Bevat de aantekeningen van college 5 tot en met 10. De colleges worden aangeboden in het Engels, en daarom de aantekeningen ook.

Lecture 5 February 17^th 2015

Money

Today we’ll have a brief look at money and its functions, issues of balance of payments, international monetary regimes (1800 – Inter War Age), the Unholy Trinity (a theoretical thinking exercise), Peak (key) currencies and currency wars and crypto-currencies and bitcoin.

International monetary system

The main issue here is exchanging currencies. The underlying challenge is related to trade. To facilitate trade, we need to know the value of various currencies. We’re interested in facilitating trade, because it’s related to increasing the economic growth and prosperity globally speaking.

A (very very) brief history of money

Originally there are two stories about the creation of money: the Metallist versus the Chartalist. From the Metallist view money replaces barter, as it became extremely difficult to find equal goods to exchange. This myth of barter goes back to Aristotle. But, there’s very little evidence of the barter society. The Chartalist school draws on anthropologist findings, which seems to be more realistic.

Money might not emerge in trade, but we do see it’s becoming more and more important as trade develops. Clearly there’s an international dimension since trade happens between states. It should be effective and trustworthy: how do you know what you’re going to get?

We’re giving money symbolic power (with lions etc.) which makes it also more difficult to counter it.

Commodity money is money that you would exchange for a specific commodity. Fiat money is money that derives its value from government money and laws. In the present days we only use Fiat money. The Chartalist school would support this kind of money.

Three functions of money

Money serves three main functions: it’s a medium of exchange; a unit of account and it’s a store of value.

Medium of exchange: that thing that mediates the relationship between the buyer and the seller. This facilitates trade, in the most basis sense.

Unit of account: money as a ruler. We want money to be a reliable ruler, to be stable and to be divisible. But in reality we see issues as inflation and deflation, which are a problem at this point.

Store of value: this is the temporal dimension. We know the value of today won’t be the value of tomorrow. So to what extent could we attribute value to money?

These three all come down to trust.

Balance of Payments (BoP)

Before we can understand exchange regimes, we need to look at the balance of payments. What can undermine the attempts of facilitating trade? The imbalance of payments can. The Balance of Payments (Bop) is a summary record of all international economic transactions a country has over a one-year period.

The general formula is this:

BoP = CuA (current account) + CaA (capital account) + CR (change in reserves)

What are these components?

The current account is the sum of all transactions related to state’s expenditures and national incomes. This comprises four types of transactions: merchandise trade (trade in tangible good), services trade, investment income and payments and remittances and official transactions.

The second major item in the balance of payments is the capital account, which measures the long- and short-term capital flows. Capital Account is the sum of all movements of financial capital in and out of country.

The final item is the change in official reserves. Each country has a central back that manages the money supply and holds official international reserves as a buffer against economic problems. When a country has a deficit in its current and capital accounts, it loses reserves, and when a country has a surplus in its current and capital accounts, it adds to its reserves.

Why do we care about this? We do, because issues of imbalance (both deficits and surpluses) of payments can undermine international monetary coordination.

Most of the time a surplus is a luxury issue, so we’re focusing on deficits, being in depth.

Dealing with BoP Deficit

There are two main ways to deal with a deficit: by financing and by adjustments.

Financing is about borrowing money from external sources (this is what the US does every year, most other countries can’t).

Adjustments are changes to the monetary, fiscal, or commercial policy to address the BoP deficit. This is the trickier way. It entails two forms: external adjustments (tariffs and import subsidies) and internal adjustments (this is more painful: implementing higher taxes, increasing interest rates etc.). The internal adjustments are about slowing down the business activity inside the country. This is what it’s theoretically, but in practice there are a lot of societal implications that makes it unpopular.

Adjustment in Practice & Theory

Liberalism, Mercantilism and Marxism all have its own vision on the various adjustments.

Liberals prefer internal adjustments, because this favours the orthodox (and neo-) liberal approach. In order words: we should free up trade!

Mercantilists prefer external adjustment, because internal adjustments reject state sovereignty. They argue it’s fair dame to change the conditions of trade between states.

Marxists oppose to the costs of internal adjustments for less developed states.

Historically we have some kind of big picture, macro-scale solutions in International monetary relations. These are crucial to know.

Classic Gold Standard (1870 – 1914)

This is a system of fixed exchange rates in which national currencies had specific exchange rates in relation to gold and countries held their official reserves in gold.

There are types of the Classic Gold Standard that go back to the 17^th Century. The dates above correspond nicely to the Pax Britannica. A great majority of Gold was pulled in London. Essentially the one who had the gold mattered.

The aim of the Classic Gold Standard is to stabilize national currencies and to facilitate trade.

The social dimension reflects the inert population and the class distinctions (the gap between the haves and the have-nots). It causes problems for people who don’t have money. This type of system relied to a certain extent to the fact that there wasn’t a lot of suffrage in society. It persisted because of the inert (inactive) population. But there isn’t a question about it: the big losers of this standard were the people from the working class.

Gold Exchange Standard (1927 – 1931)

Some people talk of an enduring Classic Gold Standard during this Interwar period, but there are some differences, which we will address. Nevertheless the Gold Exchange Standard is a very short-lived exchange system.

National currencies were pegged (linked) to the British Pound. Reserves were held in gold and other major currencies. The Pound was pegged to pre-WWI levels. Overvaluing the Pound let to numerous problems: expensive exports, low wages, increasing social unrest.

The period of the Gold Exchange Standard is the last years of the dying Classic Gold Standard. We’re heading to the Great Depression, where a domino effect of events took place:

In 1931 the UK abandons the Gold Standard. Montegu Norman from the Bank of England witnessed the period of the crashing American stock market and had a lot of confidence in the British Pounds and its gold.

Two years later the USA also abandons the Gold Standard (1933). A lot of countries around the world were still working according to this system, but as the Domino effect started, a lot of countries abandoned it as well.

The Summit in Bretton Woods (1944)

During this summit the central idea was bringing back order and stability into the global financial system. The main players were John Maynard Keynes (representing the British interests and trying to introduce an international currency) and Harry Dexter White. It was that American that won the day and put the U.S. dollar right in the middle of world trade.

(Bretton Woods) Qualified Gold Exchange Standard (1944 – 1971)

The result of the Bretton Woods summit was this: fixed exchange pegging national currencies to US dollar and US dollar to gold.

The International Monetary Fund (IMF) was set up to mitigate BoP issues.

We also see a new social dimension: embedded liberal compromise. How to deal with unemployment? To a certain point cooperation was seen as the solution. In this sense we see Keynes winning (in contrast to his other arguments on which he lost).

Another point from this standard is the adjustable peg: states could change exchange rates when necessary. But, when is necessary? The answer was: when it would benefit a state’s concerns with unemployment for example.

A system under stress

Dollar Glut: the economy faces a lot of new dollars to help redevelop and rebuild, amongst other for military spending. This caused that the amount of US Dollars transcended the amount of Gold reserves.

At the same time, Americans were running into deficit: seignoirage. Essentially this is what is called the Triffin dilemma. The United States of America were on the one hand the supplier of international reserves, and had on the other hand the obligation to exchange the dollar on a fixed rate to gold. Economist Robert Triffin predicted this problem. He stated: ‘The gap between the amount of exchangeable dollars and the available reserves in gold would only increase and override the critical limits.’ This become true in 1960: the US foreign monetary liabilities exceeded the US gold reserves. In 1971 the US breaks with QGES.

Floating Exchange Rate System (1971 - now)

Essentially what we’ve got now is a floating exchange rate system. In this system the market fully determines the value of currencies, which appeals to neo-liberals. There are some issues with the functioning of this system over years; we’ll address some of these caveats.

This system lead to inflation in The United States, in de Playa New York (1985) and later in Louvre Paris (1987) Accords.

Many less developed countries still peg their national currencies to the US dollar, which causes ‘Dolarization’ in countries like Panama and Ecuador.

In the Monetary Regimes there are three important elements: Exchange rate stability, (Private) Capital mobility and Monetary policy autonomy.

The exchange of rate stability is about a fixed or floating exchange rate, capital mobility is about the presence or absence of capital controls and monetary policy autonomy is about the level of state control over the supply of money (linked to interest rates on loans).

This brings us to the unholy trinity: it’s impossible to achieve these three at the same time. It’s a trade-off. You can do two, but not three.

So: if independent monetary policy and capital flows, exchange rate will move. Or: if independent monetary policy and fixed exchange rates, capital flows are curbed. And: if capital flows and the exchange rates are fixed, monetary policy must be sacrificed.

An example: High Unemployment

The common strategy is to lower the interest rates in order to reduce unemployment. This policy encourages money to flow out to find higher interest rates elsewhere. Exchange rates drop causing inflation so the interest rate is forced up again. In this case there are two options: to fix the exchange rates and to let the money flow freely across national borders but to have no control over interest rates, or to control interest and exchange rates, but to lose control over capital flows.

The figure in sheet 34 from lecture 5 brings this all together by showing how these three elements are present or absent in the three international monetary standards.

The Battle of Peak Currencies

The main question here is almost like a hegemonic stability question: what will be the next key currency?

We’re trying to understand the function of peak currencies. As money they have three functions: a medium of exchange, a unit of account (nearly 2/3 of all starts peg their currency to the Dollar) and a store of value.

Costs & benefits

Peak currencies know several benefits and costs. The beneficial aspects are seigniorage, the financing of balance of payments deficits and avoiding the market discipline. The costs are that domestic monetary policy can be constrained by foreigner’s holdings of the currency and the Triffin dilemma.

The New Virtual Economy: BITCOIN

This could oppose a radical alternative to existing monetary systems. Bitcoin is a new electronic cash system that’s fully peer-to-peer, with no trusted third party.

Understanding bitcoin

The value of bitcoin is totally determined by supply and demand. It’s about mining (with a computer program) with complex calculations. There’s a limited amount of bitcoins that you can mime (in that sense it’s like gold) and as we mine more and more, the amount of bitcoin revealed will decrease. Thus, there’s a fixed supply of bitcoins (today 13 million from a total of 21 million). When you download the system, you get a digital wallet. It’s completely anonymous. Now that’s becoming a problem because it’s linked to the illicit economy. So: bitcoin is a radically decentralized system, since it cuts away the middleman.

Age of Cryptocurrency

“At its core, cryptocurrency is not about the ups and downs of the digital currency market […] It’s about freeing people from the tyranny of centralized trust. It speaks to the tantalizing prospect that we can take power away from the center [away from banks and governments] and transfer it to the periphery, to We, the People” (Vigna and Casey 2015, 8)

Lecture 6 February 19^th 2015

Finance

Today we’ll get introduced to international capital markets (security, insurance and reinsurance markets), regulating international capital markets (BCBS, ISOCO, IAIS), the global bank lobby, the theory of regulatory capture and the question: How powerful are banks?

We tend to blame the back for the problems of the International financial crisis. Is that legitimate?

International capital markets

There are different definitions that focus on various characteristics of the international capital markets:

An international capital markets is a market in which actors in different countries trade assets, trade in goods and services.

The main actors are commercial banks, large corporations, nonbank financial institutions, central banks and government agencies.

The international capital markets activities take place in a network of world financial centers linked by sophisticated communication systems. This captures the role of technology in these systems. Over the time stock trading has moved away from a normal job, to a job for the smartest people in the room.

We can talk about both public sector finance (states related, IMF etc.) and private sector finance. We’ll leave the first one out here and focus on the private sector.

Three elements of Private Sector Finance

1. Loans: a process by which an institution (usually a bank) takes the responsibility to gather savings to make these available to borrowers in exchange for interest. This relates to banking
2. Securities involve the direct purchase by an investor of a security issued by a firm or government that wishes to borrow. This can refer to stocks and bonds.
3. Insurance involves the selling of a contract to cover a risk. This is also a form of finance, because it involves an exchange of finance.

Regulating global finance: the processes of authorizing, regulating and supervising financial institutions and the markets within which they operate.

Something we tend to think that there is no regulating in the global finance. But that’s not the case.

It leads us to the crucial question: Why do we need to regulate? There are two broad reasons: regulatory arbitrage (states don’t want to impose regulations in their country) and system risk (when left unregulated, financial markets are prone to bouts of instability and contagion/domino effect).

The number of banking crisis between 1970 and 2012 is quite impressive. The IMF made a global database to get an overview (slide 10, lecture 6).

Prudential regulation

There are two types of definitions of prudential regulation.

1. The first regards regulating that’s concerned with financial stability as opposed to rules designed to encourage cross-border financial flows. This describes the goal.
2. The second involves a complex, interrelated set of informal committees, formal international organizations, and decentralized networks in highly technical collaboration. This describes the form.

Development of the System

The international financial system is not an intentional system (like the Bretton Woods), but a patchwork and piecemeal system. What we do see over time is a type of vertical (institutions are linked to the organizations) and horizontal (more and more coordination between the different elements) integration.

In 1999 the Financial Stability Forum was founded, this was a ‘new’ hub of the system with a coordinating role.

Today we focus on just three actors from the complex network of the International Financial Governance system. The main players are the BCBS (Banking), IOSCO (Securities) and IAIS (Insurance).

Note: None of these regulatory agencies have formal legal power.

International Organization of Securities Commissions (IOSCO)

The IOSCO is established in 1986 and its headquarter is located in Montreal (CA).

It was a response to the rapid expansions of the international securities markets and the increased capital mobility (trans border flowing / transactions of money).

Broad and main aim: to mitigate the systemic risk by ensuring that all securities firms are adequately capitalized, and minimize the inefficiencies of cross-national regulatory differences. The success factor of this organization is the code of conduct for credit ratings agencies.

International Association of Insurance Supervisors (IAIS)

This is a newer organization, established in 1993/4. Its HQ is in Basel (CH). This was a response to BCBS. Its main aim(s) was to contribute to the improved supervision of the insurance industry for the protection of policy holders; to promote the development of well-regulated insurance markets.

The importance here lies in the role of capital. It’s all about the be secured to have enough capital to cover insurance claims.

Basel Committee on Banking Supervision (BCBS)

This Committee is established in 1974, its HQ is located in Basel (CH) in BIS. Its main function is to construct the international standards for banking regulation.

Members of this Committee are the G10+. Note: BCBS has no formal power and standards have no legal force.

Regulating International Banking

In the regulation of international banking are four terms important:

Deposit insurance, Bank examination, Lender of last resort facilities and (most crucial) reserving requirements & capital adequacy requirements.

Capital Adequacy Requirements (CAR)

This refers to the amount of capital a bank must hold as required by regulators. In order words: money to cover yourself. This requirement is a measure of a bank’s liquidity and the amount of money that has been lent out.

CAR has some problematic implications:

Problem 1: different loans are riskier than other and demand more liquidity. Question: how do we access and measure risk on loans?

Problem 2: it ‘costs’ banks money to have capital on hand, since banks make money through loans.

Basel 1 (1988)

Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for bank. So, Basel 1 sets up a series of regulations to make sure banks are able to meet their requirements. It was a response to the Bankhaus Herstatt crisis.

Capital requirement was being made dependent on the calculated credit risk of the borrower (borrower’s risk of defaulting). These risks are calculated by BCBS. This is a technocratic, top-down and inflexible approach.

Another point made in this committee was the Inflexible Credit risk assessment (Governments bonds = 0 % risk, Corporate loans = 100 % risk).

The system proposed above failed to reduce the impact of the financial crisis. This type didn’t prove to differentiate very well. Nonetheless, what it does is that it gives incentives banks to get even more risky corporate loans.

Basel ll (2004)

This was a response to the Asian Financial Crisis in 1997. What kind of power does supervisors have? Here they put more emphasis on oversight and supervision. The wish was to have a more flexible risk assessment system (A-IRB) calculated by banks or by using the BCBS standard.

Great banks can do this themselves by internal self-regulating. But, this is a huge problem because (big) banks have the inventive to advantage the system.

Basel III (2013)

Basel three was a gain a series of new innovations in direct response to the global financial crisis. There was an emphasis on reducing the ‘systemic risk’  curbs ‘procyclicality’. This includes stress testing, higher CAR, liquidity coverage ratio and capital surcharge. The implementation is delayed to 2019.

The Global Banking Lobby

How can we explain the ‘failure’ of global financial regulation? Who is to blame? Banks? Regulators? Or both? We watched a clip called Inside Job (2010) providing some insights on this issue.

Regulatory Capture

There’s a tied linkage between those being regulated (industry actors) and the regulators themselves. This link is also known as the Revolving Door problem.

George Stigler stated: ‘Regulation is dominated by the interests of the regulated’. This statement had profound policy implications. The previous assumption was as follows: regulation serves the public good. But in reality this turned out to be wrong. Stigler argues that when we regulate an industry, that will necessarily reflect the interests of the regulator. So, what to do? Reregulation? A neo-liberal heaven?

There are various dimensions of regulatory capture, it’s dependent on the level of institutional access: from access, preference attainment, the weakening of existing regulations to performing against the public interest. The latter implies ‘common interest regulation’: regulations that fulfill broader public purposes.

Robert Gilpin & Mancur Olson were talking about power and about the complixity of finding a sound definition.

We didn’t talk about ‘understanding Bank’s Lobbying Power’ (sheet 39 – 42 lecture 6), this won’t be in our final exam.

Capture is determined by a number of things: resources, issue salience, institutional access and network mechanisms (revolving doors and cognitive capture).

Resources

The main story here is that banks and trading organizations representing banks can convince regulators what to do. But it’s not just about money. It’s about how money provides you with the capabilities. So, resources are both capital as technological knowledge.

Lecture 7 February 24^th 2015

Trade

Next to money and finance, trade is the biggest corner stone in IPE. Today we’ll look into what International Trade is, and we’ll discuss some history. We’ll also address the main international trade theories in depth and we’ll address the structure of the Global Trade Regime (Does the WTO promote free trade? And does the WTO increase global equality?). So, is the liberal claim proving to be true or not? We’ll also look at some challenges to the Global Trade Structure (protectionism and the role of agriculture for example). Furthermore we’ll address the role of the civil society in short and we’ll close with the future of Global Trade relations.

What is international trade?

We can say that trade in itself is the exchange of commodities between people, actors, and international trade is when this exchange is crossing borders. Today we’ll focus on the trade of tangible things (goods and assets).

In the sheets the following definition is provided: ‘’When goods and services cross national boundaries in exchange for money or the goods and services of another state.’

Why is this important? When we think of the liberal perspective of free trade, we believe in a potential for the increase of global prosperity. But in order to achieve this we need some rules: the case for regulating international trade. International trade can provide advantages (to the domestic markets of) certain states, and disadvantages for other states.

The History of International Trade

In the14^th and 15^th century we witnessed a massive increase in trade, partly due to the emergence of nation states and the development of industrialization. In the history of international trade, we talked about two things: tolls and tariffs.

Tolls: enacted by local leaders for permission to pass through territory, or to trade. This is really an expression of sovereignty and control. It’s not only a way of generating revenue for a state, but also a sign of control. For a long time tolls were blocking international trade.

Tariffs: a percentage of tax added to the price of imported goods. These are still with us. Currently it’s a form of protectionism. The general function of tariffs was to generate revenue for the state without a reliable system of taxation, but from these external sources.

Let’s discuss Trade Theories, by building on what Cohen is writing in his book.

These three questions will help us understanding Trade Theories:

The first is: ‘When and why do (should) states engage in trade?’

Secondly; Who trades with whom?

And thirdly: Who trades what with whom?

Cohen starts with the three theories we talked about in this course: Liberalism, Mercantilism and Marxism.

Theories of International Trade

From the Liberal perspective we can also talk about the Traditional Trade Theory.

This theory talks about absolute and comparative advantage, with a series of refinements of comparative advantage: Hecksher-Ohlin Theory, Stopler-Samuelson Theory and Intra-Industry Theory. Additionally there’s a basic but very compelling Gravity Model of Trade and lastly we’ll address (Neo-)Mercantilism, with the Strategic Trade Theory.

Traditional Trade Theory

In 1776 Smith stated that trade is based on an absolute advantage, a prescriptive statement: ‘‘All states should specialize in and trade the goods they produce most efficiently.’’

Ricardo added a view to the traditional trade theory. He gives us a much more compelling description of trade: ‘’States should specialize in and trade the goods they produce at the lowest ‘opportunity cost’ relative to other states.’’ In this view trade is depending on a trade-off, the opportunity costs decide the comparative advantage. This relies entirely on a notion of labor productivity. It’s a convincing notion on trade, but a bit limited.

So let’s refine the notion of comparative advantage in the following three models:

Heckscher-Ohlin Model (1933)

The basic idea of this model is that states have a comparative advantage in producing goods that involve the use of abundant ‘factors of production’. These abundant factors are crucial. This should give states the comparative advantage in producing labor (more so than producing industrial goods). So essentially Hecksher takes what Ricardo says, but he adds: we also need to a differentiate between labor and goods.

On the ladder of abstraction we move down:

Stolper-Samuelson Model (1941)

This model explains protectionism. A state should specialize its trade in the production factor that it got most (capital, labor or land). But, one good (a capital or labor intensive one) is worth more and the other (an agricultural good for example), so you need to protect your goods. The main idea is that trade favors abundantly endowed factors and it hurts poorly endowed factors. This is why protectionism is sometimes needed.

Intra-Industry Model

This explains why states would trade ‘intra-industry’ goods. Why do Germany, Japan etc. produce cars while they don’t have any comparative advantage? This is also mentioned in Cohen, and the most popular model.

Strategic Trade Theory

This is a refinement of the Mercantilist theory we’ve talked about before. Strategic Trade is ‘’a state’s creation of comparative advantage via industry targeting.’’ The comparative advantage theory of Ricardo only works in the short run. Technological advantages make a difference in the long run. This theory accepts trade liberalization, but limitation is needed when trade jeopardizes security.

So: according to the Strategic Trade theorists comparative advantage can be good in the short run and bad in the long run. Therefore we need to stress on ‘’Competitive Advantage’’.

The Gravity Model of Trade

This can help us explain the puzzle: Why does the US trade more with some states and less with others?

It tells us that trade is a function of two things: the economic size of a country, its GDP, (Y) and distance (D).

So the trade between states I and J would be: T = Y i x Y j / D ij

It makes sense that wealthy states trade more with wealthy states and transaction costs could diminish the amount of trade due to the distance.

In reality cultural distance is also a determinant of trade, since cultural affinity (a common language for example) encourages trade.

Then we get to this question: explaining the anomalies II (Canada and Mexico). Due to special trade agreements between these countries, Canada and Mexico trade a lot more with the US than what we expect according to the Gravity Model.

Structuring the Global Trade Regime

We have a number of point to focus on as we move into structuring the Global Trade Regime, namely the founding of the GATT / WTO.

Pax Briticana (1815 – 1914): we see a massive increase in trade, but it suffered some serous problems in the Inter-War Period. Protectionist measures were implemented, like the Smoot-Hawley Tariffs (1930) and Reciprocal Trade Agreements Act (1934). Since 1945 we’ve seen a peak of measures of protectionism, what is also called the Pax Americana.

Establishing GATT

Negotiations started during the Bretton Woods Conference of 1944. Initially three international institutions were established: the International Monetary Fund (IMF), the World Bank (WB), the International Trade Organization (ITO), but this last one failed.

From ITO to WTO

1945: Havana Charter (the Charter to establish the ITO which failed)

1947: Establishment of the General Agreement on Tariffs and Trade (GATT)

1995: Establishment of the WTO, a considerable advance on GATT.

Growth of the GATT/WTO

1947: Geneva Conventions 23 members

2011: Doha Round 158 members

This shows the influence of this international institution.

GATT and China (1947 / 2001)

In the initial membership of China it was very clear that they were helping the international trade regime. But later it turned out that China didn’t want to do much with the liberal policies. China wanted to be a special member, ‘a late developer’, with special rights. But the USA didn’t agreed with this.

GATT and Russia (2012)

Russia is also an interesting example. They only joined the GATT a couple of years ago. The democratic quality and processes in Russia was the main point during the negotiations. Of course it was a Cold War enemy of the USA, the Soviet Union therefore provided a counter part to GATT and the WTO. Until 2012 the GATT reflected the neo liberal Western values (liberalism and free trade) and Russia had its own counter-GATT. The Soviet response to GATT was the COMECON: Council for Mutual Economic Assistance (1949 – 1991)

It’s interesting to see how this works: there’s no free market at all. Its main function was coordination on which states should be doing what. It was unsuccessful, probably it was more meant as a symbolic tool.

Core principles of GATT and WTO

The rules of the game are important to know, so let’s go through the main principles of these organizations.

1. Trade liberalization. Generally this is meaning tariff reduction (by non-tariff barriers).
2. Non-Discrimination (Article 1 and Article 3). This is the biggest one.

• Article 1: Most favored nation. It prohibits states from trading the same products for different tariffs in different countries.
• Article 3: National Treatment Provisions (the internal one). If we import bananas and there’re no tariffs, there might be additional barriers that provide extra benefits for the state. This works better in bigger countries where they can impose different restrictions. So to ensure equality this is also prohibited.

3. Reciprocity. This states that trade relations should be reciprocal. You can’t free ride on a good trade term. You need to extent the same trade provisions to the other state.

4. Safeguards (Article XIX). Safeguards permit members to raise tariffs on several products for a short time: temporary protectionist measures. It allows a bit of a safety net in case of serious harm to domestic producers. Anti-Dumping laws: dumping provides unfair negative effects for foreign producers, so these laws exist to identify and stop dumping behavior. This is very difficult however because markets aren’t transparent enough to control this. Countervailing duties: this allows states to impose tariffs when they feel the counter party is doing the same.

5. Development. This concerns the establishment of a special and differential treatment to developing countries. It allows them to do a number of non-free trade things to protect their economies. For example it supports free access to the European market.

Since 1947 there have been a lot of ‘rounds’ that covered numerous subjects. We don’t need to know all of this, but the main point of focus is the changing roles and functions of the GATT & WTO (dispute settlement mechanisms for example). We’ll address the three most important ones briefly: the rounds held in Tokyo, Uruguay and Doha.

Tokyo Round (1973 – 1979)

During this round there was an acknowledgement that the NIEO (New International Economic Order) might require some special circumstances to help them develop in their late industrialization.

Another subject were the non-tariff barriers and the Dispute Settlement Mechanisms. When there’s a trade dispute, there’s a third party needed to arbitrate the situation. The central problem here is that the party being offended could stop the procedure.

Uruguay Round (1983 – 1993)

Here again the Dispute Settlement Mechanisms was discussed. This mechanism needed more teeth was the general opinion. But, to what extent?

Another huge issue was the TRIPS (the Trade-Related Aspects of Intellectual Property Rights), especially relevant for developing countries.

In Uruguay progress was made on trade in agricultural goods. From the beginning agriculture has been a serious sticking point. As we see states emerge from the Frist World War, there’s a high-security factor. States have serious problems in accessing food. Government provides subsidies to farmers. This caused problems.

Besides the WTO was established as a legal personality after a 10-year during negotiation (1995).

Doha Round (1999 – present)

This third round is also called ‘The Development Round’. It discussed the elimination of the 3^rd World debt, the TRIPS in Least Developed Countries (LDC’s) and again agriculture is an issue. Next to this there were Anti-WTO protests: a demise of the WTO or ‘Doha-lite’. The question is: What will the future bring?

WTO should affect trade, right? Let’s explore the effects of the WTO.

The principles of reciprocity and nondiscrimination solves prisoner’s dilemma. The Dispute Settlement Mechanisms should enforce agreements and member states are less likely to revert to protectionism. Rules make it difficult to backslide; loss of autonomy makes states less susceptible to domestic pressures.

This all looks good, but we also see a different set of scholars showing different result (with a pessimistic view) like Robert Wade and Andrew Rose. In 2004 Rose posed the question: ‘Do we really know that the WTO increases trade?’ He finds no evident that GATT/WTO increases trade amongst members. He also states that WTO members don’t trade more than non-WTO countries. Rose describes his findings as an ‘interesting mystery’.

The second scholar was Robert Wade with his work Rising Global Inequality. He spoke about the effects on global prosperity. His statements is that the WTO has done very little to increase global prosperity.

Three ‘Sticking points’: Enforcement, Lingering protectionism and Grandfather clauses (sheets 34 – 49). These will not be in the exam.

Civil society and Global Trade Relations

(I)NGO’s and global civil society argue that there’s a democratic deficit in the WTO. They suggesting that it’s not fair for less developed countries, because the WTO is making decisions based upon the interests of their members, big businesses and corporations. So all of this is fine, but it seems to give privileges to the wealthiest.

They plead for a development from a Club Model to an Adaptive Club Model. And ultimately NGO’s are calling for a Multi-Stakeholder Model.

The Future of Global Trade

In the future we see two developing partnerships: TTIP (Trans-Atlantic Trade and Investment Partnerships) and TPP: Trans-Pacific Partnerships.

The cooperation between TTIP and TTP seems to cover everyone but China. This could be the West’s Last change to retain global trade power?

Lecture 8 February 26^th 2015

Regionalism

Today we’re going to get into trade again. We’ll face the new global and increasing trend: the challenge to liberalize global trade.

We’ll see what regionalism is, the different levels of regional integration and the ‘Two Waves of Regionalism’. We’ll also explain why states regionalize and we’ll address the subject of Regionalism and the GATT/WTO followed by the future of regionalism & global trade.

Today’s central question is: is regionalism a stepping store or a stumbling block? In other words: is it a step on the path towards, or is it something that’s standing in the way of regionalism? There’s a crucial tension between regional integration and liberalization of global trade.

In 2000 Fred Bergsten wrote an article in which he states that the world is becoming a three-block configuration including East Asia, EU and the USA. For too many years we’ve been neglecting the integration in Asia (the ASEAN), the writer argues.

What is regionalism?

Cohn (p. 212) defines: ‘’Regionalism is a difficult term to define, because it connotes both geographic proximity and a sense of cultural, economic, political and organizational cohesiveness.’’

Balaam & Dillman say: ‘’Regionalism is ‘a movement toward clubs or associations of nation-states in a geographic area that cooperate to achieve goals.’’

And Ravenhill writes: ‘‘Regions are social construction. The members of the region define both the boundaries, as the meaning of it.’’

Regionalism: one approach

How do we understand what regions are then? First of all it’s not multilateralism. Regionalism is rather like mini-lateralism.

Cohn’s definition of regional trade agreements (RTA) is ‘’reciprocal trade agreements between two or more partners.’’ Compare this to preferential trade agreements (PTA), which are non-reciprocal trade agreements between two or more partners.

Note: currently 354 RTA’s are accounting for more than 50 percent of all world trade!
 

Levels of integration

We’re going trough the various levels of integration. We think about this on a spectrum: from the least amount of integration / threat to sovereignty: a Free Trade Area (i.e. NAFTA), followed by a Customs Union (i.e. MERCOSUR), a Common Market (i.e. ASEAN), an Economic Union (i.e. EU) and a Political Union, with the most integration and the biggest threat to sovereignty.

Let’s dig deeper into these particular forms:

Free Trade Agreement (FTA)

This is the lowest threat to sovereignty; it allows the members to maintain the control. But there are some trade-offs here as well. Members eliminate tariffs, but retain autonomous customs duties toward third countries. Goods come in, but they are subject to different tariffs depending of the countries which they come from.

The problem here is this: transshipment – export goes via a member state with the lowest customs (taxation) and is shipped to a state with the best market. This is a problem because the manufacturers are avoiding the tariffs which would exist is they would directly ship them to state B.

The solution lies in the Rules of Origins (ROOs). These specify which products are qualified to circulate freely.

So, in a FTA states contain a considerable autonomy.

Customs Union (CU)

Everything here is cumulative: it builds upon each other. So the CU is everything that goes for a FTA plus common external tariffs toward third countries. In other words: there are no Rules of Origins. The CU eliminates the threat of Transshipment.

States no longer collect their own customs revenues, so there’s a reduced state autonomy.

The CU knows two difficulties: setting a common external tariff (coordinating how much to charge) and dividing customs revenues (how to distribute this money?)

Common Market (CM)

CM = FTA + CU + free movement of goods, services, capital, and labor. This creates pressure for integration on health, safety, education etc. We need to harmonize this. But to do this we need to give up more and more sovereignty. Therefore the CM can be considered as a high threat to sovereignty and a great deal of state coordination is needed.

Economic Union (EU, ASEAN)

FTA + CU + CM + harmonized industrial, regional, transport, fiscal and monetary policies (i.e., common currency). You enter into some kind of a currency union. Four Freedoms tend to lead to an Economic Union. At this point travelers and businesses are free to move but have to still deal with currency exchange, etc.

If the concern here is the instability of the exchange rate, you turn into a currency union. A common currency is regularly seen as the highest level of exchange stability.

Political Union

All the above + harmonized foreign and defense policies. A political union mainly has a symbolic character with flag, symbols, an anthem, etc. We’re not here yet.

All these different levels of regional integration are summarized in a table in our textbook (Cohn, p. 211).

A long History of Regionalism

The main historic events of regionalism are listed here:

• Napoleonic Continental System (1806 – 1814): a form of economic integration
• German Zollverein (1818 – 1871): or German Customs Union was a coalition of German states formed to manage tariffs and economic policies within their territories.
• Scandinavian Monetary Union (1875 – 1914)
• Deep forms of regional integration did not exist until after WW2. The first wave began in 1945 and lasted until 1980, the second wave haven’t ended yet.

Let’s see the characteristics of these two waves.

To begin with the 1^st Wave of Regionalism (1945 – 1980).

The main characteristics of this first wave were the 123 RTA ‘notifications’: meaning 123 times that a state went to the WTO saying they’re setting up regional trade agreement. This RTA activity is increasing. We also see Geographical proximity in this first wave. Furthermore there were both North-North agreements and South-South agreements (the African Union for example), these were based on import substitution policies and more development oriented. Key in this period is the US opposition to anything but multilateralism. Until the 1980’s the US was totally against RTA.

Key examples are the CMEA (Council for Mutual Economic Assistance) and the ECSC (European Coal and Steel Community).

Then the 2^nd Wave of Regionalism (1980 – present).

On this short period, there were over 300 RTA notifications. This proves a booming increase of regional trade. From the 1980’s North-South Agreements (like NAFTA) were introduced. The NAFTA is a free trade agreement bringing together Canada, the USA and Mexico. In this period we see geographical proximity decreasing. The USA reverses policy on RTA’s and creates the NAFTA.

A key example is, as already mentioned, the North American Free Trade Agreement (NAFTA).

Spotlight on NAFTA

The NAFTA is founded in 1992, the FTA is formed in 1994 by the US, Canada and Mexico. They saw the example of the EU and started thinking about founding a new integrative organization. The motivation was US’s frustration with the WTO negotiations. The importance of NAFTA stems from the inclusion of the US (, the comprehensive nature of the agreements, and the fact that is was the first reciprocal FTA between D’s and an LDC (we haven’t seen this type of integration with a less developed state like Mexico.) The NAFTA was set up to be a free trade agreement only. Mexico in particular wanted some type of integration to push its economy forward. The result was a consensus: NAFTA has fallen short of its goals. It hasn’t helped to truly lift up the boat, since Mexico still is a less developed state.

Spotlight on ASEAN

This is South-Asian trade agreement with Myanmar, Thailand, Laos, Vietnam, Cambodia, Singapore, Indonesia, Vietnam, Malaysia, Philippines and Brunei Darussalam as its member states. The ASEAN is founded in 1967 with a far different motivation: rising Japan; regional security; regional independence. It had to do with concerns about the conflict with (the threat of) communism in the region. It was meant to create a big power against the common enemy. In order to encourage the emergence of the Japanese economy (the Japanese ‘miracle’), a system of economic cooperation was needed. The main tasks of ASEAN were ensuring security and economic stability. The ASEAN way is characterized by informal ways of rules and keeping things more flexible. The issues of transfer sovereignty to a supranational level were barriers to cooperation.

The central question is: how can we explain the rise of regionalism?

We see three perspectives: the Mercantilist, Marxist and Liberal perspective.

Mercantilist

Let’s start with the Mercantilist (realist) perspective. From this view regional integration is a response to changing security and power relations. Some realists would argue that regional integration in Europe is only possible when they would be safe. European countries were free to cooperate under the umbrella of NATO. This is why the defense against a common enemy is another main point of this perspective.

Marxist

Secondly the Marxist perspective, which believes that regional integration is driven by TNC’s and hegemony seeking states. Regional integration is, as they argue, a journey towards hegemonic power. The capitalists benefit most from this regional integration.

Liberal

Thirdly we look at the Liberal perspective. Here the main thing is that integration is driven by market concerns like peace, larger markets, foreign investment, the bargaining of power and domestic reforms. Regional integration makes it easier for national governments to make domestic reforms.

Regionalism and GATT/WTO

But wait, doesn’t regionalism contradict the WTO? The principles Trade liberalization & Non-discrimination are contradicting to regional integration. What we see is a kind of compromise. It’s also written directly in the GATT-rules, let’s look closer to what the different articles are stating.

Article 1 and Article 24 are the most important to know. This is where the main contradiction is coming in.

GATT Art 1: MFN and Non-discrimination

GATT Art. 24: permits FTA and Customs Unions

Regionalism is perceived as a stepping-stone to free trade, and it also defined as ‘the second best route’ to liberalization.

So, how does this work?

What we want to do with a regional trade agreement is to minimize trade diversion and to maximize trade creation. Trade diversion decreases when the elimination of intra-regional trade barriers shifts some imports from more efficient outside supplies to less efficient inside suppliers. The idea is that regional trade is able to minimize trade diversion. The goal is to increase trade creation: a shift in demand form less efficient regional supplies to more efficient regional suppliers.

Is Art. 24 effective? No! It’s intentionally ambiguous. It states that all RTA’s must eliminate tariffs on ‘substantially all’ trade among the members within a ‘reasonable’ time period and that RTA’s should not raise tariffs ‘on average’ to countries outside of the agreement. Here we face problems of ambiguity, monitoring and oversight. How should we understand vague the terms ‘substantially all’, ‘reasonable’ and ‘on average’?

Is regionalism a stepping-stone or a stumbling block?

From 1948 tot 2012 we’ve witnessed a huge rapid increase of RTA’s. RTA’s are mostly geographically distributed in Euro-Mediterranean (the majority are FTA’s in force), followed by Eastern Europa & Central Asia and Americas.

Global Tensions & Stumbling Blocks

1. Fortress Europe means regionalizing to protect Europe from the outside (from immigrants and lower cost producers).

2. Global Risk Society: Global crises require global response, shift to ‘Global Governance?’ A lot of matters are cross bordering, they don’t obey the borders of the RTA, so they require a different level of cooperation.

3. Welfare Loss: J. Viner (1950) states that the selective removal of tariffs deceases aggregate welfare and leads to Trade Diversion.

4. We see another global tension in competing Regions like Anti-US regionalization.

Some future trends:

Free Trade Area of the Americans (FTAA). This is a proposed super-FTA among 34 North and South American countries. It’s meant to extend the NAFTA to both continents. In 2003 talks stalled over issues of developing countries.

The Bolivarian Alliance of the Americans (ALBA). This alliance is established in 2004 as a reaction to the FTAA plans. It’s also called a ‘socially oriented’ trade block. The ALBA knows a central redistributive mechanism by a compensatory fund and structural convergence. 

Lecture 9 March 3^rd 2015

Emerging markets

Today we’ll talk about emerging markets in the global system and we’ll pay special attention to case studies: the transitions in Russia and the rising powers India and China. We’re asking a number of questions: What is a transition? And what is the starting and ending point of a transition? We tend to think of transitions, as they’re the beginning of a certain stage and the ending of another stage. We’ll also explain variation in outcomes; how do we explain why we see better transitions in certain states under the same (more or less) conditions?

The End of History (1989)

Some background information to begin with: since the collapse from communism we saw only one game in town: liberalism. This perspective was no longer contested. There’s no longer a legitimate alternative to liberal democracy. Fukuyama called this the End of History.

In 1991 Samuel Huntington was writing about the 3^rd wave of democracy: Democratization in the late twentieth century. Almost ten years later, in 2000, Freedom House predicted that 63% of the globe was constituted by democracies.

Last year the Economist published a special issue talking about what’s going on in Ukraine in that time. What’s gone wrong with a democracy like this? Democracy was the most successful political idea of the 20^th century. Why has it run into trouble, and what can be done to revive it? It seems that the waves are rolling back. We’re facing a problem of democratic consolidation. How do we understand this process of anti-transition? In other words: why has democracy lost is momentum?

We witness stagnation towards the trend of democratization. Freedom House gives us an analysis of the improvements or declines in aggregate scores. We see a steady increase in countries that are declining.

How can we explain this? It might have something to do with the influence of China. China is showing a different political form, an alternative to capitalism and democracy, and it seems to be successful. Market socialism? Capitalism married to authoritarianism?

The problem of Democracy

Zhang Weiwei (2014) talks about the problem with democracy: ‘’democracy is destroying the West […] because it institutionalizes gridlock, trivializes decision-making and throws up second-rate [leaders] […] democracy makes simple things ‘overly complicated and frivolous’ and allows ‘certain sweet-talking politicians to mislead the people’ ’’. This provocative quotation of Zhang Weiwei raises questions.

The questions that we pose today are: Has democracy run out of steam (and, if so: how)? Has democracy been divorced from capitalism? Are hybrid regimes more efficient? Why doesn’t democracy stick? This is also known as the problem of ‘democratic consolidation’ and economic transition.

To understand this, today we’ll address four key themes. At first, there’s no single ‘transition trajectory’. We see a variation that is highly depended on the historical background, political seize and systems and policy decisions. Next to this we face the fact that transitions pose serious challenges to IPE fundamentals. We’ve always thought that capitalism meant freedom, but now these things are intertwined. Thirdly transitions are chaotic and painful. They are difficult to manage. And lastly: rising powers / emerging markets are reshaping the global balance of power.

Understanding transition?

Let’s define the term ‘transition’ at first. A transition is the process of moving from one system of national political economy to another. We need to ask a base consideration about where the transitions come from. Is it a command economy? Communism? Or socialism? And where to? Are the transitions heading to democracy?

What is the ‘end stage’ of a transition? What do we expect?

It’s a false teleology to think that all transitions are a one direction shift from authoritarianism (a state-led / command economy) to democracy (capitalism / free market economy). Traditionally we think of this as a one way street, but this is not the case. Transitions are a more fluid, dynamic process with possible political end stages: pseudo-democracy, semi-democracy, limited pluralism, limited institutional democracy etc. There are also several perceived end stages in economic sense: neo-liberal capitalism, social market economy, market socialism, and competitive authoritarianism. This variation shows the complexity and diversity of transitions.

The Puzzle: IMF 2000 report

The IMF report (2000) in the Post Communist sphere essentially states: ‘Why are some transition economies ‘approaching the finish line, others are languishing at various points along the track, and a few are barely off the starting blocks’. What is striking here is the implied theology of the finish line. A finish of what?

Explaining the Variation in Transition Stories

When we look to the Former Soviet Republics, we see a variation in the amount of free and fair national elections for example. In Estonia and Latvia 100% of the national elections has been free and fair (20 years on from the collapse of the USSR), while at Belarus only one out of eight elections can be qualified as free and fair. There are a number of factors that can help us explain this variation (as we still see in Eastern Europe for example): economic factors, cultural explanations, political-institutional explanations and political-junctural explanations.

Economic explanations

Here there seems to be three important factors: wealth, debt and the level of foreign economics assistance. Wealthy states with a high level of economic growth are more likely to be in a transition, since wealth helps to manage the transition. Wealth also helps managing the negative effects of the economic reform, a necessary tool. On the other hand, being in debt would slow down this process. And thirdly the level of foreign economic assistance is crucial. What roles do international organizations play? Do they provide money to smoothen this transition?

The J-Curve

The J-Curve is a model showing the difference between the actual route of economic transition and the expected route of economic transition. It shows the development of the economic performance over time. On the short run, the reforms tend to decrease a state’s wealth. Before one can benefit from economics prosperity, one needs to endure economic pain. So this is the story: in the transition stories policy makers and individuals expect something extremely different than what we see in reality. The J-Curve helps us to see why it would not be ideal to have implemented democracy from the first moment on, because it would be too painful when there are too many individuals and stakeholders involved through elections etc.

Cultural explanations

This is really about the variation in cultural we see in the states. People in different cultures hold divergent attitudes towards the market, free enterprise, private property, foreign investment, etc. The role of religion for example is also important in this, for it is being crucial to endure the economic hardship as we’ve seen in the J-Curve. The problem here is that not everyone shares the same work ethic and definitions of what free enterprises or markets are. Culture is very personal en diverse, so it’s hard to provide general explanations on this.

Political-Institutional explanations

Here we’re talking about the history of communism, the old regime. In the Soviet-Satellite states we saw a great diversity in the state capacity: it wasn’t a one size fits all model. The increased state capacity and decentralization has put the countries into a better position for the transition. The relationship between state agencies and business interests is influencing the transition progress. Also the concentration of authority in agencies and ‘Micro-foundations’ inherited form the predecessor regime are factors we should take into consideration. The sweet spot lies on the combination of a high capacity and a high level of autonomy (excessive discretion). The latter is from a figure of Fukuyama (2013), this won’t be addresses in the exam.

Political-Junctural Explanations

We’re focusing here on the process through which the old regime fell. What was the nature of the transition? What is top-down of bottom-up? Was it violent or peaceful? And was it sudden of gradual?

Bringing things together: explaining variation in Eastern Europe

This is the key puzzle. When we look at three different countries in Eastern Europa (Estonia, Albania and Turkmenistan), we see different scores (2013). For example on democracy (1 = Best, 7 = Worse) Estonia scores a 1.96, Albania a 4.25 and Turkmenistan a 6.93. They all have a different regime classification: Estonia has a consolidated democracy, Albania a Transitional Government or Hybrid Regime and Turkmenistan a Consolidated Authoritarian Regime (Freedom House). We also see differences on business freedom, trade freedom and freedom from corruption.

The outcomes are a function of a pre-communist history of statehood. We also saw a rapid growth of civil society, which can lead to a type of dimension of democracy related to things like freedom of assembly. Also the power seeking pro-democratic parties at that time played a big role. Besides the gravitational pull of EU membership shouldn’t be overlooked. And lastly the level of FDI (Foreign Direct Investment) also influenced the transitions.

Three case stories: Russia, China and India

The BRICs countries (Brazil, Russia, India and China) are compared a lot, since they’ve been in this same term. When we look to the GDP Growth Rate in BRICs (%) we see that the economic growth of India is ever increasing since 2011, and the economic growth of China has decreased since 2012. So: let’s focus on India! One factor to mention first is the civil stability, the stability amongst citizens seems to be important in these development.

Spotlight on Russia

We’re talking about the transition from the USSR to the modern day Russia. We see the emergence of the command economy: ‘A system where the government, rather than the free market, determines what goods should be produced, how much should be produced and the price at which the good will be offered for sale.’ A different term for this is a state-led economy. In a command economy the state owns the means of production. The state sets prices and makes production decisions. Besides the state follows overriding macro-economic objectives. This is in direct contrast to the neo-liberal economic ideology and theoretically tenets.

Command Economy in the USSR

Let’s look to the command economy of the USSR between the 1930’s and 1980’s, the period in which the world experienced a growth of command economies. How did it work and what were the benefits of this system? The Soviet Union transformed from a pre-industrial and agrarian society into a economic powerhouse. The social ‘progress’ and the ‘Command Economy Template’ were leading in this shift.

The introduction of universal suffrage was an important step in the social progress, since people started to practice democracy. Other steps in the social progress were the legalization of abortion and other health improvements. At the same time the ‘Command Economy Template’ emerged, other countries adopted this system.

There are a number of key points concerning the command economy: it should empower the state to overcome failure markets, it should decrease inequality and it should reduce unemployment.

But, there are also some weaknesses of the Command Economy. First there’s the danger of economic implosion. The Command economy tells you what you need to produce based on a central plan. This leads to the overproduction of certain goods and the underproduction of other goods. This leads to mass shortages. Another weakness is the soft budget constraints. The states provided loans that were too easy to get, so these firms were really not interested into increasing their revenues.

The government implemented a command economy but didn’t have enough information to know what to produce. The market is the only tool for us to provide in accurate information about supply and demand. So the argument here is that the command economy has an information problem, it isn’t able to respond to consumer needs.

The beginning of the end (1970 – 1980’s)

We move into this transition stage that we link to Gorbachev and to glasnost and perestroika. In these decades the policy was to introduce a limited amount of liberalization to give populace greater stake in the system and reinvigorate socialism.

This led to the collapse of the Soviet Union.

Transition Economics

What was expected, what was the transition policy?

The IMF came with the Neo-liberal transition package, based on four pillars:

1. Liberalization (prizing determined by markets and lowering tariffs)

2. Macroeconomic stabilization (bringing the inflation under control)

3. Restructuring and privatization (getting al these state’s own companies into private owners)

4. To introduce some legal and institutional reforms (i.e. competition reforms)

What we find here is considerable pressure for Russia to introduce all these reforms. For example the Worldbank led by Neo-liberal thinkers was telling the Russians that this is the way. What’s interesting about this plan is that we see the fingerprints of neo-liberalism all over. Russia was required to implement all these key pillars in once. The punishment was the holding from the WB finances. The result was a catastrophe.

In the transition economics in Russia two things played a mayor role: marketization and privatization. Marketization was done by shock therapy: an immediate introduction of liberalization overnight. Privatization was implemented in two ways: selling firm shares to the highest bidder and by voucher privatizations: individual citizens buy shares in companies by using vouchers.

Russia today

We can say: it didn’t work out very well. Putin’s election in 2000 brought an end to Russia’s experiment with democracy. From this moment on re-nationalization and re-centralization was the key. In the period 2002-20212, a strong economy is clearly a higher priority for Russia than a good democracy is.

Spotlight on China

Deng Xiaoping described China’s transition as ‘’Socialism with Chinese characteristics’’. Agriculture, before very highly regulated, was liberalized. Socialism continued; the one-party system stayed, there was no need of democratization. China’s transition is also marked by the system of Market Socialism: private enterprises and markets enjoy liberal climate but remain in state-led.

Spotlight on India

India knows two important different periods: 1947 (the independence from Britain) to 1990: a period of an insular (mixed) economy and 1991 till now with an open (mixed) economy.

1947 – 1990: Insular Economy

Prime Minister Nehru implemented the main policies, mainly policies of Self-reliance, perhaps a result from the colonialism. Amongst other was the Green Revolution, in a time of wide spread malnutrition issues. They experimented with new forms of farming; this not only led to an increasing production, but also made an agricultural powerhouse from India. Another factor of this policy was import substitution.

At this time the License Raj was introduced: the elaborate system of licenses and regulations that were required to set up and run businesses in India between 1947 and 1990. It was a result of the planned economy where all aspects of the economy are controlled by the state and licenses are given to a select few. This produced an unfriendly business environment. Last the there was the TNC exodus: a protectionism policy that for foreign investors seeking a share of control it would be required to partner with an existing Indian firm. The problem for most TNC’s is that they don’t want to share their Intellectual properties with foreigners.

1991 Transition: Exogenous Shocks

This year was a turbulent one. It was the year of the collapse of the Soviet Union, the assassination of India Ghandi (who was slowly liberalizing India), Balance of Payments deficit and structural reforms.

Manmohan Singh

He was de Prime Minister of India from 2004 to 2014. His policy had three pillars: the devaluation of the Rupee, slashing import tariffs and de decontrol of gold imports.

Lecture 10 March 5^rd 2015

Transnational corporations (TNC’s)

What exactly are TNC’s? How do we differentiate that from the MNC’s Cohn is talking about? How much power do they have? Where do they operate and why? Where do we see the major foreign direct investment going? What is de impact of TNCS’s? We’ll close this lecture by the regulation of corporate social responsibility.

By the numbers

TNC’s play a central role in global political economy. We know they compete in regional markets and in global markets. Countries essentially want TNC’s to invest in them. There are more than 80.000 TNC’s, equal to 15 trillion dollar in FDI (2008). The 300 largest TNC’s control ¼ of the world’s productive assets and 51 of the top 100 ‘economic entities’ are corporations (49 are countries). When we talk about economic actors in terms of wealth, TNC’s are dominant. ½ of the world’s 500 largest TNC’s are located in only four countries.

A contested topic

To a certain extent TNC’s is a contested topic or term. We also see references to multinational enterprises, international firms, transnational enterprises, global corporations, and globally integrated enterprises. The two dominant terms are: Multinational Corporations (MNC’s) and the Transnational Corporations (TNC’s). Multinational suggests that there’s coordination, that there are multiple nations involved. It links the interconnected world where multiple nationalities are working together. But this is a false interpretation. The type of activities these enterprises conduct, are much more transnational. They are being run by nationals (by Americans for example), but multiple countries invest. The MNC’s are an optimistic, kind of a hyperglobalistic term.

Defining TNC’s

TNC’s are ‘’Firms that own and control facilities for production, distribution, and marketing in at least two countries’’ (Cohn, 415). The crucial thing here is ownership and control, beyond the borders of the home country. The second definition, given by Balaam and Dillman, is a bit expanded: ‘Large businesses that compete in regional or global markets and whose business environment therefore extends beyond any give nation-state […] The key characteristics of a TNC are high levels of FDI.’ The key characteristic here is the high level of foreign direct investment (FDI). What is FDI? These are investments made by a corporation in the production, distribution, or sales facilities of another country. It’s direct, because the parent corporation in a home country exercises a measure of control on resources in a host nation. You buy control by stocks and shares etc. It’s not the same as Foreign Portfolio Investment (FPI) Here there’s no control. This is the purchase of of stocks, bonds, and money-market instruments by foreigners to gain financial return.

There are two different types of FDI: Greenfield investments and Mergers and acquisitions. Greenfield investments are about the creation of new facilities and productive assets by foreign firms. Mergers and acquisitions have to do with the purchase of stocks in an existing firm with the purpose of exercising control over direction of a firm. A merger is when two firms become a new entity, acquisitions is when a local firm is absorbed by a foreign firm. We see more mergers and acquisitions than we see Greenfields investments.

Let’s get to some fundamental questions. The first is: how powerful are TNC’s?

Intuitively people they are very influential in international decision-making. This is partly due to the media and a scientific hype.

Howe Powerful are TNC’s? They rule the world

Vitali et al. (2011) wrote about this issue in their book: ‘’The network of global corporate control’’. The take home point here is: about 40% of the economic value of transnational corporations in the world is in the hands of a group of 147 tightly-interconnected corporations ‘which has almost full control over itself.’

Let’s put this issue of power aside, we’ll come back when we’re talking about Corporate Social Responsibility. Now we’re asking four central questions: How do corporations become TNC’s? What are the political considerations of FDI? What are the effects of FDI on local economies? And, how are TNC’s regulated?

How do corporations become TNC’s?

We tend to think it’s all about TNC’s investing in poor countries in order to benefit form cheap labor and cheap and available natural resources. But, the reality is far more complex than this stereotype.

John Dunning introduced the OLI model, which combines Ownership, Location and Internalization. In 1981 he came with this theory why countries would invest in these foreign markets. These three things are essentially push-factors: ownership, location and internalization. Ownership is about the control that states are seeking. This type of ownership advantage is about control about how things are produced, but at the same time it’s also important for companies to compete with local markets. The second one is location. These are the most obvious things we think of. The hosting state provides lower transportation costs for example. Resource proximity/access to resources is also influential in the choice of where to host. Firms become transnational in efforts to protect their intellectual property. They fear of losing technological advantages, so they try to internalize this.

Raymond Vernon came with the Product Cycle Theory. This gives us a nice picture of how firms are becoming transnational corporations. Products have some kind of a life cycle. After a while investments in Research and Development sales decline and they need to be replaced by newer versions. This is the period of tech standardization. Foreign competitors begin to sell cheaper versions. In an attempt to try to delay this, TNC’s would implement efficiency seeking DFI and production processes will move to cheaper areas. So we see two different stages of FDI: market seeking and efficiency seeking.

Then Stephen Hymer, who talked about the Branch Factory Syndrome.He states that critical tech and the productive assets remain in the home state. FDI nurtures the ‘development of underdevelopment’ and it reinforces ‘Periphery’s’ dependence on the ‘Core’. So Hymer is pessimistic about TNC’s.

What are the political considerations of FDI?

Here the real question is: do TNC’s prefer to invest in democracies or in another political regime? And, are TNC’s risk-aversion, or risk-prone? We’re in the realm of two major considerations: the regime type and the level of development. We don’t really know whether these two matters. But there are some arguments that do say so:

Argument: TNC’s & Authoritarian states

TNC are inherently attracted to authoritarian regimes, this argument says. TNC’s find better investment opportunities in authoritarian states. There are a few reasons for this. For example they are very good in suppressing labor unions. They also tend to lower wages, things that democracies can’t. An example is the China’s Special Economic Zone. There are also various dangers, like expropriation (the ceasing of a company’s revenue from the home state) and re-nationalization (when a government decide to re-nationalize, to take control of a company’s assets).

Counter-argument: TNC’s & Democratic states

Democracies provide a more stable investment environment. Jensen (2003) states: ‘Once a TNC invests in a foreign market, it will be extremely costly to disinvest physical assets.’ This not only goes for physical assets, but for capital assets as well.

Why is this the case? We also see stability due to the fact that states offer checks and balances, which generate credibility. Things move more slowly by the fact that there are more ‘veto players’. Audience costs for democratic regimes are higher and this reduce the change that they turn back made agreements. So: democracies are more transparent, which benefits the business environment.

This stays to be a puzzle. If we knew which regimes favor FDI, states probably would change their policies.

TNC’s and the Developing World

There’s a widespread assumption that most FDI is from the North to the South. Rich countries take advantage of and exploit low wages, proximity to resources and South’s eagerness to attract investment. But, they must also content with infrastructural under-development and a lack of skilled labour.

So, in which direction does FDI flow? We see a bit of a trend from the developed economies to the developing economies. We do see a bit of a shift (much more in inward investment).

FDI is (was) mainly a North-North thing. Over 85% of the global FDI flowed out of the developing countries. We can see there’s a regional bias, there’s a high resource requirement to be able to attract FDI.

What are the effects of TNC’s on local economies?

There are some positive effects, FDI benefits to the local economy; all related to spillover benefits. Some of these ‘Spill-over benefits’ are: Imitation (reverse engineering), Skills acquisition (the investment in local ‘human capital’), Competition (the pressure to innovate) and Exports (templates).

These effects improve competitiveness and revenues of local firms. But it’s not the case that all local firms are able to equally implement these effects. It has to do with the ability of states to absorb these lessons. It gives us a sense how limited these spill-over effects would be. In reality we might not see a lot of local benefits from FDI.

How are TNC’s regulated?

The short answer: they’re really not. What we see is a rudimentary global regulatory architecture: there’s no WTO or IO’s regulating business, as there’s no Basel Committee regulating these transactions. This results in a patchwork of regulation. Various TNC’s taking advantages of usually lower regulations in home countries.

Corporate Social Responsibility (CSR)

This is a form of corporate self-regulation. It describes the efforts of businesses to behave in ways that demonstrate respect for people, communities and nature. The question is: is there’s something concerning CSR that’s regulating the behavior of TNC’s?

Friedman is very skeptical at this point. He asks: ‘’How do we define ‘’socially responsible’’ What business is it of the corporation to decide what’s socially responsible. That isn’t their expertise; that isn’t what their stockholders asked them to do.

Lecture 11 March 10^th 2015

Energy and the Environment

The incorporation of issues of environment in IPE is relatively new. For a long time it was considered as low politics. But now we see the environment shift in high politics. The wicked problems or puzzles of IPE are environmental problems. This is where cooperation is really needed. Most of these issues require international responses. We’re going to see how the international system has dealt with these issues.

We’ll get introduced to the views of the optimists versus the pessimists. The optimists have a liberal view, more growth is needed for the solution. The pessimists however think that economic development isn’t the answer. We’ll also address the short history of global environmentalism. We’ll discuss the limits of growth versus the opportunities of Sustainable Development. And we’ll see the outcomes of various conferences from Stockholm to Rio to Copenhagen. We’ll ask ourselves: Does Globalization Help or Harm the Environment? And lastly we’ll address the Environmental Kuznet’s Curve & the Resource Curse.

Some food for thought: Who do you trust most when it comes to environmental issues?

This is a research by the Euro barometer. The answers are Environmental Protection Associations (Greenpeace) for 45% and secondly Scientists with 32%. Only 10% answered the European Union and only 8% answered Teachers at school or university.

IPE and the Environment

The central debate is held between the optimists and pessimists. How to overcome the problems of environmental degradation? The optimists believe that we learn and grow and that there’s an end point to this development. Pessimists criticizes the modernization theory, some states get stuck in a perpetual stage of under-development, so economic growth isn’t beneficial for all.

Thomas Malthus

He talked about the notion of human population as a problem. Malthus did a catastrophic prediction: economic development and population growth is going to be naturally checked by starvation and diseases. He argues the existence of a natural limit to growth. The difference between the quantity of food produced and the amount of food required is called the Malthusians trap, and will be naturally decreased.

Paul Ehrlich

This perspective is replicated in Paul Ehrlich’s book: The Population Bomb (1968). Ehrlich has brought some science to the theory of Malthus. If the doubling population growth rate continues for about 900 years we’ll see 60 million billion people on the planet. We can’t live under these circumstances, so we need to take some serious actions now! According to pessimists like Ehrlich, the overpopulated world would lead to disaster and famine.

The Bet of the Century: Julian Simon (optimist) versus Paul Ehrlich (pessimist)

They took a bet on the price of five metals, which show the production rates. If Simon turned out to be right, the prices would decrease. And he was. This kind of sets the stage for the dominance of the optimists in what’s coming from Stockholm to Copenhagen.

The Bitcoin Bet: Ben Horowitz versus Felix Salmon

This is a bet on the use of the virtual currency Bitcoin. ‘’Five years from now, in January 2019, we’ll poll a representative sample of Americans. If 10 perfect or more say they have used bitcoin to buy something in the past month, Ben wins. If it’s fewer than 10 percent, Felix wins.’’ This is a huge prediction, just some years from now.

History of Global Environmentalism

It’s hard to set out a date when we started taking these issues serious, but let’s take 1972 as a starting point. It also has to do with the Industrial Revolution, since around that time it became clear that economic growth causes environmental degradation.

Externalities

This is some key terminology to understand the necessity of responding to these wicked problems. Externalities exist when the social cost of an activity differs from the private cost because of the absence of property rights or regulation.

In this case the by product of production is the smoke, which has a negative effect on the environment.

We talk about public goods and about common goods. The former are non-excludabe and non-rivalrous (more people using it doesn’t diminish the stock). The latter is non-excludable as well, but is rivalrous.

Tragedy of the Common: Garret Hardin (1968)

(Economic) Rational individual actions produce collectively ‘irrational outcomes’. This leads to the depletion of common goods.

How to eliminate externalities?

The solution here is two-fold: first to assign property rights and second to introduce (government) regulation. The first is difficult, especially for public and (most) common goods. So we’re left with the response of the international community to these issues. To that end we’re coming to the global environmental regime.

History of the Global Environmental Regime

We try to explain the current commitment through these three steps.

There are three main debates. First the Limits of Growth Debates (1960s – 1970s), second the Securitization of the issue (1970s - ?) and third the Sustainable Development Debates (1980s – 1990s).

The limits of growth

The rapport ‘The Limits of Growth’ is commissioned by the Club of Rome (1972) a private think thank with a mandate 'to act as a global catalyst for change through the identification and analysis of the crucial problems facing humanity and the communication of such problems to the most important public and private decision makers as well as to the general public’’.

The book is predicting that economic growth is limited. ‘If post WW2 levels of economic activity and environmental abuse continue, it would be the environment not land, food or other factors, that would limit global progress.’

This, the notion of limited growth, flies in the face of classic liberal thinking. The Club of Rome states that we can’t continue to increase wealth around the globe (if we don’t fundamentally change).

The Club shares various possible scenarios in its rapport. The worst-case scenario outcome is the ‘Business as Usual Outcome’. No more progress is being made from 2030. Industrial output declines, while pollution increases.

The second worst-case scenario is called: More abundant renewables. This states that industry grows 20 years longer and the global population peaks at 8 in 2040. Pollution soars (even outside the graph) leading to depressed yields, requiring huge investments in agriculture. After this population declines because of food shortages and negative health effect from pollution.

The Best-cast scenario is the solution: when the world seeks stable population and industrial output per person, the world adds pollution, resource and agriculture techs. This results in a sustainable society. 8 billion people live with high welfare and declining ecological footprint.

1972: Stockholm Conference

This is really where we see the UN has its debut on environmental issues. The environment is taking the world stage, signaling a global concern.

A fey keys things need to be mentioned. The aim of this conference was to reconcile the need for economic development in the South and the need to protect the environmental for all. It links poverty to environmental degradation. Poverty is seen as part of the question/problem. It also adopted a common responsibility: any solution is the responsibility of everyone, without any distinction between rich countries and less developed countries. Later this will become a common but differentiated problem.

The main outputs of the conference in Stockholm were The Declaration of the Human Environment, an Action Pan: who receives and who pays the finances? And the ENEP (1973), the United Nations Environmental Program, which marks an important step in a sense that these puzzles have their own institutions, their own man power in answering these questions.

Stockholm ‘Declarations’

These declarations had a very neo-liberal tone. Economic growth was seen as the solution, unleashing the economic capacity of these under developed countries. ‘’The developing countries must direct their efforts to development, bearing in mind their priorities and the need to safeguard and improve the environment.’’

There’s a shared responsibility, this is going to be reflect into equal and shared responsibilities for the solutions. Therefore The Conference calls upon government and peoples to exert common efforts for the preservation and improvement of the human environment, for the benefit of all the people and for their posterity.

These advanced ceased only one year later, due to the first OPEC Oil Shock (1973) and the second OPEC Oil Shock (1979). The environment is taking a back seat. We see a slow securitization of these issues, which changes the politics of it a bit.

OPEC is a oil cartel set up in 1973. The Seven Sisters, who essentially were responsible for setting export quotas and setting prices, dominated the oil industry. The enormous increase in oil prices, made it clear how important the oil industry is for a strong military system.

Securitization of the issue

Energy security can be defined as the uninterrupted physical availability [of energy] at a price which is affordable, while respecting environmental concerns. Initially it was about availability and affordability. The main point here is that it gives us a type of a time-out in dealing with the environment.

Shift to sustainable development

There was a fundamental shift in how we think about the roots from and solutions to this problem. We’re back to the notion of the potential of unlimited growth.

The Bruntland Report (1987) ‘Our Common Future’ presented a new evaluation/analysis of this wicked problem. All of this was filtered directly into the next big summit. It was a watershed moment in setting the environmental debate. It introduces the notion of sustainable development: ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’.

Bruntland came with an ingenious compromise: no necessary limits to growth, but it’s through growth that we can address these environmental issues. The best way to deal with these issues is to continuously stimulate growth in the poorer countries. This really was a shit of paradigm thinking, away from the limits of growth.

1992 Rio (Earth) Summit

This summit was clearly influenced by Bruntland. At this particular conference NGO’s and other actors were represented, weighting in on these crucial issues.

The outputs were: The Rio Declaration on Environment and Development (a set of 27 principles), Agenda 21 (an action plan), the UN Framework Convention on Climate Change (UNFCCC) (which revolves into the Kyoto Protocol later), The Convention on Biological Diversity and the CBDR versus ‘common responsibility’ (common, but not equally responsible, meaning there are various levels of action). The key distinction in the latter is between rich and poor. We start to see a shift from implicating everyone in it, to everyone but different.

There was also criticism on this summit. The central critiques are related to financial assistance, generating a pull of cash that would help poorer countries to get out of their underdevelopment. Who is paying for this?

We allow the non-stake actors to have access to these conferences, but it remains too top down. One size, fits all solution? That’s the question.

Johannesburg Conference 2002 (Rio + 10)

The aim of this conference was evaluating the progress since Rio & establishing targets to improve implementation. This conference is also seen as the symbol of the failure: we haven’t made any progress since then. This forms also the main criticism.

However, there were some clear outputs: The Johannesburg Declaration of Sustainable Development and the Johannesburg Plan of Implementation.

Another issue addresses at Johannesburg was the issue of financing & GEF (Global Environment Facility) (1991).

Kyoto Protocol

This protocol is an international agreement to the United Nations Framework Convention on Climate Change (UNFCCC), which commits its Parties by setting internationally binding emission reduction targets. Kyoto must be ratified by 55 states and by those states that are responsible for at least 55% of GHG (Greenhouse Gas Emissions), in order to get the biggest polluters on board.

Main innovation of this agreement is ‘cap and trade’, it allows states to buy, sell and swap emission production quotas.

Unfortunately some big players left the protocol, in 2001 USA backs out and ten years later Canada backs out.

The main sticking point here was, again, CBDR (common but differentiated responsibility).

Copenhagen Climate Conference 2009

There was a changing public opinion in the US, the catastrophe Catharina was raising awareness on environmental issues.

The progressed that is made is: developed countries reduce emission levels individually or jointly, developing countries are to monitor emissions and compile date, developed countries will raise 100 billion dollar a year by 2020 to help poor countries fight climate change, new funds will be provided to help pay countries to preserve forests and the increase in global temperature should be below 2 degrees Celsius. These progressions are not too important to know for the exam.

Does Globalization Help or Harm the Environment?

Position 1: Globalization helps the environment!

This position links ‘’poverty’’ to the environment: ‘a world free of poverty is critical for the long term health of the planet (WB)’. Insecure property rights, failure of family planning, inadequate government services and regulations, trade distortions, and insufficient investment and development assistance are roots of the problem. This optimistic position argues that growth is the solution to environmental problems and that externalities are temporary.

The Environmental Kuznet’s Curve

This variation of the original Kuznet’s Curve on inequality in the 1950’s combines environmental degradation with economic development / income per capita (growth). It has the same shape, so in the middle there’s a turning point, this is when industrial economies are on its peak. In the early stages of industrialization, pollution and environmental damage will rise sharply. As GDP increases, it will eventually peak and begin to fall, as governments begin to legislate for pollution controls and as the economy moves towards services rather than industry.

Mechanisms of the Curve

1. Heavy industries become services and information technologies driven industries. You would offshore these dirty productions of the first stage.

2. Increasing economic wealth provides the capacity to respond, then you’re in the position to introduce technological innovations.

3. At a certain state of development citizens start to demand better standards. What is it about economic development that it fundamentally changes our wants and needs? It causes a psychological change (materialism is taken over by post materialism).

The psychological dimension of the Curve: Why would citizens demand better living environments?

Maslow’s Hierarchy of Needs & Post Materialism sets the foundation of post-materialism and explains the hierarchy of human needs. Our most fundamental needs are physiological (like breathing, food and sleep), followed by safety, love/belonging, esteem and eventually self-actualization including higher demands as morality, creativity and problem solving. This model is cumulative, so in order to have any higher demand, all the previous is needed.

Measuring Post materialism

Post materialism has a lot of dimensions in itself, desires that can be debated on. Which one seems more desirable to you, if you needed to choose between a stable economy, progress toward a less impersonal and more human society, progress toward a society in which ideas count more than money or the fight against crime?

Trade liberalization and the Curve

If we don’t liberalize we have trade barriers that distort price signals. This distortion doesn’t allow us to have real information on scarcity, abundance; supply and demand. This leads to overproduction and waste. The liberal answer is that free market does provide perfect information, and that it also increases efficiency of global production. Free trade would also facilitate technology transfers and higher environmental standards. Here the notion of ‘’Trading up’’ comes in: when the government is in the position of implementing higher standards and regulations.

Position 2: Globalization harms the environment!

This position claims that globalization has a negative effect on the environment. According to this view, the curve ignores ‘irreplaceable losses’. Decline in one state means increase in another (relative gains). Not poverty is the issue here, but the emphasis lies on production patterns and unequal consumption. This is the true cause of environmental degradation. Externalities aren’t temporary: the Resource Curse is proving this.

The Resource Curse

We speak about the resource curse when countries that are relatively wealthy in natural resources remain underdeveloped because of government mismanagement and corruption. States are getting stuck because of the problem of the resource curse.

Trade Liberalization and the Curve

According to this position, trade liberalization doesn’t always improve the environment. We see a race to the bottom (things like regulatory arbitrage), Pollution Havens (offshore pollution) and Double standards (when you’re working according to a high regulatory standard in your home country and a very low standard where you have your pollution haven).

Lecture 12 March 12^th 2015

Debt and crisis

Today we’ll discuss an important and very timely topic. We’ll talk about what a debt crisis is and we’ll try to understand the 2007 Global Financial Crisis. However, today we won’t solely pay attention to the Euro crisis, but we’ll look into different crises today to see the bigger picture. The Latin American Debt Crisis (1980s), the Asian Financial Crisis (1997) and the Russian Ruble Crisis (2014) show us the profound impact on global finances. We’ll also cover how to deal with debt, mentioning the terms debt rescheduling, debt reduction and Jubilee (the notion of debt forgiveness).

What is a Debt Crisis?

Let’s define what we understand under a Debt Crisis. ‘It occurs when major debtor states lack sufficient foreign exchange to make the interest or principal payments on their debt obligations’ (Cohen, 339). We also speak about an ‘extreme balance of payments problem’, a high deficit.

Important to keep in mind is the difference between servicing the debt (paying the interest on the debt) and reducing the debt (paying down the principle).

Severity of Debt Crises

We can look to the impact of debt crisis on a spectrum from a liquidity problem to a solvency problem. The former is about ‘sending more money after de debt’, here we’re talking about debt rescheduling. States can defer payment or obtain new loans to pay off creditors and repay later. This is a kind of short tem problem. While a solvency problem is more severe, debt reduction is the key here. Debtor states can only regain credit worthiness if creditors reduce interest or principal payments. This problem can only be solved on the long term.

Solutions to Debt Crises

As already mentioned there are two different way to deal with a Debt Crisis. Debt Rescheduling (or debt restructuring) defers payment on the loan and can be used for liquidity problems. Debt reduction however, is about debt forgiveness and can be used for solvency problems.

Understanding the 2007 Global Financial Crisis

The structure of the international financial system following World War 2 was unstable and risky. In the Unholy Trinity capital mobility (which meant easing capital controls) was priority.

We also saw a repeal of the Glass-Steagall Act, the US Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities. In other words, this American law was a barrier between commercial banks and American banks. Those efforts culminated in the 1999 Gramm-Leach-Bliley Act (GLBA), when America got rid of this protective separation. Many have stated that this repeal was an important cause of the late-2000s financial crisis. Some critics argue that it permitted Wall Street investment banking firms to gamble with their depositors’ money that was held in affiliated commercial banks. Others, including former President Clinton have argues that the ability of commercial banking firms to acquire securities firms helped mitigate the financial crisis.

In 1999 – 2000/2001 we see a .com Internet Bubble Burst. A lot of start ups were seeking for venture capital, which led to too much investment in these sector, witch the collapse in 2000/2001 as a consequence. This started to change events. Interest rates were lowered in order to stimulate the economy.

Contagion

The above gave also a kick to the Euro, it was a stimulus to the problem.

Explaining crises

Let’s go to a theoretical framework that helps us to explain all of this together. When we’re analyzing crises, there are two main perspectives: the exogenous perspective and the endogenous perspective.

First the exogenous perspective. This is the perspective of the liberals. This view states that crises are a result of forces ‘external’ to the market. Any type of a crisis must be external to the market, because the market provides perfect information that wouldn’t allow a crisis. Government intervention is that kind of a ‘external force’ that leads to a crisis. This is the same explanation that we see for the 2007 crisis (in which insurance companies are the external force).

Secondly the endogenous perspective, the perspective of thinkers like Keynes. Here it’s about some internal flaw. Crises are the result of forces ‘internal’ to the market. Market actors react (and make guesses about) to what other market actors do. They are rational individuals, responding to what they expect other people to do. Market prices are set by these risky guesses. This boils down to the risky behavior of market actors.

From the explanation, we can think of attributing the blame: ‘Perp’ lineup

Time magazine published a list of 25 ‘Blameworthy people’, from Alan Greenspan (The Federal Reserve Chairman), to President Bill Clinton and American consumers.

Nothing New: Other crises

Let’s take a look at three important other crises, two predated and one ongoing. The crucial question here is: are there similarities? Is the history of things repeating itself? And can we make prediction in the case of Russia?

1980’s Latin American Debt Crisis

1997 Asian Financial Crisis

2014 Russian Ruble Crisis

Latin American Debt Crisis (1980s)

First the 1980’s Latin American Debt Crises, also known as the Less Developed States Debt Crisis and the 3^rd World Debt Crisis. As these latter names already implicate, the impact of this crisis reached beyond the borders of Latin America itself. It started in Latin America, but soon contagion effects came in.

The total amount of Debt between 1970 and 1989 went from about 30 billion dollar to about 480 billion dollar in 1987.

So, what happened? What’s the cause for this?

Again, OPEC Oil Shocks played a mayor role in this. A massive influx of cash for oil rich countries as Saudi Arabia, the Emirates etc. led to big investments in Western banks. These banks lent it out as soon as possible. The Bretton Woods institutions put these banks to invest this money in least developed countries.

When we look to the origin and causes of the 1980s Debt Crisis, we see three main factors:

External shocks (exogenous factors as the food grain shortage which increased the price of export and a dramatic rise in the price of oil), predatory lending (banks ‘pushing’ loans to less developed countries, in a ideological way supported by the IMF and the WB, not realizing that it would drive them deeper in debt) and irresponsible borrowers (less developed countries borrowed from banks to avoid IMF conditionality and improperly used loans).

Asian Financial Crisis (1997)

Let’s see the underlying global scope of this crisis. In the Post-Bretton Woods period capital controls were eased. There was a very quick contagion effect and massive decreased in exchange rates.

Irresponsible Lenders

The big problem here can be partly linked to irresponsible lenders. Thai Commercial Banks were in shady businesses and incapable of repaying.

Speculation and Panic

We also see issues of speculation and panics. Exodus of capital: foreign investors taking the money back (out of the banks) which creates a great pressure on the Thai government. Banks were unable to meet their commitments leading to huge problems and danger of bank run.

Financial Contagion

‘The transmission of a financial stock from one market or country to other interdependent markets or countries.’
Setting Asia! The confidence in this region was lost. Civil unrest was the political response to these changes.

Russian Ruble Crisis

This is the most recent one, with both economic and political causes. Declining confidence leads to the clash of the Russian Ruble. The major economic cause is the decline in the Oil Crisis. Russia’s export is hugely depended on oil, so dramatic decreases in the price of oil meant a huge decrease in export revenues. Political causes have to do with the annexation of the Krim/Ukraine and European Western sanctions on top of this. Normally it’s difficult to measure the impact of sanctions, but in this case we can say: it definitely has effect.

Russia’s Response

Russia responds to these developments by increasing its interest rates and by attracting foreign dollars, but this can lead to recession. Putin’s explanation is that this crisis is fundamentally directed by Western powers (conspiracy theories).

Dealing with Debt

Initially the Foreign Debt Regime was about debt between the two countries without any higher authority or regime. No we’ve got the WB and IMF institutions.

In the Foreign Debt regimes there are two main principles: first financing to service the balance of payment deficit and second conditionality to ensure repayments (by structural adjustment policies).

Financing to service the balance of payment deficit is about having an adequate amount of money. Here we see a neo-liberal underlying assumption stating that we need to grow out of debt to service the debt.

Conditionality is a mechanism to ensure repayment. Structural Adjustment Policies (SAPs) are meant as reforms to help you. They are the key stone for the Washington Consensus politics. SAP’s are economic policies that seek to reduce state power and introduce free market reforms to less developed countries to help them establish a foundation for economic growth. They focus on macroeconomic stability and the integration into the international economic order.

The Washington Consensus: the main principles

1. Fiscal discipline

2. Public expenditure – should be limited, public spending is reduced

3. Tax reform – Either by broadening or by limiting

4. Financial liberalization

5. Exchange rates – Making them competitive

6. Trade liberalization – Lowering tariffs

7. Increasing foreign direct investment (FDI) – Promoting the free movement of capital

8. Privatization

9. Deregulation

10. Secure intellectual property rights (IPR)

11. Reduce the role of the state – This is the overarching idea

Two approaches to Debt Restructuring

How to defer the payment of debt? This can be done in the two following ways:

Firstly by Debt Rescheduling Agreements (a set of policies that would allow states to pay off their debt and this would give economies the time to grow out of their debt) and secondly by Debt Reduction Agreements (this is appropriate for more severe debt crises, it’s some type of debt forgiveness).

Debt Relief / Debt Forgiveness

A lot of countries suffer from the inability to grout out of their debt. For this the IMF-initiative for debt reduction the ‘Heavily Indebted Poor Countries Initiative’ (HIPC) was introduced, a plan for the poorest of the poor.

We’re facing the problem of ‘Odious Debt’: when previous leaders receive financial assistance from the IMF for example and they have misused it. What we mean by misuse is when it’s not used for the good of the citizens.

The plan was to alleviate the debts of the poorest less developed countries to multilateral institutions.

(Many) strings were attached: states must commit to poverty reduction via policy changes.

Jubilee for Justice

The final subject of this lecture is the NGO Jubilee for Justice. ‘Inspired by the ancient idea of jubilee, a time when debts were cancelled, slaves were freed and land was redistributed, we are calling for a new debt jubilee in response to today’s global economic crisis: a Jubilee for Justice.’ This organization is critical to the IMF initiatives, but is supporting the notion of Jubilee. They introduce the possibility of introducing Jubilee once in a while. This NGO is also dealing with the moral dimensions of debt.

Lecture 13 March 17^th 2015

Alternative International Political Economies; the illicit economy

Today we’re talking about the illicit global economy, the things that are going on under the radar. We’ll put some ‘Myths’ about the illegal Global Economy in context. How to combat the illicit global economy? And we’re going to look at a number of case studies today: smuggling (drug trafficking) and drugs, tax havens (‘white colored people dimension’/bank secrecy) and the Internet & data protection (regulatory capture and an argument for a type of a privacy haven).

A point of Clarification on last lecture about the Latin American Debt Crisis (1980’s)

Last week we saw some causing mechanisms; multiple factors that lead to the Latin American Debt Crisis. Not every mechanism is applicable to any case. For a number of countries including Mexico the main driver is the borrowing of Petrol Dollars. In order to take advantage of its natural resources, these countries needed money. We see Mexico borrowing all this money being the first in line that couldn’t manage its balance of payments. This is the most significant to know on this issue.

What is the Illicit Global Economy?

It’s referring to markets that states cannot easily regulate or tax. There’s a plethora of Adjectives around this issue: the black market, shadow market, underground offshore, etc. Interesting here is the question who determines what is seen as illicit and licit. And, does it change? States have a monopoly on this.

A neglected Field of Study

It’s really an important topic of study, but also very neglected. We’ve a lack on true research on the illicit global economy. Essentially the excuse of social scientists is: we can only study what we can see clearly, with data available and with the illicit economy this isn’t the case.

Explaining the Illicit Global Economy

A general tendency of scholars is to make this differentiation between individual pathologies (the individual level explanation, this could be seen as marginal) and systemic pathologies (the notion that globalization also facilitates things like the illicit global economy, bad behavior. So, globalization itself is the cause, while providing both the good and the bad).

Putting things in context: Four ‘Myths’

1. Measuring the illicit economy

2. Markets trump states

3. It’s a new thing

4. Central role of technology

These are rather intuitive in understanding illicit activities.

Measuring the Illicit Economy

This is about the problem of understanding the scope, due to the fact that illicit activities go faster than legal activities. The Myth is as follows: illicit global economy has increased disproportionately to the licit economy.

A lot of journalist’s accounts using lots of impressive numbers are a hyperbole, often used to create a sense of urgency for these issues.

A fair argument to make here it that it’s not growing exponentially compared to legal activities.

Markets trump states

Myth: states are powerless against smart, globetrotting transnational criminal organizations. As the grandmother of IPE Susan Strange has put: ‘Transnational organized crime is perhaps the major threat to the world system.’

The problem here is that we see that states are still in control, deciding what is illicit. Over time we see things like toxic waste. States are still in power here.

As governments seek to regulate at the international level to implement new global legislations, there’re actually creating a frame for the global illicit economy.

A ‘New’ thing

Myth: The End of the Cold War marks the 1^st stage of the illicit global economy.

But: it’s really as old as trade itself, as Andreas is stating: ‘We like to distance ourselves from this past, thinking that modern law, regulations, and institutions have mitigated these problems. This is not true.’

Role of Technology

Myth: Modern technological advancements have lead to, and are the primary tools of, the illicit global economy.

Again, it’s not just a new thing. It would be one side of the story to not think that states also use the technology to hinder illicit activities, technology helps curb illicit economy. Governments are also benefitting from technological advancements.

Combatting the illicit Global Economy: Barriers to Cooperation

How do states cooperate on this? We see various barriers to cooperation, for example sovereignty and variation in domestic laws. When we’re talking about these kind of cross bordering issues, states have serious problems. They also don’t like to share information about business activities for example. Corporations for example will pressure states to avoid from sharing their information. Another barrier is the extent to which the government itself might be involved in this type of action: corruption (of state officials).

So, how do states than manage these actions?

We make a distinction between the demand side policies (policies designed to address market for illicit trade) and the supply side policies (policies designed to cut off the sources of illicit trade).

Supply policies are a lot more popular domestically. So what we do see is the implementation of supply side only policies. Interesting here is that this focus can lead to unintended consequences. This is what Eva Bertram is talking about when she mentions the Profit Paradox: the reduction of supply drives the prices up, which increases incentives for new criminal actors to take up rather large risks. So: the more control or regulation, the higher the price and the harder it is to get the good, this creates incentives for criminals to smuggle.

In general you could say the criminals who are willing to take these risks are more violent. So in this sense the system is perpetuating itself.

Case studies in the Illicit Global Economy

We’ll address three case studies: smuggling & drug trafficking, tax havens and the internet & privacy havens.

1. Smuggling

We watched a video about the Canadian Maple Syrup Syndicate, about the trade in Maple Syrup, which is distributed by underground channels. Someone says: ‘Staying clean isn’t easy with pushers everywhere.’ The trade is going to focus on new markets with a lot of customers like Japan & Europe.

What’s interesting here is that shows the effect of a monopoly in an industry. One organization has a monopoly on the production of this good, which turned out to be actually the cause for the stealing.

Smuggling is one of the world oldest forms of illegal activity. Smuggling is about seeking profit from transporting goods across borders in defiance of rules of exchange. It applies to a broad range of different things.

The main things here is arbitrage: buying a product in a lower-price market and selling it in a higher-price market (looking for the best price deals), and differential taxation: when taxes on the same product differ from state to state. Both refer to the difference between what we see as legal and illegal.

Smuggling is one of the most lucrative but also entranced ways of illegal businesses.

Plan Colombia (2000 – 2006)

A good example of how states are dealing with this issue, is this plan by the US from 2000 to 2006. There were debates about a type of a development plan (like a Marshall plan), and the US saw this as an incentive to their war against drugs. Plan Colombia was a US-lead anti-narcotics ‘supply side’ campaign in Colombia.

It has a profound effect on the production of cocaine, but very little effect on the supply and price market in America.

2. Tax Havens

What is a Tax Haven? ‘Tax Havens are deliberate development policies that aim to attract thereto international trade-oriented activities by the minimization of taxes and the reduction or elimination of other restriction on business operations.’

What should be striking is that it’s a deliberate development policy. Somehow we’re attributing this intentionally creating of differences for the purposes of development in that country through this jurisdiction.

There’s little consensus on what a Tax Haven is. Is the fact that you’re promoting yourself as a Tax Haven enough? Tax Haven is a loaded word with negative connotations.

Financial Secrecy Index – What are typically Tax Havens?

This is an index of Tax Havens, which gives us a secrecy score. Does this jurisdiction have country-by-country reporting? Is this country sharing information? These are two examples out of the 15 indications that this Index uses.

It’s important to think of Tax Havens on a spectrum with more of less promoting conditions.

At the top the most extreme end of the spectrum: Countries with no income tax and where foreign corporations pay only license fees (i.e. Bahamas, Bermuda, Cayman Islands), next are countries with low taxation (i.e. Liechtenstein and Switzerland), followed by countries that levy taxes only on international taxable events and where profits from foreign sources are either not taxed or taxed at a low rate (i.e. Liberia, Panama and Hong Kong) and lastly countries that grant special tax privileges to certain types of companies or operations (i.e. Luxembourg, Netherlands, Austria and Isle of Man).

What are the Common Characteristics?

The first one is the basis regulatory condition: minimal or no personal or corporate taxation. States should be stable, affluent, wealthy and perhaps small. This makes sense, since Tax Havens require consistency over time. They also score well on governance quality: Voice and accountability, Political stability, Government Effectiveness, Rule of Law and Control of corruption.

At the core of most of this are effective Bank Secrecy Laws: a set of regulations or laws that make it a criminal offence for banks to reveal a client’s identity. An example is the Swiss Banking Act (1934), which essentially enshrined the Geneva Commission into law. What we see here is that it’s becoming illegal to reveal information about its clients, except for some loose concepts like drug trafficking etc. How to open a ‘numbered account’? It doesn’t take a lot concerning paper work. If you have a certain amount of money and a VISA, you need to document the origins of the capital and your background, to prove that your money isn’t derived from illegal activity. But, to what extent is this taken seriously?

Legal Settlements with US Regulators

What are states doing about Tax Havens?

We see a type of a correlation between crises and the amount of bank fines.

Does paying the fines make any difference in the behavior of banks? It doesn’t seem to deter them.

Examples of deterrents are:

• Fines

• A public apology

• A time out – not allowing them to participate in the Global Financial System for a certain period of time

• Jail – If illicit behavior in banks is related to individual’s action instead of the bank in general. Putting them in jail might change their behavior.

3. The Internet & Privacy Havens

1995: EU is the world leader in protective legislation on customer’s privacy. This is even increasing by WikiLeaks etc.

1995 Data Protection Directive

Here we have a few things. First the strengths of the 1995 directive:

Art. 28: Mandates the creation of national supervisory authority, this proved to be a powerful mechanism.

Art. 29: Mandates creating of a working croup, as a communication exchange of information.

Art. 25: Rules about transfer of personal data to third countries, which decides that your personal data can only be transferred to a third country if that country provides equal or better regulations concerning privacy.

Next to the strengths, there are also two main loopholes:

1. 2000 Safe Harbour Agreement

Art. 25(6): EU determines if third countries meet the minimum standards. The biggest corporations are American, who is the EU to decide?

2. Applicable national Law

Art. 4: Allows companies to avoid high(er) regulation. This allows for a type of regulatory arbitrage. It relates to the ambiguity of the word Establishment. What does it mean? To what extent do you need to do business there to be established?

We close off by mentioning these big questions: Can we speak of Privacy Havens? And so we see Regulatory Capture?