GO 357 The Political Economy of Regionalism Walter Hatch Colby College Lecture Two

Economic concepts Comparative advantage theory Comparative advantage theory Heckscher-Ohlin Heckscher-Ohlin Stolper-SamuelsonStolper-Samuelson Consumer surplus Consumer surplus Producer surplus Producer surplus IPEP (“import protection as export promotion”) or Strategic trade theory IPEP (“import protection as export promotion”) or Strategic trade theory Returns to scale Returns to scale Economies of scale Economies of scale

Comparative Advantage TVsBeerAutarky Ratio Country A1 hour (to make one unit) 3 hours (to make a six pack) 1 B: 3 TV 1 TV: 1/3 B Country B2 hours (to make one unit) 4 hours (to make a six pack) 1 B: 2 TV 1 TV: ½ B

Heckscher-Ohlin Theorem A country will tend to export the commodity that more intensively uses its relatively abundant factor of production, and will import the commodity that more intensively uses its relatively scarce factor of production A country will tend to export the commodity that more intensively uses its relatively abundant factor of production, and will import the commodity that more intensively uses its relatively scarce factor of production Why? Why? Difference in relative price of commoditiesDifference in relative price of commodities Gains from specializationGains from specialization Assumes Assumes No transportation costs or trade barriersNo transportation costs or trade barriers Perfect competitionPerfect competition Constant returns to scaleConstant returns to scale Commodities always show different intensitiesCommodities always show different intensities Country production functions are identicalCountry production functions are identical Country tastes are identicalCountry tastes are identical

Stolper-Samuelson Theorem Owners of the abundant factor will enjoy increasing real income; while owners of the scarce factor will suffer decreasing real income Owners of the abundant factor will enjoy increasing real income; while owners of the scarce factor will suffer decreasing real income Why? Why? Factor prices equalize as trade deepensFactor prices equalize as trade deepens Assumes Assumes Full employmentFull employment Countries face same product pricesCountries face same product prices Countries have same technologyCountries have same technology Constant returns to scaleConstant returns to scale

Consumer surplus

Producer Surplus

Returns to scale Inputs (K,L) Output (Q)

Economies of Scale Quantity of Production Cost of Production

Strategic Trade Theory Government intervention may enhance net welfare if there is Government intervention may enhance net welfare if there is Imperfect competition (monopoly or oligopoly)Imperfect competition (monopoly or oligopoly) Positive spillovers (technology)Positive spillovers (technology) What about retaliation? What about retaliation?

Political Science concepts Hegemony Hegemony Collective action problems Collective action problems Public goods and free-ridingPublic goods and free-riding Information asymmetryInformation asymmetry Trust Trust Norms Norms Imperialism Imperialism Dependence Dependence

Hegemony Condition in which a dominant power exists Condition in which a dominant power exists “first among equals”“first among equals” Other states may balance against or bandwagon with the hegemon Other states may balance against or bandwagon with the hegemon Depends in part on hegemon’s behaviorDepends in part on hegemon’s behavior

Collective action problems Competition doesn’t always produce best outcome Competition doesn’t always produce best outcome Cooperation/collective action neededCooperation/collective action needed But collective action invites cheating But collective action invites cheating

Public goods Clean air, collective security (freeway? the ocean?) Clean air, collective security (freeway? the ocean?) Two conditions Two conditions Non-rivalrous (one person’s consumption of that good does not reduce its supplyNon-rivalrous (one person’s consumption of that good does not reduce its supply Non-excludable (provider cannot exclude others)Non-excludable (provider cannot exclude others) Supply constrained by “free riding” Supply constrained by “free riding”

Information Asymmetry Incomplete knowledge Incomplete knowledge “Market for lemons” “Market for lemons” A “prisoners’ dilemma” (game theory) A “prisoners’ dilemma” (game theory)

Prisoners’ Dilemma Player A Player B CooperateDefect Cooperate4,41,6 Defect6,12,2

Trust The best way to overcome collective action problems The best way to overcome collective action problems How to obtain it How to obtain it Playing repeat gamesPlaying repeat games Taking hostagesTaking hostages Making credible commitmentsMaking credible commitments Sharing fundamental norms or valuesSharing fundamental norms or values

Norms Standards of behavior Standards of behavior Two kinds Two kinds Regulatory: explicitly defined rulesRegulatory: explicitly defined rules Constitutive: “taken for granted” valuesConstitutive: “taken for granted” values

IPE Theories Realism Realism Liberalism (or institutionalism) Liberalism (or institutionalism) Constructivism Constructivism Marxism-Leninism Marxism-Leninism

Realism A Hobbesian system A Hobbesian system States want to surviveStates want to survive Power politicsPower politics Hegemonic stability theory Hegemonic stability theory Explaining the liberal international economic orderExplaining the liberal international economic order Hegemon tolerates free-riding, supplies the public goodHegemon tolerates free-riding, supplies the public good Apply to regionalism? Apply to regionalism?

Liberalism International system has order International system has order Individuals want wealth; states willing to cooperate to get itIndividuals want wealth; states willing to cooperate to get it States build institutions to overcome collective action problems States build institutions to overcome collective action problems Apply to regionalism? Apply to regionalism?

Constructivism The international system is socially constructed (not necessarily Hobbesian) The international system is socially constructed (not necessarily Hobbesian) But actors are driven more by constitutive than regulatory norms But actors are driven more by constitutive than regulatory norms Culture (“collective identity) mattersCulture (“collective identity) matters Apply to regionalism? Apply to regionalism?

Marxism-Leninism Marx: not an IPE thinker Marx: not an IPE thinker Lenin: Monopoly capital --> imperialism Lenin: Monopoly capital --> imperialism Dependency theory: Dependency theory: In “crude” version, the rich countries exploit the poorIn “crude” version, the rich countries exploit the poor In “sophisticated” version, triple alliance of host state, foreign capital, domestic capital produces dependent developmentIn “sophisticated” version, triple alliance of host state, foreign capital, domestic capital produces dependent development World System Theory (Wallerstein): World System Theory (Wallerstein): Core, semi-periphery, and peripheryCore, semi-periphery, and periphery Apply to regionalism? Apply to regionalism?