Lectures Global Political Economy (2014-2015)

Lecture 1 (Thursday 16-04-2015)

Lecturer went to George Tech (this University is in the top 10 of the universities in the United States). He went there to see Obama’s speech about Obama education. This is a new initiative that wants to make education affordable for everyone. First, Obama had ‘Obama care’, this was to make healthcare more affordable.

There are a lot of different perspectives about Obama education and care. Republicans for example think that Obama care may not be as great. So there are a lot of different perspectives to look at certain events, this is also the case for this course (Global Political Economy).

Republicans: Bush (they are for more autonomy)

Democrats: Hilary Clinton (wants to become president)

There are three different perspectives that will be further elaborated in lecture 2:

- Liberalism

- Marxism (they think that the capitalists are exploiting the workers)

- Economic nationalism

(See slide 5-11 for pictures of all the issues presented below)

Is ISIS fighting for State power? Will there be free choice, are they fighting for their own rights (against Marxism)? -> There are many different perspectives

Russian invasion: Russia saves the fish (Ukraine) but at what price? Perspective of Russia: We are taking back what is ours (Ukraine). We do not want Ukraine to be a part of the EU.

Nationalist perspective: either I win or you -> but we may both win if we cooperate.

-> Media represent many different perspectives

Chinese investing in South Africa -> a lot of FDI in especially Nigeria and the East-coast.

China: wants to foster Chinese growth.

There are different perspectives concerning the issue above:

1. Liberal: Great, free market, Africa gets rid of corruption, win-win situation (they will not doubt this)

2. Economic nationalists in Africa: Is it good or bad?? Africa is losing its influence, China is dictating

-> If you get money, take the cash but we do not want them to dictate

-> If we do not take the money, another country will and they might dictate in the future

-> Technology transfer: more prosperity. Key argument: either we gain or someone else is going to gain.

-> economic nationalists are much more careful, they want to make sure that they are the ones who gain.

3. Critical perspective: (Capitalists/workers/women), are we treated fairly? -> There are many other issues, for example environmental issues.

Greece: Will they leave or will they stay? Greece says: either you are helping us out or we will leave the EU zone/

1. Liberal: it is a free choice. If you leave the EU zone there will be a black hole

2. Nationalists: We have to say what we want as a nation, so we have to decide what Greece must do.

3. Critical perspective: What will happen to the weak?

Austerity: After recession, how do we deal with it?

-> either governmental spending or free market?

-> All countries in the picture wants to cut government expenses (however, U.S. is spending more so not really true in the picture)

Economic policy will shape economic development??

Class struggle: Marxist: we hate it. Liberalists: otherwise the lower class did not even have an income.

Margareth Thatcher: people were celebrating her dead. Fetcher destroyed the unions in the U.K.

About GPE/how to look at GPE?:

-Who are the actors?

- What is happening in the news?

- Why is it happening?

- How can it be explained?

-> It is important to understand the political climate and the different views (of different countries) on certain events.

Bias of Western world: we tend to have a liberal perspective. There are some big issues with the liberal perspective and there are many more perspectives. So, the goal of this course is to elaborate on these different perspectives. This course is not about being right or wrong.

Definition GPE: the economical and political environment form the 1970s until now.

Global because globalisation has changed society.

Critique: They say globalisation started with the revolution which is in 1960 and not in 1970.

IPE: academic field of study surrounding the interactions of economical and political phenomena across state borders.

Economic agent: firm or we as individual in a particular country

Have to look at what is produces, at what price it is produced, by whom it is produced etc.

Political science: the group, a subset of individuals, for example communities and institutions.

International relations: IGOs and MNCs. 2 countries: will there be war or peace? what will be the foreign policy?

ISIS: will we be in war with this State or not?

Lecture 2 (Friday 17-04-2015)

There are three major perspectives in Global Political economy. They were already mentioned in the first lecture of this course.

The 3 perspectives are:

• Economic nationalism (Realism) -> Both terms can be used interchangeably

• Liberalism

• Marxism (Critical perspectives) -> Both terms can be used

Economic nationalism

There is a distinction made between classical realism and neo-realism.

Classical realism: (Thucydides (460-395 BC), Thomas Hobbs (1588-1679)). Its view on individual life: ‘’continual fear and danger of violent death, and the life of man, solitary, poor nasty, brutish, and short.’’

Neo-realism: also called: Structural Realism. (Kenneth Waltz (1924-..).

They say that the State’s behaviour is determined by the structure of the International System.

Structure of the international system according to neo-realists (slide 7):

• The system is an Anarchy (there is a lack of central authority); there is self help and a security dilemma.

• The parts are the sovereign states, rational actors that have the same needs but different capabilities

• The outcomes are: - National interest dominates policy

- Policy can be amoral

- All states are alike (behaviourally)

Main assumptions/key actors of Neo-Realism:

• They assume that there is an Anarchy. This means that each state must look after its own interest.

• Furthermore, they say that there is a Zero-sum game view of Economic interaction. (Either we gain or we lose, so someone else gains)

• Last, primacy of the State is assumed. They believe that the State is the main actor in domestic and international domains. And they say that the economic policy must be aimed at increasing the power of the State. Also, they say that the marked based actors such as firms subordinate to the State.

The key dynamics of Neo-Realism:

• GPE is a struggle for power and wealth -> World we live in: power leads to wealth, wealth leads to power.

• International economic relations are political economic relations. Free trade is an outcome of hegemony

There are two views on globalisation in Neo-Realism: Defensive (protect the interest of the State) and Sceptical (globalisation was increased by States).

Conflict and cooperation in Neo-Realism:

Examples of these controls are:

1. Protection of domestic industries from foreign competition

2. Security concerns of strong dependence on other countries

3. Cultural imperialism

Liberalism: there is a distinction made between classical liberalism and neo-liberalism.

Classical liberalism: (18th -19th century) (John Lock (1632-1704); Adam Smith (1723-1790)

Its view on individual life: ‘’When free to choose, everyone gains from cooperation.’’ So we all benefit from trade.

Neo-liberalism: (Keohane (1941-..); Nye (1937-..) Neo-liberalists say that the world may be anarchic but interdependence makes room for cooperation between states.

International structure (Neo-liberalism) (slide 15):

• The System: Anarchy is still there in neo-liberalism but this gives opportunity for cooperation. There is a world society (i.e. institutions)

• The Parts: There are sovereign States but they are made of different groups. Also, they are not unitary actors. There are non-state actors such as IGOs, NGOs and firms. Furthermore, there are individuals

• The Outcomes: cooperation is more probable

Main assumptions/key actors:

Neo-liberalists have a positive-sum view on economic integration. They believe that there are multiple actors in the global political economy, these are:

• Individuals (when they are left free to choose, they produce positive outcomes)

• Firms (they bring economic gains to host and home countries)

• States/Governments (they should not interfere with the markets)

Key dynamics:

GPE is constituted by a search for wealth. They believe that international economic relations can produce welfare for all.

There are two views on globalisation that are both positive:

• Hyper-liberals: globalisation is welcome ‘’As Is’’

• Keynesian liberals: some attention to market reform

Conflict and cooperation:

Example: The continued liberalisation of capital flows and trade picking up after the 90s.

Marxism:

Modes of production (slide 21):

• Forces of production: Instruments of production, raw materials and labour

• Relations of production: Class system, relations of individuals to system of production, ownership and control laws

• The superstructure: Culture, institutions

-> The forces of production and the relations of production are the structure (base).

-> The modes of production are determined by the instruments of production and the raw materials.

Forms: mercantilism/socialism

Classes:

- Bourgeoisie

- Proletarian

Modes of production through history (figure from slide 22):

Capitalist mode of production (from slide 23):

Exploitation of Marxism:

Value comes from labour imbedded commodities.

Exchange value > Cost of labour (wages)

The value of the surplus is expropriated by the owners of the means of production (for example: Capitalists)

Key actors:

The key actors of Marxism are the classes (the Bourgeoisie (capitalists) vs. the Proletariat (workers). They believe that the State represents the class interests.

-> Transnational corporations extend exploitation across borders (= capitalist imperialism).

Key dynamics:

Also, a zero-sum game view of economic relations (same as economic nationalism). They believe GPE is inherently unstable and in conflict:

• The rate of profit tends to fall (capital replace labour)

• Under-consumption and over-production leads to business cycles causing instability

• Between countries, inequality emerges (see ‘’Dependency Theory’’)

Conflict and cooperation:

Methodologies

• Rational Choice (Realism): If U(A) > U(B), then Outcome A is chosen. What is rational for the agent is not always rational for a group. (slide 31 for equilibrium)

• Institutionalism (Neo-Liberalism): GPE is the interaction of agent but within a framework of institutions, norms and rules. (slide 32 for equilibrium)

• Constructivism: Actor’s interests are not give but constructed. Inflation vs. unemployment -> different interests= different behaviours

Lecture 3 (23-04-2015)

Certain perspectives are more dominant/prevalent than others

Outline:

- Recap

- Timeline (Part I: 1400-1800)

Brief recap from the lecture of last week

3 perspectives:

Important lesson of history books: when you think about world events it is very easy in the books to say this was this era, this happened then, etc.. But the distance between events is not shown often, the events are evolving over time and are not happening radically after each other. (It is a slow moving story from one event to another)

Timeline, Part I (1400-1800)

Silk Routes (ca. 100BC): the idea that back in the old days that the world was highly fragmented in different kingdoms. What happened: local trade was going on. The society was already quite involved in regional sense but not further because people could not really afford to travel further (also, other risks such as diseases).

-> They traded mostly agricultural products

Roman Empire: fell around 1400 AD

When the Western part fell and became highly fragmented again with a lot of different interest groups, the byzantine empire stayed longer.

The Renaissance

- Da vinci (studied human body, was highly influential)

Art from this era: much more from a linear perspective

The church was trying to maintain its power but this was hard.

Renaissance is important for all the other developments that happened afterwards.

City states were growing in power and were trying to become stronger within their regions

(Strong rivalry going on, see slide)

-> Companies started trading by ships because there was too much rivalry on land

For the city states to retain their power, they have to enhance their scope. They had to make effort to standardise and cooperate with other city states. As a result, nation states developed.

In this expansion of global trade, the Americans had a very unique kind of development.

E.g. farmers in Colorado (close to the Rocky Mountains) between 600-800 AD. Interesting way to look at civilisation, the civilisation was highly clustered together. The trade was just within the city. And furthermore, it was very difficult to get from one place to another because of the challenging landscapes (water, mountains that they could not cross).

-> Transportation costs in the America were incredibly high, so trade was scattered in certain key locations.

World trade: silver was flowing from Latin America to Europe and especially to Asia. If you look at this map, what you discover is that all of the arrows are pointing to Asia. This means that Asian traders were not interested in receiving goods from abroad, they already had high quality products themselves.

The Europeans were desperate to get products, so all the money went to Asia and all the goods were shipped to Europe.

Important development: the development of the trade routes and the rise of the first MNEs.

- East-Indian Company

- VOC

Driver: development of huge ship yards (never before had men built these kind of ships for trade)

-> need money

African countries were the source of slaves. What happened is that tribes in Africa were dominating over other tribes, so slaves were sold to the European countries. (So slavery is not something what the European invented)

What did the Africans buy? -> Machinery and weapons

What do realists, liberals and Marxists say about the picture in the slide about trading slaves?

Realists: Either we gain or someone else gains (Zero Sum Gain). Striving for Power and Wealth, we are gaining power and wealth here at the expense of someone else. Therefore, it is a good thing. We are gaining more control of resources, labour and land across the world and are having the benefits from it and no one else can have it.

‘’If we are going to stay in power, it is going to be at the expense of a human life’’.

Liberalist: Free trade, positive sum view, by co-operating (Europeans with Americans) they both gain if (at least the one who are on the right side of the activity). A true liberalist will also see a problem in the picture, namely: If a slave a good or a person. Liberals are about expecting humans, so we would ban it. Liberalist say we all have freedom of choice.. Would a slave have chosen to become a slave? Probably not. -> So a contrasting view.

Marxists: These are people/workers being exploited for the benefit of the capitalists, and therefore, they would not approve it. If you are from the critical perspective, you would also raise issues about the environment and gender issues etc.

From an environmental point of view you could say, for instance: ‘’we are destroying civilisation’’

-> So from this perspective there is no single good thing to say about the picture.

Initial question of the lecture:

‘’The European political economy strategy of 1400-1800 can be characterised as...?’’
-> Mercantilist imperialism: is the best way to phrase what is going on.

Ecological imperialism: ecological warfare. When the European went to Asia, the Europeans got a lot of diseases. When the Europeans went to America, the Americans got sick because they were not resistant to the diseases of the Europeans.

Liberal imperialism: Contradictio in terminis -> Contradiction in terms. Expanding a certain way of civilisation. If you are truly liberal, everyone has a choice. Do we see a lot of free markets actually happening in the 1400s to the 1800s -> No, there are a lot of countries protecting their state borders and they are very reluctant to trade with their main rivals. That is why there is so many rivalry going on between the European ships (they are fighting and bombarding each other all the time).

Mercantilism: Us or them kind of strategy. We gain money by selling stuff but we are losing wealth and power by buying stuff from others. So we are protecting our borders.

Colonial imperialism: Institutionalisation. You are forcing your role in the economy -> Want to gain more power. Subjugation of economy and colonialisation.

Conclusion:

Realism and Mercantilist Imperialism is mostly reflected in the period from 1400 until 1800.

Institutionalisation: for example, the different rules for white and black people. The institutions applied were affecting generation to generation (E.g. black people could not get a job). Unfortunately, there is a lot of rivalry between black and white people still going on today.

Lecture 4 (24-04-2015)

Part II of the timeline (1800-1900): Liberalism and Marxism

1800s: Trias Politica (Montesqieu) -> power was divided into three

-> Because the role of the state needed to be decreased

Liberal: There is some choice, there is some individual freedom when state’s power is going down.

Scientific method: is about running an experiment and see/observe what happens. (Lab experiments: really observing and trying to understand something). We still do this today  we make hypotheses, test them and reject/accept them.

-> This scientific thinking resulted in different views about states, their power should be decreased.

-> This resulted in different views about individuals, they should have more free of choice

Spinning wheel: helped the industrial revolution in the U.K. This combined with other innovations (steam engine/rail ways) resulted in cheaper international trade. Unit cost of transportation decreased -> huge boat going from one harbour to the next one instead of dividing the costs by 100 kg it was now divided by tons of kg (more on board).

Boston thee party: U.S. people claimed that they were individual people and the State should not intervene much

-> Bill of rights -> declarations of independence (individualism came to the forefront).

Pax Britannica: In the period that Britain had world monopoly. The picture shows that the British were across all oceans. (If you are the monopolist and everyone wants to trade with you, you can define prices)

Technological development mainly took place in Britain and that is why they were ahead of other countries.

-> Meant that British could dictates its terms to the rest of the world economy

There were a lot of coalitions going on, governments had secret deals behind other governments back. There was no world community such as the United Nations. There were a lot of separate groups/coalitions among the main countries evolving in trade back them. No open international relations and they were continuously wondering who is going to be at war with who.

Adam Smith: wrote ‘’the Wealth of Nations’’ -> What he said: if we think about international cooperation, we need free trade. Why did he say this??? -> Britain imposed high tariffs on everything that was imported (it was a mercantilist state: they were trading with other economies, promoting export and avoiding import. How to prevent import: by high tariffs and quotas). Adam Smith thought that they need something different, because the people in Britain were remaining poor.

-> He said that they needed to open their trade borders with France, so both countries could focus on their absolute advantage and therefore, both benefit. -> He wanted free trade (liberalists)

He said that Britain should open their borders and that other countries could choose for themselves if they would also open their borders (this is an unilateral policy: I decide what I want to do regardless of what you are going to do).

Bilateral policy means that two countries negotiate about something but this was not the aim of Adam Smith.

David Ricardo: ‘’Adam Smith was not entirely right, it was not about absolute advantage but about comparative advantage. If you suck in making both goods, you should make the good in which you suck least. ‘’

Who were the people in parliament in the U.K.: Aristocrats (that owned land). In order for them to keep an high income, foreign wheat had to be much more expensive than domestic wheat (they were very much in favour of mercantilism).

Now with the industrial revolution, we see a lot of other men entering parliament (men that were not interested in agriculture but in setting up large industries). They said: ‘’ We want you to remove the tariffs, so the costs of bread/food will be lower and the workers do need high wages. We want our workers to have a low wage to have as much profit as possible.’’

-> Therefore, there was a conflict between the industrialists and landowners.

Abolition of the Corn Laws (U.K.) -> Now food prices could drop.

These developments were not good for the workers although the food prices were reduced. What was going to happen was further isolation.

-> Made the work house/poor house even nastier

Workers could not vote, had very little education (not for women and the average common man working in a factory) -> they were the buffer for everything that happened in the economy. Their real wages were decreasing and decreasing.

The outcome of the Gold Standard: massive unemployment, continuous drop in wages

Deflation: economic uncertainty, unemployment

Poor Houses: social security institutions. Everyone had to work under horrible conditions in order to have a place to stay/sleep (namely in the poor house)

1850: 200.000 people in workhouses in the U.K.

(‘’Punishment for being poor’’)

Poor house let to Karl Max saying ‘’enough is enough’’

Mundell-Fleming Trilemma (look it up)

You cannot have all three, you can only have two.

• If you have capital mobility and policy independence, you cannot have a fixed exchange rate as a central bank.

• If you are going to set the interest rates at the rate you want it to be and you want to have the exchange rate to be fixed, the capital is not allowed to move freely.

• The Gold Standard: Fixed exchange rate (prices for gold were set) and capital mobility means that there cannot be policy independence. Because as soon as you allow interest rates to fluctuate it means that your fixed exchange rate has to be let loose.

Unemployment was a result of keeping the Gold Standard alive.

What is the main point of Karl Marx?: at its the core: the idea of the Class struggle. There is always someone exploited and someone who gains from this exploitation.

Labour movement has led to the creation of labour unions. A union uses violence if necessary to get certain rights when.

Scramble of Africa: Western European countries needed more resources -> European Imperialism (1914). Railroad built from the North to the South of Africa.

King Leopold II: used torture in Kongo (he was a European Monarch).

What do realist, liberals, and Marxists see?

Realist: Zero-sum, expanding at the expense of someone else but we are gaining wealth and power. If we are not doing this, someone else will, so therefore, it is a good thing.

Liberalist: Belgium and Germany could cooperate with the U.K. There is an opportunity for the U.K. and France to have free trade since they both have much influence. No Africans have no freedom of choice in this colonisation, this is not a good thing.

The government is creating employment by creating its military, a liberalist may not like the aspect that the government is taking this effort.

Marxists: Capitalism is imposing its role on society, so it can keep on growing. The only way to stop this is by having war and destroying the capitalists.

-> World War I broke out, the main emphasis of the European countries was to defend their country and not necessarily to defend the colonies.

Interbellum

• Roaring 20s and US isolationism

• Great Depression 30s -> America isolated itself, had high tariffs resulted in the GD

• Germany: War Repairs -> Germany had to pay for the destructions it made, German economy could not afford to pay those huge amount of money. They had hyper-inflation because of the war repairs

• League of Nations with DSU? -> Countries were coming together to discuss how they could rule the world together. The big mistake was that they did not impose any final authority, and the world was still in anarchy (there were a lot of different interests). There was no Security Council.

• Security alliance? -> E.g. Modern day NAVO. Security alliances did not work because they did not had any binding power.

• (Monetary) economic policy? -> (Questions arose) How do you manage having to repay war debts? How do you borrow money to repair your economy? What do you do when gold becomes scares? -> The countries started to experiment with economic policies but they did not create economic stability yet

• Lender of last report? -> Who do you turn to for help in case you fail? If Greece were in the same trouble during the interbellum that they are in today, they would really go bankrupt. There would be no one to save Greece. (No safety net)

Too little, too late..

After the Second World War, they looked at what went wrong after the First World War -> So they used a different approach

Economic cooperation was needed and there were institutions set up (E.g. World Trade Organisation (WTO))

What we see in the 1800-1900: First, there was extreme liberalism. Later, Marxism became much more important to help the ones that were suffering from the capitalists.

Perspective of the 2000s: E.g. critical perspective

The Cold War: struggle for power between Russia and America (See picture in the slides)

Triad: the world is split in three powerful arenas: the U.S., Europe and China.

Can you exactly divide the world in these three blocks? -> Think about that

Lecture 5 (1-05-2015)

Outline of today’s lecture:

• Context of international trade (producing goods around the world, global value chain, buying and selling around the world

• The World Trade Organisation (multilateral agreement: if I make concessions towards you, I have to apply it to everyone who is part of the agreement. The best treatment applies to all members of the club)

WTO: It has a multilateral system. Countries make all kind of exceptions in order to make trade agreements bilateral (so not benefits for all the members but only for two members). These exceptions violate the multilateral agreement of the WTO.

If one person starts bending the rule, other countries are going to follow soon (picture of spaghetti bowl on the lecture slide of the outline)

Why the World Trade Organisation was needed in the first place:

Germany had to pay a lot of war debts after World War II. How are we going to manage this? Countries had to corporate, global security had to be enforced, but how?  There was not enough commitment.

1930s: Great Depression.

U.S.: In chaos

U.K.: Was acting like there was nothing going on

Germany: Really suffering (hyperinflation)

-> U.S. did not want to get involved in cooperation (‘’the gap in the bridge’’)

Countries had a very liberal perspective on how the agreement should look like. There was a lot of talk but not enough final action (so corporation was not set up).

U.S. was thinking that the U.S. farmers were being victimised by the international trade that was going on. So, U.S. imposed higher trade barriers (import tariffs) to protect American farmers. Milk and cheese were the only products where the U.S. and the Netherlands got a trade war about.

The volume of overall world trade had decreased from 5.3 billion to 1.8 billion $ (Down the plughole, world trade 1929-33). While this was happening, you need to realise that the Great Depression was going on. There was much unemployment etc., it was hard to get products that were not made in the U.S.

Beggar by neighbour: If we are not doing so well, we are going to adjust our policy so that all other guys will suffer too. (Realist policies)

• Everyone was raising import tariffs

• There was currency competition (countries start decreasing their currency values). Countries wanted to have a favourable exchange rate, so products would be more favourable/cheaper in comparison with other countries. Make the currency as competitive as it can be.

-> Mercantilism

-> No wonder that the depressions was not solved. This was the reason that countries said: ‘’We do not want this to happen again’’ (after World War II).

After 1945: We see a gradual reconstruction of the world economy, countries were opening up for global trade again. Global trade started to rise after 1945.

2007: Modern great depression

What helps to increase global trade -> Technological innovations (reduce unit costs).

1920s-1940s: BTN (Beggar by neighbour policies)

1940s: The U.S. started talking to the U.K. and other countries to discuss how international trade should look like (discussed International Trade Organisation (ITO). This organisation stood for free trade, and free labour -> However, U.S. did not want to co-operate)

Bretton Woods: World Bank and IMF were created at this conference.

-> Someone said: maybe we can get some ideas from the ITO charter (they were not used because America backed out). Eventually, the ITO ideas were enforced in the GATT (General Agreement on Tariffs and Trade).

It was the first world international organisation that had some rules about international trade that all members had to adhere to. The agreement was multilateral (the agreements applied to all members).

1995: The GATT needed to be changed to deal with more modern trade issued. The GATT therefore became incorporated in the WTO.

What is driving policy makers into making an organisation such as the GATT.

How does the GATT really work?

How has the GATT affected international trade?

Liberalism:

- Absolute advantage (Smith)

- Comparative advantage (Ricardo)

- Factor endowments (Heckscher-Ohlin)

- Intra-industry trade (Krugman)

-> These are the main theories about international free trade

Realism:

- Mercantilism (= we protect our domestic goods)

- Infant industry

- Self sufficiency

- Strategic trade

- Cultural imperialism

Critical perspective:

- Unequal exchange

- Unequal participation

- Unsustainability (Environment/ labour/ growth / development)

Why are the GATT and WTO created? Because first we had the ITO but the U.S. backed out. After the 2nd World War countries thought that there had to be some kind of platform with rules about free trade.

Politics: social reforms

Economics: welfare gains

Diplomacy: institutions ‘with teeth’

Difference between GATT and WTO is not necessary to talk about in the context of this lecture, so therefore, the terms will be used interchangeably.

After the 2nd world war, a strong liberal wind was blowing off.

Politicians cared about full employment, expanding the production and exchange of goods, reducing tariffs, and they wanted to make sure that everyone was an equal participant.

How does the system work:

•  The first idea is non-discrimination: as soon as your good enters my border, I will treat it as a domestic goods. If you look at factual examples, we see that a lot of discrimination is going on -> This is a violation of this rule.

• Most-favoured nation: If I give one country in the agreement a nice deal, this deal applies to every member. We all treat each other equally

• Reciprocity: If I give you something that you are really going to like, I expect something in return.

• Transparency: Countries need to be transparent about what they negotiated about and how they got to the deal. WTO has decision-making by consensus, one country has one vote (regardless of the size of the country).

Bound tariff: the maximum tariff that may be imposed

Applied tariff: the tariff that is imposed (may not be higher than the bound tariff)

What is the benefit of being in the WTO?

Andrew Rose wrote an article: ‘’Do we really know that the WTO increases trade?’’

He used the gravity equation -> The bigger the distance between two countries, the less they are going to trade.

-> The wealthier the countries, the more they are going to trade (also for same language, culture etc.)

A thing that Rose did in his paper: He put in an extra indicator. The effect on trade if both countries are in the WTO. He found that WTO membership was decreasing the trade of countries.

-> Different data had to be used.

Then, we see that countries are able to reduce the transaction costs when being in the WTO. It does matter if a country is a developed or developing country. If a country is developed, it has much more benefits from being in the WTO. The poorest guys are gaining the least.

What we are facing now in the world economy: We have the WTO but there are so many countries signing bilateral agreements.

TTIP negotiations: biggest trade agreement in the world history. It is an agreement between the U.S. and the EU in order to get free trade and to get a lot of investment going on.

-> There is a lot of criticism

If we sign TTIP, then we are giving the U.S. the opportunity to sell bad quality products to us (especially food products).

Lecture 6 (15-5-2015)

Outline for this lecture:

• Global Financial System

• Transnational Production

• Global Division of Labour -> Where do we have high/low-skilled labour, where are people unemployed etc. -> this has an impact on how countries are developed

• Economic Development

Global Financial System:

Mundell-Fleming Trilemma: (from lecture 4, see notes of lecture 4)

Between the following three factors: capital mobility, fixed exchange rate, policy interdependence

Capital mobility: money/capital can be transferred freely without government restricting the mobility of capital -> liberals think capital mobility is a good thing. Realists will think that it is not good, and that national security should be protected.

Fixed exchange rates (Fixed XR): my currency fits to a certain value and if people are going to start trading this currency, this level of exchange rate will be maintained.

The advantage of a fixed XR: You know what you have to be pay in the future. If you buy something today, and you have to pay back months after -> you know exactly what to pay, no uncertainty and complete predictability.

-> Creates stability

There are two tools: monetary and fiscal policies

Policy independence (Monetary Autonomy): central banks hast the authority to raise or lower interests rates, so that they have some impact on the economy.

You cannot have all ingredients working at the same time. Each and every combination has been used in history.

Gold Standard (19th century-1914): Had a fixed XR and capital mobility, they did not have any policy independence. The only thing that could be adjusted were the wages. The wages kept on getting lower and lower, so that the U.K. could keep on competing in the international market.

-> Marx wrote a response to that, enough is enough, he thought government had to step in and start defending the working class.

Bretton Woods System (1945-1971): Fixed XR and Policy independence, no capital mobility. Policy makers said we need a fixed XR so that there is some predictability and some sense of control. Capital mobility was difficult to allows. Capital mobility was very low in the world economy, because countries were afraid that a lot of money would be moved from their country to another. Countries wanted to protect their wealth and wanted to make sure no one else could get their money (Realist perspective.

Flexible Exchange Rates (1971 –today): Policy independence and capital mobility, so there are flexible exchange rates. Balance of power shifted away from the fixed XR, because it was a very costly procedure. A country also needs foreign currencies.

What is important: Policy independence means that countries can set their own interest rates and investors are free to move their investment to where it is most favourable.

What does the system look like: It is very much liberal, because there is a flexible exchange rate with very little governmental intervention.

Key developments (Monetary System):

• Floating Exchange Rates (1971-today)

• Volatility in the Financial Markets

  • Need for Coordination (liberal point of view: if we all cooperate, we can all gain)

    • Globally (G5/7)

    • In Europe: XR Mechanism

  • Regionalisation: (Certain currencies are becoming regionally important)

    • Dollarization (There are a lot of developing countries that say that they do not have the infrastructure to deal with their own currency. So they connect their currency to the U.S. dollar and adapt their currency to the U.S. dollar. When the U.S. dollar changes in term of its value to major other currencies, the other (linked) currencies will also change.)

    • Euro (Same for the Euro)

Key developments (Credit System):

• Liberalisation of Capital Flow -> it is becoming easier to get credit

  • Opportunity to make profit + Better technology

    • New financial instruments (futures, swaps, derivatives, etc.)

    • New players (Hedge Funds, Sovereign Funds)

    • Capital in search of investment opportunities

  • Huge debt accumulation in developing countries

Countries and institutions can access credit easily and cheaply but this does not mean this is always the wise thing to do.

Financial Crisis: why do they occur? Simple explanation: There are certain powerful forces that are shifting capital to where they can get the highest return on investment. Speculators are going to keep on attacking a fixed XR until it breaks. When it breaks, the economy is in chaos, and speculators can gain money from that.

-> Financial crises occur due to capital mobility (capital mobility and financial crises go hand in hand. See graph from the lecture slides: Financial Crises -> Correlation between capital mobility and financial crises. There are more countries in financial crisis when capital mobility is high. When it is low, speculators cannot attack fixed XR and the chance that a crisis will occur is low).

Summary:

European Debt Crisis

Reactions on the crisis:

• Bail-Outs: Give Greece, Portugal, Spain and Ireland cheap loans.

• Country level reforms

  • Austerity: governments have to reduce inefficiencies, sell wherever they can.

  • Deregulations

  • New stability pacts

• At the system level (proposals):

  • More banking supervision

  • Financial transaction tax

Transnational production: companies being headquartered in one country and having FDI in other countries.

There can be inward and outward FDI (inbound/outbound FDI)

From the U.S. perspective, realism: Both inward and outward FDI can be favoured but only under certain conditions. (Outward FDI in any case, because country gets control over foreign assets. However, they do not want knowledge to be leaked)

Liberalism (in favour of FDI):

• Gains of FDI/capital mobility:

  • Increase host’s access to capital

  • Develop host’s strategic capabilities

  • Technology transfer (Realist in the U.S. will not like this)

  • Productivity, efficiency

• Risk of capital mobility?:

  • ‘’Better international institutions needed’’

Thomas Friedman:

- ‘’The hidden hand of the market will never work without a hidden fist.’’

Realism and FDI:

• Decision-making power (when country gains power, it is in favour)

• Profits

• Taxes (must be effective)

• Technology transfer (If there is technology transfer, it has to give us the upper hand. We do not want to share our important secrets with others)

• Independence (we need to make sure that we maintain control)

• security (when national security is threatened, there will not be any FDI)

Critical perspective and FDI (no kind of FDI is going to be supported, there are too many issues):

• Ownership/control versus labour (capitalists will get richer and richer, the poor will get poorer)

• Capital replaces labour (massive unemployment will be created

• Race to the bottom is unsustainable and always at the expense of the working class (production is going to move all around the world to where production costs will be the lowest)

• Pressure on host suppliers (because suppliers are very dependent on one buyer. Buyer can change supplier easily. This is another form of exploitation from the critical perspective)

• Rivalry with host’s domestic firms

• Critique on the system

  • Fair trade

  • Class, race, standards, gender issues

Global division of labour

What does a realist see in this picture? (About FDI)

- Exploitation -> Marxist perspective: Serious issues regarding labour standards, unions, wages, gender issues, problems with specialisation

- Opportunity -> liberal perspective: efficiency, specialisation, productivity, learning, trade in tasks

- Threat -> Realist perspective: she is taking the job from someone in my own economy. If there is unemployment in my own economy, then it is a threat -> domestic job losses

The EU’s push for bans on Bangladeshi textiles until they improve labour standards is founded in the economic nationalist perspective

-> the state is pushing it (the state wants power and has a national interests that they want to protect and increase)

Causes of underdevelopment:

- Internal causation/Modernization theory -> you have to adopt more western values in order to become economically developed (liberal)

- Washington Consensus: we have to tell countries that they should have free markets and liberalise their economies in order to have rapid economic growth.

- External Causation/ Dependency theory -> The reasons that countries are underdeveloped is not their fault. Developed countries are using the poorer countries.

-> How do you get poor developing countries more advanced?

Lecture 7: Movie: Inequality for all (in Pathé) (22-05-2015)

Lecture 8: Guest lecture (29-05-2015)

Return of Geopolitics? (Lecture by Mamad Forough)

He has a background in International politics.

-> lecture is mainly about chapter 1 and 6

Overview:

- Major theories of IR and IPE

- A geopolitical critique on theories

- Why geopolitics matters?

Realism (IR)/Economics Nationalism (IPE):

Also called (neo)mercantilist, statist, power politics

• Concerned with the security of the state

• There is Anarchy: no higher power

• Said differently: this is concerned with 2nd law of thermodynamics (=entropy (chaos) is increasing in the world)

• Power (IR) vs. Power and Wealth (IPE, p.10)

Power of the state is not only about military power and economic power, but also power in structures.

The liberal perspective:

• Various actors (e.g. individuals, corporations, interest groups)

• State is only an actor among other actors (and is influenced by various actors, not only influenced by other states)

• Search for conditions for cooperation (vs. coercion)

• Corporation leads to interdependence

• Mutual benefits (positive-sum)

• Hostility to the state (interventions)

Keynes (1936): more interventionist, welfare government

Hayek (1944): neoliberalism

Fukayama: End of history (1992)

-> A common critique of liberalism: Liberalism ignores the significance of powerful firms

The critical perspectives:

- Questioning established form of organisation

-> 3 main strands (p. 17)

Marxism: focus on class/workers

Marx & Engels: tension between capitalists and workers

Feminism: uncover gender relations in the order of things (Foucault) or World order (Cox)

Environmentalists: have the planet as their focus

Neo-Gramscians: focus on transnational classes and ideology

Cox: theory is always for someone and for some purpose:

The rich elite prefer neoliberalism

Workers and unions prefer Marxism

Workers (activists)prefer feminism

Militaries and politicians prefer realism

-> It is impossible to prove the theories wrong

A critique of the theories:

- They all ignore the spatial, e.g., geopolitical dimensions

What is geopolitics?

Gaea: personification of the earth, one of the Greek primordial deities ( =mother earth)

-> In Greek myths of autochthony: mother earth gives birth to the Founding Fathers.

Geopolitics: deals with space (geography) and time (history) and their influence on political and economic foreign policies (FP)

-> Looks for what is constant in FP

They consider strategic value of land and sea in economic and military power terms. State’s power to shape the global governance (world order) or what Schmitt called ‘’Der Nomos der Erde’’ (= The laws of the land)

Geopolitics is concerned with geographical factors: territory, land, terrain, waters, pollution, strategic location, and natural resources in international relations.

Discussion of today: Is there a return of geopolitics? Is there a decline of the US?

If you look at the world, you can see a lot of centralizing and decentralizing trends. There is a challenge to states: Occupy, Arab Spring, Terrorism, and so forth.

Consolidated democracies are in a mess: EU and US are an example (financial crisis).

-> Some are centralizing: Japan, India, US, Turkey.

-> Non-democracies are centralizing: China, Russia, Iran

-> Non-democracies without resources are disintegrating: Mali, Pakistan, Yemen, Iraq, Egypt, Nigerian, Syria, Afghanistan, Libya, Lebanon, and ...)

Turkey matters: they are the bridge between the East and the West.

Iran matters because of its central location in the Middle East.

Russia matters due to its big size (In geopolitics they say: size matters)

There are historical buffer zones: Crimea is in the intersection of the 2 super important buffer zones for Russia. Indispensable for the Russian Navy’s access to global waters (in the cold seasons)

Population is a very important factor in geopolitics. Russia has a negative population growth.

Northern Sea Route is becoming more and more important. Russia is going to be in control of this route.

- 20% of world’s Hydrocarbon resources lies in Russia, so Russia is going to matter.

Geographical facts of China: China has almost the same latitude as US. China has a temperate climate. If you think of China as an Island, you can see that China is defended by other locations (like US)

China’s population is much more dense in the Eastern part (mostly Han, farmers and merchants historically).

-> Recently the Han are resettling which causes a lot of tension in China.

China is the upstream water holder and countries like Pakistan, India, Bangladesh, Myanmar, Thailand, Laos, Cambodia, Vietnam are all at the mercy of the owner of the ‘’water bank’’. So China is not going to liberalize in that sense.

China’s geography:

• Blessed geography: 50 degree, north latitude

• Natural defences

• Natural resources (e.g. rare earth metals

• It is a continental climate country (like the IS)

• 9000 km of sea coasts in some of the busiest sea lines of communication

• In the far west it borders former Soviet countries that are rich in natural resources (mineral, strategic metals, energy)

• Mackinder (1900): China has the geographical potential to be a great power

China’s opportunities

•  China is a RE-emerging power (they are re-emerging after a pause, they were a power in history)

• Kissinger (2011) called China a ‘civilization state’

• China is much bigger than the map suggests

  • E.g. in Manchuria they have 100 million people living: on the side of border (Russian Far East, 5 million) there is vast resources which China can colonize (demographically and corporately). They are already occupying this part of Russia

  • Mongolia: grasslands, roads, minerals are taken over by Chinese

  • West: China is building g infrastructure around it

Chinese Foreign Policy:

• (Neo-)Mercantilists

• Deals with everyone

• It is mostly a resource acquisition type of foreign policy

• They want to make other countries economically dependent

• Malacca dilemma (it is one of the most important challenges that China faces)

• They have a policy of diversifying energy sources, building pipelines and infrastructure to deal with Malacca dilemma (MD) for energy security

• They have huge infrastructure capabilities. They established the Asian Investment in Infrastructure Bank (AIIB)

• They have a policy called the New Silk Road

• They have a tactical but not a strategic alliance with Russia and Iran (it does not mean that when someone is going to attack Russia, they are going to defend Russia. So, not strategic)

MD: there are not a lot of ways to pass from one ocean to the other ocean and this is a problem for China. If someone blocks the ways, it will put trade to a hold. (Strait of Malacca: if this is blocked, it will damage the Chinese economy. This is a huge risk for China).

The South China Sea:

- Nicolas Spykman: defined geopolitics as planning security policy based on your geography. He called the greater Caribbean the crucial point of the Western hemisphere: and the American Mediterranean, the blue water extension of US continental landmass.

- Monroe doctrine (1825): Panama Canal, building a navy, dominated the world (this is how the US did it)

- Kaplan, 2014: South China Sea is the Asian/Chinese Mediterranean or Caribbean Sea, central to Indo-pacific region, blue nation soil..

90% of the global commodities are transported via sea, so that is why the oceans are so important.

The panama canal is very important: it connected the Pacific Ocean to the Atlantic Ocean (can travel very shortly)

Also, the Suez canal is very important

The China Sea:

- Energy is not the only aspect that makes the South China Sea so important. So, there is abundant energy deposit in these waters, that is substantial but not game-changing

-> China tolerates US presence in the South China sea

- China wants to achieve strategic parity or supremacy (without a shooting war with US) and functionally dominate the region. This will give China naval access to the rest of the world. With that, it can break out of the American alliance system.

- The China Sea opens the road for the New Silk Road.

South China Sea is the centre of geopolitical dynamics in the 21st century in the same way as Eastern Europe was in the 20th (Kaplan)

- Energy transports, oil and natural gas, commerce, military deployments, for 2 of the largest economies in the world, plus a host of other vibrant economies and populous nations.

- SSC is where the foreseeable future of world economy sea lines is situated

If China dominates SSC, they would essentially neutralize Taiwan. They can become a two-ocean navy (Western Pacific and Indian Ocean)

- It would give China access to navigable southern Rimland of Eurasia, the horn of Africa, to the sea of Japan

- It will dominate the eastern hemisphere, but not in the complete way the US dominate the western hemisphere

- India is a natural balancer there.

There are a lot of military dimensions:

• China: anti-access area denial: Ballistic Missile arsenal against are, surface, space, cyber capabilities of the US -> they have superiority over American military

• China is rearming its nuclear arsenal: multiple-warhead

• China’s Ministry of Defense announced that they have a plan to move away from a policy of air defense to a combined defensive and offensive approach

• They use a lot of ‘’fishing boats’’ (belong to the fishing industry). They are dominating the region with fishing boats.

• There approach is four steps forward/ one or two steps back

• They have non-lethal but not powerful technology on their fishing boats.

Chinese military spending is increased from 1950-2008. Researchers think China does not announce the real numbers (and is spending much more). They think China does not want to scare others.

New Silk road (see slides). China is assembling new trade routes, binding other regions closer to it.

- They are building high speed railways systems in order to carry commodities instead of people. Thereby, making the American navy irrelevant.

-> China is assembling different sea, land, economics, energy, military, and transportation infrastructure.

Conclusions:

• Economic interdependence: Chinese-American threat of mutual economic annihilation (one element that realists ignore)

• Sino-American economic embrace of each other is unlike any other super power rivalry in the past

• The US owes 1.3 tn dollars to China

• Multilateralism is flexible and reproductive and can accommodate transformation

• South China Sea is where the future of geopolitics and geo-economics will unfold

• Given recent trends, it is highly likely that China will dominate functionally and then will have access to the two oceans

• As of now, it is on the offensive and the US on the defensive (very unlikely for US)

• Militaristically they can both destroy each other

• Statism is getting stronger in the world including both China and the Us

• new Cold War? CW games but no new CW (yet)

• China is behaving no differently from other rising super powers in world history

• The US will remain a global power

Final conclusion: Geopolitics is more important than it is unimportant

Lecture 9 (5-6-2015)

The (never ending) Battle of Ideas

Keynes: sometimes we need to intervene.

Globalization debate: global markets and local politics -> does this mean the death of the nation-state?

Some people argue that we have a move from national institutions to international institutions. Some countries are giving up their authority to a supranational power.

Thomas Freedman: writer for the New York Times. He is the leader in terms of the hyper-globalizers (liberals) today.

He says: (metaphor)’’ If you want to understand globalization, you have to understand the relationship between the Lexus and the Olive tree.’’ Lexus (car) is a symbol of a good thing that globalization brings to us. Olive trees have roots that go deep, we also want to keep belonging to our country.

-> Every country wants the benefit but does not want to give up their roots.

Ha-Joon Chang: A motor industry would almost go bankrupt, however, the state intervened by giving subsidies. Because of this, they survived.

Thomas Friedman (other book): The world is flat. In this book, he says distance does not matter nowadays. Production is global etc.

If my money is my money is in Euros and that value is dropping, I will turn my money into dollar.

So, people can get money out of a country very fast.

3 phases of globalization

1. Colonization

2. Firms going abroad and globalization (off-shoring)

3. Globalized on the individual level. We can move around because distance is dead, we can move around our assets etc.

Ghemawat: he asked: ‘’What percentage of all voice calling minutes do you think were international?’’ Only 2% (very less)

Also, he asked: ‘’ What is the number of first-generation immigrants?’ Only 3%

Moreover: ‘’How much direct investment was foreign?’’ Less than 10%.

And, ‘’Exports as percentage of GDP?’’ Less than 20%

We have this idea of being globalized, but if we actually look at the numbers, we are still very local if you look at the numbers.

(Look at slide 8, figure was also shown in one of the first lectures. Very important!)

Countries, firms, non-state actors, and individuals are interacting with each other.

Non-state actors are getting more and more power.

Credit rating agencies: (Friedman) ‘’There are two superpowers in the world today. There’s US and there’s Moody’s Bond Rating Service. The US can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds.’’

All the countries in red disagree with their rating. The yellow countries agree with their rating. There are very few yellow countries. This is an issue..

The disagreement is actually alarming.

Standard of Poor’s and Moody’s: all the US agencies agree with each other in numbers, but they do not agree with the Asian agencies for example.

The US rate the Western world higher than the Chinese do. On Eastern Europe they agree with each other (Asia and US), the rest of the countries get a different rating from both.

Eastern Europe is in the middle of both (US and China), so distance is not dead??

Control variables: Distance, common languages, legal origin, and trade relations.

If distance is dead, if politics is dying, why are we seeing these patterns? Why do we see these powerful organizations that can bomb countries with their downgrades??

We see in the graphs: if you want to globalize, you should have a strong state.

Recap:

Trade:

Liberalism: Beneficial for all

Realism: Make sure you do not use

Marxism: Beware of exploitation

International Finance:

Liberals: Capital mobility is good

Realism: Make sure you are protected

Marxism: Beware of exploitation

What is China doing in Africa? They are buying the country because they need their natural resources.

Division of labour:

Liberalism: Natural and beneficial to all

Realism: Make sure you are protected

Marxism: Exploitation

Is not only necessary to know what a liberalist, realist, or Marxist would say. We should also know why they say what they say.

Economic development:

Liberalism: Internal causation

Realism Make sure you are protected

Marxism: External causation

Final words: Theories is always for someone and for some purpose. Impossible to prove such theories wrong. Each has some evidence to support it.

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