Accounting, Business and Economics Department

JUNIATA COLLEGE Accounting, Business and Economics Department

International Political Economy EB 381 01

Professor Brad Andrew Office: 814-641-3378 Good 415 E-Mail: [email protected] Office Hours: MWF 10-11 AM Home Page: http://faculty.juniata.edu/andrew/ TuTh 10:30-11:30 AM and by appointment

Description:

We purportedly live in an age of globalization. Countless commentators endlessly repeat this mantra. Most of those repetitions are imprecise about what the word means and overstate how much it changes our lives. This course aims to restore precision, end exaggeration, and identify the key problems that the global economy poses for policymakers, whether in the US, developing countries, or in international organizations. It builds on your training in economics by integrating political theory, allowing you to better analyze and understand current policy issues.

The first goal of this class is to acquaint you with important topics and theoretical approaches in “international political economy.” Second, the course provides you with the kind of foundation you will need in to analyze public policy issues (even apparently domestic ones) in this “globalizing” world. Third, because this course requires so much from you in terms of active participation, including leading class discussion twice, you’ll experience a level of involvement in this class that likely exceeds any you’ve encountered before. This can be quite intellectually stimulating, because you will have the opportunity to help shape the direction of class discussion. YOU ARE AS MUCH RESPONSIBLE FOR THE SUCCESS OF THIS COURSE AS I AM!!! Finally, at the end of the course, it gives you a chance to practice the skills of policy analysis in your paper and on the take-home final exam.

As the course proceeds, its main emphasis goes from the theoretical to the practical. We begin by sampling several contemporary views of political economy, spotlighting two that will reappear often in the course. Then, the rest of the course covers what I consider the most important issue areas in international political economy--trade (the longest section), finance, the organization of production, immigration (the shortest), the global commons, culture and economic development (traditional, heterodox: development of under-development, institutional and cultural explanations).

1 Requirements and Evaluation:

This will be a seminar. As such, it is essential that all reading be completed and contemplated prior to the class meeting. Attendance is required and classroom participation (quality, not just quantity) accounts for 35 percent of your final grade. Your grade in one session as class discussion leader counts as 7.5 percent. One paper, eight pages long, counts for a total of 20 percent. A comprehensive take-home final exam counts for the final 37.5 percent.

Discussion Leader:

As discussion leader, you will take an active role guiding the class that day in the direction you deem most appropriate. As preparation for this role, you will discuss with me at least two days in advance the questions you would like to stress among those addressed and what further questions you would like added, what you see as the key issues, etc. Warning: for those not serving as a discussion leader for the day, do not assume you can “take the day off.” I expect the same level of participation from you whether a student is leading the discussion or I am.

Readings:

The following required books can be found at the book store or at online bookstores such as Half.Com and Amazon.Com:

Jeffry Frieden and David Lake, eds., International Political Economy, 4th ed. (St Martin's, 2000); Paul Krugman, Pop Internationalism (MIT Press, 1996); James Mittelman, The Globalization Syndrome (Princeton UP, 2000); Dani Rodrik, Has Globalization Gone Too Far? (IIE, 1997).

There is also a packet of course readings and items on reserve.

Academic Honesty & Integrity Policy:

Ethics are an integral feature of all personal, social, and professional considerations. Thinking ethically and accepting responsibility for one’s actions are essential to personal development. Juniata’s graduates are committed to their intellectual, ethical, professional, and social development throughout life. Students are expected to understand and comply with Juniata’s Academic Honesty & Integrity Policy.

2 SCHEDULE

* = In course packet ** = On reserve *** = Handout

1/13 Introduction and Overview

Lawrence Summers “Reflections on Managing Global Integration,” JEconPersp, Spring 1999.*** Dani Rodrik, Has Globalization Gone Too Far?, chap. 1.

I. Two Approaches to International Political Economy

1/15-1/17 The “New Institutional Economics” and Public Choice

Douglass North, “Institutions and Economic Growth: A Historical Introduction,” article 3 in Frieden and Lake. Paul Collier, “Economic Causes of Civil Conflict and Their Implications,” World Bank, June 2000.* Leon Felkins, “Introduction to Public Choice Theory”, Online article (2001) at http://www.magnolia.net/~leonf/sd/pub-choice.html Bruno Frey, “The Public Choice View of International Political Economy,” in Vaubel and Willett, eds., The Political Economy of International Organizations: A Public Choice Approach***

These readings introduce two closely related schools of political economy. Both begin from a premise that political actors are narrowly self-interested maximizers of some combination of power and personal wealth (the mix depends on the circumstances and the author). In a fundamental way, it is the economist’s approach to explaining politics. Public choice theories (ala James Buchanan’s work on rent-seeking) apply this to analyses of voting and public finance, with most practitioners writing about the US. Felkins provides an overall description, while Frey focuses on international applications. Collier’s paper is shaped by long experience in Africa, and present issues that arise when government can’t form and function. North and the New Institutionalists use similar assumptions to raise issues that Adam Smith sometimes glossed over. They do not assume the presence of an effective government to channel everyone’s self-interest into beneficial directions; rather, for them the greater or lesser effectiveness of institutions is a major reason for wealth inequality among different societies and different times.

1. North states that “Third world countries are poor because the institutional constraints define a set of payoffs to political/economic activity that do not encourage productive activity.” What does he mean by this statement? What evidence does he provide? Is it plausible?

3 2. What, for Collier, explains rebellion and civil war? Does his explanation seem right for cases you are familiar with—say, the Civil War or the Bosnian conflict? 3. What, according to Frey, does the sober eye of public choice analysis add to our understanding of IPE? Can you think of any other examples where such an approach sheds light?

1/20-1/24 Power, States, and Exchange

Kenneth Waltz, “Globalization and Governance,” PS, Dec. 1999.* Albert O. Hirschman, National Power and the Structure of Foreign Trade (1945), read pp. 3-12, skim 13-23, read 23-34.** Martin Khor, “Colonialism Redux,” The Nation, July 15/22 1996, pp. 18-20.* Susan Strange, “An International Political Economy Perspective,” chap. 4 from Dunning, ed., Governments, Globalization, and International Business (1997)** Samuel Bowles and Herbert Gintis, “The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy,” JEconPersp 7:1 (Winter 1993), pp. 83-89, propositions 1, 2, and 5 from pp. 89-98, and 98-end.*

All but the last of these readings owe something to a realist view of international relations, in which state power is the ultimate end in an anarchic world, and governments are assumed to dedicate themselves to the pursuit of this power in its various forms. The view can be traced back to Machiavelli, but Waltz is the biggest name in realist theory today. This focus on power also makes one aware of its unequal distribution in the world. You can see this concern at work in Khor and to a lesser degree in Hirschman. This was Hirschman’s first book, shaped by his experiences in World War II, and animated by the central insight that a gain from trade can be seen as that which is in the power of your trading partner to take away. Strange is an eclectic analyst: her work focuses on inequality and on multinational corporations. In the final reading, Bowles and Gintis try to combine the microeconomic-behavior approach of the theorists we read last time with a focus on inequality. As you can see, it is an unusual but interesting mixture.

1. How does Waltz respond to those who claim that globalization is making the nation- state less and less relevant? What evidence does he offer? 2. Can you think of more recent parallels to Hirschman’s description of trade and power between large and small countries? Is his argument plausible? 3. Compare Khor and Frey on international organizations. For Khor, how is power exercised in the new colonialism? Why don’t poor countries just change the institutional constraints they face? 4. For Strange, what is the difference between structural and relational power? Doesn’t relational power somehow also determine structural power? What are her examples of structural power? 5. Bowles and Gintis suggest (100), without much elaboration, that contested exchange and short-side power ought to be important concepts in thinking about international economic relations. Based on their argument, can you think of examples?

4 II. Trade

1/27 The Economics of Trade

Coughlin, Chrystal, and Wood, “Protectionist Trade Policies,” article 19 in Frieden and Lake. Paul Krugman, “Is Free Trade Passé?,” JEconPersp 1:2 (Fall 1987).* Paul Krugman, “Myths and Realities of U.S. Competitiveness,” in Pop Internationalism, 1998.

These readings pull together some of the more accessible recent writing on trade economics. The first article gives an overview of Ricardian theory and more recent developments such as strategic trade theory in a discussion of arguments about protectionism. The pieces by Krugman go into more detail about trade and returns to scale, his misgivings about turning strategic trade theory into an argument for industrial policy, and his rebuttal of the argument that trade deficits reflect dangerous losses of competitiveness.

1. Coughlin, Chrystal and Wood go through the standard neoclassical (mainstream) arguments for free trade. What assumptions do they make about the firms engaging in trade? What happens when a government institutes protectionist policies under these assumptions? 2. What aspects of international trade caused economists to question neoclassical assumptions as a basis for theorizing about the results of trade? How do increasing returns to scale and external economies of scale differ from each other? 3. In order to create comparative advantage for the US, which industry or industries would you choose to protect? Why? How?

1/29-2/3 Trade, Wages and Income Inequality

Paul Krugman, “Does Third World Growth Hurt First World Prosperity?” in Pop Internationalism. Dani Rodrik, Has Globalization Gone Too Far? , chap. 2 and first part of chap. 3 (to p. 35). Dani Rodrik, “Sense and Nonsense in the Globalization Debate,” in O’Meara, Mehlinger and Krain, Globalization: A Reader (2000).** Richard B. Freeman, “Are Your Wages Set in Beijing?,” article 22 in Frieden and Lake. Jeff Williamson, “Globalization and Inequality, Past and Present,” article 27 in Frieden and Lake.

These articles focus on the problem of increasing U.S. wage inequality and the extent that it can be attributed to international trade. Krugman argues that the impact of international trade on wages is minor in comparison to the effect of changes in technology and productivity. In contrast, Rodrik claims that conventional methods of measuring the impact of trade on wages are inadequate so that the impact is in fact very

5 large. In his second article, Rodrik critiques many of the current writing about international trade and also provides some fascinating arguments about free trade and government size and scope. Freeman surveys the arguments and empirical evidence on both sides of the argument. Williamson reviews the long-term historical evidence on trade and inequality.

1. Define factor price equalization. Why do wages not equalize in Krugman’s models one and two? 2. What effect does increased elasticity of demand for unskilled labor have on their wages? On their job security? 3. What facts do all the authors agree on with regard to the impact of trade on income inequality in the U.S.? Do you think this impact is small or large (important or unimportant)? 4. Contrast Krugman’s and Freeman’s view on trade and income inequality with Rodrik’s. 5. Whose side of the debate does Williamson’s evidence support? Is his argument convincing? 6. Economists often argue that if there is a net gain in changing a country’s policy but that some people are hurt, the winners should compensate the losers so as to make everyone better off. These are called “side payments.” Based on these readings, in particular Rodrik’s “Sense and Nonsense” article, what policies would you recommend to increase the well-being of unskilled workers in the U.S.? How would your policies affect our trading partners?

2/5-2/7 Domestic Politics and Trade Policy

Bruce Ingersoll, “Big Sugar Seeks Bailout, Gives Money to Help Get Way,” WSJ 4/27/00.* Scot Lehigh, “Trade-Offs: Labor as We Might, China Deal Won’t Be Fair for All,” Boston Globe, 5/28/00 (from NEXUS website).* Robert Baldwin, “The Political Economy of Trade Policy,” JEconPersp, 3(4), Fall 1989, to p. 131 only.* Ronald Rogowski, “Commerce and Coalitions,” article 20 in Frieden and Lake. James Alt and Michael Gilligan, “The Political Economy of Trading States,” article 21 in Frieden and Lake.

Rather than asking about the desirability of free trade, these readings are mainly devoted to explaining why free trade, which economists regard as the obviously best policy, has historically been the exception rather than the rule. As such, they are good examples of a kind of political economy that looks behind policy outcomes to find their political causes. The Baldwin article is a widely cited summary of the literature; its discussion of the first (self-interest) approach is revisited in the other pieces, but its second approach (social concerns) is not. (The Ingersoll and Lehigh articles are examples of these two approaches.) The two articles from the reader are part of the same literature. Rogowski introduces the idea of predicting trade politics using economic theory, as he

6 does with the Stolper-Samuelson factor scarcity analysis. The Alt and Gilligan is a step- by-step summary of how to reason from the economic theory of trade, through a consideration of how factor characteristics and other economic factors matter to politics, to an examination of how a country’s existing institutions may further affect political outcomes.

1. What are Baldwin’s two approaches to explaining why protection is so common, despite the objections of economists and other apparently reasonable people? What would count as evidence for one or the other explanation? 2. Looking at the “social concerns approach,” could this be made into a case for embracing free trade anyway, but with Pareto-improving compensation (side payments) for those who lose from trade? Looking at Alt and Gilligan, what might be some of the barriers to a compensation scheme? How might Rodrik (based on readings and discussion of earlier this week) answer these concerns? 3. The Alt and Gilligan piece can be read as a backhand critique of two well-known models of the political economy of trade—the “concentrated benefits, dispersed costs” idea of James Buchanan and Mancur Olson and the factor scarcity model of Rogowski. Under what circumstances does their framework predict trade policy outcomes that differ from those predicted by the other two? In your judgment, are these circumstances likely to be common?

2/10-2/12 Economic Sanctions: Power and Trade in Practice

Gary Hufbauer, Jeffrey Schott, and Kimberly Elliot, Economic Sanctions Reconsidered, second edition (1990), chaps. 1 and 5.** Jesse Helms, “What Sanctions Epidemic?” Foreign Affairs, Jan/Feb, 1999.* Richard Haass, “Sanctioning Madness,” Foreign Affairs, Nov/Dec, 1997.* Gerald Seib, “Sanctions Here, Sanctions There: Time for a Pause?” WSJ 6/17/98.*

Economic sanctions are a key topic in international political economy. You might get some benefit here by reviewing Hirschman before you start.

1. Define an economic sanction. Do you agree with Helms’s definition? Hufbauer’s definition? 2. Pick a sanction you consider to have been effective and one that you think was ineffective. Explain how the sanctions and their effects differed. 3. Maybe politicians know that sanctions are ineffective and just do them in response to domestic economic interests. Can we explain sanctions by referring to the explanations of trade policy we just considered? What would count as evidence for this, rather than an international-strategic explanation? 4. What kind of sanctions do you believe the U.S. should use, and under what conditions?

7 2/14-2/19 The Politics of International Trade Agreements

“The WTO in Brief” and additional links at http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr00_e.htm “Why trade is good for you”, Economist, 10/3/98* Ralph Nader and Lori Wallach, “GATT, NAFTA, and the Subversion of the Democratic Process,” in Jerry Mander and Edward Goldsmith, eds., The Case Against the Global Economy (Sierra Club, 1996).** Jeff Faux, “Slouching Toward Seattle,” The American Prospect 11:2, 12/6/99.* Walden Bello, “Reforming the WTO is the Wrong Agenda,” Danaher and Burbach, eds., Globalize This! The Battle Against the WTO and Corporate Rule (2000).** Jonathan Rauch, “Forget About China—Can Trade Be Saved from the WTO?” National Journal, 5/12/00.* Milton Friedman, “Introduction”, Capitalism and Freedom, (1963).**

These readings focus on the other big, current issue in international trade— multilateral trade-promoting institutions such as the WTO. Begin with the overview piece on the WTO’s website and the Economist article. After reading each of the other articles (all critical) you can go back to the site to see if the arguments of the critics are adequately answered. The Nader and Wallach piece discusses the genesis of the WTO in outraged terms with detailed arguments about the undemocratic nature of the agreement. Faux, writing just before Seattle, updates the argument with some details about rising anti-WTO sentiment in the US and internationally. His fourfold division of the trade debate is useful, but some of his claims about the effect of globalization on public budgets will be examined more closely later in the course. Bello’s article, written after Seattle, gives a critical history of the origins and provisions of the WTO, similar but not the same as that by Nader and Wallach, in arguing that the WTO does not deserve to be reformed. Rauch, whose piece will seem a little light by comparison, is a free-trader who laments that the shift from GATT to WTO raised the political profile of multilateral trade arrangements without improving their effectiveness. Friedman is a Libertarian (Classical Liberal) who prefers the least amount of government possible.

1. On the WTO website and in the writings of the critics, what theories of international politics do you see operating? Specifically, where do they see international power acting, and who wields it? 2. How would Faux classify Bello? 3. Consider the critics now in the spirit of positive (explanatory) political economy and our previous readings on the subject. What do they tell us about the politics of trade that helps explain why advocates of free trade would want “fast track” and a powerful WTO? 4. Milton Friedman says, “if government is to exercise power, better in the county than in the state, better in the state than in Washington. If I do not like what my local community does,…I can move to another local community…The great tragedy of the drive to centralization…is that it is mostly led by men of good will who will be the

8 first to rue its consequences” (Capitalism and Freedom, 3). Would Friedman, and should good (classical) liberals, line up with the critics of the WTO?

III. Capital Movements

2/21 Capital and Governments

“Who’s in the Driver’s Seat?” an Economist Survey, 10/7/95.* Obstfeld, Maurice, “The Global Capital Market: Benefactor or Menace?,” JEconPersp Fall 1998.*

Readers of The Economist are probably accustomed to reading periodic “surveys” that are snappy, detailed, and thought-provoking; this one is all of those things, but it is also unusually long, polemical, and defensive. The topic obviously has something to do with it. The article says two not-always-compatible things, that financial markets aren’t as powerful as critics charge and that their power is beneficial. The Obstfeld article covers similar ground, but after the Asian crisis. It adds historical background and theoretical depth, too.

1. How does international capital mobility affect monetary policymaking? Fiscal policy? What kinds of adjustments to this mobility does the survey recommend? 2. What are the premises behind the idea, expressed in the survey (and in Friedman’s piece), that markets may actually represent the long-term interest of a country’s citizens better than their government does? For example, in what way are markets democratic (38)? 3. How does Obstfeld compare capital mobility today to capital mobility of the past? 4. Where does Obstfeld differ from the Economist survey on the effects of capital flows on government policy?

2/24-2/28 Policy Responses to Global Capital Flows

Wessel and Davis, “Currency Controls Gain a Hearing as Crisis in Asia Takes its Toll,” WSJ, 9/14/98.* “Two Kinds of Openness,” Economist, 9/12/98.* Thomas Palley, “Destabilizing Speculation and the Case for an International Currency Tranactions Tax, Challenge, May/June 2001* Sebastian Edwards, “How Effective are Capital Controls?,” JEconPersp 13:4 (Fall 1999).** Douglas Appell, “Malaysian Recovery Proves Critics Wrong,” WSJ 9/1/99.* Jagdish Bhagwati, “Free Trade, Yes. Free Capital Flows, Maybe”, WSJ 11/16/98.** Juan Luis Moreno, “Panama: No Central Bank, No Capital Controls, No Problem,” WSJ 9/10/99.* Clive Crook, “The Pan-American Greenback: Coming Soon?,” National Journal 10/9/99 [NEXIS].*

9 Ian Katz, “Greenback Magic?” Business Week International Edition, 3/13/00 [NEXIS].*

These readings mainly concern two of the policy responses mooted—or tried— since the Asian crisis, capital controls and the adoption of another country’s currency (using the U.S. currency, it would be “dollarization”). You are probably not surprised that The Economist did not change its editorial mind about controls, remembering the strong tone against them in the 1995 survey. The Palley piece argues in favor of a Tobin Tax (one form of capital control), and in the process attempts to counter each criticism. Edwards writes mainly about controls on inflows and mostly about Chile. Bhagwati is a longtime free-trader who nevertheless supports capital controls. The last three articles refer to countries that have adopted or are considering adopting the US dollar.

1. What are the main arguments for capital controls? Could they, for instance, have prevented the Asian crisis? 2. Classify the main arguments against the Tobin tax by whether they consider it unfeasible or undesirable. In what ways is it held to be one or the other? How do (or would) its advocates respond? 3. What are the advantages and disadvantages of dollarization? Would you favor the addition of another Federal Reserve district headquartered in, say, Argentina? 4. Why didn’t Ecuador adopt the Euro? 5. Who is more convincing, the pro capital-control writers or the anti-control writers? Are there any specific circumstances under which capital controls would be advisable? Circumstances when they would not be advisable? Does your answer change given the type of control?

3/10-3/14 Financial Crises: Origins, Propagation, and Prevention

Patrice Franko, “The Mexican Peso Crisis” from The Puzzle of Latin American Economic Developoment (1999).* Wessel and Davis, “How Global Crisis Grew Despite Efforts of a Crack U.S. Team,” WSJ, 9/24/98.* Frederic S. Mishkin, “Global Financial Instability,” JEconPersp 13:4 (Fall 1999).** Lawrence Summers, “International Financial Crises: Causes, Prevention, and Cures,” AER, May 2000.* J. Bradford DeLong, “Financial Crises in the 1890’s and the 1990’s: Must History Repeat?,” Brookings Papers on Economic Activity 2 (1999).* “Through Fire and Troubled Waters,” Economist 9/2/00.* Jim Griffin, “What’s the Opposite of ‘Speed Kills’?,” TheStreet.com 9/5/00.*

These readings are about the systemic implications of big global financial crises. What are its causes? How does the present international financial system compare to systems in the past? Is global capitalism fated to suffer perpetual instability? What can be done? The Franko piece offers a basic overview of the Mexican crisis. Considering what

10 you have read from The Economist so far, it is perhaps ironic that it has been perhaps the most visible proponent of the idea that US equity markets were dangerously overvalued in 1999 and early 2000. Wessel and Davis show the failure of policy to deal with contagion its early months. The Mishkin article is both an overview (from the same issue of JEP as the Edwards article you read last time and the Rogoff article for next time) and a spotlight on domestic financial weaknesses as key causes of instability in Mexico and East Asia. Summers was part of that “crack team” that attempted to solve the East Asian crisis. He presents his view on how crises can be avoided in the future. DeLong’s work not only touches on issues we’ve covered (dollarization, capital controls), it also relates to the theme of today while being setting up a link to the next section on the IMF. It compares two periods in an attempt to discern the relative importance of capital mobility and international moral hazard in creating or aggravating crises. The last two pieces update the issue and discuss the possibly destabilizing implications of the growing importance of equity markets, relative to bond markets, in international financial flows.

1. What were the reasons for the US team’s failure to contain the Asian crisis? 2. What happened to bank lending and non-financial balance sheets in the period leading up to the crises in Mexico and East Asia? 3. To what extent is financial stability a local problem, not a systemic one, requiring only the extension to more and more developing countries a trustworthy system that includes good prudential regulation, limited deposit insurance, and greater transparency? 4. Do Summers’s proposals seem reasonable? 5. Why does DeLong conclude that financial markets are inherently prone to instability? How does this challenge Summers’s view? 6. What is Griffin’s “Wile E. Coyote” scenario? What should a central banker do in that case?

3/17-3/19 What Role for the IMF?

George Soros, “Capitalism’s Last Chance?” in Foreign Policy, Winter 1998.* Milton Friedman, “Markets to the Rescue,” WSJ, October 13, 1998* Stanley Fischer, “Reforming World Finance: Lessons from a Crisis,” in the Economist, Oct. 3, 1998.* David Wessel “A Job Not for Plumbers, But for Architects,” WSJ 3/1/99.* Dani Rodrik, “Globalization, Growth and Poverty: Is the World Bank Beginning to Get It?” unpublished essay 12/6/01.* Anne O. Krueger, “Conflicting Demands on the International Monetary Fund”, AER, May 2000.* Meltzer and Sachs, “Reforming the IMF and the World Bank”, AEI On the Issues, April 2000.** Kenneth Rogoff, “International Institutions for Reducing Global Financial Instability,” JEconPersp 13:4 (Fall 1999).** Jacob Schlesinger, “Why the Long Boom? It Owes a Big Debt to Capital Markets,” WSJ 2/1/00.* “Battling over the Bankrupt”, in the Economist, 10/5/02.*** “IMF Proposals Go Too Far…and Not Far Enough”, The Banker, 11/1/02.***

11 Whitney Debevoise, “The Debt Crisis Debate”, LatinFinance 11/02.***

Like the last section, in this one our final readings cap it off by asking about international institutional solutions, in this case, the IMF. Soros, the famous international financial speculator, thinks world capitalism has been rendered dangerously fragile by international financial speculation. Friedman has always thought that speculation was inherently stabilizing; crises, therefore, must have another cause. Rodrik notes that the recent report by the World Bank admits that there is, at best, a tenuous relationship between free trade and capital flows and economic growth and development. This hinders the argument that free capital promotes development. Krueger, lead economist at the IMF, notes many of the problems the IMF has originate from conflicting goals. Meltzer and Sachs were part of the International Financial Institutions Advisory Commission that made recommendations about reforming both the IMF and the World Bank. This article briefly summarizes their recommendations. The Rogoff and Schlesinger readings are specifically about institutional issues. The last three articles deal with the debate over a bankruptcy court for debt-ridden countries, otherwise known as the Sovereign Debt Restructuring Mechanism (SDRM). There has been a major debate going in 2002 as to whether a SDRM or collective action clauses should be instituted, or some combination of each.

1. On what basis do these authors blame the IMF for the Asian Financial Crisis? What reforms of the IMF do they suggest? 2. Do the authors of these articles have personal or political agendas that might affect their views of the IMF? 3. Is an international solution necessary to stabilize the world’s financial system? Do you think an international solution is politically feasible? These questions include the entire range of options, from doing nothing to reforming the IMF to adding a new international institution. 4. Which are better for restructuring debt: Collective Action Clauses or a Sovereign Debt Restructuring Mechanism? Or both? Or, if your answers to question three is no and no, then how would you propose dealing with debt-ridden countries?

VI. Organization of Production

3/21-3/24 The Multinational Firm

“Big is Back: A Survey of Multinationals,” Economist, 6/24/95.* James Markusen, "The Boundaries of Multinational Enterprises and the Theory of International Trade," JEconPersp, Spring 1995.* James H. Mittelman, The Globalization Syndrome, introduction, chapter 2

In recent years, many multinational corporations have changed their structure fundamentally, taking advantage of freer trade and capital movements to move toward globally differentiated productive structures--with very important implications for how we think about international economic integration. The Economist survey documents this shift. It also asks about its causes and implications, both for policymakers and for

12 managers. The Markusen article summarizes the most widely accepted economic explanation for why firms go multinational rather than just producing at home and exporting from there, and why they own plants rather than contracting out work abroad. His article suggests that theories of the firm will become just as important as trade theory for understanding the world economy. Mittleman reviews many of the classic division of labor argument and argues that it can be utilized to better understand the expansion of the firm globally, and extended to include power relations.

1. Describe the “old” organization of the typical MNC, comparing it to the “new.” What policies and global forces shaped the old one? On what policies does the new one depend? 2. What does OLI stand for? What are the different implications of each part (letter) of the framework? So what kinds of firms are most likely to have an MNC, rather than an alternative structure? 3. Some people have recently hailed the rise of the “virtual corporation,” in which everyone except a few managers and human resource people works under specific and time-limited contracts, organized on the basis of the tasks at hand, and ready to break apart and move on when the task ends—a lot like Hollywood. What do the readings for today tell you about how this works, and whether or not it is the wave of the future? 4. Markusen claims that 30 percent of international trade is actually made up of intra- firm transactions. Does his article give you reason to think this will grow? Does it mean we have to revise our theories of international trade? If so, how? 5. Does the Mittelman framework explain global production trends better than Markusen’s?

3/26-3/28 Global Firms and Governments

“The Mystery of the Vanishing Taxpayer” The Economist, January 29, 2000.*** Shah Tarzi, "Third World Governments and Multinational Corporations," article 10 in Frieden and Lake. Byron Dorgan, “Global Shell Games,” Washington Monthly July/Aug 2000.* Duane Swank, “Funding the Welfare State: Globalization and the Taxation of Business in Advanced Market Economies,” Political Studies (1998).**

Here are a few papers on relations between firms and governments, with some focus on taxation. The Economist piece documents the coming problem of footloose capital but immobile labor and its impacts on relative taxation (you may recall that Dani Rodrik made that argument in chapter one of Has Globalization Gone Too Far?). Dorgan has long fought for the “unitary tax” or Worldwide Combined Reporting, under which global firms would not be able to diminish their tax exposure by artificially shifting taxable streams (profits, etc.) from high-tax to low-tax jurisdictions. As he nicely points out, the “transfer pricing” MNCs use often leads to obvious absurdities. Swank argues against the claim that globalization has led to reduced taxes on business. Tarzi analyses

13 the relationship between firms and governments in terms of factors that affect the bargaining positions of each.

1. Why, according to Tarzi, does the relative bargaining power of firms and governments change over time? 2. What would be the advantages of a WCR system for taxation? 3. Can you reconcile Dorgan’s argument with Swank’s? 4. With Markusen’s paper in mind, what does Tarzi’s analysis have to say about possible strategies for developing countries?

VII. The Environment

3/31 Common Pool Issues--Introduction

Garrett Hardin, The Tragedy of the Commons, Science, (1968)* “The Sea” (An Economist Survey), 5/23/98.*

This section concerns the management of global public or common-pool goods. Hardin’s article is the classic that identified the common pool problem to a wide audience. As a concrete example of the common-pool problem, we begin with the oceans, many of whose benefits can be described as common-pool resources. The Economist article discusses the problems caused by bad policy, the feasibility of property-rights solutions (turning parts of this “commons” into private property) and the complications arising from the international scope of most ocean resources.

1. What are some of the most important resource problems of world’s oceans? What does the survey suggest we do to solve them? 2. How do common-pool resources compare with other kinds of goods, such as private or public goods? How do these characteristics expose them to unusual degradation (as in the “tragedy of the commons”)?

4/2-4/7 Common Pool Issues—Analysis, Issues and Solutions

Alison Butler, “Environmental Protection and Free Trade: Are they Mutually Exclusive?” in Frieden and Lake, article 29. John Vogler, “The Governance of the Commons” in The Global Commons: A Regime Analysis (1995), pp. 1-18.** John J. Fialka, “Clear Skies Are Goal as Pollution Is Turned into a Commodity,” WSJ 10/3/97 [Note: Entire article is not included. Read from subheading on]* McKibben and Wilcoxen, “The Role of Economics in Climate Change Policy”, JEconPersp, Spring 2002* Richard Cooper, “Toward a Real Global Warming Treaty,” Foreign Affairs, March/April 1998.*

14 James Mittelman, The Globalization Syndrome, chap. 10

These readings expand upon those in the previous section. Butler reviews economic arguments (i.e., Coase) behind the property-rights solution. Vogler, the key IPE reading here, summarizes the basic issues, including a discussion of property-assigning solutions toward the end (you do not have to read the book synopsis that ends this chapter). Fialka provides an update on the effectiveness of market-based regulation of sulfur dioxide emissions. Cooper offers an example of the recent politics of global warming and a policy proposal to deal with these problems. McKibben and Wilcoxen present a classic Coasian view of how to deal with global warming, expanding on the Economist piece using standard neoclassical analysis. Mittelman focuses on the protest movements surrounding environmental issues.

1. How do we apply the Coase theorem internationally? Who awards and enforces the property rights? Do we take a poor country’s price on environmental goods to be its revealed preference? What alternative do we have? 2. Why is it so hard to reach a global warming treaty? 2. What do you think of Cooper’s uniform tax solution? The McKibben/Wilcoxen proposal? 3. What issues does Mittleman raise that the others miss?

VIII. Culture Matters

4/9-4/16 Culture and Globalization

David Rothkopf, “In Praise of Cultural Imperialism?” in O’Meara, Mehlinger and Krain, Globalization: A Reader (2000).** “Culture Wars” in O’Meara, Mehlinger and Krain, Globalization: A Reader (2000).** Tyler Cowen, “Should National Culture Matter” in Creative Destruction (2002).** Jagdish Bhagwati, “Trade and Culture: America’s Blind Spot”.** Peter Berger, “Introduction” in Many Globalizations (2002).** Samuel Huntington, “The Clash of Civilizations” in O’Meara, Mehlinger and Krain, Globalization: A Reader.** Benjamin Barber, “Jihad vs. McWorld” in O’Meara, Mehlinger and Krain, Globalization: A Reader (2000).** Janet Ceglowski, “Has Globalization Created a Borderless World?” in O’Meara, Mehlinger and Krain, Globalization: A Reader (2000).**

One of the outcomes of increased international movements of goods, money and people is the interactions of cultures. This has uncertain impacts on the world, and each article addresses a particular element of the issue. They are presented in increasing order of the potential tension or conflict each author perceives globalization will generate, except for the last article. Rothkopf wants American culture to lead others to an American dominated culture. This, he argues, is best for the world (!!!). The “Culture

15 Wars” piece from The Economist downplays the whole issue as hyperbole, as does the Cowen piece. Bhagwati, who is a staunch free trader, argues that trade concessions should be made for cultural considerations. Elements of culture are important and needs to be preserved (Note: This is an unusual view for a free-trader. Normally they believe cultural arguments for trade restrictions are simply covert form of protectionism). Berger takes a dialectical view, arguing that globalization will create a synthesis between the current domestic culture and that of the nations with whom the country trades. Huntington, however, argues that the growing interaction will lead to a clash of cultures or civilizations. Barber holds a similar view, though focuses on two major sources of that clash, materialism vs. religious fundamentalism.

1. Comment on the Rothkopf view. 2. Comment on the “Culture Wars”/Cowen view. 3. What are the differences between the Huntington and Barber views? Are their differences significant? 4. Contrast the Barber/Huntington view with Rothkopf ‘s. Has Rothkopf taken into account the possible problems associated with the American cultural hegemony that he suggests? 5. Which writer(s) make the most convincing case and why? 6. What important issues do all of these authors miss? 7. Given what Ceglowski argues, is culture a trade barrier? Should free-trade exceptions be made for cultural reasons?

Note: Your paper is due Sunday, April 13 at noon (Yes, that’s right). I want it slipped under my door or pinned to my bulletin board.

IX. Economic Growth and Development

4/18-4/23 Why Do Some Nations Grow and Develop While Others Don’t, part 1?

It’s savings, investment and everything mainstream economists said it was (or “Neoliberalism works”):

Paul Krugman, “The Myth of Asia’s Miracle”, in Pop Internationalism.

It’s industrial Policy and neoliberalism:

Steven Radelet [Download from http://www.hiid.harvard.edu/caer2/htm/content/confsite/htm/papers.htm] or on reserve.

No, it’s not neoliberalism:

Rosser and Rosser, “Another Failure of the Washington Consensus on Transition Countries,” Challenge, March/April 2001.** (available on Lexix-Nexis)

16 “Unraveling the Washington Consensus: An Interview with Joseph Stiglitz,” Multinational Monitor, April 2000.** (Available on ProQuest)

Gunnar Myrdal, excerpt from The Challenge of World Poverty (1970), 275-285**

International trade, development and poverty:

Bhagwati and Srivivasan, “Trade and Poverty in the Poor Countries”, AER, May 2002.** Dani Rodrik, “The Global Governance of Trade as if Development Really Mattered” (2001). Download from:

http://ksghome.harvard.edu/~.drodrik.academic.ksg/papers.html] or copy on reserve.

Note: read the appendix of the Rodrik article first (listed just above) for a description of both the old and new versions of the Washington Consensus.

This section represents the first half of the capstone to our class. Many of the disputes discussed in this class can be broken down based upon the income level of the country. Hence, economic development becomes a crucial factor in our discussion. There are several views as to why development occurs. The neoclassical view can be traced back to Adam Smith, and rests fundamentally on savings and capital accumulation, combined with greater specialization and division of labor, as the sources of economic growth and development. Closely tied with this argument is the belief that free trade and capital movements promote economic growth and development. Krugman argues that standard neoclassical theory explains the development of East Asia. Radelet basically accepts the neoclassical (“neoliberal”) view, but believes that industrial policy plays an important role. The next set of authors are quite critical of Neoliberalism and its virtual synonym, the Washington Consensus. Stiglitz, in particular, has become a noted critic of the IMF and to a lesser extent the World Bank because of his fame as a Nobel-Prize winning economist, his tenure as chief economist at the World Bank for three years, and his willingness to criticize both the IMF and the World Bank. Bhagwati and Srivivasan distinguish between static and dynamic arguments for free trade (a distinction that I’ve been emphasizing in IEI) and its impact on poverty. Their view is clear, and contrary to that of Rodrik. Rodrik’s piece is not about why development doesn’t occur, but rather focuses specifically on trade policy and its impact upon development, arguing that countries have different capabilities, situations, etc., and as a result no one policy (ala the WTO) fits all.

1) According to Krugman and Radelet, what are the sources of economic growth and development? 2) Would Krugman support the Washington Consensus? Why or why not? What are the sources of the critique of the Washington Consensus put forth by Stiglitz, Rosser and Rosser, and (by implication) Myrdal? 3) How does Rodrik provide a middle ground between the two camps?

17 4/25-4/28 Why Do Some Nations Grow and Develop While Others Don’t, part 2

It’s culture:

David Landes, “Culture Makes Almost All the Difference,” in Harrison and Huntington, eds., Culture Matters (2000).** It’s geography and positive feedback mechanisms:

Jeffrey Sachs, “Notes on a New Sociology of Economic Development,” in Harrison and Huntington, eds., Culture Matters (2000).**

It’s institutions:

“Institutions for Sustainable Development” from Sustainable Development in a Dynamic World (World Development Report 2003).** Sokoloff and Engerman, “Institutions, Factor Endowments, and Paths of Development in the New World”, JEconPersp Summer 2000.**

These articles look beyond the standard resource-based arguments as to why nations develop, instead looking at geography, feedback loops and formal and informal institutions. Landes summarizes his argument from his book The Wealth and Poverty of Nations in this piece. The title is self-explanatory. Sachs argues that geography and positive feedback mechanisms have been the main determinants of development, with geography seemingly becoming less relevant today. In the sense of positive feedback mechanisms, his argument is reminiscent of Myrdal’s circular and cumulative causation. The World Bank and Sokoloff/Engerman articles represent an expansion on the North article that we read in the first week. Institutions have become a major area of interest recently in economic development.

In another article not required but recommended (for those who are interested in reading more because hey, you just didn’t read enough political economy this semester—see below, it’s on reserve*), North et al. argue that sound formal and informal institutions are the key to development, and contrast North and South American developmental paths to make their argument (Their conclusion is different from that of Sokoloff and Engerman). The use institutional theory to offer a different explanation of South American under- development, offering a better explanation than the largely discredited dependency/structuralist theories of Andre Gunder Frank, Raul Prebisch and Immanuel Wallerstein.

1) Evaluate Landes’s argument based upon our previous readings on culture. Is his argument convincing? Do observations from your own travel abroad support this view? 2) Relate the World Bank reading and the Sokoloff and Engerman piece back to North’s article during the first week of class. How are they similar? What are the differences in the focus?

18 3) Does the World Bank provide any explanations as to why certain institutions evolve and why some are more effective than others? 4) If we accept Sachs’s argument about geography, how does that impact the institutional argument put forth by North, et al.? The culture-based argument put forth by Landes? 5) Of all the arguments considered over the last two weeks, which seems most convincing and why? Or, if that question is too difficult, what other information would you need to answer this question?

* North, Summerhill and Weingast, “Order, Disorder and Economic Change,” from Bueno De Mesquita and Root, eds., Governing for Prosperity (2000).