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International Economics and Organisations
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INTERNATIONAL ECONOMICS AND ORGANISATIONSINHOUDSTAFEL
1. OVERVIEW OF THE COURSE ..................................................................................................................................... 3
2. INTRODUCTION GPG AND BOP ................................................................................................................................ 3
2.1 INTERNATIONAL ECONOMICS: A ‘GLOBAL PUBLIC GOODS‘ APPROACH .......................................................................... 3
2.2 THE CONCEPT OF THE BALANCE OF PAYMENTS............................................................................................................... 5
2.2.1 Imbalances ............................................................................................................................................................... 5
2.2.2 Economic perspective of BoP ................................................................................................................................... 9
3. CAPITAL ACCOUNT OPENNESS, CAPITAL FLOWS, AND THE LINK WITH GROWTH AND CRISIS ..................................... 11
3.1 DEFINING AND MEASURING CAPITAL ACCOUNT OPENNESS ......................................................................................... 11
3.2 GLOBAL CAPITAL FLOWS................................................................................................................................................. 12
3.2.1 ‘De jure’ versus ‘de facto’ capital openness .......................................................................................................... 13
3.2.2 An explanatory framework .................................................................................................................................... 17
3.3 SOME POLICY IMPLICATIONS .......................................................................................................................................... 21
4. EXCHANGE RATES ................................................................................................................................................. 22
4.1 EXCHANGE RATES REGIMES ........................................................................................................................................... 23
4.1.1 Flexible or floating .................................................................................................................................................. 23
4.1.2 Fixed ....................................................................................................................................................................... 24
4.1.3 Pegged or managed float ....................................................................................................................................... 25
4.2 EFFECTIVE EXCHANGE RATE ........................................................................................................................................... 26
4.3 SPOT VERSUS FORWARD EXCHANGE RATES .................................................................................................................. 27
4.4 INTEREST RATE PARITIES ................................................................................................................................................ 29
4.4.1 The covered interest rate parity ............................................................................................................................ 29
4.4.2 The uncovered interest rate parity ........................................................................................................................ 32
4.5 THE TOBIN TAX ............................................................................................................................................................... 33
5. INTERNATIONAL FINANCIAL CRISIS: CONCEPTS AND INSTITUTIONS ......................................................................... 35
5.1 BANKING CRISIS .............................................................................................................................................................. 35
5.1.1 Introduction............................................................................................................................................................ 35
5.1.2 The standard banking model.................................................................................................................................. 35
5.1.3 Main evolving issues .............................................................................................................................................. 36
5.1.4 Main occurrences ................................................................................................................................................... 37
5.2 EXCHANGE RATE CRISIS .................................................................................................................................................. 38
5.3 DEBT CRISIS ..................................................................................................................................................................... 39
5.4 CONSEQUENCES OF CRISES ............................................................................................................................................ 41
5.5 THE INTERNATIONAL MONETARY FUND (IMF) .............................................................................................................. 41
5.5.1 Basic introduction .................................................................................................................................................. 41
5.5.2 Sources and use of funds ....................................................................................................................................... 43
5.5.3 Main problem areas ............................................................................................................................................... 44
5.5.4 Governance of the IMF........................................................................................................................................... 44
6. INTERNATIONAL FINANCIAL CRISIS IN PRACTICE ..................................................................................................... 45
6.1 LATIN AMERICAN DEBT CRISIS (1982-) ........................................................................................................................... 46
6.2 MEXICAN PESO CRISIS (1994-1995) ................................................................................................................................ 47
6.3 ASIAN CURRENCY CRISIS (1997-1998) ............................................................................................................................ 48
6.4 GLOBAL FINANCIAL AND ECONOMIC CRISIS (2007-) AND EURO DEBT CRISIS (2011-)................................................... 49
7. LESSONS FOR THE INTERNATIONAL MONETARY SYSTEM (IMS) ................................................................................ 53
7.1 THE IMF ........................................................................................................................................................................... 53
7.2 THE STATUS OF THE US$ IN THE CURRENT IMS ............................................................................................................. 54
7.3 PROBLEMS OF THE CURRENT IMS .................................................................................................................................. 57
7.4 TOWARDS A BROADER GLOBAL FINANCIAL ARCHITECTURE.......................................................................................... 58
7.4.1 The global development (finance) architecture..................................................................................................... 59
7.4.2 The global financial institutions (‘banking’) architecture ...................................................................................... 61
7.5 THE WORD BANK GROUP ............................................................................................................................................... 61
8. INTERNATIONAL TRADE, THE WORLD TRADE ORGANIZATION, AND PREFERENTIAL TRADE AGREEMENTS .................. 64
8.1 THE WTO: WHAT?........................................................................................................................................................... 64
8.1.1 A set of liberalization commitments & rules.......................................................................................................... 64
8.1.2 A negotiation forum ............................................................................................................................................... 66
8.1.3 An institution for enforcement .............................................................................................................................. 67
8.2 TWO COLLECTIVE ACTION PROBLEMS............................................................................................................................ 68
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, 8.2.1 International cooperation ..................................................................................................................................... 68
8.2.2 Domestic commitment ........................................................................................................................................... 70
8.3 PREFERENTIAL TRADE AGREEMENTS & THE WTO: INCOMPATIBLE OR COMPLEMENTARY? ........................................ 71
8.3.1 Preferential Trade Agreements (PTAs): undermining the WTO? .......................................................................... 71
8.3.2 A political economy of trade agreements (1) ........................................................................................................ 71
8.3.3 Why PTAs then? ..................................................................................................................................................... 73
8.3.4 Intermediate conclusion on PTAs .......................................................................................................................... 74
8.4 CONCLUSION: MULTILATERALISM & BILATERALISM: CONFLICTUAL OR COMPLEMENTARY? ....................................... 75
9. OVERALL TRENDS IN INTERNATIONAL TRADE, EVOLUTION OF TRADE POLICY & THE GLOBALIZATION PROCESS ......... 77
9.1 GLOBALIZATION AND THE EVOLUTION OF TRADE ......................................................................................................... 77
9.1.1 Conceptualizing globalization ................................................................................................................................ 77
9.1.2 Evolution of trade ................................................................................................................................................... 78
9.1.3 Re-examining some myths regarding trade and the globalization process........................................................... 79
9.1.4 Concluding remarks ................................................................................................................................................ 87
9.2 WHY DO COUNTRIES TRADE? AN OVERVIEW OF KEY THEORETICAL APPROACHES ...................................................... 88
9.2.1 Why do countries trade? ........................................................................................................................................ 88
9.2.2 Comparative Advantage and Opportunity Cost ..................................................................................................... 88
9.2.3 Limitations of the Ricardian model ........................................................................................................................ 90
9.2.4 “New” Trade Theory............................................................................................................................................... 93
9.2.5 Conclusion .............................................................................................................................................................. 94
10. THE POLITICAL ECONOMY OF TRADE POLICY......................................................................................................... 95
10.1 TRADE POLICIES FROM A HISTORICAL PERSPECTIVE: AN OVERVIEW AND THE ISI VIS-À-VIS EOI DEBATE .................. 95
10.1.1 Import-Substituting Industrialization (ISI)............................................................................................................ 95
10.1.2 Trade Liberalization .............................................................................................................................................. 95
10.2 THE TAKE-OFF OF ASIA & THE EAST ASIAN MIRACLE ................................................................................................... 97
10.2.1 Trade and Growth and the Take-off of Asia ......................................................................................................... 97
10.2.2 The East Asian Miracle study (1993) .................................................................................................................... 98
10.2.3 ISI vis-à-vis EOI: Some conclusions... .................................................................................................................. 100
10.3 INTERNATIONAL TRADE POLICY AND POLITICAL ECONOMY CONSIDERATIONS ....................................................... 101
10.3.1 Political economy approaches regarding trade policy ....................................................................................... 101
10.3.2 The Cases Against Free Trade ............................................................................................................................ 104
10.3.3 Political Models of Trade Policy ......................................................................................................................... 105
10.3.4 The WTO ............................................................................................................................................................. 106
10.4 THE GLOBALIZATION TRILEMMA AND POLITICAL ECONOMY ................................................................................... 106
11. THE TRADE-GROWTH NEXUS AND IMPLICATIONS FOR POVERTY REDUCTION; RECENT IMPLICATIONS OF THE COVID-
19 PANDEMIC FOR TRADE POLICY............................................................................................................................ 110
11.1 THE TRADE-GROWTH NEXUS...................................................................................................................................... 110
11.2 SOME STYLIZED FACTS ABOUT POVERTY INCIDENCE ................................................................................................. 112
11.3 TRADE, GROWTH AND POVERTY: THE LINKAGES ....................................................................................................... 114
11.3.1 Trade and growth linkages ................................................................................................................................. 114
11.3.2 Transmission Mechanisms ................................................................................................................................. 116
11.4 TRADE AND POVERTY: THE EMPIRICAL EVIDENCE AND EMERGING POLICY ISSUES .................................................. 117
11.4.1 The empirical evidence ...................................................................................................................................... 117
11.4.2 The empirical evidence & emerging policy issues ............................................................................................. 119
11.5 TRADE AND THE COVID-19 PANDEMIC: STYLIZED FACTS, TRENDS & POLICY CHALLENGES ...................................... 120
11.5.1 Is Covid-19 changing everything? ...................................................................................................................... 120
11.5.2 Forecasts on key variables due to Covid-19 ....................................................................................................... 124
10.5.3 Policy changes .................................................................................................................................................... 125
11.5.4 Conclusion .......................................................................................................................................................... 126
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, 1. OVERVIEW OF THE COURSE
Main focus on finance and trade. Introduction for non-economics. Focusing on policies, understanding
the basic theories. Second part is eco institutions, basic introduction to some big org. 4 classes
referring to inntl finance, 4 classes intl trade . (zie kalender)
Exam: 3 questions for each part (of which to select and answer 2) in a 50%/50% division of marks. Each
question on 5 points.
2. INTRODUCTION GPG AND BOP
2.1 INTERNATIONAL ECONOMICS: A ‘GLOBAL PUBLIC GOODS‘ APPROACH
Central concept when we discuss intl eco&instit, notion of global public goods. Typically, this notion
originates from the concept of public goods in a national setting.
What are public goods? A public good has some particular characteristics:
- The first one is not-exclusion: once this good is produced (good: very generic sense, can be
anything, doesn’t need to be material), you cannot exclude people from enjoying/using the
good.
- Second one is non-rivalry in consumption: it’s not because I consume the good, that another
person cannot enjoy the good. My consumption of the good, does not reduce your ability to
use the good.
Ex. Transport.
They oppose to another category of goods: private (market produced) goods. The private market
mechanism: if you want to use that good you have to pay for it. If you use it and consume it, it is no
longer available for others to enjoy.
To make it more generic: private goods are those produced by the market mechanism (regulate
production and consumption of these goods).
There are goods/services that have those 2 characteristics (non-excl, non-riva) and so the market
mechanism doesn’t work. The market cannot get any compensation for it, because of free riding. Why
would you pay if it is freely accessible. Everyone wants the services, but no one is prepared to pay for
them.
F.e. clean air, public lighting.
How do you cure underprovision? You rely on the public sector. Either we produce it ourselves, or we
intervene in the market, we change the behaviour in such a way that this desirable thing is produced
in sufficient quantities. Typically the government steps in, financed by taxes. F.e. You can set up
institutions specifically set up to produce those goods. That’s why you need rules, agreements… You
cannot rely on the market mechanism for those things to automatically happen. You cannot rely on
voluntary.
In practice there are types of public goods:
- Quasi-public goods: comply with one characteristic not the other.
- Joint products: comply with market mechanism, but they have public characteristic eg. Public
transport.
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, Link to global public goods. Applying this concept to the international level. There are certain desirable
goods and services that we should try to provide in sufficient quantities, that are not enough produced
if we leave it to the market AND individual countries. Why would there be underprovision? Because
there is free riding at the level of states, countries. You should provide those, but we are not going to
pay for it. It relates to world problems: “global public bads”. Global public good: clean air, global public
bad: pollution. They need to be resolved and need some kind of international agreement, intl rules,
intl institutions to be dealt with. They have cross-border, transnational nature.
With globalization, what happens? More of these public goods that initially are only national; become
international. Some have always been intl such as pollution, but some are new because of
globalization. On top of national interventions, you also need international intervention. Institutions
as provider of global public goods.
Different technologies of provision exist. What are tech of provisions? Deals with the relationship
between indi efforts, what you and I do individually in terms of adding to the supply of a global public
good AND the total end of supply of the public good. How does the individual contribution translate
into the total? 3 main technologies of provision:
- Summation: the total is just a simple sum of the individuals. Eg. Pollution. Suppose you do an
intervention that reduces pollution, what is the contribution of each to the total? Sum of what
we all do together collectively. If you do more the effect on the total is higher. What does that
mean to policy consequences? What’s the policy message? Everyone counts, everyone
matters. What you do is important. The more you do the better the result. Aren’t all public
goods produced according to this summation technology? No. there are at least 2 others, that
may have completely different policy consequences.
- Weakest link: You are just as strong as your weakest link. The effect of everyone’s
contributions is not the sum of what we all do together, but the sum of that person that does
the least. Eg. Suppose we are all on an island surrounded by water, we all have our own plot
of island and each of us has a piece that is bordering the water, everyone has a coast.
Globalization means for the rest no fences between the plots of lands, even though everyone
knows their own piece. What is the big danger that we want to protect ourselves against?
Water rising, because then our land is flooded. So we all build dams. Soe may build very high
ones, some very low, some may be free riding and sayin idgaf im not going to use my own
resources. If someone did not build a dam, the water rises, the water crosses the part with no
protection, it will not only flood your piece of land, but the whole land. What si our level of
protection against these floods? The level of the lowest. It has no effect whatsoever if all the
others build super high dams. We are collectively protected only for the level of the lowest.
In terms of policy consequences, the level is completely different: you should target the
weakest link. He/she matters most. An intervention is only efficient when targeted at that
weakest link. It has no sense at all to target it at a different person.
Eg. Application in intl economics: creation of intl financial stability. Global public bad: global financial
crisis. We try to prevent this. Weakest link: what will happen if the world is financially globalized, cross-
border transactions, if there is a financial crisis in 1 country, there is a high probability that this spills
over to other countries and becomes a global crisis. Fe. The IMF can be looked upon from that
perspective. We have to focus on the weakest link if we want to prevent a global financial crisis.
Countries where there is a high probability where a financial crisis will start. The IMF should target
these countries.
There global financial crisis started in the US.
- Best shot: the effect is determined by the effort of the strongest, the one with the highest
contribution. Eg. When we try to find new vaccines, new drugs. We want to have a vaccine
asap, how are we going to direct our resources? It is most effective to target our contributions
to our best shot, one that has proven to have the capabilities and capacities to succeed. It’s
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