IPE: Some Empirics

1. IPE: Some Empirics Lecture 19: Tuesday, 19 April 2011J A Morrison Mexican Zapatista

2. Lec 19: Some IPE Empirics • Empirics in IPE • Prewar IPE • Interwar IPE • Postwar & Cold War IPE • IPE Today • The Case of Mexico

3. Lec 19: Some IPE Empirics • Empirics in IPE • Prewar IPE • Interwar IPE • Postwar & Cold War IPE • IPE Today • The Case of Mexico

4. Before we get into specifics, though, it’s worth spending some time thinking some about the nature of empirical analysis in IPE.

5. Security is Straightforward… • State goal: maximize security • Cases center on peace & conflict • What causes conflict and maintains peace? • How do actors make sense of peace and conflict?

6. Things are a little more complicated in IPE…

7. What do we try to explain in IPE? • Rate of Economic Growth & Development • Level of Economic Openness & Integration • Degree of Economic Stability • Distribution of Costs and Benefits  We try to explain all of the above!

8. It gets even more complicated...We also try to explain the interaction between these various pursuits!

9. The several dimensions of IPE are also frequently intimately related…the policies and outcomes on trade, money, and migration are all interrelated.

10. Is migration a substitute for trade & foreign investment?Or does migration foster trade and foreign investment?

11. To what extent does openness lead to growth? To stability? Do states lose the ability to control distributive outcomes when they open their markets?Does this control matter if greater economic growth follows?

12. Here, we’ll trace the history of IPE across the past century or so.I’ve organized things by “period,” synthesizing the several facets into a single narrative.I encourage you to disaggregate and trace the threads individually.

13. Lec 19: Some IPE Empirics • Empirics in IPE • Prewar IPE • Interwar IPE • Postwar & Cold War IPE • IPE Today • The Case of Mexico

14. The dissolution and demise of the Roman Empire (5th Century) disintegrated the “global” economy. “Space” mattered as infrastructure deteriorated and the locus of foreign economic policy (FEP) became increasingly local.Monetary, trade, & migration policies were organized at the level of cities—as denizens used the bricks from Roman roads to build their houses.

15. The 19th Century saw the re-globalization of the global economy. This trend had deep roots; but it reached its apogee in the late 19th Century. It was facilitated by both technological revolutions—steam power, telecommunications, & refrigeration—and British “hegemony.”

16. The 19th Century saw the re-globalization of the global economy. This trend had deep roots; but it reached its apogee in the late 19th Century. It was facilitated by both technological revolutions—steam power, telecommunications, & refrigeration—and British “hegemony.”

17. II. Prewar IPE • Money • Trade • Migration

18. Before WWI, the global financial system was organized around international gold standard system.In theory, the gold standard (GS) was an exchange rate regime that related the member countries’ currencies through their valuations to gold.

19. Gold as an Intermediary $ £ ¥ € Example: £1 = 1 oz gold = $4.86

20. As a formal matter, being on the GS required two things:(1) maintain exchange rate stability;(2) maintain convertibility between domestic currency and predetermined amount of gold.

21. Britain’s Gold Standard • 1696: Locke convinces Parliament to adopt silver standard • Permanently fixed • Fully convertible • 1717: Newton accidentally shifts Britain: silver  gold • 1819-1821: Ricardo makes gold standard official • Exchange rate stability: return to pre-war parity! • Convertibility: no limits on convertibility  Throughout, Britain maintained a robust commitment to a metallic standard. All that changed was the metal.

22. The International Standard • 1867: Paris Conference attempts to officially appoint gold as int’l standard • 1870s • Germany moves toward gold • France attempts to undercut Germany by attracting gold  bimetallic block busts • 1879: US goes to gold; Japan follows • Network Effect: value of being on common standard increases as membership increases

23. With support from other European economies, Britain formed the “core” of the international gold standard system.Britain “called the tune” for the other major economies and pressed the “periphery” to embrace the system.

24. The result? By some measures, financial markets were never more deeply integrated than they were in 1913.

25. II. Prewar IPE • Money • Trade • Migration

26. Pre-war Trade Regime • 1815-1860: Britain moves towards free trade; sets trend and pace for other countries • 1860: Cobden-Chevalier Treaty • Britain brings arch rival France on board • Most-favored-nation clause • 1870s-1914 • Rise of Germany; “Merkantilismus” as state-building (G Schmoller) • General continental retreat from free trade • British retain free trade unilaterally

27. The result? By some measures, the percentage of goods & services crossing borders in 1913 would not be matched again until the 1970s.

28. II. Prewar IPE • Money • Trade • Migration

29. Divergent growth rates increased the returns to migration.The reduction of transport and communication costs reduced the disincentives to migrate.

30. Compared to today, the 19th Century saw extraordinarily liberal migration policies.Many states (Britain, US, Latin America, W Europe, China) actively encouraged im/emigration.Imperialism similarly encouraged migration between colonies and the metropoles.

31. World migration 100 years ago • Important differences between 19th century and today: • Europe has become a net receiver • Latin America has become a net sender • Much more migration between developing countries today than before

32. The result? By some measures, the percentage of people who migrated in 1900 has never been surpassed.

33. Lec 19: Some IPE Empirics • Empirics in IPE • Prewar IPE • Interwar IPE • Postwar & Cold War IPE • IPE Today • The Case of Mexico

34. World War I • Economic warfare during war (even in GB) • Shattered spirit of European cooperation • Accelerated British relative decline • Soured imperial relations all around • Gave us Versailles

35. III. Interwar IPE • Money • Trade

36. Rebuilding the Gold Standard • Countries wanted to return to gold standard • But WWI had disrupted old currency order • Current market ERs did not match prewar official ERs • Key disagreements: • (1) what should be new ERs? • (2) how should states move into new order? • (3) who should bear the cost of adjustment?

37. Interwar Currency Wars • 1919-1925: Hyperinflation, chaos • 1925-1931: “New gold standard” proves disastrous • Extremely painful (20-25% unemployment) • Exacerbated imbalances, tensions • Increased instability • 1931-1944: Disorganized order • Countries abandon gold, float ERs • Little cooperation but less suffering

38. III. Interwar IPE • Money • Trade

39. Change in Trade Patterns • During WWI, the US took over export markets traditionally dominated by the Europeans

40. But the US continued to order its trade policy without regard for the global trade regime.This was epitomized by the passage of the Smoot-Hawley Tariff in 1930.

41. Smoot-Hawley Tariff • Raised tariffs (to 41%) that were already high • Triggered retaliation (particularly in Canada) • Considerable effect on global trade • Total Decline in Real GDP (1929-1931): 16.5% • Portion of 16.5% total decline caused by decrease in exports: 21%  S-H lessened trade and deepened the depression Source: http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff

42. Even Britain—the birthplace of laissez-faire free trade—followed suit…

43. British Protectionism • Import Duties Act (1 Mar 1932) • General tariff of 10% (excepting foodstuffs & raw materials) • Specific tariffs ratcheted up to as much as 33% • British Empire Economic Conference • “Ottawa” Conference; Summer 1932 • Official abandonment of gold standard • Established “imperial preference” system: tariffs highly favor empire goods

44. “Buy Empire”

45. The result?The interwar period deepened the de-globalization initiated by the First World War.And economic warfare became a precursor to military conflict.

46. Lec 19: Some IPE Empirics • Empirics in IPE • Prewar IPE • Interwar IPE • Postwar & Cold War IPE • IPE Today • The Case of Mexico

47. At the height of disintegration, forward-looking intellectuals and policymakers in Britain and the US began to develop a template for the postwar global economic order.

48. The Anglo-American Order • Covers major facets of IPE: trade, money, & development/reconstruction (not migration) • Distinctive pattern: • GB & US design regimes independently • GB & US negotiate on specifics; US wins • Regimes are multilateralized: everyone else invited to join • Postwar settlement • US makes firm commitment to participate • But regimes designed to enhance US position • Soviets reject settlement

49. Postwar Trade Regime • 1934: US passes Reciprocal Trade Agreements Act (RTAA) • Model: negotiate reciprocal tariff reductions • 1947: GB & US organize General Agreement on Tariffs and Trade (GATT) • 1947-1994: GATT evolves into de facto int’l trade regime • Tariffs reduced through successive “rounds” of negotiation • US, Europe, Japan, & Canada dominate • LDCs extract concessions by threatening to align with USSR

50. Postwar Monetary System • 1944: GB & US create “Bretton Woods System” (BWS) • 1944-1971: Bretton Woods System prevails • Currencies pegged to gold and/or US dollar • States impose moderate capital controls • IMF run by US (due to “weighted voting”) • 1971: Demise of BWS • Glut of dollars  dollar depreciation • Nixon abandons gold standard rather than impose unemployment • 1971-Present: floating fiat currencies • US leads major economies away from gold • Minor economies might peg to major currencies