Notes for Wednesday:

COMMUNISM

- eliminate political question in quest for economic equality

Marx:

- private property and free market is FAILING society

- gross disparities in wealth and opportunity

- Dickensian conditions

- say property becomes POWER TO OPPRESS

Economic competition ----> EXPLOITATION

Small rich dominate large poor

Marx: will lead to revolution

Communist solutions:

ELIMINATE PRIVATE PROPERTY - if property is owned by ALL, no one can

be oppressed

Market is therefore eliminated

States make all economic decisions, decide supply/demand

So taxation comes in the form of fixed prices and fixed wages

Profits go directly to state (for benefit of all)

No competition between firms - no real regulation (state self-regulates)

CRITICISM:

states don't have ability to DECREE economic decisions - leads to inefficiency and waste

state has too much power --> authoritarianism, no distinction between public and private

No freedom

MERCANTILISM

- isn't concerned with freedom and equality of citizens

--only interested in STATE POWER

domestic economy is for STATE BENEFIT

Focus on INT'L ECONOMY

originated in 1500s, when Spain began to build its empire, and other European powers followed

- states used political power to control markets elsewhere - make trade exclusive to mother country

State economic power achieved by:

1. active industrial policy

- encourage firms to pick one sector over another, in the form of taxes and subsidies

- control market to achieve highest power

2. Tariffs, nat'l barriers, trade regulations

- Mercantilists believe that importing products weakens national economy and profits

- also leads to dependency

- Japan post WWII - focus on electronics and autos

3. No social expenditures

- believe it makes citizens lazy

- if they have to provide for their own welfare, they'll work harder

- lower taxes, higher profits

4. Low interest rates - encourage borrowing and investment

Benefits: can direct economy toward national goals

intl competitiveness

industrial development

attractive for developing states: East Asian tigers (or Asian Dragons) Hong Kong, Singapore, South Korea, Taiwan

Disadvantages:

states shouldn't make these decisions

can lead to waste and competition

-- bubble popped with Asian financial crisis in 1990s, state was too tied to economy

Some say mercantilism led to fascism - use war to get national wealth and power

But - mercantilist states CAN be democracies

COMPARING ECONOMIES

Gross domestic product: total market value of all goods and services produced within a country for a period of one year

misleading - doesn't account for variations within a state.

For instance - less money made in Idaho than in NYC

Germany - more money made in WEST than East

also, fails to take COST OF LIVING into account

So, NYC might MAKE more than Idaho - but might have same STANDARD OF LIVING

GDP - might go up in the case of natural disaster (hurricane katrina) , high crime, etc. Also does not account for inequalities in wealth

PURCHASING POWER PARITY - attempts to estimate the buying power of income in each country by comparing similar costs, such as food and housing. Some say gives a more honest picture of international economy

GINI INDEX - Measures the amount of economic inequality in a society.

US and China have same level of inequality - why?

China is not so communist anymore, encouraging private firms and competition

What does the GINI Index tell us?

SD countries have lower levels of inequality

Some mercantilist countries are relatively equal, while others arent

Differences within liberal nations as well

Which is the bigger problem, poverty or inequality?

HUMAN DEVELOPMENT INDEX - developed by UNDP, looks at overall outcome of country's wealth - the health and knowledge of a country's people

adult literacy

life expectancy

educational enrollment

Does a country's wealth benefit its citizens?

Norway and Canada usually battle for #1, US is usually #10, Sierra Leone, Rwanda, and Burkina Faso usually alternate last place

Strong correlation between GDP and standard of living

Seems that all systems, with exception of communism, can create high standards of living

BUT even communist (and postcommunist countries) provide a decent standard of living for their GDP group

FUTURE OF POLITICAL ECONOMY

The world has changed

Communism has been destroyed, militant mercantilism destroyed by WWII

SD is under attack, under increasing pressure to reform, and even communist China is moving toward a freer market

End of history - Francis Fukuyama -- no more war between ideologies - liberalism, and liberal democracy has WON and that's it

Points to widespread ECONOMIC LIBERALISATION throughout the globe

Economic liberalisation - changes that limit the power of the state over private property and market forces

Do you think economic liberalism is here to stay?

Free trade and trade liberalisation

Big debates over WTO

WWII was also caused by trade imbalances - mercantilist fascist states wreaked havoc

So in 1948, the BRETTON WOODS CONFERENCE set up this organization known as the GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

- agreed to establish rules for trade and tariffs between trade

- was an int'l org striving to create stability and peace

- created the International Trade Organization (never ratified by US Senate, never happened)

- also created the IMF and World Bank

INTERNATIONAL MONETARY FUND: entrusted with overseeing the global economy, monitors exchange rates and balance of payments, as well as offering financial assistance to states who need it

World Bank: group of five institutions responsible for providing loans for countries for the purposes of development and poverty reduction , and for encouraging international investment

- GATT focused on TARIFF REDUCTIONS, reducing non tariff barriers.\

In 1995 - became WORLD TRADE ORGANIZATION

sets the rules for global trading system

resolves disputes between member states

encourages COMPLETE liberalisation - believes all nations can be wealthy by breaking down trade barriers

argues liberalisation is best because : A. trading system will be more predictable when free, B. should be more competitive, C. should be more accomodating for developing countries, gives them time to catch up

works in rounds - Uruguay round established WTO

Singapore round - 1996 - Singapore Issues: investment protection, competition policy, transparency in trade facilitation

Seattle round - 1999 - ended with failure, massive protests

Cancun round - 2003 - ended in failure, due to failure to resolve Singapore issues,

and agricultural subsidy issues

Hong Kong round - 2005 - came to an agreement about agricultural finances (reference your article) - terminate cotton subsidies in 2006, end all agricultural subsidies by 2013. LDCs got tariff-free trade conditions in developed countries

Is free trade the best way to go?

Economic arguments for it:

A. Will increase level of global OUTPUT because it allows countries to SPECIALIZE in produciton - comparative advantage - produce more of what you're good at

B. Free trade usually stems from laissez-fair economies, which produce more anyway

C. Reciprocal fair trade benefits EXPORTERS - existence of trading blocs causes an increase in supply AND demand. Known as TRADE CREATION

Moral arguments for it:

A. Free trade is a right

-- By restricting trade, states are restricting citizens' rights to buy whatever they want

B. Free trade lowers possibility of war

-- wars are less likely to be fought by trading partners, because so much can be lost

-- encourages INTERDEPENDENCE (explain)

-- Only one war has been fought between countries with MacDonald's (When NATO bombed Serbia - except NATO doesnt have a MacD's)

C. Protectionism might cause divisions within a country, so while it's done to encourage patriotism, it's not really working to that end

D. Free trade reduces poverty

- argue that free trade enables developing nations to "catch up"

- will eliminate poverty quicker

Sociopolitical arguments

A. Free trade enriches cultures

helps culture become a globalized phenomenon

Criticisms of Free Trade:

A. Free trade in RAW MATERIALS hinders development

If developing countries only export raw materials - then won't industrialize

Also, developing nations with valuable raw materials could suffer - could be taken advantage of by developed nations and come out with no profit

Also, free trade might only benefit despots in region

B. Int'l trade requires more resources to distribute

meaning - overseas shipping takes a lot of resources (fossil fuel, money)

only beneficial to developing societies if they produce SO MUCH that it offsets the price of shipping

C. It might be better to shelter and protect young industries than to force them to compete with older, more established firms

D. Free trade may favor developed nations in certain sectors

-entertainment, intellectual property, medicinal patents, software

- WTO regulations make it impossible for developing states to produce generic brands of medicines that might save lives at cheaper cost - although this may have been fixed at the Hong Kong round

E. Free trade promotes offshoring / outsourcing

- for lesser environmental safety standards

- free trade creates an environment in which companies can circumvent safety and environmental regulations

- power goes to corporations, not to governments

- labor goes to the cheapest offer

- some people call it the "race to the bottom"

- argue that labor rights are being abused by outsourcing

- also say that domestic jobs are lost due to outsourcing

Sociopolitical arguments against free trade

A. Undermines cultural diversity

MacDonalidization of the world

- French fight against it, want to preserve their culture

- agriculture - used to be small-scale, independent farmers --- now, it's large scale businesses

-- Canadian issues (Canadian content laws)

B. Dependency theory

- Dependency theory posits that the cause of the low levels of development in less economically developed countries (LEDC's) is caused by their reliance and dependence on more economically developed countries (MEDC's) -

i.e. the LEDC's are undeveloped because they rely on the MEDC's.

Some proponents of dependency theory assert that LEDC's will remain less developed because the surplus that they produce will be siphoned off by MEDC's - under the guise of multinational corporations. There is, as such, no profit left for reinvestment and development.

ex: Caribbean - produces sugar for the developed world, doesnt have the resources to industrialize

C. Free trade undermines national security

INTERDEPENDENCE - mutually dependent; a reciprocal relation between interdependent entities.

"Today, the mission of one institution can be accomplished only by recognizing that it lives in an interdependent world with conflicts and overlapping interests."

So, undermines national security - if nation is dependent on OTHERS for trade, then sovereignty is lost, and they are at the whim of other powers

However - this is unlikely

D. Free trade undermines border control

borders are more flexible and fluid, therefore control is harder to enforce

Now - an alternative might be FAIR TRADE

Fair trade - promotes international labour, environment, and social standards for the production of traded goods and services

Mostly focuses on equal trading rights for less developed countries

Anti-subsidisation in developed world: dairy and agriculture in US and EU

Very anti-WTO, say that it's controlled by the developed countries and serves the developed countries' interests

Now, focuses on agricultural subsidies and dumping (when developed countries dump industrial waste in developing countries)

Fair trade movements also have an element of environmentalism in them - they want developing countries to benefit from trade, but they want environmental standards to be respected as well

"Fair trade coffee"

According to Oxfam, free trade will:

allow developing nations to work themselves out of poverty by selling their products to rich countries at decent prices

should be allowed to protect fledgling industries until they are established enough to compete with other countries (protectionism)

claim the WTO is helping developed nations maintain dominance in the global trading system

DEBT CRISIS

Where did the debt come from?

- First oil shocks - oil-producing countries made lots of money, didn't have high social expenditures, so put the money (petrodollars) in international banks

- the banks needed to pay the interest on these HUGE deposits, so they lent it out to developing countries, where they believed rapid industrialization and new industries would quickly pay it back

-- however, world experienced a SECOND OIL SHOCK, which really made the economy go haywire, and impeded developing nations' ability to produce and make money

-- ever since then, there has been massive lending, but there have been a lot of defaults - Mexico in the early 1980s-- beginning of debt crisis

Types of debt

Unpayable debt - when the external debt exceeds the amount that the country produces (debt is higher than GDP)

Odious debt - debt incurred by undemocratic countries and misspent or misappropriated (loans given for the development of infrastructure that was spent for arms buildup: Uganda)

Sometimes, lending institutions like the World Bank would force countries to implement SAPs - structural adjustment programs - to get their economies back on track. These would include:

privatization, deregulation, no barriers to trade, cutting social expenditures, focusing on direct export, balancing budgets, making foreign investment easier and safer

So, there has been a push for debt forgiveness in this decade as part of a human rights campaign (One, Live 8, Make Poverty History)

Live 8 led to the decision at Gleneagles Scotland, at the G8 conference that 40 billion USD in debt would be forgiven to HIPCs -- Highly Indebted Poor Countries

Benefits of debt relief:

-- Many debts are incurred by dictators, and people have to suffer to pay those loans back, it's immoral

-- often, developing countries have to choose between paying loans and providing for their citizens

-- forgiveness will encourage greater fiscal care and accountability in Africa, and curtail much of the corruption that has taken place

-- adds greater transparency to civil society (transparency - full, accurate, and timely disclosure of information)

-- will increase investment from wealthier nations

Disadvantages of debt relief:

-- only encourages irresponsible budgetary practices that will lead to more debt

-- corruption will still exist

-- debt forgiveness gives governments a blank check

OK - let's discuss Milanovic quickly

Why did poorer countries fail to catch up?

Is it because they've been at war frequently?

Failed to reform as much?

Consistently have worse institutions?

Unable to attract foreign investment?

What do you think?

War - has caused a 40 percent drop in output - explains declines of LDCs

So without war, they would be much richer? What do you think?

Delay in reforms

- but even if they did reform, it would have had only a minimal affect on the economy (.2 percent)

DFI and democracy

- democracy seems not to matter much

-- does this contradict liberal model? does it mean it's wrong?

-- DFI seems to have been a positive affect on LDC economies

So author concludes:

war and strife really make a difference

lender institutions and IFIs really don't help at all

can't really say what democracy or education has to do with economy