ipe chapter summary

8/8/2019 Ipe Chapter Summary

1/24

CHAPTER 2

I) MANAGING THE GLOBAL ECONOMY SINCE WORLD WAR II: THE INSTITUTIONAL FRAMEWORK

A GLOBAL ECONOMIC RELATIONS BEFORE WWII

1 THE MERCANTILIST PERIOD

2 THE INDUSTRIAL REVOLUTION AND BRITISH HEGEMONY

3 THE DECLINE OF BRITISH HEGEMONY AND WORLD WAR I

4 THE INTERWAR PERIOD

5 THE INSTITUTIONAL FRAMWORK BEFORE WWII

B THE FUNCTIONING OF THE INTERNATIONAL MONETARY FUND, THE WORLD BANK, AND

GENERAL AGREEMENT ON TARIFFS AND TRADE

C THE INTERNATIONAL ECONMIC ORGANIZATIONS AND THE UNITED NATIONS

D POSTWAR ECONOMIC INSTITUTIONS AND THE ADVANCED INDUSTRIAL STATES1 THE IMF, THE WORLD BANK, AND THE WTO

2 THE OECD3 THE G-5, G-7, AND G-8

4 DIVISONS AMONG THE ADVANCED INDUSTRIAL STATESa The Stages of Regional Economic Integration

FREE TRADE AREA (FTA)

CUSTOMS UNION (CU) COMMON MARKET

ECONOMIC UNION

POLITICAL UNION

b The Growing Impact of Regionalism

E POSTWAR ECONOMIC INSTITUTIONS AND THE THIRD WORLD1 LDC EFFORTS TO ALTER THE INSTITUTIONAL FRAMEWORK

a The 1950S b The 1960S

c The 1970Sd The 1980S and 1990S

F POSTWAR ECONOMIC INSTITUTIONS AND CENTRALLY PLANNED ECONOMIES

G POSTWAR ECONOMIC INSTITUTIONS AND CIVIL SOCIETY1 WOMENS GROUPS

2 ENVIRONMENTAL AND LABOR GROUPS

3 DEVELOPMENT GROUPS

H CONCLUSION

CHAPTER 3

II) THE REALIST PERSPECTIVE

First important work on international relations: The history of the Peloponnesia War by Thucydides

Oldest, most influential school of thought in IR, but less important than liberalism in IPE

Two major strains of realism; one that ignore economic matters, another that is more attuned to economic-

political interactions. First strain comes from from Thucydides and the mercantilism

a BASIC TENETS OF THE REALIST PERSPECTIVE

THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS

No central authority above nation-states, international system is one of self-help

Thus principal actor the state- with preservation of national sovereignty and the pursuit of

national interest of primary concern.

Power necessary for state to retain sovereignty thus pursuit of power primary objective of states.

The state is a rational, unitary actor seeking to maximize benefits and minimize costs

Page 1 of 24


2/24

Political importance of subnational and nonstate actors such as interest groups and MNCs

downgraded

THE NATURE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS

Security Dilemma as each state seeks to bolster its own security.

Thus states most concerned with relative gains

Economic relations among states is a zero-sum game

Most powerful nations shape the rules of international organizations such as IMF, the World

Bank, and the WTO. States may either be offensive or defensive

Aggressive states may use the international economy to promote imperialist expansion of extend

national power over others

Defensive states may simply seek to maintain the economic position in the system

Hegemonic state is likely to have very different interests and policies from less powerful states

Realists are committed to capitalism and are concerned with the redistribution of power within

that system

THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS

Politics assume priority over economics in the realist perspective

Disagree with liberals who argue that increasing interdependence and globalization are eroding

state control

Realists argue that globalization only occurs to the extent states allow it Realists place considerable emphasis on ability of hegemonic state to create an open and stable

economic order that can further globalization

b THE MERCANTILISTS

Mercantilism first used as term by Adam Smith

Played important role in state building and unification after demise of feudalism

Mercantilists took all measures necessary to increase exports and decrease imports in order to accumulategold

Impossible for all states to have a positive balance of trade thus conflict central to international system

and relative gains more important than absolute gains

Declined in late 18th century with liberal criticism and gave way to free trade practicesc REALISM AND THE INDUSTRIAL REVOLUTION

Industrialization in realist view, central requirement for states seeking national security, military power,and economic self-sufficiency.

Alexander Hamilton, foremost realist thinker around 1755-1804, considered strengthening and promoting

economic development as essential for preservation of national independence and security. Emphasized

industry over agriculture, government intervention and trade protectionism.

Friedrich List (1789-1846) German Civil servant, like Hamilton, emphasized development of

manufacturing industries. In order to catch up to industrialized countries, industrialized countriesneeded to have a strong unified state that imposed trade barriers to protect its growing industries,

develop infrastructure and promote human capital

Liberals, according to List, underestimate the extent to which world is divided by national rivalries and

conflict

B REALISM IN THE INTERWAR PERIOD

Britain repealed corn laws in 1846 and opened its markets to agricultural imports ushering in period offree trade

Under pressure of WWI and interwar period free trade broke down. Realists ideas gained more influence

leading to extreme nationalism and trade protectionism. Great Depression and WWII linked to those

policies

C REALISM IN THE POST-WORLD WAR II PERIOD

D THE REVIVAL OF REALIST IPE

E HEGEMONIC STABILITY THEORY

1 WHAT IS HEGEMONY

2 WHAT ARE THE STRATEGIES AND MOTIVES OF HEGEMONIC STATES?

Page 2 of 24


3/24

3 IS HEGEMONY NECESSARY AND/OR SUFFICIENT FOR PRODUCING AN OPEN ECONOMIC

SYSTEM?

4 IS U.S. HEGEMONY DECLINING?

F REALISM AND THE ROLE OF THE STATE IN IPE

G REALISM AND NORTH-SOUTH RELATIONS

H CRITIQUE OF THE REALIST PERSPECTIVE

CHAPTER 4

III) THE LIBERAL PERSPECTIVE

A BASIC TENETS OF THE LIBERAL PERSPECTIVE

1 THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS

2 THE NATIRE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS

3 THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS

B ORTHODOX LIBERALISM

C THE INFLUENCE OF JOHN MAYNARD KEYNES

D LIBERALISM IN THE POSTWAR PERIOD

E A RETURN TO ORTHODOX LIBERALISM

F LIBERALISM AND INSTITUTIONS

1 INTERDEPENDENCE THEORY

2 THE LIBERAL APPROACH TO COOPERATION

3 REGIME THEORY

Regimes can be defined as sets of implicit or explicit principles, norms rules, and decisionmaking procedures around which actors expectations converge in a given area of international

relations

International regimes are usually associated with International organizations. For example, the

WTO is embedded in the global trade regime, and the IMF is embedded in the global monetary

regime

Regime principles and norms refer to general beliefs and standards of behavior that determine

how relations are conducted in a specific issue area

a The Formation of Regimes Some theorists argue that the existence of a hegemonic state or group of states is

necessary for both the formation and persistence of regimes

A hegemonic power plays a major role in the creation of regimes through providing

public goods and coercing other states, but it is easier to maintain regimes than it is to

establish them

b Are Regimes Important?

Regime principles, norms and rules can help to establish standards in specific areas bywhich member states can assess their own and others actions. In setting standards,

regimes can provide countries with reliable information, decrease the likelihood ofmisunderstandings, and increase the possibilities for cooperation.

Regimes can also induce national governments to follow consistent policies , limit actions

that adversely effect other states, and become less responsive to special intersts LIBERALISM AND DOMESTIC-INTERNATIONAL INTERACTIONS

Theorists often view international negotiations as a two level game involving a relationship between astates international interest and obligations (level 1) on the one hand and its economic interactions (level

2) on the other hand.

International level states bargain with other states to reach an agreement. At the domestic level, these

representatives bargain with their own domestic constituencies, whose occurrence is often needed to

arrive at legitimate and effective agreements

Page 3 of 24


4/24

LIBERALISM AND NORTH-SOUTH RELATIONS

Liberals generally agree that the key factors in development are the efficient use of scarce resources and

economic growth, which is often defined as an increase in the total per capita of a country

ORTHODOX LIBERALS AND NORTH-SOUTH RELATIONS

O.L. consider international economic relations to be positive-sum game, they believe that the

growth of interdependence will have a mutually beneficial effect on states.

Argue that north-south linkages provide even more benefits to the LDCs than to the advanced

industrial statesa Domestic Development Factors

In the 50s and 60s, liberal modernization theorists compared traditional and modern

states and traced the development process from traditionalism to modernity

Modernization theory asserts that the northern industrial states achieved economicdevelopment by abandoning traditional methods of organizing society and that the

norths development experience serves as an indispensable guide to development for the

south. From the modernization perspective, LDCs must reduce their traditional values,

institutions, and patterns of activity if they are to overcome the obstacles of development

b Paths to Development

A number of modernization theorists argued that LDCs must follow the same path to

development that was previously taken by northern states

The forces of globalization, the need to compete with advanced industrial states, and theproliferation of MNCs all indicate that development today cannot be a repetition of the

earlier western model

c External Development Factors

In the Liberal Orthodox view, third world countries are more likely to achieve

development if they are closely integrated in the global economy through freer trade andcapital flows

LDCs that have few trade and foreign investment linkages with the north are the poorest

and least developed countries. Because LDCs have shortages of capital and technology,

foreign investment, and the diffusion of advanced technologies are of particular

importance to them. Exports are also of critical importance to LDCs because of their

small domestic markets, and international trade permits LDCs to specialize in the goods

they can produce most efficiently2 INTERVENTIONIST LIBERALS AND NORTH-SOUTH RELATIONS

The interventionists believe that economic forces left entirely to themselves tend to produce

growing inequality especially when income distribution is highly distorted (as is the case

between North and South). They therefore recommend a variety of changes that involve some

degree of intervention in the market, including removal of northern trade barriers to southern

states while permitting some degree of protectionism for LDC industries, the provision of

increased financial resources to indebted LDCs through the IMF and the World Bank, and the

assurance that MNCs will nto take undue advantage of LDCs needs for foreign investment and

capitalG CRITIQUE OF THE LIBERAL PERSPECTIVE

Both the realists and historical structuralists criticize liberals for their inattention to power and

distributional issues. Realists emphasize the relative distribution of gains across states, with the morepowerful states capturing a larger share of the benefits

Realists argue that economic exchanges are in fact rarely free and equal and that bargaining power based

on monopoly and coercion can have important political effects

Historicals often accuse liberals of seeking to legitimize inequalities and exploitation

Liberals are also criticized for putting too much faith in the market and for disregarding the role of thestate

One liberal assessment NAFTA

CHAPTER 5

Page 4 of 24


5/24

IV) THE HISTORICAL STRUCTURALIST PERSPECTIVE

The term structuralist reflects this perspectives focus on structural means of exploitation, in which one class

dominates another, or rich Northern states in the center or core of the global economy dominate poorer Southernstates in the perisphery.

History has been marked by exploitation, and the mains characteristic of the current system is the

dominance of capitalism, with the capitalist class (the bourgeoisie) exploiting the workers (the proletariat).

Wide diversity of approaches within this perspective

A BASIC TENETS OF THE HISTORICAL STRUCTURALIST PERSPECTIVE

1 THE ROLE OF THE INDIVIDUAL, THE STATE, AND SOCIETAL GROUPS

Relationship among classes the main factor affecting the economic and political order.

The state is working as an agent of the dominant class-in capitalism, the bourgeoisie.

State cannot escape from the dependence on the owners of capital.1. Only when proletarian revolution eliminates private ownership will the state no longer be

required as instrument of class oppression2 THE NATIRE AND PURPOSE OF INTERNATIONAL ECONOMIC RELATIONS

Economic relations are conflictual and zero-sum.

Under capitalism private owners extract surplus from workers which it converts into

capital and invests in new means of production.

Marx and Engels predicted collapse of capitalist system due to its contradictions, butwhen this did not happen, Lenin and others maintained that imperialism explained continued

survival of capitalism.

When imperialism ended with end of colonialism, historical structuralists turned to

neocolonialism as explanation.

Others explain persistence of capitalism and Third World underdevelopment through

dependency theory and world-system theory.

In dependency theory the world is hierarchically organized, with leading capitalist states

in the core dominating and exploiting poor states in the periphery.

Under historical structuralism, no meaningful redistribution of wealth and power can

occur under capitalism.2. Goal of exploited states, i.e. Third World, should be to break linkages with capitalist states

and/or overthrow the capitalist system3 THE RELATIONSHIP BETWEEN POLITICS AND ECONOMICS

Politics subordinate to economics.

Contradiction between economic mode of production and political system resolved when

changes in mode of production cause the political superstructure to undergo similar changes.

Instrumental Marxism formal government institutions are responding in a passive

manner to socioeconomic pressures. State policies reflect the interests of the capitalist class.

Structural Marxism new line of thought resulting from fact that industrial states

adopted social policies such as welfare despite opposition from business groups. According tothis view, in contrast to Instrumental Marxism, state is relatively autonomous from direct

political pressure by capitalist class. Although in long run state policies serve the interests of the

capitalist class. State may be better placed to recognize policies which are in the long terminterests of the capitalist class than the business community which may be subject to internaldivisions. The state may not be under the direct control of the bourgeoisie but it shares a long-

term commitment to the maintenance of the capitalist systemB KARL MARX AND IPE

Marx did not write systematically about international relations but did write on India and China arguing

that Western imperialism was necessary in these countries if they were to develop and emerge from theirstagnant mode of production. Capitalism according to Marx was a necessary evil because it was a

prerequisite for moves to socialism and then communism

C MARXIST STUDIES OF IMPERIALISM

Page 5 of 24


6/24

Non-Marxist economist, John Hobson, developed most influential theories of imperialism arguing that

three major problems with capitalism, low wages and underconsumption by workers, oversaving by

capitalists, and overproduction lead capitalists to look abroad for outlet for excess goods and profitsD DEPENDENCY THEORY

According to dependency theory, capitalist countries either underdevelop or prevent Third

World from achieving genuine autonomous development.

2. This theory developed out of Latin America in the 1960s

1 ORIGINS OF DEPENDENCY THEORY 2 major theoretical traditions: Marxism and Latin American structuralism.

Both Marxists and dependency theorists advocate the replacement of

capitalism with socialism

Unlike Marxists, Dependency Theorists focus exclusively on North-South relations and

development problems in the Third World.

Dependency theorists also reject Marxist view that industrialized countries are

performing a service to Third World by spreading capitalism.

Paul Baran, first Marxist to view Third World as important area of study. Capitalists in

North are opposed to industrialization in South. Northern capitalist form alliances with Southern

elites to prevent Third World development. Elites in LDCs include fuedal landed class and

comprador class. Capitalists development occurs at the expense of autonomous development in

the Third World. From Latin American structuralist tradition come the ideas of Argentine economist, Raul

Prebisch who argued that Third World countries in the periphery suffer from declining terms of

trade. Third World at disadvantage because they export mainly primary commodities and import

finished goods from the core. Demand for finished goods increased with rising incomes, while

demand for primary products remains relatively constant. Third World can develop onlythrough government involvement to promote industrialization and decrease dependence on

trade with advanced states. Advised countries to adopt ISI policies, impose tariff and non-tariffbarriers and emphasize domestic production of manufactures

2 THE BASIC TENETS OF DEPENDENCY THEORY

Two major strains of dependency theory complicate its analysis.

First strain from Latin Americans- Fernando Henrique Cardoso and Enzo Faletto lessdoctrinaire.

Second more radical and doctrinaire from Andr Gunder Frank

a The Source of Third World Problems

External factors related to global capitalist economy responsible for constrainingthe development of Third World.

1. Main political alliances of comprador class with capitalists in Northern countriesreinforce the pattern of Third World dependency

b LDC Possibilities for Development

Gunder Frank strain argues that development of core economies required the

underdevelopment of the periphery. When undeveloped countries become part of the

periphery, they become underdeveloped as a result of their involvement with the core

countries.

In Cardoso-Faletto strain, development in periphery was possible in some cases under

model of associate dependent development in which links of dependency weremaintained. This strain gained support over time as it became more difficult to explin

why industrialization was occurring in some LDCs.

Those writing from dependent development strain are more attuned to the wide variety

of local conditions and dependency relations in the Third World thus certain LDCs can

undergo development when favorable alliances form between foreign capital, domesticcapital and the Third World state.

Despite apparent success of NIEs, dependency theorists argue that workers in these

countries receive low wages and produce less technologically sophisticated goods and

Page 6 of 24


7/24

production of capital is limited because they depend on imports of machinery,

technology and foreign investment from core

c Prescriptions for Change

LDCs cannot escape from their dependency on core nations, thus they should

break linkages and/or start a socialist revolution to bring about more social justice and

equality.2. But autonomy and socialism are not necessarily compatible leading to some

disagreement about which of these two goals is more important3 CRITIQUES OF DEPENDENCY THEORY

Does adequately define its concepts. Cant measure degrees of dependence. Core versus

periphery and developed versus undeveloped very broad categories.

Failure to consider other forms of exploitation other than capitalism.

Too much importance on international system and not enough on domestic policies and

behavior as source of third world problems.

Predictions often wrong.

Prescriptions for change vague and ill defined.

Marxists critique dependency theorists for being too nationalistic. Problem is not foreign

control but private control of means of productionE WHITHER THE HISTORICAL STRUCTURALIST SCHOOL OF IPE?

With breakup of Soviet Union critics have claimed that the historical structuralist perspective isirrelevant.

Liberalism is expanding in the Third World.

Still, historical structuralism is important perspective in IPE because of its emphasis on the poorand the weak

1 WORLD SYSTEM THEORY

World-system theory focuses on entire world system where a countrys development

depends more on the nature of the entire global system and less on its internal structures.

Concerned with relationships among states in the core and with the rise and decline of

hegemonic states as well as exploitation of states in the periphery.

Use history of capitalism to help explain exploitation of periphery.

Introduce concept of semiperiphery.

Capitalist world-economy main unit of analysis. States not meaningful actors apart from position in world economy.

Semiperiphery contributes to the stability of the capitalist world-economy and continued

predominance of the industrial states in the core.

Socialism will follow capitalism as world-economy according to world-system theory but

very vague as to when.

Critics claim places too much emphasis on relations of exchange and not enough on

relations of production. Too much emphasis on external factors.

Important alternative approach for IPE providing long-term historical view of social,

economic and political change going back to 16th century2 GRAMSCIAN ANALYSIS

Named after Antonio Gramsci, former leader of Italian political party.

Domination of capitalism only depends partly on economic factors but political,

ideological and cultural aspects of class struggle important as well.

Dominant class has hegemony when it legimates its power through institutions.

Historic bloc, referring to the congruence between the power of the state and theprevailing ideas of society and the economy, makes it difficult for subordinate groups to replace

dominant group. Thus important to develop a counterhegemony.

Ideas extended to international arena produced the concept of transnational historic bloc

which includes the largest MNCs, international banks, IMF and World Bank etc. Crucial element

is the power and mobility of transnational capital. This bloc is of threat to the ability of elected

Page 7 of 24


8/24

governments to make autonomous decisions. Workers employed by MNCs identify with

transnational capital further dividing workers.

Civil society can be part of a top-down process in which dominant class gains

acquiescence from most of population or bottom-up process where disadvantaged try to replace

capitalist order

3 THE BUSINESS CONFLICT MODEL

Hybrid approach drawing on more than one theoretical perspective.

Business groups are most important societal groups affecting government policymakingbut there are major cleavages within business community over policy issues.

Significant division in business community between internationalist and nationalist

business groups. Nationalists feel threatened by imports and favor trade protectionism.

Internationalists have integrated multinational operations and substantial dependence on exports

resist protectionism and favor open international markets.

Internationalists benefit from close working relationship with executive branch in theU.S.

Business nationalists do not similarly benefit from connections with U.S. foreign policy

establishments and concentrate on influencing Congress.

1. Even internationalists are sometimes divided with labor intensive industries favoring

military governments in Third World countries to maintain discipline in the labor force and keep

wages low. Internationalists that are less labor intensive are less likely to support military action.F CONCLUSIONS

Historical perspective may have faltered in recent years but number of promising new theoretical

approaches in this school of thought. Possible this perspective could gain more influence in future.

Return to liberal orthodoxy causing considerable dissatisfaction among have-nots

CHAPTER 6

V) INTERNATIONAL MONETARY RELATIONS

A BALANCE OF PAYMENTS

Records debit and credit transactions by residents, firms, and governments of one country with foreign

countries and international institutions

Composed of two large categories: the current account and the capital account

THE CURRENT ACCOUNT

Includes all transactions related to a countries current expenditures and national income

Four types of transactions (p. 150)

o Merchandise trade

o Service trade

o Investment income and payments

o Remittance and official transactions

2. CAPITAL ACCOUNTS

Measures long-term and short term flows of investment

a. CAPITAL EXPORTS debit items because they involve payments TO foreigners and useforeign exchange

b. CAPITAL IMPORTS credit items because they involve payments from foreigners andearn foreign exchange

BALANCE OF PAYMENT SURPLUS a government reduces its liabilities to foreign

governments and/or adds to its holdings of official reserves

BALANCE OF PAYMENTS DEFICIT when a government increases its liabilities and/or

reduces its official reserves

B GOVERNMENT RESPONSE TO A BALANCE-OF-PAYMENTS DEFICIT

When governments have a BOP deficit they have two basic policy choices:

1 ADJUSTMENT MEASURES

Page 8 of 24


9/24

MONETARY POLICY Central Bank raises interest rates to make borrowing more costly,

decreases amount of money available for loans by requiring commercial banks to hold larger

reserves

FISCAL POLICY A BOP deficit government lowers government expenditures and or raises

taxes to withdrawal purchasing power from the public

COMMERCIAL POLICY when government uses various combinations of fiscal monetary and

commercial policies such as

a EXTERNAL ADJUSTMENT METHODS causes foreigners to pay off adjustment costs:tariffs, import quotas, export subsidies, and tax

b INTERNAL ADJUSTMENT METHODS causes individuals or groups at home to pay offadjustment costs: unemployment, a reduction in living standards and business bankruptcy

2 FINANCING

Governments that choose financing must borrow from external credit sources and/or decrease

their foreign exchange reserves

3 ADJUSTMENT, FINANCING, AND THE THEORETICAL PERSPECTIVES

ORTHODOX LIBERALS payment deficits result from domestic inefficiencies and thatgovernments should adopt internal adjustments

LIBERALS oppose external adjustment measures

REALISTS & HISTORICAL STRUCTURSALISTS often oppose internal adjustment methods.

They interfere with domestic autonomy and policy making REALISTS view such external measures as fair game in a states efforts to improve its

competitive position towards other states

C INTERNATIONAL MONETARY RELATIONS BEFORE BRETTON WOODS

1 INTERNATIONAL GOLD STANDARD (1870S TO 1914)

International gold standard was fixed exchange rrate regime in which each countries currency

was given an official exchange rate in relation to gold

The gold standard functioned well because it was backed by British hegemony and my

cooperation among the core countries

The primary objective was to promote monetary openness and stability through the maintenance

of stable exchange rates2 THE INTERWAR PERIOD (1914 TO 1944)

A shift to floating rather than fixed exchange rates

Governments could no longer sacrifice the domestic welfare of its citizens to maintain external

balance in support of the gold exchange standardD THE FORMATION OF THE BRETTON WOODS MONETARY REGIME

A gold exchange system in which the value of each countries currency was pegged to gold or the U.S.

dollar

The interventionist liberals compromise:1. The postwar gold exchange standard: adjustable pegged

exchange rate system rather than a fixed exchange rate system2. The creation of the IMF would provide short-term loans to

countries with temporary Balance of payments problems

3. The support for national controls over capital flows

E THE INTERNATIONAL MONETARY FUND Was created to promote stable and orderly exchange rate and to provide member states with short-term

loans for temporary balance of payments problems

Each IMF member was given a quota based on its relative economic importance, and this quota

determined the size of its subscription, or contribution to the IMF resource pool

The IMF has a weighted voting system in which the most economically powerful countries have the

largest quotas and subscriptions and the votes

IMF conditionality has become a major factor in its loan giving: Member agree to adopt specific

economics policies in return for IMF funding

Page 9 of 24


10/24

IMF usually requires the borrowing country to adopt contractionary monetary and fiscal policies that are

the liberal-economic in nature

The 2 main policy making bodies of the IMF: The board of governors & the board of executive directors

The voting power of each governor depends on the weighted voting system

The countries with the largest subscriptions and the most votes in IMF: G-5 (The U.S., Japan, Germany,

France, and Britain)

The IMFs weighted voting system continues to favor the interests and objectives of the advanced

industrial statesF THE FUNCTIONING OF THE BRETTON WOODS MONETARY REGIME

1 THE CENTRAL ROLE OF THE U.S. DOLLAR

The US opened its market to imports from foreign countries, provided long-term loans and

grants to Europe through the European Recovery Program or Marshall Plan, and supplied the US

dollar as the main source of intl liquidity

The Bretton Woods monetary regime was base on a gold exchange standard, but gold-mining

sources were limited, so only the US dollar could meet this need for increased liquidity

The US had a substantial balance-of- trade surplus in the post war period, but had even larger

debits because of the economic and military financing it was providing through Marshal Plan

and other assistance programs. As a result, the US had overall balance-of-payments deficit

beginning in 1950 In 1960, foreign dollar holdings exceeded US gold reserves for the first time

The Triffin dilemma: It refers to the ploblem confronting a monetary regime that depends on a

sinkle key currency. The liquidity and confidence functions of the currency eventually come into

conflict

2 A SHIFT TOWARDS MULTILATERALISM

In 1960s, the shift from unilateral to multilateral management was the increased role accorded tothe Bank for Intl Settlements (BIS). It is in fact the oldest of the intl financial institutions

BIS: It was formed in 1930, its main purpose was to promote cooperation among central banks.

The US wanted to transfer functions to the IMF when the Bretton Woods institutions were

established, but European countries would not agree. Now the BIS is the main forum for

cooperation and consultation among central bankers of the advanced industrial states.

IMF members finally agreed in 1969 to create a new international reserve. Members established

Special Drawing Rights (SDRs): It is artificial international reserves, created and managed by the

IMF with G-10, which may be used only by monetary authorities and other official agencies3 THE DEMISE OF THE BRETTON WOODS MONETARY REGIME

In 1971, the US had its first balance-of-trade deficit in 1893, indicating that its trade

competitiveness was declining. President Richard Nixon decided to suspend the official

convertibility of the dollar into gold in 1971. He imposed a 10persent tariff surcharge on all

dutiable imports, promising to remove it when other countries. The US share of intl reserves had

fallen from a postwar level of 50 to 16%.

- The Bretton Woods regime of fixed exchange rates would collapse and would be replaced by aregime based on floating rates

A Multitude of Problems confronted the Bretton Woods Monetary Regime: Although the US role as the top currency state was premised on the idea that it was

an unrivaled economic hegemon, this no longer seemed to be the case

As capital flows around the world increased, the Bretton Woods system of pegged

exchange rates become increasingly untenable

The 3 characteristics of reserves-liquidity, confidence, and adjustment- all presented

serious problems

G THE REGIME OF FLOATING (OR FLEXIBLE) EXCHANGE RATES

In a free-floating regime, member countries do not intervene in currency markets, and the market alonedetermines currency valuations

Page 10 of 24


11/24

2 problems developed with the floating exchange rate regime:

1) Volatility of exchange rate: refers to short-term instability in the exchange rate

2) Misalignment of exchange rate: refers to the long-term departure of an exchangerate from its competitive level

1. THE PLAZA LOUVRE ACCORDS

The G-5 agreed on joint intervention to raise the value of the major nondollar currencies through

coordinated intervention, and the US in return promised to reduce government spending

The Plaza-Louvre accords marked a shift to managed floating in which the major governmentsintervened to correct serious volatility and misalignment of currency rates

H ALTERNATIVES TO THE CURRENT MONETARY REGIME

2 interrelated Question about alternatives to current arrangements arise:

1) Are there alternatives to the flexible exchange rate regime?

2) Are there alternatives to the dominance of the US dollar under the current?

I EUROPEAN MONETARY RELATIONS

Several major changes in the 1960s caused the EC countries to consider proposals for regional monetary

integration more seriously

Growing US balance-of-payments deficits resulted in decreased confidence in the US

dollar and a threat to exchange rate stability

Rapid European progress in establishing a customs union and for exchange rate

stability among EC members

The European Monetary System (EMS) 1979: 2 Main Features: An exchange rate mechanism (ERM) was

a form of adjustable peg system, similar to the Bretton Woods regime and A European currency units

(ECU) was a new currency based on a weighted basket or average of the EMS countries currencies

In 1986, EC members signed the Single European Act (SEA) calling for completion of the internal marketor the removal of all barriers on the movement of goods, people, and capital within the EC by January 1,

1993

The Treaty on European Union or Maastricht Treaty: An agreement to establish an EMU in 1999. The

EMU was to include the creation of a central bank and a single currency, central control over the money

supply, and wide-raging influence over national tax and financial policies

Robert Mundell-A Theory of Optimum Currency Areas: An optimum currency area is an area that

maximizes the benefits minus the costs of using a common currency J THE ROLE OF THE JAPANESE YEN

The use of the yen internationally has declined since the mid-1990s in response to Japans declining

economic fortunes

In 1997, the Japanese government proposed that Asian Monetary Fund(AMF) be formed to provide

emergency balance-of-payments supports for the economies affected by the East Asian financial crisis,

but the US opposed that.K THE ROLE OF THE U.S. DOLLAR

The US dollar continues to serve as the top, albeit negotiated intl currency

It is important to note that Dollarization is a highly asymmetrical process. Unlike EMU, in which all

members sacrificed their own currency for a new common currency with collective management of

monetary policy, in Dollarization one country relinquishes its own currency and control over monetarypolicy to another country or a group of countries

L CONCLUSION

CHAPTER 8

VI) GLOBAL TRADE RELATIONS

A TRADE THEORY

B GLOBAL TRADE RELATIONS BEFORE WWII

C GATT AND THE POSTWAR GLOBAL TRADE REGIME

D PRINCIPLES OF THE GLOBAL TRADE REGIME

Page 11 of 24


12/24

1 TRADE LIBERALIZATION

2 NONDISCRIMINATION

3 RECIPROCITY

4 SAFEGUARDS

5 DEVELOPMENT

E FORMATION OF THE WORLD TRADE ORGANIZATION

F THE WTO AND THE GLOBAL TRADE REGIME

G THE THIRD WORLD AND GLOBAL TRADE ISSUES

1 THE 1940S TO EARLY 1960S: A PERIOD OF LIMITED LDC INVOLVEMENT

2 THE EARLY 1960S TO EARLY 1970S: GROWING PRESSURES FOR SPECIAL TREATMENT

3 THE EARLY 1970S TO 1980: INCREASED NORTH-SOUTH CONFRONTATIONS

4 1980 TO 1995: MORE ACTIVE AND COOPERATIVE LDC PARTICIPATION

5 1995 TO THE PRESENT: UNCERTAINTY OVER LDC PARTICIPATION IN THE WTO

H THE EMERGING ECONOMIES AND GLOBAL TRADE RELATIONS

1 THE EASTERN EUROPEAN COUNTRIES AND GATT/WTO2 CHINA

a Requirements That China Should Liberalize Its Economyb The Question of Chinas Status in the WTO

c The Question of Chinas Implementation of Agreements3 RUSSIA AND OTHER FSU COUNTRIES

I CIVIL SOCIETY AND GLOBAL TRADE RELATIONS J CONCLUSION

CHAPTER 9

VII) REGIONALISM AND THE GLOBAL TRADE REGIME

Liberal economists consider GATT/WTO multilateralism to be the best possible route to trade liberalization

because it breaks down regional as well as national barriers to trade

Liberals support open RTAs as second best route to trade liberalization when negotiation difficulties inGATT/WTO pose obstacles to freer multilateral trade

All member countries will benefit in the long run from RTA even if asymmetrical gains

Realists and Historical Structuralists believe RTAs have important distributional effects and that some memberswill benefit at the expense of others

Realists argue that the larger partner will not permit the smaller partner to receive disproportionate benefits or

will expect some side payments in return

Historical Structuralists believe MNCs and other sources of transnational capital are the main beneficiaries of

RTAs. The main losers are the laborers and poor within industrial and Third World countries1 REGIONALISM AND GLOBALIZATION

Regionalism reference to interactions among states in a particular geographic area where there is a degree

of economic and often organizational cohesiveness

Multilateral institutions such as the IMF, GATT/WTO, and the World Bank are better equipped than

regional organizations at handling problems stemming from globalization and interdependence such as

financial crisis, trade wars, and global environmental degradation

As an organizations membership increases, higher transaction and information costs interfere withproblem identification and defector identification and sanctioning

Globalization pressures often lead like-minded states to establish regional institutions better at problem

solving than larger institutions1 A HISTORICAL OVERVIEW OF REGIONAL TRADE AGREEMENTS

Despite early attempts at establishing RTAs, modern forms did not become established until after WWII

with the European Economic Community then later forms in the 50s and 60s and since the mid-80s

Page 12 of 24


13/24

THE FIRST WAVE OF REGIONALISM

In 1949 the Soviet Union signed a treaty with Bulgaria, Czechoslovakia, Hungary, Poland, and

Romania establishing the Council for Mutual Economic Agreement (CMEA) Not consideredtrue attempt at regionalism because of state-centered orientation

European integration into the European Community and European Free Trade Association

considered first true wave of regionalism

EC movement caused spread of RTAs in Africa and Latin America

LDC causality differed in that LDCs were looking to develop larger markets (economies of scale)within the region, and were designed to pursue import substitution on regional level

Regionalism was largely unsuccessful outside of Europe because:

a There was a fundamental contradiction between the idea of giving impetus to integration via

trade liberalization and the protectionist logic of import substitution to promote

industrialization

Industries were concentrated in larger more advanced LDCs

Economic inefficiencies arose form bureaucratic countermeasures

b U.S. was opposed to RTAs during the first wave

THE SECOND WAVE OF REGIONALISM

In the mid-1980s he EC widened and deepened its integration with the accession of Spain and

Portugal in 86 and Austria, Finland, and Sweden in 95. Deepening occurred with adoption of

single market in 92 Most significant change was the U.S. turnaround in willingness to participate and promote RTAs

2 WHAT ARE THE REASONS FOR THE RISE OF REGIONALISM?

REALIST EXPLANATIONS

Security issues with U.S./Soviet Union superpowers concerned with global political security

and balance of global power, Europe concentrates on building economic strength and political

influence through regional integration

U.S. aided Europe through Marshall plan in order to solidify unified noncommunist front against

Soviet Union

Second wave attributed to shifts in balance of, strategic, and economic power from U.S./Soviet

Union to U.S./E.C./Asia-Japan

LIBERAL EXPLANATIONS

Growth of interdependence important in revival of regionalism States turn to trade liberalization to promote exports, attract foreign investment, and

upgrade technological capabilities

Involvement in RTAs less complicated than multilateral GATT

Regionalism often improves competitiveness in firms becomes more efficient comparedto others in region

Firms became more dependent on imports and exports becoming MNCs

Despite low GATT tariffs, RTAs flourish because elimination of tariff barriers is

advantageous to members

HISTORICAL STRUCTURALIST EXPLANATIONS

RTAs allow MNCs to exploit cheap labor and lower environmental standards

Capital has benefited by leaving domestic labor and using cheaper foreign labor

Regionalism comes form desire of powerful states to establish hegemony over weaker states

GATT/WTO AND RTAS

The United States as a global hegemon after WWII, strongly opposed preferential agreementsand any other type of discrimination in international trade that would interfere with an open

multilateral trade regime. The British, however, wanted to preserve their discriminatory imperialpreferences.

U.S. views prevailed and GATT called for unconditional MFN treatment (all member nations

treated equally)

GATT permitted formation of CUs and RTAs as long as exterior barriers did not exceed GATTrestrictions and are more trade creating than trade diverting

Page 13 of 24


14/24

3 TRADE DIVERSION

RTAs are inevitably trade diverting: intraregional trade with lower barriers more appealing

Trade diversion from raised protectionist barriers

CU has common external trade tariffs and may implement CVDs and ADDs in response to

pressures from import-competing companies

RULES OF ORIGIN regulations designed to prevent importers from bringing in goods to a free

trade area through member countries with lower duties and then shipping them to partner

countries with high duties 4 TRADE CREATION

The main source of trade creation in RTAs is the increased trade among member countries,

which shifts demands from less efficient domestic country production to more efficient partner

country production

Set example for increased and more effective multilateral trade negotiations in GATT/WTO

5 GATT ARTICLE 24 AND RTAS

GATT Article 24 established to ensure trade creation/diversion regulations

A.24 stipulates FTAs and CUs are to eliminate tariffs and barriers on substantially all trade

among members

1. GATT founders believe removal of all barriers would prevent proliferation of preferential

treatment

2. Genuine FTAs and CUs facilitate global trade liberalization when involving deepermultilateral integration

Exterior tariffs and barriers must not be higher than when initially entered into the FTA/CU

6 THE EFFECTIVENESS OF GATT ARTICLE 24

The 1957 Treaty of Rome establishing the EC dramatically minimized GATTs ability to exert

authority over RTAs

GATTs influence lay in its guidelines that many developing RTAs adhered to

GATTs inability to exert authority lay partly in Article 24s imprecise wording and the fact that it

does adequately address issues of contingent trade measures such as ADDs and CVCs, and

rules of origin

The GATT UR reached a common understanding on Article 24 and the WTO established a

Committee on Regional Trade Agreements to oversee and evaluate RTAs

The GATT UR reached no conclusion on how to deal with restrictive rules of origin in RTAs norhave they made unanimous clear interpretations of Article 24 statements

9. SPECIAL TREATMENT FOR LDCS

a RTAS Among LDCS

RTAs among LDCs are less stringently examined than among industrialized nations

A 1979 enabling clause was added to GATT that removed the requirement to cover

substantially all trade, and to remove all tariff barriers

b The EUs Association Agreements with LDCS

Developed countries have provided LDCs with nonreciprocal trade preferences

In EC union, France wanted continued benefits for former colonies in Africa, so

nonreciprocal tariff lowerings were established

LDCs not formerly connected with Britain or France pressured for implementation of

MFN status as decreed by GATT Historical Structuralists say nonreciprocal trade between EC and LDCs represents

neocolonialism and perpetuates continual dependency by former European colonies7 EUROPE

After WWII, a European unification that consisted of western European states was established with the

help of the United States

Establishment of the European Community and the EFTA has widened and deepened European

integration

Page 14 of 24


15/24

THE DEEPENING OF EUROPEAN INTEGRATION

European integration into a Customs Union was slowed by Frances Charles de Gaulle in vetoing

Britains membership and withdrawing France from the Council of Ministers in protest againstcommission proposal for financing of EC budget

In the 1980s the collapse of the Bretton Woods monetary regime, the OPEC oil crisis, and global

recession contributed to the stagnation of the unification process

A unified European market would produce more competitive European firms as a result of

increased specialization and economies of scale. Single European Act established freer trade without trade restrictions amongst EC members

thereby deepening integration and strengthening the European economy

SEA led to desire for establishing EMU and unified security, foreign, and social policy

Maastricht Treaty wants to establish social policies dealing with welfare and labor laws but has

been most successful in establishing an EMU in early 2002

THE WIDENING OF EUROPEAN INTEGRATION

As economies worsened in 1980s, eastern European dependency on western Europe deepened

Gorbachev helped establish an EC-CMEA agreement sanctioning trade agreements between

some individual Eastern European states

The break up of the Soviet Union led to stronger and closer ties between Western and Eastern

European states

Widening of integration brought problems ofrelocation of firmsbecause of lower labor costs,migration of eastern workers to higher paying western area, and financial burdens on EU from

enlargement of population eligible for social and economic development funds

Obstacles facing CEEC membership into the EU are fears of a two-tiered system developing with

CEEC nations, Germany breaking away from France and looking more eastward, and French

concern over Americanization of EU policy

THE THEORETICAL PRESPECTIVES AND THE EU

Realists see European integration as a strengthening Europes power (economic) vis--vis other

major actors such as Japan and U.S.

US willing to support formation of EC in view of strong Soviet proximity

Liberals economists concerned with ensuring that the EU is an open integration movement

Some Liberals express concerns of European protectionism: EUs inward orientation, liberals

point out to the reorientation of trade away from third countries to other EU members followingthe creation of the union and the accession of new members

Content that deepening and widening will contribute to trade creation amongst members

Interventionist liberals praise social policy agenda but historical Structuralists say it is inadequate

lending to continued disparities of wealth

Historical Structuralists criticize agreements between EC and LDCs because it is a mechanism of

neocolonialist dependency

2 THE WESTERN HEMISPHERE

Characterized by three overlapping regional integrations processes:

a The United States and NAFTA

b Latin American RTAs MERCOSUR

c Hemispheric integration through a Free Trade Agreement of the Americas

1. THE FORMATION OF CUSFTA AND NAFTA

US Protectionism was increasing, Canada wanted to open up freer market between two nations

to counterbalance Canadian exports to US

Canadian economists wanted more reliance on market forces less government involvement

In 1988 Canada and U.S. established CUSFTA after having established Automotive free trade

agreement

Mexico joined to form NAFTA in 1992 to supercede CUSFTA

Mexico joined for reason of foreign investment issues. Agreement with US would give Mexicanliberalization policies more credibility

Marked first time LDC was not given special treatment in agreement with an industrialized state

Page 15 of 24


16/24

THE IPE THEORETICAL PRESPECTIVES AND NAFTA

a Orthodox Liberal Perspective

Wanted to ensure freer trade incentive instead of trade diversion

NAFTA sets example for GATT

NAFTA follows a negative list approach to trade in services facilitating tradecreation

GATS takes a positive list approach to services trade facilitating easier trade

diversion US established rules that facilitated countervailing duties (CVDs) which are harsher

towards Canada and Mexico than towards US

NAFTA has binational panels to assess whether a countries CVDs adhere to national

codes

b Realist and Historical Structuralist Perspectives

Both believe NAFTA has significant distributional effects

Both say that the US, as the larger partner, will get greater benefits

Canada wanted freer trade for exports during a time of protectionism, US wanted side

benefits

Mexico gave up claims to receive special and differential treatment

MERCOSUR

Mercado Comun del Sur established as most important 3 rd World RTA Union of South American LDCs but significant union because involved two largest South

American economies (Brazil and Argentina)

Outcome skeptical because integration was inward facing and had been concentrated in Import

Substitution, history between Brazil and Argentina was long and frictional

Economy was becoming export oriented and they were unilaterally lowing tariffs at the time they

signed the Treaty of Asuncion.

End of Cold war important change in that it ended reliance on bipolar balance

Problems began when Argentina and Brazil both introduced import tariffs and no progress oraccords had been made towards deepening the union

PROBLEMS FACING MERCOSUR:

Mexican and East Asian financial crisis of the 90s contributed to lost markets

MERCOSUR members are primarily LDCs reliant upon external finance and highlyvulnerable to global financial flows

It does not have a formal dispute settlement process

Very asymmetrical system raises doubts as to future integration

Wide disparity in macroeconomic and monetary policies between two largest

MERCOSUR countries

FREE TRADE AREA OF THE AMERICAS

Enterprise for the Americas Initiative (EAI) called for investment promotion, U.S. aid indebt

relief, and the elimination of tariff barriers

Miami Summit of the Americas (34 participating countries) agreed to begin process of negotiatingFTAA to be concluded no later than 2005

Highly diverse geographic distribution of foreign trade in western hemisphere poses a potential

problem

CONDITIONS CONDUSIVE TO FTAA NEGOTIATIONS:

U.S. decline in global hegemony wants to establish hemispheric hegemony

Latin Americas shift from import substitution to export-oriented policies

Consolidation of civilian rule and democracy generally established within the

Americas

Brazil and other Latin American countries wanted new agreement started from equal footing, not

an extension of NAFTA (U.S. centric)2 EAST ASIA

1980s emerged as major center of world production and trade

Page 16 of 24


17/24

Not involved in first wave of regional integrations and are even still only in planning phases

Rise in intraregional trade due to propensity and willingness to trade with each other

THE ASEAN

Subregional agreement in east Asia consisting of 10 member countries (Indonesia, Malaysia, the

Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar, and Cambodia)

ASEAN FTA went from regional economic linkages to Agreement on Preferential Trading

Arrangements to a Free Trade Agreement

Financial crisis has created problems with competing ASEAN countries Japan threatened with Chinese cooperation with ASEAN

APEC

Largest regional initiative involving East Asia with 21 regional and transregional neighbors

Asia Pacific Economic Community

Would contain worlds three largest national economies (United States, Japan, and China) andthree of the five permanent members of the Un Security Council (China, Russia, and the U.S.)

U.S. wants to secure political security and economic access to the region and did not want to be

excluded from largest foreign markets trading bloc

First proposed to be transparent by disseminating information about member policies andpromote coordination between economic policies

Bargaining negotiation discouraged by Asian members so plans are for liberalization to be

reached by certain date THE IPE PERSPECTIVES AND EAST ASIAN REGIONALISM

APEC became the first big international institution after the end of the cold war

REALISTS view APEC as a non asian attempt to block a regional trading bloc limited to Asians

HISTORICAL STRUCTURALISTS believe APEC could lead to downward social, economic,

environmental and labor standards and a permanent shift of economic and political power to

MNCsB CONCLUSION

CHAPTER 10

VIII) MULTINATIONAL CORPORATIONS AND GLOBAL PRODUCTION

The largest MNCs are in some respects the main agents of globalization Critics argue that main problem in the study of IPE is the friction between states and multinational

corporations and not between the state and the marketa DEFINITIONS AND TERMINOLOGY

A multi national corporation is one that has holdings in more than one nation. These holdings can be

either portfolio investment which seeks profits without control and the other is Foreign Direct Investment

(FDI) which seeks to gain a controlling percentage of profits and decisionmaking power

There are two types of FDI:

1. GREENFIELD INVESTMENTS

2. MERGERS AND ACQUISITIONS

a WHY DO FIRMS BECOME MNCS

a THE HISTORICAL DEVELOPMENT OF FOREIGN DIRECT INVESTMENT THE PERIOD BEFORE WORLD WAR II

Britain was the main force behind the dramatic growth of FDI in the 19 th century

Although no government garanties international institutions, safe guards ensure investment: one

economic risk were lower under the pre WWI gold standard because currency were convertibledividends could be easily remitted and exchange rate were reasonable stable, two, political risk

was lower because a large share of the European investment was in colonial territory thatoperated under home countries rules, three, lack of restrictions on capital flows facilitated the

growth of FDI, fourth, wars during this period were limited in scope

Page 17 of 24


18/24

19th century was also a period of rapid advancement in rail and sea transportation, which

facilitated the task of managing FDIs over long distances

THE MID-1940S TO THE MID-1980S

Under US leadership FDI under a period of rapid expansion

Develop countries experienced a sustain period of economic growth from 1950s to 1973

There were major improvements in international transportations and communications: faster jets,

and ocean transports, telex and satellite communications and fax machines may contributions to

flow capital Most develop countries relax their control over FDIs after return to convertability in their

currencies

US FDIs has decline steadily since the 60s mainly due to Japan, Germany, and Western Europe

economic and industrial recovery from WWII

THE 1980S TO THE PRESENT

Reemergence of FDI since the 80s due mainly to reemergence of orthodox liberalism ending

many restrictions on capital flows and other trade barriers

Brake up of soviet block open up new market areas for FDI

Protracted GATT UR negotiations couple with the use on non tariff barriers cost firms to

circunvent barriers thus expending coverage

Remarkable feature to modern FDI is degree to which BIG 3 direct FDI with each other

(US/EU/Japan) Change in intl arena was: US lost of dominance as a source of FDI, two, erratic upper changes in

Japan change of FDI, three, the develop market economy share of inward FDI has decline and

LDC share has decrease, and the proliferation of firms engaging in FDI and new forms of

investment activities

a MNCS AND HOST COUNTRY RELATIONS: THEORETICAL APPROACHES

Liberals: countries has different factor endowments and foreign investment flows to areas where it is

more needed

Orthodox liberals: MNC operate in perfectly competitive environment

Challenges: Hymer and Kendalberger, FDI not equited with movement of capital from the home to the

host country. MNC are often finance from home country institutions

MNCs tend to be oligopolistics by nature, by raising barriers by introducing new technologies, economies

of scale and access to global finance Marxist independent theory: believe MNCs prevent third world countries from achieving genuine

autonomus development

MNCs undermine host country government, culture, and society, by coapting local business andgovernment elites, imposing political and economic pressure on the host country while altering consumer

taste and attitudes

Reasearch over years shows effects of MNCs are not as positive as negative as believe, because bargaing

powers come into place

Countries have more international players to chose from

State may have to provide insentive to lower MNCs, but MNCs have high technology, brand name

identification, access to capital, product diversity and ability to promote exports as leveraging power

favoring MNCs initially

With commitment to immoviles resources, state gains upper hand and can later hostage resources torenegotiate in better terms (obsolescing power)

Obsolescing bargain is less applicable to more sophisticated manufacture industries that are less

dependent on host specific resourcesa CHANGES IN HOST COUNTRY POLICIES TOWARDS MNCS

Host country policies toward MNCs have varied widely, ranging from nationalization of foreign

investment operations on the one hand to efforts to attract MNCs through concessions and incentives on

the other

THE SOUTH

Before WW I few restrictions on MNCs in LDCs in the South.

Page 18 of 24


19/24

In interwar period LDCs shifted to more nationalist policies.

After WWII change to restrictive policies in South more notable. China, North Korea,

North Vietnam and Cuba.

In other countries FDI viewed with hostility and limited.

In 1960s and 1970s LDCs developed more leverage vis--vis MNCs: Development of non-U.S. MNC gave LDCs alternative to seek outside finance; LDCs gained more confidence and

began to pressure MNCs to increase benefits and reduce costs of FDI; LDCs developed more

managerial, administrative, and technical capabilities for regulating MNC behavior. In UN General Assembly LDC views regarding MNCs were embodied in resolutions that

the G-77 passes over objections of industrial states but failed to reach UN agreement on

comprehensive code of behavior for MNCs.

By late 1970s, LDCs more conciliatory towards MNCs and number of nationalizations

declined.

In 1980s a number of LDCs liberalized their policies toward MNCs. Mexico liberalized its

policies toward FDI. Argentina, Chile, Colombia and Venezuela took unilateral steps to liberalize

their investment policies. China also was more welcoming to FDI by 1988.

In 1990s, LDC host countries even more open to FDI.

1. Still some of the poorest LDCs are having difficulty attracting FDI even when liberalize

policies.

THE NORTH

Developed host states in the North are generally in a different position vis--vis MNCs

than LDC host states in the states in the South.

MNCs loom larger in LDC economies and create more dependence among LDCs than is

the case for most industrial states.

Developed countries are often also major home as well as host countries of FDI and thus

are reluctant to restrict incoming foreign investment.

At the end of WWII the U.S. as the new global hegemon adopted more liberal policies

toward FDI than Western Europe.

Japan, however, had the most interventionist policy of the developed countries. Japans

inward FDI was only 0.7 percent in 1980 as compared to 41.6 percent in Western Europe and 17.2

percent in the U.S.

2. In 1970s many developed countries imposed conditions on FDI but by mid 1980s mostliberalized their economies because: controls on global capital flows were phased out and

orthodox liberalism reemerged under Ronald Reagan; global competitiveness and economic

problems generated pressures to seek foreign FDI; as Japan and Europe became stronger felt

pressures to ease restrictions on incoming FDI; U.S. pressured other nations to open to

investment especially felt in Mexico and Canada.B THE RELATIONSHIP BETWEEN HOME COUNTRIES AND THEIR MNCS

Number of home countries for MNCs small. In 1990 six countries accounted for 75 percent of all

MNCs.

Effects of FDI on home country depend on both the characteristics of home country and of itsMNCs. Realists focus on home country characteristics. Hegemons seem to benefit from outward FD.

Others, focusing on MNCs, claim they are becoming denationalized or stateless.

Two questions: 1) What are the costs and benefits of FDI for labor groups in the home country? 2)What is the relationship between competitiveness of a home country and the competitiveness of its

MNCs?

HOME COUNTRY POLICIES TOWARD THEIR MNCS

Home countries normally view outward FDI as an indication of economic and political

strength and as beneficial to their competitiveness. Home countries try to protect and sometimes

use their MNCs as a tool of foreign policy.

Sometimes home countries associate outward FDI with a decrease in home country exports, a decline in the

countrys industrial base and losses in domestic employment. In such circumstances, home countries try to stem

flow of FDI

Page 19 of 24


20/24

b The Pre-World War II Period

In 19th and early 20th centuries, home countries tried to support and protect their

corporations when they encountered difficulties abroad

c The Early Postwar Period

In 1950s to 1970s, the U.S. as hegemonic power followed assertive policies in

protecting its MNCs. The U.S. also considered MNCs to be tools of foreign policy vis--vis communist countries.

The U.S. took actions to control corporate behavior in response to its growingbalance-of-payments deficit.

1. Japan was only major economy that systematically restricted outward FDI for about

two decades after WWIId The 1980s and 1990s

During this period U.S. was willing and able to take blatant political actions to

control the behavior of their MNCs. Especially, in struggles with the Soviet Union.

Since breakup of Soviet Union, U.S. extraterritorial actions of this nature havebeen aimed mainly at Cuba. 1996 Helms-Burton act penalizes foreign companies for

doing business with Cuba if they use assets or property of U.S. MNCs nationalized after1959 Cuban revolution.

2. European countries and Japan have been less willing and able to take political actions

with their MNCs but have established closer economic links with their MNCs than theU.S.

THE EFFECTS OF MNCS ON LABOR GROUPS IN HOME COUNTRIES

Most contentious issues in home countries.

Liberals hold multinational activity generally positive for labor and MNCs pay higher

wages than domestic firms.

Labor groups are unconvinced and are often dissatisfied with outward FDI. Mobility of

capital and MNCs they say put labor at distinct disadvantage.3. Labor unions have been interested in developing a system of multinational collective

bargaining since 1970s but this approach has its serious limitations

COMPETITIVENESS AND HOME COUNTRY RELATIONS

From the liberal perspective, MNCs are seeking profitable opportunities around the

world and are becoming disconnected from home nations. Liberals maintain that the economic future of the U.S. depends more on the education

and skills of U.S. workers than on U.S. corporate ownership.

Realists argue that governments should pursue active industrial policies to promote theirown MNCs in high-technology area.

Some evidence indicates that large MNCs are becoming more global in their operations

and outlook and less closely tied to their home countries. National boundaries are becoming

blurred as some MNCs have spread their head office functions and listed their shares in stock

exchanges in several countries.

The increase in cross-border M&As and conglomerate cross-holding of shares areadditional complications in defining the nationality of MNCs today. Thus, liberals argue that

policies of home governments must change as the national origins, loyalties, and culture of

MNCs become blurred. Highest priority should be to provide competitive conditions forbusinesses in general rather than only for the countrys firms in particular.

Realists are correct, however, in that most MNCs continue to be home-based and that the

competitiveness of MNCs can affect the competitiveness of its home state. A major factor in

promoting competitiveness is R&D and there is evidence that MNCs in industrial countries keepmuch of their basic R&D activity at home.

It is important to note that there are national differences in operation of MNCs

headquartered in different countries. E.g. U.S. MNCs favor home countries less than Japanese

and German.

Page 20 of 24


21/24

4. According to liberal theory, international trade is not a zero-sum game. Industrial countries

are each others major trading partners even when they are in competition.

C A REGIME FOR FDI: WHAT IS TO BE REGULATED?

D BILATERAL INVESTMENT TREATIES

E THE UN

F GATT/WTO

G REGIONAL APPROACHES: THE EUROPEAN UNION AND NORTH AMERICA FREE TRADE

AGREEMENT

H THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT

I PRIVATE ACTORS

J CONCLUSIONS

CHAPTER 11

IX) INTERNATIONAL DEVELOPMENT

The average income in the worlds 20 richest economies is 37 times higher thanthe average income in the

worlds 20 poorest economies

Even the higher income East and Southeast Asian economies experienced a serious financial crisis whichraised questions as to sustainability of rapid economic growth

LDCs fear economic linkages contribute to dependency on North and that IMF and World Bank SALs

inhibit development efforts

Developments have induced South-Northern link strengthening and trade liberalization:

o 1980a foreign debt crisis Banks induced LDCs to shift to more open economic policies

o Revival of orthodox liberalism

o Growing fear that South has become increasingly marginalized Failure of Soviet Bloc has culminated in decline in foreign aid from western bloc LDCs have no leverage

and fewer fountains of aid

Aid is also being dispersed amongst FSU nations instead of solely previous LDCsA THE IPE PERSPECTIVES AND NORTH-SOUTH RELATIONS

LIBERALS believe interdependence has widespread benefits and argue North-South relations

have more benefits to LDCs

INTERVENTIONIST LIBERALS recognize indifferences in North South relations and believeNorthern governments should apply special treatment to LDCs

HISTORICAL STRUCTURALISTS call for a redistribution of resources among core and periphery

a THE WORLD BANK GROUP

Effects terms under which loans are made to LDCs

Composed of five institutions1. IBRD International Bank for Reconstruction and Development

Established at Bretton Woods for the reconstruction of postwar Europe later to be used for

financing developing countries

Loans directed to governments or with government guarantee2. IDA International Development Association

Became third World Bank institution to provide softer loans for struggling LDCs

3. IFC International Finance Corporation

4. MIGA Multilateral Investment Guarantee Agency

Established to encourage private foreign investment

Page 21 of 24


22/24

5. ICSID International Centre for Settlement of Investment Disputes

Established to encourage private foreign investment

Historical Structuralists and Realists accuse the World Bank of prying sovereign control outof the hands of national leaders and that they mainly enrich developed country exporters at the expense

of the poora IMPORT-SUBSTITUTING INDUSTRIALIZATION

Interventionist Liberals (Keynes) called for more government involvement in market

Historical Structuralists (Singer and Prebisch) states governments need to decrease primary goodsexportation and focus more on manufacturing and exporting goods

Prebisch developed the idea of substituting previously imported manufactured goods with domestically

manufactured goods

Governments need establish protectionist policies to reduce imports while subsidizing local

industrialization

Countries began replacing agricultural ventures in favor of industrial growth led to economic and social

disaster during 70s food crisis

Countries failed at ISI because they failed to continue to the second stage of ISI to greater

industrialization including higher technological products

Countries did not achieve second tier of ISI because most products are capital intensive and require

economies of scale

After the foreign debt crisis of the 80s countries finally abandoned ISI strategies and adopted outwardlooking economic strategies

a SOCIALIST DEVELOPMENT STRATEGIES

After failure of ISI strategy, some countries turned to socialist centrally planned economies

More concerned with redistributional aspects of economic development

Had better success at reducing economic and social inequities but they still faced economic problems

Major problem with Central Planning was that most countries (China being the exception) were too small

to properly engage in Soviet style planning

Centrally planned nations not major beneficiaries of World Bank aid because aid was intended to

promote private enterprisea EXPORT-LED GROWTH

Asian NIEs all adopted export led growth strategies and registered impressive growth rates.

While maintaining a moderate degree of trade protectionism for domestic markets, they encouragedexports with tax incentives, export credits, export targets, and duty-free imports of inputs required by

exporters and their supplies

THE IPE PERSPECTIVES AND THE EAST ASIAN EXPERIENCE

Liberals say success of East Asian economy was due to their outward facing strategies

Realists key to growth was the strong developmental state

State provided guidance to the market

State identified development as its top priority

State invested heavily in education to ensure populations had skills

State depended heavily on highly skilled technocratic bureaucracy

Dependency and World System theorists development was only example of dependentdevelopment

Political Culture (fourth perspective) Larger Asian nations influenced by Confucianism ~

emphasizes respect for authority, role of benevolent government, importance of education, and

family based values leads to economic development based on collective values, hard work,

and enterprise

THE FINANCIAL CRISIS IN EAST AND SOUTH EAST ASIA

Japanese yen increased greatly in value as a result of 85 Plaza Agreement - as Japanese exportsbecame more competitive and markets absorbed a declining share of East Asian exports,

problems of indebtedness and lack of competitiveness in the region increased

1997 Thailand allowed their currency to float and result was drastic devaluation which effected

three other countries (Indonesia, Malaysia, and South Korea)

Page 22 of 24


23/24

Asian foreign debt crisis different than 80s foreign debt crisis in two respects:

80s foreign debt crisis in Latin America, Sub-Saharan Africa and Eastern Europe

held significant shares of debt Asian was held by smaller countries with privatesector debt

80s main concerns in debt crisis related to overall indebtedness and high debt-

service ratio ~ Asia short term debt levels and outflows of portfolio investment

United states aided South Korea and Taiwan with large sums of military and economic aid

Changes in U.S. economic and strategic position made it less willing to continue support SUSTAINABLE DEVELOPMENT received multilateral approval in 87 policy that meets the

needs of the present without compromising the ability of future generations to meet their own

needs

B THE REVIVAL OF ORTHODOX LIBERALISM

Two characteristics of developmental state: Highly skilled technocratic bureaucracy and close

cooperation between major economic groupings (labor, agriculture etc.)

Successful developmental state has often been to some extent authoritarian

The market rational market ideological approach is the only correct course for development

adopted by World Bank

World Bank placed conditions on their SALs requiring control of inflation, decrease ingovernment spending, lance of budgets, privatization, deregulations of financial and labor markets, and

liberalization of policies towards trade STRUCTURAL ADJUSTMENT AND THE THEORETICAL PERSPECTIVES

Historical Structuralists believe SAPs (structural adjustment programs) almost deliberateperpetuation of export dependency

Orthodox liberals strongest supporters SAPs necessary prescription and discipline based on

Washington consensus (Thatcher Reagan free market policy)

World Bank and IMF should be doing more to focus on human development aspects ofadjustment (labor, welfare etc.)

Realists - WB and IMF are not following correct policies in downsizing governemtn through

privatization, deregulation, and trade liberalization late industrializers (no matter who) require

a large amount of government intervention to catch up

STRUCTURAL ADJUSTMENT AND QUESTIONS ABOUT ORTHODOX LIBERALISM

Liberal studies indicate that SAPs in middle-income countries often reduced government budgetdeficits, increased export earnings, increased financing available for private investment, and

enhanced economic stability and growth

The emphasis of SAPs on privatization deregulation, and openness gave adequate attention for

the need for effective LDC governments and the World Banks top-down approach to structural

adjustment did not give sufficient attention to the need for local participation in owning

policies and implementing reforms

STRUCTURAL ADJUSTMENT AND SUB-SAHARAN AFRICA

80s economic growth and industrial production stagnated, agricultural output lagged behind

population growth, per capita incomes and investment declined and unemployment increased

Liberal supporters of SAPs argue that these programs are often blamed for problems cause by

general economic deterioration. World Bank and IMF were simply reacting to Third World debt

crisis due to inefficient LDC economic policies and a series of unfavorable world economicchanges beginning with oil crisis

Liberals - Failure of ISI strategies led to reaffirmation of World Bank and IMF led strategies

Critics argue that WB and IMF strategies are ineffective in Africa place too much emphasis on

market oriented policies that do not contribute to economic growth, and their costs fall most

heavily on the poorest groups and countries

Emphasis on privatization does not take into account of the fact that private firms are often

unwilling or unable to supply essential public goods required for development

STRUCTURAL ADJUSTMENT AND THIRD WORLD WOMEN

IMF and World Banks have largely ignored the plight of women in Third World countries

Page 23 of 24


24/24

By disregarding the subsidiary role of women, these programs often reinforce male bias and

exacerbate the economic and social problems confronting third world women

Women spend much more time than men on the average on unpaid subsistence work

Women are over represented relative to men in the informal sector of the economy-work outside

home-

Women are more concentrated in the lower skill, lower wage occupation and are often paid less

than men for equal work

Women are more important in agricultural labor and less important in industry If one combines women lower wages in the formal sector with their over representation in

agricultural, the informal sector, and housework, women incomes are normally significantly less

than those of men

Because much of women time is spend doing unpaid subsistence work in the household, which

does not appear in production statistic, the World Bank gives little attention to the effect of its

SAPs on women work time

SAPs usually require the LDCs lower government deficit by facing out food subsidies andprovide incentives to farmers by raising the prices they receive for their tradable goods

World Bank views cut backs in government spending and subsidies as an indication of increase

efficiency but cost are in fact being shifted from the paid to the unpaid economy where women

do must of the job

a ANOTHER SHIFT IN DEVELOPMENT STRATEGY? THE LATE 1980S TO 1994

Protracted economic and political problems in the Africans LDCs and Asia led to gradual

recognition by the World Bank that the state had a significant role in economic development

World Bank began to address the issue of the poors LDCs and most vulnerable groups in the late

1980s and 90s

Four major bases in World Bank thinking and poverty reduction

1945 to late 1960s World Bank focus on large economic projects to contribute to

industrial development

70s World Bank began to give more attention to poverty reduction it develops more

basic human needs projects

1980s similar to first phase World Bank relied on trickle down theories of poverty

reduction condition on implementation of orthodox liberal policy Late 80s to present, similar to second phase

Dec 1994, World Bank forced to confront shortcomings in development approach when Mexico, a

country western policy had view as a model of economic management failed

2 1995 TO EARLY 2002

Stiglitz wrote for a stronger role for the state in development and shifted away for World Bank

adherence to Washington consensus

1997 World development report rejects orthodox liberal preference for minimalist state

Maintain that development requires an effective state, encouraging and complementing activities

of private business and individuals

1988 World Bank would devote increase attention and development policy to poorest individuals

in society

January 1999, Introduction of a comprehensive development framework (CDF) design to takebroader holistic approach to development than structural adjustment

Emphasizes partnership between donors and the government, and government and civil society

Constrains of the World Bank relate to reaction of major members, especially the US. Stiglitz

advocate of change critical of the IMF, World Bank and US policies toward third worlda CONCLUSION

ipe chapter summary

Documents