International Wealth And Power Final (Study Guide)

Front 1

Political Thought after Keynes: Hayek

Back 1

1. Individuals set value: both the price of objects and their purposes
2. Market achieves spontaneous, unplanned order that originates in the conscious, unique actions of individuals
3. Economy is a process of adjustment over time that coordinates plans/actions of individuals
4. Prices communicate and signal information across the system
5. Business plans and entrepreneurial decisions respond to market-generated information
6. Within a continual process of change emerges through the market function and equilibrium is established in the long-term
7. Market faltering is due to capital investments that can lead to expansion of credit and overproduction

Front 2

Political Thought after Keynes: Chicago School of Thought

Back 2

1. Opposed any government intervention that restricted free market
2. Especially opposed to use of fiscal policy to stabilize economy (Government spending causes inflation)
3. Favored use of a special type of monetary policy: quantity of money determines the general level of prices: advocated gradual increase at a fixed annual percent to aid expansion and growth

Front 3

Liberalism: Government Policies

Back 3

1. Late 1970s- early 1980s: Thatcher (1979-90) Reagan (1981-89), Kohl (82-98)
2. Washington Consensus
3. Government get out of the market
4. Monetary policy should be used to avoid disruption in the financial sector
5. Fiscal Policy should be reduced through cuts in social programs and taxes
6. Mitterand (1981-1995) in France the exception within the west

Front 4

Global Economy (1980s)

Back 4

1. Shift from manufacturing to services in OECD
2. Emergence of open capital markets
3. Acquisitions and mergers in corporate sector
4. Consumer credit expansion
5. Growth of novel financial instruments (derivatives, hedge funds)
6. Indebtedness as normal
7. The rise of lending to developing world beginning 1970s
8. Emergence of a global labor force
9. Emergence of global food production and distribution system
Increase in untenable borrowing and the Third World debt crisis of 1982
10. Shift in manufacturing to developing world

Front 5

Three Ideologies that Shape Economic Policies

Back 5

1. Liberalism: Cooperation between government
2. Mercantilism: competition between nations
3. Marxism: Competition between labor and capital

Front 6

Welfare Consequences

Back 6

Determine the level of societal well-being

Front 7

Distributional consequences

Back 7

Determine how income is distributed between groups within countries AND between nations in international system

Front 8

Society Centered Policies

Back 8

Policy goals are shaped by political response to particular interest group demands and bring into question general welfare gains

Front 9

State Centered Policies

Back 9

Policy actions in the economy occur independent of particular group interests and in search of the general welfare

Front 10

Power Distribution: 1815- Present

Back 10

1. Sates the main owner of power
2. Balance of Power (1815-1912)
3. Tight bipolarity (1912-1914)
4. War (1914-1918)
5. Unipolar transition (1945-1946): Bretton Woods
6. Tight bipolarity (1947-1955)
7. Watershed (1956-58)
8.Transition (1959-1964)
9. Loose Bipolar (1965-1970): non-state players emerge
10. Interdependence (1971-1988): states's interest linked
11. Globalization (1989-2014): Power dispersed among multiple kinds of players

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Suez Crisis

Back 11

1. June 1956
2. Nationalized Canal in Egypt after U.S. and G. B. withdrew dam offer. Israel later invaded Egypt conflict followed.

Front 12

Belgrade Conference:1961 Nehru's five principles

Back 12

1. Mutual respect for each other's territorial integrity and sovereignty
2. Mutual non-aggression
3. Mutual non-interference in domestic affairs
4. Equality and mutual benefit
5. Peaceful co-existence

Front 13

Two Principles of GATT/WTO: Market Liberalism

Back 13

1. Open free trade system for all promotes general welfare and rise in world stand of living for all countries

Front 14

Two Principles of GATT/WTO: Nondiscrimination

Back 14

a. Most Favored Nation (MFN); exception regional trade agreements and General system of preferences (GSP)
b. National treatment: government prohibited from using taxes, regulations and other policies to provide advantage to domestic firms at the expense of foreign firms

Front 15

Non-Tariff Barriers to trade

Back 15

1. Dumping: Selling goods abroad below the domestic market price
2. Predatory Pricing: allowing prices to decline to unprofitable levels to underprice other firms and drive competition out of the market place
3. Quota/Quantitative restrictions on the import of specific goods
4. Government subsidies
5. International Commodity agreements

Front 16

Issues blocking Doha Round

Back 16

1. Qatar November 2001
2. Goals: Boost world economy and stimulate growth and wealth in developing countries whose interest not met in the Uruguay Round
3. Tap potential growth through liberalization of agriculture trade (U.S. and EU subsidies)
4. Talks stalled in 2008 over disagreement on agricultural products (special safeguard Mechanism and China/India walkout of July Geneva meeting)
5. Outcome still uncertain

Front 17

Hegmons

Back 17

1. overcome free-ride problem: benefits to it are so large that it is willing to bear the full cost for others to enjoy (the cost to maintain free trade rules)
2. the historical evidence (but not enough) in favor of hegemonies promoting free trade: Britain in 19th Century; United States 1945-1973 (Japan> EU> rise of protectionism)

Front 18

Public Goods

Back 18

1. non-excludability: one good provided. no one can be excluded from enjoying its benefits
2. non-rivarly: consumption by one person does not diminish the quantity of the good available to others

Front 19

RFTA and MLN

Back 19

1. Collapse of the Soviet Union and need for new trade agreements (Russia joined WTO August 2012)
2. Changing policies od developing nations to export oriented growth
3. Scholars: 1. Desire for secure access to important trading markets (US. Canada, EU) 2. Signal commitment to economic reform (Mexico) 3. increase bargaining power in multilateral negotiations

Front 20

Opportunity Costs

Back 20

1. This is the value of what is given up when country (or person) choose one activity/policy over another
2. The cost of forgone production (measuring the efficiency of choices made about the use of scarce resources)
3. High: given up a lot of one product to make another

Front 21

Theory of Comparative Advantage

Back 21

1. During the 17th Century it was widely held that every person was better than the rest at some task; did not allow for the reality the some people lacked any absolute advantage

Front 22

Bargaining Power in Trade Negotiations

Back 22

1. Patience: both want agreement today but one may be willing to wait and insist on an outcome closer to its ideal
2. Possessing outside options: next-best alternative to current multilateral negotiations (negotiating regional agreements may be an attempt to demonstrate outside options in multilateral WTO process)
3. Private information: the extent to which one can gain access to others' private information while guarding one's own during the negotiation

Front 23

Prisoners Dilemma

Back 23

1. Two governments cannot conclude an agreement even if each identifies an outcome it would prefer to the status quo
2. Each has two strategies: liberalize (open) or protect (close) its domestic market
3. Out come for each "protect" yields more utility than "liberalize" regardless of the strategy the other adopts. So protect is the dominate strategy for both, resulting in the negotiation ending in protect/ protect, retain tariffs.

Front 24

Pareto Optimal (Zero Sum)

Back 24

1. Optimal: no single player can be made better off without making another play worse off (L/P)
2. Sub-optimal: Possible for at least one actor to improve its position without any other actor being made worse off (L/L)
3. PD outcome of PP is sub-optimal because both governments realize higher payoff at LL than at PP

Front 25

Three Conditions

Back 25

1. Iterated playing of the dilemma
2. Use of reciprocity strategies (tit for tat strategies: each government plays strategy its partner played in previous round) to enforce/liberalize outcomes.
3. Governments must care about payoffs that will occur in future rounds otherwise

Front 26

Role of WTO

Back 26

1. Creates expect ions of repeated interaction (8 completed rounds)
2. Disseminates compliance information to make tit-for-tat strategies effective; it provides transparent rules that make it easier to determine compliance; and it has a dispute resolution mechanism to enforce agreements
3. U.S. -Brazil dispute over U.S. cotton subsidies

Front 27

Society Centered Accounts of Trade

Back 27

1. Government policies are shaped by politicians's response to interest groups's demands
2. The response is based on the interplay between organized interests and political institutions
3. This approach emphasizes distributional consequences rather than general welfare gains

Front 28

Factor/Sector Model

Back 28

1. Models are interest group (demand side) focused
2. Both models hold that raising/lowing tariffs redistributes income
3. These income consequences are the source of trade policy preferences
4. The two models differ on how the results of trade policy divdd society-how each affect income distribution

Front 29

Interest Groups and Collective Actions on Trade Policy

Back 29

1. Demand Side models of trade policy focus on the role interest groups play in setting trade policy
2. Some with common interests don't because of the free rider problem. Consumers benefit from free trade but individual consumers think the cost to lobby won't make a difference and they will still get the benefit of free trade, so consumers do not lobby as a grip for trade benefits

Front 30

Collective Action

Back 30

1. Producers rather than consumers dominate trade politics
2. There is a bias toward protectionism because tariffs provide a LARGER benefit to the few firms in the protected industry [who then lobby]
3. Governments rarely liberalize trade unilaterally but will when there is reciprocity

Front 31

Interest Groups

Back 31

1. Conflict between classes: worker v. owners
2. Conflict between industries: import-oriented v. export-oriented industries
3. Common to both: the core conflict concerns the ultimate stake- the distribution of national income: income rise for those whose interests are met by the policy adpoted

Front 32

State centered infant industry

Back 32

1. industries that will not be able to compete initially because factor endowments are not always mobile: they will not yield returns higher than if used in other industries
2. Industry won't be efficient in short-run
a. economies of scale will have high unit production costs
b. economies of experience will not possess efficient labor and management skills

Front 33

State Centered- Industrial Policies

Back 33

1. 1960s and its support for semiconductor industry beginning in 1970s to compete with US industry
2. Rent seeking (higher than market-based returns on investment): private sector efforts to convince politicians to enact policies that create rents they can capture

Front 34

Strong States (Japan, France)

Back 34

1. High degree of centralized authority
2. High degree of coordination among state agencies
3. Limited numb of channels through which societal acts can attempt to influence policy

Front 35

Weak (United States)

Back 35

1. Decentralized authority
2. Lack of inter-agency coordination
3. Multiple avenues for interest groups influence on policy

Front 36

MNCs

Back 36

1. Engages in Foreign Direct Investment
2. Owns or controls Value-Added Activities in more than one country under single corporate structure
3. MNS vary in size, scope

Front 37

Horizontal MNC integration

Back 37

1. Create or acquire production units within one or moe countries for the same or similar products.
2. Cost advantage gained by placing a number of plants under common administrative control because the intangible assets are most important source of company's revenue and are best "guarded" by horizontal integration
3. Manufacturing sectors

Front 38

Vertical MNC integration

Back 38

1. Own and manage the entire supply chain
2. Take advantage of differences in factor endowments spread across countries by fragmenting the production and distribution process.
3. Internalize transactions for intermediate goods (Specific assets: firms internalize when there are problems that prevent writing and enforcing long term contracts around a single asset
4. Most likely when locational advantage and specific assets combine

Front 39

Nationalization

Back 39

1. Most often extractive industries but also public utilities, iron, steel, retail, insurance and banking
2. Many developing nations adopted the Latin American Calvo Doctrine: asserts the right host nations to nationalize foreign investments and determine fair compensation: no home government has right to intervene in another country to enforce its citizens's private claism

Front 40

Sovereign Wealth Funds

Back 40

1. Government owned funds that purchase private assets in foreign markets; UAE, other Gulf States, Norway, China
2. US and EU most concerned
3. Welcome, especially with recent difficulties in financial world
4. Scrutinize
5. Propose international rules or codes of practices to govern SWF activities- effort begun in 2007 not yet successful

Front 41

Calvo Doctrine

Back 41

1. Which asserts the right of host nations to nationalize foreign investments and determine fair compensation; no hime government has right to intervene in another country to enface its citizens's private claims

Front 42

Principles held by OECD counties: How to Treat MNCs

Back 42

1. Foreign investments are private property and should be treated as favorable as domestic private property
2. Governments have the right to expropriate but only for public purposes
3. When expropriate must offer full compensation
4. Foreign investors have right to appeal to home government when they have a trade dispute with host government

Front 43

TRIMS (Trade Related Investment Measures)

Back 43

1. Domestic-content rules: limit hosts's ability to require use of domestic content in production
2. Limit trade-balancing measures that require a firm's imports to be offset by its exports
3. Limit restrictive foreign exchange practices
4. Constrain linking investments incentives from host to export-performacne requirements

Front 44

Singapore Issues

Back 44

1. Refers to four working groups set up during the WTO Ministerial Conference of 1996 in Singapore. One of these groups was assigned to work on Trade and Investment.
2. Disagreements between largely developed and developing economies has prevented a resolution, despite repeated attempts to revisit then, notably during the 2003 Ministerial Conference in Cancun

Front 45

IMF Goals

Back 45

1. Adjustment of Short-term balance of payments problems
2. Liquidity to finance growth in world trade
3. Confidence in stable currency exchange rates

Front 46

Balance of Payments

Back 46

Total, measured in monetary terms, of all economic relations between a country and rest of the world

Front 47

Fixed Exchange Systems

Back 47

1. Values are set relative to share of world productivity, then guaranteed by governments's use of preserves
2. Governments guarantee the rate by using their official reserve assets
3. Adjusting the fixed rates unilaterally within a narrow percentage margin and with IMF approval for large margin

Front 48

Flexible Exchange System

Back 48

1. Market determination
2. Government option to intervene

Front 49

Euromarkets

Back 49

1. began 1956-57
2. Government option to intervene

Front 50

IMF Board of Governors

Back 50

1. the IMF's supreme decision-making body, consisting of one governor and one alternate governor from each of the IMF's 188
3. The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank
4. In practice the BOG delegates day to day oversight to the executive board but retains responsibility for major decisions concerning the institutions itself, such as changes to the Fund's structure, and accepting new members.
5. The BOG normally meets twice a year at the IMF-World Bank spring and annual meeting

Front 51

IMF Managing Director

Back 51

1. Five year renewable appointment
2. Executive Board may nominate from any member state but traditionally form a European member state while First of three deputies in from United States
3. Chairs the Executive Board
4. Manages and appoints the IMF 2630 technical staff of primarily economists

Front 52

Executive Board

Back 52

1. The membership commits to maintain the Executive Board size at 24 members and to review Board composition every eight years, starting when the quota reform takes effect.
2. Advanced European countries will reduce their combined Board representation by two chairs at the latest by the time of the first election after the quota reform takes effect
3. The executive board will consist only of elected Executive Directors, ending the category of appointed Executive Directors (Currently the members with the five largest quotas appoint an executive Director)

Front 53

Moral Hazard

Back 53

1. The risk that a contract will change the behavior of both parties: if I cover all your losses, you are likely to take greater risks than are in either of our best interests, so insure only part of your losses
2. Concern that government bailouts of debar nations or banks or different financial crises will have similar effect

Front 54

Hot Money

Back 54

1. Private capital that can be withdrawn at the first hunk of trouble. Private funds that are highly liquid
2. Easily moved money that can be instantaneously redirected
3. Not foreign direct investments
4. this increased volatility in many developing countries

Front 55

Thirst World Debt Crisis/SAP

Back 55

1. Three shocks in 1979
2. Rise of interest rates in the U.S. (2/3 of LA debt based on variable rates)
3. Recession in OECD reduced demand for LA exports
4. Another rise in oil prices
5. By 1982, thirty most heavily indebted developing countries, 7 of which in Latin America, owned more than $600 billion to foreign lenders
6. By 1985 creditors realized original diagnosis needed revising; led to SAP's

Front 56

IMF conditionality agreements

Back 56

1. reduce economic growth
2. raise unemployment
3. push vulnerable segments of society deeper into property
4. make private foreign lenders more willing to invest

Front 57

1990s Asian Financial Crisis

Back 57

1. Barriers to free flow of capital were eliminated from 1980s through early 1990s
2. Hence, it was easier for private individuals (rather than banks) to move capital in and out of emerging economies
3. Commercial bank lending diminished and private capital from individual investors in OECD flowed to developing countries during the 1990s
4. These flows financed government bonds and corporate stocks and bonds in newly emerging economies

Front 58

Solution to the Asian Financial Crisis

Back 58

1. Self-insurance through accumulation of large stocks of foreign exchange reserve
2. Run persistent current account surpluses: peg currencies to dollar at undervalue level to make exports attractive and discourage imports

Front 59

Debt of World's poorest countries

Back 59

1. Low productivity
2. Geographically isolated
3. Small internal markets
4. Adverse ecologies (fragile soil, water stress, malaria)
5. High fertility rates
6. civil wars
7. health care and education decline

Front 60

Multilateral Debt Incentive 2006

Back 60

1. in a parallel move, many felt HIPC wasn't sufficient so efforts by G8 including US and UK, pushed for the Multilateral Debt Relief Initiative
2. Agreement reached in March 2006 to cancel $50 billion of debt
3. Cover this "write-off" by financial contributions to multilateral lenders by advanced industrial countries
4. When countries each HIPC completion point cancel 100% of their debt.