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Global Political Economy lecture notes 1-6
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This document contains notes of the first six lectures of Global Political Economy.
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Lecture 1 International EconomicsInternational Economics
1st: International trade
That is, trade of goods and services across borders.
Trade that involves dealing with more than one sovereign government.
More than one monetary regime, set of laws.
This can lead to any number of ‘complications’ as deals are made.
o Trade regulation affects markets.
o But Int’l trade can also be extremely lucrative.
o And, arguably, it can help people in both countries.
o Though, of course, it might hinder some people in one or both countries.
2nd: International Production
So, producing goods and services across borders.
Your smartphone might have been made in 40 different countries.
Many manufactured goods now are produced from highly international networks.
How does this get regulated? Who creates enough stability for this to remain profitable?
3rd: International Financial Systems
Foreign exchange.
Every time you move into another currency area, you are subject to additional risk.
Also, credit can be given or withdrawn, leaving a small economy in shambles.
FDI is covered here as well.
4th: International Development: how do capital flows impact economic development, especially in
‘developing’ countries: this is more handled in GPE even though there are chapters in our book
(Reinert).
Does this impact me?
You might have heard of the notion of globalization.
When did globalization start? 1990s onwards?
Establishment of the WTO (1995): Global Trade gets teeth.
But globalization arguably started in the 1870s-1914:
o First ‘golden age’ of international capital. Aka heyday of the British empire.
o Global economy united under the pound and the gold standard.
Before 1945 however politicians tend to act as though the global economy as a ‘zero sum
game’. This meant, if I didn’t grab land and use it for resources and markets, then someone
else would.
This economic model fueled the political model of colonialism and was based on the old
theory of mercantilism.
Mercantilism
Metropole: centre of production.
Manufactured goods are as a rule far more profitable to produce – contain more value
added, than raw materials. So, mercantilists want production to be ‘at home’.
How to get raw materials for production – e.g. cotton for textile mills?
, You could buy them on a competitive international market or, you could take colonies, and
extract raw materials a monopsonistic prices (monopsony= only one buyer).
You then produce goods at home, and sell at home.
But also use the colonies (e.g. India), as a forced market, where you have a monopoly as a
seller.
Meanwhile, other ‘powers’ are jockeying to gain the most colonies, and most raw materials,
and markets, so that they can gain the most value added.
Most wealth = most military power = most economic power = etc.
But during the 1930s, and 1940s, the Anglo-American economists began to push a new idea.
Trade: The Non-Zero-Sum Game
The idea was that, instead of competing amongst each other for colonies and captive market
why not create a new international order based on Ricardo’s old idea, that trade, via
comparative advantage, would enrich everyone?
International trade would create more wealth than would autarky, even with colonies.
This would create incentives to work together, rather than compete.
It would also create development and it would cement the world into one big capitalist-
democratic family.
This was extremely radical: and (I think ironically) many still view it cynically – even though it
was the main cause of the end of colonialism (!).
But, to have the major powers create a whole economic system based on accountability,
democracy, good government, trust, rule of law, and on human rights and dignity…
This was the dream; and in many ways it has delivered, and continues to lift people out of
poverty.
Before Covid, by 2030, no extreme poverty. So people bought into it: it ‘won’ by selling not
only a promise, but real prosperity for the ‘middle classes’ and those who aspired to be like
them.
Bretton Woods System
Goal: to foster world trade and democracy.
Includes: United Nations, IMF, World Bank, GATT/WTO, OECD.
Global currency union under the USD (until 1971).
Increasing cooperation.
Free movement of capital, goods, and people across borders, with minimal restrictions or
tariffs.
Globalization: Rise and Decline
Thus, Globalization has been happening since before WWI (with the UK as hegemon) and,
since WWII (with the US as hegemon).
It was believed in 1989 that Russia would join the global order.
o Fukuyama’s End of History.
And that since 1997, that China would also join this global order.
And we would be one big democratic-capitalist economy.
Since the 1980s, world leaders acted as though globalization was inevitable.
Globalization
What are anti-globalists’ economic concerns?
Immigrants
, o Depresses wages
Threat of moving companies overseas
o Worsen working conditions
o Help union busting
o Reduce workers’ bargaining power
Foreign investment
o Increase housing prices in cities
o Increased debt levels
In general:
o Reduce standards of living
o Increase instability / quality of life
Globalization and International Trade
But international economists will say: pish. Overall it is the best option.
International trade enriches everyone. It creates more wealth than autarky.
Look at the lower price of goods. People now can buy shoes, shirts, appliances, phones, for
far less than they could in the 1960s and 70s. In those times, many children still went to
school without shoes, parents did not all have refrigerators, etc.
Quality of life has gone way up.
Global Poverty is rapidly decreasing: it is at an all-time low.
This is despite huge population increases.
And it corresponds with the ‘golden age’ of globalization and Bretton Woods.
So who is right?
Reality is complex.
International trade indubitably creates more wealth than autarky. It raises living standards.
But, raised living standards also depend upon a social safety net.
Governments have to intervene in markets, to reduce exploitation of the poor, or else
capitalism will look like the 19th century.
In other words, capitalism only works well if it has some government intervention, i.e.,
‘socialist’ elements (even in the US, the New Deal created a vast safety net compared with
pre-New Deal).
International Trade
In your book, Reinert attempts to make the case in favor of international trade for the most
part.
Most economists believe that in the aggregate, international trade is better than not.
We will in the first half of GPE, focus on the case for trade, looking at it critically, but
assuming that this is better than autarky.
International Trade: Absolute Advantage
In order to understand the case for international trade, one needs to look at international
trade theory. We begin with the theory of Absolute Advantage. It is a simple concept,
explained in Chapter 2.
It just means that one country can produce a product more cheaply than another. Thus, that
country will export to another country.
For example, Vietnam could in 1990 produce rice more cheaply than Japan. Thus, it began to
export rice to Japan.
, International Trade
Now, some in Vietnam went hungry, yet the country exported rice. Why?
Because, the argument is that the extra currency from rice exports could be used to better
wages in Vietnam. Also, be used to create more industry and infrastructure. And thus initiate
a self-reinforcing cycle of development.
In this way Vietnam entered the global economy- from being poor and backward, it began to
develop.
Gains from trade: cause countries to initiate trading partnerships.
S/D Basics Refresher
Supply curve:
Changes in Quantity Supplied, are indicated by movements along the supply curve.
Indicates that as price increases, firms supply more.
Changes in Supply, are shifts in supply curve.
Can happen from:
o Changes in input or factor prices (wages, raw materials).
o Technology
▪ Can enable more output from the same factor inputs.
▪ At every price.
Demand curve:
Changes in Quantity Demanded are movements along the demand curve.
As price goes down, people demand more.
Changes in demand = shifts in demand curve.
Preferences can shift demand at a given price (i.e. as countries become richer, less desirable
animal parts are made into dog food, but in poor countries they are consumed by people).
International Rice Market
Assume the same demand conditions. Trade often arises due to differences in supply rather
than demand conditions.
We assume that supply conditions are different.
Supply curve for Vietnam is farther to the right than supply curve for Japan. This means that
at every price, Vietnam supplies more rice than Japan.
Why is S curve further right? Technology superior? Inputs cheaper?
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