Political Foundations of the World Economy International Political Economy Prof. Tyson Roberts 1.
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Transcript of Political Foundations of the World Economy International Political Economy Prof. Tyson Roberts 1.
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Lecture Goals
• States & Markets in International Context• Bilateral and Multilateral Global Institutions• Brief History of the World, IPE style
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If a second person arrives, one can specialize in coconuts and the other can specialize in fish,
and they can benefit from trade
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If each actor is “fully informed,” trade results in a Pareto Improvement
Friday
Don’t trade Trade
RobinsonDon’t trade 0, 0 0, 0
Trade 0, 0 1, 1
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However, each actor may have an incentive to cheat
Friday
Cheat Stay true
RobinsonCheat -1, -1 2, -2
Stay true -2, 2 1, 1
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Cheat, Cheat is the Nash EquilibriumStay true, Stay true would be Pareto Improvement
Friday
Cheat Stay true
RobinsonCheat -1, -1 2, -2
Stay true -2, 2 1, 1
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The prospect of repeated interactions converts cooperation into a Nash Equilibrium
(But Cheat, Cheat also remains a Nash Equilibrium)
Friday
Cheat
Stay true first trade;Cease trading if cheated
RobinsonCheat -1, -1 2, -2
Stay true first trade;Cease trading if cheated
-2, 2 1+1+1+…, 1+1+1+…
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If the coconut seller gets a bad fish, he knows who sold it to him. He can refuse to trade again
until he is compensated
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As the distance and complexity of trade increases, potential for trade benefits increase,
but cheating is more difficult to monitor
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The challenge of long-distance trade
• Strong incentive to cheat, makes trade costly
Trader 2
Cheat Stay true
Trader 1Cheat -1, -1 2, -2
Stay true -2, 2 1, 1
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Institutions to prevent cheating
1. Long-term relationships based on reciprocity and trust– Works best in smaller groups (repeated
interactions, reputation)
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Solutions to cooperation problem
1. Repeated transaction– Works within tight-knit communities (Jews,
Lebanese, Hausa, etc.), but not among the world at large
2. Belief system/ideology (focal point)– Also works best in tight-knit communities
3. Third-party enforcement– E.g., by a imperial power or a hegemonic state
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Cooperation solution in state of anarchy
The repeated interaction cooperation solution depends on valuing the future
http://www.youtube.com/watch?v=BPS9YKGaKQE
The Wire’s Baltimore: When Avon Barksdale is in charge
Barksdale
Fight for territory Don’t fight
Prop Joe Fight for territory2,2 4,1
Don’t fight1,4 3,3
What is the expected outcome? (i.e., Nash Equilibrium)
Is it Pareto Efficient?
The Wire: When Avon Barksdale is in charge
Barksdale
Fight for territory Don’t fight
Prop Joe Fight for territory2,2 4,1
Don’t fight1,4 3,3
The Wire: When Stringer Bell is in charge
Stringer Bell
Fight for territory Share territory in exchange for good product; attack if
crossedProp Joe Fight for territory
2,2 4,1
Share good product in exchange for territory; withhold if crossed
1,4 3 + 2 = 5,5
What is the expected outcome? (i.e., Nash Equilibrium)
Is it Pareto Efficient?
The Wire: When Stringer Bell is in charge
Stringer Bell
Fight for territory Share territory in exchange for good product; attack if
crossedProp Joe Fight for territory
2,2 4,1
Share good product in exchange for territory; withhold if crossed
1,4 5,5
Two (Pure strategy) Nash Equilibria: (1) PJ - Fight; SB - Fight(2) PJ - Share; SB - Share
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Repeated interactions can but do not necessarily lead to cooperation
Another mechanism is third party enforcement
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State Building, Wars, and Markets
• Kings need resources to fight wars• Taxing money is less costly than extracting
tribute• Money is mobile• Solution: Property rights enforced by King
p is penalty for stealing. Assume p>1
Is enforcement by the State Freedom or a Prison?
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t) (1-t,4-p-t)
Steal (4,1) (2,2) Steal (4-p-t,1-t) (2-p-t,2-p-t)
Indicates the NE in each game.
p is penalty for stealing. Assume p>1
Is enforcement by the State Freedom or a Prison?
If p =2 & t= ½ , is society better off with or without the state?
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t) (1-t,4-p-t)
Steal (4,1) (2,2) Steal (4-p-t,1-t) (2-p-t,2-p-t)
Indicates the NE in each game.
Is enforcement by the State Freedom or a Prison?
If p =2 & t= 1/2, is society better off with or without the state?
WITH. STATE => FREEDOM
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t)2 ½ , 2 ½
(1-t,4-p-t)½ , 1 ½
Steal (4,1) (2,2) Steal (4-p-t,1-t)1 ½ , ½
(2-p-t,2-p-t)-1/2 , -1/2
p is penalty for stealing. Assume p>1
Is enforcement by the State Freedom or a Prison?
If p =2 & t= 2, is society better off with or without the state?
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t) (1-t,4-p-t)
Steal (4,1) (2,2) Steal (4-p-t,1-t) (2-p-t,2-p-t)
Indicates the NE in each game.
Is enforcement by the State Freedom or a Prison?
If p =2 & t= 2, is society better off with or without the state?
WITHOUT. STATE => PRISON
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t)1, 1
(1-t,4-p-t)-1, 0
Steal (4,1) (2,2) Steal (4-p-t,1-t)0, -1
(2-p-t,2-p-t)-2, -2
p is penalty for stealing. Assume p>1
Is enforcement by the State Freedom or a Prison?
If the state does not charge too much tax (3-t > 2, or 1 > t), life will be better in civil society.
State of nature Civil society Enforced by State
Forbear Steal Forbear Steal
Forbear (3,3) (1,4) Forbear (3-t,3-t) (1-t,4-p-t)
Steal (4,1) (2,2) Steal (4-p-t,1-t) (2-p-t,2-p-t)
Indicates the NE in each game.
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Institutions to prevent cheating
1. Long-term relationships based on reciprocity and trust– Works best in smaller groups (repeated
interactions, reputation)
2. Belief systems3. Third party enforcement
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History of the World, IPE-style: Unilateral Institutions & Mercantilist Beliefs
• ~1600-~1850: Mercantilism– Trade facilitated by empires & chartered trading
companies within empires
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History of the World, IPE-style: Unilateral Institutions & Liberal Beliefs
• ~1850-1913: 1st Age of Globalization– Common belief system among key economic
decision-makers: market liberalism (Smith, Ricardo) & rules of Gold Standard
– Enforcement by imperial governments, esp. Britain
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State Power and the Promotion of National Interests through Economic Integration
• Powerful states with leading economies have strong interest in promoting an open world economy– UK in 19th Century– US in 20th Century
• Economic integration creates markets & reduces cost of maintaining world order
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• Neorealism (Waltz)– ‘in a condition of anarchy, relative gain is more
important than absolute gain’– emphasizes the weakness of international
institutions and the fragility of cooperation
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What is the difference between relative gain and absolute gain?
Should states focus on relative or absolute gain?
Why are actors focused on relative gain less likely to cooperate?
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Payoffs with absolute gain
Challenger
Reduce tariffs High tariffs
Hegemon Reduce tariffs8, 6 4, 4
High tariffs6, 2 2, 1
What is expected outcome? (i.e., Nash Equilibrium)
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Payoffs with absolute payoffs
Challenger
Reduce tariffs High tariffs
Hegemon Reduce tariffs8, 6 4, 4
High tariffs6, 2 2, 1
What is expected outcome? (i.e., Nash Equilibrium)
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Now transform the outcomes in each cell from absolute payoffs to relative payoffs
For example, my relative payoff is my payoff/your payoff.
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Payoffs with relative payoffs
Challenger
Reduce tariffs High tariffs
Hegemon Reduce tariffs Heg.8/6 =4/3
Chall.6/8 =3/4
Heg.4/4 =
1
Chall.4/4 =
1High tariffs Heg.
6/2 =3
Chall.2/6 =1/3
Heg. 2/1 =
2
Chall.1/2 =
½
What is expected outcome? (i.e., Nash Equilibrium)
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Payoffs with relative payoffs
Challenger
Reduce tariffs High tariffs
Hegemon Reduce tariffs4/3 , 3/4 1, 1
High tariffs3, 1/3 2, 1/2
What is expected outcome? (i.e., Nash Equilibrium)
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• Neoliberal institutionalism (Keohane, etc.)– Institutions are solutions to interstate problems
such as cheating – Institutions are agreements or contracts between
actors that reduce uncertainty, lower transaction costs, and solve collective action problems
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International regimes can affect capabilities of states
• Dependency theory (e.g., Marxist): regimes reinforce dominance of rich, powerful states
• Hegemonic stability theory: international regimes enrich hegemon (but over time may dissipate hegemon’s resources)
Why?
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Hegemon gains most from free trade regime & can afford to maintainChallenger also benefits, but is less able to afford maintenance
Challenger
Spend to maintain regime
Don’t spend
Hegemon Spend to maintain regime 8, 3 5, 4
Don’t spend6, 1 2, 2
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Challenger can therefore free-ride on hegemon’s efforts
Challenger
Spend to maintain regime
Don’t spend
Hegemon Spend to maintain regime 8, 3 5, 4
Don’t spend6, 1 2, 2
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Without a hegemon, no country can capture benefits of free trade regime enough to make maintenance of free
trade regime worthwhile => lack of cooperation
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History of the World, IPE-style: Breakdown of free trade regime
• World Wars: 1914-1945 (Breakdown, Trade barriers go back up)– 1914-1918: WW1 – 1919-1939: Interwar period & WW2– 1939-1945: WW2
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History of the World, IPE-style: Return of free trade; new hegemon supports multilateral institutions
• 1945-present: 2nd Age of Globalization• Enforcement by US & Bretton Woods Institutions
– 1945-1972: Bretton Woods System• 1944, 1947: IMF & GATT established• Belief system: Keynes, etc.
– 1972-2009: Transition & Washington Consensus• 1995: WTO established• Belief system: Chicago School
International Decision-Making Rules
• Anarchic– Unilateral or negotiated decisions based on self interest and power. – Lack of cooperation => War
• Hegemonic Institution(s)– Hegemon’s law backed by power (empire, gunboats)
• Multilateral Institution (official)– Majoritarian– Weighted voting– Consensus
• Multilateral institution (unofficial)– Invisible weighting/ informal agenda setting
Scope of GATT
• Trade in most manufactured goods liberalized quickly– Exceptions: Clothes, textiles, some cars, etc.
• Services & agriculture initially left alone• Focus on tariffs and trade quota• Developing countries given waivers or extra
time to comply• GATT had weak enforcement teeth
GATT decision making rules
• Officially: majoritarian• Unofficially: Informal consensus– Launching rounds: law-based bargaining– Closing rounds: increased power-based bargaining
Sources of bargaining power
• Patience– Willingness to live with status quo
• Outside option – Related to market size (US can produce for self) &
international relations• Agenda setting – Access to “Green Room”
• Ability to act collectively– OECD, G-20
Organized Hypocrisy
Consensus in the GATT/WTO• Naked power available as
alternative• Consensus rules provide
legitimacy and information gathering to powerful nations – stable, low cost method to achieve goals
• Some votes bought with pay-offs• Weaker nations unlikely to
protest openly if hypocrisy not too blatant
Multiparty elections in authoritarian regimes
• Naked power available as alternative
• Multiparty elections provide legitimacy & information gathering to ruling elites – stable, low cost method to achieve goals
• Some votes bought with pay-offs• Opposition unlikely to protest
openly if hypocrisy not too blatant
Bargaining in the Shadow of Law or Power(Steinberg 2002)
The Tokyo Round (1973-79) closed with law-based bargaining• LDC’s outside option: Trade with Soviet Bloc• Result: Exceptions for LDCsUruguay Round (1986-94) closed with power-based bargaining• No outside option for LDCs• Result – uniform rules in WTO
Scope of WTO
• Liberalization of all goods (including textiles & agriculture) and services
• Rules extended to subsidies, intellectual property, investment, regulations & standards
• All members (including developing countries) bound to comply
• Enforcement teeth: appellate court to decide disputes – authorizes dispute winner to retaliate
Cotton Wars
• Does the cotton dispute indicate law-based or power-based decision making?
• Does the cotton dispute indicate that international regimes change outcomes?
• How do sub-national interest group politics play a role in determining the outcome?
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GATT/WTO Benefits – Worldwide(2nd Age of Globalization)
Source: PWT for countries w/1950 data only; not sure about Maddison
BW Post-BW
GATT/WTO Benefits - Distribution
• International: – According to some studies, developed countries
benefited more from WTO (Uruguay Round) than developing countries
– According to some studies, some developing countries are net losers from WTO (diminished development policy space)
– Other developing countries are winners, e.g. China and India
GATT/WTO Benefits - Distribution
• Intranational:– Trade integration has contributed to income
inequality in the US (but technological change likely played a larger role)
– Inequality has also increased in China and India– Low-skilled workers in labor-intensive
manufacturing sectors were first losers in US; higher skilled workers in services may follow
Takeaways
• All countries can benefit from free trade• Within countries, there are winners and losers• Domestically, potential losers from free trade (e.g.,
producers) can solve collective action problem, which enables successful lobbying
• Institutions such as WTO facilitate cooperation for mutual benefit (at the country level)
• WTO increases role of law, but power still plays a role (e.g., availability of outside options)– Some countries may be net losers from WTO
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• International regimes can affect– Capabilities of states
• Hegemon gains in absolute terms, but challengers able to catch up
– Interests of states• Winners from trade gain political influence & press for
more free trade (Corn Laws, etc.)• As interdependence decreases probability of conflict,
governments focus more on absolute gain & less on relative gain
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Challenges in studying regime effects on cooperation
• Difficult to ascertain whether cooperation is due to institutions or to complementary interests & underlying distributions of power– A solution: if actors obey rules that are
“inconvenient”, then institutions matter
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The EU
• What are the benefits to strong states (e.g., Germany)?
• What are the benefits to weak states (e.g., Greece)?
• What are the costs?• What choices by Germany and Greece
demonstrate that institutions affect the decisions of sovereign states?
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Takeaways
• International trade, lending, and investment is costly and risky in state of anarchy
• Enforcement institutions facilitate trade and lending/investment
• Enforcement institutions can be unilateral (predominant pre-WWI) or multilateral (predominant post-WW2).
• Institutions that constrain have costs and benefits for all, including the great powers