GO 357 The Political Economy of Regionalism

GO 357GO 357The Political Economy of The Political Economy of

RegionalismRegionalism

Walter HatchWalter HatchColby CollegeColby CollegeLecture TwoLecture Two

Economic conceptsEconomic concepts

Comparative advantage theoryComparative advantage theory Heckscher-OhlinHeckscher-Ohlin

• Stolper-SamuelsonStolper-Samuelson Consumer surplusConsumer surplus Producer surplusProducer surplus IPEP (“import protection as export IPEP (“import protection as export

promotion”) or Strategic trade theorypromotion”) or Strategic trade theory Returns to scaleReturns to scale Economies of scaleEconomies of scale

Comparative AdvantageComparative Advantage

TVs Beer Autarky Ratio

Country A 1 hour(to make one unit)

3 hours(to make a six pack)

1 B: 3 TV1 TV: 1/3 B

Country B 2 hours(to make one unit)

4 hours(to make a six pack)

1 B: 2 TV1 TV: ½ B

Heckscher-Ohlin TheoremHeckscher-Ohlin Theorem A country will tend to export the commodity that A country will tend to export the commodity that

more intensively uses its relatively abundant more intensively uses its relatively abundant factor of production, and will import the factor of production, and will import the commodity that more intensively uses its commodity that more intensively uses its relatively scarce factor of productionrelatively scarce factor of production

Why?Why?• Difference in relative price of commoditiesDifference in relative price of commodities• Gains from specializationGains from specialization

AssumesAssumes• No transportation costs or trade barriersNo transportation costs or trade barriers• Perfect competitionPerfect competition• Constant returns to scaleConstant returns to scale• Commodities always show different intensitiesCommodities always show different intensities• Country production functions are identicalCountry production functions are identical• Country tastes are identicalCountry tastes are identical

Stolper-Samuelson TheoremStolper-Samuelson Theorem

Owners of the abundant factor will enjoy Owners of the abundant factor will enjoy increasing real income; while owners of increasing real income; while owners of the scarce factor will suffer decreasing real the scarce factor will suffer decreasing real incomeincome

Why?Why?• Factor prices equalize as trade deepensFactor prices equalize as trade deepens

AssumesAssumes• Full employmentFull employment• Countries face same product pricesCountries face same product prices• Countries have same technologyCountries have same technology• Constant returns to scaleConstant returns to scale

Consumer surplusConsumer surplus

Producer SurplusProducer Surplus

Returns to scaleReturns to scale

Inputs (K,L)

Output (Q)

Economies of ScaleEconomies of Scale

Quantity of Production

Cost of Production

Strategic Trade TheoryStrategic Trade Theory

Government intervention may Government intervention may enhance net welfare if there isenhance net welfare if there is• Imperfect competition (monopoly or Imperfect competition (monopoly or

oligopoly)oligopoly)• Positive spillovers (technology)Positive spillovers (technology)

What about retaliation?What about retaliation?

Political Science conceptsPolitical Science concepts

HegemonyHegemony Collective action problemsCollective action problems

• Public goods and free-ridingPublic goods and free-riding• Information asymmetryInformation asymmetry

TrustTrust NormsNorms ImperialismImperialism DependenceDependence

HegemonyHegemony

Condition in which a dominant power Condition in which a dominant power existsexists• ““first among equals”first among equals”

Other states may balance against or Other states may balance against or bandwagon with the hegemonbandwagon with the hegemon• Depends in part on hegemon’s behaviorDepends in part on hegemon’s behavior

Collective action problemsCollective action problems

Competition doesn’t always produce Competition doesn’t always produce best outcomebest outcome• Cooperation/collective action neededCooperation/collective action needed

But collective action invites cheatingBut collective action invites cheating

Public goodsPublic goods

Clean air, collective security Clean air, collective security (freeway? the ocean?)(freeway? the ocean?)

Two conditionsTwo conditions• Non-rivalrous (one person’s Non-rivalrous (one person’s

consumption of that good does not consumption of that good does not reduce its supplyreduce its supply

• Non-excludable (provider cannot Non-excludable (provider cannot exclude others)exclude others)

Supply constrained by “free riding”Supply constrained by “free riding”

Information AsymmetryInformation Asymmetry

Incomplete knowledgeIncomplete knowledge ““Market for lemons”Market for lemons” A “prisoners’ dilemma” (game A “prisoners’ dilemma” (game

theory)theory)

Prisoners’ DilemmaPrisoners’ Dilemma

Player A

Player B

Cooperate Defect

Cooperate 4,4 1,6

Defect 6,1 2,2

TrustTrust

The best way to overcome collective The best way to overcome collective action problemsaction problems

How to obtain itHow to obtain it• Playing repeat gamesPlaying repeat games• Taking hostagesTaking hostages• Making credible commitmentsMaking credible commitments• Sharing fundamental norms or valuesSharing fundamental norms or values

NormsNorms

Standards of behaviorStandards of behavior Two kindsTwo kinds

• Regulatory: explicitly defined rulesRegulatory: explicitly defined rules• Constitutive: “taken for granted” values Constitutive: “taken for granted” values

IPE TheoriesIPE Theories

RealismRealism Liberalism (or institutionalism)Liberalism (or institutionalism) ConstructivismConstructivism Marxism-LeninismMarxism-Leninism

RealismRealism

A Hobbesian systemA Hobbesian system• States want to surviveStates want to survive• Power politicsPower politics

Hegemonic stability theoryHegemonic stability theory• Explaining the liberal international economic Explaining the liberal international economic

orderorder• Hegemon tolerates free-riding, supplies the Hegemon tolerates free-riding, supplies the

public goodpublic good Apply to regionalism?Apply to regionalism?

LiberalismLiberalism

International system has orderInternational system has order• Individuals want wealth; states willing to Individuals want wealth; states willing to

cooperate to get itcooperate to get it States build institutions to overcome States build institutions to overcome

collective action problemscollective action problems Apply to regionalism?Apply to regionalism?

ConstructivismConstructivism

The international system is socially The international system is socially constructed (not necessarily constructed (not necessarily Hobbesian)Hobbesian)

But actors are driven more by But actors are driven more by constitutive than regulatory normsconstitutive than regulatory norms• Culture (“collective identity) mattersCulture (“collective identity) matters

Apply to regionalism?Apply to regionalism?

Marxism-LeninismMarxism-Leninism Marx: not an IPE thinkerMarx: not an IPE thinker Lenin: Monopoly capital --> imperialismLenin: Monopoly capital --> imperialism Dependency theory:Dependency theory:

• In “crude” version, the rich countries exploit In “crude” version, the rich countries exploit the poorthe poor

• In “sophisticated” version, triple alliance of In “sophisticated” version, triple alliance of host state, foreign capital, domestic capital host state, foreign capital, domestic capital produces dependent developmentproduces dependent development

World System Theory (Wallerstein):World System Theory (Wallerstein):• Core, semi-periphery, and peripheryCore, semi-periphery, and periphery

Apply to regionalism?Apply to regionalism?