POSC 2200 – International Political Economy

1. POSC 2200 – International Political Economy Russell Alan Williams Department of Political Science

2. Unit Six: International Political Economy "Finance" Required Reading: • Globalization of World Politics, Chapters 15 and 27. Outline: • Introduction - Finance and Investment • Key Mechanisms • Institutions • Multinational Corporations

3. 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

4. Historically: “Gold Standard” ensured this . . . • 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

5. 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) =$95.76 USD =$61.79 USD (Jan 2002) $100.00 (CDN) = e71.18 Euro • Why do currencies go up and down in value?

6. 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

7. Currency speculation • Currency traders benefit from market fluctuations = instability is “good” – for them! • Small currency 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 $

8. Key Points: • “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

9. 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 = $$$

11. “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

12. “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

13. 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

14. 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?

15. 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?

16. “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?

17. 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

18. 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

19. 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

20. “World Bank”: • Established after WWII to make long term loans to support development • E.g. Reduce capital account deficits of developing countries • Causes . . . . • 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

21. Both IMF and World Bank subject to heavy criticism • E.g. 1)Management of the LDC “debtcrisis” 2) Support for economic liberalism and “Deregulation” – which has made some problems worse . . . . • Marxists, “antiglobalizers” and others point to failures of these institutions

22. 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

23. Example: General Electric • “Based” in US • 250 factories in 26 countries • Subsidiaries? • Products? • 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

24. 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 . . .

25. 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

26. 5) For Next Time . . . Unit Six: International Political Economy “Environmental Cooperation” Required Reading: • Globalization of World Politics, Chapter 21. • 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.)