POSC 2200 – International Political Economy Russell Alan Williams Department of Political Science

Unit Seven: International Political Economy "Business and Finance" Required Reading: Mingst, Chapter 9. Mingst, Chapter 9. Scott, The Great Divide in the Global Village, Mingst and Snyder, pp Scott, The Great Divide in the Global Village, Mingst and Snyder, pp Outline: 1. Introduction - Finance and Investment 2. Exchange Rate & Balance of Payments 3. Institutions 4. Multinational Corporations

1) Introduction - Finance and Investment: System of finance and currency exchange vital Without it there would be: Without it there would be: No Trade No Trade No Travel No Travel No Development No DevelopmentChallenges: i) National currencies versus international markets Must be confidence in the system of exchange Must be confidence in the system of exchange Need a management system that ensures: Need a management system that ensures: Convertibility Convertibility Liquidity Liquidity Stability Stability

Historically: “Gold Standard” ensured this... Historically: “Gold Standard” ensured this... Money could always be converted into precious metal – kept currencies stable Money could always be converted into precious metal – kept currencies stable Modern money is abstract – value driven by perception Modern money is abstract – value driven by perception International Challenge: Make global financial markets secure and stable (!) ii) Globalisation of finance Makes possible emergence of MNC’s Makes possible emergence of MNC’s Reduces state control over currency and investment Reduces state control over currency and investment Increases need for cooperation to ensure financial stability Increases need for cooperation to ensure financial stability

2) Exchange Rate & Balance of Payments: a) Exchange rate: Rate at which one currency can be exchanged for another E.g.$ (CDN)=$97.9 E.g.$ (CDN)=$97.9 =$80.5 US ( Mar 2009! ) $ (CDN) = e72.5 Euro Historically? Historically? Why do currencies go up and down in value?

State Choice State Choice Domestic Economic Policy Domestic Economic Policy Market Supply and Demand Market Supply and Demand

Currency Speculation Currency Speculation Real Economic Performance Real Economic Performance Strength of the Currency Strength of the Currency

b) “Balance of Payments”: Flow of money into and out of a country from trade, tourism, investment and borrowing Two main components: Two main components: Current Account – Measures trade flows Current Account – Measures trade flows Capital Account – Measures investment and borrowing flows = $$$ Capital Account – Measures investment and borrowing flows = $$$

Balance of Payments (2001) In Billions USD United StatesGermany Current Account Balance of Trade  Exports  Imports , Gov Transactions & Investment income -35 Current Account Balance Capital Account Net Investment and lending flows in (+) and out (-) of country Reserves Changes in Official Reserves 5-5

“Balance of Payments” cont... “Balance of Payments” cont... Key points: Key points: 1) Should balance every year 2) States with trade deficits must be capital importers E.g. Foreign Investment E.g. Foreign Investment Consumer borrowing Government borrowing from foreign sources

“Balance of Payments” cont... “Balance of Payments” cont... Different from government finances Different from government finances Government’s Annual Budget: Government’s Annual Budget: Has surpluses and deficits depending on tax revenue relative to spending.... Has surpluses and deficits depending on tax revenue relative to spending.... National Debt: Money owed by governments because of past deficits National Debt: Money owed by governments because of past deficits Can effect “balance of payments” - but only if deficits and debts are borrowed from foreign sources Can effect “balance of payments” - but only if deficits and debts are borrowed from foreign sources

Current financial positions: Attention to “balance of payments” can change image of power in IR Attention to “balance of payments” can change image of power in IRCanada: National Debt: Less than single year of GDP National Debt: Less than single year of GDP Large Annual Deficits... Large Annual Deficits... Early 1980s to late 1990s Early 1980s to late 1990s Trade balance: Small trade surplus Trade balance: Small trade surplus Surplus with US Surplus with US Deficit with rest of world Deficit with rest of world Balance of Payments: Balance of Payments: Canada a net capital exporter – Canadian outward investment Canada a net capital exporter – Canadian outward investment

United States: National Debt: Over $13 Trillion(!) National Debt: Over $13 Trillion(!) Equals single year of GDP Equals single year of GDP Large Annual Deficits Large Annual Deficits High in early 1980s and early 21 st Century High in early 1980s and early 21 st Century Trade balance: Large trade deficit Trade balance: Large trade deficit “Balance of Payments”: “Balance of Payments”: Requires capital imports Requires capital imports Unsustainable over long term?? Unsustainable over long term?? Implications? Implications? Risk of US decline.... Canada? Risk of US decline.... Canada? Damage to international financial system? Damage to international financial system?

China: National Debt: Unclear or non-existent National Debt: Unclear or non-existent Trade balance: Large trade surplus Trade balance: Large trade surplus Surplus with developed countries Surplus with developed countries Deficit with rest of world Deficit with rest of world “Balance of Payments”: “Balance of Payments”: China also a net capital importer (???) China also a net capital importer (???) Results in huge increases in reserves Results in huge increases in reserves More then $1 Trillion (USD) More then $1 Trillion (USD) Implications? Implications?

3) Institutions: Financial instability - exchange rate fluctuations/balance of payments problems – need to be managed.... Financial instability - exchange rate fluctuations/balance of payments problems – need to be managed.... Bad for trade Bad for trade Bad for MNC’s Bad for MNC’s Bad for States and development Bad for States and development Requires institutions to coordinate behavior and manage financial system Requires institutions to coordinate behavior and manage financial system

Domestic Institutions - Central Banks: Control monetary policy Control monetary policy Influence interest rates Influence interest rates Control exchange rate policy Control exchange rate policy Control currency reserves and interest rates Control currency reserves and interest rates Normally “independent” of political control – role is to coordinate policy with other countries to achieve stability Normally “independent” of political control – role is to coordinate policy with other countries to achieve stability E.g. Bank of Canada and U.S. Interest Rates E.g. Bank of Canada and U.S. Interest Rates

International Institutions: International Institutions: “International Monetary Fund (IMF) ”: Established after WWII to manage temporary balance of payments problems Established after WWII to manage temporary balance of payments problems E.g. Trade deficits E.g. Trade deficits Reduces exchange rate volatility Reduces exchange rate volatility Current role – longer term loans to developing countries facing “debt crisis” Current role – longer term loans to developing countries facing “debt crisis” Run by “weighted voting” Run by “weighted voting” Plays favorites? Plays favorites? Harsh treatment of LDC’s in debt Harsh treatment of LDC’s in debt

“World Bank (IBRD) ”: Established after WWII to make long term loans to support development Established after WWII to make long term loans to support development E.g. Reduce capital account deficits of developing countries E.g. Reduce capital account deficits of developing countries Causes.... Causes.... Also run by weighted voting Also run by weighted voting Loans lower cost than private lending Loans lower cost than private lending However resources insufficient However resources insufficient Developing countries borrow from other sources = high interest and debt problems Developing countries borrow from other sources = high interest and debt problems

Both IMF and World Bank subject to heavy criticism E.g. 1)Management of the debt crisis E.g. 1)Management of the debt crisis 2)Support for economic liberalism Radicals, “antiglobalizers” and others point to failures of these institutions Radicals, “antiglobalizers” and others point to failures of these institutions

4) Multinational Corporations “Multinational Corporations (MNCs)”: Private enterprises with production, facilities, sales operations and investments in several states “Multinational Corporations (MNCs)”: Private enterprises with production, facilities, sales operations and investments in several states Implies control over operations of “subsidiaries” in other countries Implies control over operations of “subsidiaries” in other countries “Home” and “host” countries??? “Home” and “host” countries??? Can only exist with globalised finance – currency exchange and foreign investment Can only exist with globalised finance – currency exchange and foreign investment

Example: General Electric “Based” in US “Based” in US 250 factories in 26 countries 250 factories in 26 countries Subsidiaries? Subsidiaries? Products? Products? Consumer electronics, financial services, weapons (tanks, jets and ships), nuclear reactors, WMD’s, and NBC Consumer electronics, financial services, weapons (tanks, jets and ships), nuclear reactors, WMD’s, and NBC $575,244,000,000 in global assets $575,244,000,000 in global assets 1/2 outside the US 1/2 outside the US 315,000 employees outside US 315,000 employees outside US

Impact of MNC’s? Home Countries? Home Countries? Bring in global profits Bring in global profits “Good” jobs “Good” jobs Host Countries? Host Countries? Hosts compete to attract MNC investment Hosts compete to attract MNC investment “Race to the Bottom” – states reduce taxes, environmental standards etc. to attract companies “Race to the Bottom” – states reduce taxes, environmental standards etc. to attract companies Bad jobs, pollution and profits go elsewhere Bad jobs, pollution and profits go elsewhere Power: MNC’s have ability to influence what host states do... Power: MNC’s have ability to influence what host states do...

Obstacles to growth of MNC’s 1) Nationalization by foreign governments E.g. Cuba, Venezuela & Newfoundland E.g. Cuba, Venezuela & Newfoundland 2) Exchange rate fluctuations and instability Increases cost of doing business Increases cost of doing business

5) For Next Time... Unit Seven: International Political Economy "Development" Required Reading: Mingst, Chapter 9. Mingst, Chapter 9. Scott, The Great Divide in the Global Village, Mingst and Snyder, pp Scott, The Great Divide in the Global Village, Mingst and Snyder, pp