organization that started in 1995.) Methods used in GEH: - **Quotative** (data, statistics) -- many limitations, no reliable data going back further in time. **Maddison database** (from year 0 until 1820 only guess estimates) Use of [summary statistics]: GDP, GDP per capita, Gini-coefficient (measures inequality), price integration (comparing prices in different locations), Terms of Trade (ratio between the index of export prices and the index of import prices. If export P \> import P =\> can purchase more imports =\> ToT\0,8 for industrial societies, and \< 0,5 for less developed, poor countries). Takes into account: **life expectancy at birth, education attained, GDP per capita.** TIME-LINE Early modern period 1500-1800 - 1492: "discovery" of America and start of new global trade networks and colonialism - Societies in Europe but also elsewhere in the world commercialize, market relations become more important - 16-17th century: start of the **triangular trade system** (transatlantic economy) -- slave trade in exchange for sugar, in exchange for European goods - Different parts of the world are affected by trade -- first global economy 1750 start of IR in England - Economic growth due to fossil fuels (coal) - IR spreads in the 19th century: Belgium; later US & Germany - 20th century: US is largest industrial country and economic leadership 19^th^ century: a new era of globalization: - Imperialism in Africa, China - Trade costs are lowered - Wealth distributed unequally also within industrial societies (impoverished workers)! 20^th^ century: - The threat of revolutions against the economic system (Russian Revolution 1917, Chinese communism 1949) - Dual world economy: communist vs non-communist world - First World War (1914-1918); Second World (1940-1945) - De-globalization: protectionism (trade barriers) and economic instability in interwar period (1919-1939) - After 1945: rise in global trade, & economic globalization - 1970s: crisis =\> neoliberal restoration (removing trade barriers) - After 1989: the fall of communism =\> even more openness **Capitalism** -- involves a constant way of profit seeking, instead of rent income seeking. (vs in the middle ages produced only what's needed, no investment to increase productivity) 3 aspects of capitalism: 1. 2. 3. Critiques? 19^th^ century Karl Marx: capitalists strive unlimited accumulation w/o regard for human consequences, and it causes concentration of wealth, therefore, it will be destroyed by class struggle (through its own success and refusal to share profits with labor (workers)). STAGES OF CAPITALISM: Commercial capitalism (1500-1800) -- trade - Started with merchants and bankers in northern Italian cities like Florence and Venice engaged in long-distance trading - Capitalism as an expansive system: seeking new markets and activities elsewhere in the world. **Industrial capitalism** (1800-1900) -- production 4 developments: 1. 2. 3. 4. **Postindustrial** (1980-...) -- money, banks, stock exchanges 1. 2. 3. 4. CHAPTER 2 -- the Great Divergence ================================= - Pre-industrial society limits to growth -- **Malthusian growth model** (Middle Ages): [agriculture and food supply is unable to follow population growth] (if there are no technological innovations or positive supply shocks), therefore population growth = increased mortality. Neo-Malthusians think that economic & population growth is on the long run not sustainable. However, this pattern was broken by industrialization. - Example: "Black Death" pandemic: loss of population =\> labor shortages =\> higher real wages. Pandemic - **the great leveler** (redistribution of wealth and resources, more equality) - HOWEVER, there had been diversions in e.g., Italy and Holland where economic growth was coupled with population increase for several episodes in history. **Little Divergence** - a divergence within Europe, North vs South (around the 1500 the urbanization was evident in northern Italy with largest cities like Milan, Florence, Venice, AND Belgium/Netherlands, HOWEVER, around 1800 most major cities are situated in Northern Europe) WHY? Internal and external explanations INTERNAL EXPLANATIONS (why Europe experience more economic growth) Cultural, demographic, political and economic. The importance of institutions (legal, religious, political, and economic organizations are societies' institutions): the degree to which they permit economic freedom; rule of law Cultural - Calvinist doctrine of **predestination** -- which stated that one's eternal fate was decided regardless of one's actions on earth -- encouraged people to work harder and save more. - Problematic: were other religions "bad"? capitalist spirit existed in other places as well e.g.: Golden Age of the Islam world in Middle Ages - HOWEVER, culture still matters: attitudes towards failure, religious attitudes towards credit etc. Demographic - Norm in Western Europe for married couple to establish an independent household =\> late marriages =\> lower fertility =\> less population growth (Malthusian effect) (vs Southern Europe where couples joined extended households, dowry system =\> higher fertility) - **European Marriage Pattern (EMP)** -- higher wages after the Black Death lured more young people to work and earn money for several years instead of marrying (EMP -- institutional arrangement) Political 1. - No political unity, permanent wars encouraged investments in infrastructure and geographical expansion (colonies outside Europe), which lead to economic growth. - Due the need to raise taxes for wars, rulers had to negotiate with subjects -- they obtained certain liberties, privileges and protection (economic freedoms) 2. Started in Middle Ages with self-governance cities - Dutch Republic: political power of merchants, Dutch parliament - Constitutional monarchy in England: "Bill of Rights" Economic - Removal of feudal restrictions, privatization of land (farmer pushed to labor market instead), **commercial agriculture** (more productivity). - [Commercial innovations]: rise of banks, credit, more investments since risks were lower. VS CHINA - Before IR China was much richer than Europe due to political centralization, less wars, lower taxes, **meritocracy** (political power vested based on merits rather than wealth or social class). - Disadvantages: political centralization led to lack of competition and innovative behavior; clan-based structure of Chinese society (risks shared within a very large family) discouraged credit. EXTERNAL CAUSES **World trade** -- long distance trade with the colonies =\> new job opportunities =\> urbanization in Northern Europe. Consumer revolution: - Large city workers earned higher wages =\> higher purchasing power =\> desire of goods from the East (coffee, tea) for social promotion =\> incentive to work harder (+females joining the labor market) - Imitation industry (silk and porcelain), copying technologies, inventions (printing press) from the East English parliament decided to impose import tariffs on cotton textiles from Asia, making it cheaper to produce it in England. As a result, this allowed the rise of an industry and development of more productive technologies than the East. Portugal and Spain? inflation of silver, crown monopolies CHAPTER 3 -- The Industrial Revolution ====================================== **Industrial revolution** - The (widespread) use of new technologies that become drivers for economic growth **New general-purpose technologies (GPT)** = technologies that can be used for a wide variety of purposes (e.g.: steam power, electricity). It can take decades to fully develop their full potential. **Industrial revolution:** an episode in which new (productive) technologies become widespread **Industrialization:** a process of transition of an economy towards industrial production (Revolutionized transportation) (Growth of non-industrial sectors) Consequences of IR: 1. 2. 3. **AOE** - use of bioenergy, wood, animal, wind, solar power in order to grow and move things **MEBE** - use mainly of subsoil fossil fuels, the burning of coal, natural gas petroleum 4. SCIENCE, TECHNOLOGY AND ECONOMIC GROWTH New technologies allow for the increase in productivity, which leads to economic growth. **Invention**: a new scientific discovery. **Innovation:** is the first commercial application of an invention. **Distribution**: when the commercial application became widespread. **Imitation**: a form of distribution. Technologies are often copied and applied in different countries. Can also be linked with innovation, as sometimes technologies are significantly improved or adapted. **Productivity** (efficiency of the economy) -- measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. **Labour productivity** - measures the amount of goods and services produced by each member of the labour force or the output per input of labour. Increased labour productivity usually is an indicator of new technologies that make production more efficient. Adam Smith's model The division of labour or labour specialization is the principal way to achieve higher productivity (capital and technology are not considered) (famous example on pin makers). However, division of labour has its limits (reaches an equilibrium), if it is not joined with new technologies that improved the production process. Schumpeterian growth Labour nor capital are engines of the economy: but technology. **Creative destruction** - process of continuous innovation, in which successful new applications of technology "destroy" older ones (creates market share for companies at the expense of companies using "outdated" technologies). Science in pre-industrial society was slow, most innovations came from Arab world and China. Limited intellectual progress in Europe due to Christianity that employs a fixed **Aristotelian worldview**, that leaves little room for reason and observation. In between 1500-1800 scientific knowledge production shifts towards Europe, examples of Galileo and Copernicus (heliocentrism). INDUSTRIAL REVOLUTION IN ENGLAND (1750-1850) Start of IR: textile manufacturing Labour-saving technical changes: - [Weaving] -\> flying wheel (1733), **power loom** (1787) - [Spinning] -\> spinning jenny (1764), **mule jenny** (1779), **self-actor** (1825) The process started with innovation in weaving. The first innovation was the **flying wheel (1733)**. This was not yet the industrialized process, but it allowed the 2 people work to be done by one. This created a **bottleneck in spinning**, the cotton wires needed for weaving. In response to that, there was an invention the spinning jenny (1764), that allowed to spin multiple wires at the same time. Still, both machines (spinning jenny and flying wheel) did not drastically alter the production process, but it was set in motion. The spinning jenny was improved by the mule jenny (1779), a device that was mechanically operated, by either water or steam power. This meant the end of spinning as a home industry! But since more wires could be produced, handweavers had golden days. But they were replaced by power looms in 1787, weaving machines that operated mechanically. In 1825 the mule jenny was fully automatically (self-actor 1825). GPT = steam - The first technological breakthrough that makes use of coal is the **Newcomen steam pump** (1700) - a pump to get water out of coal mines. Very inefficient, could only be operated effectively next to a mine (the source of fuel). - **Thomas Watt, steam machine (1773)** -- used for mechanization of textile industry. WHY ENGLAND? General: supply & demand factors, institutional environment Specific: the role of state intervention, role of science, price environment 1. - [Labour] - privatization of agricultural land led farmers to the marketplace, growing population. - [Capital] - accumulation of capital (merchants), entrepreneurs willing to take risks. - [Technology and resources] - labour-saving technologies, coal and colonial resources (cotton) 2. - Demographic growth -- rising demand for production - Increase in domestic and foreign trade -- consumer revolution, demand for Indian textiles, foreign markets to export to due to imperialism. 3. - Constitutional monarchy -- participation of the economic elites in political process. - Parliamentary democracy: - Tory's (agricultural interests) vs Whigs (entrepreneurial middle class) - - Private property rights: patent right protection - Infrastructural works (canal, railways) -- internal market integration Specific factors: - State intervention [Protectionist] state policies: - Regulation of national labour markets ("poor laws" -- people forced to work in labour market ("workhouses") in exchange for poor relief (food, clothes)) - Protecting British trade: - Navigation act -- excluded other from trading with the British empire - - Consequence: de-industrialization in India (outcompeted by the British textile industry) - Prohibition of front technologies to leave Britain (therefore, cases of smuggling) - Role of science - **Republic of letters** -- networks between scientists - **Enlightened economy** -- scientific advancements were translated to the economy, positive view towards technology, [mentality change] that the world could be improved, most craftsmen were literate. - Price environment **Induced innovation** (high-wage hypothesis) - the low costs of [capital] (due to relatively low interest rates), cheap [energy] (much coal) and the high costs of [labour] triggered the process of labour-saving technologies in England. - - 2^nd^ IR (1870-1914) - Most new applications were rooted in scientific discoveries and new inventions (most first IR technologies were not science-based mechanizations of previously known methods). This created a feedback loop: generated more new inventions. - Permanent research and development **(R&D)** - the potential for new technologies becomes an important indicator for stock value 3^rd^ IR (1945-1980) - WW2 new technologies - **Big science** - massive programs with huge budgets allocated to scientific inquiry (space, Manhattan project) CHAPTER 4 -- The spread of industrial societies: how to catch up? ================================================================= MODELS OF CATCH-UP **Knowledge = non-rival good**, once new technology is present, it can be used by anyone. In practice, the transfer of technology impacted by a number of things: 1\) [Patent protection] -- protection of knowledge is an obstacle to wider distribution of technologies. 2\) [Position in the international economy]. E.g.: India did not have the means to make its own trade policy in the 19^th^ century and could not ban British textiles from its market and to pursue a policy of import substitution and industrialization. - It was natural that other countries would follow that of the industrialized one, and that industrialization would be a global, worldwide phenomenon. "The country that is more developed industrially only shows to the less developed, the image of its own future". Other economists believed that industrialization did not spread as naturally as Marx believed, therefore British model must have been imitated completely, since the IR took place there first. - - Societies must go through a number of stages, a kind of evolution. - Must follow certain prescriptions based on English experience: parliament, property rights, privatization etc. - Belief that all agrarian societies could achieve this. He also defined the stages of industrialization:  - Stage 1**)** An economic system in **stagnation** due to low yields of natural resources and agriculture. Traditional societies based on **bartering**, little commercialization. Main economic activities involve **subsistence**, making their own ends meet. - Stage 2) At a certain point societies seek change and abandon tradition. For instance, there are **capitalist**s, entrepreneurs who accumulate and other's capital into new activities, without however having a significant impact at aggregate level. There is a **shift from subsistence to commercial farming**. There **is urbanization** and a certain degree of **specialization** in the economy. - Stage 3) Entrepreneurs in certain sectors **invest in industrial production**. The system accelerates launching a course of capital accumulation and self-sustaining productivity growth, with a level of production and income growth never experienced before. There is a high level of **population growth**. Rostow saw textiles as a good sector to start with, just like in England. There is no uniform innovation. Rather it begins first in leading sectors that precede others. - stage 4) Industrial manufacturing intrudes other sectors and pervades the economy. The rate of expansion becomes slower, and there is a **stabilization** in the creation of new technologies. Gradually, more resources go to consumption. There is a change from investment goods towards consumer durables. - Stage 5) Restrained consumption is necessary to make place for the large investments in the first stages (3-4). Only after this period has ended can the rate of accumulation in the economy be reduced and more purchasing power distributed through consumption. It is a final stage, in which a society is placed on a high equilibrium, with high-income jobs and high levels of consumption. - Sought to identify mechanisms that allow countries to develop faster, even though they were latecomers: 1. E.g.: System of investment banks in Germany that made investments in capital possible (Banks actively participated in the management of companies in exchange for their direct capital participations). 2. - 1\) The creation of [unified national markets] by eliminating tariffs and building transportation infrastructure. 2\) [Protectionism] policies (external tariffs) - free trade was damaging to industries. 3\) [Chartered banks] to stabilize the currency and provide the financial means for industrial investments. 4\) Mass education (new technologies requires more skilled labourers) However, this model became less effective as time progressed because much new technology is not cost-effective in low-wage countries, but it is what they need in order to catch up. **Big push industrialization** = radical industrialization strategy, based on making a huge number of investments, ahead of supply and demand. BELGIUM, the 2^nd^ industrial nation Why? - Lots of coal - Dense population/ population growth -- more people in labour market (land is scarce, poor laws) - Productive agriculture - Gov investments in infrastructure (e.g.: canal Brussels-Charleroi) - Pre-industrial commerce activity and manufacturing (proto-industries, which formed sectors that could be industrialized) STANDARD MODEL 1\) Creation of a national unified market - investment in **railways**. 2\) ~~Tariffs~~ not possible because of Belgium needed trade connections, especially the Netherlands. 3\) Creation of an investment bank (provides loans to innovative firms) 4\) Mass education No innovation, only existing technologies from England (**industrial espionage**). Substitutable factor: gov support and investments in industrialization Large machine and steel industries (due to mechanization of the wool industry) THE UNITED STATES Background history: by the early 20^th^ century -- largest economy; independence in 1776, majority of the population active in the agriculture; institution of slavery in the south (reduce tariffs) vs industrialized north (increase) =\> civil war. STANDARD MODEL 1\) Unified markets: railways!!! (public and private and investments); **Interstate Commerce Clause** (no laws against inter-state trade, no transport monopolies); **"Era of improvement"** (19^th^ century expansion of transport infrastructure). 2\) High tariffs against foreign manufacturers (especially British), controversial (North vs South) 3\) Chartered banks provided credit 4\) Mass education -- decentralized: \- North: high literacy rates =\> more productive workforce; later literacy rates decreased due to mass immigration but were restored by 20^th^ century expansion of secondary education. \- South: keeping the masses (both slaves and poor whites) uneducated to keep wages low. Substitutable factor: mass migration 1\) Growth of domestic markets 2\) Larger labour market 3\) Human capital -- most US inventors and entrepreneurs were immigrants - THE AMERICAN COORPORATION Corporations -- main institution behind US industrialization due to: 1\) An enormous market 2\) 2^nd^ IR: exploiting economies of scale 3\) Abundance of resources, no competition over them (unlike Europe) 1. - **Horizontal integration** -- expansion and specialization within the same sector, monopolize the production (by intensifying production or acquiring competitors) - **Vertical integration** - control every aspect of production from raw materials to finished products [E.g].: Car factory Ford: own raw materials, energy station, internal railroad system, hospital, fire department, police... **Backward integration**: when a firm starts to produce specific goods that it previously bought from suppliers. **Forward integration**: is when a firm takes over the intermediaries that separate it from the end user of the product. [Advantages]: reduced market transaction costs with suppliers, decreased the dependency on external partners. 2. - Managerial capitalism/revolution - management of professional managers, instead of the owners. - Multi-division of a business [Criticism]: corporations hold too much power and influence, monopolistic practices (price-setting), Antitrust laws =\> **reverse integration** (dividing companies into several enterprises) RISE IN PRODUCTIVITY **Fordism** -- Henry Ford - Standardization - Mass production of affordable cars - Linking wages to the rise of productivity (purchasing power of employers was linked to the growth of the company) - Pay increase: 5-dollar day (half by working, half by achieving certain goals) =\> decline of absenteeism - The assembly line - continuous flow of production (drastically reduced the time it took to build a car) **Taylorism** -- F.W. Taylor Scientific management based on: - Separation of planning (in control) and execution (uneducated workers) - Using chronometer: enhance productivity through close observation of individual workers, resented by workers. JAPAN **Tokugawa Japan** (1603-1868) -- pre-industrial Japan - De-centralized and fragmented state: a country headed by Shogun, divided into about 260 parts with their own leaders (Daimyo) and militaries. - Rigid class system (the elite: military Samurai) - Policy of **Sakoku** -- closed country (only one trading post, no new technologies) - Low wages ! Japan was able to combine technological input with labour-intensive solutions. HOWEVER, it was stronger than presumed: 1\. High urbanization levels 2\. Smithian growth, proto-industrialization (development of rural handicraft production, alongside commercial agriculture) 3\. De facto (not formal) property rights 4\. Investments in human capital (education) INDUSTRIALIZATION IN JAPAN As an external event: - Tokyo port incident 1854 (an American vessel was denied access to the port and threatened bombarding) =\> - Japan signed unequal treaties: opening up of markets, limits to tariffs - **Meiji reform** (1868) - enlightened government (abolition of caste system) Standard model 1\) Centralized administration (state investments in mining, railroad system) 2\) Meiji reforms could not protect business through tariffs because of the trade treaties in the 1850s (*Regained control over tariff policy in 1894)* 3\) State investments into business =\> creation of Zaibatsu (vertically integrated family-owned businesses). (*Well-developed financing system only in the early 20^th^ century*) 4\) Compulsory education \*full implementation of the standard model\* Japan faced the latecomer's problem: technology was adapted to Western conditions where capital was available, and labour expensive. However, Japanese redesigned Western technology to make to fit for the local context (low wages) -- **"Suwa method"** -- so that it used less expensive capital input and more cheap labour. E.g., adoption of machines powered by men instead of steam engine. CHAPTER 5 - Industrialization, poverty and (intra-national) inequality ====================================================================== Industrialization initially enlarged intra-national inequality and yet there's no improvement. New measures of inequality also link CO2 emissions, gender inequality. Inequality is also linked to life expectancy, poverty, education, low levels of social mobility (ability of climbing up by rank in society. In cast-system countries, social mobility -- almost zero.) [Pre-industrial inequality in Europe]: social groups (by birth) **ranks**: peasants, nights, lords; different right and duties; low social mobility, almost impossible. [Inequality in industrial societies]: rank was less important, **class**: **bourgeoisie** and **proletariat**; in theory, jumping classes based on merit, in reality, many barriers (e.g.: voting systems for the wealthy). **Intra-national inequality** - the distribution of wealth [within societies]. **International inequality** - the distribution of wealth [between countries] (based on GDP/capita) **Global inequality** - combination of intra-national inequality and inter-national inequality Measure: **GINI-COEFFICIENT** (0 -- equality; 1 -- inequality) **Lorenz curve**: displays the distribution of income or wealth within a country, used to calculate Gini-coefficient Diagonal line (blue) -- perfect equality G= A/(A+B) Limitations: - **Maximum "Gini"** -- maximum "amount" of inequality that can be sustained by a society (if inequality is too high in poor societies a lot of people might fall below a basic income that is needed to survive). Societies with a higher GDP can sustain a much higher Gini-coefficient. - **Inequality extraction ratio** - Gini measured as a percentage of Maximum Gini (the lower the better redistributive policies work) - **Inequality possibility frontier**: in poor societies inequality cannot be very high (vice versa) **KUZNETS CURVE** 1955: industrialization & inequality  During the early stage of economic development, as per capita income rises, the income inequality first rises but then, at a certain moment, when the economy matures (+Rostow), inequality declines (despite policies implemented) - an inverted U-shaped relation. Inequality due to **sectorial shifts**: a transfer from agriculture to industry, workers made higher wages than farmers. Eventually, more citizens benefit from economic growt, inequality decreases. Theory confirmed by equality leveling in the 20^th^ century. But there's rise again of inequality again, how long-lasting was this levelling of equality? Poverty - International poverty line (IPV) - **the monetary value of a person's consumption -** is *extremely* low -- 1.9\$ - PPP used to determine IPV due to different price levels - Since 1970s extreme poverty has decreased - Comparing poverty in the past in problematic because even the richest persons 200 years ago had no access to things (medicines, technologies) than some poor people have today. Historical trends - Before 1900: rising intra-national inequality, high poverty. International inequality rises as well -\> Great Divergence. - 1900-1980: intra-national inequality declines (due to social spending), poverty declines. International inequality continued to climb (countries unable to catch up or fixed in the colonial system). =\> The effects of the welfare state were globally ambiguous. - After 1980: Reversed pattern: intra-national inequality is rising again even though there is less poverty. International inequality has declined HOW HAVE HIGH-INCOME COUNTRIES BECOME MORE EQUAL? Problems of industrialization: - **Proletarianization** problems: female and child labour, unhealthy conditions, class conflicts (e.g., eruptions of violence in Germany after WW1) - **Le Chapelier law** -- labour unions are prohibited (it was meant for breaking medieval old institutions like guilds, controlling labour) - No protection on the work floor (accidents, sickness) - Rapid urbanization (infrastructure not being able to keep up) -- poor living conditions Around 1830: prohibition of young children labour, voting rights, wage increases. Working regulations and better bargaining positions of the workers improved their position and allowed to decrease inequality. Trade unions 19^th^ century: emergence of bargaining power through trade unions, right to strike After 1945: unions as "social partners" - **Corporatist bargaining model** (Europe): 1) collective bargaining at national, sectorial or firm level; 2) enforced by the state; 3) union members part of firms' boards, 4) negotiations of wages and working conditions. - **Liberal model** (US, Japan): restricted role, powers on the firm level Social insurance - The result of union power (medical insurance, pension, childcare...) First, [Germany]: - Political calculation of Bismarck (chancellor) to deter labour from socialist and communist movements. - Initially only for blue collar (industrial workers), less threatening groups were left out. - First, accident insurance, later: sickness, old age, disability. U.S: - Only after Great Depression: most workers were affected, sympathy for the unemployed. - Social security act (1935): - Unemployment insurance, pensions, industrial accidents, aid to single mothers (not all sectors!) - No all-encompassing national health insurance (opposed by medical field) 20^th^ century: a welfare state - Democratization (more inclusion in political system) - From idea of **laissez-faire** (the state shouldn't intervene in the economy) to active government intervention (J. M. Keynes: gov should protect employment and cushion crises) - After 1945: Fordism (higher wages =\> higher productivity, less social conflicts) - **Trentes glorieuses** (1945-1973) & **golden sixties** -- economic prosperity - The progress of Welfare State stopped in 1980 due to declining state revenue and increasing debt INEQUALITY AFTER 1980s What caused renewed intra-national inequality? - Decreased social spending (stopped progress of welfare states) - De-industrialization =\> rise of unemplyement rates =\> worsened bargaining power of labour =\> lower wages - Decline of progressive tax rates: **Trickle-down economics** - economic policies favoring the upper income brackets (which invest, set up businesses, allowing lower brackets of the society to benefit from this eventually) CHAPTER 6 -- Economic development: a view from the periphery ============================================================ THE PERIPHERY: PROBLEMS: imperialism and de-industrialization - **Imperialism** (19^th^ century new wave) Problem: unequal economic relationships -- colonial economies dependent on colonial states, little diversification, restricted trade. 1. 2. - Japan: opening borders for trade - China: Opium Wars (British ships bombarded ports in China and forced them to accept the importation of opium in exchange for other products) 3. - Copper, gold, diamond and oil - Agricultural production (soy, palm-oil, cacao,...) Consequence: division of labour (industrial north vs agricultural south). Decolonization only after 1945 - **De-industrialization** - decline of manufacturing a\\in the developing world that was outcompeted by industries in the North Asian manufacturers drive out of business for 2 reasons: 1. ! Japan: adapted machinery that lowered capital costs and made the most out of a labor-intensive environment. 2. **Underdeveloped Periphery:** Asia (excluding Japan), Africa (excluding South Africa), tropical Latin America and the Caribbean. Other Industrial Core: Canada, Europe, Russia/USSR and Japan. Southern Cone: Argentina, Australia, Chile, New Zealand, South Africa and Uruguay - **The Great specialization** - global division of labour: [South] (specialized in the export primary agricultural products) vs [North] (industrial goods). [Periphery vs Core] Great divergence =\> Great Specialization (19^th^ century) As demand for primary products increased, so did the prices, therefore states were looking for new sources of supply - **NATURAL RESOURCE CURSE** -- paradox that countries abundant of natural resources and raw materials often suffer from less economic growth than countries WITHOUT natural resources (e.g. Nigeria) -- "[Paradox of the plenty]" Why? - In the 20^th^ century Terms of trade of primary goods was deteriorating (Terms of Trade -- imports and exports prices, NOT volume.) The price of primary commodities declined relative to the price of manufactured goods over the long term. - Primary commodities' high vulnerability to price fluctuations. - High prices of commodity export can be damaging for the economy: Situation: commodities are suddenly enjoying a price boom More exports =\> deterioration of other sectors (**crowding out effect** - natural resource exploitation tends to absorb the majority of investments) =\> temporary higher wages =\> excess demand, which the domestic market cannot satisfy =\> increased import. ALSO More exports =\> stronger currency (cheaper imports) =\> damage to other domestic industrial sectors: - A stronger currency makes the export of their products more expensive. - Producers cannot compete with cheaper imported goods Example: **Dutch disease** - an economic term for the negative consequences that can arise from a spike in the value of a nation's currency, associated with the new discovery of valuable natural resources. The Gas Bubble of the 1960s, drove up the currency value, making Dutch exports of all non-oil products less competitive on the world market. Solutions? 1\) Countries should use their raw materials, for instance, for import substitution and set up industries by their own. Underdevelopment was not so much the lack of domestic improvement (contrast with the notions of Rostow on modernization), but rather the ultimate consequence of ***dependency theory*** (the periphery was poor *because* the West was rich) 2\) Sovereignty in the developing world - countries should freely dispose of raw materials and use them for domestic economic development. In reality, a lot of resources were in hand of foreign multinationals (in 1962 the UN agreed upon Declaration on Permanent Sovereignty over Natural Resources, which allowed states, if necessary to take over foreign ownership). **Nature resources as a blessing?** - a boost to their development Successful examples resource-led growth: US, Australia, Canada (19th century) Today: Norway, Saudi Arabia, Qatar 1. Natural resource abundance combined with high wages, stimulated the development of technology. - - 1. High institutional quality - the revenues of natural resources were reinvested and shared. Depends on **institutions** - the ability of states to reinvest extra revenues in infrastructure, future proof activities, diversification... Natural resource abundance *can* lead to a concentration of economic [and] political power: - Rent seeking behavior - natural resources benefitting a small class of rent-seekers, no diversifying investments - Revenues spent it on their own political capital, in prestige projects that doesn't really benefit the entire population - 1\) ISI: import substitution industrialization (1960-1980) - - - - 2\) Big Push Industrialization - - AFRICA Negative effects of colonialism for economic development: forced labour & expropriation (išvarymas) of local tribes, there were many investments in infrastructure to facilitate exports of primary commodities, resource curse Africa adapted **ISI**, yet it was still not industrialized (low productivity) because of: 1. 2. 3. LATIN AMERICA - Victim of Great Specialization - Example: Mexico -- tried to adapt the Standard Model but unsuccessfully: little tariffs, no transportation, no mass education - **ISI**, much like the Standard Model: general education, high tariffs, development of banks =\> reached industrialization - BUT production of cars (for example) was too small to reach **MES** (Minimum efficient size) =\> It was more expensive than large car production in USA =\> LA country can't compete with USA or such countries =\> Underdevelopment of industries ASIA 4 Asian tigers: Hong Kong, Singapore, South Korea, Taiwan Other success cases: China, Japan South Korea - Difficult pre-history: occupied by Japan, Korean War - [Big Push Industrialization] (state planned investments) - 1970s **5-year plan**: developing steel, petrochemicals, shipbuilding and nuclear energy industries all at the same time. Facilitating the rise of advanced mechanical and electronics industries - Company organization = **chaebol** e.g., Samsung, Hyundai, (similar to Japanese model of the group Zaibatsu) -- protected by the state, shielded from competition, given access to easy financing. - Democratization process after 1980s - [Shortcomings]: large power of chaebols, not many successful SMEs, lack of welfare system Japan - Pre-history: some industrialization following the Standard Model, but defeat in World War II - [Big Push Industrialization] =\> closed wage gap with Europe - Adaptation of technology - Planned industrialization by the Ministry of International Trade and Industry (MITI): - - - Higher wages =\> created domestic consumer market - Lots of exports =\> imports to the US (which did not impose high tariffs due to political reasons) =\> crisis in the US car and steel industries China **Stage 1**: [Big Push Industrialization]: communist planning economy, collectivization of labour (no supply/demand, more efficiency?), state-owned industries, '**walking on two legs**' (combining capital-intensive, advanced technology with labour-intensive manufacturing), HOWEVER political instability e.g., Cultural revolution. **Stage 2**: pragmatic reforms =\> market economy 1. - Household Responsibility System - the land of the collectives leased to families, could freely dispose of surplus production - More reliable water supplies and irrigation systems, new high-yielding rice seed, increased fertilizer production 2. - Countryside became not only agricultural part (Township and village enterprises) (TVEs) =\> rise in production and workers 1992 "**socialist market economy**": state-owned enterprises 🡪 publicly owned corporations, less government involvement, increased productivity (=\> China - world's biggest manufacturing country) [Overall]: Big Push Industrialization \> ISI for catch-up CHAPTER 7 - Economic globalization: what, when and how? ======================================================= **Traded openness index** -- shows the overall importance of trade in the global economic system First wave of globalization (1500-1850) - - - First global economy (1850-1914) - - - - De-globalization (1914-1945) - - Restoration of the global economy (1945-1980) - - Neoliberal (1980- today) - - - WHY GLOBAL TRADE? **Mercantilism** (16^th^-18^th^ century) - International trade - damaging to the economies - Economic power is linked to political/military power (protectionism and violence) - Trade as a zero-sum game (the profit of somebody else is the loss of the other): 1\) Colonies - good thing (provide natural resources and increase national wealth) 2\) Strong state intervention in production (to limit imports) through monopolies, regulation of production standards 3\) Import duties Mercantilism =\> **free trade** - **Adam Smith**: trade could also create added value, theory of the absolute advantage - not every country should produce everything (inefficient), countries should produce what they can produce the most effectively and efficiently. - **Absolute advantage** = the ability of an actor (country, company) to produce more of a good or service than a competitor - Trade between two countries that exploit their absolute advantage in different sectors leads to more welfare - Further development - **David Ricardo**: Smith had one major disadvantage - not all countries have an absolute advantage. An alternative theory: countries do not need to have an absolute advantage but can have an advantage in comparison. - **Comparative advantage** = countries should exploit their most efficient sectors = if they have the ability to produce something at a [lower opportunity cost than their trade partners] - Only works if there are very few trade barriers - Limitations: - Labour as the only factor - - - The law of one price = in a perfectly integrated global economy prices of the same product are the same, wages for the same job are equal, interests are similar and exchange rate superfluous (money is worth the same everywhere) = convergence - Customers have the same purchasing power - Condition: free trade of goods, knowledge and information =\> free market/no transaction costs - Only theoretical Why is there convergence? Answer: **arbitrage** - when markets are not integrated, price differences are exploited by competitors (e.g.: PC price in country France 800eur, in Belgium 1000Eur =\> merchants buy computers in France and sell in Belgium). In the long run, prices converge. Convergence in: - Movement of goods: trade =\> prices - - - Before: - Silk routes -- trade of luxury goods with Asia (China) - Marko Polo - one of the first Western visitors in China - Comparative advantage: east specialized in luxury goods, Europeans had little to offer, silver as a currency - Rise of Italian cities (via their connections in the East) - First transfers of diseases (black death) EARLY MODERN GLOBALIZATION 1500 1500: start of European expeditions =\> replaced silk routes - Explorers: Columbus, Vasco da Gama - Rise of **Iberian** kingdoms: Portugal and Spain - **Treaty of Tordesillas** (1494) -- established sphere of influence across the Atlantic between Spain and Portugal - start of colonization - **Zheng He** - expeditions from China to the Western Oceans. Did not create a permanent trade system as European explorations did, because European exploration was driven by rivalry and an urge to outcompete other states (Portugal vs Spain), whereas in China they were seen as a costly affair and waste of national resources. Competition in Europe: 1\) 16^th^ century: Spain and Portugal - - 2\) 17^th^ century: Dutch Golden Age - - - 3\) 18^th^ century: **British** enter the stage - Aspects of integration: 1\) Market integration & convergence - At first little convergence of prices due to high transportation costs, protectionist policies and trade monopolies - Later, Dutch and British challenged the Iberian monopoly =\> decrease of prices (integration) =\> consumer revolution = luxury goods within reach to lower classes =\> incentive to work harder 2\) Silver as the "global currency" - Europe had nothing to "offer", therefore silver provided purchasing power - Flows of silver from Latin America - Around 1640: the value of silver converged, it had roughly the same value in China as it did in Europe = proof of unity of the global network - In Spain: silver inflation due to "Dutch disease" 3\) Columbian exchange = a (man-made) biological exchange of animal, plants and human diseases. - Pre-Colombian societies in America had no resistance to Eurasian diseases (e.g. smallpox). This caused high death rates amongst the local population =\> "facilitated" colonialism, as it broke the resistance of the indigenous population. - Exchange of new crops (tomatoes, potatoes) =\> change of diet in different continents 4\) Slave trade - Sugar plantations -- high productivity based on slave labour, because sugar canes must be processed immediately =\> specialization of the production process - Unsustainable -- used of large amounts of fuel - **Triangular trade**: manufactured goods to Africa =\> slaves imported from Africa =\> sugar exported to Europe Impact of slavery to Africa: Some more well-developed states managed to profit from this by raiding other tribes and engaging in slave trade Conflicts, selling war captives Depopulation (labour was already scarce) End of slavery: Slave revolt (1971) - plantation workers against the French =\> establishment of black republic in Haiti Britain: movements of religious and humanitarian leaders US: prohibition of "import" of new slaves (1808), finally, **civil war**. CHAPTER 8 -- Globalization and Free Trade ========================================= Advantages of trade - [Competition]: failure to adopt new technologies and cut costs =\> replaced by more dynamic firms - [Economies of scale]: firms that export to world markets face larger demand =\> lowering price per unit of product - [Learning and innovation]: firms, countries, entrepreneurs (...) that trade gain more experience and appropriate technologies and practices Disadvantages: - Vulnerability (Corona crisis), growing risks (climate, cyberattack, terrorism) - China syndrome: increased unemployment, lowered labor force participation and reduced wages in other countries Obstacles to trade and globalization: - - - - - Forms of trade protectionism: - Tariffs on imports - Quotas - limit on physical quantities that can be imported from abroad in order to protect domestic industries. - Technical, safety, sanitary norms (e.g.: Genetically modified food in EU) - Example: Brexit = 16% fall in trade due to new trade restrictions Motives for protectionism: - Infant (new) industry protection - De-industrialization: rise of new industrialized countries cause to respond with import tariffs (to avoid de-industrialization) - Political sovereignty motives (Brexit?) - market integration and trade requires some degree of abstaining political authority (EU harmonization) However, **autarky** = complete self-independence, is not possible THE FIRST GLOBAL ECONOMY (1850-1945) Transportation - Massive lowering of transportation costs: railways and shipping (!steam) - Shipping infrastructure: Suez Canal, Panama Canal Communication technology - Speed of info travel crucial to economic decision making - Telegraph network - First telegraph cable across the Atlantic - Wireless telegraph World market integration - Individual markets now corresponded more quickly to one another, price levels converged more strongly than ever before. - Every country has a comparative advantage in something Tariffs tariffs levels decreased US: Tariffs were high but were lowered systematically. Yet remained high until the WW1, peaked during interwar period, only post-WW2 the US became a champion of free trade. Global financial integration - Rise in capital flows (investments in foreign capital stocks) - Pound sterling -- the main international trading and reserve currency =\> Britain's high influence in world economy - **The Gold Standard** - pound sterling was at any point and by any bank convertible into a fixed quantity of gold =\> fixed exchange rates; reduced the risks of trade. - Result of finding new sources of gold Consequence: London as the financial capital - Banking -- bills of exchange, a center for foreign loans - Secondary markets: London Stock Exchange, Baltic Exchange (for shippers; legal counselling and business insurance) Mass migration and globalization 2 factors drive migration: push and pull. - Pull factors = opportunities to work, higher wages, access to land, openness to religion/world-views\ Push factors = destitution in the home economy, prosecution, war, lack of opportunity, lack of social mobility - **Ellis Island** (NY) - inspections to determine if they were fit for entry into the US =\> effectively ended the era of mass immigration into NYC Disintegration of international trade (1918-1945) 1918-1929: relative restoration -\> 1929-1940: global meltdown - Loss of comparative advantages =\> protectionism - 1929 global crisis - overproduction =\> protectionism - Era of strict government control and regulations POSTWAR RE-GLOBALIZATION (1945-1980) Multilateralism and restoration of a relative free-trade regime **Multilateral agreements** = process of organizing relations between groups of three or more states: 1. - Financial aid from the US in order to restart their production process - US goals: restore export markets, avoid the spread of communism. 2. - principles of non-discrimination - Elimination of quantitative restrictions or quotas - **Reciprocity** - granting the same trading terms and conditions to all partners - Later replaced by WTO. 3. - Return of the gold standard, now on dollar - Creation of the International Monetary Fund (IMF) (lender to countries in temporary difficulty) and the World Bank The expansion of trade after WW2 was largely possible because of reductions in transaction costs stemming from technological advances, like the development of commercial aviation, telephones. Divided world economy 1. 2. Newly independent states pursuing ISI and protectionism policies =\> focused on the development of national economies Lowering of tariffs only between OECD countries Migration European countries in need of labour. Immigrant workers from Turkey, Morocco working in heavy industries. NEOLIBERAL GLOBALIZATION (1980-...) Leading advocates of neoliberal ideology: **Ronald Reagan** and **Margaret Thatcher** Neoliberal ideology Belief in the market: - Markets are self-regulating and guiding for human action (a response to the high degree of protectionism in the world economy) - Deregulation of markets - Lowering trade barriers The role of the state = **laisser faire** - Night-watchman state (only basic core responsibilities e.g., military and police). - Privatization - of state involvement in sectors like public transportation, postal services, banks etc. - restrictive monetary policy = central banks **Financial deregulation**: gold standard abandoned, deregulations in NYSE, LSE (Thatcher's Big Bang) Financial innovations: securitization Into the 1990s - [End of communism] -- privatization, Eastern Europe transition toward market economy, Chinese openness to international trade - Instead of GATT =\> **WTO** (World Trade Organization) - foundation of global commercial integration - **TRIPS** -- protection of intellectual property rights - [Migration]: resumed migration mainly for economic reasons, restrictions, migrants work around 3D: dirty, dangerous or demanding. CHAPTER 9 - Business and the global economy =========================================== **MNCs/MNEs** = multinational corporations = transnational corporations = very large companies, possessing subsidiaries in several countries, operating on a global scale. They have the ability to influence the fiscal and social policies of states. They play a big role in economic globalization, since their cross-border organization contributes to international integration and interdependence. Multinationals Operating from home and [owning assets] (factories, trading posts) [in host countries] ≠ exporting of goods or services from home base **!!!** 2 types of foreign investment: 1. **Portfolio investment** - the acquisition of foreign securities w/o any control over the management of the foreign entity. 2. **Foreign direct investment** (FDI) - ownership and control of assets in foreign countries. Through acquiring an existing firm OR by making a **greenfield investment** - the establishment of a completely new operation =\> multinational - **FDI flows** - transactions recorded during the reference period (typically year). - **FDI stocks** - the accumulated value held at the end of the reference period. Most often: parent company & its subsidiary Theories (advantages) of MNCs (why FDI and not export?) 1. 2. - Tariffs - Labour costs - transfer production to lower wage economies - Nature of the host market (adaptation of products) - Location-bound activities, e.g., nature resources 3. All three factors have been put together in a model - the **Eclectic paradigm** (OLI model): Does the firm have ownership advantages in a foreign market? =\> Should this advantage be sold or kept? -- internalization =\> do locational advantages make it more profitable to exploit its assets in a foreign location rather than at home? 3 motivations to invest abroad: 1. 2. 3. \+ - Transfer of knowledge and technology - Fresh capital - Create employment - Enhance competition - Spillovers (a new investment may create other entrepreneurial opportunities) However, very context specific: e.g., can sometimes remove competition Business-Political relations - There exists tension between governments and MNC due to balance of power which can lead to conflicts (=\> nationalization) especially in developing countries. - Hyperglobalization: corporate power is outstripping national governments, it is often difficult to control and monitor their activities, however disinvestment can cause major problems for host economy. Proto-multinationals = State-sponsored trading companies created to support colonial trading systems (e.g. Dutch East India Company (VOC)), were granted a monopoly, available to public through stock exchange. MNCs in the first global economy (1850-1914) developed =\> developing - System of monopolies abandoned, embracing the advantages of competition and free trade.   - Trade-driven (importing goods from Asia and America and selling it in Europe) - Need for natural resources for IR2 - Investments in public utilities: railways and electrification, in developing countries (mostly UK) - First cases of multinational manufacturing (ownership advantage and standardized product) e.g.: Singer [Case]: **Anaconda Copper Mining Company** - typical example of a **resource seeking investment**. The copper mines in US were showing signs of depletion, and therefore new sources of copper were needed. OLI model: **ownership advantages** - it was a mining business with expertise in geology and the extraction of resources. **Internalization** - Anaconda was a vertically integrated business, it needed reliable sources of copper in order to support that business structure. **Locational advantages** - Chile was open to foreign investors, no regulations and a friendly tax-regime, was part of the American sphere of influence. The mines were later nationalized. MNCs in post-war globalization developed =\> developed - More investments in developed countries - Market-seeking American investments - Due to growing divergence in labour costs, it was cheaper for American firms to set up production in Europe - Success linked to advertising, which was a larger and more advanced business in the US [Case]: **IBM World Trade Corporation** - American firm, in a technological sector (machines, computers) OLI model: **Ownership advantages** - largest and leading computer business, Set up mini-IBMs in many countries: promoting non-Americans to important executive positions and copying its model of efficient production. **Internalization** - decided against licensing its products to international partners, fearing a loss of its technological secrets, and opted for direct control of international operations. **Location** - American market was crowded, whereas little competition in Europe =\> reaching new markets. Lower labour costs. **MNCs in neoliberal globalization** developed and developing =\> developed and developing - Dramatic increase, stagnated by 2001, 2007 and 2020 crises - More geographically diversified FDI (NA, EU, China) - Growing importance of the service industry =\> decline of FDI in manufacturing - Mergers and acquisitions - "Dragon multinationals"- MNE's emerging from post-Communist countries (large multinational expansion through M&A) Case: **AB INBEV** -- Belgian beer brewing multinational, expanding through M&A. OLI model: Ownership advantages were relatively unimportant. **Internalization** - beer markets are "provincial" (do not accept foreigners), lost branding and reputation by selling through importers. **Locational advantages** -- avoiding the problem of different consumer tastes by buying large local beer firms and leaving them unchanged, which is less costly than promoting existing beers. REGULATING THE MULTINATIONAL **Jurisdictional asymmetry** (multinationals vs governments) - govs facing multinationals whose control and ownership lies beyond their borders - multinationals face multiple jurisdictions in different political systems Political restrictions: 1850-1914 - Relative openness - Some cultural resistance (e.g., banking in the US could not be done by foreigners) 1945-1980 - Strict screening of multinationals - Compulsory joint-ventures (requiring investing firms to take on board a local partner) - Nationalizations (expropriation) in the developing world (due to decolonization) =\> protectionist South vs "liberal" North 1980 -- Deregulation and privatization New host economies: China and Eastern Europe Codes of conduct: - Current challenges: ecology and pollution, market power, work conditions and human rights - Corporate social responsibility (as a are self-regulating tool) CHAPTER 10 -- Global crises =========================== WHAT'S AN ECONOMIC CRISIS Types of crises: - Internal (political instability) vs external (wars, pandemics) - **Financial crises** -- drop of financial assets value (1929, 2007) - **Debt crises** - countries being unable to repay loans due to increasing interests (European debt crisis (2009-2012) - **Inflation-driven crises** (German hyper-inflation crisis 1923) **Recession** - decline in economic activity, that usually leads to a decrease of GDP **Business cycle** - change in economy growth in the short term **Output gap** (production capacity) - real GDP - potential GDP. 0 = full employment High business cycle growth % \> annual average growth Output gap (+) Demand \> factories' most efficient capacity --------------------- ----------------------------------- ---------------- ---------------------------------------------- Low business cycle growth % \< annual average growth Output gap (-) Demand \< factories' most efficient capacity **Minsky model** (explains and predicts patterns of financial crises, focuses on the supply and availability of credit) Economic growth =\> Boom (investors invest) =\> Appearance of bubbles (price of assets differs than the real price) =\> People are waiting for future gains =\> Mania (borrowing in order to buy assets) =\> Debt-to-equity ratio rises =\> In some time, people start to doubt that boom will continue (demand goes down) =\> They sell assets =\> Change in price =\> Panic =\> Serious losses of boom assets Periodicity of crises - Capitalism needs crises because they are regulatory (shifts focus from activities that are inefficient, revealing new opportunities) - **Schumpeter:** crises are embedded in the capitalist system. They are caused by innovation, new products. They are necessary to the economic system, because it renews methods and organization of production and economic activities. - **Kondratiev cycles** - each period of accumulation ends with a crisis and is replaced by new sectors that are driving economic growth. **Classical economics** - supply creates its own demand: production =\> income =\> consumption Therefore, they see external reasons like technological factors as a cause of crises **Keynesian economics** (J. M. Keynes) - focus on demand factors. Uncertainty period =\> increased saving and decreased consumption =\> lower production =\> lower income =\> crisis (! need of gov intervention or it will be endless) Therefore, governments should pursue **anti-cyclical** policy: - - **Multiplicator effect** -- each investment generates multiple new incomes [Critiques] by **monetarists** (not supply/demand but money, neoliberalists) - **Friedman** \- Government intervention can be delayed, politicians may not follow anti-cyclical policies to "look better" for their re-elections \- **"Crowding-out effect"-** Monetary supply is stable =\> increased gov expenditures =\> others will have less money to spend. Gov borrows money =\> less for companies to borrow. Gov invests in infrastructure =\> consumers will be unable to buy things. - Solution = gov should spend as little as possible, monetary policies controlled by independent centra banks - All financial crises were caused by monetary problems 1929 CRISIS Collapse of NYSE (October 24 -- Black Thursday), people wanted to get rid of stocks =\>bankruptcies, lowered demand, international trade collapsed Speculative mania -- Minsky model - "Roaring twenties" -- era of optimism and growth =\> speculative mania - Ordinary people buying stock with borrowed funds (stock as collateral to loans) =\> stock prices soared - Pump and dump - artificially inflating stock prices and then sell at a high point - Tighter monetary policies - 1929 boom =\> panic to get rid of the stock - Financial problems of banks due to diminished collaterals - At the same time, industrial overproduction =\> deflation - Global effects, full recovery only after WW2 This was a **structural** crisis. Problems: 1. 2. 3. Keynesian economic model Economy had to be fixed on the demand side (Laisser-faire policies no longer working) Franklin D. **Roosevelt** "**New Deal**"(1933-1939) - reforms in agriculture, finance, waterpower, labour and housing, vastly [increasing government intervention]. Fixed unemployment, production regulations, restored trust in the banking system. 2007 CRISIS Contraction in liquidity - banks no longer would extend credit to another, due to serious mistrust, which was caused by the failing housing market in the USA. Causes: 1. 2. 3. 4. Timeline: - **2004-2006**: interest rates increase, home prices began to fall =\> many mortgage holders now owed more on their loans than their homes were worth - **2007**: MBSs loss of value, became a toxic asset (worthless) - **2007-2008**: banks began to doubt one another's solvency =\> freeze of fund =\> home owners to get new loans/refinance existing loans =\> deepening of crisis - **September 2008**: peak of crisis -- bankruptcy of largest US banks, those deemed "too big to fail" received bailouts by the Fed, others did not, in order to discourage future reckless behaviour by other banks. Solutions to the crisis: - Rescuing "too big to fail" companies in order to avoid failure of the entire financial system - Structured programs: \- Purchasing MBSs and other "troubled assets" from the US banks \- **Quantitative easing** - pouring in money in the financial system by buying up assets, bond and putting aside the worries of inflation However, European bailout program failed due to lack of cooperation (Germany refused) =\> European sovereign debt crisis European sovereign debt crisis (2009-2012) - "PIIGS" = Portugal, Ireland, Iceland, Greece and Spain -- failure of banks and whole financial systems, huge budget deficits - Greece and Portugal bailouts by the EU =\> forced to adopt **austerity** (cut spending, increase taxes) - Open criticism to the Eurozone, wish to pursue their own monetary policy, Euro nearly collapsed, rise of **Euroscepticism** - Markets calmed by an inspiring speech 2012: "whatever it takes" Consequences: - Long-term unemployment and poverty - Bankers, who helped to create the crisis, resigned, yet still earned bonuses ("golden parachutes") =\> public resentment Financial regulations - **Dodd-Frank legislation** (2010) - stress-testing (assessment of banks impact on macroeconomic stability), control of "too big to fail" banks. - **Basel III** - minimum capital requirements for banks, offered standardized methods for weighing and measuring risks. CHAPTER 11 -- Governing the world economy ========================================= GLOBAL ECONOMIC GOVERNANCE **Global Economic Governance** - consists of the rules, processes and regulations, that support global economic activity by protecting property rights, enforcing contracts etc, in order to bring [stability] and [predictability]. It is needed because there is a high degree of uncertainty in the world economy. Right now it is the strongest as it's ever been, yet tensions remain. Tension fields: 1. 2. 3. International political economy - Economic governance involves two domains: the economy and politics - In early economy science, politics wasn't part of economics, however because of the growing importance of multinational investment and the political problems it created, political economy studies have become more important National systems of political economy: 1. - Regulation of the economy, produce public goods, shareholders - Intervention must be justifiable: competition laws, pollution 2. - actively create welfare state - representation of labour in firms Types of international cooperation: - - States transfer some authority, rule-making, towards an international body - State interests can be represented in various ways: - - - - Without government interests, non-profit: religious organizations, health care organizations (Red Cross)... Why create international organizations? 1. 2. 3. Realist G. Arrighi: - **Hegemon** = a state that is the leading economic power, and that sets the rules of the global economy - They bring stability and - 4 important hegemons: the Netherlands (17^th^ century), the British (18^th^-19^th^ century) -- the gold standard, America (20^th^ ) -- WTO, China (21^th^ prediction) - **Before 1945**: there were little rules or international institutions. Some attempts to create international institutions, especially during the interwar period. - **After 1945**: breakthrough of internationalism and rule-making. **Multilateral organizations** (World Bank, WTO) and **regional integration** (European integration) WORLD ECONOMY BEFORE 1945 Britain as the hegemon - London as the main capital market - Using power to "open" markets and solve problems of international trade (power was translated in unequal commercial treaties (Ottoman Empire, Chinese Opium wars) - Gold standard as a rule Experiments in international cooperation 1. 2. 3. TOWARDS GLOBAL ECONOMIC GOVERNANCE AND INTERNATIONAL COOPERATION (1945-today?) 2 developments: multilateralism and regional integration (EU) 1. = setting similar rules between different countries - UN: - - - - **IFTI** (international financial and trade institutions): - - Gaps in multilateralism: - - - After 1990: Emergence of service economy, lack of provision of Intellectual Property Rights in international trade =\>WTO -- services and IP included (**TRIPS**), exceptions for developing states in for example implementing intellectual property law. 2. - Why EU happened? With Marshall plan, Americans forced Europeans to cooperate (not to rival). Also, European Coal and Steel Community (1951) (France wanted to weaken Germany by this) =\> Treaty of Rome (1957) =\> European Economic Community (1957) =\> EU and euro (1993) - **NAFTA** (1992) -- North American Free Trade Agreement -- Mexico, USA, and Canada (not political/customs, only market integration) - ASEAN(1967) -- Association SouthEast Asian Nations \- This summary is entirely written upon the lectures of the course \"Global Economic History\", taught by Professor Robrecht Declerq from the university Université Saint-Louis Bruxelles. -