Economics 357L
Political Economy of International Crisis

Spring 1999

Second Test

Part I: International Monetary Crises (answer one question, 30%)

1. After the abandonment of the Bretton Woods international monetary system, the major powers shifted to a floating exchange rate regime. In both economic and social/political terms how was that regime supposed to work? How did it in fact work? What forces were at work to undermine the intended?

In economic terms, the shift to floating exchange rates was supposed to solve the "adjustment problem", i.e., problems with balance of payments. For example, a trade deficit where imports > exports should result in offers of the local currency > demand for the local currency which should push the value down. As the value of the currency drops, imports become more expensive, exports less so and the trade deficit is gradually eliminated.

In social/political terms, the shift to floating exchange rates also shifted the "responsibility" for adjustment from governments who were often under fire for the consequences of the economic policies to a quasi-automatic mechanism. Put differently, the shift was a response to the crisis of the Keynesian state management of the economy and sought to escape democratic constraints. In the Keynesian period to correct a trade deficit the state would undertake restrictionary policies to increase the demand for the local currency as prices dropped and interest rates rose, making exports more attractive, imports less so and investment in the country in question more so. But restrictionary policies raised unemployment and caused social pain the resentment to which was aimed at the government. The shift to floating rates would supposedly diffuse resentment and make such problems seem unavoidable.

In reality, as opposed to expectations, people were no more ready to accept the consequences of adjustment from the foreign exchange market than they were from the state and demanded state intervention to offset things like high unemployment. Thus, states were forced to intervene in the "freely floating markets" in a way which made the system a "dirty float" rather than a free float. National governments largely failed to convince their populations to accept market results.

The forces at work involved both elements of the waged labor movement who were losing their jobs in the 1970s and 1980s, especially in Europe where unemployment became double digit, and grassroots movements of all kinds (e.g., pro-immigrant movements) who challenged the results of government policies and demanded changes. From the other side, you could say that the forces involved included the actions of speculative capital investment, especially speculative investment in the exchange markets that made them extremely volatile.

2. In Europe there has been a movement back from floating exchange rates to fixed exchange rates. Trace the course of that movement. Explain why the movement has taken place and what social and political obstacles have arisen to slow its progress. Use at least one specific country example to illustrate your argument.

The course of the movement went from floating exchange rates, to the snake, to a more rigid European Monetary System and Exchange Rate Mechanism to the Euro with a common currency. The movement has take place because floating rates failed to deal adequately with the adjustment mechanism and were so subject to speculation as to be extremely volatile. This led to difficult, expensive and increasingly ineffective central bank interventions to stabilize exchange rates (dirty float). As the quantity of money in circulation and the quantity of speculation grew so did the difficulty of achieving any kind of stability, even through joint central bank intervention. Thus the shift towards fixed rates. The snake and the ERM both required intervention by central banks (as well as other macroeconomic policies) to maintain rates within the specified band but with the direction of movement clearly set toward fixed rates the incentive for speculation in these markets dwindled. It was hardly eliminated, however, because the ultimate success of Maastricht and the achievement of the necessary terms of entry into the proposed European Economic Community and Euro were in doubt and the process delayed year after year.

The social and political obstacles to the achievement of these plans have come from the usual source: workers and others threatened by the high unemployment (anti-inflation - wage programs) required by Maastricht as a condition of entry into the Community. The Maastricht Treaty terms have been seen by people at the grassroots to constitute a coherent attempt to achieve a fundamental redistribution of wealth and power from labor to capital and they have fought back. The degree of resistance, however, has varied from country to country and thus has the attitude and willingness of particular governments to hang tough and meet the terms of the treaty.

As for country examples, the most obvious are probably those who withdrew from the ERM in 1992 under tremendous domestic pressure to deal with high unemployment: England, Ireland, etc. In each case attempts to meet the treaty terms meant very high interest rates and reduced government spending (especially on social welfare) which together hit hard at the British working class. After a decade of defeat under Thatcher it began to fight back and raise hell. Fewer jobs and less money without a job is a killer combination and workers rebelled putting the government under pressure.

Part II: The Peso Crisis (answer one question, 30%)

3. Discuss the parallels and differences between the forces that brought on the Peso Crisis in late 1994 and those that brought about the end of Bretton Woods and the shift from fixed to floating exchange rates. In answering this question take into account: a) conditions in the foreign exchange markets, b) the socio-political dimensions surrounding and influencing such decision making.

Parallels: the most obvious, immediate parallel was hot money. In both cases foreign exchange markets, and capital markets more generally, were subject to sudden and rapid in and out flows of short term portfolio investment money. In the case of Bretton Woods it was a run on the dollar in the Spring of 1971 that triggered the abandonment of fixed rates and two years of crisis over the future of the international monetary system. In the case of Mexico it was the sudden outflow of hot money and associated attack on the peso (everyone was dumping it) that forced the government's marginal devaluation to become a dramatic one and then a downward float.

Differences: the most obvious difference is that in Mexico it was fairly easy to see the connection between the economic crisis and the political crisis set off by the Zapatista rebellion and the wave of pro-democratic demands it set off. But in Europe we didn't plumb this dimension in the case of the run on the dollar, neither in the US nor in Europe. There may have been such factors at work, especially because we do know that in this period workers were driving up wages faster than productivity, achieving social welfare gains, etc. But our examination was in general terms of the rupture of Keynesianism and thus of the untenability of Bretton Woods. Another suggestion of the possibility of similarities might be seen in the other measures taken. In Mexico the Zedillo government complemented its imposition of austerity with a massive military campaign against the Zapatistas. In the US Nixon complemented his freeing of the dollar from gold by a wage-price freeze (aimed at US labor) and a 15% import surtax which struck at European exporters and their workers. But we did not examine any material that suggests the kind of direct ty-in we have seen in Mexico.

4. What were the economic and political repercussions of the Peso Crisis? What changes did it produced in Mexican government policy at both these levels? What were the effects of these changes on the people in Mexico in general, and in Chiapas in particular? Give your own assessment of the Mexican government's decisions in this period.

Economic repercussions: a huge $50b bailout of investors and Mexican financial markets and the imposition of heavy austerity on the Mexican people. The austerity came from the devaluation (raised costs of imported stuff --including basic food stuffs) and reduced government spending on social programs that struck at workers combined with higher interest rates that undermined middle class, small farmer and small business operations by dramatically increasing their costs while attacking their income. Aggregate data suggests that standards of living in Mexico fell for most people. Object (achieved) was the stabilization of financial markets at the expense of the people as a whole. No real information was given on the economic impact on Chiapas as opposed to the rest of the country. Individual assessments can vary but should address the issues, and not just say yes or no, good or bad.

Political repercussions: Mainly the massive military assault on Zapatista communities --with all the devastation to people and their communities brought by the Army to those regions. But also the austerity can be seen as a political response to the democratic upheaval in Mexico that was given impetus by the Zapatista uprising which was, after all, aimed at neoliberalism as well as indigenous rights. On the other hand, the increased austerity only contributed to swelling dissatisfaction with the PRI and the anger with neoliberal policies and undemocratic practices, so the secondary effect was probably the further "destabilization" of Mexico. Individual assessments can vary but should address the issues, and not just say yes or no, good or pbad.

Part III: Food Crises (answer one question, 30%)

5. In lectures it was argued that development and underdevelopment were not only states-of-being and processes but also strategies. Explain what was meant by this and how food production and distribution policies might be wielded within these more general strategies. Give at least two specific examples from the history of American foreign aid.

Development as state-of-being refers to seeing country's status as a given, perhaps subject to change but as the-way-they-are. Being developed often associated with industrialized. It is a static view. Thus a country is underdeveloped if it is primarily agrarian.

Development as process refers to growth coupled with structural change, just as in biological development, babies get bigger and they change physically. So too with economies and societies in this view. Also called modernization by political scientists who sought changes in cultural conditions favorable to such growth and change. Underdevelopment, however, is no longer viewed as a situation in which people and countries find themselves but as processes to which they are subject. So just as investment may bring on development, so disinvestment may bring on underdevelopment. This view much applied to the impact on colonized countries who saw their existing economy shattered as their population and resources were integrated into imperial economies.

Development, or underdevelopment, as a strategy goes beyond the observation of processes to assert that it has often been the case that those processes are the direct result of policies and that therefore development and underdevelopment are general terms for sets of policies with radically different aims. In a development strategy business and the state foster investment and growth, generally offering increased income and standards of live (at least for some) in exchange for cooperation with business and state goals. Giving (Y) to get (work). Example: Keynesianism which wrapped capitalist development around rising wages. In an underdevelopment strategy, business and the state decide (policy) to disinvest (or to refuse to invest) in a way which lowers real income and they do this as coercive strategy to force compliance with their goals. Taking away (Y) in order to get (work).

Food production and distribution policies might be wielded within these more general strategies as one dimension in the "giving to get" and "taking away to get" described above. The history of American food aid makes this easy to see because "food aid" was the result of clear-cut policy decisions (no fuzziness about the net effect of diverse private decisions). In American food aid history we discussed, for example, Herbert Hoover who went around Europe after WWI giving and withholding food according to government's willingness or unwillingness to comply with American policy objectives. More generally in the post-WWII period, after Hubert Humphrey and others passed Public Law 480 the giving and withholding of food was wielded by American diplomats to achieve US goals. In the case of India and its famine in 1965, Orville Freeman told the Indian Minister of Agriculture that we would only provide food to relieve the famine if India opened its fertilizer to American companies and undertook population control measures. They agreed and food was given. Implicit in such deals is the local government undertaking to provide conditions which are profitable for American investment --which always involves the control of labor.

6. From the materials provided for the case study of Tunisia and lectures provide a critical assessment of Seddon and Cleaver's approaches to understanding the onset of food crisis in January 1984. In other words, explain their approaches and then discuss their strengths and weaknesses.

The approaches of the two involve probing beneath the surface political interpretations of the upheavals in Tunisia to seek the underlying economic and social forces. Seddon does this to a degree; Cleaver comes along behind him and pushes the probing even further --and further afield as he seeks to understand the situation in Tunisia within a Mediterranean and global context. So Seddon points out that the riots were genuine uprisings against government food price policies (withdrawal of subsidies) rather than fomented by "outside agitators" as claimed by the government. He also seeks some explanation for the change in food price policy and finds it in the evolution of the economy (e.g., growing foreign trade deficits and government budget deficits) and uneven development within the country. Cleaver then queries the social sources of falling international revenue, such as declining phosphate exports, in terms of the Carter-Reagan depression of the early 80s; similarly for the decline in tourism receipts which can also be linked to unrest in the area which might scare off tourists. Then there was the issue of rising wages which Seddon located in workers struggles and Cleaver went further and linked to immigrant work experience in Europe and the repatriation of not only higher wages but different life-styles and changing expectations. And so on.

Strengths and weaknesses: Individual assessments can vary but should address both what was done and the methods used. Students should provide a thoughtful, reasoned response, not just it's good or bad.

7. Take the case of Ethiopia and discuss the applicability of the concepts of Power and power vis a vis agriculture to the history of conflict before and during periods of prolonged drought and famine. Draw on specifics of the history to illustrate your argument.

Vis a vis agriculture: The application of the Spinozan distinction between Power (the power to control others) and power (the power to constitute your own life and that of society) within agriculture would seem to highlight the way, in the first case, the control over food andbehind that land can be used to put pressure on those without such control to comply with demands. No compliance, no food (or no land). In the second case, the notion of power, you have situations in which precisely due to their control over food (and land to produce it) people are empowered to refuse compliance with outside forces if they don't like the terms. So peasant tenacity in hanging on to their land, or struggles to get it back via take-over or land reform can be seen, at least in part as a refusal to accept the "development deal" being offered off the land by those with Power.

Applicability to Ethiopian crisis: In Ethiopia there have been harsh conflicts between the central government --dominated by one ethnicity-- and several other regions. Government agricultural policies were wielded in part in response to such conflicts, with the government withholding help to antagonistic peoples and rewarding more cooperative ones. When the droughts came and eventually with them famine, these policies continued. The Ethiopian government sought to wield the Power given to it by command over scarce food to coerce compliance with its desires. The vivid article by Steingraber on resettlement and villagization demonstrated not only the antagonism but also the exercise in Power used by the state against those who resisted its command.

Discuss the applicability: Besides discussing the history within the context of the theory, the student should discuss the degree to which that theory is applicable and any shortcomings they see. Individual assessments can vary. Students should provide a thoughtful, reasoned response, not just it's good or bad.

Part IV: BusinessWeek (answer one question, 10%)

8. In the February 22, 1999 BusinessWeek, there is a commentary by Joseph Weber on suggestions that all of the Americas should shift to a common (dollar) currency in parallel with the formation of the European Monetary Union. What are the arguments pro and con, and what is Weber's assessment of attitudes at the time the article appeared?

Arguments pro: replicate the favorable trading conditions created in Europe through Euro currency, i.e., no exchange rate problems, no currency hedging costs. Would encourage investment in emerging markets with no fear of devaluations and would reduce risks of exchange market collapse due to sudden speculative hot money exits.

Arguments con: US would determine all countries' monetary policy. Fed would dominate all. Participation of others on Fed would be racked with contrasting objectives. Countries would lose ability to devalue as indirect way of "spreading economic pain" (presumeably onus would fall on fiscal policy where people can see what's going on and complain about it more easily. Also US would push for tax regularization.

Weber's assessment: "Few in the Americas seem ready for a single currency. But if the euro gives the Europeans a competitive edge, the NAFTA dollar may be inevitable."

9. In the March 15, 1999 BusinessWeek, there is a story about the impact of high global grain output on American farmers. What is that impact and how do the likely consequences fit within long term changes in family farming? How were such surges in production made use of in the 1950s and how, if at all, are they likely to be used today?

The impact: Bumper crops are driving down prices of farm output and with it farmers' income. The article wonders if farmers are headed for another great depression but even if not, there is the expectation of a loss of family farms.

Conequences: Such periods are typical of those that have seen the bulk of the American people forced to abandon the land and move to the city. Along with this, of course, went not only the decline of family farming but the rise of agribusiness to domination of food production (and increasingly processing).

Surges: such abundant crops were, in part, bought by the government and redistributed as food aid, either domestically or abroad. Although there is still some of this, there was no indication in the article of any such program. Indeed, the article suggested that in an off-election year, politicians could care less. If recent pork prices are any indication, the surplus will just be dumped on the market and prices will decline according.