• 80s saw a rise in value of the dollar
• marked a shift to "managed floating"

Plaza Accord (1985)

Louvre Accord (1987)

• G-5 agreed to raise value of non $ currencies
• US committed to cut spending
• Dollar Declined in value

• G-3 met to stop further decline of dollar

• Monetary Union (EMU)
• LDC-Pegging to DC currencies
• Dollarization (adopting dollars or Euros)

• Collective management of monetary policies
• realignment of currency exchange rates
• creation of a single currency

• Post WWII liberal economic order
• Global "food crisis" and "oil crisis" of 1970s
• 1980s foreign debt crisis
• End of cold war- couldn't leverage East v. West
• Asian financial crisis (1997)
• 2008 financial crisis

• Est. at Bretton Woods Conference w/ IMF
• provide development financing for LDC's
• members must be in IMF first

• Weighted Voting System on relative econ. strength
• Each member has a quota determines contribution & votes
• G-5 have largest quotas and most votes - US, Japan, Germany, UK/France

*World Bank Structure

IBRD

IFC

IDA

ICSID

MIGA

• loans only to gov'ts
• loans to private ventures in LDC's
• soft loans to poorer gov'ts
• forum for arbitration of disputes over FDI
• technical assistance to LDC's

• More votes than any other member
• WB located in DC
• WP pres. always american
• veto power over formal amendments to Articles of Agreement

WB Infrastructure phase (1945-1960)

weakness?

• focused on financing large projects (dams, bridges, roads)
• weakness- worsening income distribution in LDCs

WB Poverty Reduction phase (1970's)

weakness?

• focused more on basic health, primary education for poor
• increased financing of agriculture and rural development programs
• weakness- detracted from economic growth within LDCs

WB Orthodox Liberal Phase (1980s) 4 phases

weakness?

• Structural Adjustment Programs (SAPs)
• wanted deregulation & liberalization in trade and finance
• washington consensus: orthodox lib. belief that countries achieve economic growth thru free markets and trade
• weakness- worsening inequality; poverty reduction neglected

WB Interventionist Liberal phase (90s-pres) 4 phases

• combines liberal policies with poverty reduction strategies
• recognizing that "one size does not fit all"

Development Initiatives

*Millenium Declaration (2000)

• Reduce poverty by 1/2 by 2015
• reduce child mortality by 2/3 by 2015
• Ensure all boys and girls complete primary schooling
• halt and reverse spread of HIV/AIDS

Official Development Assistance (ODA)

Transformational Development

Gross National Product (GNP)

Gross National Income (GNI)

• sum of all grants sub-market-rate loans (soft loans) to developing countries
• investments in schools, hospitals, water, electricity, roads, sanitation, democratic institutions
• all final goods and services produced for consumption in society during a time period
• total value of goods and services produced within a country (ie GNP), together with income received from other countries

• independ. fed. gov't agency that helps countries recovering from disaster, trying to escape poverty, or engaging in democratic reforms
• gets overall foreign policy guidance from Secretary of State

• Strategic states- will best serve foreign policy interests
• 2007- emphasis on helping Iraq, Afghan., Pakistan in war on terror
• democratic governance and economic growth

• how to target countries? - reasonably stable, significant need for assistance, committment to progress
• Funds used for economic structure to sustain further econ and social progress w/out depending on aid

• Who qualifies?
• where USAID has other core goals like transformational development
• Funds used to help host country to provide resources

• Global Issues: HIV/AIDS, climate change, overpopulation
• funds used to create programs that counter these issues

• Fragile State: vunerable or in crisis (could be economic crisis or famine etc.)
• Funds used to help the fragile gov't, promote economic growth, improving social services like education

Debt Crisis

Debt Service ratio

• When a country lacks sufficient foreign exchange to make the principal payments on its debt obligations - a BOP problem
• ratio of a country's principal payments on its debt to its export income - used to assess a nation's ability to repay foreign debt

Post WWII BOP foreign Debt Regime

(2 Rules)

• A hegemon (US) and IOs (IMF/World Bank)
• Rule #1: additional financing should be made availabe for states dealing with BOP deficits
• Rule #2: providers of financing may attach "conditions" to the funding to ensure countries fix their BOP problem

•  1973 & 1979 oil crisis
• 1981 Recession
• 1982 Mexican Announcement ($78 bill debt default)
• Overlending by private commercial banks
• Borrower Incompetence
• South's dependence on North

1980s foreign debt crisis (strategies to deal with crisis)

objectives

• 2 main actors: IMF and US
• 3 main objectives: prevent the collapse of the international financial system, restore capital market access for debtors, restore economic growth

Foreign Debt "emergency" Plan (1982-1985)

weakness

• "emergency" & private "involuntary" loans to debtors to avert collapse of financial system
• Target LDCs in Africa and LA
• weakness: no structural reforms required

Foreign Debt The Baker Plan (1986-1988)

(weakness)

• focus on debt postponemnent in LA
• provision of new loans ($40 billion) - LA only owes private lenders
• required long-term structural adjusment poicies to promote economic growth
• weakness: neglected least developed countries

*Foreign Debt Strategy 3: The Brady Plan (1989-1994)

(weakness)

• debt reduction (partial forgiveness)
• handled debt on case-by-case basis
• guaranteed repayment to US banks
• required liberal reform of LDCs
• weakness: dealt only with private bank loans, thus excluding poorer LDCs with debts to IOs

Foreign Debt HIPC Initiative (1996-Present)

• focuses on "debt relief" for poorer LDCs
• requires LDCs to implement IMF and WB reforms
• Enhanced HIPC Initiative (1999): doubled debt relief, expanded it to the poorest countries

• Borrower Incompetence - excessive borrowing from foreign banks and in residential real estate
• Over-lending by private commercial banks
• Lack of banking regulation in DCs
• Corruption/crony capitalism
• Panic: creditors suddenly decide to withdraw loans out of fear that other creditors are doin the same

• Who: US, UK, Canada, France, Italy, Japan, Germany, and Russia
• G-8 agreed to:
• cancel $40 billion in debt from 18 HIPCs to WB, IMF
• double foreign aid
• end all export subsidies by 2010
• provide universal access to AIDS treatment by 2010
• ensure access to primary school for all children by 2015

• breaks down national trade barriers
• increased efficiency outweighs costs
• strengthens political/security ties
• speedier than WTO in freeing up trade
• improves competitiveness of MNCs

• divides world into competing trade blocs
• "race to the bottom" MNCs move production to states with low wages/environmental standards
• displaced workers move to obtain work
• reinforces "dependence" of poor states on rich

• increased trade among RTA memebers shifts demand to more efficient production
• increased regional competition fosters support for free trade at the global level

• RTAs raise trade barriers against outsiders to compensate for reduced barriers inside
• investment diversion occurs when MNCs move production inside RTA to produce locally
• jobs are diverted out of one country to another to take advantage of new access in different countries

• determine whether goods crossing borders within an FTA qualify for duty-free treatment

• most common RTA
• removal of all tariffs between members
• members keep their own tariffs towards nonmembers
• less of a threat to national sovereignty
• ex's - NAFTA, US/Israel, EFTA

• Small Number of CUs
• Removal of all tariffs among members
• members keep a common external tariff toward nonmembers
• must surrender more national sovereignty
• Ex's- EC

• Same characteristics of a Customs Union
• free mobility of labor/capital among members
• coordinates health, safety, education, social security
• Ex's - EU before 1999, Mercosur

• same characteristics of a common market
• harmonization of economic and social policies
• a monetary union and common currency
• Ex's - EU since 1999

• same characteristics of economic union
• single foreign and defense policy

• Article 1: Unconditional "MFN" treatment
• Article 24- permits formation of FTAs and CUs
• condition 1: must remove tariffs on "substantially all" trade among members within a "reasonable period"
• condition 2: must not raise tariffs "on the average" towards non members - FTAs can't raise avg. level of duties

• US-Mexico: NAFTA
• US-Central America: DR-CAFTA
• The Free Trade Agreement of the Americas - rejected by the bolivarian countries
• Bilateral Free Trade Agreements - Chile, Singapore, South Korea, Colombia, Peru, Panama

• Expansion of US-Canada FTA of 1989
• A treaty under international law
• congressional-executive agreement under US law
• Unlike the EU, does not create law superior to national law
• eliminates the majority of tariffs between the US, Canada, and Mexico
• requires MFN/national treatment from foreign investors
• prohibits performance requirements
• provides for settling of disputes
• Private actors can sue NAFTA directly

• Labor side agreement
• provides mechanism for member countries to ensure enforcement of domestic labor standards
• Only international body since founding of International Labor Organization (ILO) devoted to labor rights

• response to concerns that NAFTA would result in lower environmental standards if the 3 countries did not est. consistent environmental regulations
• NAAEC does not create new environment standards, but requires member states to enforce their own environmental laws

NAAEC:

CEC

NADBank

BECC

• Commission for Environmental Cooperation - Any person or nongov't organization may submit a claim that a NAFTA partner has failed to enforce env. law
• North American Development Bank - est. to assist and finance investments in pollution reduction
• The Border Environmental Cooperation Commission (BECC)

• Changes in Taxes and Government Spending
• Primary Goal: To remedy BOP disequilibrium by controlling spending
• Method: government controls money supply - Raise or lower taxes to change consumer purchasing power  -increase or decrease gov't spending

• Fiscal policy: to cut the public's purchasing power
• Raise Taxes
• Reduce gov't spending
• Problem: slows business activity, increases unemployment, cuts social programs to the needy

• Purpose: uphold the adjustable peg exchange rate system and provide short term loans to remedy BOP problems
• conditionality principle: members agree to adopt strict economic reforms in return for funding

• members required to peg their currency to gold or $
• members required to contribute to a pool of reserve currencies available for loans
• size of contribution: members assigned quotas based on economic influence - Total quota = $341 billion, US quota = $58.2 billion -
• members economies reviewed every 5 years

• Weighted voting: economically powerful countries have largest quotas and most votes - favors the north (39.1% of voting power)
• US has most then Japan, Germany, UK/France
• Simple Majority voting for most decisions - South can influence through bloc voting

• 5% shift in voting power to achieve a better voting between developed and developing countries
• expand the "flexible credit line": a quick, massive loan program provided without the usual conditionality requirements to countries w/ sound financial managment policies but having a temporary monetary crisis due to external shocks
• IMF looking for China (3.66%) to contribute more
• Beef up SDR () Reserves (currently $283 billion) - kindof monopoly money given to bailout countries and can be converted to their currency - first step towards national currency but its not actually a currency

• Euro likely to challenge the dollar this entire century - eventually countries will adapt - its going to increase an influence of power
• Need for US-EU-East Asian cooperation to promote stability and prevent currency misalignment

• Policies depend on whether gov't opts for external or internal adjustment- external- tariffs, quotas, currency devaluation - internal - imposed on indiv. at home bc of changes in taxes and interest rates
• orth. liberals for internal bc BOP deficits are bc of domestic inefficiencies- against external bc increased trade barriers
• Realists for external bc its "fair game" in gaining comp. position- against internal bc poses threat on states' policy making autonomy

• US increased military budget $100 billion
• Europe subsidizes agriculture $35-$40 billion per year, while demanding other countries to liberalize markets
• US- $190 billion subsidy to farms
• Foreign aid amounts to $50-55 billion per year
• LDCs pay $200 billion to DCs every year
• ****MORE AID GOES TO THE RICH THAN THE POOR**** - bc gov'ts are comfortable loaning to countries that are poor but off to a good start

• gas bills skyrocketed, world was held hostage for period of time
• merging of developing world as a player in politics for first time since WWII

• OPEC petrodollar incentivized lending - aggresively increased loans to the south without warning south to stop borrowing
• Lifting of capital controls in the North freed up for lending

• Reagan came to office, global economic growth halts, inflation skyrockets -
• Reagan raises interest rates, payments go up, put halt to inflation, slowed down consumers in market, debt skyrocketed

• LDCs sought private bank loans to avoid "conditionality" requirements
• LDCs flawed domestic policies - poor gov't investments, overspending, corrupt officials

• "debt traps"
• IMF/WB conditionality perpetuated LDC dependency

• unusual situtation bc mexico was an oil exporter
• spent their $ to produce more oil reserves, went and borrowed more money
• Int. rates doubled and mexico not able to pay back loans to banks in foreign countries
• Mexico  defaults on its debt and sends shockwave to developing world and other countries declare a default
• triggered rxn for WB to stop lending
• global economy under attack

• increase efficiency in use of world's resources
• stimulate innovation, competition, and growth
• create employment in host countries
• provide host country with capital, tech., and marketing networks

• Similar to FTA but deal w/ foreign investment instead of free trade
• impose rules on CPs as to treatment of FDI - prohibit performance requirements
• Provide dispute resolution mechanisms
• most BITs between LDCs and DCs
• one sided doc's bc tools of MNCs to protec their interests rather than workers and "little guys"
• best avenue right now for regulation

*Oil Price Management

• effort to keep the price of oil economically attractive but also low enough to discourage seeking competing forms of energy
• can't just jack up the price to consumers because eventually gov't and special interest groups will coordinate massive campaign to find natural resources

• point at which the max global petroleum production is reached- after this point the production will terminally decline
• population keeps growing and demand for oil will only increase, enough oil to sustain growing demand?

• get control of increasing power of oil companies
• gov'ts work together and determine how much was produced and sold to control price
• international cartel that controls 2/3 of global oil reserves
• members: algeria, angola, ecuador, iran*, iraq*, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela
• OPEC statute says: "Any country with a substantial net export of petroleum, that has same interest as member countries, may become full member of the organization, if accepted by majority of 3/4 of full members, including concurring votes of all founding members."

• After 8 year war with Iran, Iraq persauded OPEC to raise oil prices so it could pay off war debts
• Kuwait did not go along with production quota assigned to it  - chose to overproduce and keep prices down
• Iraq invades Kuwait Aug. 2, 1990 - gave Iraq 1/5 world's oil supply
• consuming and producing countries responded

• Diversify oil supplies- start drilling in off limits places - reduce dependency on middle east dictatorships
• Use strategic reserves- we have 6 months of reserve oil - many think we should tap in from time to time (when OPEC prices high, then replenish when go back down)
• Increase industrial efficiency
• Raise fuel efficiency standards
• Develop renewable energies - wind, solar, etc
• Phase in fuel taxes - oil not taxed enough - people would rethink a joyride if higher taxes

• to battle tragedy of commons- help environment
• "No Harm" principal (21): States have the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other states

*the RIO declaration of 1992 (Earth Summit) -

Principle of sustainable development

Principle of Common but Diff Responsibility to the Env.

The Precautionary principle

• Notion that continued economic growth as well as population growth can take place in a manner that will bring the global population to an acceptable overall standard of living without damaging the earth's life support system
• All countries are responsible for global env problems, but some more than others - China hides behind a developing country exception - China and India want lower threshold, but US says no - China emerging to quickly on world's economy
• Where there is a threat of irreversible env. damage, lack of scientific certainty shall not be a reason to prevent the damage

• Unsigned and not ratified
• To stabilize greenhouse gas concentrations in atmosphere
• DCs agree 5.2% reductions below 1990 levels by 2012
• Cap and Trade: allows for emissions trading among states (selling of quotas)- countries emit less can sell their quotas

*Copenhagen Climate Summit (Dec. 7-18 2009)

4 essentials

• commitments by developed countries to reduce emissions of greenhouse gases
• commitments by developing countries to do the same
• financing for DCs making commitment - 2001- EU, Canada, Norway, Switzerland, Iceland, and New Zealand promised $410 million a year - only 10% of that has been delivered - DCs want a min. of $400 billion a year by 2020 for adaptation to climat change
• how to manage financing?

• A central authority sets a limit or cap on the amount of pollutant that can be emitted. Companies are issued emission permits and req. to hold an eq. # of allowances that represent the right to emit a specific amount. Total amount of allowances can not exceed the cap, limiting emission to that level. Companies with increased emmissions will need to buy credits from those who pollute less. The buying of credits is a trade.

• Fund family planning/birth control initiatives - free contraception - adopting China's one child policy in other countries
• invest in education for all children in developing world
• promote feminism worldwide
• est. IIO to coordinate immigration policy/movements
• incentive rural development to combat urbanization
• explore outer space