Ec1400 Review Sheet
Alex Sloane
Richard T. Ely Lecture—International Financial Crises: Causes, Prevention, and Cures
by Lawrence Summers
1)
The Goal of an Efficient Global Financial System
a.
Even small increases in the efficiency with which capital is allocated have enormous social
benefits
b.
International financial integration represents an improvement in financial intermediation which
offers a potentially significant increase in economic efficiency with benefits both for consumers and
investors around th world
c.
Financial flows can provide important benefits—
a.
They finance real trade and related financial
transactions and provide cross-border liquidity to the interbank market
b.
They provide capital to local businesses on what are
often the best available terms
c.
businesses and foreign financial institutions
1.
They are closely associated with the presence of foreign
It is impossible (and counterproductive) to distinguish between good and bad capital flows
d.
Jet airplane analogy—the jet airplane made air travel more comfortable, safe, and efficient but
the accidents were larger and more frequent for a short time. This is how Summers views modern
global financial markets and their potential impact on the global economy.
2)
Understanding International Financial Crises
a.
Every crisis is different but have some common
elements--a large real depreciation, a dramatic swing in the current account, a significant decline in real
output
b.
Common elements—1) after a period of substantial
capital inflows, investors decide to reduce the stock of their assets in the affected country in response
to a change in fundamentals, 2) after a period of substantial capital inflows, investors shifted their focus
from evaluating the situation in the country to evaluating the behavior of other investors, 3) the
withdrawal of capital and associated sharp swing in the exchange rate and reduced access to capital
exacerbated fundamental weakness
c.
The presence of international “contagion” is another
feature of 1990’s financial crises
1.
Summers argues that preventing crises is heavily an issue of avoiding situations where the bank
run psychology takes hold, and that depends heavily on strengthening core institutions and other
fundamentals
3)
Crisis Prevention at the National and International Level
a.
Conclusions of underlying reasons for financial crises
a.
Serious banking and financial-sector weaknesses
usually play a role
b.
monetary-policy commitments causes crises
c.
Fixed exchange rates without the concomitant
Overly inflationary monetary policies, large fiscal
deficits, and large current account deficits
d.
National balance-sheet weaknesses—large short-term
liabilities
b.
These four underlying causes have solutions—
a.
Maintain a strong domestic financial system. When
well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and
credible means of contract enforcement, significant amounts of debt are sustainable, but if these things
are not present, no debt is sustainable
b.
Choose appropriate exchange-rate regimes—if a
country has access to international capital markets, it should either have flexible exchange rates or a
fixed exchange rate—not a pegged fixed rate
c.
A sound and stable macroeconomic policy environment
where monetary and fiscal policy vulnerabilities are minimized
d.
Countries should reduce their vulnerabilities to
liquidity/rollover risk and balance-sheet risk. Foreign reserves must be compared to meaningful
measures of liabilities that can become a claim against a country’s reserves
c.
The international community can help prevent crises by encouraging sound national economic
policies
a.
Best way to do this is by promoting transparency—all
countries should use GAAP
d.
The only real motivation for these countries is self-interest.
a.
Better economic outcomes and a higher standard of
living for a country’s citizens
4)
National and International Crisis Response
a.
The best national response to a crisis is simply not to have one
b.
The next best response is to have a sufficiently robust set of domestic institutions and national
economic system that the crisis is contained and does not reach the stage where a country’s capacity to
meet its international obligation comes into question
c.
In situations where confidence is paramount, it is a mistake to only worry about the substance of
what national authorities do—“markets overreact, so policy needs to overreact as well”
d.
Effective policy responses:
a.
Provide confidence to markets and investors that a
credible path out of the crisis existstransparency is key
b.
Tighten fiscal policy if lax fiscal policy caused the crisis
c.
Set the right monetary policy to establish confidence—
in times of crisis, the right monetary policy has to be the one that will minimize the average interest
rate over the medium term
d.
Support healthy institutions and intervene in unhealthy
institutions—don’t delay in doing so
e.
Put strong and effective social safeguards in place to
ease the task of adjustment during times of crisis, help build support for necessary reforms, and ensure
that the burden of adjustment does not fall disproportionately on the poorest and most vulnerable
groups in society
e.
The international community’s response should be through a) financial provisions or b) through
some coordination of private creditors to reduce outflows or roll over obligations coming due
f.
Issue of moral hazard—there are systematic implications when bailouts are expected, so the
international community must be careful
A Future Perfect- The Challenge and Hidden Promise of Globalization
by John Micklethwait and Adrian Wooldridge
1)
The Story of the Bruderhof’s
a.
An Amish-style religious community of 400 people which bans radios, televisions, and
homosexuality, and practices “Christian communism”
b.
Since the 1950s, to sustain their lifestyle, the Bruderhof’s make children’s toys
c.
In the 1980s, the company began to have difficulties competing with international competitors
d.
To combat the problem, the community learned and adopted Japanese management techniques
and turned each of their communities into specialist centers, with some responsible for metalwork,
others for carpentry, etc. They also adopted other international business practices and negotiating
techniques.
e.
The gains in efficiency were dramatic and they were able to deliver most of their orders on the
same day—an unparalleled feat in the industry
f.
2)
The Bruderhof’s business is booming—they did forty million in revenues in 1999
The Walls Come Tumbling Down
a.
b.
The Bruderhof’s exemplify the benefits of globalization
Critics of Globalization argue:
i.
international speculators
Communities are becoming the playthings of
ii.
Complain about the rise of a homogenized airport
culture
iii.
Complain about the loss of democratic accountability
iv.
A global race to the bottom—countries ruin themselves
by reducing taxes, benefits, and environmental controls to woo rootless companies
v.
3)
Globalization helps spur inequality
The Maelstrom
a.
The book attempts to argue the benefits of globalization in a concrete, fact-based way and dispel
the myths and rumors about the phenomenon
b.
Globalization is in fact here and it affects us in all different ways—the way we make international
calls, the angry factory workers in Flint, MI, the fact that you can get cappuccino in Shanghai, the
availability of Viagra and Harry Potter all over the world, the clothes people wear, etc
c.
4)
Globalization is “accelerating and cumulative”
A Cause Worth Fighting for
a.
Globalization is a commercial, rather than political phenomenon, driven by currency traders and
entrepreneurs rather than by politicians and bureaucrats.
b.
The one trillion dollars worth of foreign investors that poured into the third world since the early
90s, it is generally acknowledged, did more (good or bad) for these economies than any government
aid program of the previous three decades—“Silicon Valley and Bangalore have generally played more
important roles than Washington D.C. and New Delhi.”
c.
NAFTA and other such trade agreements are blurring the boundaries between countries
d.
Globalization leads to a more efficient use of resources—it does not simply relate to economic
efficiency, but also to do with freedom.
i.
“Globalization offers the chance to fulfill the goals that
classical liberal philosophers first identified several centuries ago that still underpin Western democracy”
e.
The concern that globalization is the only reason why Western countries are losing manufacturing
jobs and replacing them with service jobs is not correct
i.
It has become the scapegoat for economic distress
that has much more to do with the introduction of new technology or the repition of old mistakes
f.
Service jobs, furthermore, are higher paid than manufacturing ones, so they should not be
scoffed at
g.
Globalization has brought us better, cheaper cars ,computers, and holidays- it has forced our
governments to spend more prudently and control inflation more vigorously
h.
Globalization has done mixed things for the environment, but at least it has forced countries like
China to come clean about their pollution
i.
Globalization has exacerbated all of the weaknesses of modern society and forced countries,
companies, and people compete with the best in the world
5)
Where I Stand
a.
Globalization brings down political, social, and economic barriers and helps to hand the power to
choose to the individual
i.
Globalization widens the concept of what the
maximum degree of individual freedom could be
b.
Globalization presents the world after the Cold War with the same economic opportunities that
the world enjoyed after the Second World War
Jeff Witt
John Gray, “False Dawn: The Delusions of Global Capitalism”
The creation of the free market has been called the Great Transformation. The fundamental idea
behind free market economies is for all goods, including labor, to change without regard to
their effects on society. The free market economy, which arose in America and Britain in the 18th
century, is a new idea in social engineering. In the past, economic life had been constrained by the
need to maintain social cohesion.
According to the Washington Consensus, ‘democratic capitalism’ will soon be accepted throughout the
world. A global free market will soon become a reality in which the various economic systems and
cultures of the world will ultimately be merged into a single universal free market. However,
democracy and the free market are rivals, not allies. The natural counterpart of a free market
economy is a politics of insecurity. In the normal course of democratic political life the free market
is always short-lived since its social costs are such that it cannot for long be legitimated in any
democracy.
The emergence of a truly global economy does not imply the extension of Western values
and institutions to the rest of humankind. In the same way, the emergence of a truly global
economy does not promote the universal spread of Western liberal democracy. The history of
our time reflects that neither the American free market system nor the regime of ‘democratic
capitalism’ are necessarily replicated through economic globalization. In fact, economic globalization
works against the free market and the Western democratic ideals attached to it, spawning indigenous
types of capitalism and new regimes that owe little to the Western model.
The global economy that is currently under construction will not assure the free market’s
future. Economic globalization—the worldwide spread of industrial production and new technologies
that is promoted by unrestricted mobility of capital and unfettered freedom of trade—actually threatens
the stability of the single global market that is being constructed by American-led transnational
organizations (WTO, IMF, OECD, etc).
Economic globalization does not strengthen the current regime of global laissez-faire, but
rather works to undermine it. There is nothing in today’s global market that buffers it against the
social strains arising from highly uneven economic development within and between the world’s diverse
societies. In the absence of a strong state dedicated to a liberal economic program, markets will
inevitably become encumbered. Encumbered markets are in fact the norm in every society (markets
naturally tend to react to spontaneously arising social problems), whereas free markets are a product of
artifice, design, and political coercion. Free markets are in essence creatures of state power, and
persist only so long as the state is able to prevent human needs for security and the control
of economic risk from finding political expression.
A global free market works to set sovereign states against one another in geo-political
struggles for dwindling natural resources as states animated by the laissez-faire philosophy are
impelled to become rivals for control of resources that no institution has responsibility for conserving. A
reform of the world economy is needed that accepts a diversity of cultures, regimes, and market
economies as a permanent reality. (Note: no manner of recourse is actually given by the author in the
paper.)
At the global level, as at that of that nation-state, the free market does not promote stability or
democracy. Global democratic capitalism is as unrealizable a condition as worldwide
communism.
Klein, Naomi,
The Tyranny of the Brands
According to the author, over the past two decades or so big corporations have undergone a great
change, and this mainly has to do with corporate branding. Whereas branding used to mean putting a
logo on a product and stating that “our mass-produced product is of the highest quality”, now, “rather
than serving as a guarantee of value on the product, the brand itself has increasingly become the
product.” Production (making tangible products) now is only a small part of the operations of these
multinational corporations; what is of real importance for them is coming up with ideas and images for
the brand, that is, the lifestyle or the attitude that the brand represents. This creates a kind of race
among companies to become the least clunky and most efficient: “the companies which own the least,
keep the fewest employees on the payroll and produce the coolest ideas (as opposed to products) win
the race.”
This has two main effects: first, in their quest to expand their brand image companies invade more and
more public and cultural space. Second, even though these companies have never been more
omnipresent in our lives, they have become absent from them in a crucial way: as steady employers.
Also, production has become much devalued and lies a distant second priority after branding. By
severing the bond between employer and employee, they are however much more vulnerable to public
rage.
Also, by having become so dependent on the image of the brand, this is the Achilles’ heel of these
companies. Their brand image can be subverted by individuals who want to protect themselves against
the rule of the brands. This is all the more successful since these individuals can tap into the great
resources spent to make the logo meaningful in order to lead these campaigns against corporations.
Indeed, these companies are faced by a sort of brand boomerang: the power of brand-names being
used against themselves. Thus brand image is both the source of a great amount of corporate wealth as
well as one of the corporations’ greatest weaknesses.
Mark Hoadley
Martin Wolf, Why Globalization Works, Chapter 8, “Rise, Fall and Rise of a Liberal Global Economy”
1820-1870: Beginning of global commodity price convergence (growth: per capita 0.5 %)
1870-1913: Liberal heyday (growth: per capita GDP 1.3 %; world merchandise exports 3.4 %)
-Commodity market price gaps cut by 81%: 72% from transport and 28 % from policy
“the
most impressive episode of international economic integration,” accompanied by the most significant
declines in “intercontinental barriers to trade and factor mobility”
-Century of relative peace after Napoleonic Wars in 1815
-Bilateral trade treaties and onset of convertibility through gold standard
Problems: Nationalist/imperialist goals to satisfy demands of a working class suffrage
-Social security makes sharing citizenship less attractive, less labor mobility
-Rising tariffs begin with Bismarck raising Germany’s in 1879
1914-1950: Decline of the liberal world economic order (growth: GDP 0.9 %; exports: 0.9 %)
-Commodity market price gaps double due to trade barriers
-Failure to re-establish monetary stability (inflation and high public debt)
-Depression 1929-1932: world trade fell 70 % in value terms, 25 % in real terms
-Open economies gave way to protection of national markets
-Essential US failures: exacerbated reparations crisis; failed to abide by restored gold standard rules;
triggered Great Depression; central bank failed to halt monetary collapse; accelerated protectionism with
Smoot-Hawley tariff
1950-1973: “Golden Age” (growth: GDP 2.9 %; exports: 7.9 %); 1973-1998 (1.33 %; 5.07 %)
-Commodity market price gaps cut by 76 %: 26 % from transport and 74 % from policy
-GATT in 1947 and 8 rounds of trade negotiations since
-Substantial tariffs remained on labor-intense goods such as clothing and agriculture
-Inwardly-focused development / import-substitution proves ineffective in the long-run (i.e. Soviet
Union)
-New economic order: free capital movement and domestic stabilization, with floating exchange
-Developing countries borrowed excessively and liberalized capital flow controls incompetently:
financial crises in 80s and 90s; 10 % to 50 % of developing countries move to floating exchange from 1975
to 1997
Other notable points
-Trade has risen slower than GDP because service-based sectors integrate more slowly
-Capital flows increased (18% of world GDP in 1914 and 57% in 1995), but: many foreign-asset holdings are
short term; many capital transactions are “diversification finance,” transactions from the rich to the rich; and
high-income nations are net importers of capital (because of the U.S. deficit).
-1890s US immigration was 9 % of the initial population; it was 4 % in the 1990s. All real wage
convergence before World War I was attributable to migration, and real wages for an unskilled person in a
poor nation are a small fraction of wages for that worker in a rich nation.
Katherine Prescott
Frieden, Global Capitalism Chapter 8: The Established Order Collapses
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Overview: This chapter discusses the international economic collapse of 1929-1934: economies
of industrialized world disintegrated for five years:
Output dropped by one-fifth
Unemployment spiked to one-quarter of the labor force almost everywhere
Financial currency crises around the world
The End of the Boom
American stock prices doubled in a little over a year: result was that American money
that had fueled international growth was instead invested in American markets, turning a mild recession
elsewhere (Europe) into a full-fledged crisis
In October 1929 American stock market crashed: prices of commodities, raw
materials, farm products dropped
Industrial production dropped, unemployment rose around the world
Most governments around the world responded passively, following the lessons of
classical economics, which dictated that in a cyclical economy a recession would naturally correct itself
Belief was that allowing for natural deflation and liquidation would rekindle
economic growth by lowering prices and wages enough to encourage new investment and consumption
Boom of the 1920s had to be unwound in order to set economy back on a healthy
path
The strategy of inaction did not work
Reduced flexibility of prices and wages (due to rise of labor unions) meant that
postwar economy was not responding as it had in the past
For example, while almost a quarter of the American labor force was out of work,
real wages in many industries were high and rising because of labor unions
Most governments turned inward, enacting trade protection such as the 1930 SmootHawley Tariff Act, which substantially raised American trade barriers
Gold and the Crisis
Deflation and prolonged depression triggered financial and currency panics around the
world: countries that wanted to halt deflation and raise prices could not due so because of their
commitments to the gold values of their currencies (they could not raise prices without the ability to
back up currency with more gold, which they did not have)
Major problem: Governments were unable to carry out open monetary policy
to stimulate economies while on gold standard
International gold standard retarded government response to crisis and sped the
transmission of financial shocks
Rumors that a currency would be taken off gold and devalued caused complete loss of
confidence in national banking systems and runs on national banks: people would rather have their
money in gold or a reliable currency than in a currency that was potentially going to be devalued and
worth a lot less
Responses:
In 1931, Germany closed banks and suspended convertibility of currency into gold
Also in 1931, British government took the sterling off gold, devaluing it
Scandinavian and Baltic states, Japan, much of Latin America followed Britain
By 1932, US and French-centered states (Belgium, Luxembourg, Netherlands,
Italy, Switzerland) still on gold standard
US: “Without the commitment to gold, the Fed could have lowered interest
rates, stimulating the economy by making borrowing, spending, and investment easier. Instead,
shackled to gold standard requirements, the world’s most important central bank imposed ever more
austere and restrictive monetary policies.”
By end of 1932, world trade still barely at one-third of 1929 level: world had turned
toward protectionism
US finally came off gold standard in 1933
Resulting run on the bank: expectation of devaluation caused people to cash in
dollars and buy gold
Out of the Darkness
US government, finally freed from the constraints of gold standard, could not expand the
money supply, raise prices, and put the economy back on track
This reversal of deflation was instrumental in bringing the economy out of
the Depression
Between 1932 and 1935, industrial production in countries off gold grew by 6%
annually, while it declined by 1% annually in the gold standard countries
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Central, eastern, southern Europe and Japan turned inward when crisis hit and were soon
ruled by new fascist or protofascist governments that continued to reject the international economy
Concept of autarky – forceful separation from the rest of the world – as an
economic policy
Nazis engineered most rapid and lasting reduction in unemployment in the
industrial world
Soviets constructed a Communist autarky, which saw the most rapid
industrialization in history
Out with the Old
In the face of the original downturn, governments mistakenly followed policies inherited
from classical global capitalism
These presupposed an earlier economy of small firms, disunited workers, and
textbook conditions of perfect condition, as well as a political system that could resist pressures to
alleviate the suffering of workers and the poor
Industrial economies were now dominated by huge corporations, mass production,
and complex consumer products: labor unions were much stronger than before WWI, and political
systems were far more democratic
In the industrial setting, classical policies were counterproductive
**Depression’s harshness reflected the fundamental inconsistency
between the traditional principles of the pre-1914 classical world economy and the new
organization of domestic and international societies**
Classical world economy had failed: many countries looked to political extremes of
communism or fascism for solutions to the problems of orthodox capitalism
Frieden, Global Capitalism Chapter 9: The Turn to Autarky
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Overview: The Depression had convinced almost the entire world that traditional economics –
and politics – no longer worked under modern conditions
Ancien regime – global markets for capital and goods, gold standard, and minimal
government involvement in the economy – worked well before 1914
During the 1930s markets collapsed, governments were forced to intervene, and people
looked to replace failed traditionalism
Many countries found economic self-sufficiency to be a desirable alternative
Countries across southern, central, and eastern Europe, including Portugal, Latvia,
Germany and Greece, adopted some variant if autarkic fascism
Semi-industrial countries also embraced the new economic nationalism: Romania,
Mexico, Argentina, Japan, Italy, Russia:
Rejected the gold standard
Imposed prohibitive trade protection
Tightly controlled foreign investment
Denounced foreign investment
Defaulted on the debts they owed
Force-marched toward modern industrial growth
This path diverged from that of western Europe and North America
Semi-Industrial Self Sufficiency
Every debtor country moved toward autarky and authoritarianism, while creditors
remained democratic and committed to international integration
Debtor countries were poor enough that they relied on exports of primary products, but
were rich enough to have thriving urban industries to produce for the domestic market
Autarkies turned away from international competition and toward the use of
national resources to meeting national demands
Debtor countries rejected foreign debts, reliance on world markets, and
comparative advantage
Previous areas of specialization were taxed to stimulate less developed
sectors of the economy
Two factors caused semi-industrial countries to turn inward:
1. New groups that were less enthusiastic about global economy: industrialists
producing for the domestic market wanted protection from foreign companies
2. Collapse of the economic theoretic basis of traditionalism with the Great
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Depression
Schacht and the Nazis Rebuild Germany
Nazis needed Schacht to bolster their ties to Germany’s business leaders; Schacht and his
business supporters needed the Nazis to address the country’s economic problems [Lots of detail in
reading on Schacht, not important for exam]
Schacht saw the Nazis as capable of exercising power to reassert German nationalism and
implement the strict economic policies he believed were necessary to bring Germany out of the
Depression
Nazis sought to destroy the political Left and labor party; economic priority was to end
unemployment
Nazi government ended unemployment within three years by creating jobs
for young adults: community chores, farm work, road building, bridge repair, public works
Large increases in government spending as a percentage of GNP from 1929 to
1934 to create jobs
1936 economy at full employment
Prevented inflation and wage increases through Nazi ‘reign of terror’: violent
repercussions for store-owners who tried to raise prices or laborers who rallied for higher wages
Hitler’s regime centralized political power and financial resources such that private
capitalists were no longer important
Nazis had no intention of rebuilding ties to the West
Schacht disagreed with these policies and ultimately resigned position
Autarkic Economic Policies
Germany and Italy’s shared goals: (1) strengthen industry, (2) avoid dependence on
hostile foreigners, (3) provide resources for reassertion of military capabilities
Method was to pursue industrial modernization:
Channeled money away from agriculture and consumption (through low
wages) toward industry
Subsidized industry: Higher prices for industry required controls on foreign trade
to keep out cheaper competitors
Result was steep protection, which led to import substitution
Governments controlled foreign investment by reserving national industry for
nationals to invest in
Governments defaulted on foreign debts to save capital and foreign currency for
industry
Governments imposed tight controls on capital movements to keep money at
home to for capital investment in domestic industry
Artificially over-valued currency: made foreign goods cheaper (imported raw
materials) and domestic goods more expensive (finished products), which helped domestic industrial
producers
In past over valuation would have hurt exporters, but this no longer
mattered
Europe Swings to the Right
By 1936, every country in southern, central, and eastern Europe was a reactionary
despotism; by 1941, Nazi occupations had felled most remaining European democracies
The constituency of the New Right was drawn from the urban lower-middle
classes and small farmers with more measured support from traditional conservatives in big business
and big agriculture
Fascists had a tough time satisfying these two broad constituencies – anti-labor
capitalists and landowners versus discontented lower-middle class
Fascists celebrated agrarian tradition but also accelerated industrialization
Fascists were able to pull economies out of the Depression:
Fascists stimulated economic recovery by signaling to the business community that
its troubles were over
Use of violence to achieve economic goals
Willingness to pursue new paths and stray from traditional economic theory
Fascists’ longer-term goals:
Unquestioned political control
Accelerated industrial development
Autarky
Military Expansion
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Priority was given to state industry and military adventurism over private business: all
wealth was thrown into investment for industrialization, modernization, and militarization, while mass
consumption was discouraged and wages suppressed
Japanese government: took on many fascist features, and Japan’s economy grew by 72%
over the course of the 1930s
**In the 1930s, fascism was a serious contender for international economic supremacy
Socialism in One Country: The Soviet Union
Communist mission required the construction of a modern industrial society
Resources for rapid industrial development largely taken out of agriculture and
consumption (similar to fascist methods)
Government wanted to encourage farmers to move to cities to provide cheap labor
for industry: forced peasants into collective farms, required collective farmers to sell crops to
government at artificially low prices, which caused peasants to suffer and ultimately move to cities to
find new work
Soviet Union industrialized in a decade:
Per capita GDP rose between 1928 and 1937, while rest of the world had
stagnated
Cost was that millions of peasants died of famine in the years of 1932 and 1933
when Stalin’s regime had required farmers to sell grain to government; widespread use of terror
Industrialization was accomplished with almost complete separation from the rest
of the world economy and with a new system of central state ownership and control
Development Turns Inward
1930s also a turning point for the developing world, in particular for regions that had
already achieved a level of industrial maturity that they could build on
The Depression called into question a way of life based on exporting to Europe and
North America: primary prices had significantly decreased, making this much less profitable as an
economic policy
Developing countries in Latin America, the Middle East, Africa, and Asia experienced (1)
export collapse, (2) currency depreciation (took currencies off gold), (3) debt default and were forced to
turn inward as a result
Prices of imported goods far exceeded prices of exported goods  poor
regions could not afford to import and had to produce more at home
Governments scrambled to reorient economies away from exporting and toward
domestic production for domestic use
Stimulation of industrial investment and manufacturing in: China, Brazil, Egypt,
Chile, Columbia, even India (still a colony of Britain)
Poorest colonies of sub-Saharan Africa and Indochina did not undergo local
industrial development because they lacked resources
Rise of nationalism provided political motivation for domestic industrialization and the
turn inward
The Autarkic Alternative
In the 1930s fascism, communism, and nationalist developmentalism delivered: provided
jobs, modernization, national pride, and cohesion
International integration might eventually make societies better off, but not in postDepression setting
Harold James, The End of Globalization (Introduction)
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Explores the circumstances in which globalism breaks down by using historical precedent:
We often believe process of globalization is irreversible, but post-Depression era proves
otherwise (rejection of principles of globalism by Nazi Germany, Soviet Union, Japan, etc.)
Failure of the WTO ministerial meeting in Seattle in November 1999 indicates that there
are serious problems facing the interconnected world today
Three paths to the auto-destruction of globalized economy:
1. Volume and volatility of capital movements and resulting instability
Bets can bring down the whole system
Example of LTCM
Economists, even Paul Krugman and Joseph Stiglitz, have acknowledged the
benefits of controlling capital movements to prevent financial crises
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2. Social and political responses and reactions provoked by globalization
“Backlash” provoked by injustices of global economy
More trade protection, control of immigration
3. Globalism fails because humans and the institutions they create cannot handle the
psychological and institutional consequences of the interconnected world (James’ focus)
Tariff systems, central banks, immigration legislation
Institutions meant to handle problems of globalization
Pre-1945: League of Nations, etc.
Post-1945 WTO, IMF, Bretton Woods regime (aimed at restoration of trade
relations, but saw capital movements as destabilizing)
The Universal Age in the Sixteenth Century
Sixteenth century: first globalization
Problems created by globalization interpreted as “sin” in the setting of the sixteenth
century
Globalization threatened traditional values
Universalism made people feel deeply uncomfortable during Reformation:
Constant change was discomforting
New physical geography produced feelings that wealth of many people was
illegitimate and could not be justified by the traditional criteria
The Universal Age in the Nineteenth Century
At the end of nineteenth century the world was highly integrated economically: mobility
of capital, information, goods, and people
Three great streams of capital, trade, and migration interlinked
Integrated world produced strong domestic reactions: nationalism in the form of (1)
formulation of national identities and (2) the process of institution-building
Backlashes and Reactions
In almost every country, globalization produced demands for protection from the
effects of changes and crises coming from the outside
Belief that state should protect sectors threatened by foreign goods led to
protective tariffs
In Australia and US, lower growth provoked mass protests against immigration
Americans complained new immigrants replacing skilled native workers
Capital movements: volatility brought on by free capital movements produced regular and
massive financial crises
Linkage of gold standard: country after country went on gold standard to
create confidence in economic management and attract foreign funds
*International linkage created by gold required a new approach to
monetary management
Creation of central banks: became necessary to manage national money
The Nineteenth Century and Its Sins
Marx’s rejection of “primitive capital accumulation” [There is a lot of detail on this in the
reading, and I doubt it is important for the exam]
Krugman notes that in the past no individuals or small groups could really affect the
currency value of a middle-sized economy, but one of the most bizarre aspects of recent economic
crises has been the prominent part played by hedge funds
Rise of industry and commerce generated more protests about inequality
In the 1920s, League of Nations oversaw financial stabilizations: incredible enthusiasm for
internationalism and international institutions in 1920s
By 1930s the world had descended into economic nationalism and protectionism
Fascination with Great Depression: we are constantly now concerned with the possibility
of a repetition of the breakdown of globalization as in the 1930s
How did Depression push back globalization?
1. Falling raw materials prices made situation for many capital-importing
countries difficult
2. International political situation in Europe was burdened by an impossible conflict
over war debts and reparations
3. Tendency to react to economic problems in the 1920s by trade measures:
increased popularity of quotas due to the fact that governments were more responsive to popular
pressures
In America, there was Hawley-Smoot tariff legislation
James claims that Great Depression was directly a product of disorderly and linked
financial markets
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Reaction against the international economy put an end to globalization
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Tyler Goin
Martin Wolf, Globalization Works, Preface
The preface mainly discuses his life story and its correspondence with the rise of liberal economic
policies. Operating under the premise that ideas matter in shaping government and economies, Wolf started
out with a firm believer in social democracy. Studying at Oxford, he learned that good economic policy could
help sustain a liberal society against the threats of imperialism, militarism, socialism, communism and
fascism. When economies fail, it puts political stability and social harmony at risk. He believes that
international trade is important for prosperity, especially in developing countries.
Wolf’s book is about persuading people that market economies are the only option and that they must be
governed and regulated appropriately. Wolf worked at the World Bank for 10 years starting in 1971. He
believes raising the incomes of the poor countries is the most important contemporary challenge for
economists. During his years at the Bank he was mostly engaged in arguing for greater reliance on the market
mechanism and trade after dealing with President Robert McNamera’s unconditional lending approach. He
shows his disgust for dirigiste – inward-looking – economic policies that cause inefficiency and corruption.
The two main problems with the World Bank were that it is committed to unconditional lending, almost
regardless of what was happening in the country it was lending to. As an economist in India, he was
concerned that continued lending from the Bank was helping the government of India avoid desperately
needed policy changes. He notes those changes eventually occurred in the middle of an financial crisis of
1991 – 2 decades later. The second problem with the Bank was its lending to governments – governments
who were sometimes corrupt and occasionally vicious institutions who ignored the interests and wishes of
their peoples. In the end, Wolf notes that small groups of competent people and policies can get an economy
going in the right direction. At the Trade Policy Research Center in London, Wolf then addresses the
hypocrisy of the world’s richest countries and their irrational trade policies.
Next, Wolf worked as chief economics writer for The Financial Times. By this time after Keynesian
economics resulted in 1970s stagflation, new economic policy focused on monetary stability, inflation
targeting, privatization, adherence to “the Washington Consensus” policies, and trade liberalization ~ all
culminating in the creation of the WTO in January 1995.
He closes by saying this is a book not of academic scholarship but of persuasion. After a long collectivist
hiatus, an integrated world economy founded on market relationships had returned. He argues that the market
is the most powerful institution for raising living standards ever invented. The problem is not too much
globalization, but rather, not enough. Not arguing for a replacement of states, he believes there needs to be a
more co-operative economic order in which more states participate. Noting that socialism, communism,
fascism and imperialism were all failures, he remarks that an open liberal international order extends
opportunities to the world as a whole and that we should not throw away this golden opportunity.
Jeffrey Frieden, Global Capitalism, Chapter 11.
The World Economy from 1939-1973
The Western Allies began to plan the peacetime economic order as soon as World
War II broke out. American postwar planning began long before the United States entered the conflict. Less
than two weeks after hostilities erupted in Europe in late summer 1939, the state department and the New
York based council on foreign relations set up study groups to report on how the United States might pursue
its world vision. Once the US entered the war, hundreds of government, business, and academic experts
worked to design the peace.
Highlights
- US involvement was the key to the success of restoring international economic order. European powers
insisted the US not return to the isolationism of the interwar period.
- Experts found consensus around a need for three things: (1) freer trade, (2) international monetary stability,
and (3) the recovery of international investment.
- Secretary Hull said, “If soldiers are not to cross international borders, goods must do so”.
-The Atlantic Charter was signed stating joint aims, which included “furthering the enjoyment by all states of
access, on equal terms, to the trade and to the raw materials of the world.”
- Most wanted to continue the international monetary cooperation established in the late 1930s. Debate
focused on the gold standard which many international bankers were convinced would best meet their needs.
Industrialists did not like the inflexibility of gold.
- From this debate the IMF was formed to which countries could contribute gold and their own currency to
the common fund, and link their currencies to gold at a fixed rate.
- The World Bank was developed for the purpose of providing the loans that would be necessary to rebuild
the war torn infrastructures of the European powers.
- These developments were solidified in the Bretton Woods settlements, which was said to have dealt a
“death blow to economic isolationism of the prewar period and the serious threat that with military victory
this country would again revert to economic nationalism.”
- America was willing to avoid isolationism after 1945 because the conditions had changed. The US was now
unchallenged in world trade, finance, and investment. The newfound power and influence of the Soviet
Union also changed US views.
- America’s role in capitalism’s reconstruction combined global economic and anti-Soviet goals.
- Dean Acheson worked for the next dozen years, financing Europe in return for a commitment to European
economic cooperation, reducing American trade barriers, creating stable monetary order, and breaking down
foreign protectionism.
- The US spent over 10 billion dollars in emergency assistance to Europe and Asia after the war. The Marshal
plan and a parallel Japanese program were oriented toward economic reconstruction. The cost was
approximately 14 billion dollars or 5% of US GDP.
- Eastern European countries, in contrast, were not redeveloped by the Soviet Union who demanded huge
reparations in addition to dismantling most of the industrial infrastructure.
- Communism offered, for the first time, an existing option for people, parties, and countries dissatisfied with
the inequality and unpredictability of capitalism.
Conclusion
In the golden age of global capitalism, ruling classes pushed and pulled their societies toward domestic
and international markets. They were little concerned for, and often actively hostile to, polices to ameliorate
the poverty of the world’s majority. They argued that global economic openness was inconsistent with
policies to mitigate domestic poverty. Fascist movements rejected both the international economy and social
reform in pursuit of nationalist autarky. Out of this emerged two views:
- The West believed that liberalism had been wrong about the incompatibility of global capitalism and the
market with social reform. They wanted to prove that economically integrated market economies could adopt
equitable social policies, and that economic openness could go along with the new social democratic welfare
states.
- The East believed that liberalism was right about the incompatibility of integration and reform, that social
change meant rejecting global and national markets. They believed demand from poor people could only be
met by separating from world markets and by eliminating markets more generally.
Jeffrey Frieden, Global Capitalism, Chapter 12: The Bretton Woods System in
Action
- In August 1945, Western Europe was a half-century behind the United States; even after reconstruction, per
capita GDP in Western Europe in 1950 was equivalent to that of the United States in 1905.
- Between 1945 and 1973 the “First World” of rich democratic welfare states coalesced. In 1961 these
countries formalizes their club as the Organization for Economic Cooperation and Development (OECD).
- The industrial West rebuilt its political economies on the basis of compromise among nations, classes,
parties, and groups. Governments balanced international integration and national autonomy, global
competition and national constituencies, free markets and social democracy. The middle ground reigned at
home and abroad. The United States removed most of its trade barriers but accepted European and Japanese
protection. The Europeans negotiated an economic and political union that respected national differences.
- The postwar compromises grew out of the agreements signed at Bretton Woods in 1944, which can be
summarized as: international integration tempered by government concern for national constituencies;
markets tempered by social reforms; American leadership tempered by Western cooperation. The Bretton
Woods system delivered the goods: economic growth, low unemployment, and stable prices.
- Japan was the most dramatic success story: its output grew eightfold in just twentyfive years. Japanese
companies in the 1950s and 1960s spent one-half of all their research and development budgets to buy
foreign technology. The Japanese government supported manufacturers with tax breaks, subsidies, cheap
loans, and other assistance; and also encouraged firms to produce for export, especially with a very weak yen
that increased the good’s competitiveness. The domestic market grew spectacularly after decades of crisis
and war. By 1973, the second-largest market economy had made up nearly a hundred years in less than
twenty-five.
- Postwar economic growth was extraordinary everywhere, not just in Japan. The advanced capitalist nations
as a whole grew three times as fast as in the interwar years and twice as fast as before Word War I. American
growth was not slow, but Europe and Japan grew more rapidly.
- Western Europe and Japan caught up between 1948 and 1973 in part because millions of their people left
farming. Farm populations shrank to well below 10 percent of the total workforce on average. Labor moved
out of unproductiveagriculture into more productive manufacturing and services.
- American markets and capital helped reorient the world’s industrial economies. America’s conversion from
insulation to integration sparked a revival in world trade and investment, which drove a burst of growth in
Western Europe and Japan, which in turn contributed to the dynamism of the world economy, itself
reinforcing the trend toward global economic integration. The hopes of the designers of the Bretton Woods
system were fulfilled.
- European unification embraced the Bretton Woods compromises. It was the most ambitious trade
liberalization in history, eliminating tariffs among member States; it also improved the ability of European
business to compete internationally. Jean Monnet was the architect of such European unification, first with
the European Coal and Steel Community (ECSC) in 1952; and later, with the European Atomic Energy
Community (Euratom), and the European Economic Community (EEC), which opened for business in 1958.
- The liberalization of world trade was the first and probably most important achievement of the Bretton
Woods system. This took place without the organization planned to handle it, for the treaty creating the
International Trade Organization (ITO) was never ratified by the United States. The institution that took its
place, the General Agreement on Tariffs and Trade (GATT), itself came to be a pillar of the Bretton Woods
institutional order.
- Bretton Woods was a success in monetary relations too, even though the system only casually resembled
the plans of its founders. What had been designed as a multilateral system presided over by the IMF turned
into a dollar-based system with little IMF role. This order permitted, even required, governments to restrict
the shortterm movement of capital across borders. The system let countries run monetary policies in line with
their own conditions, even if they differed (within limits) from the policies of others, especially different
interest rates. The Bretton Woods monetary compromise kept currency values stable and currency markets
open to encourage trade and long term investment, but it imposed barriers to financial flows to permit
governments to follow their chosen policies.
- Long-term international investment, like money and trade, took directions not foreseen by the founders of
the system. The reconstruction mission of the International Bank for Reconstruction and Development
(World Bank) was displaced by the Marshall Plan and the unexpected rapidity of the postwar recovery.
Moreover, international investment did grow, but in the form of multinational corporations.
- International investment boomed after World War II for the same reasons trade grew so rapidly: economic
growth, monetary stability, reductions in barriers, and general government support. This investment took the
form of Foreign Direct Investment (FDI) for the following reasons: the rise of mass production and mass
consumption in many industries, which gave very large firms important advantages; and the persistence of
trade barriers.
- Bretton Woods allowed the sweeping liberalization of international trade and investment to coexist with a
sweeping extension of the public sector. Everywhere except Japan, the government protected citizens against
the vagaries of unemployment, sickness, disability, old age, and poverty. Postwar social spending may itself
have been a political prerequisite of economic integration. Where protectionism was not a viable option,
capitalists, farmers, and workers agreed on government programs to protect the victims of world market
forces. The social democratic welfare state was an integral part of the Bretton Woods system. It facilitated
political agreement, especially between labor and capital, on the desirability of international economic
integration. And while business prospered, the working classes also did very well. Societies became more
equal and poverty declined.
- The combination of the welfare state and the Bretton Woods order seemed to shoe that classical liberals,
fascists, and Communists alike were all wrong: Modern industrial societies could be committed
simultaneously to generous social policies, market capitalism, and global economic integration.
- The Bretton Woods system governed the international economic relations of the advanced capitalist
countries from World War II until the early 1970s. The industrialized nations turned away from economic
nationalism and conflict. But they did not return to the laissez-faire of the years before World War I, with its
presumption that the requirements of international success trumped the problems of unemployed workers and
struggling farmers.
Jeffrey Frieden, Global Capitalism, Chapter 13: Decolonization and Development.
Definitions and Abbreviations
Autarky: an economic policy or situation in which a nation is independent of international trade and not
reliant on imported goods.
ISI: Import Substituting Industrialization.
"As colonies achieved their freedom and the Latin American countries emerged from the enforced isolation
of the Depression and WWII, they struggled toward a new strategy for national development. The formula
adopted was economic nationalism…The developing countries and newly independent colonies closed
themselves to foreign trade and pursued rapid industrialization. (p. 301) "Between 1939 and 1973 developing
countries opted for inward oriented nationalist import-substituting industrialization." (p. 320)
•
1930's Latin America started down the path of import substituting industrialization. 3 waves of liberated
colonies followed:
•
1940's – Asia.
•
1940's and 1950's - Middle East and North Africa.
•
Late 1950's and 1960's Sub-Saharan Africa.
"All kept out foreign industrial products, boosted local production for local consumption, and promoted cities
and industries at the expense of the countryside and farmers. Even the handful of export-oriented countries in
East Asia achieved industrial development, relying on exports rather than import substitution. Almost all
these developing nations did well. Despite the undeniable excesses of ISI in many Asian and African
countries and even in Latin America, the 1060's were relatively food time. Economies grew; industrialization
sped along; living standards improved.
Import substitution appeared a successful economic concomitant to national political independence." (p. 320)
Highlights of Latin America's story of ISI - import-substituting industrialization
•
Latin America was transformed from a bastion of open economy traditionalism to a stronghold of
economic nationalism, developmentalism and populism. (p. 302)
•
•
In 1929 Mexican exports were 15% of Mexican output, in 1950 they were 3.5% (p. 303).
A major component of ISI was trade barriers. By the early 1960's tariffs on manufactured imports averaged
74% in Mexico, 84% in Argentina and 184% in Brazil. (p. 304)
•
Government's also provided subsidies and incentives to industry including tax breaks, cheap credit,
preferential access to imported good, parts and raw materials. They even manipulated the currency to provide
cheap dollars to manufacturers. (p. 304)
•
Like Western Europe, Latin American Government took over much of the industrial plant - railroads,
shipping lines, telephone networks, and electric power systems. But, Latin American Government also
owned the steel mills, chemical factories, oil wells and refineries, mines and smelters.
•
From 1945 to 1973 Mexico's industrial production quadrupled and Brazil's increased eightfold.
Highlights of the Collapse of Colonialism
•
By 1965 colonialism had collapsed (see top of page 307 for list of countries) because
1) After 1914 those who wanted to modify or reject the classical colonial economy grew continually in
wealth, power and influence.
2) Global problems had isolated colonies from the world economies, impeded the export economy,
stimulated urbanization and industrialization, and built up local business and middle class interests.
3) Interwar years' economic difficulties weakened supporters of colonial rule.
4) The threat of anti-colonial uprisings was a break on great power ambitions.
5) Economically the importance of colonies diminished after the war as
Europeans foreign investments shifted away from raw materials toward manufacturing.
6) America's insistence (pp. 308-309)
Highlights of India's story of ISI - import-substituting industrialization (pp. 317-319)
•
The nationalist reorientation of postcolonial economies led rapid industrialization. Government shifted
resources and people from farming and mining to manufacturing, the countryside to the cities. India's
economic policies were similar to conventional Latin-American-style import-substituting industrialization.
The Government implemented trade protection, subsidized credits, and tax incentives.
•
Unlike Latin America Nehru implemented Soviet style five-year plans emphasizing investment in
infrastructure and basic industry. From 1951 to 1966 the government made half of all industrial investment
and half of that went to the steel and iron industries. Highlights of Third World story of ISI - importsubstituting industrialization (pp. 317- 319)
•
Most of Africa and Asia grew at 2 or 3 % a year per person after decades, perhaps centuries, during which
growth had rarely, if ever, been above 1% per year.
•
The extreme turn to ISI in countries with little industry to start was due to:
1) Ideologically, industrialization was closely associated with sovereignty, just as export economy was
associated with colonial rule.
2) Urban interests supported the transition
3) Rural opposition
Josh Downer
World Bank, Economic Growth in the 1990s: Learning from a Decade of Reform, Chapter 2, pages 3143.
Events of the 1990s: Disappointments and Pleasant Surprises
This article explores which events of the 1990s defied forecasts. It does so by measuring the events of
the 1990s against the “conventional wisdom of the mainstream of development economists”, based on
the World Bank’s 1991 World Development Report.
On this basis, the 1990s produced 5 disappointments and 3 pleasant surprises.
5 Disappointments:
1. The length, depth, and variance across countries of the output loss in the transition from planned to
market economies in the former Soviet Union (FSU) and Eastern European countries.
a.
The transition recession was substantially larger than the US Great Depression and it will likely
take the countries more than twice as long to recover as it did for the defeated countries after WWII.
b.
There is large variation in the depth and length of the transition – a large part of which has to do
with the speed and depth of policy reform and the suitability for capitalism.
2. The severity and intensity of the international and domestic financial crises in East Asia.
a.
The crisis in East Asian countries was surprising because it did not share the characteristics of
many previous exchange rate crises: slow growth or declining output, large and growing public sector
fiscal imbalances, large public sector indebtedness, or obvious substantial and persistent overvaluation
of the currency
3. Argentina’s financial and economic implosion after the collapse of its currency convertibility regime.
a.
The convertibility plan’s initial successes had suggested that longevity was possible. The plan
succeeded in reducing rapid inflation and initiating a boom in the early 1990s, and it weathered the
aftershocks of the Mexican crisis reasonably well. The plan was popular domestically and praised
internationally during nearly all of the 1990s.
4. The weakness of the response of growth to reform, especially in Latin America, and the unpopularity
of many of the reforms.
a.
It was thought that the substantial and painful first-generation economic reforms—
macroeconomic stabilization,fiscal austerity,trade liberalization,privatization—would pay off with rapid
growth and poverty reduction, but growth has been disappointing.
5. The continued stagnation in Sub-Saharan Africa, the paucity of success cases there, and the
apparent wilting of optimism around the “African Renaissance.”
a.
Despite declared good intentions, a historic process of debt relief, continued unprecedented
levels of official assistance, pressure for policy reform, and promising developments in governance, no
widespread and definitive take-off has occurred. Living standards and real incomes have declined
precipitously in many countries. South Africa and Nigeria are particularly disappointing.
3 Pleasant Surprises:
1.
a.
Sustained rapid growth, especially in China, India, and Vietnam, throughout the decade.
These countries have drastically reduced destitution and poverty.
b.
The Asian countries don’t represent the traditional view because their reforms were gradual, their
policy and institutional changes were “far from perfect”, and growth had slowed in the late 1980s.
2. The strong progress in noneconomic indicators of well-being in spite of low growth in some cases.
a.
Basic education and child health have continued to improve
3.
a.
The resilience of the world economy to stresses.
Overall global economy allowed for reasonably stable growth in exports from developing
countries
b.
Capital flows were resilient
c.
In many instances, recoveries from crisis were rapid
Growth forecasts correctly predicted the rough direction but overestimated growth for Sub-Saharan
Africa, Latin America and the Carribean, Eastern Europe and Central Asia and underestimated for India,
South Asia, China and East Asia.
Monetary and Financial Reform in Two Eras of Globalization
Barry Eichengreen and Harold James
Kind of comparative study of late 19C and late 20C mon pol
HYPOTHESIS: reform consensus likely to come about when it is seen by most as essential in order
to defend/maintain the global trading system
o
Usually, International Monetary (IM) and financial system evolve in a gradual and decentralized
manner in response to market forces
o
Major and discontinuous reform essentially only happen when “problems in the monetary and
financial system are seen as placing the global trading system at risk.”
o
Disruptions to capital markets that do not threaten the overall system have less of a tendency to
catalyze reform
Capital markets viewed as “benign” in 19C
o
19C: int’l econ policy limited to supporting regime in times of crisis
o
1930s: controls slapped on after capital markets malfunctioned due to international policy
inconsistencies
o
after 1945: internationalism revived: coordinate financial restrictions imposed by gov’ts---large
part of what went on
more faith in markets, now lots of questions abou things like moral hazard exacerbated by i.e. IMF
19th CENTURY
o
1867 conference called by Napoleon II, first attempt at reform of international monetary and
financial system (IM&FS)
o
many wanted common monetary standard, some even standard coinage
o
standardization became “all the rage” in many ways
o
monetary arrangement around which standardization should take place was less clearly agreed
upon
o
IM&FS moved mainly on momentum, not agreements
o
New world order born when three most major industiral countries adopted the gold standard
o
Other element of framework: national central bank; functionalist response to industrialization and
financial deepening
o
Stability of this regime should not be “overstated,” though
o
There were crises then too; cooperative management was general tool to protect it
WWI to Great Depression
o
First major reform efforts 1920 Brussels, 1922 Genoa; lots of delaing for forex depreciation
o
“exchange dumping” became devastating for i.e. Great Brittain
o
Genoa experts pushed for stopping currency depreciation: restore gold convertibility, indep. central
Bank, fiscal discipline, cooperative management, starting new banks, and financial assistance.
o
Growth of IM&FS evolved, it did not revolt; evolution not revolution
o
Overall mixed consequences
o
Some problems with enforcement, parties to agreement lacked mechanism for encouraging
adherence to standards
o
League of nations system had no multilateral organization with the requisite capacity— if no USA
Biggest drawback
o
First “world bank” referred to as BIS; very limited freedom; not much money
o
BIS then confronted by a world financial crisis of unimagined proportions
Lots of people tried to make lots of little changes to BIS; not much happened
o
In sum, the BIS lacked the finances and leadership to cope with a crisis of such enormity. There was no consensus regarding
its role and a reluctance on the part of the creditor countries to finance its operations. Its shareholders were divided, and no
country had the capacity to impose a coherent vision. The BIS therefore retreated into the safer world of data dissemination. It
failed to do anything to prevent a major crisis and was out of its depth in dealing with the consequences.
1930s
o
attempt at crisis management failed, but still had hope that int’l community would draw
constructive lessons
o
world economic conference failed 1933, too many parties disliked things that were going on in the
lead-up; Roosevelt was a big part of this in that he refused to force a stable dollar
o
thus, proposals for monetary and financial stabilization as a way of rebuilding world trade met with
very limited support
Bretton Woods
o
Keynes started to decide that multilateral negotiations btw. Gov’ts of relatively equal influence
could not be expected to succeed, could only be realized at the insistence of “a singe power or likeminded group of powers.”
o
Lop-sided bilateralism, US over UK
o
There was more consensus re: econ. Basis of the new world order
o
Why SUCCEED?
It was different
No immediate crisis
Significant pressure for settlement
Met just after Allies landed in Normandy, possibility of end in sight for WWWII
Conference structured re: priority: reconstruction of trade
After Bretton Woods
o
This kind of reform is rarely swift
o
Disintegration of Bretton Woods—a number of stories
Monetary order needed to be modified to avoid trade war
o
Switch from “system of stable rates” to “countries committed to maintaining a ‘stable system of
rates’”
o
Failure of radical reforms, meant absence of consensus on necessary directions
o
mid-1980s: most active phase of monetary and exchange rate coordination after B-W
o
nothing addressed the explosive growth of capital flows
o
financial crisis of early 1980s shocked international trade pretty badly
o
by end of 80s, IM stability and FX stability were still largely regarded as synonymous
The 1990s
o
Rapid growth of international financial transactions, integraton of developing countries into world
economy, info, comm., sat tv, cellphones, internet
o
Influencing the new market was no easy task
o
Capital flows, in part, highlighted weaknesses in domestic financial systems
o
Capital flows growth complicated efforts to operate crawling bands and exchange rate target
zones
o
IMF in search of an anchor for macro policy and focus for its advice,e specially re: monetary
o
IMF started attaching policy/political conditions into loan systems. Mexico was first test 1994-5
o
Asian crisis 1997-8 and repercussions, espec. In Brazil but also globally
Reform for the future
o
There is little consensus on desirable directions for reform, partly reflectant of disagreement and
confusion over the nature of recent crises
o
U.S. and European officials, who embrace the view that the Asian crisis was a product of flawed domestic financial systems
and drew the lesson that such problems can put global stability at risk, have placed at the top of the international agenda measures
to upgrade financial-market governance and supervision.
o
The vehicles for doing so are international financial codes and standards for everything from auditing and accounting to
bankruptcy, insolvency, and corporate governance.
o
Strengthen IMF surveillance of capital markets in partic.?
o
Trading system has shown itself pretty resilient despite all the blows (mke:……..)
o
No country today possess the financial power and political leverage of the US
o
Still calls for serious reforms, some inter-regional
o
Why does adherence to a particularly inefficient London matter us?
o
Unprecedented levels of fiscal integration
o
Absent a u-turn away from financial integration, which we think is unlikely, this
approach to buttressing financial stability, organized around standards for areas extending well
beyond the monetary, is likely to remain the focus of reform efforts for the foreseeable future.
GOOD SUMMARY CHART
Diane Guite
Arvind Virmani, A Tripolar Century: USA, India, China.
http://www.icrier.org/pdf/wp160.pdf
This paper is analyzing the economic basis of national power, which they believe to be a defining aspect.
It concludes that the current unipolar world will be transformed into a bipolar world during the first quarter
of this century and into a tripolar one (China, USA, India) during the second quarter of the century. It
recommends the establishment (with the goal of peace) of an Asian Economic Community (with a core of
Japan, China and India) and a balanced Indo-US partnership (which will require changing the minds of
current leaders on some issues).
Economics of Global Power
-state power - “combination of [a state’s] capacity to resist the unwelcome influence of others and conversely
to influence others to behave as it wants them to”
-The relative power of nation states will depend on the relative size of national economies. The size of
country’s economy is measured by GDP at purchasing power parity. Therefore, in determining who will be
powerful, the following matter: (1) current gdp per capita, (2) growth rates and (3) population.
- Growth rates depend on the transfer of technology (knowledge) from the developed countries, and its
adaptation, application and diffusion.
- Growth rates of economies will slow as they get relatively wealthier and the possibility for catch-up growth
is exhausted. Then size will matter most.
- India and China (huge populations) projected to have growth rates in top 5 of the world. Their relative
power will rise. Question: How quickly?
Power Potential
= (GDPj/GDPu)*(PCgdpj/PCgdpu)a
- Ratio of gdps multiplied with ratio of per capita gdps (weighted to technology)
- Coefficent “a” represents how freely technology transfers. a=0, perfectly freely. Not true (e.g. Defense and
Strategic Technologies). They use a=.5, assuming military power is not of utmost importance in this age
(economic power important too) because: (1) wars are economically costly, (2) conventional warfare in
nuclear world is less important, (3) non-state actors also make conventional warfare less important.
- Actual power is different than potential power, especially because of (1) desire for power (e.g. post war
Japan vs. current China), (2) allocation of revenues (e.g. strategic use vs. environmental uses), (3) alliances
that transfer technology
Soaring Eagle: Unipolar Moment
- “The USA has been the sole super power since the collapse of the USSR and remains so today, even in
terms of ‘power potential.’”
- India and China in top 10 (unless we consider a=1: military power, aka technology that does not transfer, is
very important)
- Stressing that economic power is important in national power
A Tripolar World
- By 2025, China joins US. By 2050, India too. Driven by: income convergence
- India and China higher gdp at PPP than US by 2050 and more relative power than US by 2075
- “Quality of relations between India, China and the USA will have an important bearing on peace and
stability in Asia and on economic prosperity generally.”
- “China will almost certainly challenge USA’s economic power in Asia and across the globe and likely be
much more unabashed in asserting its economic claims in the South China Sea and its economic interests in
Asia, Africa and Latin America.”
- By the end of the century, India will be as powerful as China. Must have good relations now! (1) settle
border dispute, (2) a credible policy regarding nuclear proliferation to countries ill disposed towards India,
(3) inclusive regional economic agreements
- China will be strongest. “As India and the USA share fundamental human, social, institutional and
democratic values, it will be in the interest of the USA to ensure that the economic and technological gap
between India and China is closed as rapidly as possible so that India can act as a stronger pole in Asia.” US
needs to offer: (1) free trade, (2) abandonment of the nuclear apartheid, (3) strategic partnership, Europe may
play role too
- If Japan does not stay so pacifist, it could play a role in ensuring Asian peace (ironically) and helping India
catch China. Russia can help too.
- If technology parameter weighted at 1, tripolarity happens (just a little later).
China
- Sustained annual growth of 7.5% over 25 years, it will slow now but not stop.
- “Socialist market economy” explanation (p. 22)  low tax rates, high investment rates
- Promotion of export-oriented and technology-oriented FDI
- Cons: comparative advantage in labor-intensive goods (because of absence of labor laws), not as much CA
in non labor-intensive goods, bad income inequality
- Socio-political explosion collapsing growth? They think chance is less than 15%.
- 10% chance high growth continues and they become sole superpower.
India
- They predict “a steady rise in the underlying growth rate of the Indian economy over the next 10 years.”
(1) IT sector will factor more into gdp growth, (2) the un-exploited potential of foreign direct investment
(so far mostly, domestic investment and entrepreneurship), (3) India will become a more attractive location
for low & medium scale labour-intensive manufactured exports as China gets more rich and is forced to
adopt labor laws, (4) demographic change (the supply of labor rising faster than population), (5) underutilized pool of high IQ people, (6) democratic system and free media, (7) diverse backgrounds and facility
with English
- Income distribution has not worsened significantly during the high growth period 
- Will India have a will to power?
The EU
- Will a unified EU have economic clout equal to US? How much will for power?
- Member states will not surrender individual power.
- If soft power trumps military power in 21st century, EU may become pole. Otherwise, not.
A Partnership for Peace
- “The advanced democratic countries (EU, Japan, US) must consider how to ensure
a stable balance in Asia”
- US should partner with India. “natural allies”
- Asian Economic Community in the interest of peace and stability in Asia
Robert Kaplan, “The Coming Anarchy” The Atlantic, February 1994
http://www.theatlantic.com/doc/199402/anarchy/8
The Last Map
What will future maps look like?
-3D with groups/identities overlapping atop the 2D city-state and nation borders
-Fewer nations remaining, those that remain blurred by drug cartels, mafias, and private security agencies
-Constantly and quickly changing
-Centers of power and buffer entities more so than traditional boundaries
-“an ever-mutating representation of chaos”
India
-one democracy for India unlikely to work: too many people, religions, languages
-using up resources, esp. water
Pakistan
-“makes no geographic or demographic sense”
-no cohesive national identity, ethnic group conflict
-necessary irrigation, deforestation, growing population
-likely to “fall apart”
Climate changeeven more drastic problems
-1 billion people living on land that will be eroded or drastically changed
-In Egypt could lead to religious upheaval
-Many political systems "depend on the underpinning of natural systems”
United States
-Multi-ethnic society makes the nation-state fragile
-Patriotism simpler when every male served in military, education is similar for everyone, all take cues from
political leaders (e.g Germany, Japan)
-1960s in US marked transformation towards racial polarity, educational dysfunction, social fragmentation of
various kinds
-West Africa’s fate could perpetuate stereotypes in US
-Peaceful dissolution of Canada predicted by author
-More regionalism in general (Montana w/ Alberta, Southwest w/ Mexico City)
Border separating West Africa from the outside world becoming more impenetrable, including strict security
procedures and not much travel to and from—this will be important in future of the world
Yifan Zhang
Kenneth Scheve and Matthew Slaughter, “A New Deal for Globalization”, Foreign Affairs 2007
Wages Falling, Protectionism Rising
Less than 4% of workers saw real earnings rise from 2000-05
Even college graduates are hurting, only graduate or doctoral degrees see income rise
Result is protectionist public, strongly linked to labor-market performance
Existing solutions – more investment in education and more trade adjustment assistance – are
not adequate
Need New Deal for globalization – more progressive taxes and substantial redistribution
Rising Protectionism
2007 Congress introduced 27 anti-China trade laws
Barriers to inward foreign direct investment (FDI): Chinese energy company CNOOC for Unocal
and Dubai Ports World to operate US ports
Doha round near collapse
France, Germany, and China more averse to foreign investment
Numbers show benefits of globalization
US gain $0.5-1 trillion per year, $1650-3300/year/American
Doha add another $500/year for US
Rate of increase in output per worker 1.35 to 2.7% after 1995
China and India see huge gains to globalization
Three unconvincing explanations for why protectionism is rising despite numbers
Narrow set of industries adversely affected and strong lobbiers (agriculture, apparels), face more
receptive audience today – but this hasn’t changed in recent years and others lobby for globalization
Policymakers don’t explain benefits of globalization – but Americans acknowledge benefits
Need to balance security and economic interests – but liberalization of trade should help stability
Real roots of protectionism
Public is more protectionist bc incomes are stagnating or falling, uneven distribution
Strong link btw individual labor-market interest and policy opinions
In past years, labor-market has been worse for more Americans, blame globalization
Less education = more opposition of trade, FDI, and immigration
Rising inequality in incomes and productivity
Americans know benefits but also recognize costs of globalization
Skill level rather than industry that determines opinion of globlalization
Worsening labor-market outcomes recently, especially for poor
Inequality – productivity and income benefits only to small set of highly skilled workers
Increasing disillusionment with globalization
Inadequate adjustments
Beyond social equity, need to adjust so protectionism doesn’t eliminate gains of globalization
completely
Trade Adjustment Assistance (TAA) focused on helping displaced workers in certain industries
hurt by trade, but protectionism is not limited to industries
Want to broaden scope, but still not enough
Education is too slow, 60 years to boost college graduates from 6-33%
Inequality in who goes to college
Globalization and redistribution
Instead of changing already progressive income tax, can change payroll tax for social insurance,
which is flat, capped tax and therefore highly regressive
Eliminate social insurance (Social Security and Medicare) taxes for those below median income
and increase cap for higher income group; cuts $3800 for working class member per year
Save $500 billion from protectionism drift
Saving globalization
Delicate balance between allowing global companies to general large overall gains for US and
using fiscal mechanisms to spread gains more widely
Data suggest more support for globalization if linked to support of those hurt in process
Mankiw – Gains from trade
Gains from trade obvious when each side is better at making something, like meat or potatoes,
but wants to enjoy both, but what about if both are better at making potatoes?
Look at production possibilities curve (PPC) – showing how much of potatoes and meat they can
produce with limited time and energy
What point they are at on PPC depends on preferences
With trade, both can consume more than on their PPC
Absolute advantage – when one producer requires smaller quantity of inputs to produce a good
Comparative advantage – when one’s opportunity cost (what one gives up if one uses inputs
to create something, i.e. meat if one grows potatoes) is lower than another’s
Opportunity cost of one thing is inverse of the other, so one cannot have comparative advantage
in everything even if they can have absolute advantage in everything
As long as comparative advantages are unequal, trade will benefit everyone
Applications: Tiger should not mow is own lawn (bc mowing one lawn costs him a $10,000 ad)
and US should trade with others even if we have absolute advantage
Rares Pamfil
Adam Smith – The Wealth of Nations – Book IV, Chapter 2
“Of restraints
upon the importation from foreign countries of such goods as can be produced at home”
The chapter encourages the liberalization of trade based on the principle of comparative advantage.
Much of the wording from this summary comes from the sidenotes in my Modern Library edition of the
Wealth of Nations.
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High duties and prohibitions giving a monopoly to a particular home industry are very common
They encourage the particular industry, but neither increase general industry nor give it the best
direction.
High duties and prohibitions direct people to employ capital in producing at home what they could
buy cheaper abroad
It is as foolish for a nation as for an individual to make what can be bought cheaper
Sometimes by such regulations a manufacture may be established earlier than it would otherwise have
been but this would make capital accumulation slower, and the country might always be just as rich if it
never acquired the manufacture
No one proposes that a country should strive against great natural advantages of other countries, so
why go against smaller advantages?
No one suggests growing grapes to make wine in Scotland, because it would cost about thirty
times more to make the same wine there than it would to import it.
Merchants and manufacturers get the most benefit from high duties and prohibitions.
There are two cases which are exceptional:
Industries which are necessary for national defense (he gives the example of shipping)
When there is a tax on the manufacture of that produce at home
This tax does not give a monopoly to the home industry but in reality it often comes
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with a matching (or larger) tariff.
Two additional exemptions on the principle:
Retaliation
When it is necessary to move to free trade gradually
The dangers of abolishing free tariffs at once are exaggerated
Industries which export wouldn’t be hurt
People losing jobs would find other jobs soon, especially if the following were
abolished: the privileges of corporations, the necessity to do unpaid apprenticeships when entering a new
industry, and the law of settlement (prevented the movement of labor from one parish to another).
Private interests are two strong to allow restoration of free trade in Great Britain
Michael D. Bordo, Barry Eichengreen, and Douglas A. Irwin - Is Globalization Today Really Different
Than Globalization a Hundred Years Ago?
“This
paper pursues the comparison of economic integration now and then for trade as well as finance,
primarily for the United States but with reference to the wider world. We
establish the outlines of international integration a century ago and analyze the institutional and informational
impediments that prevented the late nineteenth century world from achieving the same degree of integration
as today. We conclude that our world is different: commercial and financial integration before World War I
was more limited. Globalization today raises new issues of governance not just because it is conjoined with a
political system which gives a louder voice to special interests, but because the economic phenomenon itself
is different: integration is deeper and broader than it was a hundred years ago.”
Note: most of the lines in the following summary are quotes from the paper.
Introduction
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some suggest that today's international integration is unprecedented but others say that before the two
world wars "markets were every bit as internationalized as today"
if we accept that integration was so ample a century ago, then why did it not create the dilemmas it
creates today?
three possibilities: there was more authority and control because of less democratization OR it
was because England was at the core of international trade, creating stability in trade and fostering an
ideological consensus OR was it that markets were not as integrated
or it might just be that the dilemmas that we face today were not absent a century ago. The situation
was not pink: think of how it all ended: in a big depression and a global financial crisis.
nevertheless, while there are things that the both worlds (past and present) have in common,
“integration is deeper and broader today than it was a hundred years ago”
Section 1 – trade is more important today
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While production of tradeable merchandise constituted a larger share of overall economic activity a
century ago, trade played a much smaller role in that production than today
today you trade a lot of components and intermediary products
Trade (international competition) and direct investments have opened up in previously “non-traded”
sectors, such as services, retail trade, and public utilities.
Section 2 – there was less commercial intercourse a hundred years ago because there were higher
transportation costs, government trade barriers, and information asymmetries.
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“Multilateral
trade negotiations, conduced under the auspices of the General Agreement on Tariffs
and Trade (GATT), helped to reduce average tariffs [from over 20%] to under 5 percent.”
Some areas zero-tariff: European Economic Community/European Union, NAFTA
Ability to communicate demand more quickly and monitor the market more closely, plus the rise of
multinational corporations that integrate industries across countries
Section 3 – there were as many trade tensions in the 19th century as there are today
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By 1914, pressure in the USA to restrict trade and immigration was more intense than today.
Reasons for tensions: cyclical instability was worse, and there were little or no forms of social
insurance (no unemployment or adjustment insurance). People lobbied for higher tariffs because shocks were
felt more badly
Sections 4 – long-term capital flows were large in volume but – just as in the case of trade – limited to
narrow sectors of the economy. Short-term flows were very much lower relative to the size of the world
economy. (I know this will only make sense to some people, I’m not one of them)
Section 5 - there were lower levels of financial integration because information did not travel so quickly,
contracts were more difficult to enforce over larger distances and there was greater macroeconomic risk
(exchange rate risk, unstable and uncertain monetary and fiscal policies). There were also no common
auditing and accounting standards (eventually British lenders started requiring reports by British accountants
and this led to the diffusion of common accounting principles).
Section 6 – Financial crises: the crisis phenomenon is hardly new, but there are some new and distinctive
features of recent crises.
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The drop in output following their outbreak is more dramatic.
For currency crises, the subsequent recovery is slower (the gold standard “resumption rule” helped
stabilize economies quicker).
In this respect as others, there are aspects of our current age of globalization that are both unprecedented and
disturbing.
Section 7 – Conclusions
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the globalization of commodity and financial markets is historically unprecedented.
Given the higher level of integration, it should not surprise us that there are tensions and instability
The surprise is that these problems are not worse: perhaps international institutions help
“The financial safety net may create moral hazard, but it at least prevents financial
catastrophe.”
Things have also been stabilized because of better accounting and auditing principles.
Will Houghteling
Why Globalization Works by Martin Wolf:
“Chapter 6: The Market Crosses Borders”
Chapter starts off with a quote from Adam Smith that gives some basic intuition behind theory of
comparative advantage.
Author discusses how his own work, commentating on the world economy, is part of global economy
and is read all over the world despite his station in England.
3 Differences between transictions within borders and across borders:
1) Economic differences: there are gov’t regulations to across-border
2) Political difference is that more than one legal jurisdiction is involved
3) Value difference is that the benefit of non-residents is never taken into account
Natural tendency of markets to corss borders conflicts w/ states’ desire to define borders
There are many restrictions on the movement of goods, products and services. Trade liberalization is
not an all or nothing process—many different ways to change restrictions.
JS Mill argued 3 general categories of trade benefits;
1) Direct advantages: benefits from economies of scale and comparative advantage.
2) Indirect advantages: dynamic gains: productivity and competition growth.
3) Intellectual and moral: facilitates growth and (often) brings democracy (south korea, Taiwan, chile)
Liberal trade is good---obstacles need to be weakened:
1) Capital: Some argue that free capital mobility proves problematic for national economic
management. Rather, control of capital is first step to despotic or economically destructive regimes.
Threatens basic human freedom. Also efficiency reasons (risk spreading, shifting consumption, higher
returns) for free movement of capital. There arevery low levels of capital shifting/invested in developing
countries b/c of low confidence in the probity and effefctiveness of the gov’t and legal systems and
problems w/ human capital deficiencies. These are problems but not insurmountable barriers.
2) People and geography: Capital rich countries offer higher returns on capital and have higher wages.
Simplest thing we can do to eliminate mass poverty is allow ppl to move freely for higher wages (not
supported in high-income countries). Second implication is that geography matters more than ever
before—richer countries can invest more in skills, more returns to increased skill, and more ability to
guarantee mkt productivity.
3) Getting policy right: policies meant to aid emerging mkts (infant-industry mkt) often are detrimental
b/c 1) they limit the mkt to domestic consumers and 2) protects from world’s most potent competitors.
Political aspect: liberal unilateralism vs. liberal internationalism:
Liberal unilateralism (everyone enacting liberal trade laws) is best for countries that do it but hard to
convince public of.
Liberal internationalism (reliance on agreements w/ other gov’ts to establish a secure liberal
environment) are a good stepping stone to more liberal world mkt.
The best choice is to limit international agreements to the essential and mutually beneficial (ppl cannot
gain benefits of liberalization unless they loosen restrictions) themselves. Critics argue that these trade
deals limit sovereign power.
Conclusion: trade in goods and services is beneficial. trade in capital would help as well , particularly
direct investment to poor countries.
Rich Nations Criticized for Enforcing Trade Barriers
NYT. Edmund Andrews. September 2002
At annual meetings, IMF and World Bank continued to push poor countires to stimulate business:
private industry, improve financial management, embrace free trade.
Many ppl within and outside organizations critized the rich countries for hypocrisy because they
maintain barriers to imports (particularly agricultural and textiles)
Pres of WB critized wealthy countries of wasting $1B/day on food subsidies that hurt farmers in Latin
America and Africa.
Oxfam also critized heavily, particularly citing pain of cotton subsidies for African economies.This right
on the heels of $100B Bush farm subsidies
Average cow in Europe gets $2.50 a day in subsidies. Avg cow in Japan gets $7. Avereage person in
Africa lives on $2 a day.
USTR Zoellick presented bill to drop subsidies that asked for Europe to slash more than US. IMF tells
the US to drop its subsidies but b/c US doesn’t borrow any money from IMF it doesn’t have to listen.
Elyse Schoenfeld
Understanding economic policy reform
Dani Rodrik
reform requires strict policies which respect budget constraints and precludes compromise with
special interest groups
remarkable amount of convergence has recently existed on what constitutes an appropriate
economic strategy
o
emphasizes fiscal rectitude, competitive exchange rates, free trade, privatization, undistorted
market prices, and limited intervention
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economists are torn between 2 different perspectives
o
good policy should produce favorable outcomes and be good politics
o
implementation of good economic policy is often viewed as requiring strong leadership
 often good policies become good politics, but a lag exists before people realize the policies are
favorable
The events of the last decade have underscored the need to understand the political-economy
of policy making
Consequences of the 1982 global debt crisis was a wave of market-oriented economic reforms
in Bolivia, Mexico, Argentina, Peru, Colombia, Chile, Asia, Africa, Eastern European countries
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Questions
o
Why massive reforms occurred after decades of adherence to different policies which were
dysfunctional and maintained for so long
o
While reforms were inspired by the East Asian experience, went beyond those taken there- did new
reformers internalize correct lessons from E. Asia?
o
Are there helpful rules for reformers to follow in getting policies approved?
The New Orthodoxy in Development Thinking and Enduring Puzzles
the Third World used to follow import-substitution policies because the goal of economic policy
was to develop domestic manufacturing capability for goods previously imported
o
focus on import controls, overvalued exchange rates, price regulation
o
urban over rural interests
o
in order to promote industrialization and in light of ideas in the 1950s/60s which dismissed benefits
from trade and the possibility of government failure
government failure occurred as East Asian economies were becoming highly successful through
pursuing trade policies
o
Success from market-oriented policies and the reduced role of government intervention (compared
to Third World countries
New idea of economic policies developed from failure of import-substituting countries and
success of trade policies pursued by East Asia
In lumping policies under import-substitution policies, failures were often misattributed to
microeconomic policies, when their sources lay either with unsustainable macroeconomic policies or
bureaucratic and institutional shortcomings
Generally, the countries that experienced a debt crisis in 1982 were those that failed to adjust
fiscal/monetary policies, not those with poor microeconomic policies
o
Ex. Mexico’s currency crisis proposed by macroeconomic, not microeconomic failures
Africa
But import-substitution policies blamed for debt crises which led to reforms Latin America,
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Many governments established reforms that went beyond those enacted in East Asia
o
Reforms called the “Washington consensus” by Williamson, are the set or reforms called for in the
first stage of policy reform
South Korea followed 5, Taiwan 5, with both countries managing fiscal expenditures and
revenues rather well, avoiding macroeconomic stop-go cycles and high inflation- largely maintained
conservative fiscal policies and competitive exchange rates to avoided macroeconomic instability
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Latin American countries largely completed the Washington consensus in the 1980s
How did East Asian countries avoid economic disaster through interventionist microeconomic policies?
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Trade protection, industrial policy worked here when it failed in other places
There was “something special about the ability of the Taiwanese and South Korean policy
makers to discipline their private sectors and their bureaucracies-an ability to which the label of
"strong" or "hard" state is often attached”
May be because of initial conditions of East Asian countries- better educated labor force which
increased ease of establishing a competent bureaucracy, and distribution of income was approximately
equal which may have led to better governance
Crisis and Reform During the 1980s/90s
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in 1980s a debt crisis engaged most of developing world
ones
many countries moved away from import-substitution policies and embraced market-oriented
at first governments responded to crises by tightening restrictions but later engaged in reform
(in Latin America, then Eastern Europe, former Soviet Union)
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Crisis instigates reform
o
A crisis is an extreme form of policy failure, so not surprising that crises lead to reform
o
Possible that the lower the degree of cohesion in society, the greater the delay before stabilization
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Policy reforms initiated by crisis atmosphere, allowing policy makers to set the agenda
o
Reformers could package fiscal reforms(seen as crucial for return of price stability) with
trade/industrial policy reforms which were seen as desirable in the long run but secondary to immediate
crisis
o
The package contained micro and macro elements, people who supported the macro changes had
to go along with the micro ones which enabled many reforms to be passed
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Reforms become sustainable when they generate “winners” with a stake in their continuation
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Belief that reforms make things worse before they make things better
o
Experience in Israel, Mexico, Argentina shows not true- exchange rate changes associated with
consumption booms and not recessions
Foreign aid should help reforms get launched by alleviating the supposed short-term costs of reform
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This is the justification for the World Bank’s and IMF’s structural adjustment lending
o
But logic is unassailable because external resources reduce the costs both of reform and of doing
nothing
o
Prospect of aid can exacerbate delay in stabilization by inducing groups to postpone making
sacrifices until aid materializes
o
Thus effect on reform ambiguous
o
Jeff Sachs is a huge proponent of foreign aid, says a government needs to be committed to reform
before aid can be helpful, but once such a government is in place the international community should
provide aid
o
But aid can also help bad governments survive
Examples of association between plentiful aid and delayed reform
o
wisdom about the Korean and Taiwanese reforms of the 1960s is that reforms took place largely
because U.S. aid was coming to an end
o
Sachs would say donors must ensure governments will undertake reforms before giving cash
Need conditionality before providing aid
In Search of a Manual for Reformist Politicians
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Williamson notes that there is no way to generalize reform process for countries
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Rational electorates will reject a reform which will benefit the majority
o
Uncertainty about consequences of reform at the level of the individual can prevent reform even if
it is acknowledged reform will make a majority better off
The Political Economy of Trading States: Factor Specificity, Collective Action Problems, and
Domestic Political Institutions
James Lat and Michael Gilligan
trade offers cheaper goods with more choice, but also is disruptive to people’s lives because it
ties their incomes to international markets
trade affects distribution of wealth within the domestic economy and aggregate domestic
welfare and distributions of wealth among national societies
Conflict over trade reflects the trade policy coalitions that form around shared interests in
liberalization as opposed to protection
o
Balance between coalitions in support of and against free trade creates demand by society for
trade
o
Problem for state of a trading economy may become weighing the good of the money(free trade)
against the good of the powerful few(restricting trade)
Collection Action from Pareto to the Present
-
collection action is a major component of explanations in trade policy
-
two problems of organizing or taking collective political action
o
excludability- because collective action is a public good, all members of a group benefit from acting
in favor of their preferred trade policy whether they contribute to the effort or not, members receive
less benefit from lobbying they par for and buy less than they would if they could not consume the
lobbying of others encourages free riding
o
o
cost of organizing
question of how policies which benefit a minority are enacted- two possibilities
may be a per person transaction cost in organizing groups
with fixed transaction costs, larger groups will find it more expensive to organize
easier for smaller groups to organize
o
if policy outcomes are likely, members of large groups with small per person stakes may think their
contributions will be insignificant and not contribute; members of smaller groups with larger stakes may
see their contribution as a bigger impact on a policy and make it
individual probabilities of deciding outcomes are larger in smaller groups, increasing benefits of
contribution
members of a smaller group make larger contributions, have a larger effect on deciding the
outcome, so benefits outweigh the costs
Brief Primer of the Stolper-Samuelson and Ricardo-Viner Models
Expected costs discussed above are a feature of the domestic political and economic environ,
affected by political institutions, factor abundance, mobility
-
Play role in determining demand for political outcomes
-
Two models help explain role of variables in determining preferences to form coalitions
o
Stolper-Samuelson Model
A change in the price of a product would more than proportionally increase the return to the factor
that is used in the production of the good
The incomes of owners of the factor would rise, giving them a stake in brining about that change in
prices
Increase in price of good leads to increase in real wage rate of labor and increase in real incomes of
laborers
In a capital-abundant country, labor loses and capital wins from freer trade
Protection of an industry will increase price of the good produced by the industry, leading to a
change in relative prices
Protection increases returns to owners of factors used in the protected good, reduces returns to
factors used less intensely in protected industry/more intensely in unprotected industry
 because factors are assumed to be mobile between sectors, owners of the same factor have the
same change to its returns regardless of whether it is employed in protected or unprotected industry
a country which is relatively abundant in capital will export capital-intensive products and import
labor-intensive products, opposite for a country relatively abundant in labor
in a capital-abundant country labor will favor protection because it can’t be used in exports, while
capital will favor free trade
trade policy can more than proportionally increase the real incomes of owners of the factor used in
the product
-
Ricardo-Viner Model
o
Factors of production are specific to a particular industry and when that industry declines they
cannot move to the rising industry
o
Assuming there are 2 industries, the export and import industries, and labor is a mobile factor that
can move between the two
If there is a relative price change from an increase in imports, the price of the import-competing
good decreases as a result of increased competition with imports
Production will also decrease and labor will flow out of the sector
However, the factor that is specific to the import industry needs to remain in the industry, and labor
is needed to produce the product, but labor becomes harder to get it as labor is flowing away from the
import industry
With productivity decline, income of specific factor in the import industry will fall relative to price of
the export good and the imported good and labor will flow into the export industry making factors in
the export industry more productive
Effect on owner of the mobile factor depends on the size of the reduction in wage rate and the share
of the imports and exports
If workers consume a lot of the import, their incomes will likely rise because their wages have risen
relative to the price of the import
Trade Policy Coalitions: Factor Specificity, Collective Action and Domestic Institutions
From models can infer preferences from the stakes facing them in potential situations of
collective action
From the Stolper Model: The scarce factor will favor restricting trade, and the abundant factor
will have incentives to favor liberalizing trade
o
o
Then, owners of abundant factor will favor liberalization while the scarce factor will favor protection
from the Ricardo-Viner Model
pro-liberalization groups will always include the specific factor in the export industry
o
where the export industry is labor-intensive and labor consumes relatively much of the imported
good, labor has an interest in liberalization as does the owner of the export factor
o
underlying logic- the factor that is politically advantaged is that which is specific to the good that
uses labor intensely, labor does not disproportionally consume that as well
Relationship Between Factor Mobility, Institutions, Collective Action Costs
-
policy outcomes partly determined by distribution of benefits
-
collective action problems also affects protection
o
three parts in collective action problems: those which relate to factor mobility or specificity; those
which relate directly to the nature of domestic policy institutions; all the rest
-
factor mobility affects collective action
o
mobility disperses benefits of any trade policy across all owners of a certain factor which leads to
non-excludability and opens up possibility of free riding
o
the more non-participants can be excluded from benefits, the easier it is to prevent free-riding,
which means factor mobility makes collective action harder
o
with no mobility, when protection is granted only to 1 industry, benefits of that protection go only
to the specific factors employed in the industry- thus, protection benefits are more excludable and freeriding is not an issue
o
political institutions- many possibilities for taking action on policy
action is taken directly by majoritarian voting (referendum)
to get a favorable outcome, need many supporters
Stolper-Samuelson model, where one’s interest depends on how large a share of one’s income is
derived from factors of production, interacts with majoritarian politics
If the majority derives most of income from labor, will be a standing majority ready to vote
for labor interests
o
outcomes depend on distribution of income
combined with level of development of economy, determines trade policy outcomes
a capital-rich country with capital concentrated among a minority should adopt trade restrictions
because the rest of the population would benefit
-
without majoritarian pressures, just need to convince a bureaucrat to enforce protection
o
don’t need support from the majority, don’t need to form interest groups to make sure the policy
benefits the majority because that would lower the per capita benefits within the group
majoritarian systems and factor mobility mean benefits are more dispersed which makes it
harder to organize a successful interest group
Collective Action Costs and Trade Policy Coalitions
-
Effect of costs of collective action
-
If hold institutional variable constant
High collective action accosts/mobile factors free riding, no trade policy coalitions since little
incentive to take costly political action to affect trade policy
-
Low collective action costs/mobile factorsurban-rural and class conflict
High collective action costs/specific factors Standard trade policy models, ideal type of trade
policy coalition where collective action problems exclude most of the public from participating in trade
politics, where individuals request protection for products
Low collective action costs/specific factors many interest groups, active consumers- industries
seeking protection for products are opposed by consumers, so any consumers might participate in trade
politics, encourages import industries to band together to go against exporters, but might lead to
instable coalition
Charts in this section are helpful
Effects of Institutions
-
domestic political institutions affect severity of collective action problems and trade coalitions
-
as costs of collective action increase, non-participation is more appealing
Conclusion
political factors including collective action costs and political institutions are likely to be just as
important determinants of trade policy coalitions as economic factors like abundance and mobility of
factors of production
Stolper-Samuelson Model requires collective action costs to be low for Rogowski’s broad trade
policy collations to emerge- with collective action problems and mobile factors, trade policy coalitions
will not necessarily form along class lines and may not at all because of collective action problems
More consistent with majoritarian mode of policy making
o
costs
o
Ricardo-Viner Model is more amenable to incorporation of various degrees of collective action
More consistent with a non-majority mode of policy making
Ramon Burgos
John Jackson, The World Trading System: Lant and Policy of International Economic
Relations, chapter 2.
2.1 - The Bretton Woods System and its context
The GATT as a treaty never came into force. the principal governmental organizations concerning
economic relations include the IMF, the IBRD and the GATT. These institutions comprise the Bretton
woods system. There are also many other economic organizations, and there are several categories for
this myriad of organizations. it is complex, constantly changing, and furnishes both pitfalls and
opportunities for constructive diplomacy.
2.2 - The Flawed Constitutional beginnings of the GATT
Trade rules have been developing since early times, from Greek city-states to various Congresses.
modern agreements began in the late 19th century.
the major initiatives leading toward the GATT were taken by the US during world war II, in cooperation
with its allies, particularly great Britain. political leaders of ht U.S. and elsewhere made statements
about the importance of establishing postwar economic institutions that would prevent mistakes from
recurring. Bretton Woods conference was held in 1944. devoted to monetary and banking issues.
established the charters of the IMF and the World Bank.
The united nations and preparations for an ITO: 1945-1948. the history of the preparation of the GATT
is intertwined with that of the preparation of the ITO charter. The GATT was not intended to be an
organization, just a mere treaty.
The GATT and the Protocol of Provisional Application (PPA). Through the PPA, GATT is applied as a
treaty obligation under international law. There is some history associated with this, but that is the
main point.
The GATT fulfills the Vacuum: since the ITO never came into being, a major whole was left in the fabric
intended for post-World War II international economic institutions: the Bretton Woods System. it was
only natural that that institution which did exist - the GATT - would find its role changing dramatically
as nations turned to it as a forum to handle an increasing number of problems of their trading
relationships. More countries became contracting parties. They met every six months, for several
weeks, discussed wide ranges of problems including disputes about the implementation of GATT rules.
2.3 The obligations of GATT and Their Legal and Institutional Setting
What are the Rules? Gatt Obligations and code of conduct. central obligations are tariff "concessions,"
by which contracting parties commit themselves to limit the level of tariffs they will impose on imports
from other GATT contracting parties. A second an central obligation is that of most favored nation
(MFN).
To whom do GATT obligations apply? private enterprises and subordinate government units. The
wording of GATT makes it reasonably clear that this agreement applies only to treatment of products
(and not services, for example). it is also reasonably clear that the agreement applies only to
government action, and not to actions of private firms or individuals.
2.4 The GATT as an organization: membership and institutional measures
despite the original theory of the draftsmen of the GATT that GATT was not to be an international
organization. since it is not an organization, in theory it doesn't have embers. the terminology issued
to emphasize this theory in the agreement itself is "contracting party". but today we can say
membership because of what the GATT as become. nations become GATT contracting parties by one of
two methods. the normal method requires a two thirds vote of approval by the existing contracting
parties for a nation to be accepted. the second path to membership provides that if a parent country
has accepted the GATT in respect of dependent customs territory, and if that customs territory later
becomes independent, such territory can become a GATT contracting party merely through sponsorship
by the parent country.
2.5 The GATT and the Trade Negotiation Rounds
GATT has sponsored several trade negotiating rounds.
Joseph Schumpeter, Can Capitalism Survive? prologue and pp 83-103.
Prologue
Author does not believe that capitalism can survive. the actual and prospective performance of the
capitalist system is such as to negative the idea of its breaking down under the weight of economic
failure, but that its very success undermines the social institutions which protect it, and "inevitably"
creates conditions in which it will not be able to live and which strongly point to socialism as the air
apparent.
IX- Growing Hostility
the social atmosphere of capitalism - the capitalist process eventually decreases the importance of the
function by which the capitalist class lives. The "bourgeois fortress" ultimately becomes politically
defenseless.
Sociology of the intellectual - there is a necessity for their to be groups whose interest it is to work up
and organize resentment, to nurse it, to voice it and to lead it.
X- Decomposition
Faced by the increasing hostility of the environment and by the legislative, administrative and judicial
practice born of that hostility, entrepreneurs and capitalists will ell eventually cease to function. Their
standard aims are rapidly becoming unattainable, their efforts futile. The most glamorous of these
bourgeois aims, the foundation of an industrial dynasty, ahs in most countries become unattainable
already, and even the more modest ones are so difficult to attain that they case to be thought worth
the struggle as the permanence of these conditions is begin increasingly realized.
Rayhan Arif
GATT: Successful overall; based on basic principles
Politically, trade faces obstacles from the tendencies towards protectionism
Tariff barriers are lower now than in the golden age before 1914 (based on graphical comparison)
GATT is an organization without any power, just a secretariat that facilitated the negotiations (no real
autonomy, it didn’t do anything that it wasn't explicitly told to do by participating parties)
Countries committed to a framework for negotiations, with certain principles
Countries would participate in "rounds" of negotiations with name
Doha (2001-2008)
Uruguay (1988-1994)
Each round pushed down tariff barriers on industrial goods
What are the principles behind GATT?
Tariff as the only form of trade impediment (no quotas); facilitates everything that happens
(implies "national treatment" in regulation) Protection against other parties adding extra restrictions
outside of tariff negotiations (clear agenda, with result of negotiations being what we expect it to be)
Most Favored Nation (MFN) treatment of all signatories [can't cut bilateral deals]; create overall
downward pressure (deals on lowering tariffs on French cheese applies to cheese from all countries)
Reciprocity-countries negotiate over the reduction in barriers
Specific self-enforcing discipline
If you allow domestic interests multiple ways of coming back, then deal will not last (this is the
rationale for tariffs only)
Crucial to link exporter interest through importer interest through reciprocity; essence of this is political
economy (in order to counterbalance the exporter interests)
The large blocs who had most interest in pushing down tariffs (MFN lowers number of needed
negotiations)
MFN is actually a complicated component (as it is now, NAFTA would not be legal under GATT); MFN
has exception for community of countries that want to unify more; very interesting provision, since it is
all or nothing (can't get telecommunications reduction in Asia since Europe won't); however, since it is
all or nothing, may get nothing sometimes if not willing to grant liberalization to everyone
Asking for MFN status is a good way of assuring that they're being treated fairly
We want to start from the assumption that GATT deliberately and purposefully limits national
sovereignty (if they abide by rules, then they would have lower restrictions than if they went about the
process independently)
GATT is a pre-commitment device to circumvent the anticipated domestic political economy of trade
Exceptions to the rules undermine the value of rules
Exceptions to GATT
Multi-Fiber Arrangement
Arrangement whereby the rich importers set product-specific quotas; country specific; non-reciprocal,
since they were arrangements and not agreements
Violates all GATT principles
Average American pays $238 to retain 235,000 jobs in the textile and apparel sectors
Mutli-Fiber arrangements estimated to cost $40 billion in lost exports and 27 million jobs on poor
countries
Introduced in 1974 as a formalization of individual agreements (under pressure from Southern
senators) [quota must grow over time; it's item by item, not industry-wide]
Phased on Jan 1, 2005 with tariffication of remaining restrictions (under WTO discipline)
Is this brilliant "sand in the gears" as transitional social protection?
Does GATT allow regional trade agreements? (Number of regional trade agreements has gone up by a
factor of 6 since 1994)
Dangers of allowing protection
Complicated non-transparent systems with multiple instruments, exceptions, exemptions
"Directly unproductive" activities and "rent seeking" (of getting the license)
Net impact of the system hugely negative
Future of the WTO will need to consider:
"Behind the border" obstacles to trade
"Safeguard" mechanisms against "unfair trade practices" such as anti-dumping
Trade in "services" (e.g. financial services, insurance, real estate)
Chapter 3 of Making Globalization Work by Stiglitz – Making Trade Fair

The main point of this chapter is that the way trade is organized benefits the rich countries over
poor countries, and that trade liberalization is not a good thing in and of itself, because poor countries
are not in a position to benefit from liberalized trade – for example, if people lose jobs due to free trade
in developing countries, there is no safety net whereas there are savings and education to fall back on
in developed countries.
Even if trade liberalization makes a country better off overall, it leads to an unequal distribution
of wealth in that country
NAFTA has not been a huge success for Mexico, primarily due to the rise of China – trade
liberalization has not helped that much in this case
Situations where the theory of free trade breaks down:
Free trade advocates say that though job loss happens due to free trade, new jobs come to
replace them (e.g. US may lose unskilled jobs but will add high productivity jobs. Problem: if the
unemployment rate is high, those who lose their job won’t go to a high paying job, but will instead
become a part of the unemployed. This happens a lot in developing countries, and unskilled workers are
hurt the most
Free trade has limited the ability of governments to create policy and take action. As tariffs and
taxes are removed, government revenues go down, thus reducing education, infrastructure, welfare,
etc.
Because of a lack of infrastructure, developing countries may not be able to take advantage of
free trade. If there are no roads, products cannot be shipped.
Therefore countries need aid in order to take advantage of trade opportunities.
Infant industries & economies
Stiglitz argues that new industries in developing nations need to develop behind broad-based
protectionist barriers.
The Current trading system
Stiglitz says that the WTO structure unfairly advantages rich countries. Rich countries set the
agenda, and are powerful and so can force concessions from small countries. The enforcement
mechanism if a country violates WTO rules also benefit rich countries because they won’t care if a small
country puts tariffs on them.
Developed states promised to cut agricultural and textiles subsidies but they never did, while
extracting concessions on intellectual property rights from developing countries.
So how should trade be reorganized to make it fair? Stiglitz’s proposals:
Rich countries should open up their markets completely to poor ones, without reciprocity. This will
benefit poor countries enormously without costing the rich countries too much.
Developing countries should be allowed to have tariffs/subsidies/etc to gain revenue to deal with
the effects of liberalization
Developed countries should remove their agricultural subsidies as these hurt developing
economies by depressing the prices of the agriculture that they produce.
Escalating tariffs (tariffs on value-added production) should be removed by developed countries
to promote industry in developing countries
Liberalization of labor flows should happen, which would increase global GDP (this is Pritchett’s
argument)
Developed nations should also remove nontariff barriers like safeguards, dumping duties,
technical barriers and rules of origin
Developed nations should not pursue bilateral trade agreements as these undermine a
multilateral trade regime
Institutional reform needs to take place in the WTO: the agenda setting process and negotiations
need to be made more fair, and enforcement needs to be more fair – stiglitz proposes that developing
countries be allowed to sell their enforcement rights to make threats more credible.
With these reforms in place, Stiglitz that the benefits and costs of trade will be more evenly shared.
Thea Sebastian
Martin Wolf—Why Globalization Works
Chapter 10: Traumatized by Trade
Thea Sebastian
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Overview
In this chapter, Martin Wolf sets out to dispel 9 alleged myths about trade
Myth #1: Imports from low-wage developing countries hollow out the industries of high-income
countries and make it impossible for high-wage rich countries to compete without a collapse in their wage
levels
Wages match productivity—accordingly, workers in rich-countries have nothing to fear
Why is productivity do much higher in rich-countries?
More capital per worker
Better education
Different composition of manufacturing
Labor-intensive manufacturing v. capital-intensive manufacturing
As Chinese capital per worker rises, so will their productivity—and therefore their wages
So, they won’t completely undercut American jobs
That said, there has been a secular decrease in American manufacturing jobs—why is this?
If growth of labor productivity is higher than the growth of output, employment must
shrink
If growth of productivity is sufficiently higher in manufacturing than in the rest
of the economy, the employment share in manufacturing will fall, even if the employment level does not
In the U.S., there’s been a sluggish growth in demand for manufactures combined with
a rapid rise in productivity—regardless of the U.S. trade balance
This isn’t a big deal, though, because people can find new jobs
Myth #2: The rise of production in developing countries threatens a global glut, deflation and
depression
The world can’t suffer from a surfeit of goods—only inadequate purchasing power
Although some countries save more than they spend, this is a problem only if the
intermediation of the flows from the savings-surplus to the savings-deficit countries does not work smoothly
Myth #3: The competitive advantage of developing countries is based on exploitation of their workers,
including children
People are being exploited because of their miserable situations, not their jobs
If you raise wages, you’ll be helping the lucky few who can get jobs, but causing more people
to be unemployed
There are better ways to go about dealing with exploitative conditions than impinging trade
For example, making foreign aid contingent on good labor conditions & encouraging
export-led growth
Myth #4: Global free trade is destructive of the environment
Stopping economic growth isn’t an option—they key is managing it
As countries become richer, they insist on higher environmental standards
Market-led economies have better environmental histories than socialist ones
The rational way to deal with externalities is to internalize them
Absence of trade can be harmful to the environment, since locally produced agriculture may
require more fertilizer, pesticides, etc.
A race to the bottom? No!
Firstly, little evidence of developed countries exporting pollution heavy industries to
the developing world
Complex, capital intensive & the risks of bad PR are too great
Differences in environmental standards are emblematic of autonomy
More evidence of a race to the top
The WTO and the environment
Should countries be able to regulate against processes and production methods? (Think
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dolphin-tuna)
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No—infringement of sovereignty and undue protectionism
Scientific evidence v. precautionary principle
The WTO allows people to base their actions on the precautionary principle—
they just have to pay a fine
Myth #5: For all of these reasons, liberal global trade should be replaced by “localization”
Localization = the idea that you should produce everything locally that you possible can, and
trade only for what you absolutely can’t
Barriers to trade, lots of subsidies to local producers, etc.
Would probably be done at the regional or national level
Reasons why localization is a bad idea
Firstly, it wouldn’t increase food security—one drought could wipe you out (security =
diversity of sources)
Secondly, it would have bad environmental side effects (exploitation of land—think
China’s Great Leap Forward)
Thirdly, efficiency would cease to be driven upwards
Plus, there will be no reason to use resources efficiently, since competition is
limited
Fourthly, developing countries would be hobbled
Although rich countries can produce all of the things that developing countries
can, the reverse isn’t true
Self-sufficiency is usually the goal of tyrants, and has failed to produce prosperity anywhere
(think Cuba and North Korea)
Myth #6: Free trade undermines the development strategies of developing countries, which cannot
compete with the advanced technologies of the high-income countries
3 arguments
Ha Joon Chang
Based on the South Korea experience, he argues that active “industrial, trade
and technology policies” are necessary for socializing the risks involved in the development of infrant
industries
Alice Amsden
Since countries may not have the knowledge-based assets to compete in modern
industry at world prices, government information can play a role in overcoming this (otherwise, potentially
highly-profitable industries may not be exploited)
Dani Rodrik
Old highly protectionist import substitution strategies did quite well—the
growth performance of countries befoe 1973 was much better than after
The scoop
It’s true that developing countries should be able to use instruments which them
overcome the many obstacles of backwardness and the absence of know-how
In terms of Rodrik’s argument, the level of investment per se isn’t necessarily the cause
of economic success—you need a good return on the investments, too
The problem with ISI is that it has natural limits and promotes inefficiency, which can
make it hard for the domestic companies to compete when markets do open up
Myth #7: Trade in commodities is unfair and unrewarding for the developing countries
The problem is that many developing countries depend on commodity exports
Unfortunately, they’ve been very hurt by decreasing commodity prices, the emergence
of more and more suppliers and the development of resource substitutes (fiber-optic cables instead of copper,
etc.)
The only thing that could really help them would be a raise in prices, triggered by supply
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reduction
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3 other questions about commodity prices
Can you insure farmers against price volatility?
Will high-income countries stop escalating tariffs?
Can you do something about the extreme concentration of global commodity trade in
the hands of a few companies?
Myth #8: The WTO is an anti-democratic organization, run in the interests of transnational
corporations and threatening to national autonomy, the environment and human welfare
What does the WTO do?
Helps provide the int’l public good of open markets
Limited tool, though
Controlled by rich countries
Not the only way to liberalize trade (can use bilateral agreements, etc.)
Does the WTO infringe sovereignty?
Only an agreement between states
WTO = tiny secretariat compared to state governments
Demands for more democracy are displaced
Need to start with better funding of the World Bank
Where does the WTO need to change?
1) Idea of a single-undertaking (that everyone has to agree to the same thing) =
misplaced
2) Dispute-settlement process needs to be reconsidered—where the underlying
meaning of the texts is obscure, panels should not try to invent law
3) Range of compensation should be broadened to include financial compensation,
such as in the EU-U.S. beef hormones case
4) Question of legitimate infant-industry protection and subsidization needs to be reexamined
5) Some sort of legal resolution needs to be made about the relationship between the
WTO and int’l environmental agreements
Myth #9: High-income countries are hypocritical in their imposition of free trade upon developing
countries, since they remain protectionist themselves, particularly in areas of most interest to developing
countries
This is justified—the most egregious examples are textiles, intellectual property rights and
ESPECIALLY farm subsidies
Also, the argument that lower commodity prices helps developing nations that are net food
importers is false—most of the people within those countries are subsistence farmers, and the majority of the
poor definitely are
Further liberalization should benefit everybody, just as long as the developing countries are
allowed to make the policy decisions needed to promote their long-term development
John Cassidy
Winners and Losers: The Truth about Free Trade
Thea Sebastian
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Overview
The argument that offshoring isn’t a big deal—and that free trade is universally good—is more
complicated than economists make it out to be
First of all, there are winners and losers
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Second of all, as developing countries develop, the downward pressure on developed country
wages could be significant
Current comparative advantage is not the Ricardian type—countries make their own
comparative advantage (by having educated citizens, etc.), and we’re not investing nearly enough in our own
human capital
The U.S. is losing jobs overseas
In the past, manufacturing bore the brunt of this global labor arbitrage. Today, largely thanks
to digitization and the Internet, the service sector, which employs fully four-fifths of the labor force, is
increasingly affected. Many white-collar industries that once provided safe, well-paid employment, such as
telecommunications, insurance, and stockbroking, are no longer immune from the temptation to outsource.
Who gains and who loses from trade?
Some Americans gain: consumers, who enjoy lower prices; stockholders, who see profits
rising at companies that employ cheap foreign labor. Some Americans lose: workers whose jobs are
displaced; the owners of firms whose contracts are transferred to foreign suppliers
But the economists' argument that the country as a whole inevitably benefits is questionable
How do economists justify free trade?
The division of labor, which is what Smith was talking about, lies at the heart of outsourcing
and offshoring
The principle of absolute advantage is relatively easy to understand, and economists cite it all
the time in an attempt to alleviate concerns about outsourcing
Ricardian comparative advantage
Poor places, like Mauritius and Indonesia, start out by producing labor-intensive goods,
such as toys and clothing. Middle-income countries enter more advanced businesses, etc.
This hierarchy of production helps lift poor nations out of poverty.
But how does the rise of potential economic superpowers like China and India benefit the United
States?
“If the wage differential between two trading countries is sufficiently large, the loss of
industries to the low-wage, underdeveloped country may well benefit both countries at the national level”
“However, as the underdeveloped country develops and starts to look more like the
developed one, the balance turns around and further loss of industries becomes harmful to the overall welfare
of the more developed nation”
This conclusion supports the common-sense notion that what helps one nation can hurt
another, and that countries adversely affected by foreign competition can lose out permanently.
So the potential gains and losses from outsourcing need to be weighed
Can workers who lose their jobs be compensated?
Yes, but compensation seldom occurs
And when workers do find new jobs, it’s generally for less pay (the average pay-cut is 13%)
Also, cities hit by plant closings take years to recover, and some-such as Gary, Indiana; Flint,
Michigan; and Syracuse-never do
Outsourcing service-sector jobs is a relatively new phenomenon, and it is growing fast
Another issue is “factor-price equalization theorem”
This is the idea that when two countries start out with similar technology and skills but
different wage rates, trade between them will reduce wages in the high-paying country and increase wages in
the low-paying country until, eventually, workers in both places end up earning the same amount
More and more American workers will be forced to compete with poorly paid labor in the
developing world—especially China and India—and the downward pressure on American wages could
become irresistible
Take-home point
Comparative advantage is no longer endowed by nature: through hard work and enlightened
administration, countries can wrest it from each other's grasp
Ricardo was writing about economies dominated by agriculture and rudimentary
manufacturing, where a favorable climate and the ready availability of raw materials were vital
These days, the keys to economic success are a well-educated workforce, technical
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know-how, high levels of capital investment, and entrepreneurial zeal-all of which countries can acquire with
the help of supportive governments, multinational firms, and international investors
However, the U.S. is investing little in its human capital
“By many measures, since 1980, the quality of the U.S. workforce has stagnated, or its
growth has slowed down dramatically”
So, it should—
Insure that its scientists are the most creative, its business leaders the most innovative,
and its workers the most highly skilled, etc.
AJ Tennant
Dani Rodrik “Sense and nonsense in the globalization debate” Foreign Policy
Main Argument:
Debate on the effects of globalization is getting more confusing, and there are some serious
social consequences that need to be taken into account and considered in the debate.
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1. Political backlash from people that depend on protectionism is understandable given
increased role of gov’t throughout the post-war period that created an environment where corporations
provided lifetime job opportunities.
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Strains on the safety net provided by the government.
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2. Globalization could lead to a new set of class-divisions between those who
embrace/prosper within it and those that don’t
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Summary:
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Intro
Debate on globalization has had extreme sides of the discussion (pro and anti), but a
better understanding of the issues is needed
Potential of globally expanding markets coming into conflict of social stability
Limits of Globalization
Globalization is currently limited by governments and their autonomy over their nations
World economy was more integrated in the late 19th century
Globalization Matters
Globalization and international trade are very important though
Maintaining “international competitiveness” is biased in policymaking
Consequences
Social bargains in some countries where lifetime employment was guaranteed no
longer exists
Demands on national government have increased and governments have grown to
perform social-welfare functions—adequate employment, establishing social safety nets, medical and
social insurance, caring for the poor
This social bargain is eroding with many employers and governments are less able
to sustain social safety nets
More Trade, More Government
Growth of trade is correlated with growth of government
Driving force is increased in social spending and social transfers
Reason: gov’t are trying to minimize the effects of the openness of the
international economy
Globalization increases the demand for social insurance, but then limits the
governments ability to provide the social insurance
Tax burden is part of creating a more open economy—contradiction w/ the
social needs
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Global Trade in Social Values
Trade exerts pressure towards a convergence of national norms and social institutions
Countries who don’t adapt, suffer in this global economy
Globalization creates an inequality in the bargaining power between employers and
employees
“fair trade” and “leveling the playing field” are ways of understanding the way that trade
causes the erosion of domestic norms and should not be used as a justification when the practices do
not conflict with domestic norms
Misunderstanding Trade
A broader approach to this debate is needed
William Greider’s book represents the misunderstandings on free trade
Greider’s arguments lack understanding of the issue
Safety Nets, Not Trade Barriers
Globalization helps those that have the skills and mobility to flourish, it can help poor
countries, it doesn’t constrain national autonomy as much as thought
However, does exert downward pressure on wages of underskilled workers in
industrialized countries and thus force economic instability, call into question social arrangements, and
erode social safety nets
Daniel Drezner US Trade Strategy: Free Versus Fair
Main Argument:
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In the form of a memorandum to the president, suggests two distinct approaches that the United
States could take on trade policy.
The first approach—“Free Trade”
Argues that American prosperity and security are best served by aggressively
seeking to lower trade barriers, even if it means that some industries lose out.
Seeks to ensure the full realization of the economic and political benefits of free
trade. It recommends a renewed commitment to the success of the Doharound of trade negotiations
through top-level U.S.involvement in the negotiations and a willingness to resist domestic political
pressures regarding issues such as outsourcing, textiles, and agriculture.
The second approach—“Fair Trade”
Contends that the economic benefits of freer trade are overstated and that the
U.S. government should slow or even halt efforts to lower trade barriers in order to promote goals such
as community stability and income security.
Seeks to balance the economic benefits of free trade with other values—
community stability and income security, for instance—even at the cost of foregoing some of the
benefits of trade. This approach recommends a tougher stance, in trade negotiations and in Congress,
to ensure receptivity to American exports and to stem the tide of outsourcing and other potential
threats to U.S.interests.
Includes background papers on four recurring challenges to U.S. trade policy
White Paper A: The Sustainability of the Trade Defecit
Balancing America’s trade and current account deficits
“If there is only a minimal economic connection between trade policy and the trade
deficit, opponents of trade expansion will make a political connection between the two. The constraint
on trade expansion will prove even more binding if the dollar experiences a hard landing and foreign
central banks are designated as the obvious scapegoats. In recent simulations conducted by IMF
economists, rising protectionism worsens the fallout from any fall in the dollar’s value. Guiding the
trade deficit down from existing levels will be necessary for Congress.” (pg55)
White Paper B: The Intersection of Trade of Regulation
Managing the intersection of trade policy and issues such as intellectual property
and labor standards
“Future trade liberalization will affect two categories of domestic regulation that
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will inspire resistance from two separate but equally problematic audiences. For civil-society groups
suspicious of the benefits of globalization, the chief concern is that trade liberalization will reduce the
stringent U.S. regulations governing the treatment of labor, the environment, and consumer health and
safety. For service sectors and professional guilds wary of import competition, the chief concern is that
trade liberalization will alter the arcane set of rules and regulations that govern their professional lives.
Politically, these sectors will have a strong tactical incentive to mobilize civil-society groups as a way to
protect their livelihood. A proper program of trade expansion will need to address these regulatory
concerns one way or another.” (pg74)
White Paper C: Distributing the Gains From Trade
Supporting workers adversely affected by trade
“Trade disproportionately harms low-wage workers and the tradable sectors that
employ them.While trade expansion can increase both unemployment and job turnover, and lower
wages, its effect should not be exaggerated; compared to the effects of other macroeconomic shocks,
trade’s effects are small. The existing TAA program is a good first step toward addressing the
distribution questions, but other policy reforms are available to ensure that trade expansion can be a
win-win arrangement for all Americans.” (pg88)
White Paper D: The Multiple Tracks of Trade Diplomacy
Harmonizing the multiple tracks of trade diplomacy.
“The trade-offs among the multilateral, regional, bilateral, and unilateral
approaches to trade are clear.The multilateral approach via the WTO would lead to drawn-out and
difficult negotiations across a wide range of issues. Furthermore, significant political capital would have
to be spent to ensure congressional support. Successful negotiations in the WTO format, however,
would lock in significant economic benefits for the United States. The push for regional and bilateral
FTAs would generate more immediate and tangible successes on the trade front. The noneconomic
benefits from this approach—in the form of rewarding allies and advancing American regulatory
concerns—would also be significant. Yet the economic impact of the regional and bilateral approach
would be considerably less, and in the long run would threaten to undercut the hard-won gains
achieved at the WTO.The unilateral approach potentially allows the United States to extract trade
concessions without having to reciprocate in kind. The cost of this approach, however, subsumes the
costs of the regional and bilateral approach and also raises larger foreign policy concerns.” (pg105)
Jamie Crooks
The Economist: Free trade on trial -- Ten years of NAFTA
A glance at NAFTA at once vindicates its supporters and its detractors. Its supporters point to
expanded intra-area trade and foreign investment. Its detractors note dismal Mexican growth,
contraction of manufacturing employment in the US. and adverse environmental consequences.
Politically, these skeptics seem to have won, given that today NAFTA is unpopular in all three
countries. However, the Economist believes that, in economic terms, NAFTA achieved "as much
as one could sensibly have expected it to achieve."
This article was written 10 years after NAFTA's enactment. From the start NAFTA has been
bitterly controversial in all three member countries. Because of this, the agreement fell far short of
scrapping all trade restrictions. Critics saw it as a radical experiment in further globalization while
advocates claimed it would create jobs and stimulate all three economies. Unsurprisingly, ten
years' experience has settled few of these quarrels.
Economically speaking, trade economists claim that the increase in intra-area trade and foreign
investment show that NAFTA has worked. Critics point to the stagnation of Mexico's growth over
much of the last ten years as a sign of NAFTA's failure. Politically, difficulties abound, as all three
countries have agreed that NAFTA is useless or worse. This lack of enthusiasm is the fault of
NAFTA's most vocal champions. They oversold the case, saying that NAFTA would benefit all
individuals and would be a net creator of jobs, neither of which would be expected by standard
models of trade economics.
Rather than expect NAFTA to a win-win proposition for all North American citizens, we must
look at whether it has done what free trade agreements are supposed to do: stimulate trade and
investment. NAFTA has done both of these. It is unpopular only because of false expectations
and because it has been blamed for every economic disappointment of the past ten years, whether
it be lost jobs in the US, a loss of the Canadian social welfare system (due to a race to the bottom),
or the stagnation of wages in Mexico. While all three of these have occurred to some degree,
when pitted against realistic estimates of what NAFTA should have accomplished, they have been
minor occurrences against the backdrop of what has been consistent economic success.
In Mexico particularly, the setbacks are particularly distracting. The Tequila crisis, for example,
which caused an immediate drop in wages of 20%, has had lasting effects that are difficult to
separate from those of NAFTA. Still, there is much evidence that the close relationship between
the US and Mexico which has been fostered by the agreement has led to a more speedy recovery
than would be expected otherwise. Overshadowing this setback is the surge in Mexico's trade,
which totaled $250 billion in 2002, and the country's traditional deficit with its northern neighbor has
been converted into a surplus in every year of NAFTA membership.
That is not to say that NAFTA does not have its failures. The mass emigration of people from
Mexico to the US has not been slowed by the agreement. The US government's subsidy of corn
has threatened the livelihood of thousands of Mexican farmers. The pollution near the US-Mexico
border due to the upsurge of the maquiladores is real with no end in sight. But while NAFTA alone
has not been enough to modernize Mexico or guarantee prosperity, it was never reasonable to
assume that it could. NAFTA has spurred trade for all its members, a goal that the agreement
should be lauded for.
Economic Growth and the Environment
(Grossman and Krueger)
This article examines the relationship between per capita income and various environmental
indicators. The study covers four types of indicators: urban air pollution, the state of the oxygen
regime in river basins, fecal contamination of river basins, and the contamination of river basins by
heavy metals. The study finds no evidence that environmental quality deteriorates steadily with
economic growth. Rather, for most indicators, economic growth brings an initial phase of
deterioration followed by a subsequent phase of improvement. The turning points for the different
pollutants vary, but in most cases they come before a country reaches a per capita income of
$8,000.
Much literature has devoted to this subject, and no clear relationship between growth and
pollution has been established. Exhaustible and renewable natural resources serve as inputs into
the production of many goods and services. However, societies have shown remarkable ingenuity
in harnessing new technologies to conserve scarce resources. Most existing studies find a Ushaped relationship, with pollution increasing with income at low levels of income and decreasing
with income at high levels of income. This paper improves upon previous studies by using reliable
empirical evidence to try and flesh out this relationship. Specifically it uses panel data from
countries around the world that measure air and water quality. For water quality, the study focuses
on oxygen levels in rivers, pathogen levels, and "heavy metal" levels. Air quality variables include
levels of sulfur dioxide, chlorofluorocarbons, carbon monoxide, and lead.
A fixed effects regression shows that there is no evidence that economic growth does
unavoidable harm to the natural habitat. Instead, the study finds that while increases in GDP may
be associated with worsening environmental conditions in very poor countries, air and water quality
appear to benefit from economic growth once some critical level of income has been reached. The
turning points in these inverted U-shaped relationships vary for the different pollutants, but in
almost every case they occur at an income of less than $8,000 (1985 dollars). These findings are
broadly consistent with those reported in other studies. Several points need to be emphasized
concerning the interpretation of the findings. First, there is no reason to believe that the process
has been an automatic one; it seems this is caused by an induced policy response, but it may be a
technology substitution or another structural issue. Second, it is possible that downward sloping
and inverted U-shaped patterns might arise because, as countries develop, they cease to produce
certain pollution-intensive goods, and begin instead to import these products from other countries
with less restrictive environmental protection laws. Finally, it should be stressed that there is
nothing at all inevitable about the relationships that have been observed in the past. These
patterns reflected the technological, political, and economic conditions that existed at the time;
there is no reason to believe this relationship will hold true across all times and places. This could
be a positive outcome: with the increased awareness of environmental hazards and the
development in recent years of new technologies that are cleaner than ever before, we might hope
to see the low-income countries turn their attention to preservation of the environment at earlier
stages of development than has previously been the case.
Neil Sawhney
Dani Rodrick, “Trade Policy as Institutional Reform”
Economists tend to think about trade policy in terms of changes in levels of tariffs and quantitative
restrictions, and the “shifts in relative prices” that follow. Policy makers have a different, broader
perspective on trade reform, based on “deeper transformations” of behavior in the public sector and the
government’s relationship with the private sector. Thus, trade reform is seen by policy makers as much more
than changes in relative prices, but as a potentially transformative institutional reform. If reform is welldesigned and consistent with institutional needs, it can spur significant economic growth and
entrepreneurship; if ill-designed, it could lead to stagnation.
I.
Rodrick argues that the best criteria for evaluating trade reform is the extent to which it creates a
“high quality institutional environment” rather than openness to trade or consistency with WTO rules.
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A “high quality institutional environment” has a greater economic payoff, according to
Rodrick, than the other two criteria.
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Implications are that WTO rules and trade regime should be seen as at the service of
developing countries’ institutional needs, rather than vice versa.
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Institutional pre-requisites for development
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In 1980’s, reformers were focused on price reforms, but by 1990’s, it was realized that price
reforms without institutional reforms would fail.
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Failure of price reform and privatization in Russia without building up of legal,
regulatory and political apparatus.
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Dissatisfaction towards market reforms in Latin America as they have not been
accompanied with social insurance and safety nets.
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Market is dependent on particular “embedded” non-market institutions: (a)property rights;
(b)regulatory institutions (antitrust laws, securities regulation); (c)institutions for macroeconomic
stabilization (central bank); (d) institutions for social insurance (social security, pensions, unemployment
insurance); and (e) institutions of conflict management (independent judiciary, trade unions, etc).
Key point is that these institutions necessarily develop in different ways as a result of their
different contexts (political, traditional, social, etc).
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Trade Policy and Institutional Reform—How are they linked?
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Trade policy often leads countries to import successful models of institutions from abroad.
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“Institutional arbitrage” arises out of the work of market forces. For example, financial
integration raises the premium for macroeconomic stability, and thus makes central-bank independence look
more “desirable”.
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Governments can purposefully use institutional arbitrage to enhance the credibility of
domestic institutions.
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Yet not all institutional convergence and “deep integration” that result from trade reform is
necessarily desirable (e.g. the TRIPS intellectual property provisions accepted by India minimize the benefits
of India’s generic pharmaceuticals industry)
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Successful institutional reforms usually combine imported institutional models with a
local approach and context.
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“Heterodox” trade reforms have proven successful when they fit political and
institutional realities. South Korea’s “outward orientation” occurred not because of increased import
liberalization, but by export subsidization (a reform now prohibited by WTO trade rules).
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“Imaginative experimentation” with institutional and trade reform have often had greater
payoffs that a wholescale importation of institutions from developed countries.
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Integration into world economy as model of Institutional Reform
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WTO membership entails institutional reforms that many have argued may not fit the needs of
developed countries, particularly those of the lowest income.
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It would cost around $150 million to implement WTO reforms on customs, sanitary
and phytosanitary measures, and intellectual property—more than some countries’ entire development
budget.
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Alternative measures, such as improving girls’ education, are argued to have much
“more attractive rate-of-return numbers”.
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The most successful “globalizers”—the East Asian Tigers—integrated with freedom to
determine trade and institutional reform on their own terms, using unorthodox policies such as export
subsidization, patent and copyright infringements, restrictions on capital flows, etc.
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The current trade rules pushing for global integration do not necessarily take into account the
priorities of a more fully developmental agenda. Essentially, WTO reforms and trade liberalization may not
lead to the institutional reform in developing countries that is most important.
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Rodrik find that there is a significant gap in the literature claiming that current trade reform leads
towards major economic growth. He argues there is reason to be skeptical about the existence of an
“unambiguous relationship between trade and economic growth.”
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The institutions at which trade policy operates is more important for economic performance
than the levels at which specific trade barriers are set.
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International trade and long-term capital flows are surely important for the economic
development of countries. However, no country has developed “simply by opening itself up to foreign trade
and investment.” Must combine opportunities of international trade with domestic capacity and institutional
building.
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The point is not that trade protection is better than trade liberalization, but that the benefits of
trade liberalization should not be “oversold”.
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John Newhouse, “Europe’s Rising Regionalism”, Foreign Affairs (February 1997)
National cultures of Europe are being “squeezed” by a broader, transnational popular culture and thus
regional cultures are being revived. In transitional time to the EU, economic security is far more important
for most leaders than other national interests. Two parallel processes emerging from the European
government’s loss of control over national economies: regionalism and globalization.
Interestingly, regionalist leaders tend to be “self-professed Europeans” who talk about bypassing national
capitals and governments in favor of Brussels. Bankers and urban planners beginning to look at Europe as a
group of distinct economic regions rather than nation-states. Regional and city governments are seeing
themselves more able to create economic growth than national governments. Thus, regionalism is not merely
a return to cultural roots or a distancing from national governments, but is centrally related to wealth
creation.
Wealthiest provinces of Western and Central Europe are creating super-regions—large economic zones that
transcend national boundaries (e.g. the “Alpine Triangle” between Turin, Lyon and Geneva). The regions
have an interest in being accepted by the EU, as the EU provides them a common market that transcends
national economies. Yet on the other hand, most people see the EU as bureaucratic and technocratic, and
would prefer policies and decisions being made at the regional rather than at the EU, or even national, level.
Important questions regarding corruption and graft as more wealth is going into the hands of local and
regional governments. Also, as wealthy regions increasingly cooperate, what will happen to poorer regions—
who will protect these regions?
Germany’s decentralized federal system allows it to most comfortably accommodate this rising regionalism.
A centralized government like France’s, however, will have significant difficulty. Important areas of rising
regionalism—Spanish Catalonia, the Rhone-Alps region of France, Northern Italy.
Regions may be supplanting the nation-state as “sources of political authority and custodians of public
policy”. It seems that regions are challenging the nation-state less on political terms than economic terms.
Newhouse concludes with an assessment that the nation-state should see regions, not the EU, as the larger
threat to its authority.
Francis Joyner
“Why Hollywood
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Rules the World, and Whether We Should Care” from Creative Destruction
Unlike other cultural products (books, music, etc.), movies provide a hard case for globalization
because of the strength that America holds in exports of this product. The U.S. film industry’s dominance in
gross sales in the global market makes it an easy target for charges of American cultural imperialism.
Cowen, however, argues that America’s dominance has occurred because U.S. filmmakers produce universal
products that individuals around the world demand. They have been able to cluster much talent in
Hollywood to produce their movies, and these products are geared towards exportation, reinforcing
Hollywood’s strength in the global market. (These are the central issues delineated by the reading, read
further for more details of the chapter).
Cowen argues that the current weakness in European cinema is due to a number of unfavorable
factors, not just on negative effects of cross-cultural exchange.
Excess subsidies by European governments create sub-par films and/or films not demanded by
the viewing public
Timing of the rise in television: because the U.S. had televisions in most households years
before Europe, the film-making industry adapted to create bigger, flashier products that provided something
TV could not.
Demographics: Consumers of film tend to be younger than older. Because the traditional
“cinema house” style of European film is better suited for older audiences than younger ones, the products
created are harder to export.
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Language: the U.S. was one of the first countries to export movies with sound—other
countries worldwide quickly became accustomed to movies in English with subtitles or dubbed in their native
language. The U.S. never became accustomed to foreign movies in the same way. Because of the difference
in linguistic expectations, European films had a harder time penetrating the U.S. market than vice versa.
Why clustering in Hollywood?
Natural advantage of largest domestic marker (America)
More investment in films, more spending on marketing
Hollywood movies are designed to have global appeal
Self-reinforcing dynamic of success in the global market, gives Hollywood further export
advantage. In contrast, the more European producers fail in the global market, the more they must rely on
television revenues and subsidies; the more they rely on TV and subsidies, the more they fail in global
markets.
Clustering of movie production worldwide
Geographic clustering of movie production has happened in other places in the world as well.
Movie production clusters in particular geographic areas simply because there is no reason not
to have clustering. When the cost of shipping the relevant goods and services are low, clustering makes
economic sense.
In the case of movies shipping the final product is relatively easy, so one would want to cluster
the inputs for the product in order to produce as efficiently as possible. Once a film project is given the goahead, it is easier to begin production of finding the talent (stars, crew, etc.)if it is clustered in one area.
Initial clusters have snowball effect, attracting yet more talent to the commercial center.
Linguistic clustering: Egyptian Arabic as the standard in the Arabic world, Hindi cinema of
Bombay as standard in India.
Clustering myths
America dominates world cinematic markets because of monopoly power: not true—1)all
primary distributors in Europe are owned by European media groups and regulated by European
governments 2)Examples of other countries playing in US market have done little to change outcomes
(Cineplex Odeon was Canadian-owned and jointly Canadian- and British-owned for a while and made little
difference on the screen)
Hollywood dominates because it can sell movies so cheaply abroad, having recovered costs in
home market (dumping product abroad): this argument explains why Hollywood films are booked by
cinemas, but not why they are so popular with audiences. American dominance arises because at equal
admission prices, European consumers prefer to see American movies.
In actuality, America’s advantage occurs because, with a large captive audience,
suppliers can afford to make better products for consumers..
American cultural imperialism?
Different critics provide two main, if somewhat contradictory, arguments.
Some complain about the global spread of the American ethos of commercialism and
individualism.
Other complaints focus on the strong global-market position of a relatively universal
product, rather than local products based on national or particularist inspirations.
Author’s response:
Many Hollywood players are international not American, thus views provided are not
strictly American.
Hollywood strives to provide a universal product in order to appeal to different
audiences worldwide.
Movies from film industries of other countries, when attempting to appeal to global
audiences, also strive for this universality.
The author acknowledges that because American films’ main audience are Americans,
they are clearly influenced by the American ethos. However, the U.S. is highly influenced by other cultures,
so the product created will meld both national and cosmopolitan influences.
“Revolution
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Globalization is making other types of economies (Japanese system, European welfare state,
Communist, developing countries, etc.) move towards the American system: a customer-is-king capitalist
system.
Globalization is perceived largely as having an American face. This has created large resentment
against America in the rest of the world. Many cultural traditions feel threatened by the advent of the instant
gratification and individualism associated with American culture.
Author underscores a love-hate relationship: individuals enjoy products available through
globalization (McDonald’s example) but are weary of the one who brings it (America)
“Global
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is U.S.” from The Lexus and the Olive Tree
Culture” from 1999 Human Development Report
Although the trading of cultural goods enriches the world by encouraging the spread of images and
ideas, there is a risk of reducing cultural concerns to protecting what can be bought and sold, neglecting
tradition and community.
Trade of cultural goods is rising, but the global market for cultural goods is being concentrated,
driving out small and local industries. There is a growing dominance of US products.
Faced with such threats, many countries argue that cultural goods should be exempt from free trade
agreements. The Uruguay Round acknowledged the special nature of cultural goods, granting some
exceptions. NAFTA also required negotiations to include provisions granting limited exemptions and
exclusions of some cultural industries.
There are concerns about cultural homogenization, but there have been trends in both directions,
towards and against homogenization.
Luis Martinez
Stiglitz, Making Globalization Work, Chapter 4, Patents, Profits, People
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2004 Morocco had a new trade agreement with US
However in this case US negotiators wanted a new agreementto protect US drug companies:
wanted t odelay introduction of generic drugs
US companies have delayed the introduction of generics: restricting data that proves the drugs’ safety etc
In 1994 Uruguay Round: Trade Related Aspects of Intellectual Property Rights (TRIPs) signed: US
forced other countries to recognize their patents and copyrights
Designed to ensure higher priced medicines
Stiglitz argues that intellectual property regime doesn’t even help industrial countries
Companies argue that laws increase innovation, but this is simplistic
Alternatives can do this more effectively
Intellectual property
Creates monopolies and rents, which are supposed to increase revenue
Leads to inefficiencies
May lead to reduced innovation
Reduce incentives for others to innovate
Slow follow on research
Divert productive expenditure to increasing monopoly power or getting around other
patents
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Designing a balanced intellectual property regime
Look at what can be patented/ how long patents last/ how broad it should be
Recently attempts to expand scope of intellectual property
TRIPs
Corporate interests influenced agreement heavily
Intellectual property does not belong in a trade agreement –it limits rather than increases
knowledge across borders
WIP (world intellectual property organization) already exists
However no enforcement mechanism
Must address gap in knowledge, not developing drugs for diseases in developing world,
not enough protection for traditional knowledge
Access to lifesaving medicines
Can waive the tax (difference between price and marginal tax)—no additional cost imposed on
developed countries
Can issue compulsory licenses: urgent need to broaden access to technology
Allows drugs to be able to be made more cheaply
Research
Drug companies spend more on advertising than on research, more on lifestyle drugs,
almost no money spent on research for diseases in poorest countries
Drug companies don’t get money from developing regions anyways
Market incentives aren’t working
Could have a guarantee fund: governments say they will for sure buy a certain amount of the drug
Innovation fund
Bio-piracy
Drug companies rediscover traditional remedies
Ned more agreements recognizing traditional knowledge
Conclusions
TRIPs was bad, discussions should go to reformed WIPO
Western trade negotiators are just looking at the producers
Oxfam- “Robbing the Poor to Pay the Rich?”
The TRIPS Agreement requires WTO members to introduce a minimum level of intellectual property
protection for copyright, patents, and trademarks, including enforcement mechanisms.
In 2001 all members of the WTO adopted the Doha Declaration “promising to prioritize public
health over private patent rights and to promote access to medicines for all.”
The commitment aims to interpret patents to prioritize health standards
Countries too poor to buy branded drugs and unable to make cheap generics could obtain
medicines more easily
The government of the United States is reneging their commitment by using technical assistance,
bilateral and regional trade agreements, and the threat of trade sanctions to ratchet up patent
protection in developing countries.
Trade ministers recognized that the WTO patent rules (trips) led to higher drug prices, placing
medicines out of reach of patient in poor countries.
Several factors are responsible for the low access to medicine
Poverty
Lack of finance
Poor health service infrastructure
High cost of new patented medicines
Neglected diseases- poor research because only occur in the developing world
The Cheapest generic drugs are being blocked by the US trade policies on intellectual property
The US has pressured developing countries to implement TRIPS plus measures which do not take
advantage of public health safeguards in regular TRIPS.
It provides biased technical assistance in countries sucha s Uganda and Nigeria (benefits US
industry and increases drug prices)
Included it in the provisions for recent trade agreements
Costa Rican Pharmaceutical Industry estimates that the implementation increases cost of
medicine by 800 per cent
Pressured Cambodia to accept patents even though the WTO allowed to defer until 2016
In Singapore they blocked parallel importation of similar products
OXFAM Recommendations
WTO members should ensure the simplification of the final TRIPS.
Remove unnecessary red tape, no mandatory limits on country eligibility, or on the diseases for
which such medicines can be procured.
US should stop using the threat of trade sanctions
US should stop using bilateral trade agreements such as CAFTA or FTAA to pressure developing or
LDCS to adopt TRIPS plus patent rules
US should provide technical assistance to developing countries that will benefit public health and
access to affordable medicines rather than the interest of the pharmaceutical industry
Developing countries should resist pressures
The international community should monitor health impacs.
Oxfam research has shown that one clinic in Uganda, was able to triple the number of AIDS
patients receiving Anti Retroviral therapy by importing generic medicines and using generics in the
place of more expensive branded drugs.
The high protection of intellectual property works in the United States because of safety nets and health
insurance. Also, it promotes investment to develop drugs. However, establishing these sanctions
against developing countries is unethical.
A Good Provider is One Who Leaves:
This article gives the story of Emmet a head of family in the Philippines. He was offered a job in Saudi
Arabia as a pool cleaner for 10 times as much as he made in Manila. He would come and go for two
decades. Now all five of his children are working abroad.
There are about 200 million migrants sending remittances back home sending about 200 billions, nearly
three times the wold’s foreign aid budget combined. IN Morocco remittances bring in more money than
tourism.
Migrant workers also face the loss of leaving their families behind. However, they face the tradeoff of
love or an empty stomach.
The economies in the west need workers, people in poor countries need jobs. Transportation and
communication have made moving easier.
Nearly 10 percent of the Philippine’s 89 million people live abroad. They send home 15 billion a year, a
7th of the Country’s GDP.
The political issue is not migration but migrant safety. Also the overseas jobs are assigned through
agencies that charge application fees; only the privileged among the poor are the ones that obtain the
jobs
EC1440 Study Guide (Continued)
Kathryn Lawrence
“US
Plan to Lure Nurses May Hurt Poor Nations”
Celia W. Dugger
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This article is only three pages
Basic gist: A provision to a May 2006 immigration bill would remove the limit on the number of
nurses who can immigrate to the United States in response to an American nurse shortage
Supporters of the bill:
The United States would fill their shortages of nurses. In April 2006, American hospitals had
118,000 vacancies for registered nurses
“There is no reason to cap the number of nurses coming in when there’s a nationwide
shortage, because you need people immediately.”
Nurses who immigrate to the US may subsequently employ voluntary efforts to nurse in their
home countries in future years.
Flight of nurses from the Philippines ot the US has provided a huge boost to the weak Filipine
economy through remittances.
Critics of the Bill:
This would drain developing nations of nurses. Specifically, the Philippines and India would
likely send an increasing number of nurses to the United States (in addition to the 1000’s per year they are
already sending). Health care has deteriorated in the Philippines in recent years due to many nurses
migrating abroad, and this bill will exacerbate the problem.
Nurse proposal may undermine US’s multi-billion dollar initiative to combat AIDS and
malaria by worsening the shortage of health workers in poor countries.
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Rather than increasing the number of educational institutions for nursing in the US (of which
there is a huge shortage), this bill is essentially outsourcing education of nurses
Many Americans are applying to be nurses within the US, however, the number of
nursing schools are limited, mostly because of a lack of nursing Professors
Facts to support criticism of legislation:
Most Filipinos died without health care in 2003, just as they had three decades earlier
80% of government doctors in Philipines have become nurses or are enrolled in
nursing programs, hoping for an American green card.
“Do
Visas Kill? Health Effects of African Health Professional Emigration”
By Michael Clemens
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Though this document is roughly 50 pages, the majority of it is complex economic
formulas/regressions/etc, but the broad points that we should be familiar with are quite simple.
Question:
Specifically, this study uses a database of health worker emigration from Africa to test
whether exogenous decreases in emigration raise the number of domestic health professionals, increase mass
availability of primary care, or improve a range of public health outcomes.
Results:
Thesis: Despite the fact that some assume that emigration of highly skilled workers can lower
social welfare of the migrant-sending country, the results of this study suggests that low social welfare is the
result of factors entirely unrelated to international movement of highly skilled workers
Summary: Results show that Africa’s generally low staffing levels and poor public health
conditions are the result of factors unrelated to emigration
“The absence of an effect of emigration on domestirc health worker stocks is plausibly the
result of a positive elasticity of labor supply to the expected wage increases afforded by the emigration
option” (2).
Results also suggests that emigration has caused a greater production of health workers in
Africa
“The public welfare effect of a health professional is smallest in countries where domestic
market failures are most pronounced, and that the impact of a highly-trained health professional smallest in
countries where that person can be substituted b a less-trained professional capable of delivering the same
care or - better in many cases – working for prevention” (38).
Less important results: 1) Doctors and nurses tend to leave richer African countries than
poorer ones; in the poorest countries, economic development appears to encourage emigration by helping
potential emigrants overcome fixed costs associated with working overseas. 2) major wars are associated
with a tremendous exodus of skilled health professionals.
Background
The rationale for a worry about emigration of skilled workers is as follows: “If skilled workers
departed for countries where their private gain better reflected their contribution, they would be lost (‘brain
drain’) and a publuic good would become a proviate good (‘poaching’). Government intervention would be
justified, by this reasoning, to ensure that the positive externality is captured by the country of origin” (1).
Grubel and Scott have published theoretical literature suggesting that, even the emigration of
physicians from developing countries could raise sending-country welfar due to technology transfer,
remittances, human capital formation induced by the migration opportunity, and other forces. Clemens has
built off of this research (along with several similar studies), however extends the literature by creating novel
data to create a test of the welfare effects of an exogenous change in the emigration of African physicians and
professional nurses, using a novel and important strategy to measure emigration rates.
This paper basically responds to those who oppose the nursing emigration bill in Celia Dugger’s
article (above) by demonstrating that emigration has little impact on staffing levels and public health
conditions, so the Phillipines, for example, shouldn’t care.
“Let
Their People Come,” Introduction
Lant Pritchett
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Thesis: The principal way rich countries disadvantage poor countries is by preventing unskilled labor
to move into their countries.
In recent years, the only ‘pro-immigartion’ moves have been to allow highly skilled laborers to enter
rich countries (nurses and doctors mentioned above).
Pritchett argues that the rich countries of the world should actively look for ways to increase the
mobility of unskilled labor across national boundaries because:
“It is the right thing to do”
“there are enormous potential benefits to people who are allowed to move”
The economics of labor mobility are simple – it is beneficial to both the immigrant and the receiving
country; the politics are the difficult part: “The ideas of rich country citizens – for instance, the idea that
immigration will harm the poor in rich countries – are the obstacle to larger mutually beneficial flows of
labor between rich and poor countries” (2).
World Bank study found that the benefits to poor-country citizens of the rich countries
allowing just a 3% rise in their labor force by relaxing immigration restrictions would help poor country
citizens by $300 billion (not ethat the industrial world gives $70 billion per year in assistance). Furthermore,
this study predicts that the current rich-country residents would benefit from this relaxation on distortions in
the labor market, resulting in a net benefit of $51 billion.
“The economics is easy – the gains are there; the politics of policy is hard.”
The purpose of Pritchett’s research: to answer the question “What are the policies toward labor
mobility that would be most beneficial to the world’s currently poor (who nearly all reside in poor countries)
and yet are still politically acceptable in rich countries?”
There are five irresistible forces that make the pressure for mobility across national boundaries
greater than ever before in human history:
1) Gaps in unskilled wages – wage gaps create pressure for migration because they are not
primarily explained by differences in the characteristics of people. (Wage gaps between 2 to 1 and 4 to 1).
2) Differing demographic futures – now-rich countries have low future population estimations.
For example, Europe especially has a shrinking population: labor force age population of Italy is forecasted
to shrink from 39 mill to 26 mill from 2000 to 2050, but labor-force-age pop of Egypt will expand from 40 to
83 million; since differences create trade, increasing differences will create ever greater pressures for labor
flows, both for Europe to accept greater labor flows and pressures for outward flows in sending countries.
3) Globalization of everything but labor
4) Rise of employment in ‘low-skill, hard-core nontradeables’ – “The results of increased
productivity, rising incomes, aging populations, and globalization of manufacturing imply that mch of the
incremental growth in the labor force will be ‘hard-core nontradeables,’ or services (nontradeables) that
cannot be outsourced and don’t require a high skill level. Examples are health aides, janitors, cashiers, and
fast food workers
5) Lagging growth in ‘ghost’ countries – There are large negative and positive changes in the
economic prospects of specific geographic regions, and these create pressures for migration. If labor is
geographically mobile and hence labor supply is elastic, then large declines in labor demand willl lead to
large outward migration – the process that created ‘ghost towns’ in the US. However, if labor demand falls
in a region but labor is trapped within that region and thus cannot become a ghost town, instead it becomes a
‘zombie economy’ - the economy is dead, but the people are forced to live there. Zambia is an example of a
“zombie economy.”
Eight Immovable Ideas that underpin resistance to increased labor flow
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1) Nationality is a morally legitimate basis for discrimination – it’s the only realm that is okay
to discriminate on – if you’re a girl, or a minority, or anything else, you can’t be discriminated; but your
nationality is just as arbitrary
2) There is a moral perfectionism based on proximity - all that matters for moral obligations is
proximity; if Haitians suffer in Haiti, we have no obligation, but if he arrives on US soil, the obligation
increases substantially.
3) Development is exclusively about nation-states, not nationals – “Development must only be
about the fate of those who remin within the borders of their nation-state”
4) Labor movements are not ‘necessary’ or desirable to raise living standards – this is false.
5) Increased migration of unskilled labor will lower wages (or take jobs away from natives)
and worsen the distribution of income in the receiving countries) – Though this concern is probably ttue, it is
unreasonable for economists to resist migration on this ground while advocating free trade – it is inconsistent
6) Movers are a fiscal cost because they use more services than they pay in taxes: Though the
validity of this point is unclear, it still inspires anti-migrant policies
7) Allowing movement across borders creates risks of crime and terrorism.
8) “They” are not like “us” culture clash – fear that immigrants will undermine ‘cultural
cohesion’ of existing society
Six Accomodations for Politically acceptable, development-friendly migration:
Bilateral, not general multilateral, agreements: There is little or no proposect for binding
multicultural commitments or open arrangements.
Temporary status for labor mobility: The best hope for the increased admission of unskilled
labor is labor mobility through temporary agreements – in spite of the political backlash potential.
Rationing, using specific quotas (by job and perhaps region).
Enhance the development impact on the sending country
Involvement of the sending country in reinforcement
Portection of the fundamental human rights of migrants
“Let
Their People Come,” Chapter 3
Lant Pritchett
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General overview:
“The problem is not a lack of economic benefits of labor mobility. There are large potential
‘gains from trade’ from allowing people on both sides of the border to enter into voluntary and mutually
benefical contracts. Because the constraints on labor flows are ideas, not economics, the main challenge is
not to generate proposals that produce economic gains (That is easy) but to produce proposals that are
politically feasible in rich countries – while remaining development friendly.”
This chapter focuses on the Myths and truths of people’s perceptions of immigration – in other
words, what they have to actually fear and what is just misunderstanding.
The magnitude and Structure of Current Migration
Tens of millions of peope would be willing to take advantage of the opportunity to work in a
rich country – even if only under stringent conditions that did not give them access to the ‘labor market’ of
the host country or hope of acquiring citizenship.
Legal barriers to labor mobility do more than reduce the flow; they also distort labor flows in
undesirable ways. For example, when an otherwise ordinary transaction is made illegal, it creates an
opportunity for criminal elements to beomce involved;
Increased Migration is unpopular in industrial countries
The proportion of the population that favored a reduction of immigration in Germany and Italy
was more than 75%, and more than 60% in UK, Netherlands, Sweden, and Norway.
In no country in Europe was the support for any increase in immigration higher than 10%
Big question: Why are people who are concerned about social justice and improving the lot of
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the world’s poor not a powerful advocacy group for greater labor mobility?
Moral Arguments that Justify Reconstructing Borders
Why is it morally legitimate to use coercion (border patrol) to prevent the entry of workers
from poor countries into rich countries?
No mention of labor movement at the “Live Eight” concert focused on improving
social justice by attacking aid, debt cancellation, and improved trade. Also, in recent report of the
Commission for Africa, aimed at development issues, there was no mention of labor mobility.
Following 8 ideas underpin the notion of the moral legitimacy of restrictions (these are also the
aforementioned “immovable ideas”):
“Nationality’ is perceived as a legitimate basis for discrimination
Analagy between apartheid and restrictions on labor mobility; restrictions are based on
conditions of brith, not on any notion of individual merit. Also, labor restrictions in nearly every case
explicitly disadvantage people of ‘color’ against those of European decent.
Though one might argue that apartheid isn’t a fair comparison because it was a system
in which people of the same nation-state were treated differently,
Uses the case of sex to show that this is the case; there is moral outrage when one
learns that there as a 10% differential in literacy rates between boys and girls in India in 1998. However,
nobody is outraged by the fact that, compared to every OECD country, the essesntially 100% of girls
complete at least grade nine, so the gap between rich country girls and Indian boys is 56%! But nobody is
outraged by this fact, and feels that discriminating based on nationality is perfectly legitimate.
Strong ‘moral perfectionism’ based on ‘proximity’
Countries with the highest ratios of foreign born workers have created clear
distinctions between citizens and noncitizens; these are GCC countries and primarily non-democracies, and
thus have less of a moral obligation to take care of visiting workers (seems like a weird argument, but…)
“Most people in industrial countries think that tolerating excessive differential
treatment of people within their national boundaries is ‘immoral’ but have few qualms about the suffering of
people outside their boundaries – and think its acceptable to force people to stay outside” (83).
It is puzzling that it is morally acceptable to use coercion to enforce an
involuntary arrangement while a mutually voluntary arrangement would be morally unacceptable (when, for
example, one opposes immigration because they assume the immigrant will be expensive and need a lot of
care and resources – even without this ‘equality’ of treatment, the immigrant woud likely want to come
anyway.
Notion that development must be about nation-states, not nationals
Exclusive focus on ‘development’ on the well being of those who remain within a
nation-state allows the reconciliation of two views: that ‘too little’ is being done about poverty, but migration
is off the agenda.
There are two possible ways to reduce global poverty – migration or raising people’s
wages within their own countries. Why does ‘development’ only focus on the second?
Notion that labor mobility is not necessary for prosperity
False assumptions:
“Economic convergence is a natural economic process” – this is a FALSE
assumption because main differences in levels of output per capita across countries are not due to capital, but
rather to differences in other things like lack of institutional structure or corruption
“Trade is a substitute for labor mobility” – this idea is ALSO FALSE.
“Aid is a substitute for migration” – ALSO FALSE.
“The world’s poor are not so poor, or it is all relative” – FALSE.
“Anti-globalization is the answer, not more globalization’ – also false, because
true globalization includes labor.
Increased migration of unskilled labor will worsen the distribution of income in the receiving
countries and decrease wages or increase unemployment
Movers are a Fiscal Cost because they use more in public services thant they pay in taxes
There is no correct answer to the question about the net fiscal cost of immigrants
US National Research Council study finds that the annual fiscal impact per US resident
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of an increase of 100,000 iper year in the immigrant flow under the baseline circumstances…to be roughly
$30 per person.”
This is a misperception because it assumes that every person who is physically present
in a country necessarily acquires a set of claims on benefits. Also, no need to have a ‘welfare state’ – you
can impose restrictions for who receives benefits and how much.
People believe that migrants create additional costs and therefore oppose it, but that’s
not necessarily true.
Allowing Movement across borders creates risks of crime and terrorism
“They” are not like “Us”
Deep seated distrust of people from countries that are ‘different’
Alexander Marcus
Survey: A Topsy-Turvy World:
The Economist Sept 16th, 2006.
Summary:
Many economists have long been expecting America's widening currentaccount deficit to cause a financial meltdown in the dollar and the bond
market. The main reason why this has not happened (yet) is that emerging
economies have been happy to finance that deficit. The flow of capital from
poor countries to the richest economy in the world is exactly the opposite of
what economic theory would predict. According to the textbooks, capital
should flow from rich countries with abundant capital, such as America, to
poorer ones, such as China, where capital is relatively scarce, so returns are
higher. It seems perverse that poor countries today prefer to buy lowyielding American government bonds when they could earn higher returns by
investing in their own economies. The world's present external imbalances
are neither desirable nor sustainable. Unless America reduces its deficit
before emerging economies lose interest in accumulating reserves, the
dollar, Treasury bonds and the whole American economy are likely to suffer
a hard landing.
In 2005 emerging economies ran combined current-account surplus of over
$500B—large chunk was investment in American Treasury securities.
Opposite of what’s predicted in textbooks—capital should run from highcapital countries like US to low-capital countries like China. This is what
happened during previous globalization. America has C-A deficit of 7% of
GDP.
Why? Bretton Wood 2 Thesis: Asian economies are deliberately undervaluing
their own currency to ensure strong export-led growth. Buying US Treasury
bonds reduces interest rates and supports consumer spending in the US
(American buy more Asian goods). Allow US to do domestic investment
(foreign direct investment). Main blame is with Asian countries and b/c it’s
in their best interest they will continue to do it for a long time.
Flaws in theory:
1)US takes only 1/5ths of Chinas exports—if China wanted to keep the yuan
undervalued it would hold down its real trade-weighted exchange rate, which
has climbed 35% from 94 to ’01.
2) Main motive for pegging Yuan to dollar=financial stability.
3) Peg has forced China to develop lax monetary policy (which is bad).
4) building up more reserves would expose asian central banks to large
future losses when their currencies do eventually appreciate.
5) FDI has financed less than 5% of China’s fixed investment.
6) China’s current account surplus widened by $140B since ’97 whereas US
deficit has expanded by $720—China is only a fraction of the problem.
Largest problem= debt to oil exporters.
All of this suggests that it’s in China’s best interest to set its currency free.
Bernanke argues that this debt is not as bad as others think b/c the rest of
the world is saving excessively so US has to run a debt. Faster growing
countries simply generate more domestic saving (ppl make more money but
financial system to invest has not caught up yet).
The question is: when do these companies lose their C-A surplus? In China
the majority of saving is a result of gov’t and business, not household
saving.
Capital mkt reforms should bring down net-savings in emerging economies.
Before that happesn emerging economies are likely to shift interest from US
treasuery bonds to corporate assets.
Present external imbalances are undesireable. Hurts America as well b/c too
little savings. When these imbalances are unwound the process will hurt
unless US reduces deficit beforehand.
Alex Lavoie
No Grand Plans, but the Financial System Needs Fixing, Ken Rogoff:
Rogoff wrote this article in February, in the midst of the current lending crisis and housing slowdown. He decries the
lack of follow through for plans to fix the global financial system. In particular, he describes how many economists and
pundits proposed bold, sweeping plans to change the global financial system following the financial crises of the late 1990s
(he mentions Argentina and Russia specifically). These proposals included proposals for a global central bank, a
sovereign bankruptcy court, and other new global institutions. Rogoff argues that plans like these are too bold and would
likely decrease innovation in financial regulation. He does think that these plans created a wealth of ideas and momentum
for more modest, reasonable changes in financial regulation. (One proposal he mentions but does not necessarily strongly
advocate for is his own plan to change all global institutional lending to aid grants) Rogoff argues that the past few years
have seen a dramatic slowdown in these ideas. Though none of the so-called grand plans would have necessarily been
great fixes, the momentum they created for change was valuable and is needed to create more small but unambiguously
positive changes.
Globalization and Its Discontents, Ch. 2 and 4, Joseph Stiglitz
Ch. 2: Ch. 2 of Joseph Stiglitz’s Globalization and Its Dicontents is a fairly intense indictment by Stiglitz of the
International Monetary Fund. The first main thing that Stiglitz criticizes the IMF for is the organization’s insistence upon
decrying Ethiopia for its failure to balance the budget and for deciding to repay a loan back early. These measures,
Stiglitz says, display how attached the IMF is to its institutional policies and how it fails to realize a situation where the
principle of development and economics outweighs organizational process. These problems are part of a larger problem
that the IMF has with all of its solutions: one size fits all answers. Stiglitz criticizes the IMF for insisting upon financial
market liberalization in developing countries where opening up markets kills low-scale credit. He gives the example of the
Kenyan Banking Failures in the early 90s as an example, and explains how the IMF fails to investigate country specifics
when providing aid or assistance. This problem is exacerbated by the fact that countries receiving aid from the IMF often
have no power to politically fight back against uniform IMF programs, because doing so would sully their reputation with
the IMF and other potential lenders that rely on the IMF’s opinion for investment safety.
The problem of one size fits all solutions is best displayed, Stiglitz argues, by the conditionality that the IMF attaches to
its loans. This conditionality is marked by a variety of problems. The first is fungibility (which we have discussed in class)
and others include failure to attach proper conditions, intrusion upon national sovereignty, and the IMF’s façade of
political independence. These problems hurt countries that received IMF aid, such as South Korea, Kenya, and Ethiopia.
Botswana, on the other hand, only received IMF aid very early on in its development, and did so only after specifically
interviewing the IMF director in its country. Using a mixture of private donors and well-trained internal economists,
Botswana was able to develop into Africa’s strongest growing economy without IMF help.
Stiglitz conludes by saying that though the IMF has many flaws, he does not intend to entirely decry its mission or its
accomplishments. Instead, he says, he believes that better accountability in the international community would help to
reveal some of the IMF’s secretive and questionable strategies to helping follow through on its mission of providing
macroeconomic stability to the international community. Current IMF programs have too much conditionality, are not
country-specific, and fail to look at both long and short term goals. Fixing the IMF and other international institutions
would help promote growth and reduce poverty.
Ch. 4: Chapter four discusses the East Asian market crises of 97-98, and provides a scathing critique of
IMF and U.S. Treasury policies in handling the crisis. He begins by explaining his view that the East
Asian countries that had had such great growth prior to the crisis did so because they didn’t strictly
adhere to the Washington consensus of capital market liberalization. He explains the two main
patterns of the crisis with examples of problems in Korea, which had allowed its firms to borrow abroad
and ended up with highly indebted firms that could not get loans, and Thailand, which had had a
speculative attack on its currency because of hot money and internal drain of its baht currency into
dollars. The typical IMF response in this case was to pump money into the countries to absorb some of
the drain of capital and restore confidence, along with imposing tightening monetary policy conditions,
liberalization of financial markets, and other reforms. According to Stiglitz, these policies failed badly.
Stiglitz argues that the biggest policy mistake of the IMF was capital account liberalization and
the failure to encourage countries to allow capital controls. Countries that did, like Malaysia, had much
more success in reducing macroeconomic problems. Stiglitz also criticizes the tightening of monetary
policy to balance budgets and increase exports at the expense of spreading the financial crisis. Stiglitz
argued that the IMF did not take into account what high interest rates would do to highly leveraged
firms and did not consider the possibility of bankruptcies. He argued that the macroeconomic
consequences of contractionary policies would hurt foreign investment much more than raising interest
rates, and that the IMF was too defensive about not allowing East Asian countries to create their own
monetary fund.
Stiglitz also believes that the IMF failed in its strategy to try and fix bankrupt companies’
situations without creating better national regulations in countries with failing firms, and that much
better financial restructuring of banks was needed as well to prevent bank runs in unstable financial
systems. Stiglitz describes the comparative success of Malaysia and particularly China in weathering the
crisis because of their anti-IMF policies. Malaysia decision to use capital controls and China’s focus on
macroeconomic success ahead of capital account liberalization, Stiglitz points out how greatly the
effects of these policies contrasted with the policies undertaken in South Korea, Indonesia, and
Thailand, and the disastrous results in those countries.
Stiglitz concludes by explaining how he believes that much of the failure of the governance of
globalization in this situation is the result of the Western market perspective that IMF leaders brought
to the situation. Their perspective was not one of experts of the Asian economies to which their policies
applied, but to more mature Western economies and in particular to the Western financial community.
Stiglitz sees this problem as large, and says that despite some regulatory gains that countries made
because of the East Asian financial crisis, the losses macroeconomically will take a long time to regain,
and will forever put those countries behind where they could have been now.
Briton Mudzingwa
A New Approach to Sovereign Debt Restructuring
By Anne Krueger (of the IMF)
http://www.imf.org/external/np/speeches/2001/122001.htm
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Problem = debt restructuring process for countries who need to default on foreign debts is
currently costly and inefficient
Need to look at ways to help countries with unsustainable debts deal with them in a
prompt and orderly fashion - and without forcing the international community to bail out private
creditors in a way that encourages inappropriate lending or investing in the future.
In recent years, countries have increasingly turned to bond issues to raise capital 
Private creditors have become increasingly numerous, anonymous and difficult to coordinate (it used to
be just a handful of banks)
This makes countries facing severe liquidity problems go to extraordinary lengths
to avoid restructuring their debts to foreign and domestic creditors, because a disorderly restructuring
can sever access to private capital for years
New solution = formal mechanism allowing a country to request a temporary standstill on its
debts, during which time the country would negotiate a restructuring with its creditors. The IMF would
only approve such a request if the debt were judged truly unsustainable.
During this limited period, the country would have to provide creditors with assurances
that money would not be allowed to flee the country, and that policies were being put in place to ensure
that the country could repay its debts in the future.
This mechanism should ensure that the process of the negotiations are not disrupted and
it should bind minority creditors into accepting a restructuring once it was agreed to by a large enough
majority
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This mechanism could be enacted by establishing a treaty obligation by amending the
IMF’s Articles of Agreement
Such cooperation would make debtors and creditors better off
It would make crisis management more orderly and less costly, by forcing
countries to face up to their problems promptly
Center for Global Development: Commitment to Development Rankings
http://www.cgdev.org/section/initiatives/_active/cdi/
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The Commitment to Development Index (CDI) rates 21 rich countries on how much they help
poor countries build prosperity, good government, and security. Each rich country gets scores in seven
policy areas—aid, trade, investment, migration, environment, security and technology—which are
averaged for an overall score.
Overall (2007): 1st = Netherlands; 2nd = Denmark; 3rd = Norway; 14th = United States
Japan (21), Greece (20) and Italy (19) are ranked worst overall
United States ranks: 14th overall; 19th in Aid; 2nd in Trade; 8th in Investment; 12th in
Migration; 21st (last) in Environment; 4th in Security; 14th in Technology
The highest ranking countries in each area are: Denmark for Aid; Canada for Trade; United
Kingdom for Investment; Austria for Migration; Norway for Environment; Norway for Security; France
for Technology.
Stiglitz, Making Globalization Work, Chapter 9 Reforming the Global
Reserve System
Money is flowing uphill from poor to rich countries.
The richest, the US, borrows $2 billion a day, and poor countries partially fund this by buying
low-interest but highly liquid bonds.
All countries hold reserves.
o
They backup currency and help manage risks.
o
Serve as a buffer against unexpected changes in the cost of debt
o
Can be used to manage the exchange rate
Buying the country’s currency when others are selling or vice versa
The world’s reserves are mainly US denominated (US dollars or treasury bills)
o
They are very low risk but only earn 1 to 2 percent returns, much lower than global markets
o
Developing countries lose billions in “opportunity costs” due to low returns
The US is the consumer of last resort
o
It constantly sells its currency (T-bills) and spends money to keep the world afloat
o
This of course increases the trade deficit
o
The US keeps a trade deficit, whether in good economic times or bad (an anomaly in the world)
Instability
o
Dollar is considered unassailable but between Feb 2002 and Dec 2004, its value fell 37% with
respect to the Euro
o
The current reserve system is inherently unstable. The reserve country gets more and more into
debt
o
Countries are moving away from the dollar toward the Euro. European countries fear the more
expensive currency crowding out exports and raising unemployment.
Scenario
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Where countries shift from the dollar to the Euro, Yen, and Yuan. There is a mutual need between
China and the US. The US buys Chinese goods and China lends the US money. This only works due to
China’s current exchange rate.
Stiglitz’s New System
o
Create a global reserve currency (he calls them global greenbacks) that can act as reserves.
o
In the East Asian crisis, Asian countries questioned why they could not keep reserves in their own
currencies, through an Asian Monetary Fund.
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Each year, member countries would contribute to the global fund and receive global greenbacks in
return
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These can be used in a crisis
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These would be exchanged at some stable rate, perhaps the average of the last three years’
exchange (it must be regulated)
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Since all countries hold the same reserves, no one must hold an excess, lowering global need for
them
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Global Greenbacks could offset deficits
Disbursements could be:
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Allocated to different countries based on income and population
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Distributed through international institutions
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Used to achieve literacy
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Individual aid (distribution to individuals)
Josh Kobza
Amartya Sen, Development as Freedom
Chapter 2 – The Ends and the Means of Development
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Introduction- Development is a process of expanding the real freedoms that people enjoy. In her approach expansion of
freedom is both (1) the primary end (constitutive role) and (2) the principal means (instrumental role) of development. The
intrinsic importance of human freedom as the preeminent objective of development has to be distinguished from the instrumental
effectiveness of freedom of different kinds to promote human freedom.
Instrumental Freedoms (1) Political Freedoms (2) Economic facilities (3) social opportunities (4) transparency
guarantees (5) protective security
Interconnections and Complementarity – instrumental freedoms directly enhance the capabilities of people, but they
also supplement one another, and can furthermore reinforce one another. “Human development” and social programs are not just a
luxury that can only be afforded by wealthy countries. East Asia and Japan have undermined the idea that you have to become
wealthy to be able to afford education and health care.
Different Aspects of China-India Contrast- Before opening, China already had a good basic education system and
widely shared health care. India had a half literate population in 1991 when it opened and a lack of social commitment to health
care. However, China has handicaps due to its lack of democracy: China saw largest famine in history (30 million dead 19581961), while India has not seen famine since 1947 Independence.
Growth Mediated Social Arrangements- The causal link between income and life expectancy is driven by (1) income
change for the poor and (2) increased public expenditure on health care. Rapid reduction in mortality can be (1) “Growthmediated” meaning broad and wide-based growth brings about the change or (2) “support-led” where a program of skillful social
support of health care, education etc produces change (Sri Lanka, pre-reform China, Costa Rica, Kerala)
Public Provisioning, Low Incomes and Relative Costs- How do poor countries pay for social programs? Relevant social
services (health, education) are labor intensive, and therefore should be relatively inexpensive in poorer countries. Poor countries
do not have to wait until they are richer before embarking on rapid expansion of basic education and health care. Education and
health care are also productive in raising economic growth.
Mortality Reduction in Twentieth-Century Britain – Provisioning of public support in Britain for nutrition & health
care experienced remarkable expansion during the two World Wars. There were changes in attitudes about “sharing”. Though per
capita availability of food fell during WWII, extreme under-nourishment almost entirely disappeared. (non-combat) mortality rates
also fell sharply.
Democracy and Political Incentives- No substantial famine has ever occurred in a democratic country because famines
are extremely easy to prevent if the government tries to prevent them. Therefore, democratic arrangements help to safeguard
economic freedom (from starvation) and freedom to survive (against famine mortality).
Conclusion- The ends and means of development call for placing the perspective of freedom at the center of the stage.
UN Millennium Project – Overview Report pgs. 1-23
The reading offers 10 key recommendations that are key to achieving the Millennium development
goals. The report suggests that early target goals such as gender parity in primary and secondary
education will miss their 2005 deadlines. It also notes that Sub-Saharan Africa is broadly off-track due
to AIDS, malaria, and falling food production.
1) Why the Goals are Important and Why we are Falling Short?
At the UN Millennium Summit in September 2000, world leaders adopted the UN Millennium
Declaration, committing their nations to a global partnership to reduce poverty, improve health, and
promote peace, human rights, gender equality, and environmental sustainability.
Report defines “extreme poverty” as poverty that kills. Extreme poverty means life expectancy of
40 years instead of 80 in developed countries. 100 per 1000 babies don’t survive to 5 years old, versus
10 per 1000 in developed countries.
Monterrey Consensus 1) World committed to a broad-based development agenda 2) world
recognized the need for a new partnership of rich and poor countries based on good governance and
expanded trade, aid, and debt relief 3) MC distinguished between developing countries that have
adequate infrastructure and human capital to attract private investment and those that rely on official
development assistance 4) identified regions where ODA is particularly necessary 5) recognized that
significant increases of ODA would be needed, and donor countries committed to provide those
additional resources 6) noted that trade is a critical engine of growth
Goals are a linchpin to global security. MDGs are central to efforts to end violent conflict,
instability, and terrorism. Poverty increases risk of conflict due to weak governments, resource
scarcity, and the drug trade. Research suggests strong causal impact of poverty and adverse income
shocks on the onset of conflict.
Where we Stand: 1990-2002 avg incomes increased by 21%, number in extreme poverty
declined by 130 million. Child mortality rates fell from 103/1000 births to 88/1000. Life expectancy
rose from 63 to 65 years. Additional 8% of the developing world’s people have access to water. Add’l
15% have access to improved sanitation services. But progress is uneven. Sub-Saharan Africa- rise of
extreme poverty, high child and maternal mortality, large numbers in slums, widespread shortfall on
most MDGs
HIV/AIDS now infects 40 million people. Pandemic in Southern Africa. Malaria is still pandemic in
SS Africa.
All developing regions have experienced substantial environmental degradation over the past
decade, which could worsen due to man-made climate change.
Why Progress is so mixed: Key to achieving MDGs is to ensure that each person has the
essential means to a productive life. 1) Goals are “ends in themselves” 2) Goals are inputs to economic
growth and further development. When individuals and economies lack basic infrastructure, health
services, and education, market forces alone can accomplish little.
Investing in core infrastructure, human capital, and good governance accomplishes several
things: 1) it converts subsistence farming to market-oriented farming 2) it establishes the basis for
private sector – led diversified exports and economic growth 3) it enables a country to join the global
division of labor in a productive way 4) It sets the stage for technological advance and eventually for an
innovation based economy.
Achieving the MDGs is about making core investments in infrastructure and human capital that
enable poor people to join the global economy, while empowering the poor with economic, political, and
social rights that will enable them to make full use of infrastructure and human capital, wherever they
choose to live.
Four reasons for shortfalls in achieving the Goals
1) Governance failures – Many poor countries w/o resources for decent salaries or the checks on
political abuse that provide incentives for performance and the ability to weed out the inept and corrupt
are unable to afford an effective public sector, so they end up suffering from large-scale inefficiencies
and wasted resources. Governments must work actively with all constituencies, particularly civil society
and the private sector.
2) Poverty traps – poverty leads to low savings rates, low tax revenues, low foreign investment,
violent conflict, brain drain, unplanned or ill-timed births and rapid pop growth, environmental
degradation. Key is to raise capital stock so that self-sustaining growth takes over. Requires
investments in public administration, human capital, and key infrastructure. Geographical conditions
also make poverty traps more likely. (Adverse transport, agroclimatic, and health conditions)
3) Pockets of poverty – middle income countries must ensure that critical investments get
channeled to lagging regions, including slums (W. China, S. Mexico, NE Brazil, Gangetic states in India)
4) Areas of specific policy neglect – Environmental policy grossly neglected due to politically weak
environmental ministries. Gender bias in public investment and social and economic policies. High
maternal mortality. Adolescents are widely underserved in life skills education. Investments in child
and neonatal health have been grossly insufficient.
James Scott, Seeing Like A State
Ch. 3 Authoritarian High Modernism
High modernism is the vision of how technical and scientific can be used to improve the human condition. Beginning in the 19th
century, high modernism transformed the idea of society into an object that the state might manage and transform (eg. Nazism in
‘perfecting’ social order).
Ch. 7 Compulsory Villagization in Tanzania: Aesthetics and Miniaturization
The ujamaa village campaign in Tanzania from 1973 to 1976 was a massive attempt to permanently settle most of the country’s
population in villages planned by the central government. Like Soviet collectivization, the Tanzanian villigization is a form of high
modernism in that it is:
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based on the idea of improving of human condition
bureaucratically efficient for the government: villigization allows better political control
visually ordered: miniaturization via villigization creates apparent order
Failures of Tanzanian villigization that can be applied to high modernist planning:
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Failure to engage subjects – if subjects don't cooperate, they can make any plan inefficient
Static standardization applied to a dynamic environment – no adjustments made for variability
Blind faith in technology and ‘rational strategies’– paternalism: locals don’t know what’s good for them
Artificially designing something as complex as a society via formalities or rules is thin at best
Pretense to discipline virtually everything will be met with resistance and ‘non-order’ eg. Black markets in economies that
are too tightly controlled
Jeff Bengel
Lant Pritchett and David Lindauer “What’s the Big Idea?”
The realities of the world in 1962:
Soviet Union
Fall of historically globalized Britain
Heightened war production
Rapid growth in closed Latin America
Great Depression fresh in memory
Produced ideas about development:
Government can be the driving force behind industrialization
Capital accumulation is the key to rapid growth
Openness is neither necessary nor sufficient for growth
Keeping with these ideas, recommendations would focus around loaning governments money for
capital accumulation
New facts by 1982:
Central planning wasn’t working
Rapid growth of East Asia
Failure of many countries to recover from the commodity shocks of the 1970s
Increasingly disappointing performance of ISI
Latin American debt crises
New big ideas:
Government has in many cases been the problem
Private, productive capital is central
Trade is the engine of growth, foreign investment is good, foreign borrowing dangerous
Structural Adjustment Aid is the new strategy—cautiously optimistic
New facts in 2002:
Slow down in the growth of developing countries
Post-communist transitions have gone badly
Rolling financial crises over the 90s and early 2000s
Collapse of sub-Saharan Africa
China and India—slow and partial reformers—have grown rapidly
The end of big ideas?
This is not a reversal or return to central planning
Nor is does it mean anything goes, or an end to debates
Just the need to refocus a discussion would should be less polarized
Growth regressions are not empirically sound and are not about policy
A conditional decision tree for policy advice
Level of income: policies could be different for countries at different places
Status of growth: it matters whether a country is in a boom or coming off prolonged stagnation
Potential linkages with other economies will be important in locking in regional benefits and
crafting institutions
Strong and capable governments may be able to carry out some policies that other governments
could not
Lawrence Summers and Lant Pritchett “The Structural Adjustment Debate”
Adjustment is an interrelated set of micro and macro-economic reforms
Even after accounting for the difficulties of assessing the impact of structural adjustment lending
(e.g. the need to assess counter-factuals), three conclusions can be made:
Countries that had at least two structural adjustment loans enjoyed faster growth than countries
that did not and themselves from an earlier period
Growth oriented changes can take time to bear fruit. There can be downturns in the interim
period.
Adjustment lending has been more successful in middle income countries than in poor countries
Four critiques of adjustment lending
Adjustment lending lacks a human face because the poor suffer both from the initial contraction
and government spending cuts necessary to restore fiscal balance
First, adjustment tends to shift the terms of trade in favor of non-tradeables—this favors the poor
Second, adjustment does induce budget cuts, and there should be efforts made to make sure the
poor do not primarily bear the burden
Adjustment lending misreads East Asian successes by discouraging active management of the
economy
There were many other factors behind East Asian success
East Asian policies worked very poorly elsewhere
Adjustment lending imposes too much austerity
The sequencing and intensity of adjustment depends on the severity and nature of the crisis
Adjustment lending allows governments to maintain misguided policy
Some nations do successfully resist pressure to reform
However, analysis indicates that adjustment lending does not allow governments to sustain
higher than normal military spending
Conclusion
The future of structural adjustment lending lies with finding better policies to recommend—we
must be able to tell governments what to do, not just what not to do
John Williamson “From Reform Agenda to Damaged Brand Name”
When he first coined the term Washington Consensus in 1989 as a reform agenda for Latin
America, he thought it was a delineation of ten uncontroversial reforms
Since then, the term has taken on many different meanings
As a result, the term should be dropped
A new reform agenda for Latin America:
The main cause of problems in Latin America is a series of crises
Policy here should aim to remove vulnerability
One step would be fiscal restraint in boom times and spending in thin times
Another is flexible—but perhaps not totally floating—exchange regime
Liberalization should proceed, but not without “second generation” institutional reform
Examples of such reforms would be changes in the judicial system or education which would help
the markets operate more fairly and efficiently
Redistribution should be on the agenda, specifically in Latin America (high inequality)
However, policy makers should also strive to give the poor the tools to help themselves out of
poverty (e.g. education, access to micro-credit)
Tracy Li
Joseph Stiglitz, Making Globalization Work, chapter 2.
Making globalization work means making it work for the 80% of world’s pop living in developing
countries. This chapter will show there are no silver bullets; dev econ is largely just trying one thing
after another.
Now, two competing schools are free market v. managed mkt economy. Advocates of Washington
Consensus tend to favor free markets: little emphasis on equality, belief in trickle-down or that equality
is province of politics, not economics. Alternative view, which Stiglitz holds, is that gov’t should both
promote development and protect the poor: should build infrastructures, etc. History + natural
experiments have shown that Washington Consensus doesn’t work, at least according to Stiglitz. Mixed
record of dev in East Asia (EA) and Sub-Saharan Africa (SSA)/Latin America (LA) shows that
development is not inevitable.
East Asia
Region has seen enormous success bc globalization has been well managed. Govt’s have actively
planned according to ec principles instead of letting mkt simply have free reign. Example, gov’ts
carefully chose certain industries to invest in and grow (like technology/electronics) to encourage longterm growth. Gov’ts also actively encouraged ppl to save. Singapore: 42% of wages directed to
“provident fund”. China and India have also limited inflows of short-term capital in order to avoid
speculative runs/instability. East Asian countries were forced by IMF and U.S. Treasury to open up to
foreign investments  contributed to crises of 1997, which resulted in part from speculative investing.
Demonstrated necessity of gov’t involvement/planning and dangers of free market.
Latin America
At first had more controlled gov’t, experienced respectable growth from 1930-80, but then underwent
crisis in early 1980s due to high interest rates in U.S. that spilled over to LA. Triggered 3 years of
decline followed by 10 years of stagnation  response = Washington Consensus policies  resulted in
low levels of growth and most of wealth went to rich; growth based on heavy int’l borrowing and
privatization that sold off national assets to foreigners  increased inequality/unsustainable growth.
Countries in Transition from Communism
Encouraged by IMF/int’l community  shock therapy, privatize as quickly as possible. Turned out to be
a disaster. Capital flight/lack of infrastructure, etc.  pathetically low growth rates, worse than most
ppl imagined at the time.
East Africa
Post-independence, didn’t have the infrastructure to realized sustained economic growth. Also suffered
from high population growth  poverty and famine. Some countries still saw healthy economic growth,
but this was again damaged by the AIDS epidemic
South Asia
Very impressive growth: resulted in part for seeds that were sown decades before, like investment in
technology/universities, etc. Also carefully regulated the pace of liberalization after several decades of
socialism.
All in all, these examples show at the Washington Consensus simply doesn’t work…
A Vision of Development
GDP is useful measure of growth, but not the end-all-be-all also really important to look at health and
environment, for example. Need to look at overall standards of living.
Role of Markets
Changes: 1960-70 saw poverty as a problem of capital: savings gap. Then, in 1980s, looked at market
as the answer, and government was getting in the way  liberalization/Washington Consensus. But
these policies failed too, and eventually it became clear that a new strategy was needed. A more
comprehensive strategy that is more country-specific
A Comprehensive Approach to Development
Successes in US and in East Asia show that countries have to strike the right balance between gov’t
intervention and free markets. What a country will choose to develop will depend on where they are in
that balance. Gov’ts can act in a number of ways, but pretty much everyone agrees that they should
est. basic education, legal frameworks, infrastructure, and some elements of a social safety net.
People are at the core of development
Education is important and must provide opportunities at the primary + higher ed levels, as well as jobs
for people when they graduate.
Importance of community
Important to enable communities to organize at the local level. Ex: new World Bank grants $25,000 to
local communities to fund their own projects.
The challenges of implementation
Often times when policies fail its said that the strategy was right but the implementation was wrong.
Main problem think of today is related to governance – corruption. The campaign against corruption has
actually made a lot of strides. There will always be corruption, but many countries are pushing towards
a greater transparency, like Nigeria and Uganda. Singapore is a good example of a country that was
able to successfully battle corruption using strong policies/punishments.
World Bank, Assessing Aid, pp 1-23.
Rethinking the Money and Ideas of Aid
Foreign aid has at times been a spectacular success, and at times an unmitigated failure. What
determines whether foreign aid will work? Current rethinking of aid  the following findings:
Financial aid works in a good policy environment
Improvements in ec institutions and policies in the dev. World are key to quantum leap in
poverty reduction. Aid can be used to support societies that want to reform, not to “buy” reform.

Value of development project = strengthen institutions and policies so that services can be
effectively delivered

Active civil society improves public service

Aid can nurture reform even in most distorted environments – requires patience and focus on
ideas, not money.
Five reforms needed to make aid successful:


4.
5.
6.
a.
7.
8.
Financial assistance should be targeted more effectively to countries w/ sound economic
management
Policy-based aid should be provided to nurture policy reform in credible reformers. Countries w/
track record, basis for optimism, often for new gov’ts in post-conflict situations.
Mix of aid activities should be tailored to country and sector conditions
Fungiblity  can’t evaluate aid based on outcomes of specific project, but rather on
effectiveness of overall spending
Focus on creating knowledge and capacity
Need to find alternative approaches in distorted environments where aid has failed: transmit
ideas, not just money.
The New Int’l Environment
In Cold War period, aid had two goals, to alleviate poverty and to build/strengthen strategic
alliances/players. Now that Cold war has ended, the second motivation is no longer there. This means
that donors could have more freedom in donating, but also are donating less. At the same time, there’s
been a surge in private capital flows. Unfortunately, private flows are more volatile and are
concentrated in a small number of countries. (95% of funds go to 26 out of 166 countries)
New thinking on Development strategy
Post-war flush of independence  gov’t-to-gov’t aid seemed like a good idea. Two gap model: dev
countries needed capital and foreign exchange. But example aid wasn’t used effectively/failed. Example
of Zaire, if funding was used to actually close these gaps, aid would have pushed per capita income to
$20,000, but instead growth has just stagnated.
Phases of dev thinking: 1) gov’t = solution, 2) markets = only hope, 3) now a mix of gov’t and
markets. New role for aid: dev assistance is more about supporting institutions and policies that it is
about giving money.
Money Matters: In a good policy environment
Evidence from cross-country studies, research into World Bank Investment projects, and case studies of
aid effectiveness. One important lesson from cross-country studies is that aid works in partnership with
private capital. $1 of foreign aid “crowds in” $2 of private investment.
Historically, allocation of aid has followed geo-political reasons as much as it does economic reasons:
former colonies receive more aid from their colonizers. Aid is also distribute along UN voting patterns.
This can change in the future.
Aid can be the Midwife of Good Policies
Give more money to good policy performers: ideas are more important than money. Some efforts pay
off only over a long period of time (like investing in the education of officials). A more straightforward
way to give aid is through conditional finance, which is what the IMF does. But a recent study shows
that conditionality is unlikely to bring about lasting reform if there’s no strong domestic movement for
change already existing.
Where desire for reform does already exist, loans can help lead to reform by 1) enabling gov’ts to
publicly demonstrate commitment to reform, 2) conditionality signals to private investors that reform
program is credible, and 3) aid spurs growth in good reform environment.
Money matters – In a good institutional environment
Fungibility means that $1 to a certain project is practice is a $1 to overall public spending. Because aid
resources are fungible, effects of “money aid” and “ideas aid” need to be assessed separately. Funding
should be based on overall public sector management. Many low-income countries have good
macroeconomic policies but inefficient service delivery (it’s easier to change your trade policies than to
fix your legal system, for example).
Aid can be the Midwife of good intuitions:
Aid can help governments experiment, learn, disseminate, and implement new ideas on service
provision. Poor countries w/ good policies should get more funding than ones w/ mediocre polices, but
in fact they get less.
Jeffrey Sachs, The End of Poverty, chapters 13-14
Poor countries lack six kinds of capital: human, business, infrastructure, natural, public institutional.
Poverty trap: in normal ec, things move towards rising incomes, per capita income rises in spite of
depreciation and pop growth, but in poor countries this doesn’t work bc ppl spend all their capital just
to stay alive. This further impoverishes the household  circle of falling incomes, zero savings and
public investment, and falling capital per person. Official development assistance (ODA) can help
jumpstart an economy to help it break out of the poverty trap
Differential Diagnosis and Capital Accumulation
Public sector should be focused on five kinds of investment: human capital, infrastructure, natural,
public institutions, judicial system, knowledge capital. Private sector should invest in businesses.
Separation bc there are a lot of upfront costs (+ increasing returns to scale) that come with the goods
that the gov’t provides  if private sector provided this would result in monopolies. Also bc these goods
are non-rival, have spillover effects, should (on moral grounds) be provided to everyone, and gov’t can
help ppl participate in private sector.
Good investments come in packages. Can’t choose just one investment as a silver bullet – things
work in conjunction w/ one another.
Investing in technological capacity. Gov’ts should invest in training technical workers, educating
villagers, and promoting scientific research. Can’t just outsource research to rich countries; homegrown
technologies will be needed to adapt global processes.
Examples of Scaling up in the Fight Against Poverty. We have samples of pilot projects that have
worked (like bed nets and malaria), but can we scale these efforts? Here are five examples that have
worked (this should be enough to use as support in an essay, but for five more, see pages 445-447):





Green Revolution in Asia: Green Revolution post-WWII, started in mexico, no used to grow tons
of wheat in India, among other things.
Eradication of Smallpox
Campaign for Child Survival; led by UNICEF, scaling up of many different public health initiatives
against TB, whooping cough, polio, etc.
Global Alliance for Vaccines and Immunization
Campaign against Malaria: started in 1950s-1960s
These cases demonstrate some common themes: scaling up is possible when backed by appropriate
and widely applicable technology, leadership, and financing.
CHAPTER 14: A GLOBAL CONTACT TO END POVERTY
Ending poverty will require actions by rich and poor countries  global compact. Proposed framework =
Millennium Development Goals-Based Poverty Reduction Strategy
A Shadow Play
Now many aid recipients pretend to reform, and aid agencies pretend to require reform. Sachs argues
that IMF/World Bank officials are ignorant (or at least refuse to recognize) that some countries are too
poor/corrupt to achieve the goals that they promise to. They refuse to acknowledge the gravity and
urgency of the problem. But people will support aid to the countries if they understand the situation.
Two sides of the compact:
Emphasizes that this is a two way street: countries should only receive aid if they can prove good
governance and commitment to reform, but rich countries should then support countries that do
demonstrate this commitment.
Planning for success: need to fix the plumbing of international assistance. Individual countries should
prepare their own poverty reduction strategies (PRS). These are available online, and are in fact quite
ingenious but are too under funded to be effective.
Why today’s system ins incoherent: right now, split personality of IMF and WB. These institutions
publicly champion the MDGs, but underfund them and then privately acknowledge they can’t be met.
What’s missing here are the links between the MDGs and the PRSs. Today, the int’l aid organizations
decide what they’re willing to give poor countries, but they should do this based on a fair and thorough
assessment of what countries need. Case in point is Ghana: proposed a very sound PRS, but was
“unrealistic” bc IMF would not provide enough funding to support it (not because the plan itself was
poor.
A Millennium Development Goals-Based Poverty Reduction Strategy
An MDG-based strategy has the following parts (5):





Differential diagnosis: of countries individual needs
Investment plan: shows size, timing, and costs of required investments
Financial plan: to fund investment plan
Donor plan: gives multiyear donor commitments for filling the MDG Financing Gap
Public Management Plan
The Financial Plan and MDG Goals Financing Gap
Need to calculate the costs of alleviating poverty; building roads, hospitals, schools ,etc. In the 1980s
and 1990s, ppl wanted the poor to pay for this themselves through privatization/private sector projects.
But they’ve demonstrated that they can’t pay very much.
Donor Plan: stress need or countries to improve governance, but they need to improve their own
performance as well. Should focus on four aspects of aid flows; magnitude, timing, predictability, and
harmonization. Harmonization refers to the idea that aid agencies should operate on basis of their true
comparative advantage
Public management Strategy: financing is necessary but not sufficient. Needs planning, construction,
training, and improved oversight. Public Management plan usu has 6 components: decentralization,
training, IT, measurable benchmarks audits, and monitoring and evaluation.
Regional Infrastructure: WB needs to improve at managing multicountry projects. Regional projects are
good bc they can improve cooperation b/e countries and countries can share responsibility for
governance  positive peer pressure.
Global Policies for Poverty Reduction
Four concerns that need to be addressed at global level: debt crisis, global trade policy, science for
development, and environmental stewardship.


Debt crisis: should have been resolved years ago. Heavily Indebted Poor countries (HIPCs)
should have been given grants, not loans in the first place. Debts should now be cancelled out right.
Global Trade Policy: sustained ec growth requires poor countries to increase their exports to rich
countries  need worldwide commitment to improving market access to poor countries. But poor
countries need trade plus aid, not trade or aid. Also, we should liberalize trade in agriculture, but this


will not be a panacea: it will overwhelmingly benefit large food exporters: US, Canada, Argentina,
Brazil, Australia
Science for Development: Poorest of the poor are often neglected by researchers (esp. private
sector); need to specially target areas that affect the poor, like diseases, climate forecasting, weather
management, etc.
Environmental stewardship: poor people are suffering most and contributed least to global
climate change
Who conducts the International System?
In theory, should be a partnership between countries, UN agencies, bilateral donors, and IMF/WB. But
in fact there’s very little cooperation between these entities, which is destructive to development. Most
rich countries prefer the IMF and WB bc that’s where their money will count for more. In UN its one
country, one vote, but in IMF/WB it’s one dollar, one vote.
David Escamilla
Joseph Stiglitz, Making Globalization Work, chapter 2.
Making globalization work means making it work for the 80% of world’s pop living in developing
countries. This chapter will show there are no silver bullets; dev econ is largely just trying one thing
after another.
Now, two competing schools are free market v. managed mkt economy. Advocates of Washington
Consensus tend to favor free markets: little emphasis on equality, belief in trickle-down or that equality
is province of politics, not economics. Alternative view, which Stiglitz holds, is that gov’t should both
promote development and protect the poor: should build infrastructures, etc. History + natural
experiments have shown that Washington Consensus doesn’t work, at least according to Stiglitz. Mixed
record of dev in East Asia (EA) and Sub-Saharan Africa (SSA)/Latin America (LA) shows that
development is not inevitable.
East Asia
Region has seen enormous success bc globalization has been well managed. Govt’s have actively
planned according to ec principles instead of letting mkt simply have free reign. Example, gov’ts
carefully chose certain industries to invest in and grow (like technology/electronics) to encourage longterm growth. Gov’ts also actively encouraged ppl to save. Singapore: 42% of wages directed to
“provident fund”. China and India have also limited inflows of short-term capital in order to avoid
speculative runs/instability. East Asian countries were forced by IMF and U.S. Treasury to open up to
foreign investments  contributed to crises of 1997, which resulted in part from speculative investing.
Demonstrated necessity of gov’t involvement/planning and dangers of free market.
Latin America
At first had more controlled gov’t, experienced respectable growth from 1930-80, but then underwent
crisis in early 1980s due to high interest rates in U.S. that spilled over to LA. Triggered 3 years of
decline followed by 10 years of stagnation  response = Washington Consensus policies  resulted in
low levels of growth and most of wealth went to rich; growth based on heavy int’l borrowing and
privatization that sold off national assets to foreigners  increased inequality/unsustainable growth.
Countries in Transition from Communism
Encouraged by IMF/int’l community  shock therapy, privatize as quickly as possible. Turned out to be
a disaster. Capital flight/lack of infrastructure, etc.  pathetically low growth rates, worse than most
ppl imagined at the time.
East Africa
Post-independence, didn’t have the infrastructure to realized sustained economic growth. Also suffered
from high population growth  poverty and famine. Some countries still saw healthy economic growth,
but this was again damaged by the AIDS epidemic
South Asia
Very impressive growth: resulted in part for seeds that were sown decades before, like investment in
technology/universities, etc. Also carefully regulated the pace of liberalization after several decades of
socialism.
All in all, these examples show at the Washington Consensus simply doesn’t work…
A Vision of Development
GDP is useful measure of growth, but not the end-all-be-all also really important to look at health and
environment, for example. Need to look at overall standards of living.
Role of Markets
Changes: 1960-70 saw poverty as a problem of capital: savings gap. Then, in 1980s, looked at market
as the answer, and government was getting in the way  liberalization/Washington Consensus. But
these policies failed too, and eventually it became clear that a new strategy was needed. A more
comprehensive strategy that is more country-specific
A Comprehensive Approach to Development
Successes in US and in East Asia show that countries have to strike the right balance between gov’t
intervention and free markets. What a country will choose to develop will depend on where they are in
that balance. Gov’ts can act in a number of ways, but pretty much everyone agrees that they should
est. basic education, legal frameworks, infrastructure, and some elements of a social safety net.
People are at the core of development
Education is important and must provide opportunities at the primary + higher ed levels, as well as jobs
for people when they graduate.
Importance of community
Important to enable communities to organize at the local level. Ex: new World Bank grants $25,000 to
local communities to fund their own projects.
The challenges of implementation
Often times when policies fail its said that the strategy was right but the implementation was wrong.
Main problem think of today is related to governance – corruption. The campaign against corruption has
actually made a lot of strides. There will always be corruption, but many countries are pushing towards
a greater transparency, like Nigeria and Uganda. Singapore is a good example of a country that was
able to successfully battle corruption using strong policies/punishments.
World Bank, Assessing Aid, pp 1-23.
Rethinking the Money and Ideas of Aid
Foreign aid has at times been a spectacular success, and at times an unmitigated failure. What
determines whether foreign aid will work? Current rethinking of aid  the following findings:











Financial aid works in a good policy environment
Improvements in ec institutions and policies in the dev. World are key to quantum leap in
poverty reduction. Aid can be used to support societies that want to reform, not to “buy” reform.
Value of development project = strengthen institutions and policies so that services can be
effectively delivered
Active civil society improves public service
Aid can nurture reform even in most distorted environments – requires patience and focus on
ideas, not money.
Five reforms needed to make aid successful:
Financial assistance should be targeted more effectively to countries w/ sound economic
management
Policy-based aid should be provided to nurture policy reform in credible reformers. Countries w/
track record, basis for optimism, often for new gov’ts in post-conflict situations.
Mix of aid activities should be tailored to country and sector conditions
Fungiblity  can’t evaluate aid based on outcomes of specific project, but rather on
effectiveness of overall spending
Focus on creating knowledge and capacity
Need to find alternative approaches in distorted environments where aid has failed: transmit
ideas, not just money.
The New Int’l Environment
In Cold War period, aid had two goals, to alleviate poverty and to build/strengthen strategic
alliances/players. Now that Cold war has ended, the second motivation is no longer there. This means
that donors could have more freedom in donating, but also are donating less. At the same time, there’s
been a surge in private capital flows. Unfortunately, private flows are more volatile and are
concentrated in a small number of countries. (95% of funds go to 26 out of 166 countries)
New thinking on Development strategy
Post-war flush of independence  gov’t-to-gov’t aid seemed like a good idea. Two gap model: dev
countries needed capital and foreign exchange. But example aid wasn’t used effectively/failed. Example
of Zaire, if funding was used to actually close these gaps, aid would have pushed per capita income to
$20,000, but instead growth has just stagnated.
Phases of dev thinking: 1) gov’t = solution, 2) markets = only hope, 3) now a mix of gov’t and
markets. New role for aid: dev assistance is more about supporting institutions and policies that it is
about giving money.
Money Matters: In a good policy environment
Evidence from cross-country studies, research into World Bank Investment projects, and case studies of
aid effectiveness. One important lesson from cross-country studies is that aid works in partnership with
private capital. $1 of foreign aid “crowds in” $2 of private investment.
Historically, allocation of aid has followed geo-political reasons as much as it does economic reasons:
former colonies receive more aid from their colonizers. Aid is also distribute along UN voting patterns.
This can change in the future.
Aid can be the Midwife of Good Policies
Give more money to good policy performers: ideas are more important than money. Some efforts pay
off only over a long period of time (like investing in the education of officials). A more straightforward
way to give aid is through conditional finance, which is what the IMF does. But a recent study shows
that conditionality is unlikely to bring about lasting reform if there’s no strong domestic movement for
change already existing.
Where desire for reform does already exist, loans can help lead to reform by 1) enabling gov’ts to
publicly demonstrate commitment to reform, 2) conditionality signals to private investors that reform
program is credible, and 3) aid spurs growth in good reform environment.
Money matters – In a good institutional environment
Fungibility means that $1 to a certain project is practice is a $1 to overall public spending. Because aid
resources are fungible, effects of “money aid” and “ideas aid” need to be assessed separately. Funding
should be based on overall public sector management. Many low-income countries have good
macroeconomic policies but inefficient service delivery (it’s easier to change your trade policies than to
fix your legal system, for example).
Aid can be the Midwife of good intuitions:
Aid can help governments experiment, learn, disseminate, and implement new ideas on service
provision. Poor countries w/ good policies should get more funding than ones w/ mediocre polices, but
in fact they get less.
Jeffrey Sachs, The End of Poverty, chapters 13-14
Poor countries lack six kinds of capital: human, business, infrastructure, natural, public institutional.
Poverty trap: in normal ec, things move towards rising incomes, per capita income rises in spite of
depreciation and pop growth, but in poor countries this doesn’t work bc ppl spend all their capital just
to stay alive. This further impoverishes the household  circle of falling incomes, zero savings and
public investment, and falling capital per person. Official development assistance (ODA) can help
jumpstart an economy to help it break out of the poverty trap
Differential Diagnosis and Capital Accumulation
Public sector should be focused on five kinds of investment: human capital, infrastructure, natural,
public institutions, judicial system, knowledge capital. Private sector should invest in businesses.
Separation bc there are a lot of upfront costs (+ increasing returns to scale) that come with the goods
that the gov’t provides  if private sector provided this would result in monopolies. Also bc these goods
are non-rival, have spillover effects, should (on moral grounds) be provided to everyone, and gov’t can
help ppl participate in private sector.
Good investments come in packages. Can’t choose just one investment as a silver bullet – things
work in conjunction w/ one another.
Investing in technological capacity. Gov’ts should invest in training technical workers, educating
villagers, and promoting scientific research. Can’t just outsource research to rich countries; homegrown
technologies will be needed to adapt global processes.
Examples of Scaling up in the Fight Against Poverty. We have samples of pilot projects that have
worked (like bed nets and malaria), but can we scale these efforts? Here are five examples that have
worked (this should be enough to use as support in an essay, but for five more, see pages 445-447):


Green Revolution in Asia: Green Revolution post-WWII, started in mexico, no used to grow tons
of wheat in India, among other things.
Eradication of Smallpox



Campaign for Child Survival; led by UNICEF, scaling up of many different public health initiatives
against TB, whooping cough, polio, etc.
Global Alliance for Vaccines and Immunization
Campaign against Malaria: started in 1950s-1960s
These cases demonstrate some common themes: scaling up is possible when backed by appropriate
and widely applicable technology, leadership, and financing.
CHAPTER 14: A GLOBAL CONTACT TO END POVERTY
Ending poverty will require actions by rich and poor countries  global compact. Proposed framework =
Millennium Development Goals-Based Poverty Reduction Strategy
A Shadow Play
Now many aid recipients pretend to reform, and aid agencies pretend to require reform. Sachs argues
that IMF/World Bank officials are ignorant (or at least refuse to recognize) that some countries are too
poor/corrupt to achieve the goals that they promise to. They refuse to acknowledge the gravity and
urgency of the problem. But people will support aid to the countries if they understand the situation.
Two sides of the compact:
Emphasizes that this is a two way street: countries should only receive aid if they can prove good
governance and commitment to reform, but rich countries should then support countries that do
demonstrate this commitment.
Planning for success: need to fix the plumbing of international assistance. Individual countries should
prepare their own poverty reduction strategies (PRS). These are available online, and are in fact quite
ingenious but are too under funded to be effective.
Why today’s system ins incoherent: right now, split personality of IMF and WB. These institutions
publicly champion the MDGs, but underfund them and then privately acknowledge they can’t be met.
What’s missing here are the links between the MDGs and the PRSs. Today, the int’l aid organizations
decide what they’re willing to give poor countries, but they should do this based on a fair and thorough
assessment of what countries need. Case in point is Ghana: proposed a very sound PRS, but was
“unrealistic” bc IMF would not provide enough funding to support it (not because the plan itself was
poor.
A Millennium Development Goals-Based Poverty Reduction Strategy
An MDG-based strategy has the following parts (5):




Differential diagnosis: of countries individual needs
Investment plan: shows size, timing, and costs of required investments
Financial plan: to fund investment plan
Donor plan: gives multiyear donor commitments for filling the MDG Financing Gap

Public Management Plan
The Financial Plan and MDG Goals Financing Gap
Need to calculate the costs of alleviating poverty; building roads, hospitals, schools ,etc. In the 1980s
and 1990s, ppl wanted the poor to pay for this themselves through privatization/private sector projects.
But they’ve demonstrated that they can’t pay very much.
Donor Plan: stress need or countries to improve governance, but they need to improve their own
performance as well. Should focus on four aspects of aid flows; magnitude, timing, predictability, and
harmonization. Harmonization refers to the idea that aid agencies should operate on basis of their true
comparative advantage
Public management Strategy: financing is necessary but not sufficient. Needs planning, construction,
training, and improved oversight. Public Management plan usu has 6 components: decentralization,
training, IT, measurable benchmarks audits, and monitoring and evaluation.
Regional Infrastructure: WB needs to improve at managing multicountry projects. Regional projects are
good bc they can improve cooperation b/e countries and countries can share responsibility for
governance  positive peer pressure.
Global Policies for Poverty Reduction
Four concerns that need to be addressed at global level: debt crisis, global trade policy, science for
development, and environmental stewardship.
Debt crisis: should have been resolved years ago. Heavily Indebted Poor countries (HIPCs)
should have been given grants, not loans in the first place. Debts should now be cancelled out right.

Global Trade Policy: sustained ec growth requires poor countries to increase their exports to rich
countries  need worldwide commitment to improving market access to poor countries. But poor
countries need trade plus aid, not trade or aid. Also, we should liberalize trade in agriculture, but this
will not be a panacea: it will overwhelmingly benefit large food exporters: US, Canada, Argentina,
Brazil, Australia

Science for Development: Poorest of the poor are often neglected by researchers (esp. private
sector); need to specially target areas that affect the poor, like diseases, climate forecasting, weather
management, etc.

Environmental stewardship: poor people are suffering most and contributed least to global
climate change

Who conducts the International System?
In theory, should be a partnership between countries, UN agencies, bilateral donors, and IMF/WB. But
in fact there’s very little cooperation between these entities, which is destructive to development. Most
rich countries prefer the IMF and WB bc that’s where their money will count for more. In UN its one
country, one vote, but in IMF/WB it’s one dollar, one vote.
David Escamilla
1. The Anti-Politics Machine: Development, Depoliticization, and Bureaucratic Power
in Lesotho – James Ferguson (1994)
WORLD BANK REPORT 1975 WAS WRONG by saying:
1966 Lesotho gained independence, was ill prepared for it
Was and is a traditional subsistence peasant society
Rapid pop growth, land pressure, deteriorating soil, declining agricultural yields prevented it from producing
enough food for its people.
60% of its workers are migrant workers in S. Africa, a very destabilizing trend
In reality, by 1910 it was already:
NOT:
REALLY:
Subsistence economy producer of cash crops for South Africa
Peasant society reservoir exporting wage laborers in same proportion
Untouched by econ development transformed by it
The World Bank’s Report was very ignorant!
The goal of his paper is to understand the framework and conditions within which statements are
necessary – questions of fact, function, and mechanism
1. The development discourse on Lesotho is distinguishable from academic discourse, and that the
difference between the two types of discourse is due to two different sets of rules of formation for
discourse not to intellectual quality – examines WB report to make this claim
2. It is necessary to show what the ‘development’ discourse in Lesotho does – examine theoretical
construct of an LDC
3. Show how and why this discourse maintains its own distinctive qualities – discover institutional and
ideological constraints that structure ‘development’ discourse
Had a historic labor migration relationship with S. Africa, in the 1800s was doing diamonds, grain, corn,
Not traditional subsistence economy but a ‘dormitory suburb of peasants’
Incorporated into an industrial regional economy, but WB said no industries existed
WB ignores that there is a railroad
Imply that commerce in the hands of foreigners doesn’t count
The WB ignored the fact that Lesotho’s colonial government (1950s era) had engaged in development
activities, it painted the picture that economic stagnation was due to government inaction so WB involvement
was needed
It also ignored the HUGE role S Africa plays in Lesotho from and economic and political perspective
The WB fails to recognize that Lesotho is moving from being an agricultural exporter to a labor exporter
WB gives a disclaimer about ‘unreliable’ statistics yet uses them to motivate its case that Lesotho has
experienced stagnation
He states that in development discourse, made up numbers are better than none at all
WB minimizes the economic impact of remittances
Errors in wage numbers make the migration to S. African seem like a new ‘crisis’
WB mistakenly concludes that instead of a huge trade deficit financed by wages earned abroad, there are
hidden agricultural exports that make up the trade imbalance; this fits its portrait
No mention of corruption or gov inefficiency
WB though the booming sectors were agricultur or mining; they really were migrant remittances, foreign aid,
retail trade, construction, etc.
Broader Critiques:
It should not be necessary for both types of ‘development’ to be used: the kind that steers towards capitalism
and the kind that alleviates poverty
-The WB mistakenly says Lesotho is not on a cash economy (said cattle were often currency)
-‘Less Developed” means retarded and poverty appears because of not being into the
Agricultural Lesotho actually is a heavy importer of food & livestock, so building roads (like the WB wants
b/c it thinks Lesotho is a backwater) only lowers the prices of imports, making it harder for Lesotho farmers
to compete
-The WB paints Lesotho as lacking credit to invest, but investing in their crops would give low yields!
-He also criticizes the ‘development’ notion that society is too ‘traditional’
Made it seem as if there was an egalitarian society of small farmers with no economic differentiation in
which migrant labor appears as a reluctant alternative to farming.
The WB errs by not defining the actor in Lesotho it wants to participate (the government? Economy is too
broad – workers? Miners? Farmers?)
The WB ignores the history of Lesotho. It has few resources b/c its land was taken by S. Africa. It has its
boundaries so it would serve as a labor pool for S. Africa.
The WB should not have a problem with Lesotho’s ‘dependence on S Africa b/c that’s really what it is!
Development mistakenly assumes that Gov policy has direct effect on the economy (here it doesn’t), also
mistakenly assume that gov speaks for the people
In reality, causes of poverty may be politician and structural not technical and geographical indicate that
government is part of the problem – development can’t support revolution.
It’s much easier to ‘sell’ a development package of irrigation, credit program, rural development, etc.
In summary, the most important theoretical premises of the ‘development’ representation in Lesotho are:
-it must be aboriginal, not incorporated into the modern world so it can be transformed by roads education
and a cash economy, mask Lesotho’s penetration into the capitalist regional economy of S. Africa
-it must appear agricultural, so it can be ‘developed’ if it seemed like a key labor source WB can’t do
anything about a wage
-it must constitute a national economy, if the economic center were S. Africa (which it really is) then the
‘development planner’ in Lesotho wouldn’t see a lot of effects on the economy
-it must be subject to the principle of governmentality, assume that the government will be very
responsive to suggestions so it will serve as an effective tool for the development
2. Samuel Huntington – Clash of Civilizations
Brief Summary:
This article does not argue that civilization identities will replace all other identities, that nation states will
disappear, that each civilization will become a single coherent political entity, that groups within a
civilization will not conflict with and even fight each other.
This paper does set forth the hypotheses that differences between civilizations are real and important;
civilization-consciousness is increasing; conflict between civilizations will supplant ideological and other
forms of conflict as the dominant global form of conflict, international relations, historically a game played
out within Western civilization, will increasingly be de-Westernized and become a game in which nonWestern civilizations are actors and not simply objects; successful political, security and economic
international institutions are more likely to develop within civilizations than across civilizations; conflicts
between groups in different civilizations will be more frequent, more sustained and more violent than
conflicts between groups in the same civilization; violent conflicts between groups in different civilizations
are the most likely and most dangerous source of escalation that could lead to global wars; the paramount
axis of world politics will be the relations between "the West and the Rest"; the elites in some torn nonWestern countries will try to make their countries part of the West, but in most cases face major obstacles to
accomplishing this; a central focus of conflict for the immediate future will be between the West and several
Islamic-Confucian states.
World politics is entering a new phase in which the great divisions among humankind and the dominating
source of conflict will be cultural. Civilizations, the highest cultural groupings of people, are differentiated
from each other by religion, history, language, and tradition. These divisions are deep and increasing in
importance. From Yugoslavia to the Middle East to Central Asia, the fault lines of civilizations are the battle
lines of the future. In this emerging era of cultural conflict, the US must forge alliances with similar cultures
and spread its values wherever possible. With alien civilizations, the West must be accommodating if
possible, but confrontational if necessary. In the final analysis, however, all civilizations will have to learn to
tolerate each other.
Analysis:
Civilization is defined as: a cultural entity….the highest cultural grouping of people and the broadest level of
cultural identity people
Great divisions in human kind are cultural
6 civilizations in the world
Western, Confucian, Japanese, Islamic, Hindu, Slav-Orthodox, Latin American, Africa
Why should civilizations clash?
1. Civilizations have real differences, most important is religion
2. The world is becoming a smaller place, so more ‘friction’
3. Economic Modernization and Social Change have separated people from local identities and have
weakened the nation-state as a source of identity
4. Growth of civilization consciousness has been enhanced by the West’s dual role. It is the dominant power,
yet a ‘return to their roots phenomenon’ is occurring among non-western civilizations. The elites of nonWestern countries have become more indigenous (not likely to sent kids to Harvard), but their people more
Western.
5. Cultural differences are harder to resolve than political or economic ones – “Which side are you on” vs.
“What are you”
6. Economic Regionalism is increasing, and it is based on culture and religion
Clash occurs at two levels.
At the micro-level, adjacent groups along the fault lines between civilizations struggle, often violently, over
the control of territory and each other.
At the macro-level, states from different civilizations compete for relative military and economic power,
struggle over the control of international institutions and third parties, and competitively promote their
particular political and religious values.
Example: Islam has bloody borders…Jes in Israel Hindus in India, Buddhists in burma, catholics in
phillipines, orthodox serbs in Balkans
Example: Us and china new cold war on human rights trade and weapons proliferation
-world of clashing civs one of double standards…mulslims contrasted west action vs. iraq with west failure
to protect Bosnians against serbs and to impose sanctions on istrael for vilating un resolutions
Confucian-Islamic Challenge to U.S.
Military power and Nukes
-says democracy and human rights has been product of colonialism in other civs
The Trends Huntington Sees:
The West in effect is using international institutions, military power and economic resources to run the world
in ways that will maintain Western predominance, protect Western interests and promote Western political
and economic values.
Alternatives for non-western countries
–
isolation,
- join the West’s bandwagon
- balance against the west by cooperating with non-Western countries in military and economic issues
1.) "kin-country" syndrome: for example the King of Jordan said the Iraq war was a war against all Muslims
and Arabs
Countries that could be dismembered – Russian and Yugoslavia as they attempt to ‘westernize’ but its culture
is non-western
Torn States – rejected by the West for full integration, trying to carve out a regional role: Examples: Russia,
Turkey (because it’s Muslim) and Mexico
First, its political and economic elite has to be generally supportive of and enthusiastic about this move.
Second, its public has to be willing to acquiesce in the redefinition. Third, the dominant groups in the
recipient civilization have to be willing to embrace the convert.
To redefine torn country must change elites, public, and dominant groups Mexico good
is Russia the west or a leader of slav=orthodox, ** says traditional authoriatarian nationalist Russia may
emerge PUTIN (it actually did as this article was written in ’99)
3. Was Foreign Aid a Mistake – William Easterly
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Development assistance is the combination of money, advice, and conditions from rich nations and
international financial institutions like the WB and IMF to achieve economic development in poor nations.
This article argues that development assistance was based on three assumptions that, with the benefit
of hindsight turned out to be mistaken.
1. We know what actions achieve economic development.
Development economists have long known the answers on how to achieve development, yet
the answers change over time.
1950-1970s Development was a matter of raising the rate of investment to GDP, including
public and private investment. However, private investment was usually not trusted, and the state had to
facilitate investment, guided by the development experts.
1980s. Two debt crises. Middle-income countries had borrowed at commercial banks at
market rates; low-income countries had loans from official agencies at concessional rates. Both entered into a
long process of rescheduling and writing off that led to a decade of loss. Development wisdom shifted away
from mobilizing and guiding capital accumulation and towards the success of the East Asian tigers. This
inspired the adjustments in the IMF and World Bank and the “Washington Consensus,” which called for
removing price distortions, opening to trade, and correcting macroeconomic imbalances.
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Loans to finance structural adjustment in the low income countries as the earlier loans to
finance investment saw little or no growth, the loans couldn’t be repaid, and the low income debt crisis
stretched out into the new millennium. In the middle income countries of Latin America, there was
adjustment and debt repayment, but little growth compared to expectations in the 1990s.
The “Washington Consensus” gave way to “Second Generation” reforms.
Although each shift in the Conventional Wisdom was provoked by the failure of the previous
CW, the argument was usually that previous recommendations were “necessary but not sufficient”
Development knowledge could draw upon more formal empirics like growth regressions. A
surplus of answers caused the hope that the New Growth Literature could find the answers in the 1990s to
collapse.
2000s Group of academics and policymakers agree that maybe we don’t know how to achieve
development. Nations that have succeeded at this task have faced different sets of obstacles and have adopted
varying policies regarding regulation, export and industrial promotion, and technological innovation and
knowledge acquisition.
Lindauer and Pritchett “it seems harder than ever to identify the keys to growth.”
Some combination of free markets and good institutions has an yield development. The
problem is figuring out what contributes to free markets and good institutions.
2. Our advice and money will make those correct actions happen.
By the same judgment by stylized facts and country cases that has guided the evolution of the
conventional wisdom, development assistance has failed to achieve development. (Africa is an example.)
Successful cases of development happening due to a large inflow of aid and technical assistance have
been hard to find. (Some argue about South Korea. Ghana, Uganda, Mozambique depend on rapid growth
episodes. Botswana seems to be long-term success even though the study fails to mention foreign aid. )
It’s very likely that low growth countries got more aid because they had low growth. This calls for
more formal econometric methods to disentangle the aid outcome from the counterfactual, utilizing
instruments such as population size and geo-strategic factors. (too many possible specifications and not
enough observations)
Positive aid and growth results have not proven robust.
The early expectations that aid would raise growth failed to pay attention to elementary economics.
the paradox first pointed out by Peter Bauer (1976) is more compelling than ever – any poor country
where incentives to invest are attractive does not need aid, while a poor country without incentives to invest
will not have aid go into investment.
The international capital market imperfections and alleged inevitability of low savings rates in
poor countries used to justify aid in the past have not held up well in today’s world.
Easterly 2005 found that structural adjustment lending also had no effect on the kind of macro
policies and price distortions that it was supposed to correct.
There was a general worldwide trend towards better policies (as judged by Conventional
Wisdom II), but the degree of movement across countries was not correlated with the intensity of aid or
structural adjustment lending.
There has also been surprisingly insufficient attention in aid agencies to the political incentives
facing recipient governments.
Large aid flows can result in a reduction in governmental accountability.
Djankov et al and Knack find y that aid worsens democracy, bureaucratic quality, the rule of
law, and corruption.
Foreign aid is a public entity spending the money of rich people on the needs of poor people.
The recipient of the aid goods has no ability to signal their dissatisfaction, and there is little information as to
which aid programs work. Nor is there much incentive for the aid agency to find out what works with little
accountability.
Development assistance as it is now conceived is inherently unaccountable and unable to
process feedback.
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3. We know who “we” are
Despite the frequency of statements like “we must end world poverty,” it is seldom clarified who is
this “we” taking responsibility for world poverty.
“A vital lesson for policy formulation and policy advice is the need to be cognizant of the shadow
prices of constraints, and to address whatever is the binding constraint on growth, in the right manner and in
the right sequence. This requires recognizing country specificities, and more economic analysis and rigor
than does a formulaic approach to policy making. “
Economists should not find so hard to take the idea of a spontaneous bottom-up order emerging out of
the decentralized actions of many actors, as opposed to a strategic vision offered by a few experts. The
invisible hand may operate in other areas besides the free market
Yet “what must we do?” is a question that people can’t help asking about a problem so tragic as world
poverty, and experts are the ones who say they have the answers.
Yet the unquenchable demand for experts who can call tell “us” the right answers shows no sign of
ending soon.
Conclusion
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We don’t know what actions achieve development
Our advice and aid doesn’t make those actions happen even if we knew what they were
We are not even sure who “we” are that is supposed to achieve development
Easterly takes away from this that development assistance was a mistake.
However, it doesn’t follow that foreign aid should be eliminated. If it seeks to create
opportunities for individuals rather than transform societies, it could work, and the problems seem more
solvable than those of “development assistance,”
Economists also still have a more general role making the case for individual freedoms that
allow the spontaneous, bottom-up processes to work.
The inability of the experts and the aid donors to provide the answers to development has not
stopped development from “just happening” on its own anyway. Economic growth without much influence
by experts or much contribution by foreign aid is happening around the world.
Even though some of these success stories could later flop, history suggests their place will be
taken by new permanent exits from poverty.
This should be enough to reassure those who care about world poverty to have some hope
rather than despair.
Nimi Katragadda
“America:
an Empire in Denial” by Niall Ferguson
Purpose: Draw parallels between British Empire of before and current
American “empire.” Ferguson concludes, “Perhaps the reality is that the Americans
have taken our old role without yet facing the fact that an empire comes with it.”
I.
II.
Why care about the history of the British Empire?
1)
US was product of that empire 2) British empire most
commonly cited precedent for current global power of US
British empire nowadays considered bad
thing, on balance—notably due to slave trade involvement
III.
Current debate on US global power or “imperial” American foreign policy
Left: Gore Vidal-imperial system has wrecked society
leaving debt, poor education, and no healthcare. Chalmers Johnson: terrorists attacks
like September 11th are expected reactions to American imperialist actions
Right:
Pat Buchanan-Overseas escapades subvert the
core republic to further evil special interests. Must pursue isolationist policy to
remedy.
IV.
Is US more powerful today than British Empire of mid-19th century?
US
more military dominant today than Britain
However,
American power is large in
informal or “soft” power “exercised through economic and cultural agencies rather
than colonial structures”
Belief amongst many critics of globalization
that multinationals and public institutions like IMF are just as powerful as soldiers of
British empire
US
formally controls smaller area—
difference between influencing sovereign state through economic/cultural pressure or
formal rule
US
face new challenges today
Nye’s image of three-dimensional board—
military power, economic power, and transnational relations (like bankers or
terrorists)—US is weak.
British
also had to worry about
transnational issues, but technological possibilities of past made individual
troublemakers less threatening. Not like capabilities of an Osama bin Laden today.
V.
Argument against imperialism
Negative
consequences of colonized-Marxists:
economically exploitative aimed at maximizing value extracted from subjects
Negatives consequences for colonizers-Liberal: distorted
market forces (military force, preferential tariffs). Free economic integration with
world was important and investment in domestic industry would have been better
Both arguments: Benefits of international
exchange could have occurred without costs of empire
Globalization today
VI.
Much
in common with integration of world pre-1914
Liberal economists: integration raises living standard,
will always be some net losers
Focus on flows of commodities, capital, and labor; less
on knowledge, culture and institutions. Also focus on ways government can facilitate
globalization through deregulation, rather than impose it, as did the British Empire.
British
empire acted as agency for
imposing free markets, rule of law, investor protection, uncorrupt government—
making it a good thing
British empire—good or bad?
VII.
British
exploitation—not altruistic.
were indeed zealous in acquisition and slavery
However, also did more to promote free movement of
goods, capital and labor than any other entity in history. Difficulty is achievements
more likely to be taken granted of than sins.
VIII.
Counterfactual—world without British empire
founded.
India,
Williamsburg, Jamaica etc would be not have been
Perhaps
all would have happened anyway but with
different names—however, reason to doubt because flows of culture and institutions
would have ceased even if flows of capital and migration occurred in spite.
Important cultural feature that
disseminated is representative assemblies and idea of liberty embodied by British.
Other empires may not have had same effect
IX.
What can US learn from British?
Most
successful economy in world can impose values on
less technological advanced regions
US
vastly wealthier than Britain of before—cost of
expanding American empire will not prohibit growth
Hypothesis
of political globalization—US shifts more in
direction of formal than informal empire. British progressed from informal to formal
imperialism.
multinationals, Hollywood, etc.
US
Globalization
currently has strong informal empire—
fundamentally different today
British empire relied on massive export of
capital and people, but US is net importer of capital and favored destination of
immigrants
US
rather than historically imperialist like British
Reality—US
will always be reluctant ruler of people,
has taken on global burdens if name of
liberty like British Empire before it.
US
has bigger economy, more people but
lacks drive to export capital, people, and culture to areas in need. It is an empire in
denial, in short.
The Bottom Billion – Chapter 3: The Natural Resource Trap by Paul Collier
I.
Natural resource trap in the context of poverty
Would
expect discovery of natural resources to be
catalyst for growth. But, surplus from natural resource exports can significantly
reduce growth. “Rents,” defined as excess of revenues over all costs including normal
profit margins, can be damaging.
Lost
income from rents
growth more than offsets gain in
3
types of countries with natural
resources: 1) whole society can live as rentiers on unearned income from wealth—eg,
Saudi Arabia ad Kuwait w/enormous oil revenues 2) resource-rich countries with
middle income status—eg, Middle East, Russia 3) poor resource rich countries—
resources do not even bring economy to middle income status
Bottom
billion disproportionately in last
category of resource-rich poverty
II.
“Dutch
disease”
Resource
exports cause country’s currency to rise in
value against other currencies. Makes country’s other export activities uncompetitive,
which might have been vehicles for progress.
Eg.
Nigeria in 1970s—oil revenues built up
and country’s other exports like peanuts and cocoa became unprofitable, production
collapsed
Dutch
disease can crowd out export
activities that otherwise have potential to grow rapidly
IMF
chief economist believes aid can also be killing
exports
Economists
also add concerns about shocks—natural
resource revenues volatile and led to crises
Volatile
revenues difficult to manage
during price boom, rational public investment goes away
Boom-bust phenomenon makes it difficult
to sort out when government is making mistakes
Eg, Nigeria 1986-world price
of oil crashed. Swing from big oil and borrowing to little oil and repayment—living
standards dropped by half.
Reforms,
structural
adjustment program—induced growth but only helped slightly. Nigerians perceived
increase in poverty was a result of economic reforms—believed international financial
institutions like World Bank had ruined Nigeria, as opposed to oil bust.
Easy
boom bust cycle
III.
to have misreading of
Resource rents make democracy malfunction
Survival
of the fattest
In
case of oil, oil rents have substantially reduced
likelihood country is democratic. Things are changing—democracy spreading to oil
economies, even without explicit pressure (Indonesia, Mexico)
Author
matched surpluses of natural resource revenues
with political institutions of each country. In presence of large surpluses autocracies
outperform democracies with large effects.
Why
natural resource revenues?
does democracy undermine ability to harness
Resource
surpluses induce excessively
large public sector—opposite of “minimal state” ideology
Resource
rich democracies under invest—
governments keen on winning next election and disregard what happens afterward,
neglecting investment for future
many white elephant projects
IV.
Resource
rich democracies invest badly-too
Why do surpluses undermine democratic politics?
Rules of democracy 1) determine how power is achieved
– elections 2) limited how power is used – checks and balances on government abuse
of power. Both undermined by resource rents
politics of patronage
Resource
rents alter electoral competition by allowing for
Bribery
becomes acceptable and thus
effective. Using vote to support party offering public serves rather than selling to
patronage party not in your interest
Patronage politics most likely
where voter loyalty to ethnic communities strong and objective information available
to voters weak (absence of press freedom)
For
patronage politics to be
feasible, ruling party has to be able to subvert public funds. If restraints upon
embezzlement tight, will be too expensive. Resource rents plays subversive role.
Resource
revenues weaken political restraints
Reduce need to tax—decrease public
scrutiny of how taxes spend and undermine accountability. Less political restraints on
how power is used—morel likely to be autocratic
Erode
checks and balances-political parties
compete through patronage.
With
powerful restraints a resource-rich
democracy can be economic success
Based
on quantitative scale,
society would need 4/17 possible restraints—crude approximation. Do not say how
restrains interact, which matter most, etc.
Free
press generally
associated with faster growth rate, especially in resource rich countries
investment
Restraints
raise return on
Eg.
Nigeria –
1) unrestrained electoral competition led to increase in cost of dam project 2) basic
restraints in 1983 led to massive reduction in costs
V.
Autocracy does not work in societies of bottom billion
Autocracy
works well only in societies not ethnically
diverse. Diversity tends to narrow support base of autocrat. Narrower base -> strong
incentive for economic policy to sacrifice growth to redistribute income to autocrat’s
group
Eg,
Saddam Hussein-Sunni Muslim and
Baath Party composed of Sunnis, detriment of Shiites and Kurds
Resource
rich and ethnically diverse society needs
democracy with strong emphasis on political restraints relative to electoral
competition
Eg.
Botswana—democracy, but elections
have not changed government—electoral competition not intense. However, adhere
to due process and all public investment projects required to meet minimum rate of
return
Botswana is middle income
country and had world’s fastest growth rate for long period
VI.
Conclusion: Natural Resource Trap
1) Dutch disease and volatility in commodity pricesinhibit growth 2) resource rents likely to induce autocracy-highly detrimental to
economic development, especially for ethnically diverse countries as with Iraq and
Saddam’s rule 3) replacing autocracy with democracy not easy. Restraints are
necessary, but incentives to build restraints do not exist for parties
Political
development trap – low income, resource rich
society that is ethnically diverse autocracy or lop-sided democracy of electoral
competition without checks and balances likely to fail to growth. Closes off traditional
path to democracy through economic development.
Also
extends to middle income countries
like Russia, Venezuela, Middle East
Why
it matters for G8 Policy
Failures
in resource rich countries affect us
Payments to buy resources are far larger
than aid and are less effective in generating economic development
Use
instruments to break resource trap
Thomas Barnett, Blueprint for Action, Chapter 1
Thinks
about future of war within context of everything else—specialize on scene
between war and peace. The Pentagon’s New Map: Material generated through research
for Secretary of Defense
If
US fights, we will be huge and they will be small. Overmatch capability creates
problems-“catastrophic successes.” What is the good you can do with this power?
Anti
access area-denial asymmetric strategies—things we say to Congress so
they will continue to fund equipment, even though we have overwhelming capacity.
Congressmen—“Will you build in my district?”
Anti-Access:
The Reality—there is no one we cannot take down (eg, Afghanistan,
Iraq). We do not have trouble accessing battle spaces; have trouble transition to
peace spaces. This not about projecting power, but staying power; not about
overwhelming force, but proportional force.
Thesis:
We have unparalleled capacity to wage war which Barnett calls
“Leviathan” force, but do not have capacity to do everything else. Need to build this
“everything else”—system administrators
Missing
functioning executive to translate will into action. Use language of
“imminent action” to scare ourselves into taking action.
Should
have had steady wave of troops in Baghdad to avoid insurgency, looting,
etc. We messed around for 6 months and Iraqis turned on us.
Need
fund.
international reconstruction fund, modeled after IMF. G20 contribute to
1990s-Berlin
Wall falls and we do Desert Storm-created their own language.
Other half carries on military operations other than war—worked between haves and
have nots of globalization.
Geoff Oberhofe
Stern Review on Climate Change
The scientific evidence is now overwhelming: climate change presents very serious global risks, and it
demands an urgent global response.
Climate change is global in its causes and consequences, and international collective action will be
critical in driving an effective, efficient and equitable response on the scale required.
Mitigation - taking strong action to reduce emissions - must be viewed as an investment, a cost
incurred now and in the coming few decades to avoid the risks of very severe consequences in the
future.
the less mitigation we do now, the greater the difficulty of continuing to adapt in future.
The current level or stock of greenhouse gases in the atmosphere is equivalent to around 430 parts per
million (ppm) CO2 1, compared with only 280ppm before the Industrial Revolution.
the annual flow of emissions is accelerating, as fast-growing economies invest in high-carbon
infrastructure and as demand for energy and transport increases around the world. The level of 550ppm
CO2e could be reached as early as 2035.
Climate change threatens the basic elements of life for people around the world - access to water,
food production, health, and use of land and the environment.
Warming will have many severe impacts, often mediated through water:





Melting glaciers will initially increase flood risk and then strongly reduce water supplies,
eventually threatening one-sixth of the world’s population,
Declining crop yields, especially in Africa, could leave hundreds of millions without the
ability to produce or purchase sufficient food.
climate change will increase worldwide deaths from malnutrition and heat stress.
Rising sea levels will result in tens to hundreds of millions more people flooded each year
Ecosystems will be particularly vulnerable to climate change,
Higher temperatures will increase the chance of triggering abrupt and large-scale
changes.

The melting or collapse of ice sheets would eventually threaten land which today is home
to 1 in every 20 people.

A number of studies suggest that the Amazon rainforest could be vulnerable to climate
change,

Warming may induce sudden shifts in regional weather patterns such as the monsoon
rains in South Asia or the El Niño phenomenon
The impacts of climate change are not evenly distributed - the poorest
countries and people will suffer earliest and most. And if and when the
damages appear it will be too late to reverse the process. Thus we are forced
to look a long way ahead.
At a national level, climate change will cut revenues and raise spending needs, worsening public
finances.
Climate change may initially have small positive effects for a few developed
countries, but is likely to be very damaging for the much higher temperature
increases expected by mid- to late-century under BAU scenarios.
Based on simple extrapolations,
costs of extreme weather alone could reach 0.5 - 1% of world GDP per annum by the
middle of the century, and will keep rising if the world continues to warm
With 5-6°C warming which is a real possibility for the next century - existing models that include the risk of
abrupt and large-scale climate change estimate an average 5-10% loss in global
GDP
we estimate the total cost over the next two centuries of
climate change associated under BAU emissions involves impacts and risks that are
equivalent to an average reduction in global per-capita consumption of at least 5%,
now and forever. While this cost estimate is already strikingly high, it also leaves out
much that is important.
including direct impacts on the environment and human health (sometimes called ‘nonmarket’ impacts) increases our estimate of the total cost of climate change on this path from 5% to
11% of global per-capita consumption.

recent scientific evidence indicates that the climate systemmay be more responsive to
greenhouse-gas emissions than previously thought

could increase the cost of climate change on the BAU path from 5% to 7% of global
consumption

a disproportionate share of the climate-change burden falls on poor regions of the world.

Emissions have been, and continue to be, driven by economic growth; yet
stabilisation of greenhouse-gas concentrations in the atmosphere is feasible
and consistent with continued growth.
despite the historical pattern and the BAU projections, the world does not need to
choose between averting climate change and promoting growth and development.
Changes in energy technologies and the structure of economies have reduced the
responsiveness of emissions to income growth, particularly in some of the richest
countries.
Stabilisation - at whatever level - requires that annual emissions be brought down to
the level that balances the Earth’s natural capacity to remove greenhouse gases
from the atmosphere.
To stabilise at 450ppm CO2e, without overshooting, global emissions would need to
peak in the next 10 years and then fall at more than 5% per year, reaching 70%
below current levels by 2050.
Reversing the historical trend in emissions growth, and achieving cuts of 25% or
more against today’s levels is a major challenge. Costs will be incurred as the world
shifts from a high-carbon to a low-carbon trajectory. But there will also be business
opportunities as the markets for low-carbon, high-efficiency goods and services
expand.
Greenhouse-gas emissions can be cut in four ways. Costs will differ considerably
depending on which combination of these methods is used, and in which sector:
• Reducing demand for emissions-intensive goods and services
• Increased efficiency, which can save both money and emissions
• Action on non-energy emissions, such as avoiding deforestation
• Switching to lower-carbon technologies for power, heat and transport
Resource cost estimates suggest that an upper bound for the expected annual
cost of emissions reductions consistent with a trajectory leading to
stabilisation at 550ppm COe is likely to be around 1% of GDP by 2050.
The average expected cost is likely to remain around 1% of GDP from mid-century,
but the range of estimates around the 1% diverges strongly thereafter, with some
falling and others rising sharply by 2100, reflecting the greater uncertainty about the
costs of seeking out ever more innovative methods of mitigation.
The transition to a low-carbon economy will bring challenges for
competitiveness but also opportunities for growth.
Costs of mitigation of around 1% of GDP are small relative to the costs and risks of climate
change that will be avoided.

Markets for low-carbon energy products are likely to be worth at least $500bn per year by 2050

Policy to reduce emissions should be based on three essential elements:
carbon pricing, technology policy, and removal of barriers to behavioural
change.
Greenhouse gases are, in economic terms, an externality: those who produce
greenhouse-gas emissions are bringing about climate change, thereby imposing costs on the world and
on future generations, but they do not face the full consequences of their actions themselves.

Putting an appropriate price on carbon – explicitly through tax or trading, or implicitly
through regulation – means that people are faced with the full social cost of their actions.

The second element of climate-change policy is technology policy, covering the full




spectrum from research and development, to demonstration and early stage deployment.
as scale increases, costs tend to fall.
policies to support the market for early-stage technologies will be critical.
The third element is the removal of barriers to behavioural change. Even where measures
to reduce emissions are cost-effective, there may be barriers preventing action. These include a lack of
reliable information, transaction costs, and behavioural and organisational inertia.
An effective response to climate change will depend on creating the conditions
for international collective action.
Greater international co-operation to accelerate technological innovation and
diffusion will reduce the costs of mitigation.
Curbing deforestation is a highly cost-effective way of reducing greenhouse
gas emissions.
Emissions from deforestation are very significant – they are estimated to represent more than 18% of
global emissions, a share greater than is produced by the global transport sector.
Norhaus Critical Assumptions of Stern Review
I find that the difference stems almost entirely from its
technique for calculating discount rates and only marginally on new science or economics. The reasoning has questionable foundations in terms of its ethical assumptions and
also leads to economic results that are inconsistent with market data.
A high return on capital tilts the balance toward emissions reductions in the future, whereas a low
return tilts reductions toward the present.
The Stern Review and other analyses of climate economics base the analysis of real returns on the
optimal economic growth theory (8, 9).
The Stern Review takes the prescriptive approach in the extreme, arguing that it is indefensible to
make long-term decisions with a positive time discount rate. The actual time discount rate used in the
Stern Review is 0.001 yr -1
If time discounting is low and society cares little about income inequality, then it will save a great deal
for the future, and the real return will be low
Using the Stern Review’s assumption of ρ = 0.001 yr -1 and η = 1, along with its assumed growth rate
(g* = 0.013 yr -1) and a stable population, yields an equilibrium real interest rate of 0.014 yr -1, far
below the returns to standard investments.
The low return also means that future damages are discounted at a low rate,
When the Stern Review says that there are substantial losses “now,” it does not mean “today.” In fact,
the Stern Review’s estimate of the output loss “today” is essentially zero.
For this case, the mean losses are 0.4% of world output in 2060, 2.9% in 2100, and 13.8% in 2200.
This is reported as a loss in “current per capita consumption” of 14.4%
With the low interest rate, the relatively small damages in the next two centuries get overwhelmed by
the high damages over the centuries and millennia that follow 2200. In fact, if the Stern Review’s
methodology is used, more than half of the estimated damages “now and forever” occur after 2800
The Stern Review’s unambiguous conclusions about the need for urgent and immediate action will not
survive the substitution of assumptions that are consistent with today’s marketplace real interest rates
and savings rates. So the central questions about global-warming policy—how much, how fast, and how
costly—remain open
Aldy, Joseph E., and Robert N. Stavins. "Architectures for an International Global Climate Change
Agreement: Lessons for Policy Community." Architectures for Agreement: Addressing Global Climate
Change in the Post-Kyoto World
Developed countries are responsible for most of greenhouse emissions, but this amount will eb dwarfed
by the emissions of poorer countries as they develop.
Kyoto protocol is the first step to regulating emissions
Imposes binding legal commitments
Sets framework for future international archetectures
6 criteria with which to evaluate climte policy archetectures
1. Environmental outcomes
policy’s timepath of emissions
impacts of climate change
2. dynamic efficiency
maximizes aggregate present value of net benefits of taking actions to mitigate climate change impacts
3. dynamic cost effectiveness
least costly way to achieve a climate outcome
4. distributional equality
distribution of equal benefits and costs across populations and both within and across generations.
5. flexibility in the presence of new information
Given uncertainties of climate change and technological advances, flexibility is key
6. participation and compliance
incentives for these things are important
Two points of view on limits
Qualitative
Lower emissions in general, stabilize CO2 levels
Quantitative
Set limits on levels of emissions, i.e. 550 ppm
Proposals
Cap and trade system
Would give developed countries incentive to reduce emissions, developing countries incentive to begin
with efficient technologies
Carbon Tax
Tax countries based on their emissions: problematic because it is hard to get countries to sign up
Set a percentage reduction target for year.
Problem, not necessarily enforcible
Increase R&D funding from Cap and Trade or Carbon Tax
Conclusion: Next architecture after Kyoto does not need to be perfect, but must be effective. There are
many possible ways to make it effective.
Alex Jutca
Why Globalization Works, Martin Wolf, Ch. 14
I.
A.International
4 Threats to Globalization
Rivalry
i.
Today differs from 1930s collapse in
international cooperation in 4 respects
1.
Single, undisputed hegemon, the US, w/ no rival
2.
Focus on internal economic development rather than conquest of additional lands
3.
Great powers’ commitment to market economies and global integration
4.
Global institutions that reinforce co-operation
Parallel: breakdown of 1930s caused in part by
ii.
pressure to accommodate rising powers
1.
Similar to pressure from China’s rapid rise
Alternative threat: mega-terrorism
iii.
1.
B.
Fears of border security for goods/people acts as tax on globalization
Instability
i.
Substantial financial and exchange rate crises
in 1980s and 1990s
1.
a.
Moved to floating FX rates has reduced risk of crises
FDI has replaced speculative behavior in LDCs
i.
No
“significant country” has reversed commitment to liberal trade or to freedom from
exchange controls
C.
Interests
i.
1.
a.
Protectionism
Transnational companies reduce ability of producers to be economically nationalist
Breakdown of companies collaboration w/ trades unions in fight for protection
b.
FDI diffuse protectionist interests
c.
National business sector is increasingly irrelevant
2.
Increase in service sector employment lowers protectionist pressure
a.
Decline in manuf. due to tech. changes, not trade (primarily)
D.Ideas
i.
‘new
millennium collectivists’—groups who unite to protest globalization
1. “United
a.
only in what they oppose”
No cohesive social force
b.
Offer no alternative way to run economy
c.
Split in objectives (e.g. Global gov’t vs. nat’l sov.)
II.
A.Multiplicity
The great dilemma
of independent sovereigns as obstacle to global prosperity and global
public goods
i.
1.
a.
2.
Example of global inequality
China’s and India’s growth have reduced global inter-personal inequality
1.5 Billion who still lag even further behind
Relative gaps in living standards will continue to grow
ii.
Divergence in performance
Cumulative historical forces that are credited with economic success (e.g.
education, infrastructure, public services, etc.)
1.
a.
b.
Creates virtuous cycle
Others have experienced the opposite
i.
Creates vicious cycle of poverty
iii.
1.
a.
Forces of Convergence
Accumulated know-how of advanced countries
Allow poorer countries to use this knowledge to catch up
Natural resources a handicap for many countries
2.
a.
Mutual dependence of the citizens and the state
Forms functioning social contract
iv.
1.
a.
Mechanisms
jurisdictional integration
EU-obligation for goods, capital, and labor mobility
i.
i.
Freer labor mobility would ease global poverty
v.
1.
a.
2.
Underlying constraint is free-riding
Global benefits, local costs
Rich sovereigns will always use money to tackle own nation’s problems first
III.
A.Critics
Learning from the critique
barely offer any help
i.
what world should be
1.
Problem of global public goods
Divergence of opinion and utopian image of
Contradictions; unorganized platforms
ii.
Important critiques
1.
infant industry promotion
2.
opening up mkts to imports from LDCs
3.
capital controls
4.
regulatory capture
5.
int’l regimes to deal with global environmental challenges
IV.
A.The
Global Challenge
‘10 Commandments of Globalization’
Mkt econ is only arrangement capable of
generating sustained increases in prosperity, providing the underpinnings of liberal
democracies and giving individuals freedom of choice
i.
ii.
Individual states remain the locus of political
debate and legitimacy
iii.
Promote international treaty-based regimes to
iv.
Such regimes need to be specific, focused, and
deliver global public goods
enforceable
v.
function of trade liberalization
WTO has strayed too far from its primary
vi.
Create regimes that include fewer countries but
contain higher standards
vii.
Integrate into global financial mkts
viii.
In absence of a global lender of last resort, it is
necessary to accept standstills and renegotiation of sovereign debt
More aid is needed to LDCs, but aid should
never be so large that it frees a gov’t from the need to raise most of its money from
its own people
ix.
x.
mistakes
Countries should learn from their own