GO 357 The Political Economy of Regionalism

1. GO 357The Political Economy of Regionalism Walter Hatch Colby College Lecture Two

2. Economic concepts • Comparative advantage theory • Heckscher-Ohlin • Stolper-Samuelson • Consumer surplus • Producer surplus • IPEP (“import protection as export promotion”) or Strategic trade theory • Returns to scale • Economies of scale

3. Comparative Advantage

4. Heckscher-Ohlin Theorem • A country will tend to export the commodity that more intensively uses its relatively abundant factor of production, and will import the commodity that more intensively uses its relatively scarce factor of production • Why? • Difference in relative price of commodities • Gains from specialization • Assumes • No transportation costs or trade barriers • Perfect competition • Constant returns to scale • Commodities always show different intensities • Country production functions are identical • Country tastes are identical

5. Stolper-Samuelson Theorem • Owners of the abundant factor will enjoy increasing real income; while owners of the scarce factor will suffer decreasing real income • Why? • Factor prices equalize as trade deepens • Assumes • Full employment • Countries face same product prices • Countries have same technology • Constant returns to scale

6. Consumer surplus

7. Producer Surplus

8. Returns to scale Output (Q) Inputs (K,L)

9. Economies of Scale Cost of Production Quantity of Production

10. Strategic Trade Theory • Government intervention may enhance net welfare if there is • Imperfect competition (monopoly or oligopoly) • Positive spillovers (technology) • What about retaliation?

11. Political Science concepts • Hegemony • Collective action problems • Public goods and free-riding • Information asymmetry • Trust • Norms • Imperialism • Dependence

12. Hegemony • Condition in which a dominant power exists • “first among equals” • Other states may balance against or bandwagon with the hegemon • Depends in part on hegemon’s behavior

13. Collective action problems • Competition doesn’t always produce best outcome • Cooperation/collective action needed • But collective action invites cheating

14. Public goods • Clean air, collective security (freeway? the ocean?) • Two conditions • Non-rivalrous (one person’s consumption of that good does not reduce its supply • Non-excludable (provider cannot exclude others) • Supply constrained by “free riding”

15. Information Asymmetry • Incomplete knowledge • “Market for lemons” • A “prisoners’ dilemma” (game theory)

16. Prisoners’ Dilemma

17. Trust • The best way to overcome collective action problems • How to obtain it • Playing repeat games • Taking hostages • Making credible commitments • Sharing fundamental norms or values

18. Norms • Standards of behavior • Two kinds • Regulatory: explicitly defined rules • Constitutive: “taken for granted” values

19. IPE Theories • Realism • Liberalism (or institutionalism) • Constructivism • Marxism-Leninism

20. Realism • A Hobbesian system • States want to survive • Power politics • Hegemonic stability theory • Explaining the liberal international economic order • Hegemon tolerates free-riding, supplies the public good • Apply to regionalism?

21. Liberalism • International system has order • Individuals want wealth; states willing to cooperate to get it • States build institutions to overcome collective action problems • Apply to regionalism?

22. Constructivism • The international system is socially constructed (not necessarily Hobbesian) • But actors are driven more by constitutive than regulatory norms • Culture (“collective identity) matters • Apply to regionalism?

23. Marxism-Leninism • Marx: not an IPE thinker • Lenin: Monopoly capital --> imperialism • Dependency theory: • In “crude” version, the rich countries exploit the poor • In “sophisticated” version, triple alliance of host state, foreign capital, domestic capital produces dependent development • World System Theory (Wallerstein): • Core, semi-periphery, and periphery • Apply to regionalism?