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POSC 2200 – International Political Economy Russell Alan Williams Department of Political Science Unit Six: International Political Economy "Finance" Required Reading: Globalization of World Politics, Chapters 16 and 27. Outline: 1. 2. 3. 4. Introduction - Finance and Investment Key Mechanisms Institutions Multinational Corporations 1) Introduction - Finance and Investment: System of finance and currency exchange vital Without it there would be: No Trade No Travel No Development Challenges: i) National currencies versus international markets Must be confidence in the system of exchange Need a management system that ensures: Convertibility Liquidity Stability Historically: “Gold Standard” ensured these . . . E.g. Money could always be converted into precious metal – kept currencies stable Modern money is abstract – value driven by perception International Challenge: Make global financial markets secure and stable (!) ii) Globalization of finance Makes possible emergence of MNC’s Reduces state control over currency and investment Increases need for cooperation to ensure financial stability 2) Key Mechanisms: a) “Currency Markets”: Private markets where foreign exchange occurs (where currencies are “traded”) E.g. the “exchange rate”: Rate at which one currency can be exchanged for another E.g. $100.00 (CDN) =$78.80 USD (Winter 2015) =$95.76 USD (Fall 2013) =$61.79 USD (Winter 2002) $100.00 (CDN) = e74.23 Euro Why do currencies go up and down in value? State choice Domestic economic policy E.g. Competitive devaluations that led to the “Great Depression” E.g. Lowering interest rates to stimulate economy can reduce value of a currency Market “supply and demand” Large “Balance of Trade” deficit can result in reduced value of currency Currency speculation Real economic performance Currency traders benefit from market fluctuations = instability is “good” – for them! Small currencies are exposed to speculative fluctuations E.g. China (?) – Trade surpluses can increase value of currencies E.g. EU – economic crisis can drive currency down Strength of the currency E.g. Perceived reliability of US $ Key Point: “Currency Markets” have grown(!) Main foreign exchange market turnover, 1988 – 2007, measured in billions of USD. Markets subject states to “discipline” in economic policy . . . this is “new”. E.g. “Bretton Woods”: System of financial management established after WWII protected states from market fluctuations – ended in 1970s. =“Capital Controls”: Formal restrictions on the right to exchange money b) “Balance of Payments”: Flow of money into and out of a country from trade, tourism, investment and borrowing Two main components: Current Account = “Balance of Trade” Capital Account = Measures investment and borrowing flows = $$$ Balance of Payments (2001) In Billions USD United States Germany Current Account Balance of Trade Exports Imports Gov Transactions & Investment income Current Account Balance 998 -1,356 658 -620 -35 -35 -393 3 398 -8 5 -5 Capital Account Net Investment and lending flows in (+) and out (-) of country Reserves Changes in Official Reserves “Balance of Payments” cont . . . Key points: 1) Should balance every year 2) States with “balance of trade” deficits must be capital importers E.g. Foreign Investment Consumer borrowing Government borrowing from foreign sources “Balance of Payments” cont . . . Different from government finances Government’s Annual Budget: Has surpluses and deficits depending on tax revenue relative to spending . . . . National Debt: Money owed by governments because of past deficits Can effect “balance of payments” - but only if deficits and debts are borrowed from foreign sources Current financial positions: Attention to “balance of payments” can change image of power in IR Canada: National Debt: Less than single year of GDP Large annual deficits . . . Early 1980s to late 1990s “Balance of Trade”: Small trade surplus Surplus with US Deficit with rest of world Balance of Payments: Canada a net capital exporter – Canadian outward investment United States: National Debt: Over $17 Trillion(!) More than a single year of GDP Large annual deficits High in early 1980s and early 21st Century “Balance of Trade”: Large trade deficits for decades “Balance of Payments”: Requires capital imports Unsustainable over long term?? Implications? Risk of US decline . . . . Canada? Damage to international financial system? China: National Debt: None “Balance of Trade”: Large trade surplus Surplus with developed countries Deficit with rest of world “Balance of Payments”: China also a net capital importer (???) Results in huge increases in currency reserves More then $1 Trillion (USD) China has “Capital Controls” Implications? “Unbalanced” Global Economy (2000-????) Americans buy too much, make little Pay for it through creative debt – house finances = !!!! Chinese export too much – currency does not go up in value = !!!! What to do with those extra USD $$$$? =Lend them to Americans! Implications? 3) Institutions: Financial instability - exchange rate fluctuations/balance of payments problems – need to be managed! Bad for trade Bad for MNC’s Bad for states and development Requires institutions to coordinate behavior and manage financial system Domestic Institutions - Central Banks: Control monetary policy - influence interest rates Control exchange rate policy - control currency reserves and interest rates Normally “independent” of political control – role is to coordinate policy with other countries to achieve stability E.g. Bank of Canada and U.S. Interest Rates International Institutions: “International Monetary Fund (IMF)”: Established after WWII to manage temporary balance of payments problems Reduces exchange rate volatility Current role – longer term loans to countries facing “debt crisis” – Requires “conditionalities” Supports “Liberalization” and “Deregulation” Run by “weighted voting” Plays favorites? = Harsh treatment of LDC’s in debt “World Bank”: Established after WWII to make long term loans to support development E.g. Reduce capital account deficits of developing countries Also run by weighted voting Loans lower cost than private lending However resources insufficient Developing countries borrow from other sources = high interest and debt problems Both IMF and World Bank subject to heavy criticism E.g. 1)Management of the LDC “debt crisis” 2) Support for economic liberalism and “deregulation” – which has made some problems worse . . . . Marxists, “antiglobalizers” and others point to failures of these institutions 4) Multinational Corporations “Multinational Corporations (MNCs)”: Private enterprises with production, facilities, sales operations and investments in several states Implies control over operations of “subsidiaries” in other countries “Home” and “host” countries??? Can only exist with globalized finance – “currency markets” and no “capital controls” blocking foreign investment Example: General Electric “Based” in US Products? 250 factories in 26 countries Subsidiaries? Consumer electronics, financial services, weapons (tanks, jets and ships), nuclear reactors, WMD’s, and NBC $575,244,000,000 in global assets 1/2 outside the US 315,000 employees outside US Impact of MNC’s? Home Countries? Bring in global profits “Good” jobs Host Countries? Hosts compete to attract MNC investment “Race to the Bottom” – states reduce taxes, environmental standards etc. to attract companies Bad jobs, pollution and profits go elsewhere Power: MNC’s have ability to influence what host states do . . . Obstacles to growth of MNC’s 1) Nationalization by foreign governments E.g. Cuba, Venezuela & Newfoundland 2) Exchange rate fluctuations and instability Increases cost of doing business 5) For Next Time . . . Unit Six: International Political Economy “Environmental Cooperation” Required Reading: Globalization of World Politics, Chapter 22. David Layfield, “International policy on climate change: after Kyoto, what next?” Environmental Politics, 19:4, (2010), Pp. 657-661. (Available from e-journals, or from the instructor.)