International Political Economy

1
International Political Economy

• A Primer

2
Topics

• The World of Free Trade
• Currency Trade

3
International Political Economy

• Highlights the intersection of politics and
  economics
• Following WWII, U.S. lead effort to construct an
  international order that permitted trade to
  flourish.

4
Beggar-thy-neighbor policies

• These policies characterized international
  commerce during the 1930s
• The idea behind these policies is that economic
  competition is a zero-sum game
• Prisoners Dilemma

5
GATT

• General Agreement on Tariffs and Trade (became
  the WTO) created in 1947
• Goal is to maximize growth in world trade through
  a reduction in trade barriers pursued on a
  nondiscriminatory basis.
• Stag Hunt

6
International Monetary Fund

• Part of the free trade regime created by the U.S.
  and its allies after WWII
• Designed to promote the stability and
  liberalization of international monetary
  transactions
• The IMF provides temporary loans to states that
  face temporary balance of payments problems

7
What are a states balance of payments?

• Consists of a comparison of all the payments the
  state and its residents made to foreign companies
  with the total of all receipts obtained from
  abroad by the state and its residents during the
  same year
• Any expenditure or movement of finances abroad
  contributes to a states payments deficit.
• Any purchases from abroad or movement of finances
  into the country contributes to a balance of
  payments surplus

8
Example
500 Rupees
1000 Rupees
India has a balance of payments deficit of 500
Rupees
9
Balance of payments deficits

• States that find themselves with persistent
  balance of payments deficits must find ways to
  restore a situation of financial equilibrium
• Those with surpluses are under less pressure to
  adjust because they make more than they spend

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Three strategies

• Internal adjustment mechanisms
• Any mechanisms designed to decrease a states
  purchases abroad by reducing expenditures
• E.g., raising taxes or interest rates
• Internal mechanisms entail economic and political
  costs to the state (or elements within it)

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Three strategies

• External adjustment policies
• Designed to restore equilibrium to a country by
  altering the terms of exchange for foreign
  economic transactions.
• E.g., tariffs, quotas, and currency devaluations
• External mechanisms place the burden of
  adjustment primarily on citizens from other
  countries

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Three strategies

• Liquidity mechanisms
• States with access to financial assets in the
  form of gold-holdings accumulated reserves of
  foreign currency from past balance of payment
  surpluses can restore their balance of payments
  equilibrium.
• Liquidity solutions to balance of payment
  deficits are provided by the IMF.

13
The International Monetary System

• How do states trade with one another given their
  different currencies?
• The monetary system establishes a common
  framework within which states can determine the
  relative value of their currencies.
• Currency rates of exchange express the value of
  one currency in relation to others

14
The Bretton Woods System

• The rules, institutions, and decision making
  procedures for determining the relative value of
  currencies was developed in Bretton Woods, New
  Hampshire in 1944.
• At a conference held in Bretton Woods the U.S.
  dollar became good as gold.

15
The importance of the U.S. dollar

• The U.S. fixed the value of the dollar at 35 per
  ounce of gold it held in reserve.
• The dollar became a parallel currency currency
  it was universally accepted as the currency
  against which all others were sold or redeemed in
  exchange markets.
• The Bretton Woods system was a fixed exchange
  rate system

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The end of fixed exchange rates

• By the 1960s, there were too many dollars
  available.
• Possibility of U.S. devaluation led other states
  to lose confidence in the U.S. dollar.
• U.S. suffers its first trade deficit in the 20th
  century in 1971.
• Nixon announces the U.S. will no longer exchange
  dollars for gold in August 1971.
• Move to floating exchange rate system