POSC 2200

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POSC 2200 International Political Economy

• Russell Alan Williams
• Department of Political Science

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Unit Six International Political Economy

• "Finance"
• Required Reading
• Globalization of World Politics, Chapters 16 and
  27.
• Outline
• Introduction - Finance and Investment
• Key Mechanisms
• Institutions
• Multinational Corporations

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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

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• 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 MNCs
• Reduces state control over currency and
  investment
• Increases need for cooperation to ensure
  financial stability

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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?

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• State choice
• E.g. Competitive devaluations that led to the
  Great Depression
• Domestic economic policy
• 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

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• Currency speculation
• Currency traders benefit from market fluctuations
  instability is good for them!
• Small currencies are exposed to speculative
  fluctuations
• Real economic performance
• 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

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• Key Point
• Currency Markets have grown(!)
• 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

Main foreign exchange market turnover, 1988 2007, measured in billions of USD.
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• 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

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Balance of Payments (2001) In Billions USD Balance of Payments (2001) In Billions USD Balance of Payments (2001) In Billions USD
United States Germany
Current Account
Balance of Trade
Exports Imports 998 -1,356 658 -620
Gov Transactions Investment income -35 -35
Current Account Balance -393 3
Capital Account
Net Investment and lending flows in () and out (-) of country 398 -8
Reserves
Changes in Official Reserves 5 -5
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• 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

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• Balance of Payments cont . . .
• Different from government finances
• Governments 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

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• 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

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• 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?

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• 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?

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• 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?

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3) Institutions

• Financial instability - exchange rate
  fluctuations/balance of payments problems need
  to be managed!
• Bad for trade
• Bad for MNCs
• Bad for states and development
• Requires institutions to coordinate behavior and
  manage financial system

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• 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

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• 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 LDCs in
  debt

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• 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

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• 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

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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

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Example General Electric

• Based in US
• 250 factories in 26 countries
• Subsidiaries?
• Products?
• Consumer electronics, financial services, weapons
  (tanks, jets and ships), nuclear reactors, WMDs,
  and NBC
• 575,244,000,000 in global assets
• 1/2 outside the US
• 315,000 employees outside US

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• Impact of MNCs?
• 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 MNCs have ability to influence what host
  states do . . .

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• Obstacles to growth of MNCs
• 1) Nationalization by foreign governments
• E.g. Cuba, Venezuela Newfoundland
• 2) Exchange rate fluctuations and instability
• Increases cost of doing business

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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, 194, (2010), Pp. 657-661. (Available
  from e-journals, or from the instructor.)