Transcript POSC 2200 - Introduction

POSC 2200 – International
Political Economy
Russell Alan Williams
Department of Political Science
Unit Six: International Political
Economy
"Finance"
Required Reading:

Globalization of World Politics, Chapters 16
and 27.
Outline:
1.
2.
3.
4.
Introduction - Finance and Investment
Key Mechanisms
Institutions
Multinational Corporations
1) Introduction - Finance and Investment:
System of finance and currency exchange vital

Without it there would be:
 No Trade
 No Travel
 No Development
Challenges:
i) National currencies versus international markets

Must be confidence in the system of exchange

Need a management system that ensures:
 Convertibility
 Liquidity
 Stability

Historically: “Gold Standard” ensured these . . .

E.g. Money could always be converted into precious
metal – kept currencies stable
Modern money is abstract – value driven by
perception
International Challenge: Make global financial
markets secure and stable (!)

ii) Globalization of finance
 Makes possible emergence of MNC’s
 Reduces state control over currency and
investment
 Increases need for cooperation to ensure
financial stability
2) Key Mechanisms:
a) “Currency Markets”: Private markets where
foreign exchange occurs (where currencies are
“traded”)

E.g. the “exchange rate”: Rate at which one currency
can be exchanged for another

E.g.
$100.00 (CDN)
=$78.80 USD (Winter 2015)
=$95.76 USD (Fall 2013)
=$61.79 USD (Winter 2002)
$100.00 (CDN)

= e74.23 Euro
Why do currencies go up and down in value?

State choice


Domestic economic policy


E.g. Competitive devaluations that led to the
“Great Depression”
E.g. Lowering interest rates to stimulate economy
can reduce value of a currency
Market “supply and demand”

Large “Balance of Trade” deficit can result in
reduced value of currency

Currency speculation



Real economic performance



Currency traders benefit from market
fluctuations = instability is “good” – for them!
Small currencies are exposed to speculative
fluctuations
E.g. China (?) – Trade surpluses can increase
value of currencies
E.g. EU – economic crisis can drive currency
down
Strength of the currency

E.g. Perceived reliability of US $
Key Point:
 “Currency Markets” have grown(!)
Main foreign exchange market turnover, 1988 – 2007, measured in billions of USD.

Markets subject states to “discipline” in
economic policy . . . this is “new”.

E.g. “Bretton Woods”: System of financial management
established after WWII protected states from market
fluctuations – ended in 1970s.
=“Capital Controls”: Formal restrictions on the right to
exchange money
b) “Balance of Payments”: Flow of money
into and out of a country from trade,
tourism, investment and borrowing

Two main components:


Current Account = “Balance of Trade”
Capital Account = Measures investment and
borrowing flows = $$$
Balance of Payments (2001) In Billions USD
United States
Germany
Current Account
Balance of Trade


Exports
Imports
Gov Transactions &
Investment income
Current Account Balance
998
-1,356
658
-620
-35
-35
-393
3
398
-8
5
-5
Capital Account
Net Investment and
lending flows in (+)
and out (-) of country
Reserves
Changes in Official
Reserves

“Balance of Payments” cont . . .

Key points:
1) Should balance every year
2) States with “balance of trade” deficits must be
capital importers

E.g. Foreign Investment
Consumer borrowing
Government borrowing from foreign
sources

“Balance of Payments” cont . . .

Different from government finances

Government’s Annual Budget:

Has surpluses and deficits depending on tax
revenue relative to spending . . . .

National Debt: Money owed by governments
because of past deficits

Can effect “balance of payments” - but
only if deficits and debts are borrowed
from foreign sources
Current financial positions:

Attention to “balance of payments” can change
image of power in IR
Canada:



National Debt: Less than single year of GDP
 Large annual deficits . . .
 Early 1980s to late 1990s
“Balance of Trade”: Small trade surplus
 Surplus with US
 Deficit with rest of world
Balance of Payments:
 Canada a net capital exporter – Canadian
outward investment
United States:




National Debt: Over $17 Trillion(!)
 More than a single year of GDP
 Large annual deficits
 High in early 1980s and early 21st Century
“Balance of Trade”: Large trade deficits for
decades
“Balance of Payments”:
 Requires capital imports
 Unsustainable over long term??
Implications?
 Risk of US decline . . . . Canada?
 Damage to international financial system?
China:




National Debt: None
“Balance of Trade”: Large trade surplus
 Surplus with developed countries
 Deficit with rest of world
“Balance of Payments”:
 China also a net capital importer (???)
 Results in huge increases in currency
reserves
 More then $1 Trillion (USD)
 China has “Capital Controls”
Implications?
“Unbalanced” Global Economy (2000-????)

Americans buy too much, make little


Pay for it through creative debt – house finances = !!!!
Chinese export too much – currency does not go
up in value = !!!!

What to do with those extra USD $$$$?
=Lend them to Americans!

Implications?
3) Institutions:

Financial instability - exchange rate
fluctuations/balance of payments problems
– need to be managed!




Bad for trade
Bad for MNC’s
Bad for states and development
Requires institutions to coordinate behavior
and manage financial system
Domestic Institutions - Central Banks:

Control monetary policy - influence
interest rates

Control exchange rate policy - control
currency reserves and interest rates

Normally “independent” of political
control – role is to coordinate policy with
other countries to achieve stability
 E.g. Bank of Canada and U.S. Interest
Rates

International Institutions:
“International Monetary Fund (IMF)”:


Established after WWII to manage temporary
balance of payments problems
 Reduces exchange rate volatility
Current role – longer term loans to countries
facing “debt crisis” – Requires “conditionalities”


Supports “Liberalization” and “Deregulation”
Run by “weighted voting”
 Plays favorites? = Harsh treatment of LDC’s in
debt
“World Bank”:

Established after WWII to make long term
loans to support development
 E.g. Reduce capital account deficits of
developing countries

Also run by weighted voting
Loans lower cost than private lending
However resources insufficient
 Developing countries borrow from other
sources = high interest and debt problems


Both IMF and World Bank subject to
heavy criticism

E.g. 1)Management of the LDC “debt
crisis”
2) Support for economic liberalism and
“deregulation” – which has made some
problems worse . . . .

Marxists, “antiglobalizers” and others
point to failures of these institutions
4) Multinational Corporations

“Multinational Corporations (MNCs)”:
Private enterprises with production,
facilities, sales operations and investments
in several states



Implies control over operations of
“subsidiaries” in other countries
“Home” and “host” countries???
Can only exist with globalized finance –
“currency markets” and no “capital controls”
blocking foreign investment
Example: General Electric

“Based” in US


Products?


250 factories in 26 countries
 Subsidiaries?
Consumer electronics, financial services, weapons
(tanks, jets and ships), nuclear reactors, WMD’s, and
NBC
$575,244,000,000 in global assets


1/2 outside the US
315,000 employees outside US
Impact of MNC’s?

Home Countries?
 Bring in global profits
 “Good” jobs

Host Countries?
 Hosts compete to attract MNC investment
 “Race to the Bottom” – states reduce taxes,
environmental standards etc. to attract
companies
 Bad jobs, pollution and profits go elsewhere

Power: MNC’s have ability to influence what host
states do . . .
Obstacles to growth of MNC’s
1) Nationalization by foreign governments

E.g. Cuba, Venezuela & Newfoundland
2) Exchange rate fluctuations and
instability

Increases cost of doing business
5) For Next Time . . .
Unit Six: International Political Economy
“Environmental Cooperation”
Required Reading:


Globalization of World Politics, Chapter 22.
David Layfield, “International policy on climate change:
after Kyoto, what next?” Environmental Politics, 19:4,
(2010), Pp. 657-661. (Available from e-journals, or from
the instructor.)