Transcript Slide 1

International Political
Economy: Monetary Affairs
PO 325: International Politics
International Money and Business
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In addition to the trade of goods, the
nature and exchange of money are
important factors in international
political economy
The transaction of money is at the
heart of several current issues and
debates important to the global
system, including international
development and the politics of
multinational corporations
The Currency System
For Centuries, International
Currencies Pegged to Precious
Metals (Gold, Silver)
 In Recent Times, The Values of
Currencies are Defined in
Relation to One Another (e.g., $
to ¥), and They are Backed By
Hard Currency Reserves
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The Currency System
Relative Values are Arbitrary; It
is the Changes in Relative
Values over Time That are
Meaningful
 Exchange Rates Can Be Fixed
(Determined by States’
Establishment of Official Rates)
or Floating (Determined by
Global Currency Markets) –
Latter is More Common
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The Rise and Fall of Currencies
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Supply and Demand
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Increased Supply of Currency is
Beneficial for Governments, Because it
Increases Revenue
Best Way to Increase Supply is to Print
More Money – BUT, Printing too Much
Increases Inflation (Amount of Goods
Unchanged But More Money to Buy it) –
This Causes Relative Currency
Devaluation
This Decreases International Demand
For a Particular Currency, Weakening It
The Rise and Fall of Currencies
Intentional Devaluation
(Unilateral Change in Value to
Fix Financial Problems)
 Many Governments Trust
Central Banks to Control
Currency Lending Rates –
Increases Trade Stability
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The Bretton Woods (1944) System
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Provided Stability/Capital Access,
and Promoted Third World
Development and Integration
Set up Regime of Stable Monetary
Exchange, Based on US Dollar and
Backed By Gold (1/35 of an ounce)
Other States’ Currency Fixed to
Dollar; International Monetary Fund
(IMF) Established New Rates Based
on Long-Term Fluctuations and
Balance of International Payments
The Bretton Woods (1944) System
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If Country’s Relative Currency Value
Fell, it Would Have to Buy Currency
Back with Specie
Bretton Woods Also Established
World Bank (International Loans)
Overvaluation of Dollar Led to
Collapse of Fixed Exchange System
in 1971 (Unilateral US Decision)
IMF Created Special Drawing Right
to Which Dollar Was Pegged
State Financial Positions
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Balance of Payments: Summarizes All
Capital Inflows and Outflows
Current Account: Includes ExportsImports (Trade Balance) +
Government Transactions and
Payments.
Capital Flow (Foreign investment +
Loans and Other Inflows
Changes in Reserves
State Financial Positions
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Why/How Do States Go Into Debt?
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Trade Deficit (Must Be Rectified Through
Balance of Payments, Sometimes
Through Borrowing)
Domestic Income and Consumption
Patterns – If People Overspend, Must
Borrow from Gov’t to Pay Bills
Government Overspends Taxation
(Keynesian Deficit Spending)
Multinational Business
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Actual Transactions Carried Out by
Firms – In IPE, the Most Important
of These are Multinational
Corporations
MNCs: Companies Based in One State
But With Affiliated Branches in
Others
Can Be Industrial Corporations
(Make Goods In Various Countries
and Sell them Elsewhere) (GM)
Can Be Financial Corporations or
Service Sellers (AT&T, McDonalds)
Multinational Business
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MNCs Have Increasingly Gained
Political Power in The
International Realm
Multi-billion Dollar Earners;
Motivated by Profit
 Often Seem Beholden to No World
Government; Count Stockholder
Loyalty as Most Important
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The Politics of Foreign Direct
Investment
MNCs Operating Abroad Invest
in Foreign Economies (Capital
Ownership)
 FDI is Long Term Investment in
Host Government– Relationship
of Host, Home Country, and
MNCs Important
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The Politics of Foreign Direct
Investment
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Political Conditions of Host Countries
Can Directly Impact MNCs
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Host Countries: Can Stimulate Growth,
But Results in Loss of Sovereignty,
Tradition
MNCs: Political or Popular Hostility Can
Diminish Safety and Productivity; No
Guarantee of Protection From Home
Countries (Subject to Foreign Law – ex:
Intellectual Property)
Home Gov’t: Still Taxes MNC, Holds
Trade Policies, Controls Currency –
Effects MNC