International Political Economy

1
International Political Economy
SIS 401 Summer 2005
Wolfram Latsch

• Presentation 2.
• Prosperity and Violence
• The Opportunities and Risks of Exchange

2
Prosperity and Violence

• The importance of comparative development in
  historical perspective
• Growth of per capita incomes and the
  transformation of social and political systems
• Economic transformation
• Political transformation
• (PROSPERITY) (VIOLENCE)

3
Prosperity and Violence

• Economic transformation
• income
• consumption investment
• capital
• returns

sacrifice
Future Present
4
Prosperity and Violence

• Economic development
• Investment, capital formation
• Formation of organizations of production and
  exchange
• __________________________________
• Political development
• Domestication of coercion and violence
• Use of coercion to enforce laws impersonally

5
Prosperity and Violence

• The political foundations of economic
  development
• The decision to form capital,
• and the formation of institutions that render it
  rational to do so

6
Prosperity and Violence

• The Emergence of the State
• The state enforces agreements (contracts) by
  the threat of, or use of, violence (specialist in
  violence)
• This enables contracts and anonymous exchange
  (doing business with strangers)
• The state consists of a set of individuals who
  are subject to a single ultimate third party who
  uses violence for enforcement

7
Prosperity and Violence

• The Emergence of the State
• The state must define and delineate what it
  agrees to protect (rights)
• Only some agreements will be enforced by the
  state, others will be enforced by non-state
  enforcers, using methods other than violence
  (e.g. using long-term relationships)

8
Prosperity and Violence

• Understanding the political foundations of
  economic development
• Bargaining between specialists in wealth
  creation and specialists in violence
• The domestication of violence, restricting the
  threat and use of violence to promote
  wealth-creation

9
The Exchange Diagram

• Economic development
  
• means an increase in the number of transactions
  that are
• spatially separated
• temporally separated
• between people who dont know each other

10
The Exchange Diagram
Genetic distance
unrelated
Spatial distance
distant kin
close kin
Temporal distance
Borrowing, lending
(inter-temporal allocation of resources)
11
The Exchange Diagram
Genetic distance
unrelated
Globalization
Spatial distance
distant kin
Trading diaspora
close kin
Temporal distance
Origin
Robinson Crusoe
12
Exchange Diagram

• Transaction costs increase away from
  origin and along the axes
• more exchange with strangers
• exchange over greater distances
• exchange over time
• (separation of Quid and the Quo,
  borrowing, lending)

Genetic distance
unrelated
Spatial distance
distant kin
close kin
Temporal distance
13
Exchange Diagram

• Transaction costs increase away from
  origin and along the axes
• more exchange with strangers
• exchange over greater distances
• exchange over time
• (separation of quid and pro, borrowing,
  lending)

Genetic distance
unrelated

• Exchange and production involve transactions
  between parties (individuals, firms etc.)
• Transactions typically involve changes in
  ownership (i.e. an exchange of property rights)
• Changes in ownership are costly
• what has been exchanged, and when?
• is it of the right quantity and quality?
• will the other party comply?
• if not, can the contract be enforced?
• what will enforcement cost?
• The costs involved when ownership changes are
  called transaction costs.
• The higher these costs, the lower the volume of
  transactions

Spatial distance
distant kin
close kin
Temporal distance
14
Exchange Diagram

• Transaction costs increase away from
  origin and along the axes
• more exchange with strangers
• exchange over greater distances
• exchange over time
• (separation of quid and pro, borrowing,
  lending)

Genetic distance
unrelated
Exchange and production involve transactions
between parties (individuals, firms
etc.) Transactions typically involve changes in
ownership (i.e. an exchange of property
rights) Changes of ownership take place in
markets Well-functioning markets permit a greater
volume of transactions Well-functioning markets
are more competitive Well-functioning markets
lower transaction costs Access to markets
determines transaction costs Regulating access
to markets is a source of political and economic
power
Spatial distance
distant kin
close kin
Temporal distance
15
Exchange Diagram

• Transaction costs increase away from
  origin and along the axes
• Institutions aimed at reducing transaction
  costs allow expansion along axes
• Expansion along axes allows gains from trade in
  space and time
• Gains from trade allow greater prosperity

Genetic distance
unrelated
Spatial distance
distant kin
close kin
Temporal distance
16
The Exchange Diagram

• Emergence of new opportunities
• Specialization and gains from trade
• (based on comparative advantage)
• Growth of economic networks
• (interconnected markets, interconnected
  producers and consumers)
• Growth of prosperity

17
The Exchange Diagram

• Emergence of new risks
• Threat of systemic network failure
• as the number of connections within a network
  grows
• More effective transmission of shocks
• (increased synchronization of business cycles)

18
Global Synchronization
The Economist November 11th 2004
19
The Exchange Diagram

• The balance of risks and opportunities
• Positive network effect
• the value of a network increases as the number
  of nodes or terminals increases
• Negative network effect
• the vulnerability of a network increases with
  the number of nodes or terminals connected to
  it

20
The Exchange Diagram

• The balance of risks and opportunities
• Trade-off between the positive network effect
  of an increased division of labor, and the
  reliability of a larger network of transactions
• Greater prosperity increases the likelihood of a
  large-scale coordination failure
• Great Depression, Asian crisis

21
The Exchange Diagram

• The balance of risks and opportunities
• Emergence of
• fiscal and monetary management of the business
  cycle (stabilization policy)
• Emergence of
• social insurance to buffer impact of crises

Workers compensation, old age insurance,
unemployment insurance, disability insurance,
welfare programs
22
The Exchange Diagram

• The balance of risks and opportunities
• Emergence of
• organizations that manage international economic
  relations
• (IMF, World Bank, WTO etc.)

23
Distance Diagram

• Insurance mechanisms can
• limit the downside or the volatility of
  outcomes, while enabling the exploitation of the
  upside of greater networks and integration
• help cope with negative effects and with
  transitions between regimes

Genetic distance
unrelated
Spatial distance
distant kin
close kin
Temporal distance