Within a Ricardian framework there are several simplifications that we must take in mind as we discuss it. First is that labor is the only input, it is immobile within national borders, but it can move within industries and there is full employment. In terms of the markets, there are perfect competition and no trade frictions with the two economies only producing two outputs. Finally, the trading nations have the same technology and there are constant returns to scale.
If we take these assumptions as a given, we can look at the simple models and say that there are gains from trade as long as one of the countries has a lower opportunity cost in one of the goods than the other country (if they are the same there is no reason for trade). The toy models we work with show that a move down the production possibility frontier to specialize in the good that the nation has comparative advantage in makes everyone better off.
Even if you think within the constraints of the model, as unrealistic as they may be and think about how this operates in the real economy the logic still makes sense. There is an idea that there are only so many jobs and that for some reason the economy as it was in the US in say 1957 is the way that it should remain forever more. What it ignores is that US manufacturers have gotten better at some other things. If you think of the Trade between the US and China as comprising trade between airplanes and radios, “Making America Great Again” has the idea that we need to make more radios. What this ignores is that the tradeoff is much greater in the US because here we are much better at making airplanes, so the opportunity cost of making a radio is a much higher fraction of an airplane in the US than it is in China. This means that here we get to consume more radios than we would otherwise because we can specialize in the airplane market and trade those extra airplanes for radios.
Monday, September 9, 2019
Friday, September 6, 2019
Nice Country You Got. Shame if Someone Structurally Adjusted It: On the Bretton Woods Institutions
The story of the Bretton Woods conference is the story of Harry Dexter White, Keynes, and the representatives of fifty other counties holed up in a relatively inaccessible hotel in New Hampshire hammering out the details of the postwar economic order. This was a mirror of their political peers in Potsdam and Yalta who put together the postwar political order. Laying out an aggregable postwar order was crucial because it was not hard to look around and see what happened without multilateral institutions. After WWI, the League of Nations was fairly weak in part because though Wilson was the main driver behind the formation of the League of Nations, there was not buy in. The newly powerful US wanted to go their own way. So what happened economically was busts in the immediate postwar years with a sharp and now forgotten recession as the belligerent powers moved into a peacetime economy – then the roaring twenties in the US) though even that hid regional troubles as farms failed and there was a property bubble in Florida. And then of course the fear of the spread of far-left parties in Europe with genocidal fascism as well as a rising Japan invading its regional neighbors (dispossessing English and French imperialists in the process) all led to the war that our actors were trying to resolve.
For me that context is important in thinking of the modern IMF and its sister institutions – which is an evolved version as an institution of those agreements – is open to criticism. I first became aware of these multinational, multilateral institutions in 1999 when there were protests for the WTO negotiations in Seattle. The media focused on people dressed up like sea turtles, but it was more broadly a protest against the path that globalization proceeded on. Now when I think of that era, I think of this picture of “International Monetary Fund (IMF) managing director Michel Camdessus (left) looks on as Indonesian President Suharto signs an agreement in Jakarta in this January 15, 1998 file photo. When the IMF last held its annual meeting in Asia, in Hong Kong in 1997, it was leading the rescue of the region`s wrecked economies.”
This picture for a lot of people really cements the idea of the IMF as a neocolonial project. Why neocolonial? Mainly because what the IMF had done in its second iteration was to become a source of funds for poor countries who had gotten into trouble somehow. Often a previous administration would over-borrow and ransack the state treasury, and then the next group of people would come in and say that they had no capacity to grow their country thanks to the previous fellows. The IMF would come in and offer help in terms of loans. The problem is that in the international financial system, a country can’t just say that the other fellows were just making themselves rich and we couldn’t be on the hook for what they did and the people who lent to them did so at their own risk, so we will just repudiate those loans and start with a clean slate. Nope. The new guys have to make whole what the other guys did, facing the debt burden. So, what the IMF does is come in and say we can help you out. But there are strings attached. You can get some of our money, but you need to open up your markets and privatize your state holdings. This is a problem because just maybe these one-size-fits-all recommendations are not actually effective in all contexts, and it just reinforces the neoliberal “Washington Consensus”. Then the next time there’s a problem the country the results are the same. The other big issue with the IMF is that it is nominally a democracy. The problem is that it operates on the one-dollar-one vote rule, giving rich countries much more power than smaller countries. At any times, this is a bad deal, since what it does is allows the rich countries to try to adjust the poor countries in their image. But it becomes an especially bad deal when you have people in power in the rich countries who are acting in bad faith. This locks out from the international order nations that might not agree with the Washington Consensus for whatever reason. It gives the powerful exorbitant and unearned control and sets us up for problems like we saw above. The US controls the payment system and trade disputes right up until it doesn’t. They’re trying to pressure Iran and Venezuela through control of the dollar payment system. Other countries can just say “never mind” and create parallel and isolated systems so that they don’t have to use SWIFT. The IMF at the very least has recently realized that their structural adjustments may have been overly onerous, but the story of the rest of the institutions has not been written yet.
Cited:
https://timesofmalta.com/articles/view/imf-back-on-stage-in-asia-role-less-certain.42467
For me that context is important in thinking of the modern IMF and its sister institutions – which is an evolved version as an institution of those agreements – is open to criticism. I first became aware of these multinational, multilateral institutions in 1999 when there were protests for the WTO negotiations in Seattle. The media focused on people dressed up like sea turtles, but it was more broadly a protest against the path that globalization proceeded on. Now when I think of that era, I think of this picture of “International Monetary Fund (IMF) managing director Michel Camdessus (left) looks on as Indonesian President Suharto signs an agreement in Jakarta in this January 15, 1998 file photo. When the IMF last held its annual meeting in Asia, in Hong Kong in 1997, it was leading the rescue of the region`s wrecked economies.”
This picture for a lot of people really cements the idea of the IMF as a neocolonial project. Why neocolonial? Mainly because what the IMF had done in its second iteration was to become a source of funds for poor countries who had gotten into trouble somehow. Often a previous administration would over-borrow and ransack the state treasury, and then the next group of people would come in and say that they had no capacity to grow their country thanks to the previous fellows. The IMF would come in and offer help in terms of loans. The problem is that in the international financial system, a country can’t just say that the other fellows were just making themselves rich and we couldn’t be on the hook for what they did and the people who lent to them did so at their own risk, so we will just repudiate those loans and start with a clean slate. Nope. The new guys have to make whole what the other guys did, facing the debt burden. So, what the IMF does is come in and say we can help you out. But there are strings attached. You can get some of our money, but you need to open up your markets and privatize your state holdings. This is a problem because just maybe these one-size-fits-all recommendations are not actually effective in all contexts, and it just reinforces the neoliberal “Washington Consensus”. Then the next time there’s a problem the country the results are the same. The other big issue with the IMF is that it is nominally a democracy. The problem is that it operates on the one-dollar-one vote rule, giving rich countries much more power than smaller countries. At any times, this is a bad deal, since what it does is allows the rich countries to try to adjust the poor countries in their image. But it becomes an especially bad deal when you have people in power in the rich countries who are acting in bad faith. This locks out from the international order nations that might not agree with the Washington Consensus for whatever reason. It gives the powerful exorbitant and unearned control and sets us up for problems like we saw above. The US controls the payment system and trade disputes right up until it doesn’t. They’re trying to pressure Iran and Venezuela through control of the dollar payment system. Other countries can just say “never mind” and create parallel and isolated systems so that they don’t have to use SWIFT. The IMF at the very least has recently realized that their structural adjustments may have been overly onerous, but the story of the rest of the institutions has not been written yet.
Cited:
https://timesofmalta.com/articles/view/imf-back-on-stage-in-asia-role-less-certain.42467
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