International political Economy, Apuntes de Economía Política

¡Descarga International political Economy y más Apuntes en PDF de Economía Política solo en Docsity! INTERNATIONAL POLITICAL ECONOMY PART I: Theoretical perspectives and a brief historical background x WHAT IS IPE? WHY DO WE STUDY IT? International political economy (IPE) studies how politics shape developments in the global economy and how the global economy shapes politics. It focuses most heavily on the enduring political battle between the winners and losers from global economic exchange, being its gains not distributed evenly among individuals, and what generates political competition in national and international arenas and shapes the evolution of the global economy. It concerns the politics of international economic transactions, domestic politics, institutions and other factors. IPE deals with how political negotiations in the international sphere by multiple actors interconnected through multiple networks can affect, as a crisis, to people’s lives, even far away from the place where the decision was made. We are subject of it, so from IPE depends that we live in a harmonious integrated and convergence economy or in a conflict-ridden global village. Interconnectedness can have many benefits, as the expansion of trade and capital flows, the increasing job opportunities and wealth. Also, it may lead to converging prices, consumption patterns and economic policies. The actors are states, international organizations, supranational organizations, firms, the civil society and individuals. The global economy is broken into four such issue areas deeply connected to the others: - The international trade system is centered upon the WTO o 153 countries o Nondiscriminatory system, equal terms access to all other members markets o Enable governments to progressively eliminate tariffs and other barriers ƒ World trade has grown steadily o Challenge at the regional trading agreements - The international monetary system enables people living in different countries to conduct economic transactions with each other o When it performs these functions well, international economic exchange flourishes. o When it doesn't, the global economy can slow or even collapse - Production and investment: capital flows, MNCs, FDI. A multinational corporation is a firm that controls production facilities in at least two countries, representing about one-quarter of the world’s economic production and a third of the trade o Shape politics because they extend managerial control across national borders, they make decisions that affect economic conditions in other countries o Focus on why they exist and their impact, and how the political battle shapes government efforts to attract and regulate their activities - Economic development seeking shape governmental strategies o Industrialization – specific strategies o Motives of election - how the political battle shapes those elections o Variable success – which ones has been more successfully and why o Whether participation in the international economy facilitates or frustrates development o *N-S divide and development – comparative advantages Some phenomena are moving the ground of the global economy and raising controversies: changing shares (and roles) of advanced and developing nations; competitiveness, crises, shifting demand; “competitive protectionism”and trade wars (N-S, N- N, S-S). Understanding developments in the global economy requires us to draw on economic theory (economic interests of businesses and workers), explore domestic politics (how political processes transform them into trade policies), examine the dynamics of political interactions between governments (how decision in one country affects others), and familiarize ourselves with international economic organizations (their role in regulating foreign economic policies that governments adopt). % of their incomes in foreign markets and the French, German, and Dutch invested only slightly smaller shares of their incomes. These capital flows constructed railroads and other infrastructure in the lands of recent settlement. By 1870, tariffs had fallen substantially, and a system of freer trade formed by much of the globe had formed around Britain power to expand its imports and most importantly exports. This led to competition between free trade states and an economic transformation (technological changes, declining cost and fixed spread over many more units, new industries of greater size and of scale) context in which international cooperation importance grew, as price movements, a monetary system and fluctuations converged; what led to the alteration of the nature of business firms and markets. Britain lost its hegemony in 1914 due to their move towards economic nationalism and the relative declining growth in productive capacity due to the advancements of other compared to it. Certain special advantages in US and Germany were well suited to industrial developments of the age: scientific education, raw materials availability industrial capabilities and large and affluent markets. Also, the first stirrings emerged of intustrializaton in the Third World (India, China, Japan) Britain remained the dominant force even in 1913, but as an investment actor. It had an incomplete adaptation to emerging world of capital-intensive, large-scale, scientifically based and professionaly managed firms (smaller enterprises, limited managerial hierarchies). Advantages to the 1st Industrial Revolution did not transfer to the 2nd one, so as to push its entrepeneurs to take the lead in developing these areas, because of smaller and slower-growing markets and advantages in areas that did not lend to economies of scale nor were greatly affected by new systems of communication and transportation; so exports remained in older industries. By the late nineteenth century, therefore, it was no exaggeration to talk of a GLOBAL ECONOMY. 2) Breakdown and collapse of the system In the 1870s-1920s there was a high mobility of all factors due to expanding trade, capital flows and flow of people (hi labor mobility). The 20th century was born into a globalized economy, but the interdependence between nations succumbed world trade when World War I started: If everyone depended economically, when closing trade great economic crisis is achieved. In the first half of the twentieth century governments dismantled the dense international economic networks they had created and retreated into sheltered national economies. The First World War triggered the retreat. European governments abandoned the gold standard in order to finance the war. They tightly controlled trade and financial flows in order to marshal resources for the war. American manufacturing output expanded during the war as the United States supplied the European nations, and its financial power grew as the belligerents turned to the United States to finance their war expenditures. In contrast, 5 years of fighting weakened the British industrial capacity. Britain borrowed heavily and sold many of its foreign assets to finance its war expenditures, and thus exited the war saddled with a heavy foreign debt. The interwar period (1914-1945) meant the end of 19th century liberalism and empires (Czarist, Austria-Hungarian and Ottoman) and the birth of new states. There was a chaos in the international monetary system and interdependence in trade and finance collapsed. Governments tried to reconstruct the global economy but were not successful. Britain provided much of the infrastructure of the global economy but by the turn of the century Britain was ceding ground to the United States and Germany. The United States stood as the world's dominant economic power: the world's largest manufacturing economy and its largest creditor. Yet, refused to accept the responsibilities that hegemonic status carried, preferring instead to retreat into a traditional policy of isolationism. France and Britain had borrowed from the United States to finance part of their war expenditures and they asked them to forgive these debts. The United States refused, insisting that European governments repay the debt and raised tariffs in 1922, making it difficult for Europe to sell products in the American market in order to earn dollars needed to repay the debt. War debt was linked (at least in the eyes of European governments) to German reparations payments. France insisted that Germany pay for war damages by paying reparations to the Allied powers. Larger reparations payments in turn delayed economic recovery in Germany and thus delayed recovery throughout Europe. An early settlement would have enabled European governments to move past wartime ammosities. IS GLOBAL INTEGRATION BRAND NEW “ Wh a t a n e x t r a o r d i n a r y e p i s o d e i n t h e e c o n o m i c p r o g r e s s o f m a n t h a t a g e w a s w h i c h c a m e t o a n e n d i n A u g u s t 1 9 1 4… The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth... he could… adventure his wealth… i n n e w e n t e r p r i s e s o f a n y q u a r t e r o f t h e w o r l d … H e c o u l d s e c u r e c h e a p a n d c o m f o r t a b l e m e a n s of transit to any country or climate without passport or other formality. But, most importantly of all, he regarded this state of affairs as normal, certain, and permanent… and any deviation from it as aberrant, scandalous, and avoidable. “ - J.M. Keynes, 1920, The Economic Consequences of the Peace. Although governments had reestablished a gold standard and had revived international trade by the mid-1920s, lingering war debts and reparations problems rendered the system quite fragile and unable to withstand the shock of the crash of the American stock market in October 1929, a major crisis of oversupply (inadequate demand) caused by the Roaring Twenties rising prices. The Great Depression of 1929 depressed economic activity. Consumer demand fell sharply, and as people stopped buying goods, factories stopped production and released their workers. Output fell by 30% between 1929 and 1933 and unemployment rose to 27 % in the US and as high as 44 % in Germany and 15% in England. A questioning of liberalism and global interactions emerged, as a new consensus on government to intervene. Domestically, regulation and demand management were necessary, and internationally, protectionism appeared to be the alternative to previous free trade. Some instruments applied were the “New Deal” (Roosevelt administration) on creating jobs inspired by Keynesian economics and the US Social Security act of 1935, as well as the emergence of social welfare states in Europe to the public provision of needed social security. Extremism arised in many countries questioning political and economic liberalism, rightward in several European countries and leftward in the US and some parts of Latin America. Governments responded to collapsing output and rising unemployment between autarchy and protectism from a fear of interdependence, by raising tariffs in a desperate attempt to protect the home market. The United States led the way, sharply raising tariffs in the 1930 Smoot-Hawley Tariff Act, and many others followed. Countries with colonial possessions created trade blocs that linked the colonial power and its possessions. Great Britain established the Imperial Preferente System in 1933 to insulate its trade and investment relationships with its colomes from the rest of the world. France established similar arrangements with its colonial possessions. Powerful countries that lacked colonies began using force to acquire them. Germany exploited its power and position in Central Europe to establish a network of bilateral trade relations with the region. By the mid- 1930s the world economy had disintegrated into relatively insulated regional trading blocs, there were no institutions to order and rearrange international transactions and governments were moving toward the Second World War. War and depression would produce new forms of domestic and international political power committed to new arrangements of international management. 3) After World War II American policymakers drew two lessons from the interwar period: a) World War II was caused in part by the failure to reconstruct a stable global economy after the First World War, the construction of a stable and liberal international economy would have to be a centerpiece of post-World War II planning in order to establish a lasting peace. b) The United States alone controlled sufficient power to establish a stable global economy. America's European allies had been further weakened by World War II, and the Japanese and German economies had been destroyed. The United States, in contrast, emerged in a stronger position. These conclusions encouraged the United States to embrace an internationalist orientation. Working alongside British policymakers in the early 1940s, the United States designed international institutions to provide the infrastructure for the postwar global economy. The resulting Bretton Woods system—so named because many of its final details were negotiated at an intergovernmental conference held in Bretton Woods, New Hampshire, in late summer of 1944—continues to provide the institutional structure at the center of the global economy, derived from the power and purposes of the US and peace and stability international postwar planning. ƒ The IMF was designed to manage exchange rates and payments imbalances among nations. Its primary purpose was to provide short term loans to countries experiencing a current account deficit in their balance of payments. There was a vision of trade deficit being an indicator of profligacy, and if the deficit hasn’t been eliminated a temporary change of the exchange rate would be applied. ƒ World Bank to supplement private capital for international investment. It can borrow funds in capital market. It didn’t really matter until 1960s when the Third World needed lending. ƒ GATT to serve as a negotiating forum for the reduction of tariffs and other barriers to trade. GATT just became a forum, without really imposing any erasing of tariffs or anything. But they were dropped in most products except in agriculture and services. At the broadest level, the difference of the post-WWII system reflected changed public attitudes about the government's proper economic role. In the nineteenth-century liberal system, governments eliminated trade barriers and made little effort to manage domestic economic activity. The Great Depression encouraged governments to play a more active role in the economy. Governments used macroeconomic policy to promote growth and limit unemployment, and they established safety nets to protect society's most vulnerable from the full force of the market. This more active government role in turn required some insulation between the domestic and the international economies. The rules embodied in the Bretton Woods system provided this insulation. International trade and investment grew more quickly between 1938 and 1973 than any other previous period, leading to a substantial growth, which was even quicker after 1950. There were several key ingredients for this to happen: increasing trade due to the expansion of manufacturing and a multilateral system, change to a fixed exchange rate (all to $ and $ to gold), recovery of Europe and Japan, elimination of tariffs and stable prices of oil. 4) US hegemony – “Pax Americana” The “ H e g e m o n s t a b i l i t y ” t h e o r y explains tha the presence of a single dominant power in the international system does create this international economic order, as the hegemon has the capacity and the motivation to make and enforce the rules for the world political economy. World War II showed and accentuated the productive advantages of the U.S. economy, being able to have more productivity than the others. There were striking imbalances in the world economy, sizable current account deficits between Europe and the United States, and the US helped Europe and Japan through additional funds such as the Marshall Plan or lending them money. This ensured the European recovery and to enshrine the dollar as the key international currency. It is also helped that Soviet Union was threatening Europe’s democratic governments so the US could ensure their security. Europe willingness to stay united economically was because of the impetus of the United States. The Truman doctrine (1947) was the the first official statement of “containment”, to support free peoples of the world who are subjugated to outside pressures; solidifying US position marking the formal declaration of the Cold War as a political response to Soviet aggression in Europe, Turkey or Iran. This was concreted in the Marshal Plan of aid by Secretary of State George Marshall, European Recovery Program showing the coalition and enhancing cooperation of Western powers. There was a bipolar institutionalization of a Western and an Eastern Bloc. The NATO was established in 1949 -formed by 11 countries and 13 in 1951- as an alliance against the Iron Curtain; and the Warsaw Pact in 1955 would be the opposite, as of the BW trio the eastern COMECON. Regionalization was stimulated by the EFTA (1948) and the EEC (1957). US actions were always seen as (theories) to provide general benefits to the world sacrifizing themshelves short-term ones or as disproportionately beneficial though providing collective benefits. They couldn’t get what it always wants: full idea of convertibility of the pound to the dollar failed and EEC political face was impossible in such a fast time. Overall, coercion didn’t help the US to obtain its objectives, it proved to be counterproductive. An extraordinary level of peace and prosperity was obtained, certainly with disproportionate benefits accruing to developed states, but also some previously poor states gaining in economic strength. But the Third World did not fare as well, because of the increase in the importance of manufactured goods and political instability in most countries. 5) World development and demise of the Bretton Woods system The US experimented an increasing role of military spending, the rise of foreign aid, and a persistent balance of payments deficit. In the 1930s, Keynes proposed to use increases in government spending during periods of economic recession to stimulate the economy, and this converged with the also needed rise of spending to pay for the military requirements of the Cold War. The Kennedy administration thought of reducing taxes while increasing spending to provide an extra boost to the economy. The Third World became a battlefield for showing the U.S. economic and military position in the world against its mayor opponent in the Cold War. The U.S. had a balance of payments deficit due to the support given to the Europeans. By the late 1950s the deficit presented new problems, even when Europe had recovered, as high investment have been done overseas, although having surplus in income it created a deficit in the overall balance. The amount of dollars abroad became higher than the amount of U.S. gold, and they rise the price of gold in terms of dollars: a “run” on the dollar. The country couldn’t maintain their position as the leader and manager of the world economy in these conditions and would face complaints about their unavailability of facing their payments deficit. Devaluation was rejected at first by the US, and instead tried to cope up with this dilemma by other means such as reducing private capital abroad or defending the pound but were useless. The last solution was creating a new form of international money called Special Drawing Rights (SDRs), a checking account that central banks could use to supplement their international reserves, but that was useless too. The rise of the multilateral corporations and new international capital markets were a consequence of the dollar glut and the reduction of tariffs, corporations ran to invest in Europe triggering the start of globalization. FDI became an overwhelmingly American phenomenon as production abroad by U.S. firms was almost four times as great as all U.S. exports. This had impactful consequences, such as the expansion of American technology to Europe or condensing the economical and political stability of Europe. On the other hand, a new international capital market called Eurocurrency was created, which consisted in an unregulated international money supply. D. MARXISM It appears as a critique of capitalism, which is characterized by two central conditions: the private ownership of the means of production (or capital) and wage labor. Founding fathers are Marx (1818-1883) with “ D a s K a p i t a l ” and Engels joining in “ T h e C o m m u n i s t M a n i f e s t o ”. ƒ Manufacture goods value is determined by the amount of labor, not fully payed by capitalists, only a subsistence wage retaining the rest to reinvest. ƒ Natural tendency to the concentration of capital because of economic competition. Falling rate of profit due to investment leads to a growing abundance of productive capital, which in turn reduces the return to capital. ƒ Imbalance between the ability to produce goods and the ability to purchase goods, as large capital investments continually augment the economy's ability to produce goods whereas falling wages continually reduce the ability of consumers to purchase the goods being produced. Economic determinism is the path of the Marxist analysis of reality, whose unit of analysis are classes. Capitalist dynamics created the highest efficiency and productivity in history but they created a great inequality, which will cause rising ups and destroy capitalism. ƒ Capitalists are who made decisions, not the market mechanism, due to capital concentration, then decisions are not market-based, but made by the few firms that control the necessary investment capital. ƒ The state operates as an agent of the capitalist class, enacting policies that reinforce them. Focus on large corporations as the key actor determining how resources are used (not the state nor the market). E. DEPENDENCY THEORY It rises as an offspring of Marxism, focusing on the analysis of capitalist dynamics at an international level. Founders are Prebisch, Frank and Wallerstein. “Prebish thesis” analyzed the terms of trade deteriorating against poor countries after studying capitalist crisis as he saw that the prices dropped, but more and for a longer time period in developing countries and recovered much easier in rich countries. The organizations he created served as reference to many developing countries, as the ECLA to find solutions and help Latin American economies grow. ƒ The capitalist world system is composed of a core and a periphery, defined by manufacturing production against raw materials and primary products. ƒ International trade is the root of global inequalities. The N-S divide between industrialized and non-industrialized countries stemming from international trade is a locked-in situation, reinforcing and reproducing underdevelopment making it perpetual. What they produce has much lesser value, and if they produce higher-value products, they will produce them more expensive. Start investing in the technology to make a more efficient production is very expensive too as going back to Hamilton’s mercantilist arguments. Answers can be found in protectionism or an entire exit of the game (autarchy, wait for a social revolution or make the ground for it). Mercantilists argue that the state guides resource allocation in line with objectives shaped by the quest for national power. Liberals argue that politics ought to play little role in the process, extolling instead the role of market-based transactions among autonomous individuals. Marxists argue that the most important decisions are made by large capitalist enterprises supported by a political system controlled by the capitalist class. 9 Mercantilists focus on the consequences of resource allocation for national power. The central question a mercantilist will ask is … "Is there some alternative allocation of resources that would enhance the nation's power in the international system?" 9 Liberals rely heavily upon economic theory to focus principally upon the welfare consequences of resource allocation. The central question a liberal will ask is … "Is there some alternative allocation of resources that would enable the society to improve Its standard of living?" 9 Marxists rely heavily upon theories of class conflict to focus on the distributional consequences of resource allocation. The central question a Marxist will ask is … "Is there an alternative political and economic system that will promote a more equitable distribution of income?" Thus, liberalism emphasizes the welfare consequences of resource allocation, whereas mercantilism and Marxism each emphasize a different aspect of the distributional consequences of these decisions. DEFINITIONS 1. International political economy (IPE) studies how politics shape developments in the global economy and how the global economy shapes politics. It focuses most heavily on the enduring political battle between the winners and losers from global economic exchange., being its gains not distributed evenly among individuals, and what generates political competition in national and international arenas and shapes the evolution of the global economy. a. How this influence international economic transactions, domestic politics and institutions. b. Deals with the political negotiations that affect people lives, the connection of multiple actors through multiple networks and how crisis and agreements affect our lives 2. International monetary system: system that enables people living in different countries to conduct economic transactions with each other, which foster economic exchange or slow down the economy. 3. Multinational corporation: firm that control production facilities in at least 2 countries, being able to influence the economic conditions across countries. 4. Politics shaping decisions: the process through which the collective decision emerged from the political battle between winners and losers of global economic exchange shape foreign economic policy and the allocation of resources available, taking into account the backdrop of scarcity. a. Explanatory studies: studies oriented toward explaining the foreign economic policy choices that governments make or a pattern of choices. 5. Consequence of decisions: decisions about resource all9ocation have welfare and distriutional consequences. a. Evaluative studies: studies oriented toward assessing politicy outcomes , making judgements about them and proposing alternatives, regarding if it raises or lowers social werlfare or efficiency and the alternatives. 6. Mercantilism: theory of IPE rooted in the 17th and 18th century that address the relation between national power deriving from wealth and which sees trade as a way of acquiring trade from abroad running a positive BoT; some activities are more valuable than others. This way, state must play a large role in allocating resources. 7. Liberalism: theory of IPE rooted in the 18th century to challenge mercantilism that draw a strong line between politics and economics, being economic activity to enrich individuals and not state, who has to get out of allocation of resources and being market-based transactions between individuals the way to allocate resources. Countries get wealthier by having comparative advantages, gaining from trade regardless of trade surpluses. 8. Marxism: theory of IPE arised as a critique to capitalism, in which the state operates as an agent of the capitalist class, who make decisions; and who has a natural tendency to the concentration of capital, a falling rate of profit and an imbalance between the ability to produce goods and the ability to purchase them. The growing inequality will cause rising ups. 9. First wave of globalization: dramatic expansion of global economic exchange in the 19th century driven by the interaction between technological change (innovation in transportation, communication) and politics (bilateral trade agreements and stable international monetary system). 10. Cobden-Chevalier Treaty: treaty performed between Britain and France to eliminate most tariffs on trade between them, and which triggered a wave of negotiations that quickly established a network of bilateral treaties that substantially reduced trade barriers throughout Europe and the still-colonized developing world. 11. Realism: theory of IPE which see the international conflict marked by conflict, hence anarchical, and in which the main actors are states -rational, power-maximizers- in a zero-sum game. 12. Mercantilism: theory of IPE rooted in the 17th and 18th century that address the relation between national power deriving from wealth and which sees trade as a way of acquiring trade from abroad running a positive BoT, protecting industries in an “economic nationalism”; some activities are more valuable than others. This way, state must play a large role in allocating resources. 13. Liberalism: theory of IPE rooted in the 18th century to challenge mercantilism that draw a strong line between politics and economics, being economic activity to enrich individuals and not state, who has to get out of allocation of resources and being market-based transactions between individuals the way to allocate resources. Countries get wealthier by having comparative advantages, gaining from trade regardless of trade surpluses, with absolute gains and a positive-gain game. 14. Marxism: theory of IPE arised as a critique to capitalism rooted in economic determinism, in which through the class analyses, we observe how capitalism has created the greatest efficiency and productivity but with great inequality. The state operates as an agent of the capitalist class, who make decisions; and capitalism has a natural tendency to the concentration of capital, a falling rate of profit and an imbalance between the ability to produce goods and the ability to purchase them. The growing inequality will cause rising ups. a. Dependency theory: an offspring of Marxism rooted in Prebish thesis, Frank and Wallerstein; and which sees the capitalist world system -with great efficiency and inequality- as a division between core and periphery, being international trade the root of global inequalities, say, the N-S divide as a locked-in situation which the much lesser value of DC’s production. i. Prebish thesis: terms of trade are deteriorating against poorer countries, due to as price drop, they do it more and for a longer time in poor countries. The organizations he created served as referende to many DCs. 15. Corn Laws: tariffs and other trade restrictions on imported food a grain enforced in Britain between 1815 and 1846, to keep grain prices higher thus favouring domestic producers. It came to be seen as a barrier to manufacturing and financial interests. 16. “Passive hegemon”: role of Britain in the 19th century when being the hegemone not enforcing freer trade but those countries joining it by its advantages over mercantilism and protectionism 17. British advantages: -particular configuration favoring its development- a highly commercialized society, the rising agricultural productivity, monetary economy, few restrictions, opportunities,…; military and political power to defende and preserve their new capabilities. 18. Expansion of the world economy: political unification of Germany seeking for unified markets and greater international influence changed the economic landscape in Europe, railroads financed by Britain and then France expanded the scope and scale of markets, and the industrial progress in Europe widened the scope of economic relationships. 19. British hegemomy: remaining the dominant force even in 1913 – but as an investment actor; losing because the inadaptation to emerging world. 20. Industrial Revolution: revolution in power, railroads, steam engine, manufacturing,… that produced a huge transformation of transportation and communication, and in which Britain was the pioneer with its unilateral move towards free trade. 21. Golden Age of Liberalism: evolution of the waves of trade policies in the 19th century in Britain through the gradual liberalization with the Corn Laws repeal and the victory of manufacturers interests over agricultural, resulting in the Britain’s unilateral opening. 22. Gold Standard: commitment of countries to fix their currencies on gold, officially 1879-1934 but the facto much longer, which made a smoothly-functioning global transactions system. Quited in 1931 by Britain after the Great Depression. 23. Great Depression: crash in NYSE and a deep recession produced by an overproduction and an inadequate demand which caused plummeting prices and demand and that crashed with a skyrocketing unemployment and the questioning of liberalism and emergence of social policies. 24. New Deal: regulations destined to intervene in the markets and ensure social conditions 25. Marshal Aid: European Recovery Program in 1947 by the Secretary of State George Marshall showing the coalition of Western powers. 26. Truman Doctrine: first official statement of containment to the USSR in 1947, to support free people of the world who are subjugated to outside pressures, making the formal declaration of the Cold War. 27. NATO: North Atlantic Treaty in 1949 which was an initially British idea, to form an alliance against the Iron Curtain. 28. COMECON: Council for Mutual Economic Assistance, the response of Stalin to Marshal Pan, marking soviet dominance in the Eastern bloc. 29. IMF: designed to manage exchange rates and payments imbalances among nations: Its primary purpose was to provide short term loans to countries experiencing a current account deficit in their balance of payments. There was a vision of x The World Bank / International Bank for Reconstruction and Development (WB/IBRD) The WB was established to provide a portion of the capital necessary for reconstruction and development, to increase the volume of foreign investment. The nations should establish a permanent international body to perform these functions. Any role of the state. x The General Agreement on Trade and Tariffs (GATT) The GATT was established to facilitate international economic cooperation in international trade. It was a negotiating forum for reducing tariffs and other barriers to international trade based on “shared” norms and principles, rather than a proper organization, what implied limited authority and delegation. It comprised 34 members in 1952 (80% of world trade), and suffered from a limited organizational capacity, a small central organization and the varying willingness of members to comply. It is an imperfect substitute of the ITO, as this was unaccepted by the US Congress; with a commitment on economic development and more detailed rules on competition policy, employment related measures and issues and investment. The GATT was the only multilateral instrument in trade from 1948 to the 1995 implementation of the WTO and triggered an unprecedented growth of trade. The protectionist legacy played a major role in the formation of the GATT, with discrimination in its very core (bilateral agreements, …). - PRINCIPLES 1. Economic liberalism — belief in freer trade and gains from trade and commitment to reduce barriers 2. Non-discrimination — basic for avoiding past tensions. If you provide an advantage to one GATT member, you have to do it to the others too. a. Most Favored Nations clause (art. I GATT) “ a l l m e m b e r s w i l l b e t r e a t e d e q u a l l y ” implied qual access to markets and tariff treatment, but only for members. b. National treatment (art. III GATT)— treatment of domestic and foreign versions of the same products (“like products”) similarly after they enter the domestic market, prohibiting government from using measures to provide advantages for domestic firms at the expense of foreign firms. No subsidies or tax exemptions. 3. Reciprocity The rise of regional blocs simultaneous with international regimes make some puzzles as it is building blocs along multilateralism or it is stumbling them. Despite the principle of nondiscrimination (MFN), article 24 of the GATT allowed the formation of “customs unions” among GATT members (an exemption), as the EEC in 1957. Preferential Trade Agreements (PTAs) are an umbrella name for various agreements, plurilateral or bilateral. Thus, we find customs unions, a group of countries that eliminate all tariffs among themselves but maintain a common external tariff with 3rd parties; and FTAs (Free Trade Agreements, in which members eliminate tariffs on trade with each other but retain autonomy in determining their tariffs with non-members. - EXEMPTIONS ƒ The GSPs (Generalized System of Preferences; enacted in the late 1960s) allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than those from advanced countries. The Haberler Report points out that “LDCs would not be better off if they open up to free trade, as for others. ”, what origin the protectionism in developing countries. The GATT has not expanded to agriculture, because it is the comparative advantage of LDCs. The GATT excluded a lot of things and thus many countries. The US and the EU are the main obstacles currently in free trade. “ T h e C o n f e r e n c e h a s a g r e e d t h a t e x p a n d e d i n t e r n a t i o n a l i n v e s t m e n t i s e s s e n t i a l t o p r o v i d e a p o r t i o n o f t h e c a p i t a l n e c e s s a r y f o r r e c o n s t r u c t i o n a n d d e v e l o p m e n t . “ “ … t h e n a t i o n s s h o u l d c o o p e r a t e t o increase the volume of for ign investment for these purposes, made through normal business channels. It is especially important that the nations should cooperate to share the risks of such foreign investment, since the benefits are general. ” The GATT operates through an inter-governmental bargaining platform based on ministerial meetings. The Single-Undertaking Principle make members commit to comply all GATT rules at signing. Each nation has one vote and decision making is based on consensus, being able members to veto an agreement making that round not to be completed; majority rule for joint action and 2/3 of the membership required for a waiver. It is a bit more democratic than the IMF quota system. Rounds of discussions are carried out aiming for freer trade. The WTO – DESIGN AND PRACTICE. UNINTENDED CONSEQUENCES? All markets rest on political structures. World trade has grown so rapidly over the last 60 years because an international political structure, the World Trade Organization (WTO), and its predecessor, the General Agreement on Tariffs and Trade (GATT), has supported and encouraged such growth. Internationalization has been brought by the decisions governments have made about the rules and institutions that govern world trade. The GATT was an inter-governmental bargaining platform based on ministerial meetings to which member access accepting th Single Undertaking Principle and which acts within a consensus-based decision-making (through veto). It is guided by market liberalism, non-discrimination and reciprocity; yet, there are preferential trade agreements, exemptions and persisting safeguards, state aid, subsidies and other policies. Most countries are members now of the WTO, while GATT had only 33 members, and both share the same principles and exemptions. Recently Brazil has acquired importance (first non-northern president), and along ministerial conferences at Kenya and Argentina, we are seeing a changing concern and roles. (GATT/WTO ROUNDS) Year Place/Name Subjects # of meetings 1947 Geneva Tariffs 23 1949 Annecy Tariffs 13 1951 Torquay Tariffs 38 1956 Geneva Tariffs 26 1960-61 Dillon Tariffs 26 1964-67 Kennedy Tariffs and anti-dumping 62 1973-79 Tokyo Tariffs, NTB’s (non-tariff barriers 102 1986-94 Uruguay Tariffs, NTB’s, rules, services, intellectual property, dispute settlement, textiles, agriculture, creation og WTO 123 2001- Doha Development Round Implementarion, LDCs, sustainable development, agriculture, services, market access for non-agricultural products, interllectual property rights 179 9 The Kennedy Round was very important: tarrifs diminished substantially. Non-tariff barriers are more difficult to abolish because they are less visible 9 In Tokyo lots of conflict took place 9 The Uruguay Round might have been the most imortant round. After it, WTO was created, more binding and more inclusive (many members become it in this round). Inclusion of developing countries as the IMF and the WB and other funds turned instrumental the membership, making it a requirement of loans; inclusion of agriculture due to Brasil, India and a group of countries within the WTO major agricultural exporters. 9 The Doha Round it was going to start in the US, but big protests in Seattle (*film). After it was launched in a non-very democratic way. The growing length of rounds reflect the complexity of the issues at the center of negotiations and the growing diversity of interests. The WTO is the hub of an international political system under which governments negotiate, enforces and revise rules to govern their trade policies. In 1995, governments folded the GATT into the newly established WTO where it continues to provide many of the rules governing international trade relations; since 1947 having been gradually revised, amended and extended. It is relatively small: 153 members but 635 people of staff and a budget of roughly $170 million. Whilst GATT was a set of rules agreed upon by nations, the WTO is an institutional body. As such, GATT was merely a forum for nations to discuss, while the WTO is a proper international organization (which implies physical headquarters, staff, ...). The two core principles of the WTO are market liberalism and non-discrimination (MFN clause and national treatment), inherited from the GATT. These two core principles are accompanied by hundreds of other rules providing the central structure for international trade, prescriptive or proscriptive and regarding exemptions. All rules are created by governments through intergovernmental bargaining as the primary decision-making mechanism of the WTO, negotiating agreements that directly liberalize trade and indirectly support that goal through altering government policies on tariffs and nontariff barriers. Governments organize their negotiations on bargaining rounds with a definite starting date and a target one for conclusion. ƒ At the beginning they meet as the WTO Ministerial Conference for 3 or 4 days to establish an agenda on issues to focus and a dateline. ƒ Ended, lower-level national officials conduct detailed negotiations on the topics embodied. ƒ Periodic stock takings are heald to reach interim agreements. ƒ Once negotiations have produced the outlines of a complete agreement, ministers meet at a final Ministerial Conference to conclude the Round. ƒ National governments then ratify the agreement and implement it according to an agreed timetable. Rules created provide a framework for international trade. Participation in the WTO require governments to accept common rules that constrain their actions, and by accepting them they shift from an international anarchic environment to a rule-based one. The Dispute Settlement mechanism ensure that governments comply with the rules they establish by helping governments resolve disputes and authorizing punishments, it has a quasi-judicial status (to secure a “positive solution” to the dispute — art. 3.7 DSU). It works as follows: a complainant, consultations (preferred outcome, to reach a mutually agreed solution), panel formation (chosen by parties members of the WTO trade experts who act as a court) and preparation of a report, and then countries are obliged to change their behaviours, though there is right of appeal. International institutions such as the WTO have public good characteristics, since it benefits all governments and it is difficult to deny them to units, but free riding can be a problem. “Hegemonic stability” theory evidence is in world trade flourishing during periods of hegemonic leadership. The one instance of hegemonic transilion is associated with the collapse of the world trade system, as the British to American hegemony one in the early 20th century after the IWW and accentuated after the IIWW. Each looked to the other to bear the cost of reconstructing the world economy, but the inability of the UK and the inactivity of the US triggered the Great Depression and the rise of protectionist blocs. Japanese grow 1960s-1980s made them do it quicker than the US, and the North-american deficit and decline on productivity suggested that a transition was to come. The US adopted more aggressive protectionist trade policies that achieved the survival and enter in a period of robust growth in the mid-1990s against a Japanese decline. WIDENING of the trade regime – as more players are involved (most countries). This pose diversity and new challenges: different market relations and institutions, and different ways in which state intervenes. There is a careness to leveling the playground regulating competition in domestic markets, as bad practices that might hinder unfair competition might develop to the international ground a) Conflict of interest and priorities coinciding with deepening (new issues, new rules, …) were incorporated. b) N-S conflict a. Trade-related Aspects of Intellectual Property Rights (TRIPs) i. ‘ M a r r a k e s h A g r e e m e n t ’(1994): Standards for intellectual property regulations (some of them important to developing countries; created some major tensions because they made the drugs more expensive) 1. Copyright and related rights ▫ 2. Trademarks ▫ 3. Geographical indications ▫ 4. Industrial designs ▫ 5. Patents ▫ 6. Layout designs of integrated circuits ▫ 7. Protection of undisclosed information ▫ 8. Control of anti-competitive practices in contractual licences c) Agriculture — new members has comparative advantage on it d) Access to Northern markets The OXFAM “Double Standards” report say that trade is one of the most powerful forces linking our lives and a source of unprecedented wealth, but increased prosperity has gone hand in hand with mass poverty and the widening of already obscene inequalities between rich and poor. The problem is not that international trade is inherently opposed to the needs and interests of the poor, but that the rules that govern it are rigged in favour of the rich. Structural reasons exist for poor countries not being able to have a big share in international trade. o While rich countries keep their markets closed, poor countries have been pressurised by the IMF and WB to open their markets at breakneck speed, often with damaging consequences for poor communities. o Low and unstable commodity prices, which consigns millions of people to poverty, has not been seriously addressed by the international community. o TNCs have been left free to engage in investment and employment practices which contribute to poverty and insecurity, unencumbered by anything other than weak voluntary guidelines. o The WTO rules on intellectual property, investment, and services protect the interests of rich countries and powerful TNCs, while imposing huge costs on developing countries. “rules of international trade are rigged in favor of the rich countries … t h e r e i s a r o b b e r y a g a i n s t t h e w o r l d ’ s p o o r ” . The DSI (Doble Standards Index) idea establish that higher tariffs for poorer countries, being its higher than that of the aid, “trade b a r r i e r s i m p o s e d o n t h e p o o r : 1 0 0 U S D / y r . ”. To a fair trade and reform of world trade is needed: a) market access to fight against poverty, b) ending the use of conditions attached to IMF-WB lending programmes c) new international commodities institution to promote diversification and end over-supply, new intellectual property rules d) democratize the WTO so that the poor have voice e) new intellectual property rules f) prohibiting rules that force governments to liberalise or privatise basic services that are vital for poverty reduction g) enhancing the quality of private-sector investment and employment standards h) changing national policies Large parts of the developing world are becoming enclaves of despair, increasingly marginalized and cut off from the rising wealth generated through trade. The anger, despair, and social tensions that accompany vast inequalities in wealth and opportunity will not respect national borders. The instability that they will generate threatens us all. 9 Persistent poverty and increasing inequality are standing features of globalization. Trapped in low-value-added ghettoes, and the growth in their exports has little impact on their levels of poverty. In many cases, export production is dominated by the simple assembly and re-export of imported components under TNC auspices, with limited transfer of technology. In many others, export growth has been built on highly exploitative employment practices. 9 Well-managed trade has the potential to lift millions of people out of poverty when the potential of trade is harnessed to effective strategies for achieving equitable growth. o Export production creating new opportunities for employment and investment in the process. Low-income developing countries account for more than 40 per cent of world population, but less than 3 per cent of world trade. If developing countries increased their share of world exports by just five per cent, this would generate $350bn – seven times as much as they receive in aid. 9 Trade barriers in rich countries targeted at the goods that poor produce, such as labour-intensive agricultural and manufactured products. o Double Standards Index (DSI). This measures ten important dimensions of rich-country trade policies, including average tariffs, the sizes of tariffs in textiles and agriculture, and restrictions on imports from the Least Developed Countries. It measures the gap between the free-trade principles espoused by rich countries and their actual protectionist practices. No industrialised country emerges with credit, but the European Union (EU) emerge as the worst offender, beating the United States by a short head. o Total subsidies to domestic farmers in these countries amount to more than $1bn a day. These subsidies cause massive environmental damage and over-production, driving down prices for exports from developing countries and devastating the prospects for smallholder agriculture. 9 The IMF, the World Bank, and most Northern governments are strong advocates of trade liberalisation. Partly as a result of these loan conditions poor countries have been opening up their economies much more rapidly than rich countries. 9 The underlying causes of the crisis in commodity markets vary from product to product. However, the general problem is one of structural over-supply. Output across a wide range of products is consistently exceeding demand, which leads to excessive stocks and periodic price collapse. 9 In development terms, good-quality investment transfers skills and technology, and creates dynamic linkages with local firms. Much FDI does not fit into this category. 9 TNCs have a major influence on employment standards in developing countries, partly as direct employers, but mainly through their sub-contracting activities. In many major exporting economies, governments have dismantled employment protection in order to attract FDI, often with the encouragement of TNCs. Moreover, the market conditions created by TNCs, including intense price pressures on suppliers and stringent delivery deadlines, make it difficult to raise standards. 9 Trade-Related Aspects of Intellectual-Property Rights (TRIPs) more stringent protection for patents will increase the costs of technology transfer. Behind the complex arguments about intellectual-property rights, the TRIPs agreement is an act of institutionalised fraud, sanctioned by WTO rules. o Grave consequences for public health, doubling the costs of medicines. 9 Northern governments have effectively authorised corporate investors to undertake acts of bio-piracy, by permitting them to patent genetic materials taken from developing countries. To add to their problems, smallholder farmers could lose the right to save, sell, and exchange seeds. 9 Under the General Agreement on Trade in Services (GATS), industrialised countries are seeking to open new markets for TNC investors. These include markets for financial services and basic utilities, such as water. Service-sector activities in which developing countries stand to benefit – such as labour supply – have not been prioritized. Developing countries need development assistance if they are to integrate into world markets on more favourable terms and to extend opportunities to the poor. There is a growing danger that many developing countries will be forced by unsustainable debt to transfer the wealth that is generated by exports to creditors in rich countries. Each WTO country may have one vote, but eleven of its members among the least-developed countries are not even represented at the WTO base in Geneva. Informal power-relations reinforce inequalities in negotiating capacity at the WTO. Meanwhile, beyond the WTO, powerful TNCs exercise a disproportionate influence over the direction of trade policy. DEFINITIONS 1. GEN is the general rate that is applied to all goods not originating in countries falling under the MFN treatment. 2. Most Favoured Nation (MFN) rates stand for the regular customs tariff rates applicable to all countries not subject to the General Rate (GEN). Conventionally applied between WTO members, these rates may also be applied between countries that are not members of the WTO. Preferential rates may be granted under free trade agreements or the Generalised System of Preferences (GSP). 3. Antidumping measures are imposed by the domestic goverment on foreign imports that they think are priced below fair market value. 4. Countervailing are measures taken by a domestic country when they believe the good has benefitted from subsidies which creates unfair competition. 5. Bretton Woods Trio: IMF, IBRD/WB, GATT; formed to avoid another war and depression, by John Maynard Keynes and Harry Dexter White. 6. IMF: International Monetary Found established to promote international monetary cooperation, exchange stability and orderly exchange arrangements by providing loans and thus avoiding crisis that would prejudice other countries too; and the surveillance and technical and financial assistance. To foster economic growth and high levels of employment, and to provide temporary financial assistance to countries to help ease a BoP adjustment. 7. IBRD/WB: World Bank established to provide a portion of the capital necessary for reconstruction and development and to increase the volume of foreign investment through normal business channels since sharing the risks is important because the benefits are general. 8. GATT: General Agreement on Tariffs and Trade established to facilitate international economic cooperation in international trade, as an imperfect substitute of the ITO, being this negotiating forum for reducing tariffs and other barriers to international trade the only multilateral instrument in trade since 1948 to 1995, highly influenced by the protectionist legacy, and being its successor the WTO. It is based on shared norms and principles -economic liberalism, non-discrimination and reciprocity- by its 34 members, having limited authority and organizational capacity, reflecting the varying willingness of members to comply, being challenged by the rise of regional blocs and having exemptions on the GSP, the Haberler Report and protectionism in DCs. Its functioning is based on ministerial meetings and an inter- governmental bargaining platform; with a consensus-based decision mechanism. 9. MFN: equal treatment between members 10. National treatment: prohibiting government from using measures to provide advantages for domestic firms at the expense of foreign firms. 11. PTAs: bilateral or plurilateral agreements 12. Customs union: group of countries that eliminate all tariffs among themselves but maintain a common external tariffs with 3rd parties; technically violating MFN clause. 13. FTAs: free trade agreements between members that eliminate tariffs on trade with each other but retain autonomy in determining their tariffs with non-members. 14. GSP: Generalized System of Preferences, that allows advanced industrialized countries to apply lower tariffs to imports from developing tariffs than those from advanced countries. 15. Single-undertaking Principle: commitment to comply all GATT rules at signing. 16. Consensus based decision-making: through veto the round can not be completed 17. Widening of the trade regime: more players most countries are included with great diversity and new challenges (different market relations and ways in which the state intervenes) and conflict of interest and priorities in new issues or rules and the far know N-S divide. 18. TRIPs: Trade-related Aspects of Intellectual Property Rights; standards for intellectual property regulations, some of then important to developing countries as created some major tensions because they made the drugs more expensive Recent research has challenged the two theories above, saying that trade policy preferences are based on perceptions or beliefs about what is best for the country as a whole, independently from the class or industry it belongs to. But, how to organize interests? There is a collective action problem (free-rider) in transforming individual preferences into political demands which requires individuals to share a common preference to organize in order to exert influence on the policy-making process. Everyone thinks someone else will devote their time, money and resources to do something, so that my contribution is indifferent and therefore I will not make an effort. As everyone thinks like that, no one contributes and interest groups tend to fail because of free-riding. This accentuates in large and heterogeneous groups Political institutions also play a big role on shaping trade politics, as they transform the interests-groups demands into actual policies. Rules influence which interests gain representation, electoral systems also have a role (majoritarian tend to encourage organization around sector-based industries while proportional around factors), and also have a role the democratic or not nature and if presidetialist or parliamentarist. We might expect governments in countries with proportional systems to maintain lower tariffs than majoritarian systems, but there is no consistent proof of this. Veto players are political actors whose agreement is necessary in order to enact policy. The more veto players, the more difficult it will be to change policies. Coalition governments are multi-veto player systems, but a majoritarian parliamentary government like Britain’s only has one veto player, the party that has the majority. The extent to which protectionism rises during recessions appears strongly shaped by veto players. Organization of societal interests can also be in unions, federations, confederations or even small but powerful lobbies. ¾ WEAKNESSES OF THIS APPROACH TO TRADE POLITICS: a) It does not explain anything about the consequences of this type of organization and does not tell us who will win the political battle. b) It assumes that politicians have no trade preferences other than groups they are representing, but they usually do not comply people will and attempt to change them. c) It does not address the motivations of non-economic actors (as environmental groups or HR supporters). Factors model Sectors model Stolper-Samuelson Theorem (H-O) •Factor endowments will determine the comparative advantage of a country. • Labor-abundant: Export textiles •Capital-abundant: Export computers •Effects of trade on real incomes of different sets of individuals. •Owners of abundant factors will be pro- free-trade •Those of scarce factors are proprotectionist. Ricardo-Viner model (R-V) •Sector is what really matters. •Factors are not necessarily mobile •Real incomes of different individuals tied to industries where they work. •K and L in X industry: pro-opening •K and L in M-competing industry: pro-protectionist. x STATE-CENTERED APPROACH This approach assumes that, under certain circumnstances, the government can intervene in the economy to raise social welfare as trade protection can do it and policymakers and choices are independent and not influenced by domestic interest groups, they rather pursuit the “national interest”. - The “INFANT INDUSTRY” PARADIGM for the justification of protectionism set that there are cases in which newly created firms (infant), will not be efficient initially, but could be in the long run if they are given enough time to mature. Ever since A. Hamilton and F. List. o Economies of scale made them compensate the initial and large fixed costs through large scale production, though initially with negative gains. o Economies of experience means the acquirement through production of the specific skills. Thus, a short period of tariff protection will enable them to become more efficient, export and compete internationally; and then the tariff can be removed. Long-run welfare gains against short-term losses for the tariff. This is INDUSTRIAL POLICY, undertaken to develop infant industries, channeling resources away from certain industries and directing them towards those industries that the state wishes to promote. This can be done through tax policy (exemptions, breaks, incentives), subsidies, finance and credit incentives, protectionist barriers or government procurement practices. - The political foundation of industrial policy is STATE STRENGTH, the degree to which national policy makers are insulated/unaffected by domestic interest groups, regarding all ties with society (electoral system, structures, collective actors clout, …). Strong states are characterized by a high degree of centralization and limited number of channels; so it is easier to formulate long-term plans and implement industrial policies. o For instance, Japan is depicted as a strong state, and has been able to pursue industrial policy and channel resources to specific, targeted industries for development. o On the other hand, the United States is depicted as a weak state – decentralized state, division of powers within the federal government; and this provides multiple channels to try to influence policymaking. - The Strategic Trade theory provides the theoretical justification for industrial policy in hi-tech industries, as these industries are characterized by oligopolistic competition (perfect in infant case), and if a certain firm dominates the high- tech market, they capture the excess returns they pay more their workers national income rises welfare benefits. The industry who will dominate will be usually the first-movers, and this will provide the rationale for governments to intervene and enable late entrants to successfully challenge first movers, through: subsidies (research and development), tariffs and quotas (keep foreign goods out) and favoring domestic producers over imports. ¾ WEAKNESSES OF THIS APPROACH TO TRADE POLITICS: a) They lack of explicit microfoundations, an incentive structure (rewards) that encourages policymakers to promote national welfare. b) Interest groups do not dictate policy, but establish the parameters in which policy must be made. c) The conclusions of Strategic-Trade theory are achieved under a relatively restrictive set of assumption. So, if we were to alter these assumptions (how a firm responds to subsidies, how many are in the sector, where do they sell their p r o d u c t s … ) maybe we wouldn’t raise national income as a result of industrial policy. Strength Weakness Society-centered approach Microfundational analysis Links between economic utility and political choices of outcomes Assumes the median voter’s political power Transivity of the society’s preferences to trade policies Econ 101 and 102 background State-centered approach Empirical evidence Ideology, non-economic interests Microfoundational analysis on the state actor’s behavior DEFINITIONS 1. Society centered approach: society’s interests and trade policies 2. Factors model: based on abundand or scares factors, the factor intensity, mobile factors and class conflict 3. Heckscher-Ohlin model: each nation comparative advantage from trade is tradec to its particular factor endowments, exporting the good with intensive production in the abundant factor. 4. Stolper-Samuelson Theorem: trade benefits the owners of abundant factors and hurts the owners of scarce factors, coinciding with proliberalization and protectionist groups. 5. Sector model: based on assec specifity, immobile factors and cross-class alliances 6. Ricardo-Viner Theorem: specific factors approach, its not the factors but the sectors which matters 7. Trade policy objectives and preference of state actors: policymakers may intervene in the economy in line with their objectives independent of societal interests, assumint its independence and that protectionism under certains conditions may increase social welfare 8. “Infant industry” paradigm: newly created firms lack of efficiency so they need state support, having long-term gains instead of short-runs losses in social welfare 9. Strategic trade theory: strategic interactions between firms in an oligopolistic international markets by the use of subsidies, aid, import tariffs and other incentives for firms facing gloal competition, being able to have strategic effects to their development in the international market. 10. State strength: … POLITICAL ECONOMY OF DEVELOPMENT – ISI, EOI and Neoliberalism Until World War I, liberal trade policies were carried out by DCs (independent and colonies). By the late 1950s, protectionist approach dominated their policies until the late 1980s. Most governments erected very high trade barriers after WWII, and to the extent that they all participated in the GATT, they sought to alter the rules of international trade convinced that it was biased against DCs, working for them through UN. Following the logic of infant-industry case for protection, they pulled resources out of agriculture and into manufacturing. These policies have changed much since 1980s (protectionist systems dismantling, active participants of WTO, abandoned the quest for alter rules). The initial shift to protectionism is influenced by the political competition between rural-based agriculture and urban-based manufacturing. Liberal trade policies were carried out because of the domination of export-oriented agricultural interests (endowments: much T and less k). DCs exports were heavily concentrated in primary commodities (agricultural products, minerals and other raw materials), some even were monoexporters (depending almost fully by one product), underlining their endowments distribution. Landowners dominated politics prior to WWII, differing considerably across regions. 9 In Latin America, and indigenous landowning elite dominated domestic politics, with alliances with the military as in Argentina and Chile (“oligarchic democracy” – constitutionally democratic but participation restricted to the elite) or with the protection of dictatorial and often military governments as in Mexico, Venezuela and Peru. Here, liberal trade policies favoring agricultural production and export at the expense of manufacture goods, so highly open. 9 In Asia and Africa, export-oriented agricultural interests dominated local politics through colonial structures, for example enclave agriculture (producers - low buying from local suppliers and exporting most) or the colonial powers encouraging the production to export them. These political arrangements began to change in the early 20th century, giving way to the interests of import-competing manufacturers, being triggered this from outside with an incentive then to abandon liberal trade policies continuing protectionist arrangements of the 1930s. 9 In Latin America, international economic shocks from WW I and II produced a rationing in the US and Europe that made imports difficult. Also falling commodity prices (Great Depression, WWII) reduced export revenues and disrupted the patterns of trade, leding to trade barriers and local producing of previous imports, which originated a growing urban middle class. This gave rise to interest groups, industry-based associations and labor unions pressing governments for favoring import-competing sector, also the new middle class and organized interests gave rise to new political coalitions. 9 In India, the global collapse forced them to become self-reliant as their export markets and revenues constricted sharply, thus not being able to get foreign exchange and reducing imports as well. They created an indigenous manufacturing sector, becoming the 10th largest producer of manufactures and fusing with the burgeoning nationalist movement (independence, supplant foreign-owned export sector system) reaching independence in 1947. 9 In Pacific Asia, decolonization caused a transferred power from a foreign colonizer to indigenous groups. In South Korea the war and land reforms reduced landowners power and increased relative power of the urban sector. In Taiwan, Chinese migrants instituted land reforms to prevent a repeating of their mainland experience. 9 In Africa, decolonization came latter, led by an indigenous coalition with acquired positions in the administration, and insatisfied with the discrimination (colonist-managed enterprises and staffed, limited opportunities of participation in arrangements rather than as workers). Independence struggles began in the 1950s seeking to transfer control to indigenous elites. Development is a process of economic transformation leading to increased levels of prosperity in a region or country. ƒ Whose income is increasing? ƒ A rough average: per capita ƒ How to initiate & sustain it? ISI EOI/ELI Market Liberalization production of consumer goods for the domestic market by using import and exchange controls -state intervention and planning ISI Speeding up industrialization by exporting goods based on depreciated currency -state intervention and planning? x 1st wave of development thinking - <<Market failures>> There were «structural» problems in domestic and international markets, as agriculture was the predominant economic activity, primary products: export staples. Most governments wanted to shift resources out of agricultural production into manufacturing industries and thus willing to reduce poverty. According to STRUCTURALISM, dominant branch of development economics, the shift would not occur unless the state adoptes policies to bring it about, as the market will not promote industrialization. Structuralist argued that market imperfections inside developing countries pose serious obstacles to the reallocation of resources from agriculture to manufacturing industries, developing economies were too inflexible, limiting investment in manufacturing industries. a) Low saving, investment and income – vicious cycles b) Complementary demand: few people earn a money wage, no firm will be able to sell its products unless a large number of others do, producing a variety of goods to change; no single entrepreneur has incentives unless a coordinated behavior to all win. c) Pecuniary external economies: from interdependence among market processes, unless investment decisions are coordinated neither firm will invest to increase production. The structuralist solution was a state-led big push for industrialization, engaging in economic planning and making necessary synchronized investments itself or coordinating the private ones. This provided a justification for state-led strategies of industrialization in order to overcome inherent problems and trigger a momentum for growth. There were also market imperfections in the international economy, mainly as Singer-Prebisch thesis addressed the deteriorating terms of trade to developing countries, the main culprit of underdevelopment. a) Exported primary commodities steadily fell relative to manufacture goods, because as income rise in core countries, a smaller percentage of its income will be spent on imports of primary commodities, but as it does in periphery countries, a larger percentage of its income will be spent on manufactured imports from the core. Falling demand for primary commodities will cause the periphery export princes to fall, whereas rising demand for manufactured goods will cause the periphery import princes to rise. b) Dependency of the periphery aggravates during crisis. c) Capital accumulation could not be divorced from the country’s links with the international economy. d) Interconnectedness and the Great Depression – plunging commodity prices and demand, a major disruption of LDCs trade patterns and revenues (hence, political coalitions) e) Participation in the GATT-based trade system would actually make it harder for developing countries to industrialize by depriving them of critical resources. Governments in DCs believed the hypothesis andwere convinced that industrialization would not occur if participating in the GATT. Structuralism enabled governments to transform protectionism into comprehensive state-led development strategies. After the WWII, they were carried out sheltered by high protectionist barriers, and internationally, distributional consequences concern made DCs to seek far-reaching changes to the GATT system. Activism appeared at the multilateral trade regime for LDCs’ «differences» (Haberler Report by GATT & the GSP CLAUSE) and widespread protectionism as a way to develop and adjust given low financing (left or right in the ideological spectrum? // Protect forever or for a while? // Infant industries everywhere). x ISI: Import-Substituting Industrialization Structuralism was the intellectual justification of state-led development strategies. The confidence that the state could achieve what the markets not (USSR drastic industrialization in the 1930s-50s). The logic of ISI is: countries would industrialize by substituting domestically produced goods for manufacturing items they had previously imported. - PREMISES: a. “Inward looking” development b. State-led industrialization c. “Urgency” of industrialization to end structural impediments d. Protecting the domestic market i. High barriers – final consumption products ii. Low barriers – raw materials & intermediate products It was planned to set an “investment regime” (subsidies, incentives, controls, licenses) after a major resource transfer from agriculture to manufacturing ƒ Low interest rates (even negative REAL interest rates) ƒ Growth of domestic private and public firms ƒ Transnational companies — tech. and capital ƒ An overvalued currency The politics of ISI shifted political power from export-oriented agricultural interests to import-competing manufacturing interests through the creation of state-owned enterprises (in varying importance). The beneficiaries were the urban interests, but especially large firms (workers, but formal sector and organized; multi-sectoral conglomerates). It was a 2-stage strategy: o Initial stage – Easy ISI (1930s-60s): imitation and importation of tried and tested procedures. Domestic manufacturing of relatively simple consumer goods because a large domestic demand currently existed satisfied by imports, the technology to produce them could be easily acquired and relies heavily on low-skilled labor. o Expectations: increase wage-based employment and develop skills by gaining experience that could be applied to other manufacturing businesses (entrepreneurial, …). o Results: success in some countries, high growth rates and rapid industrialization, relative failure in small markets The domestic capacity to absorb simple consumer goods would be exhausted and its production limited, so there must be a shift to more complex manufacturing activities. This would become on the adoption of an EOI strategy as L-intensive manufactured industries begin to export rather than continue producing domestically exclusively, or … o Secondary ISI (1960s-80s): shift to consumer durable goods, intermediate inputs and k goods needed to produce consumer durables. Will to increase the backward linkages by increasing demand in industries that supply components for the production of a good. o Instruments: planning (targeting, amount of I, assess contagion), investment policy (promote targets, nationalization of financial sector to direct resources as they would not do it privately; creation og state-owned and mixed enterprises) and trade barriers (control FOREX and protect infant industries). o Results: slowing down of growth, overproduction, uneven protection, overvalued currency (limited exportability), crises, indebtness and instability. Often taken, as in Brazil, by declining prices of export goods that meant a large share of their economy, which produced declining terms of trade and trade deficits, and as a result of protectionist strategies taken in consequence. There imports of goods similar to the locally produced were prohibited and a national investment bank (NDBE) was established to finance in the 1950s industrial projects. There was a problem with inadequate transportation networks, shortages of electric power and underdevelopment of basic heavy industries. To expand them and not believing on private actors to invest, they nationalized industries and invested heavily on them. They also sought to create a domestic capacity to produce complex consumer goods, through prohibiting imports of cars (example) and obliging foreign investors to set up production facilities in the country and purchase 90% of their parts from local firms. They also offered them subsidies. EOI and Neoliberalism – IMPLICATIONS – from the Washington Consensus to the Beijing Consensus The last 30 has been dominated by neoliberalism and export-oriented industrialization. In contrast to structuralism, neoliberalism is highly skeptical of the state’s ability to allocate resources efficiently and places great faith in the market’s ability to do so, it advocates for the state’s withdrawal from the economy, the reduction (ideally, elimination) of trade barriers and reliance on the market to generate industries that produce for the world market. It has dramatically affected policy. DCs have reduced tariffs and remove other barriers, thereby opening their economies to imports; they have sold state-owned enterprises to private groups; deregulated the economy to allow prices to reflect the underlying scarcity of resources. Countries not to the GATT, have joined the WTO. Last 30 years have been of a reversal of adopted development strategies, replacing belief in the state’s role by the market efficiency, and skepticism about trade for integration. The shift emerged from the interplay between: ISI economic imbalances in the 1970s, East Asian countries outperforming; and a severe international crisis In the 1980s forced governments to embark on reform, encouraged strongly to take neoliberal reforms by the IMF and the WB. By the late 1960s, ISI was generating 2 important imbalances: x Government budgets: generating persistent deficits due to the heavy involvement in the economy. o Non-profitable enterprises. o Subsidies on urban resident interests (political support) as civil service employing. x Persistent CA deficits: ISI generating a considerable demand for imports while reducing the ability to export. o Dependency on imports came from the requirement to import machines and part not produced domestically. o Exports declined due to uncompetitiveness, there wasn’t enough demand as to benefit from economies of scale; and due to the weakening of agriculture on incentives to produce (taxes). Inefficiencies were reinforced by the tendency to maintain overvalued exchange rates. Foreign goods were underpriced and k goods and intermediate inputs could be acquired from abroad at a lower cost than at home, thus disincentiving local procuding of those goods. ISI was creating an economic structure that could not pay for itself. Domestic politics played a role creating multiple veto players that limited the ability of the government to alter policies. In addition, government intervention had established an environment conducive to rent-seeking (efforts by private actors to use the political system to achieve a higher-than-market return on an economic activity) as with imports, because imports restrictions made them scarce and could be sold at a higher price than the world market one. Consequently, people had incentives to pay government civil servants to acquire licenses, and government civil servants to sell them. Fights of the G77 and the UNCTAD and government unwillingness to scale back their industrialization strategies made them look for a way to cover the deficits. They often sustained them borrowing from abroad, but when not payed, no more will be received. The point in which they had to correct balances was the early 1980s. Then 4 East Asian economies (Hong Kong, Singapore, South Korea and Taiwan) were realizing dramatic gains on the basis of a very different development strategy. Per capita income grew 3 times more than in others, manufacturing output more that any other DC and exports while the other ones shrank. Agriculture diminished while manufacturing grew, unlike ISI countries where agriculture diminished but manufacturing failed to grow. The South Korean miracle started with an initial ISI, then EOI. ƒ State’s design of a strict industrial policy focused on hi-tech, hi-value-added exports. ƒ High domestic savings and investment ƒ International markets and political context Ö The most concentrated business structure - Chaebols (like keiretsus in Japan) x EOI: Export-Oriented Industrialization … (“Asian Tigers”) In an export-oriented strategy, emphasis is placed on producing manufactured goods that can be sold in international markets. The neoliberal opinion argues that success was a consequence of market-friendly development strategies, as their willingness to embrace international markets and their ability to maintain stable macroeconomic environments; but state-oriented interpretations argue that it was due in large part to the state-led industrial policies. Most of the, adopted ISI strategies in the immediate postwar period, but shifted to EOI once they have exhausted the gains of easy ISI since the 1960s; as Taiwan, South Korea and the NICs. - PREMISES: a. Focusing on international markets (emphasis in exports) – invested in profitable domestic industries b. Trade liberalization (only partial and selective) - reducing the costs of critical inputs at world prices a. Promoted exports b. Still relying heavily on tariffs and other barriers c. Incentivizing the domestic industries a. Exchange rate undervalued b. Facilitating cheap credits d. Investment in education and skills a. R&D, innovation, selective incentives. e. Conservative fiscal policy Market-oriented or state-led trajectory? Macroeconomically, inflation was much lower than in other DCs, they maintained appropriately valued exchange rates and they pursued relatively conservative fiscal policies, borrowing little and tapping domestic savings. This way, liberalization did not implied CA deficits and real exchange rates encouraged investment. Others argue that development has more to do with well-designed industrial policies, a model conceptualized in distinct stages: 1) Industrial policy promotes L-intensive light industry 2) Emphasis on heavy industries 3) Targeting skill- and R&D-intensive consumer durables and industrial machinery. Governments design policies and organizations to transition from one to another, driving industrialization from low-skilled, L- intensive production to k-intensive forms of production and from there to industries that rely on high-skilled labor and technology-intensive production. As each stage reaches the limits of rapid growth, emphasis shifts to the next, stressing in each one the need to develop internationally competitive industries. They relied heavily on industrial policies, to achieve 4 goals: 1. Reduce the cost of investment funds in targeted industries – providing firms with preferential access to low-cost credit and long-term investment (nationalization of the banking sector to control investment capital or widely influence). 2. Create incentives to export – linking access to investment funds at low interest rates to export performance, undervalued exchange rates improved competitiveness a. Ensuring that domestic firms could purchase their intermediate inputs at world prices – creation of FT zones and export-processing zones (imported duty free as long as the finished goods were exported) 3. Protect infant industries and promote the acquisition and application of skills – straightforward protection by legislation prohibiting; investment in education and scientific infrastructure (institutes, tax incentives to induce chaebols in SK to create laboratoried for R&D purposes) that was critical to the transition to the third stage. Both explanations have value. Price rightness, export promotion and macroeconomic stability encouraged investments in CA industries; and industrial policy was successful targeting sectors where CA could be created, reducing production costs, encouraging export and upgrading skills. x “Conservative Revolution”, the Neoliberal Turn By the early 1980s, governments in many DCs were recognizing the need for reform, as economic crisis struck in large part as a consequence of governments’ decision to borrow to finance their budget and CA deficits, what turned to be a bad decision as: funds were used to apply for large infrastructure projects or domestic consumption, not generating export revenues to repay the loans; and international shocks (oil crisis of 1973, declining terms of trade and higher interest rates on their debts) increased the foreign debt, raised it cost and reduded export earnings. As crisis hit, governments turned to the IMF and the WB for financial assistance, what they linked to economic reform through the SAPs designed to reduce the role of the state, belief shaped by the East Asian experience, whose different aspects with the others they wanted to solve. They encouraged, through conditionalities, to: a) create a stable macroeconomic environment (budget deficits into surpluses) b) liberalize trade (dismantling import-licensing systems, simplifying tariff structures and reducing them) c) privatize state-owned enterprises (selling them to private entities) d) deregulation This way, government will foster competition and efficiency that could drive economic development. It was the end of ISI. Crisis and reforms brought a sharp contraction of economic activity, redistributed income from the urban sector to agriculture and export-oriented manufacturing industries and hurt producers in the import-competing sector as well as those employed in the non-traded goods sector. Privatization and civil-service reform usually resulted in large job losses. Groups that would lose from SAPs attempted to block the reforms, whereas those who gain support them; government was forced to mediate and it was hard to implement reforms as many hurted sectors was of political support, though the realignment of interests eroded obstacles. Following data, countries that have reformed the most should see large improvements in growth, whereas countries that have reformed less should see smalol growth gains, and that growth rates has been higher that it no reforms carried out. 9 Thatcherism and Reaganomics f. “Government failures” & revival of the belief in markets g. Stabilization, deregulation, privatization, liberalization Widespread impact of neoliberalism on developing countries because of the “Chicago Boys” and the role of IOs. After 1980s crisis in the developing world, collapse of the Berlin Wall and reforms in Eastern Europe, the Washington Consensus emerged on policies that DCs should carry out to ensure a return to growth, based on “stabilize, privatize and liberalize”. i. Fiscal discipline ii. A redirection of public expenditure priorities iii. Tax reform iv. Interest rate liberalization v. A competitive exchange rate vi. Trade liberalization vii. Liberalization of inflows of foreign direct investment viii. Privatization ix. Deregulation (to abolish barriers to entry and exit) x. Secure property rights These rapid openings and sudden transitions will be made through trade liberalization by GATT/ WTO membership and PTAs. Also a capital account liberalization to the expansion of (especially short-term and volatile) capital flows. Successive crises came with contagion risks and “herd behavior”, as the Asian Crisis. Heavy social and political cost also arise as there were more losers than winners and several inequalities and poverty were generated. “ I f I w e r e t o c h a r a c t e r i z e t h e p a s t d e c a d e , t h e m o s t r e m a r k a b l e t h i n g w a s t h e g e n e r a t i o n o f a g l o b a l c o n s e n s u s t h a t m a r k e t forces and economic efficiency were the best way to achieve the kind of growth w h i c h i s t h e b e s t a n t i d o t e t o p o v e r t y . ” (World Bank President Conable, 1990) x READING: “UNGA – UN MILLENNIUM DECLARATION” Resolution adopted by the General Assembly 55/2. United Nations Millennium Declaration I. Values and principles 1. reaffirm our faith in the Organization and its Charter as indispensable foundations of a more peaceful, prosperous and just world. 2. in addition to our separate responsibilities to our individual societies, we have a collective responsibility to uphold the principles of human dignity, equality and equity at the global level. 3. nations and peoples have become increasingly interconnected and interdependent. 4. We are determined to establish a just and lasting peace all over the world in accordance with the purposes and principles of the Charter. 5. We believe that the central challenge we face today is to ensure that globalization becomes a positive force for all the world’s people. Only through broad and sustained efforts to create a shared future, based upon our common humanity in all its diversity, can globalization be made fully inclusive and equitable. 6. Certain fundamental values to be essential to international relations in the twenty-first century. a. Freedom. Men and women have the right to live their lives and raise their children in dignity, free from hunger and from the fear of violence, oppression or injustice. Democratic and participatory governance based on the will of the people best assures these rights. b. Equality. No individual and no nation must be denied the opportunity to benefit from development. The equal rights and opportunities of women and men must be assured. c. Solidarity. Global challenges must be managed in a way that distributes the costs and burdens fairly in accordance with basic principles of equity and social justice. Those who suffer or who benefit least deserve help from those who benefit most. d. Tolerance. Human beings must respect one other, in all their diversity of belief, culture and language. Differences within and between societies should be neither feared nor repressed, but cherished as a precious asset of humanity. A culture of peace and dialogue among all civilizations should be actively promoted. e. Respect for nature. Prudence must be shown in the management of all living species and natural resources, in accordance with the precepts of sustainable development. Only in this way can the immeasurable riches provided to us by nature be preserved and passed on to our descendants. The current unsustainable patterns of production and consumption must be changed in the interest of our future welfare and that of our descendants. f. Shared responsibility. Responsibility for managing worldwide economic and social development, as well as threats to international peace and security, must be shared among the nations of the world and should be exercised multilaterally. As the most universal and most representative organization in the world, the United Nations must play the central role. 7. In order to translate these shared values into actions, we have identified key objectives to which we assign special significance. II. Peace, security and disarmament III. Development and poverty eradication IV. Protecting our common environment V. Human rights, democracy and good governance VI. Protecting the vulnerable VII. Meeting the special needs of Africa VIII. Strengthening the United Nations x READING: “ U N D P – HUMAN DEVELOPMENT REPORT 2017 Overview Human development for everyone The geopolitical scenario has changed, with developing countries emerging as a major economic force and political power. Globalization has integrated people, markets and work, and the digital revolution has changed human lives. Yet, human development has been uneven and human deprivations persist. Progress has bypassed groups, communities, societies—and people have been left out. And new development challenges have emerged, ranging from inequalities to climate change, from epidemics to desperate migration, from conflicts to violent extremism. Key messages ƒ Universalism is key to human development, and human development for everyone is attainable. ƒ Various groups of people still suffer from basic deprivations and face substantial barriers to overcoming them. ƒ Human development for everyone calls for refocusing some analytical issues and assessment perspectives. ƒ Policy options exist and, if implemented, would contribute to achieving human development for everyone. ƒ A reformed global governance, with fairer multilateralism, would help attain human development for everyone. Human development is about enlarging freedoms so that all human beings can pursue choices that they value. The human development approach shifted the development discourse from pursuing material opulence to enhancing human well-being, from maximizing income to expanding capabilities, from optimizing growth to enlarging freedoms. Measuring human development The composite Human Development Index (HDI) integrates three basic dimensions of human development. ƒ Life expectancy at birth reflects the ability to lead a long and healthy life. ƒ Mean years of schooling and expected years of schooling reflect the ability to acquire knowledge. ƒ Gross national income per capita reflects the ability to achieve a decent standard of living. To measure human development more comprehensively, the Human Development Report also presents four other composite indices. ƒ The Inequality-adjusted HDI discounts the HDI according to the extent of inequality. ƒ The Gender Development Index compares female and male HDI values. ƒ The Gender Inequality Index highlights women’s empowerment. ƒ Multidimensional Poverty Index measures nonincome dimensions of poverty. As UNIVERSALISM is the centrepiece of human development, human development must be and can be attained for everyone. The positive evidence is encouraging. Yet, even with all this commendable progress, the world still faces many complex development challenges. o Lingering (deprivations), deepening (inequalities) and emerging (violent extremism). o Global (gender inequality), regional (water stress) and local (natural disasters). o Most are mutually reinforcing—climate change reduces food security; rapid urbanization marginalizes the urban poor. The 2030 Agenda, the Paris Agreement on climate change and new concerns show that under the rumble of debate and gridlock, a nascent global consensus is emerging around many global challenges and ensuring a sustainable world for future generations. Closing the human development gaps is critical, but so is ensuring that future generations have the same, or even better, opportunities. And fulfilling the 2030 Agenda is a critical step towards enabling all people to reach their full potential. ƒ Both are anchored in universalism—enhancement of freedoms / concentrating on leaving no one behind. ƒ Both share the same fundamental areas of focus — eradicating extreme poverty, ending hunger, reducing inequality, ƒ Both have sustainability as the core principle. First, the 2030 Agenda can see what analytical parts of the human development approach strengthen its conceptual foundation. Similarly, the human development approach can review the narrative of the 2030 Agenda and examine parts that can enrich it. Second, the Sustainable Development Goal indicators can use the human development indicators in assessing progress towards the Sustainable Development Goals. Similarly, the human development approach can supplement the Sustainable Development Goal indicators with additional indicators. Third, the Human Development Reports can be an extremely powerful advocacy instrument for the 2030 Agenda and the Sustainable Development Goals. And the Sustainable Development Goals can be a good platform or the greater visibility of the human development approach and the Human Development Report for the coming years. Some barriers are deeply embedded in social and political identities and relationships —such as blatant violence, discriminatory laws, exclusionary social norms, imbalances in political participation and unequal distribution of opportunities. Overcoming them will require putting (beyond assistance and monitoring) empathy, tolerance and moral commitments to global justice and sustainability at the centre of individual and collective choices. Legal and political institutions can be used and abused to perpetuate group divisions. Some social norms can be helpful for harmonious coexistence within societies, but others can be discriminatory, prejudicial and exclusive. Inequalities in income influence inequalities in other dimensions of well-being, and vice versa. Excluded groups lack agency and voice and so have little political leverage to influence policy and legislation through traditional means. Social and political movements linked to identity, whether nationalist or ethnopolitical, seem to be getting stronger. Human rights are the bedrock of human development. Duty holders support and enhance human development and are accountable for a social system’s failures to deliver human development. The notion of human security should emphasize a deep understanding of threats, risks and crises for joint action in the human development and human security approaches. The challenges are to balance the shock-driven response to global threats and the promotion of a culture of prevention. Freedoms are interdependent, and such interdependence may be reinforcing. Limiting the freedom of others may not be the intended consequence of exercising one’s freedom, but some actions that curb others’ freedom may be deliberate. This is reflected in the affluence bias of the policy options in many economies, in the way the legal system is built and in the way institutions work. Sustainable development is an issue of social justice. It relates to intergenerational equity— the freedoms of future generations and those of today. PART IV: Globalization amidst discontents and a bleak future MULTINATIONAL CORPORATIONS – Foreign Direct Investment Multinational corporations are enterprises that control assets of other entities in economies other than its home economy. Not only do they produce over national borders, but they also sell finished goods or components of other goods abroad. These cross- border investments have been an important source of foreign capital. They make decisions based on their own corporate success. As they operate both in national borders and global markets, they are object of study among observers of international political economy. MNCs can be seen as instruments of a liberal economic order or as instruments of capitalist domination. First MNCs emerged in the XIX century in Great Britain, their domain was the colonies. British investors controlled almost half of the total FDI, shortly surpassed by the first american MNCs at the end of the XIX century. As we can see, MNCs have grown at an incredible rate over the last century, particularly over the past 30 years. o Number of MNCs actively operating in the world increased about elevenfold over the last 40 years o Growth of Foreign Direct Investment (FDI) - a national firm becomes an MNC when it build or purchases a plant or a factory in another country, thus involving in FDI The UN estimates that MNCs account for ⅓ of global exports, 4% of world GDP and employ around 77 million people worldwide. Lot of trade involving MNCs is between MNCs (infra firm trade) or between parent companies and affiliates. There is over 80,000 parent companies and over 820,000 affiliates. However, their power is concentrated in a small number of firms. ƒ HOME countries – advanced industrialized economies, the “TRIAD” (the US, Western Europe or Japan; 92% of MNCs headquarters). ƒ HOST countries – developing countries heavily concentrated in a small number of countries of Latin America and Asia (¼ of MNCs parent firms, 2008), the rest in advanced industrialized countries. The emergence of these MNCs is a significant change in the global economy, as almost every aspect of globalization is linked to the activities of MNCs through FDI. Foreign Direct Investment is a mechanism by which MNCs invest in other countries: a firm based in one country builds a new plant or purchases an existing one in a foreign country. There is a major concentration of FDI both inflows and outflows. There is a new trend of FDI movements: S-N and S-S. this is due to the “multilatinas” recent phenomenon, as América Móvil (260 million in 18 countries), Grupo Carso or CEMEX. Falling trade barriers and increasing advances in technology have made it easier for firms to internationalize their activities. x FACTORS ATTRACTING MNCs – economic explanation MNCs engage in international transactions and own productive establishment in more than a country. What drives international firms to become MNCs? Most of the motivation for this change is due to the economic environment in which it operates. - PULL FACTORS - LOCATIONAL ADVANTAGES: motivation for a firm to internationalize its activity (engage in economic transactions with another country). o Natural resources – if they move part of its production to a place that has abundant resource of a factor of production they need for their product, they’ll be able to get some profit out of it. ƒ The earliest motivation for international activities, back in the 19th century. The most clear example of this today is how American and European oil companies invest in the Middle East, as it has a oil natural resource access. o Market-oriented investments – where there is a large, growing demand of the product they are trying to sell. ƒ The less local competition, the easier it will be for an MNC to sell their product in this market. ƒ Tariffs and barriers to import are also an important fact o Efficiency-oriented investments – availability at a lower cost of the factors of production that are used intensively in the production of a specific product. Parent firms allocate different stages of the production process in different parts of the world, according which factors of production are more abundant in each region. ƒ If the product an MNC is trying to sell requires a lot of labor but very little qualified personnel, the MNC will move part of the production process to a country where there is a lot of cheap labor. There are two mechanisms why MNCs take their transactions out of the market and into a single corporate structure, relating with market imperfections: a) Horizontal integration happens when a firm creates multiple production facilities that produce the same good. Firms integrate horizontally when a cost advantage is gained by placing a number of plants under common administrative control. Intangible assets, what drives firms to horizontally integrate, are a set of skills or knowledge whose value is difficult to determine, and therefore difficult to buy and sell, what generates horizontal integration. b) Vertical integration happens when firms internalize their transactions for intermediate goods, when MNCs buy several small companies and each one of the companies makes a part of the process that will eventually lead to the final product. Thus, each stage of the production process is handled within a single corporate structure, the MNC itself. It happens when most of the assets of the product the MNC is producing are specific assets. Specific assets involve a long-term economic relationship that can only be provided when all stages of production are handled by the same MNC in order to avoid opportunistic behavior (disputes about whether to rise the price of parts, the price of labor and so on). In both cases, the incentive to take transactions out of the market and within a single corporate structure arises from the ability of the market to accurately price the value of the asset that generates the firm’s income. There exists some risk of monopoly and threats to national development. - COST ADVANTAGES o Financial advantages o Tax advantages - breaks, reduced rates, … o Regulation advantage - OTHER FACTORS o Macroeconomic stability and good prospects – high growth, low rates of inflation, debt, … o Trade openness o Ease of doing/starting business o Human capital - skilled labor, good education o R&D investment (by local and foreign capital) – innovation - POLITICAL FACTORS o Do the MNCs care about political dynamics of a host country? ƒ If yes, why so? o Does democracy matter? ƒ Or is it about stability? o Good institutions? ƒ Protections on property rights ƒ Which regimes protect PR better? o Good governance? In sum, MNCs are not only firms that own productive establishments abroad and engage in international transactions, but also firms that respond in a predictable way to the characteristics of the economic environment in which they operate. x CONCESSIONS OFFERED TO MNCs 1. Direct financial incentives a. Loans and grants by the host government b. Low cost investment 2. Exemption from import duties a. Export Processing Zones 3. Purchase guarantees 4. Tax incentives a. Tax breaks and deductions x MNCs CONTESTED 1) Control of critical sectors in host countries 2) Large shares in the total stock of investment, production and sales. 3) Highly concentrated industries 4) Use of important resources 5) Impact on economic policies & decision-making 6) Endangering national sovereignty & national development strategies? Host countries try to restrict MNC activities, but few can dictate the terms under which they can operate. Instead, they often bargain over the terms, and try to reach an agreement about how the income generated will be distributed between the MNC and the host-country. The outcome depends on the bargaining power of each side, which arises from the extent to which each side exerts monopolistic control over things valued by the other. o In natural-resource investment: bargaining power initially favors the MNC (few countries own a monopoly over a natural resource and MNCs can therefore choose), but then it shifts to the host country in a process called the obsolescing bargain. The MNC can’t easily remove its fixed investment, which becomes hostage. Thus, since bargaining power has shifted, the government can renegotiate the agreement to get a larger share of revenue. o In low-skilled labor-intensive manufacturing investment: bargaining power favors the MNC. No host country with a monopoly on low-skilled labor, manufacturing investments don’t become hostages… o The evidence is in the growing competition of host countries to attract FDI in this sector. o This comes in the form of locanational incentives: packages offered to MNCs that either increase the return of a particular investment of reduce the cost of the risk. In bargaining with the MNCs, different ideas can come: ƒ Re-investment of profits ƒ Prohibitions on expatriation ƒ Joint ventures ƒ Partial inclusion or exclusion from some sectors ƒ Critical sectors-strict regulations or prohibitions ƒ Technology transfer-licences ƒ Performance requirements ƒ Linkages w/ domestic industry ƒ Btw prohibition and content requirements There are several factors that account for the difference of developing and the industrialized country in the sense of using national regulations: a) Developing countries have been more vulnerable to foreign domination than advanced countries, because the latter have larger and more diversified economies than the developing countries. b) The correlation between country's role as a home to MNCs and its policies with FDI - when countries both host foreign firms and are home to MNCs, they are less likely to adopt policies on purely host-country basis. This is mostly the case of industrialized countries. c) How governments approach state intervention in the national economy - industrialized countries are willing to allow the market to drive economic activity, whereas the developing countries pursue ISI strategies with state intervention. Thus, attempts to regulate MNC activity were mostly in country where governments play large role in the economy. DCs are definitely moving forward, they are more open than before and they are less vulnerable to foreign domination. They shifted from natural resources to manufacturing and some of them are even moving from being a host to the foreign investment to being a home base for MNCs. Due to this, we can expect less intervention in the future in the market by governments of developing countries, and no shift back to interventionist strategies. x MNCs REGULATION – international Even though there are partial rules, set out within the WTO and OECD, there are no comprehensive international rules governing the activities of the MNCs. The reason is that conflict between the capital- exporting developing countries has prevented agreement on such rules. Developing countries have advocated international rules that codify their right to control foreign firms operating within their borders. Advanced industrialized countries have pursued rules that protect foreign investment by limiting the ability of host countries to regulate the MNCs operating in their economies. Hence the lack of a consensus. International rules governing FDI have been based on four legal principles: 1. NATIONAL TREATMENT: foreign investment is private property to be treated at least as favorably as domestic private property. 2. EXPROPIATION RIGHT: governments have a right to expropriate foreign investments, but only for a public purpose. 3. COMPENSATION: when a government does expropriate a foreign investment, it must compensate the owner for the full value of the expropriated property “adequate, effective and prompt”. 4. APPEAL: Foreign investors have the right to appeal to their home country in the event of a dispute with the host country. Such principles were accepted by capital-exporting and capital-importing countries throughout the 19th century. The capital-importing countries began to challenge these legal principles following WWI. The first challenge came in the Soviet Union, after rejection of private property. The comprehensive nationalization of industry that followed “constituted the most significant attack ever waged on foreign capital”. Led by the United States, the advanced industrialized countries, in their role as capital exporters, have placed greatest emphasis on creating international rules that regulate host-country behaviour in order to protect the interests of the MNCs. Developing countries by contrast, in their role as capital importers have placed greatest emphasis on creating international rules that regulate the behavior of MNCs so that those countries maintain control over their national economies. This basic conflict has prevailed for more than fifty years of discussions about international investment rules and prevented agreement on comprehensive rules. Throughout the 1960s and 1970s, developing countries undertaken a number of efforts to create international investment rules that reflected their interests as capital importers, and sought international recognition of their right to exert full control over all economic activity within their territories. Such efforts met opposition from the advanced industrialized countries. Calvo doctrine (1868) - “N o g o v ’ t h a s t h e r i g h t t o i n t e r v e n e i n a n o t h e r c o u n t r y t o e n f o r c e i t s c i t i z e n s ’ p r i v a t e c l a i m s . ” x ITO: to set multilateral rules/ investment clause x UN Resolution on Permanent Sovereignty over Natural Resources (1962) – rights of host countries to exercise full control over their natural resources and foreign firms operating in these sectors. x New Int’l Econ. Order (NIEO): attempt to regulate MNCs to facilitate their contribution to development. a. Code of conduct to regulate MNC behavior b. Never implemented. x OECD: establishing codes Multilateral Agreement on Investment (MAI) a. further liberalization of FDI b. greater security for investment c. national treatment and MFN d. dispute settlement mechanism i. Protecting the interests of the large MNCs ii. Reaction and campaigns of transnational organizations & networks 1. PUBLIC CITIZEN (non-profit interest group: www.citizen.org) iii. Ceased in 1998. x READING: “SEN – HOW TO JUDGE GLOBALISM” Globalization is often seen as global Westernalization. Great developments happened in Europe and now they spread to the world. Western dominance seen as continuation of imperialism, contemporary capitalism rules of trade and business relations serving the interests of not the poorer people in the world. Globalization is neither new nor necessarily Western, and it is not a curse. Over thousands of years, globalization have contributed to the progress of the world through travel, trade, migration, cultural spread,… these interrelations have been very productive in the advancement of different countries, and indeed, the active agents of globalization have often been located far from the West. The high technology of the 1000 A.D. was used extensively in China a millennium ago, and globalization spread it throughout the world. Also it is to note the Eastern influence on Western mathematics. Europe would have been a lot poorer in many dimensions had it resisted the globalization of mathematics, science and thechnology at that time. Global interdependences and movements The misdiagnosis that globalization has to be resisted has played quite a regressive part in colonial and postcolonial world (India case, concepts travelling full-circle as sinus). It is a serious error, as globalization is much bigger and greater than imperialism. The issue of the distribution of income remains an entirely separate question. There is evidence that globalization has brought prosperity to many areas of the globe, and we cannot reverse the economic predicament of the poor across the world by withholding from them the grat advantages of contemporary technology, the efficiency of international trade and exchange and the social as well as economic merits of living in an open society. Rather, the amin issue is how to make a good use of the remarkable benefits of economic intercourse and techno0logical progess in a way that pays adequate attention to the interests of the deprived and the underdog. Are the poor getting poorer? The principal challenge is inequality (international and intranational): the troubling ones include disparities in affluence and gross asymmetries in polit8ica, social and economic opportunities and power. A crucial cuestion concerns the sharing of potential gains from globalization. Ther is a need of making those questions with more clarity. Global justice and bargaining problem Even if the poor are getting richer, this would not mean that they are getting a fair share. The real exercise is the choice between the alternatives. The real issue is the distribution of globalization’s benefits. Altering global arrangements The use of the market economy is consistent with many different ownership patterns, resources availabilities, social opportunities and rules of operation. And depending on these conditions, the market economy would generate different prices, ters of trade, income distribution and more generally, diverse overall outcomes. Social security arrangements and other public intermentions can sum further modifications. The use of the market is a grant of prosperity, but it does not work by itself in global relations (or within a country), but enabling conditions will generate very distinct results, and will depend on economic, political and social institutions operating globally and nationally. Institutions and inequality We must see the legitimacy of many questions of antiglobalizations protesters. It is usual to find misdiagnosis on where the main problems lie. Global capitalism is much more concerned with expanding the domain of market relations than with, say, establishing democracy, expanding elementary education or enhancing the social opportunities of social underdog. There is a need to go beyond the priorities of it. Thus, international business concerns often have a strong preference for autocracies and can damage LDCs countries conditions. Fair sharing of global opportunities GLOBALIZATION – Great Opportunities, major challenges Economic globalization is based on increasing interconnectedness/integration, with intensifierd linkages between multiple actors at multiple levels. - Most importants forces/dynamics: b. International trade c. (Ideally) International flow of labor d. International capital flows i. FDI - Foreign Direct Investment ii. Foreign Portfolio Flows – much more fluid, may be undertaken by individuals (securities, shares, bonds, private stocks). 1. It can cause a lot of volatility, specially in the host markets Much more mobile since … Most of the course understanding the dynamics, regimes, strategies within international trade. ¾ FDI/FPI - differences lies in greater volatility of FPI. e. Contingent upon the host country conditions, and regulation as well as the type of investment. f. Specially needed in countries with a high trade deficit. g. Shorter-term and speculative flows prevalent in the south i. Greater opportunities and risks ii. They come in and they go out. Depending on the rules of the game; host countries are very restrictive in the regulations – possibility of being sanctioned by the absence of capital flows h. Widespread financialization of the global economy – pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production (Knipper 2001: 14) i. Very important future of today’s globalization, causing a lot of risks in many markets International trade EXPANDED through liberalization and has become increasingly institutionalized (GATT and WTO; limited enforcement, loopholes, bypassing the rules, …) FACING the hegemon’s challenging the very institution and increasing competition and tensions. ƒ Dicreasing of tariffs after Cold War, influenced by the adding of many countries to the international system of trade, involving the WTO (Uruguay Round, 1995). ƒ Correlating to that, as a response, world trade increases in substantial levels until the financial crisis ƒ Incorporation of new players and its growth o As China, WTO in 2001, as the major exporter; resisted becoming a member of the international system of trade – now has become the champion specially lately after the current hegemon o US the highest market, strong middle class o Despite the population advantage of China, it remains second ¾ TRADE WARS___________________________________________________________________________________ ii. US-China only: so far costing 250 bn USD i. Disputes happen in the WTO since the establishment of the DS Body i. It has not worked as effectively as it promised to, and ever since ii. The deviation from the rules of the game, which is actually tolerated show as that the effectivenes is quite limited 1. They then impose barriers j. G20 Summit - TRADE i. Tensions: US – Russia, US – Saudi Arabia, Turkey – Saudi Arabia ii. Terrible situation of Argentina k. IMF report for the G20 meeting: “car tariffs, if imposed, could cut 0.75 % of the global economy” l. “The global economy faces a critical juncture where significant risks are materializing and darker clouds are looming … Rising trade barriers are ultimately self-defeating for all involved.” – Ms. Lagarde i. Turning point in terms of economic changes, economic policies and political changes m. “There is a good possibility that a deal can be made …. Contingent upon China meeting certain conditions” - Larry Kudlow (Director of the National Economic Council – Economic Advisor to the WH) i. Retaliation by China of the American imports was of 6 bn USD ii. US position - Good posibility that a deal can be made, open to it 1. Talk about tariffs – SIGNIFICANT, any barriers, any subsidies 2. Trade reform – fair and reciprocal 3. Intellectual property theft 4. Infrastructures – US dominant energy power x DIFFERENT VIEWS ON GLOBALIZATION ¾ Norberg_______________________________________________________________________________________ 1. Free markets and free will of people -Options have multiplied (transportation cost fall, more efficient communitations, and trade and k liberalization). These factors liberalize out thinking on local routines, it is more difficult to control people with much more options, our control of our lives is growing, along with prosperity. -Many feel powerless in the face of globalization, as it is much determined by the decentralized decisions of millions of people. Many groups are afraid of a globalized humanity acquiring more power at the expense of political institutions. -The new freedom of choice means not being subject to local employers or structures but having more and international options 2. Global capitalism is creating a better world Now other contintnts are awakening and developments are also beginning to be affected by ordinary peopl’s everyday decision-making. The poor and ppowerless find their well-being vastly improved when inexpensive goods are no longer excluded by tariff barriers and when foreign investments offer employments and streamline production. -By capitalism he means the liberal market economy (capital ownership and investment opportunities can also exist in a command economy), with free competition based on the right of property and freedom to negotiate and start business activities; individual liberty in the economy. He believes not in regulatory codes creating things, but in people’s capacity and tha combined force that results from our interactioons and exchanges. Pledge for more liberty and a more open world not because efficiency, but because that system unleashes creativity as no other can, spurring the dynamism of human advances. Not economic transactions supplanting human relations, but voluntary relations in all fields. 3. Democratization Democratic reforms and economic liberalization are needed to ensure the gains of globalization to arrive to all. 4. Improving indicators Increasing wealth, improving health, paved roads, diminished poverty, empowered men and WOMEN. IN ALL COUNTRIES except in Africa Optimistic views on globalization… ¾ Oatley_______________________________________________________________________________________ 1. “some of the biggest beneficiaries of globalizaiton over the last 20 years have been the world poorest individuals.” ¾ Friedman 1. “ T h e L e x u s a n d t h e O l i v e T r e e ” – Happy co xistence of th old and th new, global and local (“GLOCALITATION”) 2. “ T h e Wo r l d i s F l a t ” – Flattened world in terms of opportunities & access. World as a level-playing field facilitated by globalization ™ CHALLENGES OF GLOBALIZATION - Benefits are there, but unequally distributed (across and within the nations) - Increasing inequalities an “race to the bottom” o Fierce competition over prices, wages, regulations - Not a rising of real wages in a lot of time o Fierce competition over capital inflows (many countries in need of it) - Concerns on national sovereignty o Corporations and IOs: having more power than the states? ƒ Natural resources extraction in poor countries specially o Capital flows: anational policymaking obsolete? ƒ Such flows might make it completely obsolete x Asian crisis in the 1990s x Money comes in and out destroying macroeconomic stability in a lot of countries o Competitive pressure: threatening social security arrangements o Coming from competition for capital flows - Not tax as much as you did before x TIME DEVELOPMENT ƒ 1914-1945 — interwar period ƒ 1945-1980s – partial mobility o Not all countries in the GATT regime ƒ 1980s-… - new face of globalization, high mobility but of a different kind o Trade and capital – liberalized o Not people – only high-skilled x The 2nd phase of globalization - POSTWAR CONSENSUS a. A subtle balance: freer trade and restricted capital flows i. Visible hand: state intervention – social security provision ii. BALANCE: liberal international order and compensation of the losers b. Multilateral actors, in the international level, facilitating cooperation between different states and levels, monitoring international transactions i. Postwar international regimes ii. Institutionalization of cooperation and interconnectedness iii. Unprecedented expansion of trade - INSTITUTIONALIZATION AND INTERDEPENDENCE a. “the Bretton Woods trio” i. IMF — supervisors of the fixed exchange rate regime; strict controls on capital flows ii. GATT – director of international trade iii. IBRD – constructor of Europe (among others) x The 3rd phase of globalization - WIDENING AND DEEPENING OF MOBILITY AND INTEGRATION (except that of labor) a. Trade liberalization b. Capital account liberalization – main difference with the other phase - UNPRECEDENTED INCREASE OF CAPITAL FLOWS a. Short-therm flows and recurring crisis b. Financialization and de-industrialization c. IOs and their deficiencies iii. Rules bypassed in a lot of occasions, IOs cannot do much 1. One of the most imprtant players in the global economy, challenges the rules and the existence of the system, the US iv. Changing power balances and unequal access d. Political consequences of the current phase of globalization CALL FOR REFORMS, CALL FOR A “RESPONSIBLE GLOBALIZATION” - Widespread contestation of the current phase of globalization. o From ALL ideological shades. o Appeal of extreme ideologies (Left and right) - Current political outcomes: o Economic (and other forms) nationalism & populism ƒ In the US even being one of the largest markets o Can the states come back on the stage? - Future political outcomes o Potentially, major changes at both the domestic and international level o The end of the postwar multilateral order? o Changing political regimes?