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CHAPTER 2
I) MANAGING THE GLOBAL ECONOMY SINCE WORLD WAR II: THE INSTITUTIONAL FRAMEWORK
A GLOBAL ECONOMIC RELATIONS BEFORE WWII
1 THE MERCANTILIST PERIOD
2 THE INDUSTRIAL REVOLUTION AND BRITISH HEGEMONY
3 THE DECLINE OF BRITISH HEGEMONY AND WORLD WAR I
4 THE INTERWAR PERIOD
5 THE INSTITUTIONAL FRAMWORK BEFORE WWII
B THE FUNCTIONING OF THE INTERNATIONAL MONETARY FUND, THE WORLD BANK, AND
GENERAL AGREEMENT ON TARIFFS AND TRADE
C THE INTERNATIONAL ECONMIC ORGANIZATIONS AND THE UNITED NATIONS
D POSTWAR ECONOMIC INSTITUTIONS AND THE ADVANCED INDUSTRIAL STATES1 THE IMF, THE WORLD BANK, AND THE WTO
2 THE OECD3 THE G-5, G-7, AND G-8
4 DIVISONS AMONG THE ADVANCED INDUSTRIAL STATESa The Stages of Regional Economic Integration
FREE TRADE AREA (FTA)
CUSTOMS UNION (CU) COMMON MARKET
ECONOMIC UNION
POLITICAL UNION
b The Growing Impact of Regionalism
E POSTWAR ECONOMIC INSTITUTIONS AND THE THIRD WORLD1 LDC EFFORTS TO ALTER THE INSTITUTIONAL FRAMEWORK
a The 1950S b The 1960S
c The 1970Sd The 1980S and 1990S
F POSTWAR ECONOMIC INSTITUTIONS AND CENTRALLY PLANNED ECONOMIES
G POSTWAR ECONOMIC INSTITUTIONS AND CIVIL SOCIETY1 WOMENS GROUPS
2 ENVIRONMENTAL AND LABOR GROUPS
3 DEVELOPMENT GROUPS
H CONCLUSION
CHAPTER 3
II) THE REALIST PERSPECTIVE
First important work on international relations: The history of the Peloponnesia War by Thucydides
Oldest, most influential school of thought in IR, but less important than liberalism in IPE
Two major strains of realism; one that ignore economic matters, another that is more attuned to economic-
political interactions. First strain comes from from Thucydides and the mercantilism
a BASIC TENETS OF THE REALIST PERSPECTIVE
THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS
No central authority above nation-states, international system is one of self-help
Thus principal actor the state- with preservation of national sovereignty and the pursuit of
national interest of primary concern.
Power necessary for state to retain sovereignty thus pursuit of power primary objective of states.
The state is a rational, unitary actor seeking to maximize benefits and minimize costs
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Political importance of subnational and nonstate actors such as interest groups and MNCs
downgraded
THE NATURE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS
Security Dilemma as each state seeks to bolster its own security.
Thus states most concerned with relative gains
Economic relations among states is a zero-sum game
Most powerful nations shape the rules of international organizations such as IMF, the World
Bank, and the WTO. States may either be offensive or defensive
Aggressive states may use the international economy to promote imperialist expansion of extend
national power over others
Defensive states may simply seek to maintain the economic position in the system
Hegemonic state is likely to have very different interests and policies from less powerful states
Realists are committed to capitalism and are concerned with the redistribution of power within
that system
THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS
Politics assume priority over economics in the realist perspective
Disagree with liberals who argue that increasing interdependence and globalization are eroding
state control
Realists argue that globalization only occurs to the extent states allow it Realists place considerable emphasis on ability of hegemonic state to create an open and stable
economic order that can further globalization
b THE MERCANTILISTS
Mercantilism first used as term by Adam Smith
Played important role in state building and unification after demise of feudalism
Mercantilists took all measures necessary to increase exports and decrease imports in order to accumulategold
Impossible for all states to have a positive balance of trade thus conflict central to international system
and relative gains more important than absolute gains
Declined in late 18th century with liberal criticism and gave way to free trade practicesc REALISM AND THE INDUSTRIAL REVOLUTION
Industrialization in realist view, central requirement for states seeking national security, military power,and economic self-sufficiency.
Alexander Hamilton, foremost realist thinker around 1755-1804, considered strengthening and promoting
economic development as essential for preservation of national independence and security. Emphasized
industry over agriculture, government intervention and trade protectionism.
Friedrich List (1789-1846) German Civil servant, like Hamilton, emphasized development of
manufacturing industries. In order to catch up to industrialized countries, industrialized countriesneeded to have a strong unified state that imposed trade barriers to protect its growing industries,
develop infrastructure and promote human capital
Liberals, according to List, underestimate the extent to which world is divided by national rivalries and
conflict
B REALISM IN THE INTERWAR PERIOD
Britain repealed corn laws in 1846 and opened its markets to agricultural imports ushering in period offree trade
Under pressure of WWI and interwar period free trade broke down. Realists ideas gained more influence
leading to extreme nationalism and trade protectionism. Great Depression and WWII linked to those
policies
C REALISM IN THE POST-WORLD WAR II PERIOD
D THE REVIVAL OF REALIST IPE
E HEGEMONIC STABILITY THEORY
1 WHAT IS HEGEMONY
2 WHAT ARE THE STRATEGIES AND MOTIVES OF HEGEMONIC STATES?
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3 IS HEGEMONY NECESSARY AND/OR SUFFICIENT FOR PRODUCING AN OPEN ECONOMIC
SYSTEM?
4 IS U.S. HEGEMONY DECLINING?
F REALISM AND THE ROLE OF THE STATE IN IPE
G REALISM AND NORTH-SOUTH RELATIONS
H CRITIQUE OF THE REALIST PERSPECTIVE
CHAPTER 4
III) THE LIBERAL PERSPECTIVE
A BASIC TENETS OF THE LIBERAL PERSPECTIVE
1 THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS
2 THE NATIRE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS
3 THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS
B ORTHODOX LIBERALISM
C THE INFLUENCE OF JOHN MAYNARD KEYNES
D LIBERALISM IN THE POSTWAR PERIOD
E A RETURN TO ORTHODOX LIBERALISM
F LIBERALISM AND INSTITUTIONS
1 INTERDEPENDENCE THEORY
2 THE LIBERAL APPROACH TO COOPERATION
3 REGIME THEORY
Regimes can be defined as sets of implicit or explicit principles, norms rules, and decisionmaking procedures around which actors expectations converge in a given area of international
relations
International regimes are usually associated with International organizations. For example, the
WTO is embedded in the global trade regime, and the IMF is embedded in the global monetary
regime
Regime principles and norms refer to general beliefs and standards of behavior that determine
how relations are conducted in a specific issue area
a The Formation of Regimes Some theorists argue that the existence of a hegemonic state or group of states is
necessary for both the formation and persistence of regimes
A hegemonic power plays a major role in the creation of regimes through providing
public goods and coercing other states, but it is easier to maintain regimes than it is to
establish them
b Are Regimes Important?
Regime principles, norms and rules can help to establish standards in specific areas bywhich member states can assess their own and others actions. In setting standards,
regimes can provide countries with reliable information, decrease the likelihood ofmisunderstandings, and increase the possibilities for cooperation.
Regimes can also induce national governments to follow consistent policies , limit actions
that adversely effect other states, and become less responsive to special intersts LIBERALISM AND DOMESTIC-INTERNATIONAL INTERACTIONS
Theorists often view international negotiations as a two level game involving a relationship between astates international interest and obligations (level 1) on the one hand and its economic interactions (level
2) on the other hand.
International level states bargain with other states to reach an agreement. At the domestic level, these
representatives bargain with their own domestic constituencies, whose occurrence is often needed to
arrive at legitimate and effective agreements
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LIBERALISM AND NORTH-SOUTH RELATIONS
Liberals generally agree that the key factors in development are the efficient use of scarce resources and
economic growth, which is often defined as an increase in the total per capita of a country
ORTHODOX LIBERALS AND NORTH-SOUTH RELATIONS
O.L. consider international economic relations to be positive-sum game, they believe that the
growth of interdependence will have a mutually beneficial effect on states.
Argue that north-south linkages provide even more benefits to the LDCs than to the advanced
industrial statesa Domestic Development Factors
In the 50s and 60s, liberal modernization theorists compared traditional and modern
states and traced the development process from traditionalism to modernity
Modernization theory asserts that the northern industrial states achieved economicdevelopment by abandoning traditional methods of organizing society and that the
norths development experience serves as an indispensable guide to development for the
south. From the modernization perspective, LDCs must reduce their traditional values,
institutions, and patterns of activity if they are to overcome the obstacles of development
b Paths to Development
A number of modernization theorists argued that LDCs must follow the same path to
development that was previously taken by northern states
The forces of globalization, the need to compete with advanced industrial states, and theproliferation of MNCs all indicate that development today cannot be a repetition of the
earlier western model
c External Development Factors
In the Liberal Orthodox view, third world countries are more likely to achieve
development if they are closely integrated in the global economy through freer trade andcapital flows
LDCs that have few trade and foreign investment linkages with the north are the poorest
and least developed countries. Because LDCs have shortages of capital and technology,
foreign investment, and the diffusion of advanced technologies are of particular
importance to them. Exports are also of critical importance to LDCs because of their
small domestic markets, and international trade permits LDCs to specialize in the goods
they can produce most efficiently2 INTERVENTIONIST LIBERALS AND NORTH-SOUTH RELATIONS
The interventionists believe that economic forces left entirely to themselves tend to produce
growing inequality especially when income distribution is highly distorted (as is the case
between North and South). They therefore recommend a variety of changes that involve some
degree of intervention in the market, including removal of northern trade barriers to southern
states while permitting some degree of protectionism for LDC industries, the provision of
increased financial resources to indebted LDCs through the IMF and the World Bank, and the
assurance that MNCs will nto take undue advantage of LDCs needs for foreign investment and
capitalG CRITIQUE OF THE LIBERAL PERSPECTIVE
Both the realists and historical structuralists criticize liberals for their inattention to power and
distributional issues. Realists emphasize the relative distribution of gains across states, with the morepowerful states capturing a larger share of the benefits
Realists argue that economic exchanges are in fact rarely free and equal and that bargaining power based
on monopoly and coercion can have important political effects
Historicals often accuse liberals of seeking to legitimize inequalities and exploitation
Liberals are also criticized for putting too much faith in the market and for disregarding the role of thestate
One liberal assessment NAFTA
CHAPTER 5
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IV) THE HISTORICAL STRUCTURALIST PERSPECTIVE
The term structuralist reflects this perspectives focus on structural means of exploitation, in which one class
dominates another, or rich Northern states in the center or core of the global economy dominate poorer Southernstates in the perisphery.
History has been marked by exploitation, and the mains characteristic of the current system is the
dominance of capitalism, with the capitalist class (the bourgeoisie) exploiting the workers (the proletariat).
Wide diversity of approaches within this perspective
A BASIC TENETS OF THE HISTORICAL STRUCTURALIST PERSPECTIVE
1 THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS
Relationship among classes the main factor affecting the economic and political order.
The state is working as an agent of the dominant class-in capitalism, the bourgeoisie.
State cannot escape from the dependence on the owners of capital.1. Only when proletarian revolution eliminates private ownership will the state no longer be
required as instrument of class oppression2 THE NATIRE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS
Economic relations are conflictual and zero-sum.
Under capitalism private owners extract surplus from workers which it converts into
capital and invests in new means of production.
Marx and Engels predicted collapse of capitalist system due to its contradictions, butwhen this did not happen, Lenin and others maintained that imperialism explained continued
survival of capitalism.
When imperialism ended with end of colonialism, historical structuralists turned to
neocolonialism as explanation.
Others explain persistence of capitalism and Third World underdevelopment through
dependency theory and world-system theory.
In dependency theory the world is hierarchically organized, with leading capitalist states
in the core dominating and exploiting poor states in the periphery.
Under historical structuralism, no meaningful redistribution of wealth and power can
occur under capitalism.2. Goal of exploited states, i.e. Third World, should be to break linkages with capitalist states
and/or overthrow the capitalist system3 THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS
Politics subordinate to economics.
Contradiction between economic mode of production and political system resolved when
changes in mode of production cause the political superstructure to undergo similar changes.
Instrumental Marxism formal government institutions are responding in a passive
manner to socioeconomic pressures. State policies reflect the interests of the capitalist class.
Structural Marxism new line of thought resulting from fact that industrial states
adopted social policies such as welfare despite opposition from business groups. According tothis view, in contrast to Instrumental Marxism, state is relatively autonomous from direct
political pressure by capitalist class. Although in long run state policies serve the interests of the
capitalist class. State may be better placed to recognize policies which are in the long terminterests of the capitalist class than the business community which may be subject to internaldivisions. The state may not be under the direct control of the bourgeoisie but it shares a long-
term commitment to the maintenance of the capitalist systemB KARL MARX AND IPE
Marx did not write systematically about international relations but did write on India and China arguing
that Western imperialism was necessary in these countries if they were to develop and emerge from theirstagnant mode of production. Capitalism according to Marx was a necessary evil because it was a
prerequisite for moves to socialism and then communism
C MARXIST STUDIES OF IMPERIALISM
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Non-Marxist economist, John Hobson, developed most influential theories of imperialism arguing that
three major problems with capitalism, low wages and underconsumption by workers, oversaving by
capitalists, and overproduction lead capitalists to look abroad for outlet for excess goods and profitsD DEPENDENCY THEORY
According to dependency theory, capitalist countries either underdevelop or prevent Third
World from achieving genuine autonomous development.
2. This theory developed out of Latin America in the 1960s
1 ORIGINS OF DEPENDENCY THEORY 2 major theoretical traditions: Marxism and Latin American structuralism.
Both Marxists and dependency theorists advocate the replacement of
capitalism with socialism
Unlike Marxists, Dependency Theorists focus exclusively on North-South relations and
development problems in the Third World.
Dependency theorists also reject Marxist view that industrialized countries are
performing a service to Third World by spreading capitalism.
Paul Baran, first Marxist to view Third World as important area of study. Capitalists in
North are opposed to industrialization in South. Northern capitalist form alliances with Southern
elites to prevent Third World development. Elites in LDCs include fuedal landed class and
comprador class. Capitalists development occurs at the expense of autonomous development in
the Third World. From Latin American structuralist tradition come the ideas of Argentine economist, Raul
Prebisch who argued that Third World countries in the periphery suffer from declining terms of
trade. Third World at disadvantage because they export mainly primary commodities and import
finished goods from the core. Demand for finished goods increased with rising incomes, while
demand for primary products remains relatively constant. Third World can develop onlythrough government involvement to promote industrialization and decrease dependence on
trade with advanced states. Advised countries to adopt ISI policies, impose tariff and non-tariffbarriers and emphasize domestic production of manufactures
2 THE BASIC TENETS OF DEPENDENCY THEORY
Two major strains of dependency theory complicate its analysis.
First strain from Latin Americans- Fernando Henrique Cardoso and Enzo Faletto lessdoctrinaire.
Second more radical and doctrinaire from Andr Gunder Frank
a The Source of Third World Problems
External factors related to global capitalist economy responsible for constrainingthe development of Third World.
1. Main political alliances of comprador class with capitalists in Northern countriesreinforce the pattern of Third World dependency
b LDC Possibilities for Development
Gunder Frank strain argues that development of core economies required the
underdevelopment of the periphery. When undeveloped countries become part of the
periphery, they become underdeveloped as a result of their involvement with the core
countries.
In Cardoso-Faletto strain, development in periphery was possible in some cases under
model of associate dependent development in which links of dependency weremaintained. This strain gained support over time as it became more difficult to explin
why industrialization was occurring in some LDCs.
Those writing from dependent development strain are more attuned to the wide variety
of local conditions and dependency relations in the Third World thus certain LDCs can
undergo development when favorable alliances form between foreign capital, domesticcapital and the Third World state.
Despite apparent success of NIEs, dependency theorists argue that workers in these
countries receive low wages and produce less technologically sophisticated goods and
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production of capital is limited because they depend on imports of machinery,
technology and foreign investment from core
c Prescriptions for Change
LDCs cannot escape from their dependency on core nations, thus they should
break linkages and/or start a socialist revolution to bring about more social justice and
equality.2. But autonomy and socialism are not necessarily compatible leading to some
disagreement about which of these two goals is more important3 CRITIQUES OF DEPENDENCY THEORY
Does adequately define its concepts. Cant measure degrees of dependence. Core versus
periphery and developed versus undeveloped very broad categories.
Failure to consider other forms of exploitation other than capitalism.
Too much importance on international system and not enough on domestic policies and
behavior as source of third world problems.
Predictions often wrong.
Prescriptions for change vague and ill defined.
Marxists critique dependency theorists for being too nationalistic. Problem is not foreign
control but private control of means of productionE WHITHER THE HISTORICAL STRUCTURALIST SCHOOL OF IPE?
With breakup of Soviet Union critics have claimed that the historical structuralist perspective isirrelevant.
Liberalism is expanding in the Third World.
Still, historical structuralism is important perspective in IPE because of its emphasis on the poorand the weak
1 WORLD SYSTEM THEORY
World-system theory focuses on entire world system where a countrys development
depends more on the nature of the entire global system and less on its internal structures.
Concerned with relationships among states in the core and with the rise and decline of
hegemonic states as well as exploitation of states in the periphery.
Use history of capitalism to help explain exploitation of periphery.
Introduce concept of semiperiphery.
Capitalist world-economy main unit of analysis. States not meaningful actors apart from position in world economy.
Semiperiphery contributes to the stability of the capitalist world-economy and continued
predominance of the industrial states in the core.
Socialism will follow capitalism as world-economy according to world-system theory but
very vague as to when.
Critics claim places too much emphasis on relations of exchange and not enough on
relations of production. Too much emphasis on external factors.
Important alternative approach for IPE providing long-term historical view of social,
economic and political change going back to 16th century2 GRAMSCIAN ANALYSIS
Named after Antonio Gramsci, former leader of Italian political party.
Domination of capitalism only depends partly on economic factors but political,
ideological and cultural aspects of class struggle important as well.
Dominant class has hegemony when it legimates its power through institutions.
Historic bloc, referring to the congruence between the power of the state and theprevailing ideas of society and the economy, makes it difficult for subordinate groups to replace
dominant group. Thus important to develop a counterhegemony.
Ideas extended to international arena produced the concept of transnational historic bloc
which includes the largest MNCs, international banks, IMF and World Bank etc. Crucial element
is the power and mobility of transnational capital. This bloc is of threat to the ability of elected
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governments to make autonomous decisions. Workers employed by MNCs identify with
transnational capital further dividing workers.
Civil society can be part of a top-down process in which dominant class gains
acquiescence from most of population or bottom-up process where disadvantaged try to replace
capitalist order
3 THE BUSINESS CONFLICT MODEL
Hybrid approach drawing on more than one theoretical perspective.
Business groups are most important societal groups affecting government policymakingbut there are major cleavages within business community over policy issues.
Significant division in business community between internationalist and nationalist
business groups. Nationalists feel threatened by imports and favor trade protectionism.
Internationalists have integrated multinational operations and substantial dependence on exports
resist protectionism and favor open international markets.
Internationalists benefit from close working relationship with executive branch in theU.S.
Business nationalists do not similarly benefit from connections with U.S. foreign policy
establishments and concentrate on influencing Congress.
1. Even internationalists are sometimes divided with labor intensive industries favoring
military governments in Third World countries to maintain discipline in the labor force and keep
wages low. Internationalists that are less labor intensive are less likely to support military action.F CONCLUSIONS
Historical perspective may have faltered in recent years but number of promising new theoretical
approaches in this school of thought. Possible this perspective could gain more influence in future.
Return to liberal orthodoxy causing considerable dissatisfaction among have-nots
CHAPTER 6
V) INTERNATIONAL MONETARY RELATIONS
A BALANCE OF PAYMENTS
Records debit and credit transactions by residents, firms, and governments of one country with foreign
countries and international institutions
Composed of two large categories: the current account and the capital account
THE CURRENT ACCOUNT
Includes all transactions related to a countries current expenditures and national income
Four types of transactions (p. 150)
o Merchandise trade
o Service trade
o Investment income and payments
o Remittance and official transactions
2. CAPITAL ACCOUNTS
Measures long-term and short term flows of investment
a. CAPITAL EXPORTS debit items because they involve payments TO foreigners and useforeign exchange
b. CAPITAL IMPORTS credit items because they involve payments from foreigners andearn foreign exchange
BALANCE OF PAYMENT SURPLUS a government reduces its liabilities to foreign
governments and/or adds to its holdings of official reserves
BALANCE OF PAYMENTS DEFICIT when a government increases its liabilities and/or
reduces its official reserves
B GOVERNMENT RESPONSE TO A BALANCE-OF-PAYMENTS DEFICIT
When governments have a BOP deficit they have two basic policy choices:
1 ADJUSTMENT MEASURES
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MONETARY POLICY Central Bank raises interest rates to make borrowing more costly,
decreases amount of money available for loans by requiring commercial banks to hold larger
reserves
FISCAL POLICY A BOP deficit government lowers government expenditures and or raises
taxes to withdrawal purchasing power from the public
COMMERCIAL POLICY when government uses various combinations of fiscal monetary and
commercial policies such as
a EXTERNAL ADJUSTMENT METHODS causes foreigners to pay off adjustment costs:tariffs, import quotas, export subsidies, and tax
b INTERNAL ADJUSTMENT METHODS causes individuals or groups at home to pay offadjustment costs: unemployment, a reduction in living standards and business bankruptcy
2 FINANCING
Governments that choose financing must borrow from external credit sources and/or decrease
their foreign exchange reserves
3 ADJUSTMENT, FINANCING, AND THE THEORETICAL PERSPECTIVES
ORTHODOX LIBERALS payment deficits result from domestic inefficiencies and thatgovernments should adopt internal adjustments
LIBERALS oppose external adjustment measures
REALISTS & HISTORICAL STRUCTURSALISTS often oppose internal adjustment methods.
They interfere with domestic autonomy and policy making REALISTS view such external measures as fair game in a states efforts to improve its
competitive position towards other states
C INTERNATIONAL MONETARY RELATIONS BEFORE BRETTON WOODS
1 INTERNATIONAL GOLD STANDARD (1870S TO 1914)
International gold standard was fixed exchange rrate regime in which each countries currency
was given an official exchange rate in relation to gold
The gold standard functioned well because it was backed by British hegemony and my
cooperation among the core countries
The primary objective was to promote monetary openness and stability through the maintenance
of stable exchange rates2 THE INTERWAR PERIOD (1914 TO 1944)
A shift to floating rather than fixed exchange rates
Governments could no longer sacrifice the domestic welfare of its citizens to maintain external
balance in support of the gold exchange standardD THE FORMATION OF THE BRETTON WOODS MONETARY REGIME
A gold exchange system in which the value of each countries currency was pegged to gold or the U.S.
dollar
The interventionist liberals compromise:1. The postwar gold exchange standard: adjustable pegged
exchange rate system rather than a fixed exchange rate system2. The creation of the IMF would provide short-term loans to
countries with temporary Balance of payments problems
3. The support for national controls over capital flows
E THE INTERNATIONAL MONETARY FUND Was created to promote stable and orderly exchange rate and to provide member states with short-term
loans for temporary balance of payments problems
Each IMF member was given a quota based on its relative economic importance, and this quota
determined the size of its subscription, or contribution to the IMF resource pool
The IMF has a weighted voting system in which the most economically powerful countries have the
largest quotas and subscriptions and the votes
IMF conditionality has become a major factor in its loan giving: Member agree to adopt specific
economics policies in return for IMF funding
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IMF usually requires the borrowing country to adopt contractionary monetary and fiscal policies that are
the liberal-economic in nature
The 2 main policy making bodies of the IMF: The board of governors & the board of executive directors
The voting power of each governor depends on the weighted voting system
The countries with the largest subscriptions and the most votes in IMF: G-5 (The U.S., Japan, Germany,
France, and Britain)
The IMFs weighted voting system continues to favor the interests and objectives of the advanced
industrial statesF THE FUNCTIONING OF THE BRETTON WOODS MONETARY REGIME
1 THE CENTRAL ROLE OF THE U.S. DOLLAR
The US opened its market to imports from foreign countries, provided long-term loans and
grants to Europe through the European Recovery Program or Marshall Plan, and supplied the US
dollar as the main source of intl liquidity
The Bretton Woods monetary regime was base on a gold exchange standard, but gold-mining
sources were limited, so only the US dollar could meet this need for increased liquidity
The US had a substantial balance-of- trade surplus in the post war period, but had even larger
debits because of the economic and military financing it was providing through Marshal Plan
and other assistance programs. As a result, the US had overall balance-of-payments deficit
beginning in 1950 In 1960, foreign dollar holdings exceeded US gold reserves for the first time
The Triffin dilemma: It refers to the ploblem confronting a monetary regime that depends on a
sinkle key currency. The liquidity and confidence functions of the currency eventually come into
conflict
2 A SHIFT TOWARDS MULTILATERALISM
In 1960s, the shift from unilateral to multilateral management was the increased role accorded tothe Bank for Intl Settlements (BIS). It is in fact the oldest of the intl financial institutions
BIS: It was formed in 1930, its main purpose was to promote cooperation among central banks.
The US wanted to transfer functions to the IMF when the Bretton Woods institutions were
established, but European countries would not agree. Now the BIS is the main forum for
cooperation and consultation among central bankers of the advanced industrial states.
IMF members finally agreed in 1969 to create a new international reserve. Members established
Special Drawing Rights (SDRs): It is artificial international reserves, created and managed by the
IMF with G-10, which may be used only by monetary authorities and other official agencies3 THE DEMISE OF THE BRETTON WOODS MONETARY REGIME
In 1971, the US had its first balance-of-trade deficit in 1893, indicating that its trade
competitiveness was declining. President Richard Nixon decided to suspend the official
convertibility of the dollar into gold in 1971. He imposed a 10persent tariff surcharge on all
dutiable imports, promising to remove it when other countries. The US share of intl reserves had
fallen from a postwar level of 50 to 16%.
- The Bretton Woods regime of fixed exchange rates would collapse and would be replaced by aregime based on floating rates
A Multitude of Problems confronted the Bretton Woods Monetary Regime: Although the US role as the top currency state was premised on the idea that it was
an unrivaled economic hegemon, this no longer seemed to be the case
As capital flows around the world increased, the Bretton Woods system of pegged
exchange rates become increasingly untenable
The 3 characteristics of reserves-liquidity, confidence, and adjustment- all presented
serious problems
G THE REGIME OF FLOATING (OR FLEXIBLE) EXCHANGE RATES
In a free-floating regime, member countries do not intervene in currency markets, and the market alonedetermines currency valuations
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2 problems developed with the floating exchange rate regime:
1) Volatility of exchange rate: refers to short-term instability in the exchange rate
2) Misalignment of exchange rate: refers to the long-term departure of an exchangerate from its competitive level
1. THE PLAZA LOUVRE ACCORDS
The G-5 agreed on joint intervention to raise the value of the major nondollar currencies through
coordinated intervention, and the US in return promised to reduce government spending
The Plaza-Louvre accords marked a shift to managed floating in which the major governmentsintervened to correct serious volatility and misalignment of currency rates
H ALTERNATIVES TO THE CURRENT MONETARY REGIME
2 interrelated Question about alternatives to current arrangements arise:
1) Are there alternatives to the flexible exchange rate regime?
2) Are there alternatives to the dominance of the US dollar under the current?
I EUROPEAN MONETARY RELATIONS
Several major changes in the 1960s caused the EC countries to consider proposals for regional monetary
integration more seriously
Growing US balance-of-payments deficits resulted in decreased confidence in the US
dollar and a threat to exchange rate stability
Rapid European progress in establishing a customs union and for exchange rate
stability among EC members
The European Monetary System (EMS) 1979: 2 Main Features: An exchange rate mechanism (ERM) was
a form of adjustable peg system, similar to the Bretton Woods regime and A European currency units
(ECU) was a new currency based on a weighted basket or average of the EMS countries currencies
In 1986, EC members signed the Single European Act (SEA) calling for completion of the internal marketor the removal of all barriers on the movement of goods, people, and capital within the EC by January 1,
1993
The Treaty on European Union or Maastricht Treaty: An agreement to establish an EMU in 1999. The
EMU was to include the creation of a central bank and a single currency, central control over the money
supply, and wide-raging influence over national tax and financial policies
Robert Mundell-A Theory of Optimum Currency Areas: An optimum currency area is an area that
maximizes the benefits minus the costs of using a common currency J THE ROLE OF THE JAPANESE YEN
The use of the yen internationally has declined since the mid-1990s in response to Japans declining
economic fortunes
In 1997, the Japanese government proposed that Asian Monetary Fund(AMF) be formed to provide
emergency balance-of-payments supports for the economies affected by the East Asian financial crisis,
but the US opposed that.K THE ROLE OF THE U.S. DOLLAR
The US dollar continues to serve as the top, albeit negotiated intl currency
It is important to note that Dollarization is a highly asymmetrical process. Unlike EMU, in which all
members sacrificed their own currency for a new common currency with collective management of
monetary policy, in Dollarization one country relinquishes its own currency and control over monetarypolicy to another country or a group of countries
L CONCLUSION
CHAPTER 8
VI) GLOBAL TRADE RELATIONS
A TRADE THEORY
B GLOBAL TRADE RELATIONS BEFORE WWII
C GATT AND THE POSTWAR GLOBAL TRADE REGIME
D PRINCIPLES OF THE GLOBAL TRADE REGIME
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1 TRADE LIBERALIZATION
2 NONDISCRIMINATION
3 RECIPROCITY
4 SAFEGUARDS
5 DEVELOPMENT
E FORMATION OF THE WORLD TRADE ORGANIZATION
F THE WTO AND THE GLOBAL TRADE REGIME
G THE THIRD WORLD AND GLOBAL TRADE ISSUES
1 THE 1940S TO EARLY 1960S: A PERIOD OF LIMITED LDC INVOLVEMENT
2 THE EARLY 1960S TO EARLY 1970S: GROWING PRESSURES FOR SPECIAL TREATMENT
3 THE EARLY 1970S TO 1980: INCREASED NORTH-SOUTH CONFRONTATIONS
4 1980 TO 1995: MORE ACTIVE AND COOPERATIVE LDC PARTICIPATION
5 1995 TO THE PRESENT: UNCERTAINTY OVER LDC PARTICIPATION IN THE WTO
H THE EMERGING ECONOMIES AND GLOBAL TRADE RELATIONS
1 THE EASTERN EUROPEAN COUNTRIES AND GATT/WTO2 CHINA
a Requirements That China Should Liberalize Its Economyb The Question of Chinas Status in the WTO
c The Question of Chinas Implementation of Agreements3 RUSSIA AND OTHER FSU COUNTRIES
I CIVIL SOCIETY AND GLOBAL TRADE RELATIONS J CONCLUSION
CHAPTER 9
VII) REGIONALISM AND THE GLOBAL TRADE REGIME
Liberal economists consider GATT/WTO multilateralism to be the best possible route to trade liberalization
because it breaks down regional as well as national barriers to trade
Liberals support open RTAs as second best route to trade liberalization when negotiation difficulties inGATT/WTO pose obstacles to freer multilateral trade
All member countries will benefit in the long run from RTA even if asymmetrical gains
Realists and Historical Structuralists believe RTAs have important distributional effects and that some memberswill benefit at the expense of others
Realists argue that the larger partner will not permit the smaller partner to receive disproportionate benefits or
will expect some side payments in return
Historical Structuralists believe MNCs and other sources of transnational capital are the main beneficiaries of
RTAs. The main losers are the laborers and poor within industrial and Third World countries1 REGIONALISM AND GLOBALIZATION
Regionalism reference to interactions among states in a particular geographic area where there is a degree
of economic and often organizational cohesiveness
Multilateral institutions such as the IMF, GATT/WTO, and the World Bank are better equipped than
regional organizations at handling problems stemming from globalization and interdependence such as
financial crisis, trade wars, and global environmental degradation
As an organizations membership increases, higher transaction and information costs interfere withproblem identification and defector identification and sanctioning
Globalization pressures often lead like-minded states to establish regional institutions better at problem
solving than larger institutions1 A HISTORICAL OVERVIEW OF REGIONAL TRADE AGREEMENTS
Despite early attempts at establishing RTAs, modern forms did not become established until after WWII
with the European Economic Community then later forms in the 50s and 60s and since the mid-80s
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THE FIRST WAVE OF REGIONALISM
In 1949 the Soviet Union signed a treaty with Bulgaria, Czechoslovakia, Hungary, Poland, and
Romania establishing the Council for Mutual Economic Agreement (CMEA) Not consideredtrue attempt at regionalism because of state-centered orientation
European integration into the European Community and European Free Trade Association
considered first true wave of regionalism
EC movement caused spread of RTAs in Africa and Latin America
LDC causality differed in that LDCs were looking to develop larger markets (economies of scale)within the region, and were designed to pursue import substitution on regional level
Regionalism was largely unsuccessful outside of Europe because:
a There was a fundamental contradiction between the idea of giving impetus to integration via
trade liberalization and the protectionist logic of import substitution to promote
industrialization
Industries were concentrated in larger more advanced LDCs
Economic inefficiencies arose form bureaucratic countermeasures
b U.S. was opposed to RTAs during the first wave
THE SECOND WAVE OF REGIONALISM
In the mid-1980s he EC widened and deepened its integration with the accession of Spain and
Portugal in 86 and Austria, Finland, and Sweden in 95. Deepening occurred with adoption of
single market in 92 Most significant change was the U.S. turnaround in willingness to participate and promote RTAs
2 WHAT ARE THE REASONS FOR THE RISE OF REGIONALISM?
REALIST EXPLANATIONS
Security issues with U.S./Soviet Union superpowers concerned with global political security
and balance of global power, Europe concentrates on building economic strength and political
influence through regional integration
U.S. aided Europe through Marshall plan in order to solidify unified noncommunist front against
Soviet Union
Second wave attributed to shifts in balance of, strategic, and economic power from U.S./Soviet
Union to U.S./E.C./Asia-Japan
LIBERAL EXPLANATIONS
Growth of interdependence important in revival of regionalism States turn to trade liberalization to promote exports, attract foreign investment, and
upgrade technological capabilities
Involvement in RTAs less complicated than multilateral GATT
Regionalism often improves competitiveness in firms becomes more efficient comparedto others in region
Firms became more dependent on imports and exports becoming MNCs
Despite low GATT tariffs, RTAs flourish because elimination of tariff barriers is
advantageous to members
HISTORICAL STRUCTURALIST EXPLANATIONS
RTAs allow MNCs to exploit cheap labor and lower environmental standards
Capital has benefited by leaving domestic labor and using cheaper foreign labor
Regionalism comes form desire of powerful states to establish hegemony over weaker states
GATT/WTO AND RTAS
The United States as a global hegemon after WWII, strongly opposed preferential agreementsand any other type of discrimination in international trade that would interfere with an open
multilateral trade regime. The British, however, wanted to preserve their discriminatory imperialpreferences.
U.S. views prevailed and GATT called for unconditional MFN treatment (all member nations
treated equally)
GATT permitted formation of CUs and RTAs as long as exterior barriers did not exceed GATTrestrictions and are more trade creating than trade diverting
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3 TRADE DIVERSION
RTAs are inevitably trade diverting: intraregional trade with lower barriers more appealing
Trade diversion from raised protectionist barriers
CU has common external trade tariffs and may implement CVDs and ADDs in response to
pressures from import-competing companies
RULES OF ORIGIN regulations designed to prevent importers from bringing in goods to a free
trade area through member countries with lower duties and then shipping them to partner
countries with high duties 4 TRADE CREATION
The main source of trade creation in RTAs is the increased trade among member countries,
which shifts demands from less efficient domestic country production to more efficient partner
country production
Set example for increased and more effective multilateral trade negotiations in GATT/WTO
5 GATT ARTICLE 24 AND RTAS
GATT Article 24 established to ensure trade creation/diversion regulations
A.24 stipulates FTAs and CUs are to eliminate tariffs and barriers on substantially all trade
among members
1. GATT founders believe removal of all barriers would prevent proliferation of preferential
treatment
2. Genuine FTAs and CUs facilitate global trade liberalization when involving deepermultilateral integration
Exterior tariffs and barriers must not be higher than when initially entered into the FTA/CU
6 THE EFFECTIVENESS OF GATT ARTICLE 24
The 1957 Treaty of Rome establishing the EC dramatically minimized GATTs ability to exert
authority over RTAs
GATTs influence lay in its guidelines that many developing RTAs adhered to
GATTs inability to exert authority lay partly in Article 24s imprecise wording and the fact that it
does adequately address issues of contingent trade measures such as ADDs and CVCs, and
rules of origin
The GATT UR reached a common understanding on Article 24 and the WTO established a
Committee on Regional Trade Agreements to oversee and evaluate RTAs
The GATT UR reached no conclusion on how to deal with restrictive rules of origin in RTAs norhave they made unanimous clear interpretations of Article 24 statements
9. SPECIAL TREATMENT FOR LDCS
a RTAS Among LDCS
RTAs among LDCs are less stringently examined than among industrialized nations
A 1979 enabling clause was added to GATT that removed the requirement to cover
substantially all trade, and to remove all tariff barriers
b The EUs Association Agreements with LDCS
Developed countries have provided LDCs with nonreciprocal trade preferences
In EC union, France wanted continued benefits for former colonies in Africa, so
nonreciprocal tariff lowerings were established
LDCs not formerly connected with Britain or France pressured for implementation of
MFN status as decreed by GATT Historical Structuralists say nonreciprocal trade between EC and LDCs represents
neocolonialism and perpetuates continual dependency by former European colonies7 EUROPE
After WWII, a European unification that consisted of western European states was established with the
help of the United States
Establishment of the European Community and the EFTA has widened and deepened European
integration
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THE DEEPENING OF EUROPEAN INTEGRATION
European integration into a Customs Union was slowed by Frances Charles de Gaulle in vetoing
Britains membership and withdrawing France from the Council of Ministers in protest againstcommission proposal for financing of EC budget
In the 1980s the collapse of the Bretton Woods monetary regime, the OPEC oil crisis, and global
recession contributed to the stagnation of the unification process
A unified European market would produce more competitive European firms as a result of
increased specialization and economies of scale. Single European Act established freer trade without trade restrictions amongst EC members
thereby deepening integration and strengthening the European economy
SEA led to desire for establishing EMU and unified security, foreign, and social policy
Maastricht Treaty wants to establish social policies dealing with welfare and labor laws but has
been most successful in establishing an EMU in early 2002
THE WIDENING OF EUROPEAN INTEGRATION
As economies worsened in 1980s, eastern European dependency on western Europe deepened
Gorbachev helped establish an EC-CMEA agreement sanctioning trade agreements between
some individual Eastern European states
The break up of the Soviet Union led to stronger and closer ties between Western and Eastern
European states
Widening of integration brought problems ofrelocation of firmsbecause of lower labor costs,migration of eastern workers to higher paying western area, and financial burdens on EU from
enlargement of population eligible for social and economic development funds
Obstacles facing CEEC membership into the EU are fears of a two-tiered system developing with
CEEC nations, Germany breaking away from France and looking more eastward, and French
concern over Americanization of EU policy
THE THEORETICAL PRESPECTIVES AND THE EU
Realists see European integration as a strengthening Europes power (economic) vis--vis other
major actors such as Japan and U.S.
US willing to support formation of EC in view of strong Soviet proximity
Liberals economists concerned with ensuring that the EU is an open integration movement
Some Liberals express concerns of European protectionism: EUs inward orientation, liberals
point out to the reorientation of trade away from third countries to other EU members followingthe creation of the union and the accession of new members
Content that deepening and widening will contribute to trade creation amongst members
Interventionist liberals praise social policy agenda but historical Structuralists say it is inadequate
lending to continued disparities of wealth
Historical Structuralists criticize agreements between EC and LDCs because it is a mechanism of
neocolonialist dependency
2 THE WESTERN HEMISPHERE
Characterized by three overlapping regional integrations processes:
a The United States and NAFTA
b Latin American RTAs MERCOSUR
c Hemispheric integration through a Free Trade Agreement of the Americas
1. THE FORMATION OF CUSFTA AND NAFTA
US Protectionism was increasing, Canada wanted to open up freer market between two nations
to counterbalance Canadian exports to US
Canadian economists wanted more reliance on market forces less government involvement
In 1988 Canada and U.S. established CUSFTA after having established Automotive free trade
agreement
Mexico joined to form NAFTA in 1992 to supercede CUSFTA
Mexico joined for reason of foreign investment issues. Agreement with US would give Mexicanliberalization policies more credibility
Marked first time LDC was not given special treatment in agreement with an industrialized state
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THE IPE THEORETICAL PRESPECTIVES AND NAFTA
a Orthodox Liberal Perspective
Wanted to ensure freer trade incentive instead of trade diversion
NAFTA sets example for GATT
NAFTA follows a negative list approach to trade in services facilitating tradecreation
GATS takes a positive list approach to services trade facilitating easier trade
diversion US established rules that facilitated countervailing duties (CVDs) which are harsher
towards Canada and Mexico than towards US
NAFTA has binational panels to assess whether a countries CVDs adhere to national
codes
b Realist and Historical Structuralist Perspectives
Both believe NAFTA has significant distributional effects
Both say that the US, as the larger partner, will get greater benefits
Canada wanted freer trade for exports during a time of protectionism, US wanted side
benefits
Mexico gave up claims to receive special and differential treatment
MERCOSUR
Mercado Comun del Sur established as most important 3 rd World RTA Union of South American LDCs but significant union because involved two largest South
American economies (Brazil and Argentina)
Outcome skeptical because integration was inward facing and had been concentrated in Import
Substitution, history between Brazil and Argentina was long and frictional
Economy was becoming export oriented and they were unilaterally lowing tariffs at the time they
signed the Treaty of Asuncion.
End of Cold war important change in that it ended reliance on bipolar balance
Problems began when Argentina and Brazil both introduced import tariffs and no progress oraccords had been made towards deepening the union
PROBLEMS FACING MERCOSUR:
Mexican and East Asian financial crisis of the 90s contributed to lost markets
MERCOSUR members are primarily LDCs reliant upon external finance and highlyvulnerable to global financial flows
It does not have a formal dispute settlement process
Very asymmetrical system raises doubts as to future integration
Wide disparity in macroeconomic and monetary policies between two largest
MERCOSUR countries
FREE TRADE AREA OF THE AMERICAS
Enterprise for the Americas Initiative (EAI) called for investment promotion, U.S. aid indebt
relief, and the elimination of tariff barriers
Miami Summit of the Americas (34 participating countries) agreed to begin process of negotiatingFTAA to be concluded no later than 2005
Highly diverse geographic distribution of foreign trade in western hemisphere poses a potential
problem
CONDITIONS CONDUSIVE TO FTAA NEGOTIATIONS:
U.S. decline in global hegemony wants to establish hemispheric hegemony
Latin Americas shift from import substitution to export-oriented policies
Consolidation of civilian rule and democracy generally established within the
Americas
Brazil and other Latin American countries wanted new agreement started from equal footing, not
an extension of NAFTA (U.S. centric)2 EAST ASIA
1980s emerged as major center of world production and trade
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Not involved in first wave of regional integrations and are even still only in planning phases
Rise in intraregional trade due to propensity and willingness to trade with each other
THE ASEAN
Subregional agreement in east Asia consisting of 10 member countries (Indonesia, Malaysia, the
Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar, and Cambodia)
ASEAN FTA went from regional economic linkages to Agreement on Preferential Trading
Arrangements to a Free Trade Agreement
Financial crisis has created problems with competing ASEAN countries Japan threatened with Chinese cooperation with ASEAN
APEC
Largest regional initiative involving East Asia with 21 regional and transregional neighbors
Asia Pacific Economic Community
Would contain worlds three largest national economies (United States, Japan, and China) andthree of the five permanent members of the Un Security Council (China, Russia, and the U.S.)
U.S. wants to secure political security and economic access to the region and did not want to be
excluded from largest foreign markets trading bloc
First proposed to be transparent by disseminating information about member policies andpromote coordination between economic policies
Bargaining negotiation discouraged by Asian members so plans are for liberalization to be
reached by certain date THE IPE PERSPECTIVES AND EAST ASIAN REGIONALISM
APEC became the first big international institution after the end of the cold war
REALISTS view APEC as a non asian attempt to block a regional trading bloc limited to Asians
HISTORICAL STRUCTURALISTS believe APEC could lead to downward social, economic,
environmental and labor standards and a permanent shift of economic and political power to
MNCsB CONCLUSION
CHAPTER 10
VIII) MULTINATIONAL CORPORATIONS AND GLOBAL PRODUCTION
The largest MNCs are in some respects the main agents of globalization Critics argue that main problem in the study of IPE is the friction between states and multinational
corporations and not between the state and the marketa DEFINITIONS AND TERMINOLOGY
A multi national corporation is one that has holdings in more than one nation. These holdings can be
either portfolio investment which seeks profits without control and the other is Foreign Direct Investment
(FDI) which seeks to gain a controlling percentage of profits and decisionmaking power
There are two types of FDI:
1. GREENFIELD INVESTMENTS
2. MERGERS AND ACQUISITIONS
a WHY DO FIRMS BECOME MNCS
a THE HISTORICAL DEVELOPMENT OF FOREIGN DIRECT INVESTMENT THE PERIOD BEFORE WORLD WAR II
Britain was the main force behind the dramatic growth of FDI in the 19 th century
Although no government garanties international institutions, safe guards ensure investment: one
economic risk were lower under the pre WWI gold standard because currency were convertibledividends could be easily remitted and exchange rate were reasonable stable, two, political risk
was lower because a large share of the European investment was in colonial territory thatoperated under home countries rules, three, lack of restrictions on capital flows facilitated the
growth of FDI, fourth, wars during this period were limited in scope
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19th century was also a period of rapid advancement in rail and sea transportation, which
facilitated the task of managing FDIs over long distances
THE MID-1940S TO THE MID-1980S
Under US leadership FDI under a period of rapid expansion
Develop countries experienced a sustain period of economic growth from 1950s to 1973
There were major improvements in international transportations and communications: faster jets,
and ocean transports, telex and satellite communications and fax machines may contributions to
flow capital Most develop countries relax their control over FDIs after return to convertability in their
currencies
US FDIs has decline steadily since the 60s mainly due to Japan, Germany, and Western Europe
economic and industrial recovery from WWII
THE 1980S TO THE PRESENT
Reemergence of FDI since the 80s due mainly to reemergence of orthodox liberalism ending
many restrictions on capital flows and other trade barriers
Brake up of soviet block open up new market areas for FDI
Protracted GATT UR negotiations couple with the use on non tariff barriers cost firms to
circunvent barriers thus expending coverage
Remarkable feature to modern FDI is degree to which BIG 3 direct FDI with each other
(US/EU/Japan) Change in intl arena was: US lost of dominance as a source of FDI, two, erratic upper changes in
Japan change of FDI, three, the develop market economy share of inward FDI has decline and
LDC share has decrease, and the proliferation of firms engaging in FDI and new forms of
investment activities
a MNCS AND HOST COUNTRY RELATIONS: THEORETICAL APPROACHES
Liberals: countries has different factor endowments and foreign investment flows to areas where it is
more needed
Orthodox liberals: MNC operate in perfectly competitive environment
Challenges: Hymer and Kendalberger, FDI not equited with movement of capital from the home to the
host country. MNC are often finance from home country institutions
MNCs tend to be oligopolistics by nature, by raising barriers by introducing new technologies, economies
of scale and access to global finance Marxist independent theory: believe MNCs prevent third world countries from achieving genuine
autonomus development
MNCs undermine host country government, culture, and society, by coapting local business andgovernment elites, imposing political and economic pressure on the host country while altering consumer
taste and attitudes
Reasearch over years shows effects of MNCs are not as positive as negative as believe, because bargaing
powers come into place
Countries have more international players to chose from
State may have to provide insentive to lower MNCs, but MNCs have high technology, brand name
identification, access to capital, product diversity and ability to promote exports as leveraging power
favoring MNCs initially
With commitment to immoviles resources, state gains upper hand and can later hostage resources torenegotiate in better terms (obsolescing power)
Obsolescing bargain is less applicable to more sophisticated manufacture industries that are less
dependent on host specific resourcesa CHANGES IN HOST COUNTRY POLICIES TOWARDS MNCS
Host country policies toward MNCs have varied widely, ranging from nationalization of foreign
investment operations on the one hand to efforts to attract MNCs through concessions and incentives on
the other
THE SOUTH
Before WW I few restrictions on MNCs in LDCs in the South.
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In interwar period LDCs shifted to more nationalist policies.
After WWII change to restrictive policies in South more notable. China, North Korea,
North Vietnam and Cuba.
In other countries FDI viewed with hostility and limited.
In 1960s and 1970s LDCs developed more leverage vis--vis MNCs: Development of non-U.S. MNC gave LDCs alternative to seek outside finance; LDCs gained more confidence and
began to pressure MNCs to increase benefits and reduce costs of FDI; LDCs developed more
managerial, administrative, and technical capabilities for regulating MNC behavior. In UN General Assembly LDC views regarding MNCs were embodied in resolutions that
the G-77 passes over objections of industrial states but failed to reach UN agreement on
comprehensive code of behavior for MNCs.
By late 1970s, LDCs more conciliatory towards MNCs and number of nationalizations
declined.
In 1980s a number of LDCs liberalized their policies toward MNCs. Mexico liberalized its
policies toward FDI. Argentina, Chile, Colombia and Venezuela took unilateral steps to liberalize
their investment policies. China also was more welcoming to FDI by 1988.
In 1990s, LDC host countries even more open to FDI.
1. Still some of the poorest LDCs are having difficulty attracting FDI even when liberalize
policies.
THE NORTH
Developed host states in the North are generally in a different position vis--vis MNCs
than LDC host states in the states in the South.
MNCs loom larger in LDC economies and create more dependence among LDCs than is
the case for most industrial states.
Developed countries are often also major home as well as host countries of FDI and thus
are reluctant to restrict incoming foreign investment.
At the end of WWII the U.S. as the new global hegemon adopted more liberal policies
toward FDI than Western Europe.
Japan, however, had the most interventionist policy of the developed countries. Japans
inward FDI was only 0.7 percent in 1980 as compared to 41.6 percent in Western Europe and 17.2
percent in the U.S.
2. In 1970s many developed countries imposed conditions on FDI but by mid 1980s mostliberalized their economies because: controls on global capital flows were phased out and
orthodox liberalism reemerged under Ronald Reagan; global competitiveness and economic
problems generated pressures to seek foreign FDI; as Japan and Europe became stronger felt
pressures to ease restrictions on incoming FDI; U.S. pressured other nations to open to
investment especially felt in Mexico and Canada.B THE RELATIONSHIP BETWEEN HOME COUNTRIES AND THEIR MNCS
Number of home countries for MNCs small. In 1990 six countries accounted for 75 percent of all
MNCs.
Effects of FDI on home country depend on both the characteristics of home country and of itsMNCs. Realists focus on home country characteristics. Hegemons seem to benefit from outward FD.
Others, focusing on MNCs, claim they are becoming denationalized or stateless.
Two questions: 1) What are the costs and benefits of FDI for labor groups in the home country? 2)What is the relationship between competitiveness of a home country and the competitiveness of its
MNCs?
HOME COUNTRY POLICIES TOWARD THEIR MNCS
Home countries normally view outward FDI as an indication of economic and political
strength and as beneficial to their competitiveness. Home countries try to protect and sometimes
use their MNCs as a tool of foreign policy.
Sometimes home countries associate outward FDI with a decrease in home country exports, a decline in the
countrys industrial base and losses in domestic employment. In such circumstances, home countries try to stem
flow of FDI
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b The Pre-World War II Period
In 19th and early 20th centuries, home countries tried to support and protect their
corporations when they encountered difficulties abroad
c The Early Postwar Period
In 1950s to 1970s, the U.S. as hegemonic power followed assertive policies in
protecting its MNCs. The U.S. also considered MNCs to be tools of foreign policy vis--vis communist countries.
The U.S. took actions to control corporate behavior in response to its growingbalance-of-payments deficit.
1. Japan was only major economy that systematically restricted outward FDI for about
two decades after WWIId The 1980s and 1990s
During this period U.S. was willing and able to take blatant political actions to
control the behavior of their MNCs. Especially, in struggles with the Soviet Union.
Since breakup of Soviet Union, U.S. extraterritorial actions of this nature havebeen aimed mainly at Cuba. 1996 Helms-Burton act penalizes foreign companies for
doing business with Cuba if they use assets or property of U.S. MNCs nationalized after1959 Cuban revolution.
2. European countries and Japan have been less willing and able to take political actions
with their MNCs but have established closer economic links with their MNCs than theU.S.
THE EFFECTS OF MNCS ON LABOR GROUPS IN HOME COUNTRIES
Most contentious issues in home countries.
Liberals hold multinational activity generally positive for labor and MNCs pay higher
wages than domestic firms.
Labor groups are unconvinced and are often dissatisfied with outward FDI. Mobility of
capital and MNCs they say put labor at distinct disadvantage.3. Labor unions have been interested in developing a system of multinational collective
bargaining since 1970s but this approach has its serious limitations
COMPETITIVENESS AND HOME COUNTRY RELATIONS
From the liberal perspective, MNCs are seeking profitable opportunities around the
world and are becoming disconnected from home nations. Liberals maintain that the economic future of the U.S. depends more on the education
and skills of U.S. workers than on U.S. corporate ownership.
Realists argue that governments should pursue active industrial policies to promote theirown MNCs in high-technology area.
Some evidence indicates that large MNCs are becoming more global in their operations
and outlook and less closely tied to their home countries. National boundaries are becoming
blurred as some MNCs have spread their head office functions and listed their shares in stock
exchanges in several countries.
The increase in cross-border M&As and conglomerate cross-holding of shares areadditional complications in defining the nationality of MNCs today. Thus, liberals argue that
policies of home governments must change as the national origins, loyalties, and culture of
MNCs become blurred. Highest priority should be to provide competitive conditions forbusinesses in general rather than only for the countrys firms in particular.
Realists are correct, however, in that most MNCs continue to be home-based and that the
competitiveness of MNCs can affect the competitiveness of its home state. A major factor in
promoting competitiveness is R&D and there is evidence that MNCs in industrial countries keepmuch of their basic R&D activity at home.
It is important to note that there are national differences in operation of MNCs
headquartered in different countries. E.g. U.S. MNCs favor home countries less than Japanese
and German.
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4. According to liberal theory, international trade is not a zero-sum game. Industrial countries
are each others major trading partners even when they are in competition.
C A REGIME FOR FDI: WHAT IS TO BE REGULATED?
D BILATERAL INVESTMENT TREATIES
E THE UN
F GATT/WTO
G REGIONAL APPROACHES: THE EUROPEAN UNION AND NORTH AMERICA FREE TRADE
AGREEMENT
H THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
I PRIVATE ACTORS
J CONCLUSIONS
CHAPTER 11
IX) INTERNATIONAL DEVELOPMENT
The average income in the worlds 20 richest economies is 37 times higher thanthe average income in the
worlds 20 poorest economies
Even the higher income East and Southeast Asian economies experienced a serious financial crisis whichraised questions as to sustainability of rapid economic growth
LDCs fear economic linkages contribute to dependency on North and that IMF and World Bank SALs
inhibit development efforts
Developments have induced South-Northern link strengthening and trade liberalization:
o 1980a foreign debt crisis Banks induced LDCs to shift to more open economic policies
o Revival of orthodox liberalism
o Growing fear that South has become increasingly marginalized Failure of Soviet Bloc has culminated in decline in foreign aid from western bloc LDCs have no leverage
and fewer fountains of aid
Aid is also being dispersed amongst FSU nations instead of solely previous LDCsA THE IPE PERSPECTIVES AND NORTH-SOUTH RELATIONS
LIBERALS believe interdependence has widespread benefits and argue North-South relations
have more benefits to LDCs
INTERVENTIONIST LIBERALS recognize indifferences in North South relations and believeNorthern governments should apply special treatment to LDCs
HISTORICAL STRUCTURALISTS call for a redistribution of resources among core and periphery
a THE WORLD BANK GROUP
Effects terms under which loans are made to LDCs
Composed of five institutions1. IBRD International Bank for Reconstruction and Development
Established at Bretton Woods for the reconstruction of postwar Europe later to be used for
financing developing countries
Loans directed to governments or with government guarantee2. IDA International Development Association
Became third World Bank institution to provide softer loans for struggling LDCs
3. IFC International Finance Corporation
4. MIGA Multilateral Investment Guarantee Agency
Established to encourage private foreign investment
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5. ICSID International Centre for Settlement of Investment Disputes
Established to encourage private foreign investment
Historical Structuralists and Realists accuse the World Bank of prying sovereign control outof the hands of national leaders and that they mainly enrich developed country exporters at the expense
of the poora IMPORT-SUBSTITUTING INDUSTRIALIZATION
Interventionist Liberals (Keynes) called for more government involvement in market
Historical Structuralists (Singer and Prebisch) states governments need to decrease primary goodsexportation and focus more on manufacturing and exporting goods
Prebisch developed the idea of substituting previously imported manufactured goods with domestically
manufactured goods
Governments need establish protectionist policies to reduce imports while subsidizing local
industrialization
Countries began replacing agricultural ventures in favor of industrial growth led to economic and social
disaster during 70s food crisis
Countries failed at ISI because they failed to continue to the second stage of ISI to greater
industrialization including higher technological products
Countries did not achieve second tier of ISI because most products are capital intensive and require
economies of scale
After the foreign debt crisis of the 80s countries finally abandoned ISI strategies and adopted outwardlooking economic strategies
a SOCIALIST DEVELOPMENT STRATEGIES
After failure of ISI strategy, some countries turned to socialist centrally planned economies
More concerned with redistributional aspects of economic development
Had better success at reducing economic and social inequities but they still faced economic problems
Major problem with Central Planning was that most countries (China being the exception) were too small
to properly engage in Soviet style planning
Centrally planned nations not major beneficiaries of World Bank aid because aid was intended to
promote private enterprisea EXPORT-LED GROWTH
Asian NIEs all adopted export led growth strategies and registered impressive growth rates.
While maintaining a moderate degree of trade protectionism for domestic markets, they encouragedexports with tax incentives, export credits, export targets, and duty-free imports of inputs required by
exporters and their supplies
THE IPE PERSPECTIVES AND THE EAST ASIAN EXPERIENCE
Liberals say success of East Asian economy was due to their outward facing strategies
Realists key to growth was the strong developmental state
State provided guidance to the market
State identified development as its top priority
State invested heavily in education to ensure populations had skills
State depended heavily on highly skilled technocratic bureaucracy
Dependency and World System theorists development was only example of dependentdevelopment
Political Culture (fourth perspective) Larger Asian nations influenced by Confucianism ~
emphasizes respect for authority, role of benevolent government, importance of education, and
family based values leads to economic development based on collective values, hard work,
and enterprise
THE FINANCIAL CRISIS IN EAST AND SOUTH EAST ASIA
Japanese yen increased greatly in value as a result of 85 Plaza Agreement - as Japanese exportsbecame more competitive and markets absorbed a declining share of East Asian exports,
problems of indebtedness and lack of competitiveness in the region increased
1997 Thailand allowed their currency to float and result was drastic devaluation which effected
three other countries (Indonesia, Malaysia, and South Korea)
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Asian foreign debt crisis different than 80s foreign debt crisis in two respects:
80s foreign debt crisis in Latin America, Sub-Saharan Africa and Eastern Europe
held significant shares of debt Asian was held by smaller countries with privatesector debt
80s main concerns in debt crisis related to overall indebtedness and high debt-
service ratio ~ Asia short term debt levels and outflows of portfolio investment
United states aided South Korea and Taiwan with large sums of military and economic aid
Changes in U.S. economic and strategic position made it less willing to continue support SUSTAINABLE DEVELOPMENT received multilateral approval in 87 policy that meets the
needs of the present without compromising the ability of future generations to meet their own
needs
B THE REVIVAL OF ORTHODOX LIBERALISM
Two characteristics of developmental state: Highly skilled technocratic bureaucracy and close
cooperation between major economic groupings (labor, agriculture etc.)
Successful developmental state has often been to some extent authoritarian
The market rational market ideological approach is the only correct course for development
adopted by World Bank
World Bank placed conditions on their SALs requiring control of inflation, decrease ingovernment spending, lance of budgets, privatization, deregulations of financial and labor markets, and
liberalization of policies towards trade STRUCTURAL ADJUSTMENT AND THE THEORETICAL PERSPECTIVES
Historical Structuralists believe SAPs (structural adjustment programs) almost deliberateperpetuation of export dependency
Orthodox liberals strongest supporters SAPs necessary prescription and discipline based on
Washington consensus (Thatcher Reagan free market policy)
World Bank and IMF should be doing more to focus on human development aspects ofadjustment (labor, welfare etc.)
Realists - WB and IMF are not following correct policies in downsizing governemtn through
privatization, deregulation, and trade liberalization late industrializers (no matter who) require
a large amount of government intervention to catch up
STRUCTURAL ADJUSTMENT AND QUESTIONS ABOUT ORTHODOX LIBERALISM
Liberal studies indicate that SAPs in middle-income countries often reduced government budgetdeficits, increased export earnings, increased financing available for private investment, and
enhanced economic stability and growth
The emphasis of SAPs on privatization deregulation, and openness gave adequate attention for
the need for effective LDC governments and the World Banks top-down approach to structural
adjustment did not give sufficient attention to the need for local participation in owning
policies and implementing reforms
STRUCTURAL ADJUSTMENT AND SUB-SAHARAN AFRICA
80s economic growth and industrial production stagnated, agricultural output lagged behind
population growth, per capita incomes and investment declined and unemployment increased
Liberal supporters of SAPs argue that these programs are often blamed for problems cause by
general economic deterioration. World Bank and IMF were simply reacting to Third World debt
crisis due to inefficient LDC economic policies and a series of unfavorable world economicchanges beginning with oil crisis
Liberals - Failure of ISI strategies led to reaffirmation of World Bank and IMF led strategies
Critics argue that WB and IMF strategies are ineffective in Africa place too much emphasis on
market oriented policies that do not contribute to economic growth, and their costs fall most
heavily on the poorest groups and countries
Emphasis on privatization does not take into account of the fact that private firms are often
unwilling or unable to supply essential public goods required for development
STRUCTURAL ADJUSTMENT AND THIRD WORLD WOMEN
IMF and World Banks have largely ignored the plight of women in Third World countries
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By disregarding the subsidiary role of women, these programs often reinforce male bias and
exacerbate the economic and social problems confronting third world women
Women spend much more time than men on the average on unpaid subsistence work
Women are over represented relative to men in the informal sector of the economy-work outside
home-
Women are more concentrated in the lower skill, lower wage occupation and are often paid less
than men for equal work
Women are more important in agricultural labor and less important in industry If one combines women lower wages in the formal sector with their over representation in
agricultural, the informal sector, and housework, women incomes are normally significantly less
than those of men
Because much of women time is spend doing unpaid subsistence work in the household, which
does not appear in production statistic, the World Bank gives little attention to the effect of its
SAPs on women work time
SAPs usually require the LDCs lower government deficit by facing out food subsidies andprovide incentives to farmers by raising the prices they receive for their tradable goods
World Bank views cut backs in government spending and subsidies as an indication of increase
efficiency but cost are in fact being shifted from the paid to the unpaid economy where women
do must of the job
a ANOTHER SHIFT IN DEVELOPMENT STRATEGY? THE LATE 1980S TO 1994
Protracted economic and political problems in the Africans LDCs and Asia led to gradual
recognition by the World Bank that the state had a significant role in economic development
World Bank began to address the issue of the poors LDCs and most vulnerable groups in the late
1980s and 90s
Four major bases in World Bank thinking and poverty reduction
1945 to late 1960s World Bank focus on large economic projects to contribute to
industrial development
70s World Bank began to give more attention to poverty reduction it develops more
basic human needs projects
1980s similar to first phase World Bank relied on trickle down theories of poverty
reduction condition on implementation of orthodox liberal policy Late 80s to present, similar to second phase
Dec 1994, World Bank forced to confront shortcomings in development approach when Mexico, a
country western policy had view as a model of economic management failed
2 1995 TO EARLY 2002
Stiglitz wrote for a stronger role for the state in development and shifted away for World Bank
adherence to Washington consensus
1997 World development report rejects orthodox liberal preference for minimalist state
Maintain that development requires an effective state, encouraging and complementing activities
of private business and individuals
1988 World Bank would devote increase attention and development policy to poorest individuals
in society
January 1999, Introduction of a comprehensive development framework (CDF) design to takebroader holistic approach to development than structural adjustment
Emphasizes partnership between donors and the government, and government and civil society
Constrains of the World Bank relate to reaction of major members, especially the US. Stiglitz
advocate of change critical of the IMF, World Bank and US policies toward third worlda CONCLUSION