Poli Sci Final

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  1. Monetary Relations
    exchange rate in a floating market

    foreign exchange market

    • devalued the dollar currency compared
    • to the yuan when goods were purchased from China

    • oil priced in dollars--helps to
    • appreciate

    • Latin American currencies pegged to
    • the dollar

    as a hedge against inflation

    global reserve currency

    trade imbalance

    hurts US economy

    normal trade/exchange altered
  2. Balance of Payments (BoP)
    • accounting tool that measures a
    • nation’s trade in goods, services, financial assets, & loans

    mercantilist tool
  3. Components: current account
    balance of trade

    merchandise trade

    services trade

    investment income and payments

    remittances and official transactions
  4. Components: Capital account
    direct investment

    long-term investments (over one year)

    short-term capital

    very liquid in under a year
  5. Concepts of BoP
    must balance, by definition

    current account deficit

    capital account finances the deficit

    foreign purchases of domestic assets

    current account surplus

    capital account spends the surplus

    domestic purchases of foreign assets
  6. Japan BoP
    • import restrictions lead to current
    • account surplus

    high private savings rate

    • limited consumption makes it difficult
    • to boost economy
  7. Good numbers in BoP
    current account surpluses are good

    mercantilist/realist argument

    • scale assets mean foreign ownership,
    • dividend payments

    • borrowing on reserves can lead to
    • higher interest payments, lower consumption, and stagnation

    • current account deficits not good or
    • bad

    • financed through scale of financial
    • assets

    • financial assets no different than
    • merchandise
  8. US
    large deficits

    • almost entirely driven by
    • consumption/lack of savings

    • not completely offset by foreign
    • investment

    loans have supported US consumption

    why invest in the US?

    • 1998, exports: $1.192 trillion -
    • imports: $1.351 trillion = $-203.827 billion

    • goods sold through foreign
    • subsidiaries: $2.4 trillion

    • not a real deficit; firms are
    • extremely profitable, explaining foreign investment confidence

    • some argue that firm strength is not
    • the same as state strength

    firm could move
  9. History:

    gold standard and fixed exchange rate

    • gold held in reserve to back up a
    • country’s currency

    • promotes monetary openness and
    • stability

    supported/enforced by British hegemony
  10. 1914-1944
    gold exchange standard

    • countries held gold and/or another
    • currency as reserves

    • British unable to uphold the system
    • and it degenerated into devaluation competitions

    failure of British hegemony

    change in domestic systems

    voting made spending important
  11. Bretton Woods
    International Monetary Fund (IMF)

    • each country would peg its currency to
    • gold or US dollar

    • contribute to IMF holdings for lending
    • to those with BoP problems

    regime legitimacy

    sufficient reserves for liquidity

    confidence in the reserve currency

    • no adjustment options for reserve
    • currency (USD)

    • IMF did not have enough reserves, so
    • US became the guarantor of world liquidity

    Triffin Dilemmakey currency regimeneed for liquidity leads to BoPs and areduction of confidence in the key currency
  12. System Failure
    • public goods created relative losses
    • for US

    liquidity-deficit problem

    Marshall Plan

    US domestic spending in the 1960s

    Vietnam, Great Society

    • US inability to devalue its currency
    • created a loss in competitiveness

    • 1971: Nixon removes the US from the
    • gold standards and imposes a tariff to compel other nations to help devalue the
    • dollar
  13. Eurodollars (not Euro)
    USD held in non-US banks

    • Soviet move to keep assets from being
    • frozen and maintain some liquidity

    • these dollars were outside US control,
    • which meant there was a secondary free market of dollars
  14. Floating Exchange Rates
    • most industriazlied nations floated
    • currencies by 1973

    • system was a mixture of free floating
    • with some managed interventions by central banks

    Plaza-Louvre Accords

    • coordinated effort to devalue and then
    • stabilize the dollar in mid-1980s

    subsequent efforts failed

    • nations give up control over the value
    • of their money to the market

    • some sovereignty is lost and the state
    • becomes constrained in its ability to spend money
  15. Speculative Attacks due to Capital Account Liberalization
    Capital account liberalization

    economic shock

    speculative attack

    like bank runs on countries

    few causal factors:

    • real estate speculation and distorted
    • lending incentives led to private default

    • other countries: Brazil, Argentina,
    • Turkey, & Russia

    bandwagon effect

    potential results

    local currency falls

    local stock market collapse

    higher unemployment

    real debt increases, et al.

    • loose regulation of capital account
    • allowed for the sudden collapse of these states
  16. Historical development of Capital Account Liberalization
    • private financial flows destabilized
    • economies in 1920s and 1930s

    • Bretton Woods policies give states
    • “explicit rights to control all capital movements” permanently --Keynes

    • IMF forbidden, by charter, to push for
    • capital controls

    • favored currency stability in an era
    • of free trade

    • mid-1970s, advanced economies started
    • to loosen capital controls and completed transformation by the beginning of the
    • 1990s
  17. Argument for Capital Controls (Interventionist Liberalism)
    1)Pegged Exchange Rates

    • -Slave to the policies
    • enacted by the pegged state

    • -Lower relative
    • interest rates -> Capital Outflows or Overvaluation

    • 2)Floating Exchange
    • Rates

    • −Euphoria
    • and Pessimism (Speculation) creates volatile currencies

    • −Distinction
    • between production/ employment (trade liberalization) and financial
    • liberalization which promotes short term finance

    • 5)IMF
    • was created to provide short term finance to help balance of payments problems

    • 6)The
    • needs of the domestic economy should trump the global economy.

    • 5)The international
    • system lack the institutions that domestic economies have.






    • 7)Boom
    • and Bust Patterns

    • −Euphoria
    • lending, pessimism leads to sudden stop, economy painfully adjusts

    • −Approximately
    • 124 banking crises, 208 currency crises, and 63 sovereign debt crises between
    • 1970 and 2008
  18. Argument against Capital Controls (orthodox liberalism)
    • improved global allocation of
    • resources

    • encourage governments to pursue sound
    • fiscal and monetary policies

    prevent currency misalignments

    • allow countries to pursue independent
    • monetary policies

    • extreme expansionary policies would be
    • restricted by devalued currencies

    • markets will send the correct signals
    • and regulate their own

    financial actors behave rationally
  19. Searching for a common currency
    • 19th and early 20th centuries: British
    • Gold Standard

    • mid-1940s to 1971: Bretton Woods, US
    • dollar-gold peg

    • 1971-today: dollar based on stability
    • of US economy

    • today: pressure to adopt a new reserve
    • currency partially due to US BoP problem
  20. Free Trade
    To Trade or Not to Trade

    • comparative advantage and
    • specialization is key to global economic growth

    not all nations will benefit equally

    Strategic goods--level of autonomy

    • infant industries--mass money into
    • education to improve

    particularly computer science

    • protecting industries to help grow and
    • compete

    • domestic dislocations - foreign
    • imports = local job loss

    • all politics is local, especially
    • trade
  21. Heckscher-Ohlin
    • countries will export those products
    • that use abundant or cheap factors

    • US: agriculture, military technology,
    • services (education, design, medical, legal, financial, etc.)
  22. Stopler-Samuelson Theory
    • abundant production factors will favor
    • free trade because they can better compete and therefore benefit from the open
    • markets

    • scarce production factors favor
    • protection because they cannot compete very well


    • specific industries may benefit from
    • protection even if one or more of the production factors is abundant

    • car industry wanted protection in late
    • 1970s and early 1980s, even though American labor is abundant

    • grouping by production factor can be
    • very problematic; these factors are diverse

    • unskilled, skilled, and highly skilled
    • labor are all rather different
  23. Strategic Trade Theory
    • creation of comparative advantages
    • through an industrial policy

    • Import Substitution
    • Industrialization--(ISI) subsidizing domestic goods rather than buying imports
    • in order to grow industrialization

    often achieved through subsidies

    • create distortions and rent-seeking
    • incentives that tend to addict firms to the subsidies

    • firms lobby to maintain their rent,
    • making it politically difficult to remove the ISI or subsidy

    • Latin America’s ISI failed, Asian ISI
    • worked

    • authoritarian government that refuses
    • to be paid off (expert-led growth)

    • mercantilist policy; Latin America too
    • week
  24. Brief History of International Trade
    • US increased tariffs, which decreased
    • trade, the global money supply, and fed into the Great Depression

    • following the crash, Smoot-Hawley
    • radically raised tariffs, pushing the US and the world into the Great
    • Depression

    essentially halted foreign trade

    • why did the US not ascend to the
    • leadership role of which it was capable?


    • domestic pressures for protection and
    • Congressional power over trade

    • general perception of isolation in the
    • US

    • Congress gradually transferred power
    • to the president, whi is less tied to specific domestic groups lobbying for
    • protection
  25. Gains from Efficiency
    a reduction in a tariff from 40% to 0%

    • every $6 redistributed nets $1 from
    • efficiency

    • every $50 redistributed nets $8.33
    • from efficiency

    a reduction in a tariff from 5% to 0%

    • every $50 redistributed nets $1 from
    • efficiency

    Complete Global Free Trade

    US aggregate GDP would raise by 1%

    at 14 trillion, would gain 14 billion
  26. What is not in the Model
    cost of securing the ports and cargo

    cost of retraining

    income losses are between 8-25%

    revenues (profits) leave the state

    realist argument

    costs to the environment

    • reduction in working conditions and
    • pay

    who gains and who loses
  27. Poor vs. Rich Countries
    • better to be rich in a poor country or
    • poor in a rich country?

    $3,000 vs. $9400


    • free trade and comparative advantage
    • led to states that industrialized those that relied on commodity exports

    • by 1900, developing countries only
    • produced half the manufactured goods they did in 1830

    landowners vs. industrialists
  28. Liberal Peace: Liberal Pacifism (Schumpeter)
    democratic capitalist peace

    • liberal institutions and principles
    • through democracy and capitalism, will make states less agressive

    • only war profiteers and military
    • aristocrats gain from wars

    • no democracy would pursue minority
    • interests and high costs

    • when free trade prevails, no class
    • gains from forcible expansion
  29. Liberal Internationalism (Kant)
    Kant’s 3 articles of peace

    • Republican state with a market economy
    • and judicial freedom

    constitutional law

    • informal union of peace among states
    • over time

    international law and cooperation

    cosmopolitan law

    • trade and human interactions lead to
    • conditions of universal hospitality

    • material incentives for moral
    • commitments

    • spirit of commerce impels states
    • toward war avoidance

    • economic interdependence leads to
    • alliances
  30. Liberal Imperialism (machiavelli)
    liberal expansionism

    • republics by necessity or political
    • survival are expansionist because liberty encourages increased population and
    • property

    realism and Rousseau

    • interdependence engenders dependence
    • (inequality)

    • inequality between states leads to
    • insecurity and conflict

    • while commerce brings wealth,
    • inequality can breed war
  31. Trade and Conflict
    • liberal trade can lead to a liberal
    • economy

    liberal peace

    trade makes war more expensive

    • also creates/increases cultural ties
    • which decreases the likelihood that conflict will break out

    reduction of state failure

    • increased external (international)
    • trade decreases the likelihood that states will fail

    • trade means greater openness, which
    • leads to less repressive and weak regimes

    • more trade usually means a higher GDP
    • per capita, which should realte less dissatisfaction within the country

    • relationship could be reversed--trade
    • is greater in more stable countries

    • unrest does damage economic growth,
    • while economic growth does not seem to affect unrest
  32. Causes of Economic Globalization
    • global trade of goods, assets, and
    • services

    • new technology that tends to break
    • down hierarchies because of rapid diffusion

    • public and private economic
    • institutions that promote global trade, common economic policies and regimes
  33. Causes of Socio-Political Globalization

    • people’s national identities are
    • challenged by the transmission of images from around the globe

    • we are becoming “Earthlings,” not
    • American, Canadian, Mexican, Chinese, etc.


    • with national identities in question,
    • ethnic and religious identities increase

    • these identities react negatively to
    • other cultures

    • fundamentalist muslim reaction to
    • women’s rights

    • why didn’t this occur against
    • communism and its role for women and religion?
  34. Globalization Effects on the State
    is the state weakening?

    Capital mobility

    • state cannot keep businesses in place
    • by force
  35. MNCs
    state constrained by the MNC’s rules

    • the MNC can move to another country,
    • thereby taking business from that state


    • state has less and less ability to
    • shut down communication with outside world

    • too much information being transferred
    • at once to truly control

    • increasing authority of international
    • organizations

    internal problems

    • maintaining economic viability at
    • home, while accepting global trade, etc.
  36. the “no change” argument
    • nation-state only gives up that
    • authority it wishes to and can always take it back

    • globalization is an accepted choice by
    • states
  37. transformed (“radically moderate”)
    • states must reconcile the domestic,
    • international and global pressures

    • these new pressures are forcing the
    • state to adapt and we don’t yet know what the result will be
  38. Does America lead globalization?
    • hegemonic stability theory asserts
    • hegemons will determine the international political economic system

    following WWII, the US was the hegemon

    • but would the liberal economic beliefs
    • of the time suggest an open economic system would have been the natural result?

    failure to secure liberal trade

    ITO failed

    GATT was weak, ultimately replaced
  39. Why was the US hesitant to lead?
    solationist history

    • Americans tend to believe that they
    • are isolated from the rest of the world

    • while Europe and others have age-old
    • rivalries, histories of secret treaties and sellouts, etc., the US perceives
    • itself as above such immoral political games

    physically isolated/protected

    • 2 oceans, arctic tundra to the north,
    • a weak state to the south

    Puritan colonists

    • left immoral nations in search of a
    • more pure existence

    • supersized economy meant that America
    • was largely unaffected by the world economy

    more affected today, but not much

    • domestic trade dwarfed international
    • trade in 1945

    • sacrifices were easily paid for by
    • such a large GNP

    • therefore, the US never had to make
    • too many hard choices or enforce too many unpleasant policies
  40. Leadership or not?
    • truly liberal approach to
    • globalization--let the market decide

    • American economic philosophy is partly
    • responsible

    is this such a bad thing?

    • each nation is more able to decide for
    • itself than be forced by the US or some IO

    • is American globalization actually
    • this open?

    • choice to participate, but
    • consequences if a state does not
  41. Regional Responses to Globalization

    what is a region?
    geographically-definable area

    common historical experiences

    common problems

    • cultural, political, and economic
    • connections that differ from the rest of the world

    • organizations that manage their
    • collective regional affairs
  42. Europe
    • labor plays a strong role in the
    • economic policy

    labor is protected by the government

    VAT--Value Added Taxes

    paid maternity leave

    • governmental intervention in the
    • economy is accepted and expected

    Europeans haven’t given up on Keynes

    • misinterpreted: protection of the
    • worker

    • promoting the welfare of the citizenry
    • is the goal of economic activity

    EU limites intervention

    • recent problems make intervention
    • problematic
  43. North America
    • governmental intervention is a last
    • resort policy

    freedom of markets is paramount

    • microeconomic (individual) stress for
    • short-term profits for shareholders
  44. Asia
    production emphasized over consumption

    • strong tilt toward businesses over
    • consumers because the whole is more important than the individual

    • colluding networks of firms promote
    • competition with the rest of the world at the expense of the consumer

    • economy is less a legal and more a
    • social obligation

    • social, economic, and political
    • harmony is paramount

  45. Regional Response to Globalization

    • by merging into economic alliances,

    • states can protect themselves from global competition while still enjoying some
    • of the benefits of liberal international economics
    • regions are a natural reaction to

    • globalization which may be perceived as wiping out cultural and national
    • identities
    • protection of European films

    • gain from other EU policies

  46. Multinational Corporations

    • firms that own enough assets to

    • control the production in a firm in a foreign country
  47. Foreign Direct Investment
    (What it IS
    • ownership of enough shares to control

    • the company
  48. Greenfield


    • creating/building new
    • assets, factories, etc.

    joining of two companies

    • purchase of one company by another

  49. Transnational vs. Multinational

    • most MNCs are not truly multinational

    • firm has home country and runs its

    • affiliates from there
    • instead they are transnational

    • crossing national boundaries

    • referred to as ethnocentric or home

    • country-oriented
    • truly multinational firms are

    • geocentric or stateless
    • do not tie themselves to a specific

    • country

  50. Horizontal integration

    • produce the same product in different

    • countries
    • i.e. Coca-Cola, Budweiser, McDonald’s,

    • etc.
    • used to increase market share around

    • the world
    • tailor product to local tastes

  51. vertical integration
    • extremely hierarchical

    • control the entire production process

    • by raw materials from one country, research & development from another, and
    • assembly in still another
    • reduces transaction costs

    • control quality

    • avoid high tax countries

    • avoid specific restrictions

  52. FDI pre WWI
    • significant levels of FDI

    • British hegemony provided a secure

    • investment environment
    • pre-WWII gold standard lower

    • transaction costs for investment
    • colonial holdings made investments

    • secure and open to imperial power
    • very few capital flow restrictions

    • took much longer

    • wars were limited because of British

    • stabilizing
  53. FDI during Interwar period
    • FDI decreases because of
    • instability
  54. FDI-WWII-1980s
    • significant increases in investments

    • American hegemony promoted expansion

    • of FDI
    • DCs had sustained growth up to 1970s

    • major advancements in communications

    • and transportation
    • Failure of ITO and the weakness of

    • GATT made FDI very enticing
    • liberal economic order

    • US-led gold standard

    • most investment went from DC to DC

  55. MNC-Host Country Relations

    • liberal perspective

    • because countries are abundant in

    • different factors, the flow of capital increases productivity
    • capital can flow from wealthy

    • countries to those with less capital
    • as an externality, FDI also transfers

    • technology and skills to the host country
    • orthodox liberals suggest that FDI

    • also helps alter values to fit with development, an essential step toward
    • modernization
    • also suggest that MNCs still operate

    • in a perfectly competitive world

  56. Questioning the Liberals

    • MNCs can get their funding from the

    • host country, so there is no transfer of capital
    • capital made in the host country can

    • be removed
    • MNCs are oligopalistic; they

    • concentrate the industry because they have an economy of scale, which can even
    • overwhelm domestic producers with advantages
  57. Realists on MNC host country relations
    • outward FDI is good because it

    • increases control of other nations’ economies
    • inward FDI has a weakening effect, and

    • therefore should be regulated

  58. Dependency Theorists on MNC host nation

    • foreign investment creates an industry

    • in an LDC
    • virtually all profits return to the

    • investors; they don’t stay in the LDC
    • therefore the LDC is dependent on

    • foreign capital for development
    • however empirical analyses show that

    • FDI increases the development of the host country
  59. Obsolescing on MNC host nation...
    • as the MNC invests in a country, it

    • becomes dependent on that country to maintain its investment
    • once a factory is built, the MNC needs

    • the host country to continue to play nice
    • power relationship shifts

    • fixed investments increase the shift

    • in power because the MNC becomes tied to the host
    • advanced technologies that permit

    • relocation and require higher skilled workers decrease MNC reliance on the host
    • brand identification limits

    • obsolescence becaue the host cannot expropriate the assets and then profit from
    • them without the branded label

  60. LDC-Host Country Policies

    • up to WWII, FDI was virtually

    • unlimited
    • colonialism endorsed FDI and most

    • former colonies had a liberal perspective
    • LDC elites benefited from the FDI and

    • so they supported it
    • after WWII

    • LDCs began to restrict FDI

    • socialist ideologies

    • in communist countries, FDI was

    • prohibited/impossible
    • reaction to colonialism and foreign

    • control
    • 1960s-1970s

    • nationalization/expropriation rose as

    • LDCs increased their assertiveness and abilities
    • the increased number of MNCs allowed

    • the LDCs to be more selective, giving them greater power over the FDI process
    • 1970s- present

    • reversal to a more open policy toward

    • FDI
    • much of the nationalizations were

    • petroleum and mining interests, which had been completed
    • nothing more to expropriate

    • in many cases, LDCs failed to

    • capitalize on the taken property
    • nationalizations decreased MNC

    • investment in the LDCs, which in turn hurt their bargaining position
    • the debt crisis cut back on lending,

    • so the LDCs had to get capital from the MNCs

  61. DC-Host Country Relations

    • generally open through the past

    • century with a few exceptions
    • based on isolationist and realist

    • thinking, the US restricted some FDI during the interwar period
    • Europeans concerned about

    • Americanization promoted their own MNCs and placed greater restrictions on US
    • MNCs
    • Japan is the outlier in its FDI

    • restrictions
    • heavily protected, largely cultural

    • reasons

  62. MNC-Home Country Relations

    • outward FDI is seen generally as a

    • sign of strength and so is promoted by the home government
    • constraints put on FDI because:

    • use of the investment as a foreign

    • policy tool
    • constrain the gransfer of technology

    • to opponents
    • limits the control of the government

    • once MNC has an affiliate, it can

    • begin to circumvent home country rules and directives
    • 1945-1970s

    • US promoted FDI but also used it for

    • its foreign policy goal of containing communism
    • Europe promoted FDI, while Japan

    • maintained considerable constraints to ensure any investments helped the
    • Japanese economy as a whole
    • 1980s-1990s

    • US continued to use FDI as a foreign

    • policy tool
    • with the end of communism, this, too,

    • came to an end

  63. MNC-Labor Relations

    • liberals support MNC promotion and

    • argue that labor benefits from foreign investments
    • MNCs compete more effectively, create

    • more jobs in the home country, etc.
    • labor/historical structuralists argue

    • that FDI hurts labor through the following processes:
    • MNCs create more jobs int he host

    • countries that could be created at hom
    • labor is largely immobile; capital is

    • mobile
    • places labor at a disadvantage

    • unions cannot practically organize

    • across national borders
    • splitting the work force makes

    • collective bargaining less collective
    • labor in an LDC will have much

    • different utilities than labor in a developed country
    • i.e. a Mexican GM worker is much

    • different than an American GM worker

  64. Development

    Lay of the Land

    • average GDP per capita: $9,512

    • only $1,318 below the US poverty line

    • US GDP per capita: $45,000

    • China & India average GDP per

    • capita: $5,049
    • 2.5 billion people (37% of the world

    • population) live on slightly more than half the world average GDP per capita
    • Qatar: $91,379

    • Luxemburg: $83,759

    • Burundi: $392

    • DRC: $319

    • ten poorest countries have GDP per

    • capita below $1,000 per year
    • DRC, Burundi, Liberia, Niger, CAR,

    • Timor-Leste, Sierra Leone, Togo, Malawi, Mozambique
  65. Strategies for Devleopment
    • Keynes’ ideas of

    • interventionist-but-liberal policies promoted the idea that LDC governments
    • should be strong and active in the economy
    • Prebisch-Singer thesis asserted that

    • demand for raw materials (including agriculture) would remain stable compared
    • to rising wealth
    • more money does not mean the consumer

    • will want more food or drink, but more manufactured goods
    • therefore LDCs should pursue an import

    • substitution industrialization (ISI) strategy

  66. ISI-Import Substitution Industrialization

    • protect domestic market from

    • manufactured goods so that what was once imported can be produced domestically
    • first-stage goods will be non-durables

    • second-stage should replace immediate

    • and durable goods
    • creates domestic manufacturing firms

    • that will grow and be able to compete on world market
    • promotion of industry would mean a

    • de-emphasis on agriculture and other raw materials, but not to the point of
    • neglect
    • idea is to support industrialization,

    • not gut raw material production
    • LDCs followed ISI, but neglected

    • agriculture and became dependent on DCs for the inputs needed for their
    • manufactured goods
    • lower sales from raw materials cut

    • into the amount of hard currency flowing into the LDC
    • DCs used FDI to get around trade

    • barriers making ISI less effective
    • Asian countries limited FDI to avoid

    • this

  67. Green Revolution

    • development of high-yield crops

    • increased inequality in the agriculture section in LDCs
    • increased output masked the fact that

    • agriculture was severely neglected in many LDCs

  68. weather and Soviet demand for grain
    created a food crisis in early 1970s

    • de-emphasis on agriculture and

    • increased inequality cut the supply for food to the rural poor, therefore
    • requiring food imports into the LDCs
    • fewer agricultural exports left little

    • or no money to pay for the imports and the manufacturing sector was failing to
    • produce profits

  69. non-petroleum-exporting LDCs were
    doubly hurt in the 1970s because they had to import food and oil cost more

    • exports and profits wend down, imports

    • went up
    • LDCs were able to reach the first

    • stage, but the second stage was made difficult by their small domestic markets
    • and inability to produce without help from DCs
    • fundamentally ISI failed to create a

    • world competitive manufacturing sector

  70. Socialist Development Strategies

    • instead of protecting domestic firms,

    • socialist LDCs cut off all trade with the LDCs
    • these LDCs followed the Soviet model

    • Soviets were big enough and had

    • Eastern Europe as an expanded market
    • only China had a large enough domestic

    • market to succeed at the socialist development

  71. Export-Led Growth

    • use a moderate to minimal level of

    • protection, while promoting exporting firms with tax breaks, export subsidies,
    • and duty-free imports
    • domestic policies also promote the

    • development of work force by lowering employment taxes and the minimum wage
    • short-term transition costs the

    • population
    • long-term benefits are considerable

    • MUST have a strong state

    • can be judged on a state’s ability to

    • collect taxes

  72. East Asian Miracle

    • between 1960s and 1980s, East Asian

    • states followed an export-led growth strategy, and grew at tremendous rates
    • in some cases, growth in GDP per

    • capita exceeded 500%
    • liberals argued that this success was

    • a result of outward directed policies, not inward directed ISI
    • realists asserted that a strong

    • developmental state was responsible

  73. East Asian states shared the following

    • Confucian culture emphasized respect

    • for authority and therefore the government
    • importance of education and heavy

    • investment
    • strong familiar ties (dependent work force)

    • provided guidance to the market by

    • promoting technology, etc.
    • states valued growth over individual

    • consumption
    • bureaucracies were strong and

    • efficient
    • focus solely on exports

    • domestic industries were only

    • subsidized if they were considered winners
    • political culture also attributed to

    • the success
    • political culture: the set of shared social values

    • within a state

  74. Foreign Debt

    • what is debt?

    • not trade deficit (difference

    • between imports and exports)
    • not budget deficit (difference

    • between government spending and tax revenue)
    • accumulated securities and outlays the

    • government has
    • securities: treasury bills--money

    • coming in
    • outlays: social security--money going

    • out
    • total debt looked at as a percent of

    • GDP
    • current US debt is 97% of GDP

    • about equal to the size of the economy

    • in 2000, US debt was 75% of GDP

  75. Debt is a function of power

    • you owe $1,000--creditor has power

    • over you
    • you owe $100,000,000--you have power

    • over creditor
  76. Debt Crisis
    • the inability to pay the minimum payment on debt services

    • driven by imports and exports

    • on a personal level, this means

    • bankruptcy

  77. History of debt


    • creditors were much more diffuse--had

    • greater control over the loans being handed out
    • banks had greater power

  78. History of debt


    • IMF established and used as the lender

    • of last resort, primarily for LDCs
    • IMF had tremendous power over LDCs

    • austerity programs

    • linked to economic reform and

    • recession

  79. History of debt

    • banks began consolidating (i.e. Bank

    • of America)
    • gave private loans to countries

    • food and oil prices spiked

    • massive profits for OPEC countries

    • petrodollars flood banks--needed to

    • invest
    • banks invest in Latin America and

    • Southeast Asia
    • high growth rate compared to DCs

    • wealthy countries stopped buying from

    • LDCs
    • raise in interest rates--more

    • expensive to repay
    • US Chairman of the Fed raised interest

    • rates to lower inflation--extremely effective
    • adjustable interest rates make things

    • affordable
    • oil prices fell

    • Mexico couldn’t pay back its debts,

    • etc.
    • restructuring didn’t create growth

  80. Solutions To Debt

    • restructuring debt

    • engaging in more responsible behavior

    • HIPCs--highly-indebted poor countries

    • permanently poor, without a solution

    • policymakers suggest debt forgiveness

    • banks are adamantly against this

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Poli Sci Final
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