Announcements Projects Projects Remainder of class Remainder of class Globalization and Financial Contagion (this week) Globalization and Financial Contagion.
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AnnouncementsAnnouncements ProjectsProjects Remainder of classRemainder of class
Globalization and Financial Contagion Globalization and Financial Contagion (this week)(this week)
Policy Principles (1 lecture)Policy Principles (1 lecture) Policy applications: What do you want to Policy applications: What do you want to
study?study? Climate change? Energy/Peak oil? Biodiversity Climate change? Energy/Peak oil? Biodiversity
loss? Real estate bubbles? Financial loss? Real estate bubbles? Financial crisis/stabilization/New Bretton Woods?crisis/stabilization/New Bretton Woods?
International Trade, International Trade, Globalization and Globalization and Financial CrisisFinancial Crisis
Impacts on Scale, Distribution, Impacts on Scale, Distribution, Efficiency and DemocracyEfficiency and Democracy
What is Globalization?What is Globalization?
The integration of all national The integration of all national economies into one global market, economies into one global market, with one set of ruleswith one set of rules
Global market takes precedence over Global market takes precedence over national autonomynational autonomy
What’s a legitimate alternative?What’s a legitimate alternative? Supporting institutions are IMF, World Supporting institutions are IMF, World
Bank, World Trade Organization Bank, World Trade Organization (WTO), NAFTA, etc.(WTO), NAFTA, etc.
What are it’s defining What are it’s defining characteristics?characteristics?
Economic growth (increasing Economic growth (increasing material consumption) as sole material consumption) as sole desirable enddesirable end
Privatization and commodification of Privatization and commodification of public services, national and global public services, national and global commonscommons
Corporate deregulation and Corporate deregulation and unrestricted movement of capital unrestricted movement of capital across bordersacross borders
Increased corporate concentrationIncreased corporate concentration Cultural and economic Cultural and economic
homogenizationhomogenization
What has been the impact of What has been the impact of Globalization on:Globalization on:
Ecological sustainabilityEcological sustainability Distribution of wealth and incomeDistribution of wealth and income Economic outputEconomic output Economic stabilityEconomic stability DemocracyDemocracy The allocation of scarce resources The allocation of scarce resources
towards an improved quality of life for towards an improved quality of life for all peopleall people
The Theory Behind International The Theory Behind International TradeTrade
Comparative advantageComparative advantage
One country can be more efficient at One country can be more efficient at producing everything than another producing everything than another country, and still benefit from trade country, and still benefit from trade with the inefficient countrywith the inefficient country
Assumes that trade must be Assumes that trade must be advantageous or else countries advantageous or else countries would not participate. would not participate.
Numerical exampleNumerical example
6 rupiah3 pesosTotal resources
2 C4 rupiah1 pesoclothes
2 F2 rupiah2 pesosfish
Total outputIndonesiaPhilNO TRADE
6 rupiah3 pesosTotal resources
3 C3 pesosclothes
3 F6 rupiahfish
Total outputIndonesiaPhilTRADE
1 rupiah = 5 pesos
Impacts of comparative advantageImpacts of comparative advantage
More total output and freedom of More total output and freedom of choice in consumptionchoice in consumption
More specialization, and less freedom More specialization, and less freedom of choice in production (but only of choice in production (but only desirable end is consumption)desirable end is consumption)
Some sectors/regions within a Some sectors/regions within a country will lose out (but winners can country will lose out (but winners can compensate losers)compensate losers)
Global Markets are good for everyoneGlobal Markets are good for everyone Markets will end povertyMarkets will end poverty
““The real losers in Seattle”The real losers in Seattle” Markets will solve environmental Markets will solve environmental
problemsproblems Environmental Kuznet’s curveEnvironmental Kuznet’s curve Population growth and povertyPopulation growth and poverty
Economic growth is essentialEconomic growth is essential Humans are insatiableHumans are insatiable ““The Moral Consequences of Economic The Moral Consequences of Economic
Growth” (B. Friedman)Growth” (B. Friedman) Protectionism & ‘beggar thy Protectionism & ‘beggar thy
neighbor’neighbor’
Comparative or Absolute Comparative or Absolute Advantage? Advantage?
What if capital can flow between countries?What if capital can flow between countries? Indonesian capitalists will produce fish and Indonesian capitalists will produce fish and
clothes in the Philippinesclothes in the Philippines
Numerical exampleNumerical example
33 pesosTotal resources
11 C11 pesoclothes
11 F22 pesosfish
Total outputIndonesiaPhilCapital flows
6 rupiah3 pesosTotal resources
3 C3 pesosclothes
3 F6 rupiahfish
Total outputIndonesiaPhilNo capital flows
1 rupiah = 5 pesos
Absolute advantageAbsolute advantage
There will be more fish and clothesThere will be more fish and clothes What about employment in What about employment in
Indonesia? Can people flow across Indonesia? Can people flow across borders?borders?
Is efficient economic production all Is efficient economic production all that matters?that matters?
Can winners compensate losers?Can winners compensate losers? If trade is voluntary, how could this If trade is voluntary, how could this
happen?happen? e.g. Toxic waste in Abidjane.g. Toxic waste in Abidjan
The Facts Behind GlobalizationThe Facts Behind Globalization
What empirical results would we What empirical results would we expect under absolute advantage?expect under absolute advantage?
Rich get richer, poor get poorerRich get richer, poor get poorer Headlines:Headlines: Number of Hungry Rising, Number of Hungry Rising,
U.N. Says U.N. Says By ELIZABETH BECKER By ELIZABETH BECKER Published: December 8, Published: December 8,
20042004 Number of hungry and number of poor at Number of hungry and number of poor at
record levels (though not when measured in record levels (though not when measured in percentage terms)percentage terms)
Income of poorest countries is falling Income of poorest countries is falling (World Bank statistics)(World Bank statistics)
Richest countries accumulating greatest Richest countries accumulating greatest share of new wealthshare of new wealth 1% of GNP growth in US = GNP of 24 poorest 1% of GNP growth in US = GNP of 24 poorest
nationsnations
How does a country get an How does a country get an absolute advantage?absolute advantage?
Race to the bottomRace to the bottom EnvironmentEnvironment Wages—Mexican wages 11% of US wagesWages—Mexican wages 11% of US wages
We would expect the countries with the We would expect the countries with the lowest wages and most lax environmental lowest wages and most lax environmental standards to exhibit economic growth and standards to exhibit economic growth and atrocious environmental degradationatrocious environmental degradation Headline 9/1/2004: Rivers Run Black, and Headline 9/1/2004: Rivers Run Black, and
Chinese Die of CancerChinese Die of CancerBy JIM YARDLEY, NYTBy JIM YARDLEY, NYT
How does a country develop domestic markets for How does a country develop domestic markets for domestic production?domestic production?
Unavoidable Environmental Unavoidable Environmental Costs of TradeCosts of Trade
• TransportationTransportation– Global warmingGlobal warming– Oceanic pollutionOceanic pollution– Dependence on fossil fuelsDependence on fossil fuels
• Spread of weed species (especially Spread of weed species (especially aquatic)aquatic)– Asian longhorn beetleAsian longhorn beetle– San Francisco BaySan Francisco Bay– Salmon bacteriaSalmon bacteria
NAFTA and the EnvironmentNAFTA and the Environment
Environmental side agreementEnvironmental side agreement Environmental Kuznets CurveEnvironmental Kuznets Curve Actual results in Mexico from 1985-Actual results in Mexico from 1985-
19991999Gallagher, GDAEGallagher, GDAE
Rural erosion increased 89% as small Rural erosion increased 89% as small farmers cultivated more in response to farmers cultivated more in response to decreasing pricesdecreasing prices
Municipal solid waste increased 108%Municipal solid waste increased 108% Water pollution—29%Water pollution—29% Urban air pollution—97%Urban air pollution—97%
NAFTA and the EnvironmentNAFTA and the Environment
Chapter 11Chapter 11 Metalclad corporationMetalclad corporation
Toxic dump site or natural protected area?Toxic dump site or natural protected area? MTBE, MMEMTBE, MME
WTO similarWTO similar Turtle excluder devicesTurtle excluder devices Marine mammal protection actMarine mammal protection act
NAFTA and the NAFTA and the EnvironmentEnvironment
Growing corn Growing corn exports from USexports from US
NAFTA and DistributionNAFTA and Distribution Who are poorest in Mexico?Who are poorest in Mexico?
22% of Mexico's labor force in small ag.22% of Mexico's labor force in small ag. What do we export to Mexico?What do we export to Mexico?
Corn prices dropped 45% in Mexico (US Corn prices dropped 45% in Mexico (US subsidies average $20,000/farmer/year)subsidies average $20,000/farmer/year)
Tortilla prices increased in MexicoTortilla prices increased in Mexico Mexican farmers produced more, not lessMexican farmers produced more, not less
What does Mexico export to US?What does Mexico export to US? What’s the impact on unions, wages?What’s the impact on unions, wages?
NAFTA and DistributionNAFTA and Distribution
Significant decline in real wages in Significant decline in real wages in Mexico (minimum wage down 23% Mexico (minimum wage down 23% under NAFTA)under NAFTA)
Number of households in poverty Number of households in poverty increased 80% between 1984-1999, increased 80% between 1984-1999, 75% living in poverty75% living in poverty
Over half of rural Mexico in extreme Over half of rural Mexico in extreme povertypoverty
Record increase in number of Record increase in number of billionairesbillionaires
NAFTA and Efficiency NAFTA and Efficiency
Exports up in Mexico, but imports up Exports up in Mexico, but imports up by moreby more
Rate of growth less than 1% per Rate of growth less than 1% per capita per year (1985-1999) vs. 3.4% capita per year (1985-1999) vs. 3.4% under import substitution under import substitution industrialization.industrialization.
NAFTA and EfficiencyNAFTA and Efficiency
Environmental impacts: Environmental impacts: Financial costs of degradation from 1988-Financial costs of degradation from 1988-
1999 10% of GDP ($36 billion/yr)1999 10% of GDP ($36 billion/yr)Gallagher, GDAEGallagher, GDAE
Economic growth $14 billion/yrEconomic growth $14 billion/yr Distributional impactsDistributional impacts
Law of diminishing marginal utilityLaw of diminishing marginal utility
Globalization and Stability: Globalization and Stability: Financial contagionFinancial contagion
WWhhat is contagion?at is contagion? Speculative flowsSpeculative flows
2 trillion per day2 trillion per day ““Speculators are harmless as bubbles on a Speculators are harmless as bubbles on a
steady stream of enterprise. But the position is steady stream of enterprise. But the position is serious if enterprise becomes a bubble on the serious if enterprise becomes a bubble on the whirlpool of speculation. When the capital whirlpool of speculation. When the capital development of a country becomes the by-development of a country becomes the by-product of the activities of a casino, the job is product of the activities of a casino, the job is likely to be ill-done.”likely to be ill-done.”
John Maynard KeynesJohn Maynard Keynes
Causes of ContagionCauses of Contagion Caused by freedom of capital to go Caused by freedom of capital to go
where it wantswhere it wants Speculative bubblesSpeculative bubbles Moral hazardMoral hazard ““Fundamentals” wrongFundamentals” wrong
Overvalued exchange ratesOvervalued exchange rates High current account deficitsHigh current account deficits Excessive money creationExcessive money creation
Causes of ContagionCauses of Contagion Selling shortSelling short Herd behavior, animal Herd behavior, animal
spirits, Reflexivityspirits, Reflexivity Multiple equilibriaMultiple equilibria
Examples of ContagionExamples of Contagion LA debt crisis (1982)LA debt crisis (1982)
Petro-dollars and ReagonomicsPetro-dollars and Reagonomics Tequila crisis (1994)Tequila crisis (1994) Asian flu (1997)Asian flu (1997)
Real estate bubbleReal estate bubble Financial speculation and devaluationFinancial speculation and devaluation Impacts of devaluation on debtImpacts of devaluation on debt Impacts on trade competitorsImpacts on trade competitors IMF roleIMF role
Current crisis (2008)Current crisis (2008)
Impacts on DemocracyImpacts on Democracy
Structural adjustment programsStructural adjustment programs Brazil’s electionsBrazil’s elections
Policy OptionsPolicy Options
Tobin TaxTobin Tax Speculation taxSpeculation tax Restricting capital flowsRestricting capital flows Higher marginal tax brackets and Higher marginal tax brackets and
more equitable distributionmore equitable distribution
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