Political Science 12: IR -- Sixth Lecture, Part 2

Transcription

1 Political Science 12: IR -- Sixth Lecture, Part 2

2 8 International Financial Relations

3 International Financial Relations 1.International Finance Cross-Border Investment Why Invest and Borrow Abroad? Distributional Conflicts The Role of the IMF Multinational Corporations

4 International Financial Relations 1.International Finance Cross-Border Investment Why Invest and Borrow Abroad? Distributional Conflicts The Role of the IMF Multinational Corporations

5 International Finance Cross-border investment can improve welfare in both countries Financial interests cooperate Financial ties can make societies mutually vulnerable

6 International Finance The Financial Crisis of 2008 Credit crunch in housing market Toxic assets Cascade

7 International Finance Foreign and international actors can have strong influence on a country s welfare.

8 International Finance

9 International Financial Relations 1.International Finance 2.Cross-Border Investment 3.Why Invest and Borrow Abroad? 4.Distributional Conflicts 5.The Role of the IMF 6.Multinational Corporations

10 Cross-Border Investment Portfolio: investor has no role in management Bonds Loans Stocks

11 Cross-Border Investment Direct investment: investor maintains control of facilities

12 International Financial Relations 1.International Finance 2.Cross-Border Investment Why Invest and Borrow Abroad? Distributional Conflicts The Role of the IMF Multinational Corporations

13 Why Invest and Borrow Abroad? Figure 8.1: Foreign Investment in Emerging Markets,

14 Why Invest and Borrow Abroad? Benefits from investing outside one s country Costs of investing abroad

15 International Financial Relations 1.International Finance 2.Cross-Border Investment 3.Why Invest and Borrow Abroad? Distributional Conflicts The Role of the IMF Multinational Corporations

16 Distributional Conflicts Table 8.1: International Investment Flows,

17 Distributional Conflicts Across borders Terms of the investment Loans Obsolescing bargain

18 Distributional Conflicts Within a borrowing country Foreign capital may be fickle Foreign capital inflows may benefit some more than others

19 Distributional Conflicts Within a borrowing country Government borrowing: Who should sacrifice?

20 Distributional Conflicts

21 Distributional Conflicts Within a borrowing country Moral hazard

22 Distributional Conflicts Moral hazard Federal Deposit Insurance Corporation (FDIC) Created in 1933 (very early in FDR s administration)

23 New Financial Instruments Innovation in financial sector in the last thirty years Hedge funds and investment banks created new products Unregulated, no safeguards, no insurance

24 Moral Hazard: Insurance The S&L crisis (late 1980s) declare bankruptcy FDIC bailout A bank knows that it is insolvent make a bunch of very risky loans that will be lucra9ve if they pay off (such as buying lo=ery 9ckets) loans go bust, bankruptcy loans pay off FDIC bailout live the high life!

25 Moral Hazards and Solutions Insurance: someone else pays if you get in trouble Moral hazard: insurance reduces incentives to act responsibly Solution to moral hazard: regulation and monitoring

26 International Financial Relations 1.International Finance 2.Cross-Border Investment 3.Why Invest and Borrow Abroad? 4.Distributional Conflicts The Role of the IMF Multinational Corporations

27 The Role of the IMF The International Monetary Fund Cooperation through an institution Serves same function as Britain in the nineteenth century

28 The Role of the IMF The IMF created the recognition that monetary and financial markets are prone to socially disastrous failure.

29 The Role of the IMF The IMF turned from monetary insurance to financial power in the mid 1970s.

30 The Role of the IMF Lately, Ireland, Greece, and Portugal all have needed to borrow from the IMF.

31 The Role of the IMF Voting share adjustments October 2010 G-20 agrees to give over 6% voting share to dynamic developing countries

32 The Role of the IMF Benefits Provides information Can facilitate agreement that otherwise would be difficult

33 The Role of the IMF Criticism of the IMF Financial standards and information Negligible impact on preventing crises

34 The Role of the IMF Criticism of the IMF Negotiations nondemocratic IMF forces noneconomic policy concessions

35 The Role of the IMF

36 International Financial Relations 1.International Finance 2.Cross-Border Investment 3.Why Invest and Borrow Abroad? 4.Distributional Conflicts 5.The Role of the IMF Multinational Corporations

37 Multinational Corporations Foreign direct investment (FDI) Greenfield Mergers and acquisitions Joint ventures

38 Multinational Corporations FDI: Why and where? Market access Natural resources

39 Multinational Corporations FDI: Why and where? Minimize factor costs Permissive tax Regulatory environment

40 Multinational Corporations

41 Multinational Corporations Nearly 75% of FDI flows among wealthy countries.

42 Multinational Corporations Why do countries seek FDI? Less risky than loans Creates jobs

43 Multinational Corporations Spillover effects

44 Multinational Corporations International institutions and FDI Unlike trade, FDI is not deeply regulated at the international level

45 Political Science 12: International Relations