lecture 14 politics imbalances
TRANSCRIPT
-
8/12/2019 Lecture 14 Politics Imbalances
1/22
International Political Economy #14
The Politics of Imbalances
William Kindred Winecoff
Indiana University Bloomington
October 17, 2013
W. K. Winecoff | IPE #14: Politics of Imbalances 1/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
2/22
The Importance of Money
Suppose a resident of the U.K. wants to buy a Jay-Z from the U.S., and
offers a Beatles in exchange. But the U.S. producer of Jay-Zs doesntwant any more Beatles... she already has plenty. In our simple model of
trade were stuck... nothing can happen.
In the real world transactions dont break down in this way. We have
money, which can be invested internationally.
Foreign Direct Investment (FDI): long-term capitalinvestment, generally in fixed assets like factories, buildings,
or heavy machinery.
Foreign Portfolio Investment (FPI): often short-term, more
liquid investments in equity or debt, e.g. stocks and bonds.
Currency Reserves: holdings of foreign currencies, generallyby national central banks.
We measure quantities of international trade in the Current Account
(CA) and quantities of international investment in the Capital Account
(KA).
W. K. Winecoff | IPE #14: Politics of Imbalances 2/20
http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
3/22
What Is the Current Account?
1 An accounting mechanism describing the difference between national
income and national expenditure:
GDP=Consumption(C) + Government(G) +
Investment(I) + (Exports(X) Imports(M))
I.e., GDP (C+ G+ I) = (XM)
That (X
M) is the Current Account (CA). (Not exactly,but close enough for our purposes.)
2 An implied difference between savings and investment:
Let Savings(S) =GDP (C+ G)
Therefore, S
I= X
M.3 Hence:
IfS > Ithere is a CA surplus, i.e. X>M.
IfS < Ithere is a CA deficit, i.e. X
-
8/12/2019 Lecture 14 Politics Imbalances
4/22
Clarifying the Terminology
A current account surplus means you export more good and services
than you import: there is a net flow of goods/services out of your
country.
A capital account surplus means you export lessfinance than you
import: there is a net flow of finance into your country (FDI, FPI,
and/or currency).
Its a little weird, because it comes from accounting rules, but those are
the proper definitions. Just memorize them.
W. K. Winecoff | IPE #14: Politics of Imbalances 4/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
5/22
The Balance of Payments
Current Account deficits (surpluses) must be offset by Capital Account
surpluses (deficits), and vice versa.
A CA deficit means you import more than you export; a KA surplus
means you invest more than you save.
(S I) (XM) = 0.
What is the Capital Account?
Change in foreign ownership of domestic assets minus change
in domestic ownership of foreign assets.
This occurs through international direct and portfolio investment, as
well as foreign exchange reserves.
W. K. Winecoff | IPE #14: Politics of Imbalances 5/20
http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
6/22
Back to Politics
Imagine two countries: one developed, with a lot of capital; oneless-developed, with a lot of labor. How might they differ in their
preferences?
Theyll prefer different patterns of trade openness/closure: developed
country wants open capital-intensive industries and protected
labor-intensive industries; developing country wants the opposite.
Maybe different preferences over consumption vs. production as well?
Developing country: high un- and under-employment >
want policies to generate jobs.
Developed country: low un- and under-employment > want
policies to facilitate consumption.
In our two-country/two-good bartering model theres nothing we can do
about this. But when we add money things change.
W. K. Winecoff | IPE #14: Politics of Imbalances 6/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
7/22
Complicating the Trade Model
Suppose you wanted to boost employment. What would you do?
W. K. Winecoff | IPE #14: Politics of Imbalances 7/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
8/22
Complicating the Trade Model
Suppose you wanted to boost employment. What would you do?
Keep the value of your currency low so that the goods your
country produces are less expensive (i.e. quantity demanded
goes up).
Suppose you wanted to boost consumption. What would you do?
W. K. Winecoff | IPE #14: Politics of Imbalances 7/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
9/22
Complicating the Trade Model
Suppose you wanted to boost employment. What would you do?
Keep the value of your currency low so that the goods your
country produces are less expensive (i.e. quantity demanded
goes up).
Suppose you wanted to boost consumption. What would you do?
Keep the value of your currency high so that goods foreigncountries produce are cheap.
How does this happen? Developing country sells goods to developed
country and uses proceeds to buy financial assets (FDI, FPI, currency
reserves) rather than goods: exchange goods for IOUs (future
consumption) and get jobs, albeit at fairly low wages (currentconsumption).
I.e., the developing (developed) country has a current account surplus
(deficit) and capital account deficit (surplus). Instead of Jay-Zs,
developing country gets $ for their Beatles.
W. K. Winecoff | IPE #14: Politics of Imbalances 7/20
http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
10/22
Ex.: The Story of Chimerica, 1979-2013
China: Needed hundreds of millions of jobs.
U.S.: Had jobs; wanted consumption.
The result? Huge CA surpluses for China, huge CA deficits for U.S.
Opposite for the KA in both countries.
Note: this is more general than just US/China, as well briefly see now
but learn more about in the next section of the course. Other
industrializing countries, as well as oil/energy exporters, also had big CA
surpluses, while other developed countries had CA deficits.
Does what we know about hegemony tell us anything about this?
W. K. Winecoff | IPE #14: Politics of Imbalances 8/20
http://goforward/http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
11/22
Note: That should be billions rather than millions.
W. K. Winecoff | IPE #14: Politics of Imbalances 9/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
12/22
Note: For our purposes, Financial Account is another name for Capital
Account.W. K. Winecoff | IPE #14: Politics of Imbalances 10/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
13/22
The U.S. and the World
W. K. Winecoff | IPE #14: Politics of Imbalances 11/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
14/22
The U.S. and the World
W. K. Winecoff | IPE #14: Politics of Imbalances 12/20
http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
15/22
The Hegemon and the World
In short, the developing world and much of the developed world hasorganized their economies in relation to the U.S.
To encourage exports, many of these countries held down the value of
their currencies relative to the USD.
The U.S. let this happen (and/or encouraged it) because:
Higher consumption for U.S. consumers is politically popular,
and the U.S. economy operated at more-or-less full
employment from 1984-2007.
The U.S. wanted to encourage development and trade i.e.
interconnectedness and the incorporation or more and moreof the Gap into the liberal order.
Generally, these governments preferred safe IOUs to risky ones for
political reasons: huge demand for US sov debt.
W. K. Winecoff | IPE #14: Politics of Imbalances 13/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
16/22
Bernanke The Global Savings Glut
We can think about the CA as reflecting trade, or as reflecting finance.These are really the same, but different focii can emphasize different
dynamics. A focus on finance leads us to the GSG:
1 Developed European & Asian countries need to boost savings
for aging populations. Developing countries need to build
war chests of currency reserves to protect against financial
crises like those in the 1990s.
2 Weak currencies can encourage growth via exports.
3 Sharp increase in energy (e.g. oil) costs leads to more $ for
energy exporters.
If you, as a developing country government, have a bunch of $ to invest,
where are you going to invest it? Probably in the largest economy with
the deepest, most liquid financial markets. And thats the U.S.
W. K. Winecoff | IPE #14: Politics of Imbalances 14/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
17/22
The Result
W. K. Winecoff | IPE #14: Politics of Imbalances 15/20
http://goforward/http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
18/22
The Result
W. K. Winecoff | IPE #14: Politics of Imbalances 16/20
http://goforward/http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
19/22
The Result
W. K. Winecoff | IPE #14: Politics of Imbalances 17/20
http://goforward/http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
20/22
The Result
W. K. Winecoff | IPE #14: Politics of Imbalances 18/20
http://find/ -
8/12/2019 Lecture 14 Politics Imbalances
21/22
Interdependence
This is exacerbated by the USs structural position, esp with regards to
the dollars role as the global reserve/exchange currency.
Increased demand for dollars globally impliescontinued, and increasing,
indebtedness by the US, as well as asset price bubbles.I.e., we dont have a de jurefixed exchange rate system (as under
Bretton Woods) anymore, but we have a de factofixed exchange rate
system with developing countries keep the value of their currencies low
in order to facilitate job growth.
A new form of the Triffin dilemma?
W. K. Winecoff | IPE #14: Politics of Imbalances 19/20
http://goforward/http://find/http://goback/ -
8/12/2019 Lecture 14 Politics Imbalances
22/22
The Crash
Bubbles tend to pop, and this one did. Well get to that after we learn
about the role of the IMF.
W. K. Winecoff | IPE #14: Politics of Imbalances 20/20
http://find/