UCI week 10 Political Science on Democracy as Freedom Essay

  

Choose one prompt, tell me which you choose

Required Format: Each paper should be typed, single-spaced, using 12-point font, Times New

Roman and one-inch margins. Title is only required when you’re given multiple prompts to choose

from. Indicate your choice as your title – e.g. “Title: Weekly Paper 3, Prompt 3”. If external resources

are cited, provide a bibliography at the end of your paper. When you cite the textbooks, you still need

to provide the author’s name and page number, but you don’t have to provide a bibliography at the

end of your paper. Make sure you choose one reference style and be consistent throughout your paper.

I recommend American Political Science Association Style Manual (aka APSA). Consult the latest

edition of the reference style:

Prompts for Weekly Paper 9
(Week 10 Paper)
Expectation & Requirement
→
Now, here’s the list of prompts
(Same as What Professor Wilkinson Posted)
Prompt 1 (Lectures 16 and 17abc)
Should capitalism be relentlessly globalized in the
interest of world prosperity and peace?
Prompt 2 (Lecture 17c, but read
ahead in FLS4 619-635)
Are we
the natural progress
And so heading
capitalist utopia of 1776?
Or will antiglobalization movements and illiberal
Prompt 3 (Lecture 18)
Will Washington DC and Beijing have to be
drowned before the US and China cooperate on
climate control, or will flooding New York and
Shanghai do the job?
LECTURE
17a
Globalization I:
The Liberal Approach
to
International Political Economy
General theme of FLS Part Three
• For FLS, War/Peace is the Realm of
– Win/Lose Bargaining
• What anybody gains, somebody loses
– and of Lose/Lose destruction
• Sometimes everybody ends up worse off
• IPE is the Realm of Win-Win
Cooperation
Liberal themes of FLS Part Three
• Realm of Bargaining: Avoid
Lose/Lose Outcomes (make and
keep the peace)
• Realm of Cooperation: Find
Win/Win Outcomes (build
prosperity)
FLS Part Three
Chapter 7: International Trade
Chapter 8: International Financial
Relations (and Migration)
Chapter 9: International Monetary
Relations
Chapter 10: Development
Liberal Economic Ideals,
Chapter by Chapter
• Ch. 7: Global free trade
Liberal Economic Ideals,
Chapter by Chapter
• Ch. 7: Global free trade
• Ch. 8: Global free movement of
capital and labor
Liberal Economic Ideals,
Chapter by Chapter
• Ch. 7: Global free trade
• Ch. 8: Global free movement of
capital and labor
• Ch. 9: A single world money, OR a
world money free market
Liberal Economic Ideals,
Chapter by Chapter
• Ch. 7: Global free trade
• Ch. 8: Global free movement of
capital and labor
• Ch. 9: A single world money, OR a
world money free market
• Ch. 10: A prosperous world of rich
countries
The Liberal World Model:
A World on the American Model!
• Across America’s state borders, there is mostly
• Free movement of
– Goods (no tariffs at state borders)
• Some limits on agricultural items for fear of diseases
– Capital ownership (no limits on trans-border
investment)
– People (no entry visas, exit visas, or passport
control at state borders)
– Money (a single national money; no need to
exchange at borders, report large movements,
and credit cards function wherever)
Or a World on the European-Union Model
• Like the union of the 13 American
colonies, the European Union is a
union of nations that also gave up that
right to close one another out.
• Across European borders, there is also
• Free movement of
– Goods
– People
– Capital ownership
– Money (in the Euro zone)
Liberal Globalization Policy
•
•
•
•
What is right for America
And for the EU
Is right for the world
So economic freedom
– To move goods to get the best price
– To move oneself to get the best job
– To move businesses to get the highest profit
– To move money to get the best return
• Should be globalized!
Why? Liberal Economic
Doctrines
• A Global free market best allows
– maximization of specialization
– maximization of production
– maximization of trade
– maximization of welfare
However, reality is different
• The problem of world political
economy for Liberals is that the
real world stands far away from
the Liberal ideal.
• Instead of global free trade, the
Liberal sees barriers
obstructing trade everywhere.
Brute Economic Realities
• Trade barriers everywhere
Brute Economic Realities
• Trade barriers
• Capital controls by many countries
Brute Economic Realities
• Trade barriers
• Capital controls
• Multiple manipulated currencies,
some very suspect or unwanted
abroad
Brute Economic Realities
•
•
•
•
Trade barriers
Capital controls
Multiple currencies
Immigration restrictions
Brute Economic Realities
•
•
•
•
•
Trade barriers
Capital controls
Multiple currencies
Immigration restrictions
Rich and poor nations:
International inequality
But…
• Bad as things are, they used to be
much worse!
Remember Max Roser!
• The world is much better;
• The world is awful;
• The world can be much better
TOPIC
17
a-1
Liberalizing World
Trade
International Trade per Max
Roser
• Things are awful
– (trade barriers everywhere)
• Things are much better
– (world trade burgeons)
– (many trade barriers have fallen)
• Things could be much better
– (global free trade)
• Work on it!
Things have gotten better
Container ship routes
Belt and Road plans
Trade and growth
Trade globalization
Driving globalization:
technological progress
Great Powers Have Become Big
Traders!
Trade
• Things are much better
• Things are awful
Countries are not equally open
to trade
Trade barriers are constantly
being put up
The Puzzle
If trade is mutually beneficial, in
general
The Puzzle
If trade is mutually beneficial, in
general,
then policies that hinder trade hurt
welfare and productivity.
The Puzzle
If trade is mutually beneficial, in
general,
then policies that hinder trade hurt
welfare and productivity
BUT
All countries restrict trade!
How Trade is Restricted
• Import Tariffs
How Trade is Restricted
• Import Tariffs
• Import Quotas
How Trade is Restricted
• Import Tariffs
• Import Quotas
• Nontariff Import Barriers
How Trade is Restricted
• Import Tariffs
• Import Quotas
• Nontariff Import Barriers
– legislated preferences
How Trade is Restricted
• Import Tariffs
• Import Quotas
• Nontariff Import Barriers
– legislated preferences
– targeted health and safety standards
How Trade is Restricted
• Import Tariffs
• Import Quotas
• Nontariff Import Barriers
– legislated preferences
– targeted health and safety standards
– antidumping penalties
How Trade is Restricted
•
•
•
•
Import Tariffs
Import Quotas
Nontariff Import Barriers
Subsidies to “national
champions”
How Trade is Restricted
•
•
•
•
•
Import Tariffs
Import Quotas
Nontariff Import Barriers
Subsidies
Export Prohibitions
Why Do All Countries Restrict
Trade?
Trade produces winners and losers.
Why Do All Countries Restrict
Trade?
Trade produces winners and losers.
Open markets produce competition,
and competition produces winners
and losers
The Winners from Competition:
The Public (The Buyers)
• “In general, if any branch of trade,
or any division of labour, be
advantageous to the public, the
freer and more general the
competition, it will always be the
more so.”
• Adam Smith, The Wealth of
Nations
The Losers from Competition:
The Sellers
• “The interest of the dealers… in
any particular branch of trade or
manufactures, is always in some
respects different from, and even
opposite to, that of the public. To…
narrow the competition, is always
the interest of the dealers.”
• Adam Smith, The Wealth of
Nations
Why Do All Countries Restrict
Trade?
The benefits of trade are public
goods
Trade restrictions reflect a collective
action problem
Consumer interests
• Consumers are
– many
– unorganized
– not highly motivated
• Consumer interests are politically
weak
Foreign producer interests
• Foreign producers (who might be
low-cost) are
– many
– unorganized
– outsiders
• Foreign producer interests are
politically weak
Domestic producer interests
• Domestic producers are
– few
Domestic producer interests
• Domestic producers are
– few
– highly motivated
Domestic producer interests
• Domestic producers are
– few
– highly motivated
– organized
Domestic Producer Politics
• “People of the same trade seldom
meet together, even for merriment
and diversion, but the conversation
ends in a conspiracy against the
public, or in some contrivance to raise
prices.”
• Adam Smith, The Wealth of
Nations
Domestic producer interests
• Domestic producers are
– few
– highly motivated
– organized
– insiders
Domestic producer interests
• Domestic producers are
– few
– highly motivated
– organized
– insiders
• Domestic producer interests are
politically strong
The Power Politics of Trade
Barriers
• Consumer interests are weak
• Foreign producer interests are
weak
• Domestic producer interests are
strong
• Result: trade barriers and high
prices!
Why Do All Countries Restrict
Trade?
Trade barriers, like trade, produce
winners and losers.
Trade barriers redistribute income from
(weak) domestic consumers and
foreign producers to (strong) domestic
producers.
The US Sugar Lobby is a Case in
Point
Figure 7.A: The Cost of Sugar
To take a case study: the US
sugar lobby.
•
US sugar prices are about double world market prices because of the
concentrated interests of sugar producers in Hawaii, Florida,
Louisiana, Minnesota and the Dakotas.
•
Producers have organized, lobbied, and contributed to members of
Congress, and received in return benefits at the expense of US
taxpayers and consumers.
•
The ability of American sugar producers to get protection illustrates
how a small and well-organized group can dominate trade policy to the
detriment of voiceless consumers and excluded foreign producers.
•
You will find parallel cases throughout the world wherever you care to
look.
So free trade has strong opponents
• Powerful domestic producer
interests
Things could be much better
Where the Liberal Trade Ideal of
Near-Zero Trade Barriers Has Been
Achieved
• Inside the United States (which was
founded by 13 independent
countries!)
– But not outside
• Inside the European Union (of
many once-independent countries)
– But not outside
How can trade be freed up?
• If countries overall will prosper
from opening up trade…
• But some groups would lose….
• Some gains from trade can be
used to compensate the losers
• And bring them on board!
It’s Been Done!
• Global trade institutions
– GATT (General Agreement on Trade and
Tariffs, 1947-1995)
– WTO (World Trade Organization, 1995)
• Regional trade pacts
– NAFTA (1994)
– EU (European Union, 1993)
– Mercosur (Common Market of the South,
1991)
International Institutions to
Promote Trade
• Global trade institutions
– GATT (General Agreement on Trade and
Tariffs, 1947-1995)
– WTO (World Trade Organization, 1995)
WTO Members 2018
International Institutions to
Promote Trade
• Global trade institutions
– GATT (General Agreement on Trade and
Tariffs, 1947-1995)
– WTO (World Trade Organization, 1995)
• Regional trade pacts
– NAFTA (1994)
– EU (European Union, 1993)
– Mercosur (Common Market of the South,
1991)
– and many others mapped in FLS 7.1
Regional Trade Agreements
Check out FLS4 328-329
Extensive Regional Economic Integration
No Global Economic Union
Key to Last Slide
•
•
•
•
•
•
•
•
Seven stages of international
economic integration:
Preferential trading area
Free trade area
Customs union
Common market
Economic union
Economic and monetary
union
Complete economic
integration
Progress toward Free Trade Has Been
Made
But Full Global Economic Union Remains
the Liberal Idea!
Not There Yet.
Will America lead again? Not just now.
TOPIC
17
a-2
Liberalizing the
Flow of World Labor
Liberal Economic Principles
• Apply not only to Goods
– (Chapter 7, Trade)
Liberal Economic Principles
• Apply not only to Goods
– (Chapter 7, Trade)
• But also to the Factors of
Production themselves (Chapter 8)
The Movable Factors of
Production
• Logic: Factors of production
– Land–not mobile (but ownership is!)
– Labor–mobile (by migration)
– Capital–mobile (by investment)
Liberal Principles of Factor
Mobility
• Both labor and capital should move
throughout the world to their best
opportunities
– Labor to high-wage locales (e.g. wealthy
developed countries)
– Capital to high-profit locales (e.g. less
developed countries)
– And land should be owned by those who
will put it to best economic use (even if
they are foreigners)
Another Brute Reality
• But there are obstacles and
resistance
Another Brute Reality
• But there are obstacles and
resistance
• International migration is deeply
resented and sharply restricted
Another Brute Reality
• But there are obstacles and
resistance
• International migration is deeply
resented and sharply restricted
• Foreign investment tends to go to
wealthier developed countries
Another Brute Reality
• But there are obstacles and
resistance
• International migration is deeply
resented and sharply restricted
• Foreign investment tends to go to
wealthier developed countries
• What are the interests and patterns
of resistance?
Another Brute Reality
• But there are obstacles and resistance
• International migration is deeply resented
and sharply restricted
• Foreign investment tends to go to wealthier
developed countries (as we shall see in the
next section)
But there is still plenty of
migration in the world
• The colors in the next slide
describe the net international
migration. Blue indicates net
emigration countries/regions, and
red indicates the net immigration
countries/regions. Empty spaces
indicate countries/regions with
missing data.
There is considerable worldwide
labor mobility
The flows are uneven, but they
tend to move toward developed
countries, where liberal
economics says they should go.
•
•
See next slide
https://content.openclass.com/eps/pearsonreader/api/item/33c1ac75-46ce-4867-ae305281538f14a6/1/file/RubensteinCHG3-071415MB/OPS/img/imported_files02/rube_030105-world-migra.png
The US is the world’s main immigrant-receiving
country.
By now there are certainly more than 50 million
immigrants living in the United States
http://www.pewglobal.org/2018/02/28/global-migrantstocks/?country=US&date=2017
United States
Russia
Germany
Saudi Arabia
United Arab Emirates
United Kingdom
France
Canada
Australia
Spain
Total Migrants
45,785,090
11,048,064
9,845,244
9,060,433
7,826,981
7,824,131
7,439,086
7,284,069
6,468,640
6,466,605
As % Total Population
14.3
7.7
11.9
31.4
83.7
12.4
11.6
20.7
27.7
13.8
Mexico is the largest sending country
Globalization of Labor
• There is intense social pressure to
move toward peace and prosperity
• And from the Liberal perspective,
there should be, and labor should
move as easily between countries as
within them!
Globalization of Labor
• BUT International labor mobility faces many
legal restrictions
• And is now triggering many political
controversies
• US border caravan problem
October 12, 2018 caravan
A Migrant Caravan in Mexico
Globalization of Labor
• BUT International labor mobility faces many
legal restrictions
• And is now triggering many political
controversies
• US border caravan problem
• EU migration—rise of populist nationalism in
Europe
Nationality of persons found to be illegally
present in the EU (2014)
Globalization of Labor
• No satisfactory migration theory
• Nor liberal institutions in place
• A task for the next generation of
international political economists
• Somebody needs to design a win-win
globalization-of-labor game!
• I think I’ll leave that to you…
Food for thought!
• Can global labor flows be so
institutionalized as to provide winwin outcomes and compensate
losers?
• If so, how?
• If not, why not? And where to go
then?
TOPIC
17
a-3
Liberalizing the
Flow of World
Capital
Beginning with some basic
vocabulary
• Direct Investment
• Portfolio investment
• Sovereign lending
Investment Types
Direct investment: investor buys or
establishes and manages a business
Let us say you have decided to start a business. A
juice bar, say. You’ve saved some money, and
now you rent a space, buy some furniture and
equipment and supplies, print a menu, get a sign,
comply with local government licensing
regulations, and open for business.
OK, you have made a direct investment, and
you’re in charge. You win, you lose, it’s on you. Of
course most new businesses fail, that’s capitalism,
but some don’t.
You’re lucky, or smart, or hard-working;
whatever, you don’t fail. You decided to
expand. But you can’t afford to on your
savings.
So you go to a bank and ask for a
loan. If you get it, you have
received what is called a portfolio
investment. You still manage the
business, the bank does not; you
just owe money to the bank, on
some repayment schedule.
Investment Types
Portfolio investment: investor has
no role in management; owns
some papers giving rights
Loans
Ok, you’re a success! Your secret
recipes rule. You decide to create
a chain of juice franchises. For
this you need more money. You
incorporate and sell shares in your
new undertaking to the public, or
rather you get brokers and
specialists in finance capital to
take you public with a stock
offering.
Investment Types
Portfolio: investor has no role in
management
•
Loans
•
Stocks
OK, you’re a great success! Now
you have an established
reputation, and you still want to
expand, but you are no longer
willing to dilute your ownership of
the business by selling shares of it
(stock), so you sell bonds to the
public; you’re getting them to loan
you money at interest, as your
first banker did, but now you need
a lot more money, so away you go
to the bond markets!
Investment Types
Portfolio: investor has no role in
management
•
Loans
•
Stocks
•
Bonds
You’re rich, hurrah! Your juice
empire has taken you to the top of
the financial world!
OK, the money is rolling in, more
than you know what to do with.
You become a portfolio investor
yourself.
You buy stocks, you buy bonds.
For instance, you can lend money
to the US Government by buying
Treasury bills, notes and bonds.
Investment Types
• Sovereign lending
– Loans from private actors to
governments
You’ve joined the wealthy of the world.
You’re a finance capitalist!
Have a look at your new club! Let’s get some
background on the group you have joined.
The global wealth pyramid (i)
• The next slide is a picture of then global wealth
pyramid, put together by one of the banks that cater
to them.
• At the bottom 3.4 billion adults owning less than
$10,000 total each.
• Next, 1 billion with less than $100,000 of wealth.
• Then 349 million people each worth under a million
dollars.
The global wealth pyramid (ii)
• Next we see the top layer of that pyramid, and it’s a
pyramid too.
• About 30 million people with under 5 million dollars,
• then more layers,
• and at the top 123,800 people with $50 million or
more.
And then there’s the top of the
top!
• The 20 richest people in the world
2019 Forbes Billionaires List
Now just imagine….
11. YOUR NAME HERE!
The Other Side of the Portfolio
• OK, back to your juice empire and
portfolio investing. You’re crazy
rich!
• You have more money than you
know what to do with! You’ve
expanded your juice empire as far
as you care to, so what to do with
your surplus wealth and extra
income?
What to do with your spare
change?
• If you’re Bill Gates, you might give it away.
What to do with your spare
change?
• If you’re Bill Gates, you might give it away.
• If you’re Warren Buffett, you’ll probably start
buying shares of other people’s businesses.
What to do with your spare
change?
• If you’re Bill Gates, you might give it away.
• If you’re Warren Buffett, you’ll probably start
buying shares of other people’s businesses.
• But if you’re not that self-confident, you’ll
probably get an investment managing
company and ask them to handle your spare
change. “Invest for me!”
Individual Investors
• Two major classes of private
capital in the world economy
– Wealthy Individuals (You!)
– Middle-class contributors to pension
funds
Individual Investors
• Two major classes of private
capital in the world economy
– Wealthy Individuals (You!)
• Often comfortable with risky investments
– Middle-class contributors to pension
funds
• Greatly dislike risk
Capital’s early steps toward
investment
• Whichever you are, your capital is
heading toward an investment.
• It goes from you ….
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
• Then mostly to a mutual fund
– Bond or stock or both
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
• Then mostly to a mutual fund
– Bond or stock or both
– Domestic or foreign or world
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
• Then mostly to a mutual fund
– Bond or stock or both
– Domestic or foreign or world
– One-country or several
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
• Then mostly to a mutual fund
– Bond or stock or both
– Domestic or foreign or world
– One-country or several
– Sector or broad-based
Capital’s early steps toward
investment
• It goes from you ….
• To an investment bank (or
company)
• Then mostly to a mutual fund
• And then where?
Where Should It Go?
• Per the Liberal Ideal
• Since the poorest countries have
the greatest room for growth
• they should therefore vacuum up
most foreign-investment capital
Where Does It Go?
• Not where it’s needed!
Where Investment Capital Actually
Goes
• Mostly stays home
Where Investment Capital Actually
Goes
• Mostly stays home
– Mostly low-risk (US Treasury Bonds)
Where Investment Capital Actually
Goes
• Mostly stays home
– Mostly low-risk (US Treasury Bonds)
– And insured US municipal bonds
Where Investment Capital Actually
Goes
• Mostly stays home
– Mostly low-risk (US Treasury Bonds)
– And insured US municipal bonds
– Even “risky” capital mostly actually
goes to high-grade lower-risk corporate
bonds and stocks
Where Investment Capital Actually
Goes
• Mostly stays home
• Foreign investment mostly goes to
– rich countries
Where Investment Capital Actually
Goes
• Mostly stays home
• Foreign investment mostly goes to
– rich countries
– success stories
Destinations of the World’s Foreign Direct Investment:
Mostly to America!
What’s the Problem?
• Why not more foreign investment?
• Why not more investment in the
countries that need it most?
Why Invest Abroad? Benefits
• Primary objective: a higher rate of
return
Why Invest Abroad? Benefits
• Primary objective: a higher rate of
return
• Possibly also
– access to resources not available at
home
– opportunity to reuse owned
technology
– access to a superior legal system
Why not to invest abroad: Risks
• Sovereign risks:
– What if the borrowers default?
– What if the investees live like kings
and then fly by night?
– How good is debt enforcement?
Why not to invest abroad: Risks
• Sovereign risks
• Sovereign defaults: What if a
government won’t pay up?
You get a “Haircut”
•
•
•
•
ARGENTINA
On 28 October 2019, Alberto Fernandez was elected as president and
formally took office on 10 December 2019, replacing Mauricio Macri.
The country is in the midst of an economic crisis. During Macri’s tenure,
Argentina’s GDP fell by more than 3 per cent, inflation surged and there
was a currency crisis resulting in a USD 57bn International Monetary
Fund (“IMF”) bailout (the largest loan in the organisation’s history).
Argentina remains in deep recession, with inflation of more than 50 per
cent and a weakened peso.
On 21 January 2020, Nobel Prize-winning economist Joseph
Stiglitz warned investors in Argentine debt that there will need to
be “significant haircuts” in any renegotiation and thus major losses.
And lose money! (Not your purpose!)
https://www.nber.org/papers/w20964.pdf
• “Between 1997 and 2013 there were 24 sovereign
bond defaults and debt restructurings in the global
economy. The three better known cases are the
Russian default of 1998, the Argentine default of
2001, and the Greek default of 2012. But there were
many others, including defaults and restructurings
in the Ukraine, Cameroon, and Uruguay. In almost
every one of these episodes investors
•
incurred considerable losses.
Why not to invest abroad: Risks
• Sovereign risks
• Sovereign defaults
• Inferior legal rights: In foreign
courts, foreign investors may not
enjoy the same rights as national
borrowers, nor as they enjoy at
home
Why not to invest abroad: Risks
•
•
•
•
Sovereign risks
Sovereign defaults
Inferior legal rights
Higher information and transaction
costs: you know less about the
receiving country, and it costs you
to find out!
Why not to invest abroad: Risks
•
•
•
•
Sovereign risks
Sovereign defaults
Inferior legal rights
Higher information and transaction
costs
• Unexpected macroeconomic
trends: you don’t understand how
that economy works (and doesn’t)
Why not to invest abroad: Risks
•
•
•
•
Sovereign risks
Sovereign defaults
Inferior legal rights
Higher information and transaction
costs
• Unexpected macroeconomic trends
• Scapegoating: you get blamed for
sending investment abroad
“Offshoring our jobs!”
“Offshoring our jobs!”
Why not to invest abroad: Risks
•
•
•
•
Sovereign risks
Sovereign defaults
Inferior legal rights
Higher information and transaction
costs
• Unexpected macroeconomic trends
• Scapegoating: you get blamed for or
for bringing investment in!
“Buying our country!”
Strategic Vulnerability
• Foreign investments are also
strategically vulnerable to hostility
arising between the investor’s
home country and the investment’s
host country.
Strategic Vulnerability
• The First and Second World Wars
were accompanied by
confiscations of the investments of
so-called “enemy aliens.”
Strategic Vulnerability
• The Russian, Nazi, Chinese and
Cuban Revolutions of the 20th
century were also accompanied by
confiscations, in the form of
“nationalization” and of debt
repudiation.
Extra problems for international investors
• “Obsolescing Bargains”
A Commitment Problem
• A country eager for investment
may initially agree to generous
terms to reach a bargain that
attracts a foreign investor
• The investor commits irrevocably
A Commitment Problem
• The “Obsolescing Bargain”
– The investor commits irrevocably
– and then loses bargaining power
• Over time, once the investment has been made and
turns a profit, and as the foreigner’s fixed assets in
the country increase, the bargaining power shifts to
the government and it may force a change in the
terms of the bargain to its own benefit.
Mearsheimer would say: there’s
no world state to enforce the
contract!
• The “obsolescing bargain:” can apply to any
bargain that is not governed by the rule of
law enforced by an impartial third party–for
instance, in gangland interactions. Take the
case of the bargain between the investors of
the Corleone family and the gambling
entrepreneur Moe Greene in the film, “The
Godfather.”
An Obsolescent Bargain in Godfatherland
• The Godfather
• Michael Corleone vs. Moe Greene
• The Corleone family used to be
strong and in command
• The Corleones “bankrolled” Moe
Greene’s Vegas hotel
• but
An Obsolescent Bargain in Godfatherland
• But ..the Corleones lost their clout.
• And Moe Greene decided to stiff them.
• Moe Greene: “Yeah, let’s talk business,
Mike. First of all, you’re all done. The
Corleone Family don’t even have that
kind of muscle anymore.”
Fear of Obsolescing Bargains
May limit access to foreign
investment
• Foreign capital inflows may be
limited to the most liquid
investments (e.g. government
bonds)
• Foreign capital may be flighty
Extra problems for international investors
• “Obsolescing Bargains”
• “Moral Hazard”
Moral Hazard
•
The theory of moral hazard posits that when
borrowers or lenders believe they will be
bailed out by somebody, or can pass the
problem off to some chosen victim, they will
engage in riskier borrowing, lending or
investing practices.
• The same will be true when the risk of
disaster falls on somebody else, as for
instance a successor management or
government.
Moral Hazard
and Toxic Economics
• Borrow for “investment”
• Spend on
– high living
– Bribing the electorate with handouts
• Have a “fiscal crisis”
• Offer a “haircut” to feign investors
• Demand a bailout rom the IMF
But sometimes the bailout is
very unpleasant!
• Bailout’s Big Daddy: the IMF
(International Monetary Fund)
• IMF has negotiated bailouts with
Argentina
• This is NOT popular in Argentina
• Bailouts usually mean “austerity”!
Still, some international capital
takes the risks
Figure 8.1: Foreign Investment in Emerging
Markets, 1970–2007
So which emerging markets get
the investment–and why?
• Ease of Doing Business
• The World Bank produces an Ease
of Doing Business Ranking for 189
countries in the world. Economies
are ranked on their ease of doing
business, from 1 – 189.
How easy is it to
• Start a business?
• Build a
warehouse?
• Get electricity?
• Register
property?
• Get credit?
• Protect
investment?
• Pay taxes?
• Export and
import?
• Enforce
contracts?
• Discharge
bankruptcy?
Ease of Doing Business
• The next slide shows a map of the
world, color-coded by ease of
doing business.
• Dark green is easiest ¼.
• light green is next ¼.
• orange is ¼
• and red is hardest ¼.
Ease of Doing Business (World
Bank 2017)
Ease of Doing Business
is greatest in the richest countries, and worst in those countries
that need investment most
So which emerging markets get
the investment–and why?
• Ease of Doing Business
• Economic Freedom
– A second reason why countries are
chosen for foreign investment is their
economic freedom. This includes but
is not limited to their ease of doing
business.
The annual survey Economic Freedom of the World is an indicator
published by the Canadian Fraser Institute which measures:
• Size of government: expenditures,
taxes, and enterprises
•
Legal structure and security of
property rights
• Access to sound money
•
Freedom to trade internationally
• and Regulation of credit, labor,
and business
Economic Freedom
is greatest in the richest countries, and worst in those countries
that need investment most
So which emerging markets get
the investment–and why?
• Ease of Doing Business
• Economic Freedom
• Competitiveness
– A third way in which foreign investors might look
at a target country is its competitiveness. The
Global Competitiveness Index of the World
Economic Forum assesses “how productively a
country uses available resources
The “Pillars of Competitiveness”
• Institutions
• Appropriate
infrastructure
• Stable macroeconomic
framework
• Good health and
primary education
• Higher education and
training
• Efficient goods markets
• Efficient labor markets
• Developed financial
markets
• Ability to harness
existing technology
• Market size—both
domestic and
international
• Production of new and
different goods using
the most sophisticated
production processes
• Innovation
Most vs. least competitive
• Singapore is first
• Chad is 141st.
Again, the Destinations of the World’s Foreign Direct Investment:
Singapore got $62 billion, Chad is not even on the map
Most vs. least competitive
• Investors prefer Singapore—but
Chad needs investment most!
So which emerging markets get
the investment–and why?
•
•
•
•
Ease of Doing Business
Economic Freedom
Competitiveness
Corruption
– A fourth way in which investors might look at a
foreign country is its level of corruption, meaning
“the misuse of public power for private benefit.”
Since 1995, Transparency International (TI) has
published the Corruption Perceptions Index (CPI)
annually ranking countries “by their perceived levels
of corruption, as determined by expert assessments
and opinion surveys”
Corruption Perceptions Index
2018
• The next slide shows the TI World
Map of the Corruption Perceptions
Index 2018: in yellow are the
countries with less corruption, in
red the ones with more corruption.
Corruption discourages foreign
investment. The next diagrams,
from a study of the “Influence of
corruption on economic growth
rate and foreign investment”
show that less corrupt countries
with a low CPI (Corruption
Perception Index) in the world (a),
in Europe (b) and in Asia © receive
enormously more foreign
investment per capita.
The next slide shows a
strong relationship
between corruption and
the wealth of a country
(per capita gross
domestic product).
(Podobnik et al., 2008)
The next slide shows a strong
negative relationship between
corruption and economic growth.
Countries which are presently
more corrupt exhibit on average
negligible or even negative growth
rates of GDP per capita. In
contrast, less corrupt countries
exhibit higher growth rates. (Jia
Shao et al.: Quantitative relations
between corruption and economic
factors, 2007)
So which emerging markets get
the investment–and why?
• Investment will go preferentially to
countries
– where it is easy to do business,
– where there is economic freedom,
– where competitiveness is high,
– and where corruption is low.
Liberal Activism in IPE Capital
• All the “measuring” institutions are
also “campaigning” institutions
•
•
•
•
•
•
Each of the institutions that collects and disseminates these
data—
World Bank and IFC (International Finance Corporation) on
Ease of Doing Business
Fraser Institute Economic Freedom Network
World Economic Forum on Competitiveness
Transparency International on Corruption-Has a program of change intended to induce countries to move
their institutions in a direction that would make them attractive
to foreign investment.
Ongoing Liberal Campaigns to Get Capital To
Flow Where It Is Most Needed
• World Bank and IFC (International Finance
Corporation)
– Make It Easier To Do Business!
• Fraser Institute Economic Freedom Network
– Open Your Economy!
• World Economic Forum
– Compete For Investment Better!
• Transparency International on Corruption
– Clean Up Your Politics!
Ongoing Liberal Campaigns to Get Capital To
Flow Where It Is Most Needed
• Have had some success, but very mixed
World bank campaign for Increased Ease of Doing Business;
https://www.doingbusiness.org/en/reports/global-reports/doingbusiness-2020
• Doing Business 2020 captures
• 294 regulatory reforms
• implemented between May 2018 and May
2019. Worldwide, 115 economies made it
easier to do business.
• Twenty-six economies became less
business-friendly, introducing 31 regulatory
changes that stifle efficiency and quality of
regulation.
Fraser Institute Campaign for
Increased Economic Freedom
• “The Economic Freedom Network
is devoted to promoting economic
freedom around the world.”
• “Economic freedom has been
shown in numerous peer-reviewed
studies to promote prosperity and
other positive outcomes. It is a
necessary condition for
democratic development.”
Economic Freedom: Stagnant
World Economic Forum (Davos)
• Davos researchers give countries
advice on improving their
international competitiveness
• The World Economic Forum’s
Performance Overview charts for
countries can also be seen as
showing areas particularly in need
of improvement.
WEF Frustration
• “The 2019 results of the GCI 4.0 reveal the size of the
global competitiveness deficit. The average GCI
score across the 141 economies studied is 60.7,
meaning that the ‘distance to the frontier’ stands at
almost 40 points. On nine of the 12 pillars, the
average gap globally stands at more than 30 points.
Advanced economies perform consistently better
than the rest of the world, but overall, they still fall 30
points short of the frontier. Singapore, the best
performer overall, still falls 15 points short of the
ideal.”
Transparency International
• “Transparency International is the
global civil society organization
leading the fight against
corruption. …. TI’s mission is to
create change towards a world free
of corruption.”
Corruption–Not So Good
• “2.1 Views on the extent of corruption
• People around the world regard corruption as a
serious, and in many cases, very serious problem
for their societies. On a scale of one to five, where
one means ‘corruption is not a problem at all’ and
five means ‘corruption is a very serious problem’,
the average score across the countries surveyed
was 4.1.”
• Transparency International, Global Corruption
Barometer 2013
Corruption Trends–up
• 2.2 Views on whether corruption is getting
better or worse
• “Our survey finds that 53 per cent of people
surveyed think that corruption has increased
or increased a lot over the last two years.
Twenty nine per cent of people think that it
has stayed the same and just 18 per cent of
people think that it has decreased.”
Backsliding Governments
– “The majority of people (54 per cent) in the
Global Corruption Barometer survey
consider their government to be ineffective
at fighting corruption…”
– “This lack of confidence in governmental
efforts has grown compared to people’s
views in our last survey in 2010/2011 when
just under half (47 per cent) of people
surveyed thought the government to be
ineffective.”
Transparency International
on Anti-corruption campaigning
– “…a critical mass of people are prepared to engage in
a variety of different activities against corruption. On
average, across the 107 countries surveyed, 87 per
cent of people would be willing to get involved in at
least one” of the following ways
– 51% would join an anti- corruption organization
– 54% would pay more to buy from a corruption-free
company
– 56% would take part in a peaceful protest
– 56% would spread the word about corruption through
social media
– 72% would sign a petition
Transparency International
– “The results support a move to
engage people much more deeply in
the fight against corruption. There is
a widespread willingness to get
involved through these various
means which the anti-corruption
movement should make the most of
to take the fight against corruption to
a larger scale.”
And yet it is possible to diminish
corruption, and can be rewarding for the
country that does so, though not for the
corrupt officials who are deprived of their
privileges. The next slide shows how
countries that improved their corruption
score over a 5-year period also increased
their rate of economic growth, a finding
“consistent with the interesting possibility
that reducing the corruption level leads to
significant growth in the wealth of [a]
country.’ (Podobnik, 2008)
Summing Up on International Institutions and
Agendas
• Noticeable net progress on ease of
doing business (World Bank)
Summing Up on International Institutions and
Agendas
• Noticeable net progress on ease of
doing business
• Stagnation on economic freedom
(Fraser Institute)
Summing Up on International Institutions and
Agendas
• Noticeable net progress on ease of
doing business
• Stagnation on economic freedom
• Stagnation on competitiveness
(World Economic Forum)
Summing Up on International Institutions and
Agendas
• Noticeable net progress on ease of
doing business
• Stagnation on economic freedom
• Stagnation on competitiveness
• Backsliding on reducing
corruption (Transparency
International)
Summing up on International
Finance
• Mobility of international capital is great
but
Summing up on International
Finance
• Mobility of international capital is great
but imperfect
Summing up on International
Finance
• Mobility of international capital is great
but imperfect
• There are many real-world obstacles to
the free and easy movement of capital
to developing countries
Summing up on International
Finance
• Mobility of international capital is great
but imperfect
• There are many real-world obstacles
• But there has been a gradual increase
in such movement
Summing up on International
Finance
• Mobility of international capital is great
but imperfect
• There are many real-world obstacles
• But there has been a gradual increase
• And there are institutions that work
with some mixed success to increase
the poorer countries’ ability to attract
capital investment
-30-
LECTURE
17b
Globalization II:
World Money
FLS Chapter 9
Money
• In a liberal capitalist system, there
is trade, and trade needs a money
if it is to develop its full potential
and maximize production
Money
• And trade needs a sound money if
it is to develop its full potential
Money is a Public Good
• Therefore, in a capitalist system of
trades and markets, a sound
money is a public good
Money
• But what exactly is “money”?
Money
• But what exactly is “money”?
• And what is “sound” money?
What is “Money”?
Any “medium of exchange”
• A “money” is first and foremost
anything that serves as a “medium of
exchange”-• that people will trade their goods and
services for;
• and that people can use to buy the
goods and services of others.
Money as measure of value
•
A money can also be used as a
“measure of value in trade” that allows
numerical prices to be set for goods,
which in turn makes it easier to
compare the value (“prices” of the
goods the money is exchanged for.
Money as unit of account
•
Numerical money can also
serve as a “unit of account”
that allows records to be
kept of the prices goods
trade for, making
bookkeeping easier
Money as a store of value
•
A “sound” money that keeps
its value over time can then
serve as a “store of value”
Money as a store of value
•
•
A “sound” money that keeps
its value over time can then
serve as a “store of value”
Permitting the “saving” of
value-in-exchange today that
can be used to buy
tomorrow.
What Has Been Used as “Money”?
• Paper!
– Paper is intrinsically pretty
worthless, but at least sine Song
Dynasty China what is written on or
printed on paper has given it value in
exchange—paper money.
Song Dynasty China
Paper Money (“jiaozi”)
What Counts as “Money”?
• Paper! Song Dynasty paper
• Salt!
– Salt, on the other hand is a genuine
commodity, it will flavor your food
and preserve it—and in several
places and times in the world, it has
also bought the food.
Salt and Fiber Block Money
(Angola 1901)
What Counts as “Money”?
• Paper! Song Dynasty paper
• Salt! Salt money of Angola
• Stones!
– Travel to the island of Yap in the
Caroline Islands, and you will meet
many large stones which have value,
and have be used in transactions.
The Stone Money of Yap
What Counts as “Money”?
• Paper? Song Dynasty paper
• Salt? Salt money of Angola
• Stone? Stone money of Yap
• So whatever is accepted as money, is
money.
What’s real money?
What isn’t?
• Are salt and stones really
“money”? If they are accepted and
used in trade, the answer has to be
yes.
• Whatever is accepted in exchange,
in trade, in taxpaying–is money!
It is money…
…if you think it is!
The proof of a money…
…is in exchanging!
Who Creates Money?
• How is money created? Who makes
something into money?
• Nature creates some (“cowry money”)
Cowry shell money:
Tomb of Lady Fu Hao, China c. 1200 BC;
an Arab trader in Africa (1845 print)
Who Creates Money?
• Nature (“cowry money”)
• Artisans (“knife money, “spade money”)
Knife money and spade money
(Zhou Dynasty China)
Personal Money:
The Note of Hand
Note of Hand
• 500 pounds in 1852 was worth
about 40,000 of today’s dollars.
• This note could then be
exchanged—standing alone,
• it was, itself, money!
Business Money
(“bills of exchange”)
Who Creates Money?
• Nature (“cowry money”)
• Writers (“notes of hand”)
• Artisans (“sycee,” “knife money,” “tool
money”)
• Merchants (“bills of exchange”)
• Governments (“greenbacks”)
Governments (“greenbacks”)
Who Creates Money?
• Nature (“cowry money”)
• Writers (“notes of hand”)
• Artisans (“sycee,” “knife money,”
“tool money”)
• Merchants (“bills of exchange”)
• Governments (“greenbacks”)
• Central banks (“Federal Reserve
Notes”
Central Banks (“Federal Reserve Notes”)
Who Creates Money?
• Nature (“cowry money”)
• Writers (“notes of hand”)
• Artisans (“sycee,” “knife money,” “tool
money”)
• Merchants (“bills of exchange”)
• Governments (“greenbacks”)
• Central banks (“Federal Reserve Notes”
• Cryptocommunities (“Bitcoin”)
Bitcoin
• Bitcoin is a new currency that was
invented in 2009 by an unknown
person using the alias Satoshi
Nakamoto. It is labeled a digital
currency, virtual currency, or
“cryptocurrency.”
• It has had a fluctuating career
…in a Classic Pattern
Nevertheless
it is money…
…to you
…if you think it is!
…until you think it isn’t!
Money: Plenty and Sound
• To function well as
–
–
–
–
Medium of exchange
Measure of value
Unit of account
Store of value
Money: Plenty and Sound
• To function well as
–
–
–
–
Medium of exchange
Measure of value
Unit of account
Store of value
• in a complex society
• with enormous numbers of goods and services
being traded every day.
Money: Plenty and Sound
• To function well as
–
–
–
–
Medium of exchange
Measure of value
Unit of account
Store of value
• in a complex society
• with enormous numbers of goods and services
being traded every day.
• Any “money” needs
– Quantity enough to service all trades
– Value stability enough to be thought “sound”
– not easy to get both!
Let’s look a bit at the
historically dominant
money types,
and at the evolution of
modern moneys.
Evolution of Moneys
– “Hard Money”
– The “Gold Standard”
– Fiat Money
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Three main types
– Copper (and other “base” metals
Main historical currencies: Copper
China, Rome, America
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Three main types
– Copper (and other “base” metals
• Clockwise from upper left
– Western Han dynasty Chinese cash
– Strings of Chinese cash
– Roman As of Nero
– US cent of 1850
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Copper (and other “base” metals
– Silver
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Copper (and other “base” metals
– Silver
• Clockwise from upper left
– Chinese silver sycee (individual
craftsman)
– Athenian Tetradrachm after 449 BC
– Spanish “piece of eight” Philip V 1739
– 1934 US Peace Dollar
Main historical currencies: Silver
China, Athens, Spain, America
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Copper (and other “base” metals
– Silver
– GOLD!
Main historical currencies: Gold
Persia, Rome, Britain, America
Durable Money Bases of the Past
• Hard Money (“Specie”)
– Copper (and other “base” metals
– Silver
– GOLD!
• Clockwise from upper left
– Achaemenid Persian Daric c. 490 BC
– Roman Aureus of Antoninus Pius AD 145
– English Guinea of Charles II.
– American Double Eagle of 1933, when gold
coinage for currency ended.
Durable Money Bases of the Past
• Hard Money
– Lasts (except when edges trimmed)
– Inconvenient to carry around a lot
– Always in short supply
•
•
•
•
Except in sudden finds and lootings
That enrich the finders and looters
Increase the public supply of the money
And lower its value!
To address these problems
• There was an experiment with
– “papergold”
– The “Gold Standard”
– and “papersilver”
– The “Silver Standard”
• Hard money used as “backing” for
more widely circulated paper money
that promised that hard money stood
behind it.
The “Gold Standard”:
A Gold Certificate
Gold (1934) and Silver (1928)
“Certificates”
“Certificates”
• Observe the promises on each
note.
International Monetary Regimes,
1870–Present
• The classical gold standard,
1870–1914
Great Britain adopted a gold standard for its
paper currency in the 1820s and
“encouraged” others to do the same.
• By 1870, every important economy was “on
the gold standard.”
The Gold Standard Controversy
The gold standard was at the center of many political
debates in the late 1800s and early twentieth century.
• During recessions, there was a demand for what
today would be called an economic stimulus, which
the gold-standard regime did not permit.
• In the 1890s, the United States fell into a “recession”
(decline o economic activity, production,.
Employment, etc.)
• there was a call to “inflate the currency” by adding a
silver standard to the gold standard.
The Gold Standard Controversy
• The Silverites, a faction of the Democratic
Party, argued that unlimited coinage of silver
(“free silver”) would solve the country’s
problems by injecting more money into the
economy.
• Farmers and small-business owners from the
West and South tended to agree.
• Wealthy northeastern industrialists preferred
to keep the gold standard in place.
The Gold Standard Controversy
The Gold Standard Controversy
• The American Democratic presidential
candidate William Jennings Bryan called for
a monetary system based on silver in his
campaigns of 1896, 1900, and 1908.
• His poster shows the slogan “No cross of
gold” to the right of Bryan’s name.
The Gold Standard Controversy
The Gold Standard Controversy
L. Frank Baum, who wrote The Wonderful
Wizard of Oz, was a Kansas farmer who was
hurt by the gold standard.
• In the book, the Yellow Brick Road
represented the gold standard; the
Scarecrow, a farmer; the Tin Man, industrial
labor; Dorothy was a naïve American; the
Cowardly Lion was (insufficiently radical)
William Jennings Bryan; and the Wizard
(McKinley) represented financial interests.
•
The Gold Standard Controversy
• When Toto pulled back the curtain, the
Wizard was finally exposed as a useless
fraud.
• In the book, Dorothy (America), the farmers
and the workers all triumph.
• In reality, Bryan lost all his elections.
• And the inherent problem of the gold
standard (undersupply of money) remained.
• And worse was yet to come.
Paper Money and Currency Collapse
• Paper money (“Fiat Money”) begins in
disguise
• “Gold Standard” (paper promising gold)
• “Silver Standard” (paper promising silver)
• A country promises to trade its papergold or
papersilver for a specified amount of metal at
a fixed rate
• Then it reneges!
From Papergold
to Pure Papermoney
• It is in fact very difficult for governments to
resist the temptation to print papergold
money that the governments do not in fact
have the hard currency to back.
• During and after World War I, governments
printed irredeemable papergold, and then
“went off the gold standard,” meaning
reneging on their promises to back
papergold with real gold.
From Pure Papermoney to
Currency Collapse
• Pure papermoney (“fiat money”)
always tempts its makers to
“overissue” it
• For example, Mongol Papermoney
Mongol (Yuan) Dynasty Money in
China
Mongol Paper Money
• “How the Great Kaan Causeth the Bark of
Trees, Made Into Something Like Paper, to
Pass for Money All Over his Country.”
• —Marco Polo, The Travels of Marco Polo
Mongol Paper Money
per Marco Polo
• All these pieces of paper are, issued with as much
solemnity and authority as if they were of pure gold or
silver…
• with these pieces of paper, made as I have described,
Kublai Khan causes all payments on his own account to
be made;
• and he makes them to pass current universally over all
his kingdoms and provinces and territories, and
whithersoever his power and sovereignty extends…
• and indeed everybody takes them readily, for
wheresoever a person may go throughout the Great
Kaan’s dominions he shall find these pieces of paper
current,
• and shall be able to transact all sales and purchases of
goods by means of them just as well as if they were coins
of pure gold.
Pure Papermoney and Currency
Collapse
• Chinese Papermoney
– Song Dynasty
– Chin Dynasty
– Mongol (Yuan) Dynasty
– Ming Dynasty
•
•
•
•
All worked for a time
But then were printed recklessly
And all hyperinflated
And their value collapsed
Paper Money and Currency
Collapse
• Chinese Paper
• Not just China
• The US knows something about
currency collapse.
• The “Continental”
Continental Dollars of 1775
achieved worthlessness by 1781
Paper Money and Currency
Collapse
• Chinese Paper
• American: The “Continental”
• French: Assignats and Mandats
Assignats
Value of Assignats 1789-1796
Seven years to Worthlessness!
Mandats did better!
Introduced 1796
Worthless1797
Paper Money and Currency
Collapse
•
•
•
•
Chinese Paper
The “Continental”
Assignats and Mandats
Confederate Money
Don’t forget
Confederate Money!
Paper Money and Currency
Collapse
•
•
•
•
•
Chinese Paper
The “Continental”
Assignats and Mandats
Confederate Money
1923 German Mark
The German Mark 1923
Clockwise
•
•
•
•
Five Billion Marks bill
Value of the Mark vs. the Dollar
Going shopping
Money to burn!
Paper Money and Currency
Collapse
•
•
•
•
•
•
Chinese Paper
The “Continental”
Assignats and Mandats
Confederate Money
1923 German Mark
Zimbabwe Dollar
The Zimbabwe Dollar
The Zimbabwe Dollar—
Rejected at last even as toilet paper…
Yet Papermoney
Survives and Flourishes!
• Today’s main currencies in use are
all “fiat” moneys
International Money
• The World Monetary Prestige Structure
– The Masses
– The Monetary Nobility
– The Monarch of Moneys
Many are Printed
But few are Chosen!
The Monetary Nobility:
Dollar, Euro, Pound, Yen
The World’s Reserve Currencies:
The Monarch and His Court
“Reserves” and “Reserve
Currency”
• Foreign-exchange reserves: assets
held by central banks and
monetary authorities, usually in
different reserve currencies
“Reserves” and “Reserve
Currency”
• Reserve currency: a currency
governments and institutions
choose to hold in significant
quantities as part of their foreign
exchange reserves
The World’s Transaction
Currency
• Transaction Currency – the
currency in which a business
transaction is processed and
booked.
The World’s Transaction
Currency
• “Somewhere between 40 and 60
percent of international financial
transactions are denominated in
dollars.” Robert Gilpin, 2001
International Money (iv)
• International Monetary Regimes,
1914-date
– Floating rates, 1914-1944
– Bretton Woods, 1944-1973
– Managed Float, 1973-date
International Monetary Regimes,
1914–Present
Floating rates, 1914–44
International Monetary Regimes,
1914–Present
International Monetary Regimes,
1914–Present
Bretton Woods, 1944–73
International Monetary Regimes,
1914–Present
Managed float: 1973–present
International Monetary Regimes,
1914–Present
Figure 9.1: The Value
of the U.S. Dollar,
1975–2010
Dorothea Victrix!
• Dorothy wins at last!
– “We need to be able to increase the
money supply”
– With pure papermoney it can be done
• “We need to be able to devalue”
• Inflation Targeting
Compromising with the Banks
• Dorothy compromises with the
Wizard
– “We won’t print so much that it
becomes utterly worthless”
– Just enough “quantitative easing” to
keep the economy humming
• Inflation Targeting
Inflation Targeting
• New Zealand began it in 1990
• In use by the central banks in
–
–
–
–
–
United Kingdom (Bank of England),
Canada (Bank of Canada),
Australia (Reserve Bank of Australia),
South Korea (Bank of Korea),
Egypt, South Africa, Iceland, Brazil and others
Inflation Targeting: Why
• To affect exchange rates
• To affect growth rates
• To affect employment rates
Inflation Targeting: How
• US Federal Reserve
• General inflation target: 2%
• How?
– set interest rates and lend money to
banks
– buy US Treasury Securities
• “Quantitative Easing”
• =“Print Money” (without using a printing
press!)
Papermoney as a Commodity
has Exchange Rates
Exchange Rate Regimes
Choose Your Own National Regime!
•
Floating
•
Pegged
•
Managed
•
Drop your currency and
dollarize!
Exchange Rate Regimes 2010
The previous slide
• Dark green – free float regime,
• Light green – Managed float regime,
• Blue – different types of currency peg (Linked exchange
rate, fixed exchange rate, Currency board, fixed/crawling
peg, fixed/crawling band),
• Red – direct usage of foreign currency; dependencies
that use the currency of their “mainland” colored the
same as the respective state.
Fiat Currencies Still Collapse
Greek Currency Collapse 2011
International Money
• The Liberal Monetary Ideal
– One World Money
– Sound Money
– Managed Carefully
The Liberal Monetary Ideal:
A Single World Money
• Eliminate speculation in Foreign exchange markets
(Forex)
• Eliminate intercurrency transaction costs
• Eliminate the balance of payments/current account
problems
• Eliminate the risk of currency failure
• Eliminate the uncertainty of intercurrency changes in
value
• Utilize the seigniorage benefit and control of printing
money for the operations of the global central bank
and for global public benefit.
• Eliminate the need maintain multi-currency
International Money
• The Liberal Monetary Ideal
– One World Money
– Sound Money
– Managed Carefully
• The Brute Monetary Reality
– Limited Monetary Unions
Not Quite World Money:
Currency Unions in 2010
International Money
• The Liberal Monetary Ideal
– One World Money
– Sound Money
– Managed Carefully
• The Brute Monetary Reality
– Limited Monetary Unions
– Making Do
So we settle for
Day-to-day
international money
management
and
lots of uncertainty
And that’s the International
Monetary Regime!
-30-
LECTURE
17c
Development: Causes
of the Wealth and
Poverty of Nations
FLS Chapter 10
Adam Smith
• Book III of The Wealth of Nations
(1776)
• “Of the Different Progress of
Opulence in Different Nations”
Progress toward Wealth
• There were differences in development,
or in the “progress of opulence” as it is
called in ‘The Wealth of Nations,” when
Adam Smith was formulating liberal
political economy.
• However, in Smith’s view, which
remains the predominant liberalcapitalist ideology, there is a natural
progress toward what he sometimes
calls “opulence” and sometimes
”wealth.”
Progress toward Wealth
Adam Smith
• Book III, Chapter I
• Of the Natural Progress of
Opulence
Progress toward Wealth
• This “natural progress of opulence”
moves fastest when human wealthseeking inclinations are not impeded
by obstacles.
• In other words, if the world is not now a
world of wealth and equality of
prosperity, there are obstacles which
must be observed, analyzed, and
addressed, and which it would be a
global public good to remove or
overcome.
Facts: Unequal Development
• The world economy is unequally
developed
– by country and by region
• Whether we speak of
– accumulated wealth
Extreme Poverty is indeed shrinking
But: Unequal Development
• The world economy is unequally
developed
– by country and by region
• Whether we speak of
– accumulated wealth
Wealth levels per adult by country
Unequal Development
• The world economy is unequally
developed
– by country and by region
• Whether we speak of
– accumulated wealth
– or of
– the flow of yearly income
Country Income Groups 2020
What keeps poor nations poor?
• We have already seen
– 1. War
War helps keep poor nations poor
War and Conflict Deaths 19452000
What keeps poor nations poor?
• We have already seen
– 1. War
– 2. Lack of Democracy
As does Lack of Democratic
Accountability:
Close Match to Poverty
What keeps poor nations poor?
• We have already seen
– 1. War
– 2. Lack of Democracy
– 3. Obstacles to Doing Business
As Does Difficulty of Doing
Business
The greener the easier
What keeps poor nations poor?
• We have already seen
– 1. War
– 2. Lack of Democracy
– 3. Obstacles to Doing Business
– 4. Corruption
Corruption 2019:
The Greener the Cleaner!
Corruption as a Factor
Contributing to Inequality
Tom Paine would say
• The State is Against the People!
What keeps poor nations poor?
• We have already seen
– 1. War
– 2. Lack of Democracy
– 3. Obstacles to Doing Business
– 4. Corruption
– 5. But are poor nations that don’t
underwrite national development
maybe just following a bad example?
Development depends
on Good Infrastructure, and
Infrastructure on Good Government
• Every few years since 1988 (Ronald Reagan,
President) the American Society of Civil Engineers
issues an Infrastructure Report Card.
• Through 6 Presidents, trend is downward.
Why scapegoat the poor?
Even the wealthy are misgoverned
Howbeit, There Are Other
Obstacles to Development
• Geographic Obstacles
– Physical Distance from Cores
– Landlock
– Localized Diseases
– Natural Resources
Geographic Obstacles to
Development
• Physical Distance from Cores
– Translates into time-to-market
– And cost-to-market
The poorest countries
are far from the wealthy cores
which hinders trade between them
Geographic Obstacles to
Development
• Physical Distance from Cores
• Landlock
The trade of landlocked states
can be held hostage
by coastal neighbors
Landlock
• The previous map shows 42 Landlocked
Countries
• Paul Collier, in The Bottom Billion, argues
that being landlocked in a geographic
neighborhood far from wealthy trade
partners (Switzerland and Austria do fine!) is
one of four major development “traps” by
which a country can be held back.
• Landlocked developing countries have
significantly higher costs of international
cargo transportation compared to coastal
developing countries (in Asia the ratio is 3:1).
Geographic Obstacles to
Development
• Physical Distance from Cores
• Landlock
• Localized Diseases
Localized diseases
• While pandemics, like COVID-19,
set back the development o the
world, locally epidemic and
endemic diseases hold back the
regions where they sap energy and
strength
Proportion of Epidemics 2001-2017
That Happened Here
Geography of an Endemic Disease:
Malaria
Malaria
• Malaria is an endemic disease. It poses
an obstacle to development, not on an
emergency or disaster basis, but
persistently and permanently.
• Malaria has a very wide reach, tending
to kill children and debilitate adults, but
it is concentrated in poor tropical
countries .
Poverty and Malaria
March Together
Poverty and Malaria
•
•
•
•
Malaria imposes substantial costs to both individuals and
governments.
Costs to individuals and their families include purchase of
drugs for treating malaria at home; expenses for travel to, and
treatment at, dispensaries and clinics; lost days of work;
absence from school; expenses for preventive measures;
expenses for burial in case of deaths.
Costs to governments include maintenance, supply and
staffing of health facilities; purchase of drugs and supplies;
public health interventions against malaria, such as insecticide
spraying or distribution of insecticide-treated bed nets; lost
days of work with resulting loss of income; and lost
opportunities for joint economic ventures and tourism.
Malaria contributes to poverty, and poverty welcomes malaria
Geographic Obstacles to
Development
•
•
•
•
Physical Distance from Cores
Landlock
Localized Diseases
Natural Resources
– Some have more, some less
Uneven Distribution of
Productive Land
Uneven Distribution of
Productive Land
Uneven Distribution of Food
Production
Uneven Distribution of
Freshwater Resources
Uneven Distribution of Proven Oil
Reserves (Jan. 2014)
A Geopolitical
Obstacle to Development
• National NON-Self-Determination
National
NON-Self-Determination
• ~200 states today (192 UN
members)
• ~6700 languages in the world
(Source: Ethnologue)
• Language strongly defines
collective identity
Indigenous living languages
Do we need ethnically homogeneous
nation-states?
•
•
•
•
One nation per state
One state per nation
~6700 UN member nations?
(Most would be landlocked)
Geographic Obstacles to
Development
• National NON-Self-Determination
• Paul Collier examined 94 countries over the
period 1960–1990 and found that ethnic
diversity was highly damaging to growth in
the context of limited political rights, but was
not damaging in democracies.
– Diversity without Democracy damages economic
growth
– Democracy allows growth even with diversity
Reprise of Topic 10a
• 1. Goal of development: global
prosperity
Reprise of Topic 10a
• 1. Goal of development: global
prosperity
• 2. Actuality of global development:
mixed, unequal, with poverty
regions
Reprise So Far
• 1. Goal of development: global
prosperity
• 2. Actuality of global development:
mixed, unequal, with poverty
regions
• 3. Obstacles to development:
political, geopolitical
What to do?
• Political Factors
– Continue War Reduction
• Peacemaking, peacekeeping, peacebuilding
Continue War Reduction
What to do?
• Political Factors (already
discussed)
– War suppression
– Democratization
• Nonviolent civic resistance
Nonviolent civic resistance
offers the best path to
democratization
• https://www.nonviolent-conflict.org/wpcontent/uploads/2018/10/When-CivilResistance-Succeeds-Pinckneymonograph.pdf
• Democracy is most likely when
activists can keep their social bases
mobilized for positive political change
while directing that mobilization toward
building new political institutions.
What to do?
• Political Factors (already
discussed)
– War suppression
– Democratization
– Freeing Business
• Improvement is happening where it’s needed
What to do?
• Political Factors (already
discussed)
– War suppression
– Democratization
– Freeing Business
– Reducing Corruption
• Education may help
Fighting Corruption:
Education May Help
What to do?
• Political Factors (already discussed)
– War suppression
– Democratization
– Freeing Business
– Reducing Corruption
– Setting a good example
• Raise that grade!
• Or face ridicule!
Why scapegoat the poor?
Even the wealthy are misgoverned
What of Other Factors
• Physical Distance
Geographic Factors
• Reduce Transport Costs
– To address physical distance
China’s Belt and Road
China’s Belt and Road
Geographic Factors
• Reduce Transport Costs
• Promote Customs Union
– To offset landlock
Address Geography:
Landlock
Address Geography: Landlock
• Customs Unions give Transit
Rights to the Landlocked
Customs Unions
EU–28 members
(pre-Brexit)
The Bright Side of Brexit
• We’ll learn a LOT about the
importance and value of Transit
Rights!
• From cost-benefit studies yet to
come
Address Geography
• Physical Distance
• Landlock
• Diseases
Address Diseases:
Policy Against Malaria
Address Uneven Distribution
of Natural Resources
• Free markets and free trade
– Promote international specialization
and division of labor
Address Uneven Distribution
of Natural Resources
• Free markets and free trade
– Promote international specialization
and division of labor
– Start with America!
– America is endowed with productive
land
Uneven Distribution of
Productive Land
Address Uneven Distribution
of Natural Resources—by Trade!
• Free markets and free trade
– Specialize in food and sell to the
world!
– Including China, which is killing its
soil
Address Uneven Distribution
of Natural Resources
– The immense and sustained growth of the People’s Republic of
China since the 1970s has exacted a price from the land in
increased soil pollution.
– The Ministry of Ecology and Environment believes it to be a
threat to the environment, to food safety and to sustainable
agriculture.
– According to a scientific sampling, 150 million mud (100,000
square kilometres) of China’s cultivated land have been
polluted, with contaminated water being used to irrigate a
further 32.5 million mu (21,670 square kilometres) and another
2 million mu (1,300 square kilometres) covered or destroyed by
solid waste.
– In total, the area accounts for one-tenth of China’s cultivatable
land, and is mostly in economically developed areas.
– An estimated 12 million tonnes of grain are contaminated by
heavy metals every year, causing direct losses of 20 billion
yuan ($2.57 billion USD).[13]
–
https://en.wikipedia.org/wiki/Soil_contamination#People%27s_Republic_of_China
Address All Factors with
“Virtuous Circles”
• Keep Growing Global Education!
Continue reducing uncoiling
Continue Increasing Literacy
Address All Factors with
“Virtuous Circles”
• Keep Growing Global Education!
• Keep Growing Global Science
Research!
Address Obstacles
• Geography
• Virtuous circles
• Strategic learning
– From successful exemplars
Frequent themes of the Successful:
Trade Strategy
• “Import Substituting Industrialization”
and “Export Oriented Industrialization”
may work early
• But eventually they generate foreign
resistance
• so then
– Join the WTO
– And open up to imports as well as exports
Frequent themes of the Successful:
Politics
• Establish domestic peace (early)
• Accept political freedom & democracy
(sooner or later)
Frequent themes of the Successful:
Politics
• Ethnically diverse?
– Create a “disinterested” government
– or allow diversity representation
• E.g. use federalism to allow ethnic regional
autonomy
– Use trade revenues to satisfy ethnic
demands and preserve home peace
Frequent themes of the Successful
(with Foreign Aid)
• Use foreign aid to
– Build infrastructure
– Provide the social cushion for
market-friendly but disruptive
reforms
Frequent themes of the Successful
(with no Foreign Aid)
• Attract Foreign Direct Investment
(FDI) with
– Crime control
– Rule of law
– Free trade zones
– Labor education
To sum up:
• Notable progress toward Adam Smith’s
“opulence”
• Ways to overcome obstacles are
increasingly well understood
• The most assiduous nation-student of
growth strategy (China) has made the
most and the fastest progress
• But now faces pushback and needs to
rethink its strategy!
Are we heading toward Adam Smith’s
liberal capitalist utopia of 1776?
• “…the natural progress of opulence”?
Are we heading toward Adam Smith’s
liberal capitalist utopia of 1776?
• “…the natural progress of opulence”?
• Despite many vicissitudes….
Are we heading toward Adam Smith’s
liberal capitalist utopia of 1776?
• “…the natural progress of opulence”?
• Despite many vicissitudes….
• I would be inclined to
Are we heading toward Adam Smith’s
liberal capitalist utopia of 1776?
• “…the natural progress of opulence”?
• Despite many vicissitudes….
• I would still be inclined to
• “text ‘possible’ to 1776!”
-30-
-30-
-30-
-30-
Success: Development Increase
1975-2002
National savings
Adjusted savings
Self-reinforcing factors
Advancing Development
• National Savings
• Education
Tertiary education spending
Self-reinforcing factors
Advancing Development
• National Savings
• Education
• Science Research
Science research 2001
Where Science Has Advanced
Fastest 2005-2015
Self-reinforcing factors
Advancing Development
•
•
•
•
National Savings
Education
Science Research
R&D
Research and development
Expenditure 2002
Lecture 18 update
November 26, 2020
US withdrawal from Paris
• Was effective November 4 2020
• Joe Biden is expected to revoked the
withdraweal
But review the evaluation by the
Economist
• Lecture 18 video @ 29:56
• Existing plans will not do the job
• Existing pledges will not even meet the
(Inadequate) plans
• Existing policies will not even meet the
(inadequate) pledges
Concordia Climate Clock
• 2020 update not ready yet
• But you can follow it (for 1.5 degrees C only)
minute by minute at
– https://www.concordia.ca/news/climateclock.html
• It would appear that we are (very slowly)
losing ground

Purchase answer to see full
attachment