Discussions of the King/King Reader, II MBA 628

Discussions of the King/King Reader, IIDiscussions of the King/King Reader, II

MBA 628MBA 628

Trading in IllusionsTrading in IllusionsDani RodrikDani Rodrik Reading 15Reading 15

Here is the Rodrik thesis again:Here is the Rodrik thesis again:““Foreign trade and investment Foreign trade and investment

have become the ultimate yardstick have become the ultimate yardstick for evaluating the social and for evaluating the social and economic policies of governments in economic policies of governments in developing countries.” (p. 184)developing countries.” (p. 184)

Trading in IllusionsTrading in IllusionsDani RodrikDani Rodrik Reading 15Reading 15

So the thesis is:So the thesis is:Global integration should not Global integration should not

become a substitute for a become a substitute for a development strategy.development strategy.

““Openness Does Not Deliver”Openness Does Not Deliver”Says Rodrik:Says Rodrik:

““The fastest growing countries are China, The fastest growing countries are China, India, and others in East and Southeast Asia. India, and others in East and Southeast Asia. Policymakers in these countries have also Policymakers in these countries have also espoused trade and investment liberalization, espoused trade and investment liberalization, but they have done so in an unorthodox but they have done so in an unorthodox manner—gradually, sequentially, and only manner—gradually, sequentially, and only after an intitial period of high growth – and as after an intitial period of high growth – and as part of a broader policy package with many part of a broader policy package with many unconventional features.” (p. 185)unconventional features.” (p. 185)

Standards for DevelopmentStandards for DevelopmentThe World Bank and others have The World Bank and others have

developed lists of prerequisites for developed lists of prerequisites for development (especially since trade development (especially since trade liberalization fails to produce hoped-liberalization fails to produce hoped-for results). These include pegging for results). These include pegging currency or preferring the pure float, currency or preferring the pure float, etc.etc.

Development Opportunity Development Opportunity CostsCosts

““Most suggested reforms are quite Most suggested reforms are quite reasonable, but in the real world, reasonable, but in the real world, governments face difficult choices governments face difficult choices over how to deploy their fiscal over how to deploy their fiscal resources, administrative resources, administrative capabilities, and political capital.” capabilities, and political capital.”

But setting priorities to maximize But setting priorities to maximize integration into the global economy integration into the global economy has real opportunity costs. (p. 186)has real opportunity costs. (p. 186)


To sign just three WTO agreements To sign just three WTO agreements on on customs valuation, sanitary customs valuation, sanitary measures and trade-related measures and trade-related intellectual property rightsintellectual property rights will cost will cost developing countries $150 million for developing countries $150 million for implementation. implementation.

That’s a year’s development budget That’s a year’s development budget for many least-developed countries. for many least-developed countries.


The money could be spent for The money could be spent for secondary-school teachers or for secondary-school teachers or for primary education for girls.primary education for girls.


The rules for admission into the The rules for admission into the world economy reflect little world economy reflect little awareness of development priorities awareness of development priorities and are often unrelated to sensible and are often unrelated to sensible economic policy.economic policy.

Development Opportunity Costs:Development Opportunity Costs:The Exchange Rate RegimeThe Exchange Rate Regime

““How should developing countries choose How should developing countries choose their exchange-rate regimes? their exchange-rate regimes?

During the last four decades, virtually During the last four decades, virtually every growth boom in the developing every growth boom in the developing world has been accompanied by a world has been accompanied by a controlled depreciation of the domestic controlled depreciation of the domestic currency. currency.

Yet financial openness makes it all but Yet financial openness makes it all but impossible to manage the exchange rate.” impossible to manage the exchange rate.” (p. 186) (p. 186)

Development Opportunity Costs:Development Opportunity Costs:The WTO often follows other The WTO often follows other

prioritiespriorities““For instance, WTO agreements on For instance, WTO agreements on

anti-dumping, subsidies and anti-dumping, subsidies and countervailing measures, agriculture, countervailing measures, agriculture, textiles, and trade-related textiles, and trade-related intellectual property rights lack any intellectual property rights lack any economic rationale beyond the economic rationale beyond the mercantilist interests of a narrow set mercantilist interests of a narrow set of powerful groups in advanced of powerful groups in advanced industrial countries.” (p. 187)industrial countries.” (p. 187)

Asian MythsAsian MythsDoes Rodrik deny that the Asian Tigers Does Rodrik deny that the Asian Tigers

developed on the basis of export drives?developed on the basis of export drives?

““That these countries reaped enormous That these countries reaped enormous benefits from their progressive benefits from their progressive integration into the world economy is integration into the world economy is undeniable. But look closely at what undeniable. But look closely at what policies produced those results.” (p. policies produced those results.” (p. 188)188)

Asian MythsAsian MythsSouth Korea and Taiwan developed South Korea and Taiwan developed

mostly in the 1960s and 70s, before mostly in the 1960s and 70s, before global trade rules were developed global trade rules were developed and invasive. They had no pressure and invasive. They had no pressure to open their borders to capital flows.to open their borders to capital flows.

Asian MythsAsian Myths

China also followed a highly China also followed a highly unorthodox strategy, violating almost unorthodox strategy, violating almost all the trade-regime rules. (No private all the trade-regime rules. (No private property rights, extensive property rights, extensive protectionism, etc.) protectionism, etc.)

These countries could do their own These countries could do their own thing, which is not the case for thing, which is not the case for developing WTO participants today.developing WTO participants today.

The Thesis AgainThe Thesis Again““The available studies reveal no The available studies reveal no

systematic relationship between a systematic relationship between a country’s average level of tariff and country’s average level of tariff and nontariff barriers and its subsequent nontariff barriers and its subsequent economic growth rate. economic growth rate.

If anything, the evidence for the 1990s If anything, the evidence for the 1990s indicates a positive relationship between indicates a positive relationship between import tariffs and economic growth… import tariffs and economic growth… countries dismantle their trade countries dismantle their trade restrictions as they grow richer.” (p. 189)restrictions as they grow richer.” (p. 189)

Conclusions?Conclusions?Rodrik concludes:Rodrik concludes:

““Unorthodox innovations that depart Unorthodox innovations that depart from the integration rule book are from the integration rule book are typically part and parcel of such typically part and parcel of such strategies. strategies.


Consider “some of the innovations Consider “some of the innovations that have been instrumental in kick-that have been instrumental in kick-starting investment and growth in starting investment and growth in the past. None came out of a the past. None came out of a Washington economist’s tool kit.” Washington economist’s tool kit.” (p. 190)(p. 190)


Public enterprises during the Meiji Public enterprises during the Meiji restoration in Japan; restoration in Japan;

Township and village enterprises in Township and village enterprises in China;China;

An export processing zone in An export processing zone in Mauritius;Mauritius;


Generous tax incentives for priority Generous tax incentives for priority investments in Taiwan;investments in Taiwan;

Extensive credit subsidies in South Extensive credit subsidies in South Korea; Korea;

infant-industry protection in Brazil infant-industry protection in Brazil during the 1960s and 1970s during the 1960s and 1970s

New Wave of GlobalizationNew Wave of GlobalizationWorld Bank Reading

18What was the first wave?What was the first wave?What started it and what What started it and what

stopped it?stopped it?


18What was the second wave?What was the second wave?What started it and what What started it and what

stopped it?stopped it?What is agglomeration?What is agglomeration?


18What is the third wave?What is the third wave?What role have the developing What role have the developing

countries played in it?countries played in it?What are the downsides?What are the downsides?


18What about capital flows?What about capital flows?What about migration?What about migration?What about poverty?What about poverty?


18From 1870 to 1915From 1870 to 1915

Falling transport costs Falling transport costs First wave of globalization. First wave of globalization. Nationalism and war stopped the Nationalism and war stopped the

process.process. Trade fell back to 1870 level.Trade fell back to 1870 level.


18From 1945 to 1980, the second waveFrom 1945 to 1980, the second wave

This was a return to the pattern of the This was a return to the pattern of the first wave.first wave.

Trade doubled relative to world income, Trade doubled relative to world income, recovering the level of the first wave.recovering the level of the first wave.

The North-South pattern of trade was The North-South pattern of trade was restored, but didn’t restore movements restored, but didn’t restore movements of capital and labor.of capital and labor.


18Trade in the second wave was based Trade in the second wave was based

not on comparative advantage not on comparative advantage (differences in factor endowments), (differences in factor endowments), but on cost savings from but on cost savings from agglomeration and scale.agglomeration and scale.

We reach the phase where We reach the phase where alternative trade theory has some alternative trade theory has some explanatory power.explanatory power.

Economics of AgglomerationEconomics of Agglomeration““Firms cluster together, some producing Firms cluster together, some producing

the same thing and others connected by the same thing and others connected by vertical linkages…The presence of a rich vertical linkages…The presence of a rich network of manufacturing firms network of manufacturing firms provides a positive externality to each provides a positive externality to each firm in the system, allowing it to acquire firm in the system, allowing it to acquire inputs locally, thus reducing the costs of inputs locally, thus reducing the costs of transport, of coordination, of monitoring transport, of coordination, of monitoring and of contracting…and of contracting…

Economics of AgglomerationEconomics of AgglomerationClustering enables greater specialization Clustering enables greater specialization

and thus raises productivity” (p. 212).and thus raises productivity” (p. 212).

““But agglomeration economies, good But agglomeration economies, good news for those in the clusters, …are bad news for those in the clusters, …are bad news for those left out” (news for those left out” (Ibid.).Ibid.).

For the industrial world, this was a global For the industrial world, this was a global age. For the developing world it was not.age. For the developing world it was not.

New Wave of Globalization, post New Wave of Globalization, post 19801980This wave has been distinctive.This wave has been distinctive.

A large group of developing countries A large group of developing countries broke into global markets.broke into global markets.

Others became increasingly Others became increasingly marginalized.marginalized.

International migration and capital International migration and capital movements again became substantial.movements again became substantial.

Developing Countries Broke into Developing Countries Broke into Global MarketsGlobal Markets

Countries accounting for c. 3 billion Countries accounting for c. 3 billion people harnessed their labor abundance people harnessed their labor abundance to gain a competitive advantage in labor-to gain a competitive advantage in labor-intensive manufactures and services. intensive manufactures and services.

80 percent of their exports were now 80 percent of their exports were now manufactures.manufactures.

Newly globalizing developing countries Newly globalizing developing countries improved their infrastructure, skills and improved their infrastructure, skills and institutions that modern production institutions that modern production needs.needs.

Openness and GrowthOpenness and GrowthNote the regression evidence of the Note the regression evidence of the

correlation between openness and correlation between openness and growth on p. 218.growth on p. 218.

Why are other countries Why are other countries marginalized?marginalized?

Countries with about 2 billion people Countries with about 2 billion people have not integrated into the global have not integrated into the global industrial economy: most of Africa industrial economy: most of Africa and many of the economies of the and many of the economies of the former Soviet Union.former Soviet Union.

Per capita income here actually Per capita income here actually declined during the third wave.declined during the third wave.

Why are other countries Why are other countries marginalized?marginalized?

High transport costs to global markets and High transport costs to global markets and poor infrastructure (ports, internal poor infrastructure (ports, internal railroads, highways and railroads, highways and telecommunications).telecommunications).

Poor economic policies that kept them Poor economic policies that kept them from joining the club.from joining the club.

Some countries may make it in services Some countries may make it in services later, but won’t in industrialization. Service later, but won’t in industrialization. Service markets are still far less integrated.markets are still far less integrated.

International Capital FlowsInternational Capital FlowsTotal capital flows to developing Total capital flows to developing

countries went from less than $28 countries went from less than $28 billion in 1970s to about $306 billion in billion in 1970s to about $306 billion in 1997.1997.

Mergers and acquisitions were the Mergers and acquisitions were the most important source of this increase, most important source of this increase, especially in conjunction with especially in conjunction with privatization of public companies.privatization of public companies.

The top 12 emerging markets receive The top 12 emerging markets receive most of the net inflows:most of the net inflows:

International Capital FlowsInternational Capital FlowsThe top 12 emerging markets receive The top 12 emerging markets receive

most of the net inflows, including most of the net inflows, includingArgentina, Brazil, China, India, Argentina, Brazil, China, India, Malaysia, Mexico and Thailand.Malaysia, Mexico and Thailand.

Malaysia and Chile were most Malaysia and Chile were most successful in attracting FDI (of about successful in attracting FDI (of about $2,000 per capita).$2,000 per capita).

What are the Implications for What are the Implications for Migration?Migration?

How has this globalization How has this globalization affected poverty?affected poverty?

Overall inequality has declined Overall inequality has declined between the new globalizers and the between the new globalizers and the OECD countries.OECD countries.

Within-country inequality has Within-country inequality has increased there, especially due to increased there, especially due to the rise of inequality in China.the rise of inequality in China.


China started modernization with China started modernization with extremely equal income distribution extremely equal income distribution and extremely high poverty.and extremely high poverty.

Intra-rural inequality in China has Intra-rural inequality in China has decreased, butdecreased, but

Inequality has grown a lot between the Inequality has grown a lot between the rural areas and the rising urban rural areas and the rising urban agglomerations, and between agglomerations, and between provinces with agglomerations and provinces with agglomerations and those without.those without.


Between 1993 and 1998 the number of Between 1993 and 1998 the number of people in absolute poverty declined by 14 people in absolute poverty declined by 14 percent to 762 million. percent to 762 million.

For them, the third wave of globalization is For them, the third wave of globalization is the golden age. Poverty is predominantly the golden age. Poverty is predominantly rural.rural.

Average years of schooling and life Average years of schooling and life expectancy have improved to levels close expectancy have improved to levels close or equal to levels achieved by rich or equal to levels achieved by rich countries in 1960.countries in 1960.

Five Wars of GlobalizationFive Wars of GlobalizationMoises NaimMoises Naim Reading 16Reading 16

What are the five?What are the five?

Drugs,Drugs,Arms,Arms, Intellectual PropertyIntellectual PropertyPeoplePeopleMoneyMoney


Who are the contestants?Who are the contestants?Governments vs. Resourceful Governments vs. Resourceful

networks empowered by networks empowered by globalization.globalization.


Governments fighting these new Governments fighting these new wars with the old police enforcement wars with the old police enforcement tools are losing. Why can’t they win?tools are losing. Why can’t they win?

How can multilateralism help?How can multilateralism help?


Will continued globalization Will continued globalization processes help or hurt the war processes help or hurt the war against illicit trade?against illicit trade?

Analysis of intellectual propertyAnalysis of intellectual propertySee slides 48 and 49See slides 48 and 49

Analysis of Trade in Vice MarketsAnalysis of Trade in Vice MarketsSee slides 66 to 70See slides 66 to 70


Victory may not be possible, but we must Victory may not be possible, but we must try to reverse recent, dramatic gains.try to reverse recent, dramatic gains.

Are these law enforcement problems?Are these law enforcement problems?No, they are a global trend that shapes No, they are a global trend that shapes

the world as wars formerly did.the world as wars formerly did.We need law enforcement officials, but We need law enforcement officials, but

they alone won’t do. Many types of they alone won’t do. Many types of skilled personnel and new ways of skilled personnel and new ways of thinking about the problems are needed.thinking about the problems are needed.

Five Wars. I. DrugsFive Wars. I. Drugs In 1999 the illicit drug trade was at In 1999 the illicit drug trade was at

$400 billion worldwide, about 8 $400 billion worldwide, about 8 percent of world trade.percent of world trade.

The US spends between $35 and 40 The US spends between $35 and 40 billion each year on the war on billion each year on the war on drugs, most for interdiction and drugs, most for interdiction and intelligence.intelligence.

Five Wars. II. Arms Five Wars. II. Arms TraffickingTrafficking

In20% of total small arms trade is In20% of total small arms trade is illicit trade, generating over $1 billion illicit trade, generating over $1 billion annually.annually.

Small arms helped fuel 46 of the 49 Small arms helped fuel 46 of the 49 largest conflicts of the nineties and largest conflicts of the nineties and were responsible for c. 1,000 deaths were responsible for c. 1,000 deaths a day. Over 80% of the victims were a day. Over 80% of the victims were women and children.women and children.

Five Wars. III. Intellectual Five Wars. III. Intellectual PropertyProperty

Piracy costs the United States an Piracy costs the United States an estimated $9.4 billion in 2001.estimated $9.4 billion in 2001.

Piracy rate of business software in Piracy rate of business software in Japan and France is 40 percent, in Japan and France is 40 percent, in Greece and So Korea about 60 Greece and So Korea about 60 percent, and in German and Britain percent, and in German and Britain around 30 percent.around 30 percent.

How does one stop it in China?How does one stop it in China?

Five Wars. III. Intellectual Five Wars. III. Intellectual PropertyProperty

Discuss Pigou.Discuss Pigou.Price discrimination is standard, Price discrimination is standard,

routine, normal practice in domestic routine, normal practice in domestic industries and services.industries and services.

How is it in international trade?How is it in international trade?

Notice Naim’s statement on p. 194Notice Naim’s statement on p. 194

Five Wars. IV. Alien Smuggling Five Wars. IV. Alien Smuggling This involves the illegal copying, This involves the illegal copying,

manufacturing, and distributing of manufacturing, and distributing of high-end, brand-name products.high-end, brand-name products.

It’s a $7 billion a year enterprise and It’s a $7 billion a year enterprise and the fastest growing business of the fastest growing business of organized crime.organized crime.

Five Wars. IV. Alien Smuggling Five Wars. IV. Alien Smuggling Each year between 1 million and 2 Each year between 1 million and 2

million people are trafficed across million people are trafficed across borders, most of whom are women borders, most of whom are women and children.and children.

200,000 children are enslaved per 200,000 children are enslaved per year.year.

Five Wars. IV. Alien Smuggling Five Wars. IV. Alien Smuggling Traffickers tempt victims with jobs Traffickers tempt victims with jobs

across borders or with adoption of across borders or with adoption of children in wealthier countries. Then children in wealthier countries. Then they “keep the victims in they “keep the victims in subservience through physical subservience through physical violence, debt bondage, passport violence, debt bondage, passport confiscation, threats of arrest, confiscation, threats of arrest, deportation, or violence against their deportation, or violence against their families back home.”families back home.” (p. 194) (p. 194)

Five Wars. V. Money Five Wars. V. Money Laundering Laundering

Money can be hid from governments, Money can be hid from governments, creditors, business partners, or even creditors, business partners, or even family members.family members.

It may come from tax evasion, It may come from tax evasion, gambling, and other crimes.gambling, and other crimes.

Between two and five percent of the Between two and five percent of the world’s annual gross national product, world’s annual gross national product, or between $800 billion and $2 trillion.or between $800 billion and $2 trillion.

Five Wars. V. Money Five Wars. V. Money Laundering Laundering

And what is money laundering?And what is money laundering?“’“’Dirty’ funds can be electronically Dirty’ funds can be electronically

morphed into legitimate assets” (p. 195).morphed into legitimate assets” (p. 195).

How is money laundering done?How is money laundering done?

Get it across the border and into a Get it across the border and into a “legitimate” account there. It can later “legitimate” account there. It can later be transferred anywhere.be transferred anywhere.

Why can’t governments win? (p. Why can’t governments win? (p. 195)195)

Technology available to criminal Technology available to criminal networks and governments, but the networks and governments, but the latter must cope with tight budgets, latter must cope with tight budgets, bureaucracies, media scrutiny, and bureaucracies, media scrutiny, and electorates.electorates.


Trade will continue to grow, Trade will continue to grow, providing cover for the expansion of providing cover for the expansion of illicit trade.illicit trade.


International migration will likewise International migration will likewise grow, from which new recruits and grow, from which new recruits and victims will come.victims will come.


The spread of democracy will permit The spread of democracy will permit criminal cartels to manipulate weak criminal cartels to manipulate weak public institutions by corrupting public institutions by corrupting police and bribing politicians.police and bribing politicians.


The spread of international law and The spread of international law and its embargoes, sanctions, and its embargoes, sanctions, and conventions will offer criminals new conventions will offer criminals new opportunities for providing forbidden opportunities for providing forbidden goods to those on the wrong side of goods to those on the wrong side of the international community.the international community.

The five kinds of warriors could The five kinds of warriors could winwin

They are not bound by geography and They are not bound by geography and can occur anywhere.can occur anywhere.

They defy traditional notions of They defy traditional notions of sovereignty. They have no national sovereignty. They have no national allegiance. They are often highly paid, allegiance. They are often highly paid, hypermotivated and resource rich.hypermotivated and resource rich.

They face strong incentives to They face strong incentives to overcome government-imposed limits overcome government-imposed limits to trade.to trade.

The five kinds of warriors could The five kinds of warriors could winwin

They face strong incentives to overcome They face strong incentives to overcome government-imposed limits to trade.government-imposed limits to trade.

They pit bureaucracies against networks. They pit bureaucracies against networks. They have too many flexible resources They have too many flexible resources to be caught and too few resources to to be caught and too few resources to command a sustained and focused command a sustained and focused (national) government opposition.(national) government opposition.

Naim’s suggestionsNaim’s suggestionsDevelop more flexible notions of Develop more flexible notions of

sovereignty. Sovereignty is not sovereignty. Sovereignty is not compromised by other, seemingly compromised by other, seemingly threatening nations states, but by threatening nations states, but by stateless networks invading in stateless networks invading in pursuit of trade.pursuit of trade.

Naim’s suggestionsNaim’s suggestionsStrengthen existing multilateral Strengthen existing multilateral

institutions.institutions.Governments acting alone are not Governments acting alone are not

likely to succeed.likely to succeed.

Naim’s suggestionsNaim’s suggestionsDevise new mechanisms and Devise new mechanisms and

institutions. We can no longer rely on institutions. We can no longer rely on the traditional legal frameworks, the traditional legal frameworks, military doctrines, weapons systems, military doctrines, weapons systems, and law enforcement techniques.and law enforcement techniques.

Naim’s suggestionsNaim’s suggestionsMove from repression to regulation.Move from repression to regulation.

How are these wars like U.S. How are these wars like U.S. experience with prohibition?experience with prohibition?

Note the costs of repressing or trying Note the costs of repressing or trying to eliminate trade by making it to eliminate trade by making it illegal.illegal.

What happens to price and What happens to price and quantity in illegal markets?quantity in illegal markets?

Demand

Supply, normal

Supply with added risk premium

Two gospel principles Two gospel principles would seem to applywould seem to apply

Joseph Smith: “We teach them correct Joseph Smith: “We teach them correct principles and let them govern principles and let them govern themselves.themselves.

Possible implication. Teach Church Possible implication. Teach Church members to practice self-restraint and members to practice self-restraint and refuse to participate in debilitating refuse to participate in debilitating markets. Let the others consume.markets. Let the others consume.


Mutual theme:Mutual theme:““I stand for prohibition.”I stand for prohibition.”

Notice the higher quantity of Notice the higher quantity of consumption with normalized supply. consumption with normalized supply. After it is legal and available, will After it is legal and available, will some of the greater number of some of the greater number of consumers be our children?consumers be our children?


Why not try to work for a more Why not try to work for a more prudent society with reduced prudent society with reduced demands for the products of vice demands for the products of vice markets?markets?

How? Through repression or How? Through repression or regulation?regulation?

FiniFini

The EuroThe EuroMany have seen problems with the Many have seen problems with the

adoption of the Euro. adoption of the Euro. The Martin Feldstein prophecyThe Martin Feldstein prophecyKrugmann’s “hazing” in the EMU.Krugmann’s “hazing” in the EMU.

The EuroThe EuroMany have seen problems with the Many have seen problems with the

adoption of the Euro. adoption of the Euro. Critics say the EMU is not an optimal Critics say the EMU is not an optimal

currency area:currency area:Low labor mobilityLow labor mobilityVarying financial structures across European Varying financial structures across European

nationsnationsNon-synchronized business cycles.Non-synchronized business cycles.

EMU at 1EMU at 1Reading 28 Mark A. WayneReading 28 Mark A. WayneThis article looks at some of the This article looks at some of the

technical questions related to the technical questions related to the adoption of a new currency system.adoption of a new currency system.The shaky introduction of the Euro, it’s The shaky introduction of the Euro, it’s

decline to $.88 and its recovery.decline to $.88 and its recovery.Measuring and controlling inflation.Measuring and controlling inflation.Seignorage, which will be significant for Seignorage, which will be significant for

the Euro.the Euro.

EMU at 1EMU at 1Reading 28 Mark A. WayneReading 28 Mark A. WayneThe ECB doesn’t publish its minutes The ECB doesn’t publish its minutes

and votes. Why not?and votes. Why not?

They want to take off the pressure on They want to take off the pressure on council members to vote along council members to vote along national lines rather than in the national lines rather than in the interests of the euro area as a whole.interests of the euro area as a whole.

EMU at 1EMU at 1Reading 28 Mark A. WayneReading 28 Mark A. WayneReview the growth and stability pact Review the growth and stability pact

of the Maastricht Treaty, p. 318. The of the Maastricht Treaty, p. 318. The German and French dilemma.German and French dilemma.

Fiscal problems of the future and the Fiscal problems of the future and the Euro. Pensions and the graying of Euro. Pensions and the graying of European society are an example.European society are an example.

Creation of Euro and Role of $Creation of Euro and Role of $Reading 29 P.S. PollardReading 29 P.S. Pollard

All currencies serve as unit of All currencies serve as unit of account, store of value and medium account, store of value and medium of exchange.of exchange.

The dollar also serves as an The dollar also serves as an international currency. What is that?international currency. What is that?

Creation of Euro and Role of $Creation of Euro and Role of $Reading 29 P.S. PollardReading 29 P.S. Pollard

Governments hold reserves for three Governments hold reserves for three main puposes:main puposes:To finance foeign debt,To finance foeign debt,To finance imports, andTo finance imports, andTo intervene in currency markets to To intervene in currency markets to

manage the exchange rate.manage the exchange rate.

International Functions of the $ and International Functions of the $ and EuroEuro

The long-term debt of developing The long-term debt of developing countries is most commonly countries is most commonly denominated in U.S. dollars. Euro denominated in U.S. dollars. Euro area currencies are the next area currencies are the next preferred choice.preferred choice.

The global petroleum industry is The global petroleum industry is denominated in dollars.denominated in dollars.

Shifts in reserve currenciesShifts in reserve currencies If there is major shifting away from dollars If there is major shifting away from dollars

to Euros as a reserve currency,to Euros as a reserve currency, sharp drop in the dollar’s value,sharp drop in the dollar’s value, increase in value of the Euro,increase in value of the Euro, i rates would rise in U.S.i rates would rise in U.S. i rates would fall in Europe.i rates would fall in Europe.

If European financial markets prosper and If European financial markets prosper and grow, the increase in investment options grow, the increase in investment options would benefit both us and Europe.would benefit both us and Europe.

European Labor Markets/EMU Challenges European Labor Markets/EMU Challenges AbroadAbroad

Reading 30 Soltwedel Reading 30 Soltwedel et alet al Currency unions reduce foreign exchange Currency unions reduce foreign exchange

transactions costs, which stimulates trade, transactions costs, which stimulates trade, investment, growth and employment. investment, growth and employment.

But there are also costs for member statesBut there are also costs for member states No independent monetary policyNo independent monetary policy No currency devaluationNo currency devaluation

Asymmetric shocks will likely put pressure Asymmetric shocks will likely put pressure on national labor markets and may boost on national labor markets and may boost unemployment rates in affected areas.unemployment rates in affected areas.

European Labor Markets/EMU Challenges European Labor Markets/EMU Challenges AbroadAbroad

Reading 30 Soltwedel Reading 30 Soltwedel et alet alEU asymmetric shocks in the EU are EU asymmetric shocks in the EU are

much more pronounced on a regional much more pronounced on a regional than on a national level.than on a national level.

Eurosclerosis, labor market rigidity Eurosclerosis, labor market rigidity remains a big problem in Euroland.remains a big problem in Euroland.

Especially England and Holland Especially England and Holland increased flexibility and their increased flexibility and their economies have improved.economies have improved.

Discussions of the King/King Reader, II MBA 628

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