ECONOMÍA POLÍTICA INTERNACIONAL

CHAPTER 1: WHAT’S IPE?

Structures and Levels of Analysis: (ex. of Ukraine war)

- Global level: energy crisis
- International level: Belarus role in war (UK, BEL, RUS)
- State – societal level: national level exports/imports
- Individual level: your household expenses

We are going to analyze: production structure, trade structure, monetary & finance, security structure, knowledge
structure.

International political economy is about: interaction between States + Markets + Societies

Sometimes what it’s good from an economic point of view (raising taxes) is a terrible idea from an electoral/society
perspective. There are trade – offs.

IPE’s Evolution:
1. Susan Strange: emerges as a discipline

Contrasting perspectives (policy):

- Three dominant perspectives: Mercantilism/economic nationalism, economic liberalism, and structuralism
- Each perspective emphasizes different values, actors, and solutions to policy problems
- They also obscure important elements highlighted by the other two perspectives

POLICY IS DIFFERENT THAN POLITICS.

Liberalism or economic liberalism is the perspective most closely associated with economics.
It values production and economic efficiency
Today economic liberals:
- Classical orthodox economic liberals (OELs)
- Heterodox intervensionist liberals (HILs)

Mercantilism or economic nationalism is the perspective most closely associated with political science.
Realist variant of mercantilism:
- Hard power (the application of coercive power to compel another actor to do something) and
- Soft power (using the influence of culture, beliefs, and values to persuade another actor to do something)

Actors and theorists associated with this perspective value broad national security above all other motives and
objectives.

Structuralism is rooted in Marxist thought and is the perspective most closely associated with sociology.
Attention is usually directed at the values and beliefs of the dominant economic classes in society, but also in the
exploitative outlook of the working class.
Critical perspectives rooted in structuralism as well.
CHAPTER 2: MERCANTILISM

History period: 16th – 17th centuries

Modern idea of the nation – state (we don’t talk about empires anymore, we talk about “countries”).
Also connected with classical imperialism  not only conquer you through war.
Great Britain advocating.
Now: China
The most powerful economy (cheapest, more technological) is the one advocating for liberalization. More
competitive factors always advocate for free trade, the less competitive, protectionism.

Examples from Donald Trump:

- “China is rebuilding their country off our money”
- “We are destroying the dollar in order to try to compete with them”
- “We should tax Chinese products

Neomercantilism:
The destructive “new” logic that threatens globalization.

Post – Trumproteccionism?
TTIP
We are protecting our businesses.
American people in the last years have been experiencing a lowering in their welfare, and the shortcut is blaming
other nations for it.

Biggest problem with populism: they sometimes are right (in the diagnosis, not in the political prescription, which is
not normally balanced).

There is a difference between mercantilism as an historical period and philosophy.

PART I: HISTORICAL MERCANTILISM

Concept born when gold became wealth. Import = Gold outflow, which means I’m sending gold to my enemies, and
that’s why import restrictions were established  protection from foreign goods.
From XVI century to XVIII century. Wealth related with trade balance > 0  we have to import more than what we
export.

Absolute vs. Relative gains

Mercantilists always think in relative gains.
Mercantilists prefer an agreement that brings 2% to the country instead of 5%, only to ensure the neighbor doesn’t
earn more than him. They see the world as competition with others.

New patterns of trade: south bridge, north bridge, increased economic activity in Europe.
Rise of sovereign territorial states: we found out trade was a good thing, the way for societies to be better, live
better….
PART II: THE MERCANTILIST / LIBERAL CYCLE

Free trade?
1870: no trade, autarchy.
WWI: golden age of UK and capitalism falls.
WWII: we have Bretton Woods and trade starts to recover again
1905: falls again
2008: falls again (financial crisis)
2016: falls again a little (Brexit)
2020: falls again a little (Covid)

We see liberal periods are followed by protectionists periods.

Who benefits from globalization: the cheaper, the most productive….

- At the beginning: UK
- Then: US
- Now: China

THE LIBERAL RESPONSE TO THE PERIOD OF PROTECTIONISM

Relative gains are not equally distributed, but trade brings absolute gains to every party involved (everyone is better
off with it). All individuals are always better off or at least as good as they were with free trade.
Smith & Ricardo: masters of this liberal approach.
Specialization in production

US History of Protectionism:
1755 – 1804: they were forming the country, couldn’t compete with the uK.
Hamilton and List accused Britain of supporting free trade for purely selfish reasons. Of course everyone is in it for
selfish reasons.
Early 1900s: start to reopen, but they found out that if they reopen too fast, they could not compete with the UK.
The Great Depression was driven by protectionism and created the perfect ground for economic nationalism and
created the perfect ground for WWII.

Exercise: Three policies, or countries that you can connect with mercantilism these days. What do all the concepts
have in common?
Russia, North Korea, and US. What do they have in common?
- Past rooted in communism (not the US)
- Nuclear weapons (which means security, independence, POWER, being able to take strong decisions on
your own)
- “Taking care of the left – behind”  they are proposing alternative growth views

Exam question: mercantilism transformation or transition goes from wealthy accumulation to votes / jobs
protection.
If I protect my people, if I protect my jobs, we are better off. The idea of la patria, el pueblo, in dictatorship times,
was based on autarchy in 1960’s.
What mercantilism is about in a nutshell:
- Protect from globalization (Elite)
- My growth > your growth
 - My country first: is protectionism actually putting my country first? Possibly yes, but the key here is
BALANCE, the most challenging thing to achieve.

Keynesianism and Post - War

In history cycles go back and forth, so Keynes was against economic nationalism (WWII) and advocated state
interventionism to avoid the problems that gave light to WWII; but international liberalization.

PART III: NEO - MERCANTILISM

70s + 80s
1st actor Japan:
- Nontariff barriers (NTB), import quotas and voluntary export agreements (VERs): why would a country limit
what it can export to the rest of the word? To limit technology transfer.
- Japan was particularly successful in this and complemented its protectionist trade with strategic FDI…

These years we found out that the oil crisis was a big problem. States used a variety of neo – mercantilists policies.
The US now is a net oil exporter, completely contrary to what happened in those decades.

Neo – mercantilism: LDCs

Developing countries have wanted to “catch up”, but they can’t do it like developed countries. By trying to climb up
the ladder they were incentivized to embrace our rules, but they haven’t benefitted that much (for example, from
the WTO). The Washington consensus imposed these policies TOO FAST.

Neo – mercantilism: Industry

Saving money was established by the law in Singapore. They regulated all those things to move the country in the
direction they wanted to go.
Strategic resources: you have to protect your country from dependence on strategic resources.
US accumulated all the oil and gas they could so whenever there was a crisis, they could pump it into the market
and lower the price.

Neo – mercantilism: strategic resources

The more you have, the stronger you can play the mercantilism game.
Industrialized democracies establish political…(South Arabia, for ex.)

America and Huawei The Economist video – group discussion:

Which potential political and economic drawbacks may arise from governments “picking winners” and providing
loans and subsidies to strategic industries?
What happens if consumers opt out for a tool/technology/product that actually threatens national security?
Are we going to let other regimes benefit from our freedoms?
What is the downside or the upside or free press? What happens if a foreign country uses our free press to
undercut our political power and therefore, the instability of our country?
We are in a moment in history in which we don’t want each other. If the neighbor starts with protectionist tactics,
I’m going to do the same.
China: we own our companies, or we have a law that obliges every citizen and company to cooperate with national
intelligence. So China is picking and investing in industries. Should we do the same? Should the government pick a
company and subsidize them? When you pick a winner, you pick a loser at the same time (if you invest in sector A
you don’t invest in Sector B). what are the drawbacks of doing that? You’re breaking antitrust (competition), the
domestic market…so the risks associated with that decision are too high  public criteria.

TAKEAWAY FROM MERCANTILISM:

- Oldest and somehow most powerful IPE approach, because it has the back of the state actor.
- Evolved over years and adapted.
- Mercantilist motives and policies are still responsible for distensions
- With the campaigns of protectionism (1970…), many experts have pointed out the important relationship
between national security, peace, etc., with international relationships (Brexit was all about that). Make
Europe great again, America great again, etc., without actually assuming they cannot because the rules of
the game have dramatically changed; you cannot compete with China ignoring China exists.
- As long as states exist, they will be first priority to national security. America first, absolutely, but how?
Through international cooperation? Protectionism and economic nationalism? To an extent, a mix.
- Mercantilist point of view: economic liberalism viewed as a tool that hegemons (UK, US, China…) use to
promote their own interests. Only partially true /everybody benefits)
- Globalization and financial crisis have exposed the inadequacy of the market alone to protect states and
their societies. We need cooperation.
- The balance is the challenge.

CHAPTER 3: LIBERALISM

Liberalism dominates the world after WWI.

Then Marx’s “A Contribution to the Critique of Political Economy” brings structuralism.

Libertarian (Liberal in Europe): social freedom and economic freedom

Conservatives: they like economic freedom but not much social

Authoritarian: example of China. Economic freedom but not social freedom.

Liberal in the US = Social Democrat in Europe (Pedro Sánchez)

ROOTS OF THE LIBERAL PERSPECTIVE:

- Self – interest: competing interests can be productive to generate positive outcomes
- Respect to the market and the individual
- “Distrusting” the state, potential to abuse power
- Adam Smith
- And much more: state and competition. We need reliable institutions, good competition regulation! The
paradox of liberalism.
- Internationally open
- Through cooperation we can be better off than with competition, sometimes
- Orthodox vs Heterodox:
o Orthodox: no state. Is it possible to be an orthodox economic liberal nowadays? (public health,
education…).
o Heterodox: some
o Debate: what do we want to finance as a society with the money we earn from taxes?
Game theory:
- Cooperation is the only way through (David Ricardo)

Liberacy means 2 things: democracy and capitalism

CORN LAWS
Coming from mercantilism (closed economy). Restrictions on grain imports. Liberals were against this. And the laws
were repealed. They found out for the first time ever that if you wanted to protect, you need not to protect (open
to gain competitiveness).

John Stuart mill evolved those ideas. Need some interferences from the state.

Ordoliberalism: German / UE version of this.

Then Keynes: Great Depression is the perfect example that the market needs intervention.

HEGEMONIC STABILITY THEORY

For the system to work properly, you need a hegemon to bear the costs associated with keeping the economy open,
stable…we need an hegemon to keep the system moving. Otherwise, individualism.

Are we all Keynesians after all?

Liberalism has 2 problems:
- Is prone to financial crisis. Financial system allows for economic growth but is unstable in itself.
- Tax rates generate inequality
Even the republican party with Busch (conservative liberal) had to take measures (nationalize banks).

CHAPTER 4: STRUCTURALISM

There was a point in history where we didn’t know if capitalism was better than communism or not.

Structuralism:
- Marxism
- Feminism
- Anti – globalism (against global elites)
- Constructionism

Rooted in Karl Marx and Lenin. A very simple concept: the structure (elite).

INTRODUCTION
Structuralism believes that the current global capitalist system is UNFAIR, we are rewarded in an unfair way.
What exists now: uneven system.
IPE is not about freedom (like liberals think). We believe in COOPERATION to fight the elites.
They are right in that capitalism creates a hierarchy of classes or nations based on their economic position.
If you own staff you are a capitalist, if you don’t own anything you are a worker, an exploited worker.
“The mentality of over – productivity is polluting our lives”  the famous “10 simple ways to be productive”.

If you have the money you control the media. If workers want to have influence they have to form unions but will
always be weaker because they don’t have assets.

The only explanation as to why people are not protesting is because we have been ideologically manipulated. We
believe that we want to have a well-paid 9-5 job, be respected, etc., but this is a part of a set of construct that the
capitalists have created. Capitalists disseminate their message more efficiently. “Work is good, leisure is bad, and
material things will increase –“.

BUT MARX’S SOLUTION IS WORSE THAN THE DISEASE. But he was right about FREE EDUCATION.
Failure of communism but:
- Inequality
- Financial instability
- Globalization  firms > states

CAPITALISM ADAPTED, which Marx did not contemplate  welfare state

By definition capitalism is exploitative, because workers are paid less than their value of work so the entrepreneur
can make profit.
Capitalism therefore contains the seeds of its own demise  Marx believes that the capitalism system will never
survive, as workers will become tired of this.

What Marx’s tenets we have now:

- Heavy progressive or graduated income tax
- Centralization of credit in the hands of the state (cajas de ahorro example)
- Extension of factories and instruments of production owned by the state (again, example of companies
controlled by political parties)
- Gradual abolition of the distinction between town and country
- Free education for all children in public schools.

Main ideas:
- Those who have few resources believe everyone should have fewer resources
- Main figure: Antonio Gramsci (view’s complementary to Marx’s):
o “We have all being convinced to be exploited”
o “Convinced that we have the same interests that the companies we work for”
o “I hate the indifferent”

CAPITALISM LEGITIMIZATION:
- Inheritance
- Marketing  happiness and ESG
- Mortgages
- Fun
- International  tourism and Erasmus
- Social determinism
- Meritocracy
 - It’s not so bad…
- Apparent freedom to (“choosing your own poison”)
- “New age” spiritualism
- Optionality
- Minimum standard of living
- Free – rider

CONCLUSION:
Book: “The Almarank of Naval Ravirant”

CONSTRUCTIVISM

Inflation drivers:
- Money supply
o Low interest rates (past)
- Increase in demand of products
o End of Covid
o Fiscal stimuli
o Past savings
- Energy prices
o Ukraine war
o Raw materials
- Capital requirements (banks)
- Supply chain changes

Supply to the right + demand to the right = rise on prices

Inflation and the ECB:

1. Why 2% inflation goal? The Boskin effect.
2. How should we fight against inflation?
a. Raise interest rates: impacting consumption and investment  which negatively impacts GDP 
which negatively impacts Price
b. Why are societies willing to accept this? We accept the idea that institutions take decisions for us
3. Inflation trade – offs?
a. Employment
b. Consumption
c. Investment

Constructivism is based on the idea of decision – making policies are consequences of how people see the world.
Politics implement those policies.
Do we deserve the politicians that we have? Yes
Do they represent how our country is? somehow yes
Politics and politicians are built from our social norms, our preferences…
Interests + institution + ideas

Ideas: the beliefs we have as individuals

Principled ideas of Spanish people: democracy, family,…

Causal ideas:

Principled ideas of American people: freedom

Causal ideas: no restriction to guns, abortions…
Principled ideas + causal ideas: world views  private communities take care of the community itself

Principled ideas define goals and delimit means

Causal ideas specify roadmaps

Interests and ideas are socially “constructed” (they result from a process of interaction – they are not
predetermined). Example of why is a process of interaction: we are a very catholic country but 97% of the
population is tolerant with homosexual relationships.

Every policy choice is a combination of ideas, interests and institutions

AUSTERITY EXERCISE:
- Principled ideas:
o Balanced budget balance
o Keep welfare state + Government + state + country
- Causal ideas
o Reduce debt
o Cut spending or increase taxes or increase growth
- Interests:
o Critic: keep the rich, rich
o Keep the banks safe (“too big to fail”)
o Governments and banks
o In the long run, also society (growth)
- Institutions:
o ECB
o E. Union / E. Commission
o IMF

The question is not about austerity or not, is about speed:

- Too fast we kill so many jobs
- Too slow the markets don’t recover confidence
And also about the mechanisms
SMART AMERICA:
- Woke culture
- Meritocracy
- Higher education
- Social status
- Environmentalism
- Family identity
- Democrats
- Suburbs + east coast
- Globalists
- Bernie + extreme left
- Clintons = social democrats

REAL AMERICA:
- Rednecks
- Rural
- Traditionalists
- White
- Republicans
- Real – middle class
- Conservatives
- Lower education
- Nationalists and anti – global
- Trumpists v.s. republicans traditional

Future of globalization - Richard Baldwin

Digital technology is making easier to “export” services, which hasn’t been possible until now. Economic incentive to
do it. Coming faster than most believe.
Opportunities for the most competitive citizens, but problems for the least competitive.

Why haven’t states done more to crack down on corporate tax avoidance? Why is it hard for governments to
reduce tax avoidance and tax evasion by TNCs? Explain some of the methods that TNCs use to reduce their taxes.
1. Not want to  lose FDI  reduced revenues.
2. Reputation effects
3. Corporations’ power  social + lobbyist
4. International competition
5. Losing jobs  less welfare  less votes

Method to reduce taxes:

1. Tax havens
2. Double – Irish – Dutch sandwich
 a. Parent company sets up a subsidiary in the Netherlands. They transfer patents, knowhow and other
valuable assets. The subsidiary is structured in a way that they have small business operations and
create a lot of profit, subject to minimal tax due to the tax regimen in the Netherlands. The Dutch
subsidiary charges royalties and fees for the things passed down by the parenting company and
transfers the funds created to another subsidiary in a tax haven or a low-tax jurisdiction
b. This enables the parent company to benefit from the Netherlad’s tax treaties, which exempts some
of the income to taxing and also benefits from the low tax jurisdiction the subsidiary in the low tax
jurisdiction country is receiving from the dutch one. DOUBLE LOW TAX. This implies FDI in two other
countries.
3. Donations to foundations
4. Transfer pricing
a. Transfer and distribute the cost of different assets of the MNC between the different subsidiaries
the MNC might have
5. Conduit companies

FDI and Policy

Can too much FDI be a problem for a country? “Dutch disease”
Threat for developed countries: capital flows from other countries rose real estate prices and appreciated exchange
rates  you are not able to export.

DEGLOBALIZATION

Protectionism started increasing from 2019, not when Trump took office.

Tax policy:
- Always tries to establish tax incentives to bring direct investment from abroad. They trick the firms to invest
and capture them. When they have already invested, they trap them. Countries will try to show external
appeal, but then they will be trapped.
- Transfer pricing
- Offshore

Political risk and expropriation:

- Expropriation is a very big problem. You can be a left – politician but still be respectful with international
laws

Final considerations:
- Interesting new trends: emergence of BRICs is causing instability in our countries
o State owned TNCs a new source of mercantilist policies
o Insourcing again

Has globalization peaked?

- The “lazy peak globalization” narrative:
o 3 stages:
 60-90’s: steadier, less tariffs, less costs
 90’s: know – how shift, delocalization (more ICT)
  90’s – 08’: false peak
o Only goods
o Double fallacy
- Correction 1 (peak at 2008):
o 08’ false peak
o Oversimplification
o Different peaks and different players: China before 08’ and EU hasn’t peaked.
o Granular analysis
- Correction 2 (heterogeneity between EU members):
o Across countries and across time
o Deglobalization myth: not peaked.
- Correction 3 (China openness ratio has maintained steady):
o China  steady growth
o More independent
o Own supply chain
o Not intermediaries
o Particularly: state – owned optimism
- Has globalization peaked?
o Not peaked
o False / exaggerated peaks
o Maybe on goods
o Remote  new “peaks” to come
o Goods may reach new peaks

TRADE

1. Liberalism theoretical reaction (how would they react to China’s opening?)

a. No trade barriers
b. No subsidies
c. Benefitting from China’s supply chain
d. Competition  means two things: lower prices and better products
e. Should bring more information (China should be more transparent)
f. Technology advance
g. Bigger role in international organizations

2. How are advanced countries actually reacting?

a. Protectionism
b. Subsidies
c. Concern/uncertainty
d. Tensions

Connecting the Ferrovial case with this: the bottom line is that this is going to be happening more often, being in a
global market where countries compete. There are more “competitive” countries for operating.
The dilemma is between being more competitive in the global arena (cutting salary’s people and asking for more
hours of work) or only in our country.
PERSPECTIVES ON TRADE

1. MERCANTILISIM: is a matter of jealousy, of comparing each other (not fairness). Competitive advantage
unconditionally benefits both or all of the parties engaged in trade. If my neighbor is benefitting by 3 and
me by 2, I’ll feel like I’m losing when we are both winning. If I protect emerging industries, some industries,
I’ll be able to make some of the players of my economy better off. The thing about free trade is that it
creates concentrate losers and dispersed winners. If the losers are a lot (and represent a lot of votes), I’m
going to try to win them as president…challenges.
Fear of being too dependent on others.

2. LIBERALISM: the world is not run on absolute advantage but by comparative advantage. You have to find
what you can do without losing too much of other resources. Specialize precisely in those goods where you
have to give up less of other things to produce.
Hecksher – Ohlin Model: Stolper – Samuelson goes a step beyond  China specializes in cheap labor, wages
go up, and wages in the US go down (result: Americans elect Donald Trump). American workers cannot
compete international in a specific sector of activity with Chinese workers.

3. STRUCTURALISM: trade liberalization as a version of classical imperialism. Developed states want to take
advantage of non-developed.

4. CONNSTRUCTIVISM: the prospective of the citizens about international trade are changing  for example,
the EU, which is concerned about energy, food, inflation, immigration….constructivists think that trade it’s
changing its mentality: now we care about fair trade, environment, etc.

The dilemma of trade liberalization resembles a Prisoner’s dilemma. Only works if countries open at the same time
their economies. The best thing for me would be to protect while the others open, but that’s not realistic.

Most important question of this course: what’s the difference between a friend and a girl/boyfriend?
Reciprocity and nondiscrimination is something that you share with both. If you are willing to get in a relationship
with someone, you must be willing to accept the fact that you have to go a step beyond (with 1, and not the others).
The GATT/WTO stablished conditions based on reciprocity and non-discrimination  every single country in the
world joined this and they agreed on the minimum conditions for trade happening between country A and country
B. then, you can sign bilateral agreements, you can go to monetary unions, or even into a federation and form a
country, but you start from reciprocity and non-discrimination.
The WTO took then a step beyond: we are going to agree on an institution: a Dispute Settlement Channel.
But at the end of the day, everything is about reciprocity and non-discrimination at the minimum level.
China, not considered a market economy in the WTO, makes the other countries able to impose more tariffs than to
others recognized as such (France, for example). China is always pushing for that recognition, and the US is pushing
the other way around.

Countries in joining the free trade, start from the GATT/WTO and explore from there.
Bilateral agreements: spaghetti bowl effect.
Politicians like Trump prefer bilateral agreements because then you can impose your voice (not when 15 countries
are part of the agreement too).
TTIP: 27 European countries + US
When the 2016 election came to US, democrats and republicans were against it.
Would have boosted very much the economies  very criticized by left parties in Europe.

TPP: main goal of this was not economic. It was to create an alternative to China. Included: Australia, Brunei,
Canada…
Criticism: human rights and environment protection. These countries don’t support it.

Bilateral Trade Deals signed by Trump administration: the mega bloc trend was stopped.
Not the overall trend worldwide: RCEP (where the US is not). Biggest trade bloc in history.

VIDEO: Trade deals aren’t really about trade.

How to achieve world peace (Bretton Woods): economic interdependence.
Idea behind what became 4 years later the GATT  created globalization, outsourcing, multinational corporations,
etc.; created what we know as the world today.
“2nd Bretton Woods”: Uruguay Round. Instead of world peace, they were focused on economic efficiency.  idea of
non-tariff barriers: products from the outside compete in the same playing field as those from the inside.
In 1995, we got rid of GATT and replaced it with WTO. Idea: non – tariff barriers. Countries’ domestic laws,
regulation, etc. needed to align with this world sense of efficiency.

Example: Europeans and Americans. US wants to export the GMO to the EU but they don’t want that. US backed by
the WTO: “your domestic policies are not aligning with the sense of world efficiency”.

How do we promote as many goods and services in as many countries as possible without affecting each country’s
regulations and views?

We are not talking about trade but about rules and global standards (in what kind of world do we want to live in?).

We created the global economy we have now. The rules that we passed are the rules of the world that we live in.
Let’s think about what rules do we want to embrace or not. Do we want global efficiency the paradigm or
something else like global prosperity?

WTO: ARGUMENTS IN FAVOR AND AGAINST OF

- In favor:
o Less tariffs
o Enhances global trade
o Basic rules for dispute resolution + own dispute resolution mechanism
o Non – tariff barriers
o Open (“all – inclusive”)  includes almost all countries
o More voices are heard  developing countries
- Against of:
o Slow / failing negotiations
o Ambiguous policies
o Longer than expected disputes’ settlements
o No judges’ replacement
 o China’s role (considered a non – market economy so their tariffs don’t have to be lowered)
o Veto
o US can’t negotiate
o There are alternatives, more efficient.
o Trustworthy? Not coercion

Question is: the world could live without the WTO or not?

International monetary and finance structure: who are the most important actors, what are their interests, and
what international political – economic institutions have been established to achieve their goals?

- Actors:
o Political parties
o Governments
o Households
o Firms
o Lobbies
o NGOs
o Banks
o European Commission

- Institutions:
o Central banks
o IMF
o EU
o States

- Goals of these actors:

o Stability in prices and in markets
o Financing
o Savings
o Cooperative markets  liquidity

When a country experiences a crisis, their currency devaluates and therefore, their exports increase and then
start recovering.

If in Portugal starts a crisis, or in Spain, the euro doesn’t react because it doesn’t depend only on them. How can
they depreciate their “euro” (how can they make themselves cheaper?)? Cut wages.
Higher employment and lower wages = reduction of production costs.

How inflation affects exchange rates: if inflation is higher in US, the dollar appreciates, and it means I have more
purchasing power with dollars.

MUNDELL TRINITY
https://www.youtube.com/watch?v=HLfceACjPNY
3 STAGES:
- Gold Standard (1870 – 1913): this is an ideal, so it never worked perfectly well. The role of gold at this
moment was informative, gave predictability and stability (because it was a “fixed” exchange rate). State
difficult choice (play with the fixed rate or not). If you don’t have enough reserves, you cannot do it.
The Mundell Trilemma: what do I give up? Monetary independence.

MAIN CHALLENGES THAT FISCAL POLICY (GOVERNMENT) FACES:

- Unemployment, which means 2 things: lower revenues and more spending (if we lose our job, they take
care of us, kind of a “contract” between the government and its people).
- Budget constraints
- Populist policies
o Democracy + re-election
- The welfare state
o Democratic issues
o Lower revenues due to weaker growth
- New areas
o Defense
o Climate change

MAIN CHALLENGES THAT MONETARY POLICY (GOVERNMENT) FACES:

- Inflation
- Banking stability
- Ex. rates volatility
- Creating monetary space (0%)

Budget constraint = government revenue + new debt = public spending

Revenue < spending  deficit
Deficit  public debt
Public debt  higher interests
Higher interests  more deficit

ECB breaks this mechanism.

What is the goal of the ECB: inflation
What the ECB did in 2012 was only possible because inflation was -1%. The goal was not saving the Euro, Spain,
Greece (side – effects)…the goal was to bring inflation back to 2%.
With the inflation at actual levels, can the ECB keep doing this? And for how long?
If inflation is high, central banks cannot intervene in bond buying. We may be facing a new public debt crisis.

US has a privilege: issues debt in the “global” currency, the dollar.

Part 2
Bretton Woods monetary order  post WWII
Rebuild the world through cooperation, interdependence… Interconnectedness.

Main objective: avoid competitive devaluations.

IMF  provide temporary macro economical assistance to some countries.

US was the only country that needed to run a current account surplus to make the world work (all the currencies
were linked to the dollar, but the dollar was the only linked to gold). The US needed at the same time, to provide
the collective goods that the mankind needed (roads, hospital…), but international ones: global security, global
trade system, global capital flows…

This was a midpoint between the gold standard and the interwar flexibility. The US was bearing the cost of the
adjustment (gold).

But in the 70s things change  inflation in US  appreciation of the dollar  countries that relied on dollars
started exchanging their dollars for gold. The unwillingness of the FED to raise more their interest rates, gave rise to
the Nixon closing the Gold window  the US didn’t have enough gold to keep the system working in a CA deficit.

When you have a CA deficit, means you have a FA surplus (being financed by the rest of the world). For the first time
in history, the hegemon country (EEUU), instead of financing the world, is being financed by it (and this has been
happening since then). Consequently, you are exporting less than what you are importing (dollars are escaping your
country, the world starts having more dollars). Additionally, you have inflation (you lose purchasing power). The US
was reluctant on raising interest rates because it didn’t want to affect economic growth, and consequently high
inflation led holders of dollars to exchange those dollars for gold  the US didn’t have enough gold for this. US said
“enough”.

That’s how we arrive to today: free – floating system  no currency is backed by gold.
By 1985, the US had become the world’s biggest debtor nation.

New Monetary (dis)order  fixed but adjustable exchange rates become unsustainable.

Intervention:
- High: before WWI
- High with adjustments: WWII
- Low or none: now

******Mundell trilemma (exam)

Conclusion  most important issue associated with the globalization of capital: how to manage financial instability.
2 problems of capitalism:
- Wealth accumulation in top income quantiles
- Financial crises
o Do we need more or better regulation?
o What is the role of multilateral institutions in a world of unrestrained capital markets?
- Does globalization inevitably
RODRICK’S TRILEMMA

Deep economic integration  we eliminate all transaction costs. Who impose those barriers? nation – states.
- 1 option: global federalism:
- 2 option: maintaining the nation state, but to make it responsive only to the needs of the international
economy.
- 3 option: downgrade our ambitious with respect to how much international economic integration we
should achieve.

Anny reform must face this trilemma: hyper – globalization, national sovereignty, democratic policies.

If you want financial stability + integration: you need institutions.

If you want financial integration + national financial policies: must give up stability, because institutions cannot
prevent everything.
If you want financial stability + national financial policies: must give up integration.

EU: we are giving up national financial policies.

UKRAINE

Russia has been a constant threat in Europe.

As Europe, we want to correct: we don’t want a country to not respect human rights, we want to intervene.

Russia: “you are not entitled to tell me what I can do in my country. Leave me alone, I don’t want your propaganda”.
Perceives as a threat the expansion of the UE to the East, as that means that human rights, democracy,
environmentalism…are coming and they are something harmful to their values.
China lives with the same mentality.

Exit from Afghanistan  we didn’t heal the country, we got sick of it.

REALISM
Dominant paradigm to analyze security issues.
States are primarily motivated by self-interest and seek to maximize their power and security.

Classical realists assume:

- State survival depends on defense capabilities.
- Power emanates from military capabilities.
- Organizations, but at the end of the day is the state the one who needs to use its power.

NEOREALISM
Believe realists oversimplify.
Focus on the structure of the international system rather than the individual actions of states  a neorealist would
advocate for a systemic solution rather than an intervention, in the case of Russia and Ukraine.
States are motivated by the desire to maintain a balance of power in the system.

DIFFERENCES BETWEEN THEM

- The level of analysis: same problems with different perspectives
o Realism: individual states
o Neorealists: international system and the distribution of power among states. For ex, US invaded
Afghanistan to rebalance the region.
 We cannot invade tomorrow Portugal because the system prevents it from happening

PHASE 1: COLD WAR BIPOLARITY

Bipolar distribution of power.
The origin of Cold War are connected with the division of Europe.
Neorealists take is that Cold War resulted from collapse of old order.

Korean War 1950: proxy war rather than a direct one.

Cuban Missile Crisis

PHASE 2: THE WEAKENING OF BIPOLARITY 1973-1991

US opened – up relations with China as a counterweight to Moscow.
Oil crisis 1973: economic war.
Phase of real events and real conflicts in which countries took positions.

George Bush  the moment when the US finally opened to Russia.

PHASE 3: END OF COLD WAR ANDD GSS INSTABILITY: A UNIPOLAR OR MULTIPOLAR WORLD?
Countries in the Western world really believed everything was good now, and globalization was perfect. But they
didn’t know people in the Middle East were mad about how they had had approached global security  rise of
Islamic attacks.

That gave rise to the recent evolution:

How the war in Ukraine is reshaping America’s global alliances?

- SWE + FIN  NATO
- Indo – Pacific alliances
- India’s wobbly response
- Link: EU + Indo – Pacific
- China + Brick’s + Arab – oil producers
- I2/U2
- G7  G12
- Australia + GB Deal

We have a block – forming dynamic here  Democratic vs Autocratic.

- NATO + some Asian allies
- China + Brick’s + Arab – oil producers
We can also see it as a neorealist phenomenon  one system vs the other system.
Exam question.
A realist would say ‘let’s fight Russia’, a neorealist doesn’t care about that and says, ‘take a deeper view’.

Donald Trump  “we are going to be protecting only domestic interests, unilaterally…” so, at first, not necessarily
interested in combining with NATO countries.

CLASSICAL REALISTS AND NEOREALISTS

Neorealist approach to Russia: instead of bombing it (realists’ view), the solution would be to impose sanctions,
change education, make Russia more western – like…

INEVITABILITY:
- Progress
- Future better
- Hope
- Can’t stop progress
- Policies
- Not past – oriented, but future – oriented

ETERNITY:
- Historical enemies
- Factuality elimination
o Insecurity, uncertainty
- Threats  constant
- Diminish achievements.
- Russia, China…
- Media weakness
- Results  democracy
- They advocate that our freedom is making our societies weaker

These are the 2 ways of perceiving politics and reality.

THE AMERICAN FACTORY

China, India, Brazil, and Russia reshaped their economies and everyone else’s.

- Former Communist Countries

Had to create a market economy from 0. Most of the wealth was in hands of the state. Took a while to adapt. This
led to restructuring.

Almost all suffered severe economic decline after leaving communism, but some of them were able to recover
faster than others. In those crisis, some of them blamed democracy, capitalism, etc., because they were not patient
(this is still present in some of these countries).
When they started joining capitalism, their economic performance started to increase, but they suffered from crony
capitalism, “demographic disaster”…

- Brazil
Enormous resources. Import – substitution industrialization. Worked well in the beginning but nothing spectacular.
Re – election of Cardoso. Started emerging as one of the most important exporters.

Lula Da Silva: not as extreme as Chavez and perceived more balanced. Puts in place macroeconomic policies, while
putting in place strange domestic economic behavior. Fame Zero worked very well for reducing poverty in Brazil,
and Lula was able to make it without worrying foreign investors.

Sugar cane plantations: feeling of giving up their welfare (planting of their food) for foreign investors.

What kind of evidence do economic liberals point to in support of their argument that the rise of China, Brazil,
India… is economically good for the rest of the world?
The upside of competition is that your country, companies, workers, become more competitive…The downside is
that we don’t want to work more hours for less money, they can outcompete us.

- India
Green Revolution first step. Domestically invested a lot of money in agriculture. Good infrastructure set up that
allowed the country to grow and foster their economic growth for years. But very low range of growth rate (7%).
Similar to Brazil but with a big difference: their society is structured in a very specific way.
They want to have technology and highly educated workers, they cut agriculture subsidies. Government had to put
a lot of money again to transform the society. Their aim is to have more working age population than China (who is
slowing down) in the following years. Good human capital, cheap labor and very competitive.

Realists hope it will be a regional buffer against Islamic extremism. Economic liberals see India as a good example of
how globalization leads to growth.

Different from Brazil: no internal mobility between the different shares of the population (classes). Ultra – rich
businessmen, but the country shows prospect.

- China’s world order

o Diplomatic relations with Saudi Arabia + Iran
o Ukraine peace talks
o Inexistence of international institutions. They want to reduce their power.
o Own position on Russia
o Modernization is different from “westernization”.
o Become a mediator in the world. Benevolent role if…according to interests.

EUROZONE BREAK UP

I. Economic
a. Decrease in GDP
b. Inflation
c. Trade
 i. + spillovers if devaluation
d. Tariffs
e. Less Euro zone bargaining power.
f. Debts in euros are paid with devaluated currencies (pesetas, for ex.), which means the burden is
MUCH HIGHER.

II. Social
a. Rise of nationalism
b. Burn things
c. Loss of purchasing power
d. Less social policies (less money because of debt)

III. Political
a. Extremism
b. Territorial disputes
c. Domestic interests
d. Populism

THE EUROPEAN ADVENTURE:

Why is Europe integrating?  from top to bottom  political leaders deciding everything for us
EU – ECB – IMF troika established conditions for the bail – outs that domestic authorities wouldn’t have imposed
(for good and for bad). Debtor countries pushed for more adjustment because they wanted their money back. We
have a problem of lack of common vision, of homogeneity of destiny.

EU TRILEMMA + GERMANY’S VIEW

Trilemma  Common spending, more investment, budget constraints
Germany’s view: more investment (common level) and budget constraints
South countries’ view: common spending and more investment (national level)

ENERGY CRISIS

1970’s V.S. today’s energy crisis

1. 1973  Arab v.s. Israel war  boycott  embargo (cutting production)

2. Embargo: the goal was not to produce negative economic impact in the US but change foreign policy.
a. Short term economic impact
b. Change in foreign policy? Affected to US economy but didn’t change its foreign policy. They went to
other supplier.
3. Energy = weapon  energy security
a. US over reliance on oil from Arab countries
b. Boycott  look for alternatives (Country B: prices will go up but reduces reliance on Arab
countries). US for the first time realized that they needed to develop their own tools to generate oil
and gas. That’s how they became the first oil and gas exporter  how? By fracking new
technologies (that are VERY contaminating. The upside is that you get your own energy). The
 transition started in the 80’s. Basically, they found their weakness and transformed it into a
strength. We are expecting something similar to happen with Russia and Europe.
c. Europe didn’t want to follow US’s route, because we are more green – friendly. We opt for green
transition. We are going to be paying more for our energy for the next 20 years, so they need to
frame it politically (we are doing it for the planet).
4. Nuclear? Is not labelled as a green energy. Why?
a. Residuals it produces
b. Europe has been heavily lobbied to not rely on it

All energy crises have the same appearance: supply shock.

Do you think that we will ever run out of oil?

There’s a point in which to get the last drop of oil is going to be so hard and expensive, that we will switch to
another alternative.

OPEC

The OPEC played a major role in the 1973 oil crisis. US was depending on them from 2 points of view: importing
their oil and them financing our growth.

Question: what are the key economic, social, and environmental tradeoff associated with the growth of green
energies?

(+) (-)
SOCIAL - Less foreign dependence - Less jobs
- Better health
- Consciousness
ECONOMIC - New jobs - Less jobs
- New business opportunities - Less efficiency
- Long – term investments
- Not – so reliable (until we
can store it in a battery)
ENVIRONMENTAL - Good for it - “Nimby”
- Noise, nature, impact

Energy in the 2000’s

- Volatility
- 2 structural trends:
1. US independence
2. EU Green transition
- And a structural trend not related with oil:
o Bric’s growth  drives demand up  a natural trend to increase in prices
- OPEC’s power  pushes down prices (oil) + pushes up other energy prices (EU)
- Three major events:
 o 2001: Irak + Afghanistan wars (prices up)
o 2008 – 2012: economic crisis (prices down)
o Covid crisis: prices down

The Global Energy System

- Inexistence of enough investment to go full – green

- More state intervention to curb dependency
- Enough fossil  not incentive
- Policies: shift will be “unavoidable”
- Energy austerity + New alliances with gas suppliers  political instability
- Common European policy?
- Dramatic shit from 70’s
- US doesn’t want to be EU’s savior