MAJOR CONCEPTS IPE

Importante:
Los conceptos que Christina pidi que no tomramos en cuenta porque no son del
primer parcial son:
13. Factor specificity (Karla)
31. Stolper-Samuelson (Mariana)
32. Ricardo Viner (Nazim)
38. State-centered approaches to trade (Rebeca)
39. Society-centered approaches to trade (Rebeca)

Favor de seguir el ejemplo (pero con ms sobre las lecturas):

1. Dependency theory
Definicin en clase:
An analysis of relations between the core and the periphery.
Promoted Import Substitution Industrialization as an alternative to participation in the
international market.
Central Dependency Scholars
Andre Gunder Frank
Development under-development
Underdevelopment as a result of colonization
Theotonio de Santos
Colonial dependence
Financial-industrial dependence
A structure of dependence
- Raul Prebisch
United Nations Committee on Trade and Development (UNCTAD).
Developing country (scarce technology and capital).
-

Definicin en Lecturas (es slo un ejemplo, falta ms informacin de las lecturas):

Dependency theory is a structuralist perspective that highlights the relationship between what
are referred to as core and peripheral countries, while calling attention to the constraints put on
countries in the latter group.
Con bibliografa: Balaam D. N. and Dillman B., Introduction to International Political Economy,
the United States, Pearson, 2013.

1. Dependency theory (Alberto)

Definicin en clase
An analysis of relations between the core and the periphery. The core depends on raw
materials of the periphery and the periphery depends on manufactured goods of the core. Due to
the values traded both core and periphery states cannot change its status or role in the
international economy, therefore, theyre fixed. This theorists given this realization proposed exiting
the system and creating a new one in which they could self provide their goods to their population.
In order to achieve this they thought of Promoted Import Substitution Industrialization as an
alternative to participation in the international market. A clear example of this scholars can be
found in Latin American countries in the 70s.
Import Substitution Industrialization was based on infant Industrys theory. One should protect
specific industries (the ones that produced goods you would normally import) within your country to
let them grow and permit competition in the international arena.
Central Dependency Scholars
Andre Gunder Frank
Development under-development
Underdevelopment as a result of colonization
Theotonio de Santos
Colonial dependence
Financial-industrial dependence
A structure of dependence
- Raul Prebisch
Created United Nations Committee on Trade and Development (UNCTAD).
Developing country to find scarce technology and capital.
-

Definicin en las Lecturas

A country did not thrive or falter simply because of its own national endowments. Rather
progress could be attributed to the power it had to set the rules of the international economic
game. Center countries or the industrialized countries defined the rules, the periphery or
developing countries, were pawns in the international pursuit of profit.
Cardozo actually thought that it was possible to grow within the systems but severe antimonopolistic international measures were needed.
ISI tools:

SOEs State Owned Enterprises

High tariff Walls as protectionist measures.
Export subsidies
Foreign exchange controls
Import Licensing
Industrial Incentives
Quotas
Tariffs

ISI failed do to its lack of competition incentives in a globalizated economy. It promoted

industries that wtihout the protection wouldnt be able to stand by themselves.
Bibliografia: Balaam D. N. and Dillman B., Introduction to International Political Economy, the
United States, Pearson, 2013.
P. Franko The puzzle of Latin American Politics Rownman and Littlefield Publishers. 2007.

2. World Systems theory (Ana Padilla)

3. Barriers to trade (Arturo Duque)
En clase:
Barriers to trade are usually attached to protectionist policies supported by the mercantilist
ideology and refused by the liberal and neo liberal perspective.
Trade barriers can be imposed either by taxing or applying a tariff to the movement of goods
and services, or can be Non-tariff barriers. NTBs refer trade restrictions that make importation
and/or exportation of a product difficult and/or costly.
Can take various forms such as:
1. Specific prohibitions Import bans.
2. Specific conditions Complex regulatory environment, lengthy customs
procedures, inadequate infrastructure.
3. Specific market requirements Employment law, various product specifications
(example: cars).
After WWII the GATT was created to regulate and negotiate the diminish of tariff and non-tariff
trade barriers.
Lectura:
Irwin. The GATT in historical perspective.
During 1860-1913 world trade relations centered around a network of bilateral trade treaties
(nonsystem) containing the Most favored Nation clause. This regime brought about relatively
low trade barriers, along with very little trade discrimination.
Certain that the nonsystem of the late 19th century would not be automatically resurrected after
WWII, the US and the UK began preparing the ground during the ground during the early 1940s
for a postwar international agreement on commercial policy to reduce trade barriers and limit
discriminatory tariff preferences.
Irwin. A brief history of international trade policy
Mercantilists sought a highly interventionist agenda, using taxes on trade to manipulate the
balance of trade or commodity composition of trade in favor of the home country. This strategy
could never work if all nations tried to follow it simultaneously
Smith argued that economic growth depended on specialization and the division of labor.
International trade effectively increased the size of the market for any given country, allowed for
more refined specialization, created an international division of labor, and thereby benefited all
3

countries by increasing the worlds productivity and output. . Smith made a powerful case that
government promotion of trade and government restriction of trade were unwise and harmful.
He changed the analysis of trade policy and established the presumption that free trade was the
best policy.
4. Comparative advantage v.s absolute advantage (Brianda)
Definicin en clase:
Absolute advantage states simply, if one country can produce a product at a lower cost than
another country, then it would make sense to trade.
The comparative advantage concept takes into account the opportunity cost. In his famous
example, Ricardo discussed trade between Portugal and England.

His model encompassed the following assumptions

o
Both countries produced cloth and wine.
o
Labor is the sole input of production
o
Labor productivity varies between industries and countries
Although Portugal had an absolute advantage in both goods, trade was beneficial due to the
comparative advantage of England in producing cloth. Hence, according to Ricardo, England
would nevertheless benefit from free trade with Portugal. The lesson is that to identify a
countrys comparative advantage, a comparison of production costs across countries is
necessary.
Definicin en lecturas
DILMAN AND BALAAM (Chapter on liberalism)
For Smith, if a foreign country can supply us with a commodity cheaper than we
ourselves can make it, better bout of them with some part of the produce of our
industry, employed in a war in which we have some advantage. Smith, thus,
generally opposed most state restrictions on free international market. Absolute
advantage
IRWIN Against the Tide
For Smith, the underlying cause of the foreign industry superiority was irrelevant. As long as the
one country has an advantage in the production of a good and the other country wants it, it will
always be more advantageous for the latter rather to buy from the former than to make.
IRWIN Trade Under Fire
Smith: What is prudence in the conduct of every family can scarce be folly in that of a great
kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry, employed in a
way in which we have some advantage. The general industry of the country . . . will not thereby
be diminished . . . but only left to find out the way in which it can be employed with the greatest
advantage. It is certainly not employed to the greatest advantage, when it is thus directed
towards an object which it can buy cheaper than it can make.

Smith believed that the benefits of trade went well beyond this simple arbitrage exchange of
what is abundant in the home market for what is abundant in the world market. The wealth of
any society depends upon the division of labor. The division of labor, the degree to which
individuals specialize in certain tasks, enhances productivity. And productivity, the ability to
produce more goods with the same resources, is the basis for rising living standards.
Ricardo asked, what if one country was the most efficient at producing everything? Would that
country still benefit from trade? Would disadvantaged countries find themselves unable to trade
at all? To answer these questions, Ricardo arrived at a brilliant deduction that became known as
the theory of comparative advantage. COmparative advantage implies that a country could find
it advantageous to import some goods even if it could produce them more efficiently than other
countries.
According to Ricardo, international trade is not driven by the absolute costs of production, but by
the opportunity costs of production. The country most efficient at producing textiles might be
even more effi- cient than other countries at producing other goods, such as shoes. In that case,
the country would be best served by directing its labor to producing shoes, in which its margin of
productive advantage is even greater than in textiles.
5. Industrial Revolution (Carla)
En clase:
September 3:
Polanyis puzzle: Why did the prolonged period of relative peace and prosperity
in Europe (1815-1914) suddenly end?
o According to Polanyi, the answer to the puzzle goes back to the Industrial
Revolution. It gave rise to a number of English thinkers who developed the
theory of market liberalism.
Market liberalisms core belief (acc. To Polanyi): Human society should be
subordinated to self-regulating markets.
Polanyi argues that Englands leading role as the workshop of the world
resulted in the idea of a self-regulating market becoming the organizing
principle of the world economy. The societal response was the concerted
effort to protect society from the market. In turn, effort to protect society
produced conflicts.
Polanyi argues that creating a fully self-regulating market economy is
impossible because it requires that human beings and the natural
environment be turned into pure commodities. This will ensure that
destruction of both society and the natural environment. His argument
rests on his distinction between real and fictitious commodities.
Embededness = economy is not autonomous; rather it is subordinate to
politics, religion and social relations.

September 8:
Britains power declined just before WWI (1914-1918). The industrial Revolution
had spread; countries were catching up while Britain experienced relative decline.
En lecturas:
K. Polanyi. The Great Transformation: The Political and Economic Origins of Our Time (ch. 3).
During the Industrial Revolution (XIXth century) there was an improvement in tools of
production, accompanied by a catastrophic dislocation of the lives of the common people.
Economic liberalism misread the history of the Industrial Revolution because it insisted
on judging social events from the economic viewpoint.
The Industrial Revolution was merely the beginning of a revolution as extreme and radical as
ever inflamed the minds of sectarians, but the new creed was utterly materialistic and believed
that all human problems could be resolved given an unlimited amount of material commodities.
The Industrial Revolution should be defined as the establishment of market economy.
The impact of this institution cannot be fully grasped unless the impact of the machine on a
commercial society is realized. Once elaborate machines and plants were used for production in
a commercial society, the idea of a self-regulating market system was bound to take shape.
Production with the help of specialized, elaborate, expensive tools and plants can be fitted into
such a society only by making it incidental (consequential) to buying and selling. The merchant
will procure the goods in a different way, not by buying them ready-made, but by purchasing the
necessary labor and raw material. The two put together, plus some waiting, amount to the new
product.
Since elaborate machines are expensive, they do not pay unless large amounts of goods are
produced. For the merchant all factors involved must be on sale: they must be available in the
needed quantities to anybody who is prepared to pay for them. Unless this condition is fulfilled,
production with the help of specialized machines is too risky. In an agricultural society such
conditions would not naturally be given; they would have to be created.
All transactions are turned into money transactions. All incomes must derive from the sale of
something or other, and whatever the actual source of a person's income, it must be regarded
as resulting from sale. The most startling peculiarity of the system lies in the fact that, once it is
established, it must be allowed to function without outside interference. Profits are not any more
guaranteed, and the merchant must make his profits on the market. Prices must be allowed to
regulate themselves. Such a self-regulating system of markets is what we mean by a market
economy.

What the merchant needs is raw materials and labor: nature and man. Machine production in a
commercial society involves the transformation of the natural and human substance of society
into commodities. Nothing less will serve the purpose: obviously, the dislocation caused
by such devices must disjoint man's relationships and threaten his natural habitat with
annihilation.
J. Ravenhill. Global Political Economy (ch. 1).
The era of mercantilism did not bring a notable increase in overall global wealth. Despite the
striking extension of the global market during the seventeenth and eighteenth centuries, the
majority of commerce continued to be conducted within individual localities until the Industrial
Revolution. The introduction of steam power revolutionized transportation, both internally and
internationally. And in the second half of the XIXth century, further technological advances
contributed to a shrinking of the world and to a deepening of the international division of labor.
The value of world exports grew tenfold between 1820 and 1870.
6. Corn Laws (Daniela)
Definicin en clase:
Really protectionist measures, especially with grains.[1]
They were important because most academics think that it was because of their
repeal that GB started to practice free trade
(In a more friendly way: You must untax the peoples bread! - Cobden)
Lecturas
J. Ravenhil (ed.). Global Political Economy. 4th ed. Oxford University Press
Chapter 5 The Evolution of the Global Trade Regime by G.R. Winham pp. 77, 111
The Corn Laws were perhaps the best known example of a political clash over trade
policy that fits nicely with Stolper Samuelson theorem.[2]
They were created after the revival of foreign trade after the Napoleonic Wars
Restricted importation of various grains like wheat, rye, barley and oats, as well as beans and
peas. (those grains were defended by the landowning elite)
Obviously not everybody was happy with this so the idea of a reform started with
manufactures, especially textile producers that were anxious to reduce labor costs. So they
created the Anti Corn Law League in 1838
Richard Cobden became the leagues most famous advocate. He convinced working
and middle classes to push the parliament for a new reform. Within this group was the
Chartist Reform Movement which organized a bigger campaign
1932 Great Reform Act and the enfranchisement of voters in the large industrial
center
This had a great impact on Tory Prime Minister, Robert Peel, he introduced a sliding
scale for grain duties in 1841 and then reduce them in 1842 1844 in an attempt to reduce
the food crisis.
He failed.

In 1845, with both support of the Radicals and Liberalist, he[3] repealed the Corn Laws
altogether
This provided high protection to agricultural products and followed up with this action
the series of new administrative and diplomatic measures over the next two decades
that put free trade into practice.
1860 all protectionist duties in Britain were eliminated.

D.A. Irwin. A Brief History of International Trade Policy

- The repeal of the Corn Laws in 1846 was a crucial formative movement in the
development of the modern world order.
From that point on, Britain was committed to the path of free trade. This path in
turn had a major impact in the development of a more open and integrated world
economy

[1] Most academics think this lead to the food crisis in 1844
[2] Understand the Corn Laws repeal as an outcome of a struggle between the industrial and
agricultural interests in Britain, through a different lens that of hegemonic leadership
suggests that Britain was pursuing a strategy of leadership and openness in the world economy
(OJO! Esto no vena en el libro. El autor no dice qu es el teorema, pero esto lo encontr en un
paper de dos acadmicos ingleses . De todos modos, Christina dijo que el teorema no es tema
del primer parcial)
[3] After this the Tories were isolated on the trade issue in parliament
7. Frederic Hayek (Diannic)
Introduction
Where will socialism lead us? We should endeavor to understand the forces which have created
National Socialism at this time: That this will enable us to understand our enemy and the issue
at stake between us. We know we are fighting for freedom to shape our life according to our
own ideas.

Chapter 1 Abandoned Road

Political thinkers warned us that socialism means slavery and now a new kind of slavery rises
and we dont see the connection. We have moved in the direction of socialism. We are
abandoning the basic individualism inherited by Montaigne, Erasmus. Individualism in the
Renaissance meant respect for the individual man, which is the recognition of his own views
and tastes as supreme in his own sphere (science, energies). Today individualism means
egoism and selfishness. Growth of commerce meant men could attempt to shape their lives.

Economic freedom>> free growth of economic activity. All classes did benefit from the general
advance. Material comfort, security, independence, new sense of power over their own fate.
Liberals>> you must understand the society, its structure to create the conditions most favorable
to its growth.
2. Great utopia
Socialism meant new freedom from coercion, from necessity. The demand for new freedom was
the old demand for an equal distribution of wealth. Socialism belongs to the world of utopias, the
belief of attainability of freedom & equality through Marxism has forced Russia to travel towards
a totalitarian state. Hitler>> socialism had killed liberalism
3 Individualism and Collectivism
Socialism aims:

Ideals of social justice, greater equality and security

Abolition of private enterprise creation of a system of planned economy

Some see socialism as an object of practical politics, others see it as a danger.

Dispute on what is the best way on planning our common affairs
Planners argument: a central direction of all economic activity according to a single
plan laying down how the resources of society should consciously directed to serve
particular ends. We must centrally direct economic activity to make the distribution of
income conform to current ideas of social justice.
Liberal argument: Where effective competition can be created, it is a better way of
guiding individual efforts. There is no coercive or arbitrary intervention of authority.
Controlling prices or quantities of commodities deprives competition of its power of
bringing about an effective coordination of individual efforts.
Hayek:

Effective competitive system needs an intelligently designed and

continuously adjusted legal framework.

Competition and central direction become inefficient tools if they are

incomplete

Planning and competition can be combined only by planning for

competition, not by planning against competition.

Central planning is the start of the growth of constraints on individual

society.
F.A. Hayek. The Road to Serfdom. University of ChicagoPress: 50 Anv edition.
8. John Maynard Keynes (Graciela)
In class:
John Maynard Keynes (1883-1946) was a British economist
Often considered the father of the heterodox school. Under
conditions of uncertainty he proposed some government intervention.
Keynes was later important in terms of established the Bretton
Woods Institutions
9

For Keynes, the question revolved around how to restart the

domestic economy
Keynes proposed that the state take the lead
Constructive state intervention
This line of thinking has become known as the heterodox school
The heterodox school dominated domestic economies after WWII
The Keynesian Compromise
At the international level, we talk about the Keynesian Compromise
A compromise that reconciles state and international interests
Keynes played a key role in establishing a new international economic order (The
Bretton Woods System or the Bretton Woods Institutions)
Lecturas:
Liberal with a distaste for authoritarian regimes such as communism and facism.
Keynes rejected the populist interpretation of Hayek's argumentthat any increase in state
planning is the first step on the way to tyrannybut agreed with the overall view that the bounds
of state intervention needed to be clearly defined for liberal democracy to remain safe.
o The economist. Keynes and Hayek: prophets for today.
John Maynard Keynes is one of the most influential political economists of the twentieth
century. He stands out in the evolution of liberalism or developing a subtle and compelling strain
of liberalism called Keynesian theory of economics or Keynesianism.
His ideas were increasingly popular in the 1930s up through the Great Depression and WWII
until the early 1970s.
Keynes is known for refuting some of the basic principles of economic liberalism. He believed
that the great depression was evidence that the invisible hand of the market sometimes errs in
catastrophic ways.
The solution for Keynes is to combine state and market influences in a way that it still relies
on the invisible hand but theres a control from the government.
The Keynesian compromise: Keynes was involved in the reconstruction of Western Europe
after WWII. He also established the new international economic order.
o Balaam & Dillmann Chapter on liberalism
9. Neoliberal economic policies (Guillermo)
"Las politicas neoliberales fueron promovidas por Reagan y Thatcher como respuesta al
agotamiento del keynesianismo clasico para hacer frente a las necesidades del sistema
nacional"
-Se basaron mas en la ideas de Smith, von Hayek, y Friedman que en Mill y Keynes
-Estas politicas fueron una respuesta ante la negativa de poder utilizar politicas monetarias
cuando el sistema internacional funcionaba con el sistema dolar-oro, se accedi a la baja del
gasto gubernamental y la posibilidad de no reducir sueldos por amenazas inflacionarias, sino
depreciar la moneda y aumentar las tasas de inters.

10

-Promete la idea de la convergencia: al cabo de la apertura de los mercados financieros, de

productos es como el mercado en el largo plazo establecer un precio nico, y por ende un
salario nico, por el que todos los paises coincidiran en mismo punto.
-El avance tecnolgico, es el que propicia un avance en los niveles de crecimiento de los
pases.
-Se basa en la desregulacin, la baja de impuestos, privatizacin de empresas paraestatales, la
promocin del libre mercado, de la no intervencin estatal, para el saneamiento de las finanzas
pblicas.
-Acompaado por la globalizacin, el neoliberalismo busca promover los valores en el
escenario internacional
-Una economa global integrada derramara sus beneficios netos en todas las esferas pblicas.
-Crticas: Stiglitz hace referencia a que el neoliberalismo ha sido incapaz de acondicionar a los
pases en desarrollo para que alcancen a los pases desarrollados. Colander usa el argumento
del precio nico, para establecer que no es posible la idea de la convergencia, ya que esta
propiciaria cambios en el sistema laboral estadunidense y que las presiones sociales seran tal
que no podra implementarse. Se observ en la dcada de los 90 que la mayora de los pases
implementaron polticas neoliberales a raz de crisis econmicas y financieras, sin embargo no
estuvieron exentos de ellas despus tampoco. Friedman, habla que el modelo no contempla
externalidades como la asimetra de informacin o la proteccin medioambiental.
-La teora neoliberal pareciera ser una ley imperfecta para el desarrollo y muchos estados
optaron por mayor intervencin estatal para creacin de incentivos al desarrollo tecnolgico y el
crecimiento.
D.N Balaam and B. Dillman, Introduction to International Political Economy. Pearson, 2013.
O Chapter on Liberalism

10. Liberalism (Ivan)

Clase: Is the most influential perspective in IPE. Economic institutions and states founded and
influenced by liberalism. Institutions like the WTO, IMF, WB.
Two strands:
Orthodox school (Hayek)
The government should provide internal and external security. Establish essential public goods
such as infrastructure. Prevent the spread of disease (public health). And establish property
rights and enforce contracts.
Individual rights at the center of orthodox liberalism.
Economic freedom = Political freedom
Heterodox school (Keynes)
Important for establishing Bretton Woods institutions. State intervention in case of extreme
uncertainty, constructive state intervention
11

Adam Smith said that trade is not a zero-sum game but a positive sum game. Protective trade
instruments are inefficient because they are not competitive. If resources are allocated
inefficiently, it does not maximize utility.
Rationality: our behavior is purposeful and goal-oriented. We order our preferences and we
pursue these preferences systematically. We are utility maximizers.
Rational Choice Theory: we have perfect information and we purposely calculate the cost of our
alternatives.
Efficiency is the core principle of economic liberalism. The best placement of scarce resources.
Lectura: Essentially, the broad term liberalism means liberty under the law. Liberalism
focused on the side of human nature that is competitive in a constructive way and is guided by
reason, not emotions. Although liberals believe that people are fundamentally self interested,
the do not see this as a disadvantage because competing interests in society can engage one
another constructively. This contrast with the mercantilist view, which, dwells on the side of
human nature that is more aggressive, combative and suspicious.
For classical economic liberals, individual freedom in the marketplace represents the best
alternative to potentially abusive state power when it comes to the allocation of resources or
organizing economic activity.
In a capitalist economy, self-interest drives individuals to make rational choices that best serve
their own needs and desires. However, it is competition that constrains and disciplines selfinterest and prevents it from becoming destructive to the interests of others.
When individuals are free to make their own career choice, they naturally prepare for and seek
out careers or lines of employment in which they are likely to be more productive. Likewise, as
economic circumstances change, labor resources will be rapidly redeployed to growing sectors
of the economy as individuals take advantage of the new opportunities.
Smith is clear that indeed state has some necessary and legitimate functions in society,
especially to defending the country, building public works, health, enforce contracts, keep
market functioning, and help to achieve individual rights. If competition is absent the invisible
hand can no longer make competition work for the benefit of the society.
Ricardo argued that positive-sum payoffs of trade hind together the nations of the world by a
common thread of interest and intercourse.
Mill acknowledges the problems created by the markets inherent inequality. He proposed that to
achieve social progress, the state should take the definitive action to supplement the market.
His views on education and other social policies reflect the evolution of liberalism in his time

D.N Balaam and B. Dillman, Introduction to International Political Economy. Pearson, 2013.
O Chapter on Liberalism

11. Classical mercantilism/neo-mercantilism (Johanna)

Classical Mercantilism (definicin en lectura):

12

Mercantilism is the oldest and psychologically most deeply embeded of the three IPE
perspectives. It accounts for one of the basic compulsions of all people and nation-states: to
create and sustain wealth and power in order to preserve and protect the nation's security and
independence from any number of real and imagined threats. Historically, classical mercantilism
connoted efforts by states to promote exports and limit imports, thereby generating trade
surpluses that would strengthen the nation while protecting certain groups within society.
The classical mercantilist period of history is inextricably linked to the rise of modern nationstate in Europe. The practice of mercantilism gained full head of steam after the Thirty Year's
War ended in 1648.
Neo-mercantilism (definicin en clase):
-We use the term to account for a variety of instruments to protect wealth and power.
- The term protectionism is generally used to describe the existence of trade barriers.
Neo-mercantilism (definicin libro):
Today, neomercantilism accounts for a more complex world marked by intensive
interdependence where states use a wider variety of instruments- especially economic ones- ti
protect their societies.
Biografa: Balaam & Dillman, Chapter 2 Mercantilism and Structuralism.
12. Structuralism

The results of decades of neoliberalist politics are now highly visible and regrettable: financial
crises, poverty, inequality and capital accumulation in just a few hands (Kose & Ozturk 2014).
Capitalism, and in its most advanced form, imperialism, is by itself an unfair order that exploits
societies to the benefit of the few (Lenin). Structuralism is then a reaction to this economic order.
Structuralism is a theory to explain economic relations by criticizing the prevailing order.
It main features are that i) it observes economic relations from the point of view of the oppressed
and the unprivileged; ii) it addresses the importance of the underdeveloped, peripheral nations
that faced challenges extremely different from the first-world countries; iii) the main factors to
explain social reality is economics and technology (Ballam & Dillman).
The philosophical foundations of structuralism comes from Karl Marx and its concepts of
class, dialectical materialism, class struggle and class consciousness. Their narrative is as
follows: there exist a fixed amount of factors of production (capital) that is distributed in an
uneven way; just a few hands concentrate the most of them. The capitalist in order to achieve its
economic purposes (accumulation of wealth) exercises a relation of dominance to the workers
(proletariat) who are being exploited. As the dominant class, it takes over institutions, specially
the State, that reifies this relation in order for it to last for as long time as possible (Polanyi;
Balaam & Dillman; Lenin).
For IPE, structuralism extrapolates this narrative to explain the international economic
order.

Capitalist/first

world/wealth

accumulating

countries

exploit

proletariat/third

13

world/peripheral nations extracting resources that could be either natural, manufactured or even
intellectual, reifying this relations of dominance over time (Balaam & Dillman).
Recent or contemporary readings (extensions) of structuralism come in the form of
Modern World System Theory and Dependency Theory. The first one shaped the ideas of a world
divided into core, periphery and semiperiphery according to its position in the dominance
relation between each other (Wallerstein). Dependency theory (ver el otro resumen/concepto de
este) was developed in Latin America by UNECLA (CEPAL) to explain poverty and slow
growth in the region. The main explanation comes from the dependence of primary products and
the volatility of its prices and their lack of industrialization (Franko).
The most important contribution of structuralist theory is that it let us think again about
this relations and identify the asymmetries that surround them. This could enable us to think
international economic relations differently and should empower us to denounce this unfair
system and all of its problems. To interpret the world as a series of dialectical conflict of classes
let us imagine a world with a minimal confrontation in which poverty and inequality could reach
an all time low.
Main scholars:
Marx, Lenin, Polanyi, Wallerstein, Presbich, Krugman, Stiglitz
Bibliography:
In text
13. Factor specificity (Karla)
14. GATT/WTO (Mariana)
Lo visto en clase :
El GATT (General Agreement on Tariffs and Trade) fue creado en 1947 y no es parte del Banco
Mundial, en 1995 se convirti en el WTO.
El GATT buscaba reducir las tarifas y fue muy exitosos en eso, sin embargo, se tena la
cuestin de cmo disminuir las barreras sin tarifas, las cuales no eran fciles de identificar. El
GATT es un framework agreement with contracting parties. Es importante mencionar que la
principal diferencia entre el GATT y el WTO son los mecanismos de discusin de las
resoluciones, esto provoc que el GATT fuera mucho ms dbil que el WTO
El artculo 35 del GATT establece que:

No discriminacin

Principio de la nacin ms favorecida cualquier ventaja que se

le d a un parte contratante, se le dar a todas las dems partes
contratantes.

14


Principio del intercambio entre naciones obliga a las partes
contratantes a tratar por igual a los productores extranjeros y as los
nacionales. Tambin establece que un pas cannot discriminate vs imported
products once it had cleared customs

Prohibition vs Quantitative y otras restricciones de no tarifa como las

cuotas, en este punto algunas naciones acordaron de forma voluntaria restricciones a
las exportaciones para cumplir con esta regla.

Principio de Reciprocidad se hizo como proteccin cuando los

pases en desarrollo se empezaron a unir, es muy cuestionable, ya que es
difcil que exista reciprocidad entre partes muy desiguales.

Principales Funciones del GATT

Facilitar negociaciones
Poner estndares y reglas de transparencia
Establecer normas
Administrar los acuerdos de tratados

El GATT/ WTO organizaron sus negociaciones en lo que hoy son 8 bargaining rounds, y
un noveno que se encuentra en curso. Los 7 primeros trataron sobre la legalidad del GATT
y sus tarifas. Entre los rounds se encuentran; Genera (1947), Uruguay (1986- 1993),
Kennedy (1963 - 1967), Tokyo (1973 - 1979) y Doha (2001)
Retos ms grandes de la transicin GATT WTO.

Pasar de una base de consenso del GATT a una base de reglas

con el WTO.

Complicacin de las negociaciones a causa del aumento de

miembros y de la diversidad.

La reduccin de las barreras de no tarifa es mucho ms

complicado que reducir las tarifas

La participacin de la sociedad civil.

Expandir la agenda global trae nuevos conflictos como lo son el

intercambio de servicios, la propiedad intelectual o medidas de inversin.
Lecturas : repiten exactamente lo mismo que se vio en clase pero amplan la parte del WTO.
There are a number of ways of looking at the World Trade Organization. It is an organization for
trade opening. It is a forum for governments to negotiate trade agreements. It is a place for
them to settle trade disputes. It operates a system of trade rules. Essentially, the WTO is a place
where member governments try to sort out the trade problems they face with each other
The WTO was born out of negotiations, and everything the WTO does is the result of
negotiations. The bulk of the WTOs current work comes from the 198694 negotiations called
the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade
(GATT). The WTO is currently the host to new negotiations, under the Doha Development
Agenda launched in 2001.

15

Where countries have faced trade barriers and wanted them lowered, the negotiations have
helped to open markets for trade. But the WTO in some circumstances its rules support
maintaining trade
At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading
nations. These documents provide the legal ground rules for international commerce. They are
essentially contracts, binding governments to keep their trade policies within agreed limits.
Although negotiated and signed by governments, the goal is to help producers of goods and
services, exporters, and importers conduct their business, while allowing governments to meet
social and environmental objectives.
What the WTO do :
Trade negotiations The WTO agreements cover goods, services and
intellectual property. They spell out the principles of liberalization, and the
permitted exceptions.
Implementation
and
monitoring
WTO
agreements
require
governments to make their trade policies transparent by notifying the WTO
about laws in force and measures adopted.
Dispute settlement Countries bring disputes to the WTO if they think
their rights under the agreements are being infringed.
Building trade capacity WTO agreements contain special provision for
developing countries, including longer time periods to implement agreements
and commitments, measures to increase their trading opportunities, and
support to help them build their trade capacity, to handle disputes and to
implement technical standards.
Outreach The WTO maintains regular dialogue with nongovernmental
organizations,
parliamentarians,
other
international
organizations, the media and the general public on various aspects of the
WTO and the ongoing Doha negotiations, with the aim of enhancing
cooperation and increasing awareness of WTO activities.
Referencias:
Ravenhill (ed.). Global Political Economy. 4thed. Oxford University Press.
Chapter 5: The Evolution of the Global Trade Regime by G. R. Winham.
Irwin. The GATT in Historical Perspective. The American Economic Review, Vol.
85, No. 2.

15. Bretton Woods Institutions (Nazim)

Definicin de clase
The Bretton woods Conference resulted in a global economic institution.
The main objectives at Bretton Woods:
o To manage the international economy
o To rebuild war-torn economies.
o To avoid the disastrous events of the interwar period.

16

International institutions provide a forum for dialogue for countries. The assumption is that we
can cooperate (Wilson after WWI).
The Post WWII architecture consisted in:
o The International Monetary Fund (IMF): promote short terms loans and monitor
the gold standard (The IMF coordinated). The coordinating ability of the IMF with
the gold-standard helped to reduce uncertainty
o The World Bank: bank of reconstruction aiming at the time to Europe.
At the international level, liberals tend to support the establishment of strong institutions
o Liberal institutionalism
o The IMF: was established for financial stability
o The World Bank: reconstruction
Definicin en libros
The commitment to multilateralism that developed in the late 1930s and during the Second
World War bore immediate fruit in the founding of the Bretton Woods multilateral financial
institutions: the International Monetary Fund and the World Bank
J. Ravenhill (ed). Global Political Economy. 4th ed. Oxford University Press.o Chapter 1:
The Study of Political Economy by J. Ravenhill.
The Bretton Woods Order wanted to rebuilt the international monetary and finance order.
The Breton Woods conference also established two public institutions to assume some aspects
of international lending that had previously been left to private markets: the international
monetary fund (IMF) and the International Bank of reconstructions and development (IBRD,
known asWorld Bank).
The IMF was to provide short-term loans to help countries finance their temporary balance of
payments deficits, thus providing deficit countries with greater breathing space than they had
had under the pre-1930s international gold standard.
The IRBD was designed to provide and encourage long-term loans for reconstruction and
development after the war, a task for reconstruction and development after the war, a task that
the private markets were not trusted to perform well on their own.
J. Ravenhill (ed.). Global Political Economy. 4th ed. Oxford University Press.o Chapter 7:
The Evolution of the International Monetary and Financial System by E.
16. Non-tariff barriers (Regina)
Definicin en clase:
Non-tariff barriers (NTB) are restrictions that make importation and/or exportation of a product
difficult and/or costly
1. Specific prohibitions
a. import bans
2. Specific conditions
a. complex regulatory environment
b. inadequate infrastructure
c. lengthy customs procedures
3. Specific market requirements
a. employment law

17

b. various product specifications

They are more difficult to identify and reduce than regular tariffs.
En lecturas:
NTBs were addressed in the GATTs Tokyo Round (1973-9) because By the early 1970s chaos
in the international monetary system and increasing use of non-tariff barriers in response to the
surge of exports from Japan and the newly industrializing economies (NIEs) resurrected fears of
trade protectionism (...) This negotiation started slowly because of the need to gather and
classify enormous amounts of trade data with respect to NTBs.
J. Ravenhill. Global Political Economy. Chapter 5: The evolution of the Global Trade Regime,
pp. 119, 121. (In syllabus, Sept 8).
17. Dumping/WTO (Sofa M.)
Definicin en clase:
The GATT was substantially weaker as an organization than the WTO today because it lacked a
dispute resolution mechanism
Multilateral Trade Negotiations
The GATT/ WTO organizes their negotiations in bargaining rounds
Each round has aimed to reduce specific barrie to trade
To date, 8 round have been concluded and the 9th round is still ongoing (the
Doha Round)
2001: Doha Round (The first WTO Round)
The Uruguay Round is also significant because it established the WTO
The Kennedy Round (1963-7)
The negotiations also resulted in the GATTs antidumping code
Dumpling and Anti-Dumping Duties
Dumping:
Understood as selling a product to another country for less than its sale price in
the exporting country
The GATT/WTO defines dumping as exporting below the normal value of a
product
Determined through a comparison of the price of the product in
both the exporters and importers market
Or through the analysis of the exporters costs of producing the
product vs. the sales price
En Lecturas:
The WTO is first a forum for the negotiation of liberalization agreements. Second, it seeks to
ensure that members comply with agreements, which include both monitoring and technical
help. Third, it provides a mechanism for solving trade disputes between members.

18

The WTO brings together different groups of countries for the negotiation of large packages of
trade issues.
Bibliografa: J. Ravenhill (ed.). Global Political Economy. 4th ed. Oxford University Press.
18. Orthodox economic liberals vs. heterodox economic liberals (Alberto)
Nota: Este debate se gener tanto en el tema de clase strands of liberalism y en el tema de
schools of IPE, La profesora hizo el comentario especfico de aunque tienen los mismos
nombres, son dos debates. El primer debate (Hayek V.S.Keynes) ya est explicado en esta lista
en el tema 10.
Schools of IPE
Definicin en clase:
Orthodox School is also called the American School and is usually associated with positivist
thinking. It focus on causal relation analysis and was the first focused theory of IPE. Their most
important exponents were Keohane & Nye with Power and Interdependence first published in
1977.
The main concept introduced by them was complex interdependence that tried to distance
itself from the realist theories of IR. It consisted on 3 main characteristics: multiple channels of
cooperation within nations, absence of hierarchy among different issues of nations and
diminished role of the military force. It relies heavily on statistics and applied mathematics to
formulate its thesis.
Heterodox School is also called the British School, contrary to the orthodox school this school
focuses on a post-positivist classical thinking. It uses Historical analysis as its main tool and was
created as a response to mathematical and causal analysis. It searches an holistic approach to
IPE. Its main exponent was Susan Strange who focused on a qualitative methodology.
Informacin de las lecturas
In addition to Keohane and Nye , Gilpin gave a contribution to the Orthodox theory (or the
American School ) to mix International Politics and Economics to explain the actions of
transnational corporations this was a more realistic (not realist) approach to the field. .
Participation by Keohane and Nye in organizing the IO publication A magazine that helped the
spread of the ideas of IPE in all universities.
International Economics and International Relations: A Case of Mutual Neglect by Strange in
1970 was the birth of IPE in the British School. As Keohane & Nye, she created the International
Political Economy Group to stress the ideas of IPE through British scholars.
For her,power could be understood to operate on two levels: structural and relational. the
power to shape and determine the structures of the global political economy . . . the power to
decide how things will be done, the power to shape frameworks within which states relate to
each other.

19

Bibliografa: B.J. Cohen: International Political Economy: An Intellectual History. Princeton

University Press 2008.
19. Smoot-Hawley tariff (Ana Padilla)
20. Global governance (in terms of trade) (Arturo)
Clase:
The global governance on trade is one of the objectives of the Bretton Woods agreements. After
the GATT created specifically as a contract to regulate trade negotiations, the International
Trade Organization was supposed to be created by 48. But its creation wasn't ratified by the
US Congress, so it became irrelevant, because US was an preponderant actor on trade. So
countries had to keep relying on the GATT as a contract, but with no institution to regulate trade,
maintaining just the framework agreement. The most important article of GATT are the ones that
guarantee the non discrimination: I - Most Favored Nation, means that any advantage granted
to a contracting party (country) will be accorded to all other parties.This ensures no retaliation.
III- National treatment principle.

21. Rent-seeking (Brianda)

Definicin en clase
State intervention may lead to rent seeking asking for economic benefits that the
market will not give you.
According to the neo-liberal argument, sluggish growth could be attributed to rent-seeking
pressures on the government. Government intervention in the economy was seen as the
problem.
Margaret Thatcher warned about the dangers of rent seeking.
Segn el FMI:
Rent-seeking results in reduced economic efficiency through poor allocation of resources,
reduced actual wealth creation, lost government revenue and increased income inequality.
Definicin en lecturas:
BALAAM AND DILLMAN (Chapter on liberalism)
Adam Smith Merchants often had a disproportionate influence over the Parliament and could
press their private interests. These special interests often solicited the power of the state to
allow them to disregard competitive pressures and convince those in power that what they
wanted was identical to generate interest. Manufacturers often easily influenced the legislature
such that they acquired companies gained the sole right to sell products, keeping prices above
the natural price.
He supported the state exercising vigilance and enforcing competition policies to
preserve competition and help the market work properly

20

 Smith feared rent-seeking (the manipulation of the state to rig the market in such
a way as to reward powerful business interests with high prices and high profits). For
Smith, absent competition, the invisible hand can no longer make competition work for
the benefit of all society.
Many neoliberals argued that the state was too big and not to be trusted. Echoing Smith, they
maintained that its interests reflected powerful special interests, whereas the market is neutral
toll to redistribute income to those who are most efficient, hardworking and innovative. Although
these policies may lead to income inequality, the benefits at the top of society will later trickle
down to benefit labor and the masses.
Con bibliografa: Balaam D. N. and Dillman B., Introduction to International Political Economy,
the United States, Pearson, 2013.
22. The Keynesian Compromise (Carla)
En clase:
August 25:
John Maynard Keynes (1883-1946) was a British economist often considered the father of the
heterodox school. Keynes observed the Great Depression (under economic uncertainty people
will stop spending).
For Keynes, the question revolves around how to restart the domestic economy. Keynes
proposed that the state take the lead. Constructive (rent seeking) state intervention. This line
of thinking has become known as the heterodox school. The heterodox school (because it is a
new type of economic thinking, economics and political goals become one at a certain point in
time) dominated domestic economies after WWII.
At the international level we talk about the Keynesian Compromise. It is a compromise
that reconciles state and international interests. Keynes played a key role in establishing a
new international economic order: the Bretton Woods system or the Bretton Woods Institutions.
En lecturas:
D.N Balaam and B. Dillman. Introduction to International Political Economy. Chapter on
Liberalism.
In 1944 the allies met at Bretton Woods, New Hampshire. Two new institutions were created to
manage the postwar economy: the IMF and the World Bank. Three years later the GATT was
created. Keynes headed the British delegation and the institutional result reflected many of his
ideas.

21

Keynes believed that on domestic front positive government action was both useful and
necessary to deal with problems the invisible hand did not solve. At the same time, he
envisioned a liberal or open international system in which market forces and free-trade policies
would play major roles in each states foreign economic policy objectives. The Keynesian
compromise was the idea that management of the international economy would be
conducted through peaceful cooperation of states represented in the Bretton Woods
institutions based on embedded Keynesian ideas about IPE. States would work to gradually
reduce their state regulatory policies so as to open their national economies as they recovered
and became more competitive. The result was that domestic trade protection and capital
controls became accepted exceptions to economic liberal policies in international negotiations.
The Keynesian flavor of embedded liberalismstrong international markets subject to
social and political restraints and regulations reflecting domestic prioritiesbecame the
mainstream IPE view in the industrialized world from the 1930s into the 1970s.
23. Embedded liberalism (Daniela)
-

Power is necessary to establish regimes, but the content of the regimes are determined
Also by social purpose (norms). Fusion of power + norms lead to regimes, which play a
mediating role, by providing a permissive environment for the emergence ofspecific international
economic transactions. (two independent variables, one dependent variable with more
properties and variance)
a reconciliation of market and society domestic interventionism
(it generated both long term economic performance and social protection its laissez faire
predecessor)
Lecturas:
J. RAVENHIL (ED.). GLOBAL POLITICAL ECONOMY. 4TH ED. OXFORD UNIVERSITY
PRESS
Chapter 7: The Evolution of the International Monetary and Financial System by E. Helleiner
pp. 177
It was clear that the US would emerge from the war as the dominant economic power.
Their objective was to build and sustain a more liberal and multilateral international
economic order. (they wanted to avoid the repetition of events such as the Great
Depression and WWII.)
But US policy makers did not want to see a return of the classical liberal economic order,
they were proposing new kinds of government interventions in domestic economic life, this
what called Embedded Liberalism by Ruggie
This was shared by policy makers in many other countries, including Keynes and his
American counterparty, Harry Dexter White. Both took lead in producing detailed blueprints
for the post-war international and financial system
At Bretton Woods, 44 delegation endorsed a final set of arguments. They agreed to peg
their currency in relation to the gold content of the US Dollar, which was convertible into
gold at a rate of $35 per once

22

24. Hegemonic stability theory (Diannic)

Definicion en clase:
The hegemon has the largest share of wealth in the global economic system.
U.S. Taking the leadership in the world trade
After WWI US emerged as the largest industrial power.
After WII: U.S. domestic goals: Protect and generate revenue for federal government and
isolation from Europe.
1929: Stock market crashed. US intensify efforts to protect domestic producers.
1930: The Smoot Hawley Tariff raised U.S. tariffs on over 20,000 imported goods to protect
American farmers.
1947: General Agreement on Tariffs & Trade functions>> facilitating negotiations, setting
transparent rules and standards, establishing norms, administrating trade agreements.
Definicin en lecturas:
In its early form, the theory posited that hegemony, or the existence of a single dominant
economic power, was both a necessary and sufficient condition for the construction and
maintenance of a liberal international economy. It follows that once the hegemon began to
decline, the international economy would move toward greater conflict and closure. The theory
has since been refined and extended, concluding that a greater potential exists for no
hegemonic international economic cooperation than was allowed for in the original formulation.
Keohane>> Hegemony as preponderance of material resources. To be hegemonic a country
must have access to crucial raw materials, control major sources of capital, maintain a large
market of imports and hold comparative advantages in goods with high value added, yielding
high wages and profits.
Frieden, Jeffrey A. abd David A. Lake. (2009. International Political Economy: Perspectives on
Global Power and Wealth.
R.O. Keohane. After Hegemony: Cooperation and Discord in the World Political Economy.
Princeton University Press, 1984.

25. Industrial policy (Graciela)

La poltica industrial comprende aquellas medidas que apuntan a modificar de manera
coordinada la estructura industrial por sectores (reduccin de la capacidad instalada en las
industrias antiguas, fomento de nuevas industrias), incidir coordinadamente en la estructura
industrial a nivel regional y fomentar la competitividad de la industria.
Lecturas:
Import substitution industrialization relied on a variety of economic tools to achieve its aim. The
toolbox can be broken down into three categories: active industrial policy, protective
international instruments, and accommodationist fiscal and monetary policy complemented by a
careful program of transnational participation.

23

Industrial policy was anchored in the formation of state-owned enterprises (SOEs) throughout
the region. Under the assumption that the state was the only able domestic actor with the
resources to produce in relatively underdeveloped markets, state firms were formed in a wide
range of heavy industries, including oil, petrochemicals, telecommunications, steel, and aircraft.
Additional Tools of Industrial Policy: Targeted Lending, Multinational Activity, and Passive
Monetary Policy
Ownership was not the only tool of industrial policy in Latin America. Industrial policy was
accommodated by monetary and fiscal measures. The state provided subsidies to domestic
firms, and it granted tax credits and soft credit to jump-start the national industrial motor.
National development banks were formed, such as Chiles Corporacin de Fomento de la
Produccin (CORFO) and Brazils State National Development Bank (BNDE), to target
investments in the economy. A national development bank has an advantage over commercial
lenders in planning strategic investment projects. As a state bank, it has a longer return horizon
and is able to be active in more risky sectors because bottom-line profits are not the objective.
Key industries such as machinery, automobiles, shipbuilding, and telephones were targeted as
central to industrial growth. In Mexico, the Law of New and Necessary Industries provided select
tax exemptions to promote growth in a limited number of unrepresented but critical sectors in
the economy.
Form state-owned firms
Form mixed economic enterprisespart state, part private
Require government purchases from national firms
Require foreign firms to establish joint ventures
Pressure foreign firms to increase local content
P. Franko The Puzzle of Latin American politics. Rowman and LIttlefield
Publishers, 2007 (3rd ed.)
26. Lenin/Imperialism (Guillermo)
Imperialismo es la fase monoplica del capitalismo
-La teoria imperialista tiene 5 puntos principales:
1) La concentracin de la produccin y del capital ha generado monopolios que dominan el
sistema econmico, contrario a los supuestos del capitalismo de la libre competencia
2) la creacion de una oligarqua financiera, basada en el capital financiero por la unin de la
clase banquera e industrial.
3) la importancia de la exportacin de capital a diferencia de la exportacin de productos como
instrumento de control.
4) la formacin de empresas transnacionales monopolistas
5) la divisin del mundo por los poderes capitalistas
-Su teoria ha sido modificada muchas veces porque no existe un marco historico vasto de este
tipo de paises, la teoria de la dependencia ha sido mas estudiada en el caso de las teorias
estructuralistas. Una de las mas fuertes criticas es que la Union Sovietica por un lado cumple
con este modelo y es un pais comunista. Y por otro lado se ve a la teoria de lenin como una
justificacion para que las teorias marxistas apliquen a la URSS, con el fundamento de que el
24

capitalismo ha llegado a su ultima instancia y debe ser el estado bolchevique aquel que
detenga su crecimiento. En realidad Marx penso sus teorias para paises industrializados y
desarrollados, no para una Rusia semi feudal y sub desarrollada.

27. Most-favored nations (MFN) clause (Ivan)

Under the most-favored nation principle, a government is obliged to grant to any trading partner
with which it has signed an agreement treatment equivalent to the best (most preferred) it offers
to any of its partners. For example, if France had a trade treaty with Germany in which it had
reduced its tariffs on imports of German steel to 8 per cent, it would be obliged, under the mostfavoured nation principle, if it signed a trade treaty with the United States, to reduce its tariffs on
imports of US steel also to 8 per cent. The MFN principle is the foundation of non-discrimination
in international trade, and is often asserted to be the cornerstone of the post-1945 trade
regime. The MFN principle makes a significant contribution to depoliticizing trade relations
because:
1. Countries are obliged to give equivalent treatment to all trading partners, regardless of their
economic power.
2. Countries cannot discriminate in their treatment of the trade of certain partners simply because
they do not like the political complexion or policies of the governments of these countries.
The MFN principle was introduced into the trade agreements of the 1930s and incorporated as
Article I of the GATT in 1947. It required GATT Contracting Parties to extend to all signatories
the benefits of any agreement that it might reach with any other country (that is the mostfavoured nation) in the GATT.
Non-discrimination introduced the problem of free riding, where a country might take
unreciprocated benefits from a lowering of tariffs by other countries, but this was regarded as a
lesser problem than that that caused by overtly discriminatory tariff policies. The overall
purpose of MFN and non-discrimination was to create a unified multilateral trading system, and
to prevent the international trade system from degenerating into a Balkanized system of regional
preferences.
J. Ravenhill (ed). Global Political Economy. 4th ed. Oxford University Press.
o Chapter 1: The Study of Political Economy by J. Ravenhill.
o Chapter 5: The Evolution of the Global Trade Regime by G. R. Winham

28. The WTOs dispute settlement mechanism (Johanna)

To understand the WTO, it is necessary to examine important legal elements drawn from the
WTO Agreement and the Dispute Settlement Understanding (DSU). The WTO was vested with
legal personality, which the GATT did not have.
The practice of dispute settlement was begun on a customary basis under the GATT, and
certain procedures, such as the establishment of adjudicatory panels to hear cases. The WTOs
DSU improved the system in a number of ways:

25

 An Appellate Body was established to improve the consistency of legal decisionmaking.

The coverage of dispute settlement was extended to all areas of the Uruguay
ROund Agreement, removes the competition that previously existed between differing
dispute settlement mechanisms.
The DTU makes it obligatory for members engaged in a dispute to use the WTO
system and no resort to unilateral measures.
In the GATT, a dispute settlement system developed by customary practice, but in the WTO it
was mandated by international agreement in the form of the DSU, and included in the Uruguay
Round Agreements. The DSU is a particularly powerful form of international dispute settlement,
and the management of this system has created political controversy among members of the
WTO.
WTO statistics indicated that, in slightly more than five years of operation, there had been some
193 member complaints on 151 distinct trade issues. Approximately half of the complaints are
settled or dropped in the consultation phase that precedes formal dispute settlement. Once a
case is formally engaged, it proceeds to the three-person panel comprising trade experts for a
legal decision and then, if requested, it will continue to the Appellate Body on appeal. Once a
decision has been reached, the next issue is implementation. In the WTO, countries are legally
obliged to accept and implement a negative dispute settlement decision, and it is possible for an
injured party to take retaliatory action, even though such an action is counterproductive from the
standpoint of liberalizing the trade regime, in that it erects further barriers to trade.
J. Ravenhill (ed.) Global Political Economy. 4th ed. Oxford University Press. The Evolution of
the Global Trade Regime by G.R. Winham. Chapter 5.
29. Reciprocity/nondiscrimination (Julio)

The principles of reciprocity and nondiscrimination are the pillars of world trade institutions
from GATT to WTO. Reciprocity is best understood as the rule of international commerce which
states that when one country lowers its protection rates, she expects the same concession from its
trading partner. The idea behind this is that these mutual changes in trade policy bring about
equal changes in import volumes across trading partners. The other principle, nondiscrimination,
is a separate norm, under which a government agrees that any tariff applied to the exports of a
given product from one trading partner will apply equally to the exports of that product from all
other trading partners. It is also known as the principle of the Most Favored Nation (MFN)
(Class).
The function of both norms are that mutual changes in trade policy conforming to
reciprocity will stabilize the terms of trade, and that MFN tariffs will ensure that all countries can
trade on the same terms (face the same set of exporter prices). Together, these properties serve to
neutralize the terms-of-trade motives for trade policy intervention (Class).
26

Its roots could be traced back to the Reciprocal Trade Agreement Act of 1934, which
accepted that setting tariff rates could no longer be exclusively a unilateral policy by a state, but,
rather, was a bilateral matter to be settled through negotiation. However, it was not until after
WWII that with USA as the hegemonic power that pushed for liberalization, multilateralism and
a legal approach to international trade relations that this principles were regarded as necessary
for a new economic order (Winham in Ravenhill).
Both principles were considered since the proposal of the International Trade
Organization. When it failed, they were transferred to the legal framework that was to shape the
General Agreement on Tariffs and Trade (GATT) of 1947. The GATT rules were a mechanism to
ensure that countries that reduced protection by lowering tariffs did not reinstitute that protection
through other measures (Irwin).
The GATT rules are contained in the 35 articles of the General Agreement. Article I and
III contain the principle of non discrimination. Article I is known as the MFN clause which states
that a country cannot discriminate externally; while Article III states that a country cannot
discriminate internally between domestic and imported products (Class).
Reciprocity is mentioned in Article XXVIII. It establishes the methodology adopted by
the GATT for reducing trade restrictions. Tariff negotiation must be conducted on a reciprocal
and mutually advantageous basis, meaning that every country should be treated equally (Class).
The mechanism, in a positive sense, means that during negotiations countries must seek a
balance of concession in the sense that they cut tariffs reciprocally. In a negative sense, it
means that when one country increases previously bound tariffs, the affected one can withdraw
substantially equivalent concessions (important for the dispute settlement mechanism) (Ossa
2009).
The reciprocity principle still is a guiding beacon for GATT/WTO. However, it came
under scrutiny when developing countries started to join because it was highly questionable
whether the equal treatment of unequal partners could be considered reciprocal. Legal
provisions were made to mitigate the obligations of GATT membership or developing countries
through the concept of special and differential treatment (Class-WTO).
30. The Uruguay Round (Karla)
En clase:
URUGUAY ROUND (1986-1993)
Two main points: creation of WTO and incorporation of developing countries.

Tariffs

Non-tariff measures

Trading rules
27

Services
Intellectual property rights
Textiles and clothing
Agriculture
Dispute settlement
Establishment of the WTO

En lecturas:
The Uruguay Round negotiation was launched at a GATT ministerial meeting in Punta del Este
Uruguay, in September 1986. It was a difficult path because the previous GATT multilateral
negotiation had made considerable progress in reducing protectionism from non-tariff barriers.
Pressure began to build up shortly after 1979 to expand the GATT regime to include new issues,
such as services, investment, and intellectual property.
Developing countries resisted efforts by developed countries to establish a new GATT
negotiation following the Tokyo Round. The US argued that a new negotiation was necessary to
make the GATT relevant to a changing world economy. In 1982 a GATT ministerial meeting was
convened to consider this possibility. There was a sharp resistance, particularly from developing
countries that were overwhelmed by the global debt crisis and mainly concerned to expand
traditional exports to developed countries to service debt obligations to the IMF, Western
governments and private banks.
The 1982 ministerial meeting was a failure for the proponents. Nonetheless, the meeting did
establish important work programs that generated the data needed for future negotiation. The
most dramatic part of the lead-up to the Uruguay Round negotiation was when Americans and
the Indians agreed that the session would launch negotiations on a range of issues, including
services, but that negotiations on services would be undertaken in a separate structure from
those on goods (esto provoca que disminuyan las posibilidades de que los pases desarrollados
puedan forzar el equilibrio entre los servicios y los temas tradicionales de negociacin).

1)
2)
3)
4)

The agenda of the Uruguay Round comprised fifteen negotiation groups arranged in four
principal categories:
Market access: it included the areas of agriculture and textiles.
Reform of GATT rules.
Measures to strengthen the GATT as an institution.
New issues: services, investment and intellectual property. They were included in order to
make the GATT more relevant to developments in the world economy and to respond to strong
pressures coming from industry in developing countries.
Services
It is important to remember that by the 1980s, services were over half of the Gross Domestic
Product of developed countries!! For the GATT, the incorporation of services was not a
straightforward matter. Services are not goods, which were the focus of GATT rules.
Nevertheless, services can include processes as widely differentiated as engineering

28

consulting, financial intermediation, tourism or legal advice. Therefore, the GATT stopped
visualizing services as non-traded goods and services became recognized as an integral
part of the international economy. In order to accomplish this, the first task for the
negotiators at the Uruguay Round was to develop a common database on which substantive
decisions could be later made. Secondly, a code of principles (General Agreement on Trade
in Services, or GATS) would have to be negotiated to provide for a standard of treatment
between countries of trade in services. Finally, the code of principles would have to be
applied to specific sectors of services and trade.
Investment
Investment was included because by the 1980s it had become apparent that investment
was interchangeable with trade. Also, trade liberalization might be less valuable in
stimulating international economic exchanges unless it is accompanied by the liberalization
of investment regimes. In the Uruguay Round, the negotiation of a multilateral investment
agreement eventually proved to be an unreachable goal and the agreement that was
reached on Trade-Related Investment Measures (TRIMs) dealt only with a small proportion
of the issues raised in the negotiation.
Intellectual Property
In the case of intellectual property, Trade-Related aspects of Intellectual Property Rights
(TRIPs) grant state protection to producers of new ideas. Negotiations in the Uruguay
Round began by addressing the problem of counterfeit goods in international trade, but
developed countries quickly pressed for a broader negotiation over patents and copyrights.
The controversy over the TRIPs Agreement continued as a mainstay of WTO politics, as
developing countries saw intellectual property rights as a mechanism by which developed
countries could maintain a competitive edge relative to countries that lacked a sophisticated
technological infrastructure.
It formally concluded with official signatures at the Marrakesh Ministerial Meeting in April 1994. It
produced a wide range of agreements integrated under a common legal system. The World
Trade Organization system is contained in the Marrakesh Agreement, establishing the World
Trade Organization and the Dispute Settlement Understanding (DSU). The WTO agreement
established the WTO as an international organization and ensured that all agreements
negotiated at the Uruguay Round were accepted as a single undertaking, thus increasing the
legal integration of the WTO trade regime. The dispute settlement system established by the
DSU was also intended to apply to all areas of the Uruguay Round Agreements; hence it is an
integral part of the architecture of the new WTO system.
Why is the Uruguay Round important?
The WTO and the Uruguay Round Agreements provided for clearer rules on trade and
reduced the fragmentation and inconsistency that had existed between various GATTsponsored agreements. Externally, the WTO reinforced the role of trade in international
economic relations and it permitted trade concerns to be represented more fully in relations with
the World Bank and the International Monetary Fund. The creation of the WTO represented

29

institutional progress because the WTO is a formally constituted international organization and
not like the GATT, which was mainly a contact regarding trade rules between countries.
The various agreements reached at the Uruguay Round greatly expanded the rules of the
international system of trade. The issue of trade was brought up for the first time along with
old issues such as agriculture and textiles. There was a reduction of protectionism in two
sectors that had for a long time resisted the progression towards a more liberal world trade
regime.
The Uruguay Round Agreements were accepted by the developing countries engaged in the
negotiation, and represented the most far-reaching commitments those countries had
made in the international trade regime. The Uruguay Round concluded at a time when many
developing countries were undergoing substantial liberalization, and the confluence of change in
the developing world and the deepening of the multilateral regime will engage trade more fully in
the progress towards international development.
The Uruguay Round Agreements represented a further step towards a system based on
rules rather than power in international trade. The agreements advanced the rules-based
nature of trade relations between countries, and thereby increased the economic security of
smaller and middle-sized countries in their relations with larger powers.
The agreements created an obligation for countries to adjudicate an issue if a trading
partner seeks this recourse. Conversely countries are obligated not to use unilateral trade
sanctions as an alternative to multilateral dispute settlement actions under the WTO. Both
provisions were intended to increase the prospects that countries, regardless of their size
and power, would be equal before the law in trade disputes.
Results of GATT Negotiations 1960-1964
Negotiation

Number of
countries

Results

Dillon Round 1960-1961

26

- Average tariff cut of 10% on $4.9 bn of

trade.

Kennedy Round 1963-1967

62

- Average tariff cut of 35% on $40 bn of trade.

- Anti-dumping code.

Tokyo Round 1973-1979

102

- Average tariff out of 35% on more than $100

bn of trade.
- Six codes dealing with non-tariff measures,
plus aircraft code.
- Revision of GATT articles for developing
countries.

Uruguay Round 1986-1994

128

- Average tariff cut of 39% on $3.7 tr of trade.

- Twelve Agreements (including Agriculture,
Textiles, Subsidies, Safeguards).
- New issues: Agreements on Trade in

30

Services (GATS) and Trade-Related Aspects

of Intellectual Property Rights (TRIPs).
- Dispute Settlement Understanding (DSU).
- Creation of WTO, new legal footing for the
multilateral trade regime.
John Ravenhill. Global Political Economy. Oxford University Press, 2014.
31. Stolper-Samuelson (Mariana)
32. Ricardo-Viner (Nazim)
33. Capital mobility vs capital controls (Regina)
En clase:
Complexity of globalization: increase in the mobility of goods and capital
En lecturas:
The transition from pegged exchange rates to floating exchange rates in 1973 was a
consequence of the rise of international capital mobility.
(Primera lectura del 24 de sept, Ch. 5 Eichengreen)
The change in international financial flows has been even more dramatic: the fraction of
countries with a liberalized financial system has risen threefold over the past 50 years. As
more countries have embraced the benefits of permitting the free movement of capital,
international financial flows have increased markedly.
M.A. Kose and E.O. Ozturk. A world of change (In syllabus, August 11).
Governments continued to erect barriers to the movement of goods in the second part of the
nineteenth century, but capital and people moved relatively freely across the globe, their mobility
facilitated by developments in transportation and communication.
(Ravenhill, chapter 1, page 9.)
Neoliberals have insisted that the new technologies of communications and transportation make
it both inevitable and desirable that the world economy be tightly integrated through expanded
trade and capital flows. (...) Systematic efforts of neoliberals to dismantle restraints on trade and
capital flows and to reduce governmental "interference" in the organization of economic life.
Globalization has only the Golden Straitjacket. If your country has not been fitted for one, it will
be soon. Friedman goes on to say that the "golden straitjacket" requires shrinking the state,
removing restrictions on trade and capital movements, and deregulating capital markets.
(Polanyi introduction. August 27 in the syllabus).

31

Exchange-rate stability, capital mobility, and national policy autonomy are incompatible.
Together these 3 values form a kind of unholy trinity that operates regularly to erode collective
commitments to monetary collaboration.
(Frieden and Lake, The triad and the unholy trinity. Sept 24 in syllabus)
34. Fixed exchange rates (Sofa M.)
Definicin en clase:
What are exchange rates, and why do they matter?
The exchange rate is the price of a national currency relative to other national
currencies
When a currency becomes more valuable relative it appreciate its value
A fixed exchanged means that it is actually fixed to something. We see this with the classical
gold standard. For example, currency A is fixed to X amount of gold.
A pegged rate means that a target rate is set to another currency and it will be allowed to vary
within the band. Ex: currency A is allowed to vary +/- say 2% in relations to currency B.
Both aim for stability though. A peg is more flexible than a fixed system
En Lecturas:
Fixed rate of exchange worked to support the simultaneous circulation of gold and silver.
Pegged rates were viable for the first quarter-century after World War II, the argument goes,
because of the limited mobility of financial capital, and the subsequent shift to floating rates was
an inevitable consequence of increasing capital flows.
The growth of highly liquid international financial markets in which the scale of transactions
dwarfed official international reserves made it all but impossible to carry out orderly adjustments
of currency pegs. Not only could discussion before the fact excite the markets and provoke
unmanageable capital flows, but the act of devaluation, following obligatory denials, could
damage the authorities reputation for defending the peg. Thus, at the same time that pegged
exchange rates became more costly to maintain, they became more difficult to adjust. The shift
to floating was the inevitable consequence.
The problem with this story, it will be evident, is that international capital mobility was also high
before World War I, yet this did not prevent the successful operation of pegged exchange rates
under the classical gold standard. Even a glance back at history reveals that changes in the
extent of capital mobility do not by themselves constitute an adequate explanation for the shift
from pegged to floating rates.
What was critical for the maintenance of pegged exchange rates was protection for
governments from pressure to trade exchange rate stability for other goals.

32

The priority attached by central banks to defending the pegged exchange rates of the gold
standard remained basically unchallenged. Governments were therefore free to take whatever
steps were needed to defend their currency pegs.
A monetary authority constitutionally required to peg the exchange rate was insulated from
political pressure to do otherwise and enjoyed the confidence of the markets.
Hardening the peg: tome toward monetary union. Nothwihstanding detours, this was the avenue
pursued by the members of the European Community. In 1991 they adopted a plan to establish
a European Central Bank (ECB) to assume control of their monetary policies, irrevocably peg
their exchange rates, and replace their national monies with a single European currency.
Whether other regions will emulate their example remains to be seen. What is clear is that
informally pegged or pegged-but-adjustable exchange rates are no longer a feasible option. In
most cases, the only alternative to monetary union has become more freely floating rates.
Bibliografa: B. Eichengreen. Globalizing Capital: A History of the International Monetary
System. Princeton University Press, 2008.

35. Floating exchange rates (Lourdes)

Lo visto en clase:
The international monetary regime changed to floating exchange rates on 1970s when Nixon
chooses to get off of the modified gold standard because of the inflatory pressure that caused
insecurity and shock waves.
Floating exchange rates are function of supply and demand
Stability isnt relevant, there is currency speculation.
In the same time, the European Union started raising. They sought currency stability to
maximize money security. Having the same goal, the individual participation of each state
increased, creating unified stability.
Under this type of regime, the challenge for each country is to maintain
international stability without affecting their own internal policies.
Lo visto en las lecturas:
Since the collapse of the Bretton Woods system, effort to reconstruct a system of pegged but
adjustable exchange rates failed repeatedly. Capital mobility increased the pressure on weakcurrency countries seeking to defend their pegs. Growing numbers of governments found
themselves forced to float their currencies.
Floating exchange rates in the 1970s
How did the transition occurred?
Officials, especially those of organizations like the IMF that were heavily
committed to the old system, did not jump willingly; they had to be pushed. While the

33

Europeans and Japanese hoped for the restoration of par values, the United States,
having endured repeated attacks on the dollar, was inclined to continue floating.
The members of the IMF then groped toward the Second Amendment to the
Articles of Agreement, which legalized floating and eliminated the special role of gold.
It obligated countries to promote stable exchange rates by fostering orderly economic
conditions and authorizing the IMF to oversee the policies of its members.
There was no consensus forecast of the behavior of floating exchange rates.
Some believed that the demise of par values removed the problem of one-way-bets and
persistent misalignments. The contrary view was that the world was about to enter a
dangerous era of financial turmoil.
What were the results?
At first, it seemed that the pessimists would be proven rights. The dollar
depreciated by 30% at the first 6 months of floating. The yen and the sterling were also
undervalued.
During 1970s, the governments intervened in the currency markets and there
was some willingness to adjust monetary and fiscal policies with the exchange rate in
mind (unlike 1980s). Intervention was on both sides of the market: it was used to support
weak currencies and to limit the appreciation of strong ones.
The governments of USA and Germany worked to control the depreciation of the
dollar, but in 1977, responding to expectations of accelerating USA inflation provoked by
the Carter administrations policies, the dollars depreciation resumed
Cooperative domestic policy adjustments may have been too modest to
stabilize exchange rates, but they prevented the major currencies from diverging further.
So, how did the government reconcile domestic policy objectives with the imperatives of
exchange rate stabilization?
In all countries that participated in the Bonn summit, there was a powerful
faction that favored domestic policy changes needed to stabilize exchange rates.
Where conflict occurred, governments resorted to capital controls to mitigate
the trade-off between domestic policy autonomy and currency stability.
Readers should not come away with the idea that the 1970s were copacetic. With the transition
to floating, real as well as nominal exchange rates became more volatile than before. But
problems were not as severe as those that arose with the dollars dramatic misalignment in the
1980s.
The difference in the 1970s was more concentrated in intervention, more
extensive use of capital controls, and greater willingness to adapt policies to the
imperatives of foreign-exchange markets.
Floating exchange rates in the 1980s
Three events transformed the international monetary environment at the end of the 1970s:
1.
Advent of the European Monetary System
2.
Shift in the USA policies
3.
Shift in the Japanese policies

34

SHIFT IN THE JAPANESE POLICIES: Few nations had been more committed than Japan to
exchange market intervention. In 1973 the yen was allowed to float and intervention was used
to hold the currency within a narrow trading range. But with the first oil shock, the exchange rate
was permitted to fluctuate more.
This transition to a more flexible policy has important implications for the
international monetary system.
By the 1970s, with the growth of the Japanese economy, the level of the yen had
become an issue of concern to other countries. The behavior of the dollar/yen rate
came to resemble that of the dollar/deutsche rate.
SHIFT IN THE USA POLICIES: The USA also gravitated toward greater exchange rate flexibility.
The Reagan administration followed with cuts in personal income taxes. The budget deficit
widened and interest rates rose. Foreign capital was attracted to the USA by higher interest
rates, pushing the currency further.
The dollars appreciation in 1983-85 highlighted the need for cooperative
adjustments of macroeconomic policies to counter misalignments.
The dollar rose further to an extent that was not explained by interest rates and
macroeconomic fundamentals. This movement, interpreted as a speculative bubble,
eroded the Reagan administrations resistance to foreign exchange-market intervention.
For Reagan, congressional protectionism threatened its agenda of deregulation
and economic liberalization; for the Japanese and European it jeopardized the access to
the American market The five governments issued a joint statement of desirability of
an orderly appreciation of the non-dollar currencies and their readiness to
cooperate to attain it (This is the Plaza communiqu).
Cooperation and intervention in fact played a role in halting the dollars rise. Once it began
falling, the dollar depreciated rapidly.
The IMF played a surprisingly small role in these developments. The IMF is
portrayed as a mechanism for applying sanctions and rewards to encourage countries to
follow cooperative agreements. In practices, the IMF was an unattractive venue in which
to conduct negotiations.
George Bush and Bill Clinton displayed little readiness to adjust policies to stop
the dollars fall. There was little domestic opposition to the dollars decline. Why?
Because an overvalued currency (dollar in mid 1980s) imposes to producers of traded
goods a problem to compete; but an undervalued currency (dollar in mid 1990s) imposes
only modest costs, as consumer experience higher inflation and import prices.
By 1992 the low level of the dollar had become a huge problem for Japan (profits of
producers were squeezed) and for Europe (commitments to support the maintenance of pegged
rates persisted).
The experience of developing countries
When Europe came out of the crisis of 1992, flexible exchange rates rose in industrialized
countries. The same trend was evident in the developing world, although it was slower in

35

coming, because floating was a challenge as disturbances could result in high levels of
exchange rate volatility and disrupt resource allocation.
How did the transition of developing countries to floating exchange rates occur?
1.

The vast majority of developing countries had pegged their currencies being the shelter of
capital controls. But pegging proved increasingly difficult to reconcile with the effort to liberalize
financial markets. Developing countries had resorted to import substitution policies after
WW2.
2.
In Latin America, countries suffered from the depression of 1930s and the lesson drawn was
the need to insulate from the international market. Tariffs and capital controls were
employed. Price controls, marketing boards, and financial restrictions were used to guide
domestic development.
3.
With time, however, interventionist policy was increasingly captured by special-interest
groups. Trade and lending picked up, and the exhaustion of easy growth opportunities placed a
premium on the flexibility afforded by the price system. In 1960s, developing countries shifted
from import substitution and financial repression to export promotion and market liberalization.
But the consequences of liberalization were not the same as the ones on industrialized
countries:
1.
International financial flows became more difficult to control
2.
International capital movements grew, making their management more troublesome.
3.
It became difficult to resist the pressure to allow currency to appreciate when capital surged
in or to let the exchange rate depreciate to facilitate adjustment when capital flowed out.
The diversity of developing-country experience spawned a debate about the efficacy of
alternative policies. Countries that stayed with pegged rates enjoyed low inflation rates, unlike
countries that maintained flexible-rates and those that shifted to floating rates. An exchange rate
peg will be particularly appealing to governments seeking to bring high inflation under control. It
is not surprising that pegging the exchange rate has been an integral element of stabilization
programs in the developing world.
Currency board is a great option to avoid the dilemma of pegged exchange rates (inflation
takes time to decline, which leads to overvaluation).
Currency board is when a country adopts a parliamentary statute or constitutional amendment
requiring the central bank to peg the currency to hat of a trading partner. This should halt
inflation and minimize problems of overvaluation.
The resemblance of currency boards and the gold standard is striking. The weakness of the
currency board system is also the same as under the gold standard: limited scope for lender of
last resort intervention. Currency board reflects a decision to sacrifice flexibility for credibility.
The rigidity that is its strength, is also its weakness. Currency board works on some countries
and fails in others.

36

Conclusion
Countries who found themselves forced to float their currencies liked the circumstance not a bit.
Developing economies with thin financial markets found it difficult to endure the
effects of volatile exchange rates swings.
Currency fluctuations disrupted the efforts of European Community members to
forge an integrated European market.
Even the USA, Germany, and Japan lost faith in the ability of the market to drive
their bilateral exchange rates to appropriate levels in the absence of foreign exchangemarket intervention.
This dissatisfaction with freely floating exchange rates prompted a variety of partial measures to
limit currency fluctuations. The main measures were: European Snake of 1970s, European
Monetary System, and the Plaza-Louvre regime of coordinated intervention.
But these limited measures could not succeed in a world of unlimited capital
mobility.
B. Eichengreen. Globalizing Capital: A History of the International Monetary System.
Princeton University Press, 2008. Chapter 5: After Bretton Woods, pgs.134-184
36. The classical gold standard (Rebeca)
Lo visto en clase:
- Definition: A fixed exchange rate monetary system that predominated between
the years of 1870 and 1914. It linked the value of currencies to the price of gold.
- Its main goal was: to create and maintain stability in international trade.
- Its problems were that: a) the gold standard was relatively inflexible and b)
national governments gave up autonomy at home since they were not able to freely use
monetary policy to adjust the economy.
- Its main supported was: the UK.
Lo visto en las lecturas:
ON MONETARY SYSTEMS
The international monetary system is the glue that keeps the international system together
(Eichengreen, 2008, Introduction). It plays a vital role in IPE since it:
Provides stability to foreign exchange markets
Eliminates BOP problems
Permits credits during shocks (Eichengreen, 2008, Introduction)
Since the XIX century, the system has gone through various changes.
The first was the collapse of the gold standard during the inter-war years. This system had
worked perfectly well pre-1914.
Capital markets explain the development of all monetary systems, including the gold standard.

37

Capital flows were facilitated in the beginning by the gold standard, a fixed exchange regime
with almost global reach. (Ravenhill, Ch.7 by E. Helleiner)
ON THE GOLD STANDARD
I.
ORIGINS OF THE GOLD STANDARD (Eichengreen, 2008, Ch.3)
At the start of the XIX century, countries were on bimetallic standards (both gold and silver coins
circulated). Only the UK was on the gold standard. But the simultaneous circulation of gold and
silver was not easy, and arbitrage often occurred. Large movements of arbitrage stripped
counties of the metal underpriced at the moment. With no more of that metal to release, the
domestic monetary system no longer provided a floor to support its price.
This happened in the UK, where a) silver was underpriced and b) Brazilian gold production rose
lowering its price. Silver coins went out of circulation and UK adopted the gold standard due to
convenience.
Then, industrialization happened. Suddenly, the UK was the worlds leading industrial and
commercial power.
Portugal, which had strong relations with the UK, was the first to follow the UK in adopting the
gold standard.
During the Franco-Prussian war, many countries in continental Europe suspended convertibility.
The UK appeared as an island of monetary stability.
Germany, Europes second industrial power, tipped the balance. It went on the gold standard
after the war since inconvertible paper currency circulated in the place of silver. The silver
standard was of no advantage to them. Hence, the newly created mark was to be based on
gold.
After Portugal and Germany, network externalities were responsible for the widespread adoption
of the gold standard.
II.
HOW DID THE GOLD STANDARD WORK?
The best explanation is David Humes his price-specie flow model.
Premise: the gold standard is self-regulating.
Assumptions: only gold currency circulates, which means exports are paid in gold and imports
must be paid with gold.
Argument: David Hume argued that trade imbalances, like trade deficits, were self-correcting.
Imagine a country country A -- that exports a lot and gets its payments in gold. Gold inflow
raises rent, which results in inflation. Inflation pushes up the exchange rate, which makes
importing from country A more expensive. Exports go down. Imports however, go up, due to
inflation making domestic goods more expensive. And if imports are now cheaper, then gold will
flow out of the country correcting inflation.
A country running a trade deficit country B -- imports more than it exports. Importing means
that gold is flowing out of the country, which means a lowering of domestic prices. This lowering
of domestic prices also lowers the exchange rate, making domestic goods more attractive to
foreigners. The expected rise in exports that flows from this will correct country Bs deficit. (Esto
en azul no lo copien literal, hice un resumen de lo que dice Eichengreen)
Hume did not take into account, however, that most money was not gold coins but banknotes.
Banks had to simulate the automatic adjustments of the gold standard by following the rules of
the game. A trade deficit was thus corrected by tightening the money supply. However,

38

governments did not always follow the rules of the game, and so, the gold-standard was not
really self-regulating. (Ravenhill, Ch.7 by E.Helleiner)
(For a period of time, the Cunliffe version of Humes model extended upon Humes findings by
assuming that both gold and paper currency were used. The mechanism was the same, only
that the model explained that trade imbalances were corrected through changes in the money
supply.) (Eichengreen, 2008, Ch.3)
III.
THE COLLAPSE OF THE GOLD STANDARD
There are two main explanations for the collapse of the gold standard: 1) the one from
hegemonic stability theory and 2) the one that looks into the process of democratization.
Pre-1914, the global order was financially and monetarily integrated, due to a) currency unions
and b) imperial currency blocs.
This did not last though. The first signs of disintegration came during WWI. Cross border
financial flows were diminished and countries abandoned the gold standard to let their
currencies float against each other.
After WWI, the UK and the US led the efforts to restore the gold standard. They were successful
in the beginning. In the 1920s, capital flows were resumed as many countries re-adopted the
gold standard.
But in the 1930s, the financial crisis led economies to abandon the gold standard again. Capital
flows were limited, mainly because of capital controls (government regulation on cross-border
financial movements). (Ravenhill, Ch.7 by E. Helleiner) (Eichengreen, 2008, Ch.3)
In the 1930s, currencies fluctuated considerably and so governments put in place convertibility
restrictions. Convertibility restrictions were to prevent the national currency from being
converted to foreign currency.
Hegemonic stability theory tells us that the gold standard fell because of the UKs decline as
hegemon. Before 1914, the UK was the worlds biggest creditor and the sterling was the most
trusted currency. The UK helped:
a)with global payment imbalances by exporting capital (lending), and
b)with stabilization of markets through the Bank of England, which acted as lender-oflast-resort.
The UK stopped being the hegemon after 1914. It lost the ability to be a leader.
The US was the new hegemon (biggest creditor, the dollar was the most trusted currency), but it
was not willing to be. Mainly because of a) isolationism and b) the conflict between international
and domestic economic interests. Unlike England, the US:
a)did not export capital (no more lending after its economy began to slow down, which
caused BOP crises on many countries that depended on US loans and which were then
made worse when the US increased tariffs with the Smoot-Hawley Act).
b)did not act as lender-of-last-resort. (Ravenhill, Ch.7 by E. Helleiner)
Now, many people and scholars disagree with hegemonic stability theory. To them, the collapse
of the gold standard was not due to changes in the relationship between states, but what was
happening within the states. There was an important shift in government: it was no longer
believed that monetary policy should be used to a fixed exchange rate between the national

39

currency and gold. The shift was due to democratization making domestic demands more
relevant. Things like preventing unemployment became more important than ensuring
convertibility to gold. (Ravenhill, Ch.7 by E. Helleiner)
According to Eichengreen, the world went from pegged exchange rates to floating ones due to
unmanageable capital flows that threatened the central banks ability to maintain pegs. The
problem is that high capital flows were also a characteristics of the gold standard which is
clearly based in fixed exchange rates.
In the XIX Century world, if politicians were given the option between protecting the exchange
rate or ensuring full employment and social well-being, they would have opted for the former.
This is obviously not true for the post XIX century world.
Today, governments will subordinate currency stability for other domestic goals due, precisely, to
democratization, which consisted in the beginning of the XX C of:
- universal male suffrage
- the rise of trade unions
- and parliamentary labor parties politizacing monetary and fiscal policy
- the welfare state
All of this contributed to the shift from classical liberalism in the XIX C to embedded liberalism in
the XX century. (Eichengreen, 2008, Ch.3)
Since there was no more governmental commitment to maintain fixed exchange rates (no more
commitment to the rules of the game), the self-regulating character of the gold standard broke
down. (Ravenhill, Ch.7 by E. Helleiner)
Along with democratization, the Great Depression led countries to escape the discipline of the
gold standard. Governments used depreciation to promote exports and alleviate the pain from
the great depression. (Ravenhill, Ch.7 by E. Helleiner)
37. The modified gold standard (Claudia)
Definicin en clase:
Also known as The Bretton Woods System (1944-1973), it was the international monetary
system established after WWII to overcome the chaos caused by both world wars. It was based
on the classical gold standard hoping it would bring great economic growth, experienced before
WWI.
Main goal: stability and some flexibility. Band created, not a completely fixed exchange rates.
Commitment of the US and trust in the USD is necessary for the system to work.
Lectura (Eichengreen ch. 4):

Three major modifications were made to the classical gold standard in order to adapt to the new
postwar context:
Pegged exchange rates became adjustable.
Controls were permitted to limit international capital flows.

The International Monetary Fund (IMF) was created to monitor national economic
policies and extend balance-of-payments financing to countries at risk.

40

These innovations were developed to avoid the major worries experienced during the interwar
era: The first one eliminated balance-of-payments deficits without the deflationary increases in
central bank discount rates. The second was designed to avert the threat posed by volatile
capital flows. The thirds objective was to sanction governments responsible destabilizing the
international system and compensate countries that were adversely affected.
Operating a system of pegged exchange rates between convertible currencies required credit to
finance imbalances, as the Bretton Woods Agreements (BWA) had recognized. The Bretton
Woods System, like the classical gold standard, was responsible for generating its own liquidity;
governments and central banks supplemented their gold serves with foreign exchange. Given
the hegemonic position of the US and Americas ample gold hoard, the BWA directed the US to
declare a par value against gold while permitting other countries to declare par values against
the dollar. Hence, the system remained dependent on dollars for its incremental liquidity needs.
Problems:
The de Gaulle problem: The system grew less symmetric as the dollar solidified its
status as the leading reserve currency.
The Triffin dilemma: Accumulating dollar reserves was attractive only as long as there
was no question about their convertibility into gold. This made the system dynamically
unstable.
Due to the lack of adjustment capacity of the USD as European and Japanese economies grew,
Nixon administration suspended the commitment to provide gold to official foreign holders of
dollars in 1971. It imposed a 10% surcharge on merchandise imports to pressure other
countries into revaluing to prevent the devaluation of the USD. At the Smithsonian Conference
in Washington, the USD devalued, the rest of the major currencies were revalued, and
fluctuation bands were widened. A second devaluation of USD in 1973 resumed the flight from
the dollar and European economies jointly floated their currencies upward, establishing the end
of The Bretton Woods monetary system.
38. State-centered approaches to trade (Rebeca)
39. Society-centered approaches to trade (Rebeca)

41