INTERNATIONAL TRADE, WTO/GATT (General Agreements on Tariffs and Trade)

- January 1991: EU formalized (formerly the European Commission) | Goods, Capital, Labor, and Services (4 factors of production) liberalized | US concerned of a "European Fortress" - Three Guiding Principles underlying GATT Negotiations: (1) Reciprocity: trade of equal or greater value between parties. (2) Non-discrimination: i.e. MFN: Most-Favored Nation clause, have to provide other countries
with the same benefits. (3) Transparency (anti-non-tariff barrier clause) | "Bicycle Theory of Trade:" if trade ceases to move forward, then it will collapse [has to exceed protectionist tendencies/barriers] GATT Rounds: 1947-Geneva; 1948-Annecy; 1950-Torquay; 1956-Geneva; 1960-61-Dillon; 1964-67-Kennedy (item-by-item tariff reductions negotiated); 1973-79-Tokyo (response to Era of New Protectionism, introduced non-tariff barriers); 1986-93-Uruguay [US use of Volunteer Import Expansion (VIEs), Section 301 - Goods; Super 301 - Countries, Super 301 - wielding this "big stick" yielded Structural Impediments Initiative (SII) (US accusing Japan of trading impediment), Japan "not a normal trading country" - Nichibei Economy: interdependent relationship; Agenda items: Services sector, Intellectual Property (TRIPS), Trade-Related Investment Measures (TRIMS), Agricultural sector, Create a superior organization]; 2001...-Doha Dev. Round "Development Round" - goes up against USDA & EU Common Agricultural Policy (CAP) - Non-Tariff Barriers: Subsidies; Technical barriers; Customs validation procedures; Government procurement; Import licensing; Quantitative restrictions - "hard core" measures Multilateral Agreement on Investment (MAI) - to be ensconced in the WTO: Calls for (1) Liberalization of regulations governing FDI (FDI known as "Creeping Expropriation"). (2) Non-discrimination. (3) Investment protection. (4) Dispute settlement. Collectively, the "Singapore Issues" in the Doha Round. INTERNATIONAL MONETARY RELATIONS AND THE IMF - "Currency Wars": Brazil's Finance Minister Guido Mantega "A well-functioning monetary system facilitates the growth of world trade, foreign investment, and global interdependence. It is the prerequisite for a prosperous world economy." - Robert Gilpin - Chinese increasing capital account balance is sometimes confused for increased competitive excellence; however, approx. 70% of China's exports are by foreign-invested enterprises (FIEs) - Capital Account Liberalization: Freeing transactions from restrictions and allowing financial capital to flow freely in or out of a country Two types of Financial Crises: Banking Crisis: occurs when there is either the potential for an actual run on bank deposits. Currency Crisis: occurs when there is a sharp devaluation or depreciation in the value of the currency. Intervene in 1 of 2 ways (1) Purchase domestic currency w/ foreign exchange reserves (2) Raise interest rates |"Contagion effect" irrationality creates herd behavior, i.e. "Tequila effect," following Mexico's peso crisis in 1994-95 | Asymmetrical information results in: adverse selection, moral hazard, and herding The root of many of China's problems is the total absence of financial intermediaries making sound decisions on the basis of risk and return: 70% of banking loans continue to flow to SOEs. SOEs operate under "soft budget constraints." They are subsidized regardless of performance. | Years of policy-directed lending, a virtual absence of credit-risk management, and loose bookkeeping practices by banks and their customers have contributed to steady growth in NPLs (Non-Performing Loans) | Chinese leadership may never be willing to de-link the SOEs from government financing for fear of the loss of control and a major source of income for the Communist Party Leadership. The correct view would see the problem as political, not technical. Role of Money: (1) Medium of Exchange, (2) Unit of Account, (3) Store of Value | "Dollarisation" of economies-USD replaces the local currency for use, i.e. Ecuador, Lebanon To perform an international role, money must also provide: Liquidity & Confidence (that it will maintain its store of value) | KEY TO SUCCESS IS TRUST Pre-War Monetary System: Gold Standard - had a stabilizing, equilibrating, and confidence-building effect on the system; States gradually found that the "embedded" economic liberal ideas of a self-regulating economy did not work. | Post-War Monetary System: Phase I (1947-71): Fixed but adjustable exchange rates, Modified gold standard ($35/oz), USD was system's reserve "top" currency, Peg/band system (PAR exchange rate kept in a "Trading Band" range-"Snake in the tunnel system"), "Keynesian compromise" allowed individual nation-states to continue regulating domestic economic activities within their own geographic borders. The "political bargain" between the US and its allies after WWII became unstuck, Nixon unilaterally decided to remove the gold conversion (Aug. 1971). Phase II (since 1971): Floating exchange rates, Managed Float System, Market exchange rates (Free Float - no government intervention; Managed Float; Dirty Float - overt government intervention; Filthy Float - outright/unilateral government intervention), End of gold standard | In times of international stress - people move money into gold - July 1944: International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank) ("Twin Sisters") were created at Bretton Woods - Overriding objective was to prevent a reappearance of virulent economic nationalism, the leading cause of WWII - World Bank - Lend mid-to-long-term for development purposes | IMF - lend for short-term balance of payments deficits (official lender to gov'ts, only members can borrow) - Meant to fight 3 Conditions: Nationalism in Trade Protectionism, Regionalism, and Currency Devaluations |"Surveillance" function (less important since '73); Monetary Pillar, Lender of Last Resort - Administers economic policy prescriptions to the world's troubled economies; "Doctors of Development" | Oversaw systemic transformation of "transitional economies" (Russia, China, Eastern Europe) | Alarm bells go off once a country has "90-days" or less of Foreign Exchange to cover its Imports and Debt Service - 8 Exec. Directors representing individual countries (China, France, Germany, Japan, Russia, Saudi Arabia, the UK, and the US) and 16 others that represent groups of the remaining countries | Board decisions made by consensus |Historically the Managing Director of the IMF has been European and the president of the WB has been a US citizen; US has the most votes with 17.8%, Japan second with 6% - Funding the IMF: Quota System: "Owned" by its members, with ownership distributed in accordance with a system of quotas. Weighted towards Industrial Countries Sources of Liquidity: 1962 General Arrangements to Borrow (GAB) | 1969 Special Drawing Right (SDR): international reserve asset that can be exchanged at an agreed-upon value in lieu of currency; Henry Hazlitt "These SDRs were created out of thin air, by a stroke of the pen;" "Paper Gold;" At the heart of the unease about SDRs is the fear that an expansion of IMF financial resources will lead to an internationalization of individual countries' debt problems, shifting the burden of adjustment from the debtor country to the international community; As of 1999, four currencies in the basket: USD (45%), Euro (29%), Yen (15%), Pound Sterling (11%) | 1998 New Agreement to Borrow (NAB): counter excessive swings in currency values Borrowing from the Fund: (1)Balance-of-payments financing through unconditional and conditional tranches (lender of last resort), (2) Funding under special facilities for countries that have specific needs and circumstances, (3) Concessional financing for low-income member countries | Swaps "soft" for "hard" currencies, loans are called "purchase agreements," dispersed in installments (Short Leash) IMF Conditionality: Borrowers must agree to adopt certain economic policy measures before money will be dispensed [Structural Adjustment Policies (SAPs)] Tranches (4): Countries can draw on all four tranches drawing up to 100% of their quotas. (1) Gold or Reserve Tranche (Unconditional tranche): The currency of choice or SDRs are given with minimal conditions, only with the condition that the purchasing country will make a "reasonable effort" to overcome its balance-of-payments problems | (2-4) tranches are conditional and come with progressively more rigorous requirements for borrowing: Increased loss of economic policymaking sovereignty; Conditional installments; Standby Arrangements - performance targets written into the agreements

- Trilemma:

Mundell

States desire three things at once (1) the ability to respond to domestic political forces (often referred to as monetary autonomy), (2) international capital mobility (necessary for efficient international finance), and (3) stable exchange rates (desirable for smooth international trade and investment).

IMF Prescriptions/Conditions: (1) Supply (note all items are prone to leakage - untoward side effects): Cut government spending; Devalue the currency; Raise interest rates; Trade liberalization. (2) Growth: Privatization; Liberalize FDI rules/regulations. (3) Demand: Promote private investment, Financial liberalization IMF Ideology - the following all leading to "Ideological Blindness:" (1) Reagan-Thatcher-Kohl revolution, (2) Washington Consensus, (3) 1989 End of Cold War (Capitalism won) Special Facilities: 1963 Compensatory Contingency Financing Facility (CCFF) | 1974 Extended Fund Facility (EFF) | 1993 Systemic Transformation Facility (STF) Concessional Facilities (created in response to the early 1980s debt crisis): 1986 Structural Adjustment Facility (SAF) | 1987 Enhanced Structural Adjustment Facility (ESAF) | 1999 Poverty Reduction and Growth Facility (replaced ESAF) | HIPCs: Heavily Indebted Poor Countries; UNCTAD: United Nations Conference on Trade and Development - Expansion of IMF responsibility (poverty reduction): Increasing awareness of poverty reduction and promotion of various actors in the international system, i.e. (rich world social pressure - Roman Catholic Church (Jubilee 2000 Movement), international NGOs, entertainment celebrities, etc.). (2) Growing concern among IMF member nations that income disparity will destabilize political systems and undermine national support for the international capitalist system - Hegemonic Stability Theory (Second Theory of International Economic Relations) - aka (Long Wave Cycle Theory: 50-60 yr cycles of hegemonic power) - Provides: the rules of the game, the structure that applies to all, a role of a mediator, "Public Goods" - system maintenance items, i.e. liquidity (those that benefit = "free riders"), military security (deterrence, trade routes, alliances), economic good (trade rules), economic aid, CURRENCY (stable - key currency) | By definition a Hegemon seeks free trade Aberration: Fallacy of control, the world is too big to exert physical dominance, you need to have control of hearts and minds ("Soft Power") - Forces Undermining the Hegemon: Unipolar Versus Multipolar Power Structure (rising regionalism: EU, NAFTA, ASEAN, Mercosur); Multipolar Power Structure (Economic Nationalism) - companies are competing for market share against others | Sovereignty at Bay | Hegemon is always inclined to "Military Overstretch" (Paul Kennedy) - 1967: Peak of US Foreign Direct Investment (76% of global aggregate FDI was by the US) | US was the world's Growth Engine | Lead to a hollowing out of US manufacturing | Surplus of US dollars abroad Eurodollars (dollar deposits overseas) | US influencing the liquidity of the world | Vietnam War: very expensive, lead to Military Overstretch | LBJ created the "Great Society," | "Government Creep," a "crowding out" of private capital | Rise of Asian Tigers : Singapore, Taiwan, Hong Kong, S. Korea | NICs - Newly Industrialized Countries | BEMs - Big Emerging Markets - 1971: NEP (Nixon Economic Policy): De-pegged the US dollar from gold, devalued USD to increase US export competitiveness | Wage and Price Freeze (Draconian measure - 90-days that turned into nearly 1,000 days (phases 1, 2, 3, & 4)) | Unilaterally imposed a 10% Tariff on all imported products - 1973-74: External Shock, OPEC oil price increased 4x | 1978-79: External Shock, OPEC oil price increased by 2x | PETROL DOLLAR RECYCLING (first major force of the globalization of finance), money transferred through MCBs (Money Center Banks) - 1981: Inflation became combat priority 1 | NTBs | Increased borrowing by Developed and LDCs to pay for oil | Rise of the OPEC (Cartel) - rise of multi-polarity | 1970's = "Era of New Protectionism" - Reagan version of "hegemony on the cheap" helped correct the US current account deficit and sustain the value of the USD 1985 - The Plaza Accord: Other G5 states (GB, West Germany, France, and Japan) to raise their currencies, esp. Japan | 90's: Private capital flows came to dwarf official flows - The End of the American Century???: No ready alternative to US leadership exists; End of the Cold War temporarily reinvigorated; Inertia; The US economy has been able to migrate to the service sector If not the Dollar, then what? EU is not ready; Chinese yuan not available enough; Special Drawing Rights (SDRs): not accepted as foreign exchange. Not liquid enough.

"Dollar Trap" Many state officials of the major powers and the emerging nations have a vested interest in preserving the system as is, but with an eye toward what might lie ahead.
WORLD BANK AND DEVELOPMENT (Post 1973-74 world, the LDC economic model is characterized as "indebted industrialization") International knowledge structure: A set of rules, practices, institutions, and bargains that determines who owns and can make use of knowledge and technology, where, how, and on what terms.

Advances in information and communication technology (ICT) have resulted in a borderless, lightly regulated global financial system using complex financial instruments "Advances in knowledge" accounted for approx. 68% of the increase in US labor productivity and 28% of the growth in US income between 1929 and 1982. "Triple Helix:" A university-industry-government relationship that accelerates innovation. - Henry Etzkowitz | Dept. of Defense: US Defense Advanced Research Projects Agency (DARPA) Schumpeterian Industries: High-tech (knowledge) industries, where only firms have the capacity to take on large R&D projects. "Gales of creative destruction" destroy established monopolies and create new dominant firms. | STEM Fields: Science, Technology, Engineering, and Mathematics Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement of the WTO, requires countries to provide some minimum level of IPR protection and enforcement Patents: Issued by gov'ts to confer the exc. right to make, use, or sell an invention for a period usually of 20 years | Copyrights: Protect the expression of an idea, not the idea itself | Trademarks: Signs or symbols (including logos and names) registered by a manufacturer or merchant to identify goods and services WIPO: World Intellectual Property Organization (1967), a UN agency, was created to monitor adherence to the Berne and Paris Conventions regarding IPRs Under US trade law, the government can impose unilateral retaliatory trade sanctions against countries that fail to protect IPRs adequately | "priority foreign countries" - Special Section 301 of the 1988 Omnibus Trade and Competition Act (Super 301) requires the US Trade Representative (USTR) to retaliate against countries that "deny adequate and effective protection of intellectual property rights" or "deny fair and equitable market access to US persons that rely upon intellectual property protection." Anti-Counterfeiting Trade Agreement (ACTA): powerful political & Biz actors pushing global IPR enforcement & tying counterfeiting and piracy to security issues, border control, etc.

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- Anti-Counterfeiting Trade Agreement (ACTA): powerful political & Biz actors pushing global IPR enforcement & tying counterfeiting and piracy to security issues, border control, etc. - Geographic Indicators (GIs): Protect and promote "authenticity and heritage" | Madhavi Sunder - GIs are the "poor people's IPRs" | Compulsory License: State license granted to a local party with or without the consent
of the right holder to product and sell a good under patent | Parallel Imports: imports of patented goods without the permission of the patent holder | Traditional Knowledge (TK): knowledge and practices of indigenous or local communities as they relate to such things as plants, agriculture, land use, folklore, and spiritual matters.

- David Bollier: societies need to preserve a large knowledge commons (Creative Commons) or public domain from which everyone can draw freely to be creative and productive.
Shared Characteristics of LDCs: High instances of poverty; earnings less than $2 per day; Income inequality and lack of a middle class; Lack of education; Inadequate health care; Hunger; High instances of infant mortality; Lack of infrastructure; Weak governments; Dependency on foreign aid and humanitarian assistance | $1.25/day = critical point of real poverty | $2.00/day = little more than bare subsistence - Independence and Underdevelopment: trade-off (paradox): (1) Development offers a means to end poverty and the start of true independence (2) Exploitation, manipulation, and continued subjugation 3 forces shaping conundrum for LDCs: (1) Dlvpmnt a response to colonial cond. & as a resistance to cultural domination by the West (2) Cold War: proximity to the US or to its allies or historical connections to former mother countries often shaped the political and economic development strategies of LDCs (3) The economic success of the developed countries provided a strong rationale for some LDCs to follow 1955 Afro-Asian Bandung (Indonesia) Conference: first major step by LDCs to forge a common identity and is the genesis of what came to be viewed as a Southern perspective Formed Nonaligned Movement (NAM) in 1961: 3 primary purposes (1) Be the LDCs' political arm for advocating political independence for remaining European colonies (esp. in Africa). (2) Be their vehicle for positioning themselves outside the sphere of the Cold War scenario. (3) To promote the interests of the LDCs as a whole | "Seven Sisters" - Seven major Oil companies Raul Prebisch: the development dilemma in Latin America was inextricably linked to factors outside the region. (1) The international division of labor reinforced the dependence of LDCs on the developed nations as outlets for primary products (2) Product specialization perpetuated LDC dependence on the developed countries for capital and technology Underdevelopment and Undevelopment: Undevelopment: lack of development. Underdevelopment: the outcome of a process that further undermined LDC economies - Andre Gunder Frank: Underdevelopment in LDCs was a by-product of the development process in industrialized regions - Relations between Developed and Developing World: Prebisch (thought leader - Structuralism) | UN Economic Commission on Latin America & the Caribbean (ECLAC)-1950 | UN Conference on Trade and Development (UNCTAD)-1963 | New International Economic Order (NIEO)-1974 How to Develop: Economic Liberals: "latecomers". Criticism: "race to the bottom," no trickle down effect. Structuralist Perspective: employ a "buildup" strategy (Moran), Implement import-substitution policies (tariffs on imports and subsidies for local industries)-protect local producers and limit expensive imports, Import-substituting industrialization (ISI): used by several Latin American countries between 1960s and 1980s, promote "home-grown" industries. Mercantilist Perspective: Export-oriented growth: Pick and Foster National Champions EA Miracle & FC: "Little Dragons": Thailand, Indonesia, the Philippines, and Malaysia; WB study in 1993: The East Asian Miracle: Economic Growth and Public Policy: 2 factors: EA countries were successful at "getting the fundamentals rights" (1) Prmtng a high rate of saving (invsmnt possible w/out large foreign debts) (2) "Export-push" policies; the key was that the governments avoided making critical mistakes | Critics blame the report for assigning fault for failures to the state and credited the market for the successes, rather the positive factors were dictated by state actions | "Premature globalization" Global Competition and Interdependence: 1990s began the era of intense global economic interdependence: 3 major changes: (1) Economic liberalization in China, begun in the 1980s, accelerated as Hong Kong was returned from British rule in 1997 and China was granted membership in the WTO in 2001. (2) Collapse of the communist government of the Soviet Union and its Eastern European satellite nations turned them all into "emerging market" economies. (3) A series of government reforms in India turned its strategy from inward-looking state development to outward-looking market development. - As a result of these changes and numerous smaller ones, more than half the world population was, at least theoretically, suddenly part of a global market - Informal Economy: part of the economic system that operates outside of direct government control or regulation Microcredit vs Macrocredit: Macrocredit does not quite trickle down. Microcredit (Grameen Bank-Bangladesh): "Trickle-up" approach; has been successful by solving the challenge of asymmetric information; Millennium Development Goals: (1) To eradicate poverty and extreme hunger by half (2) To achieve universal primary education (3) To advance gender equality and empower women (4) To reduce child mortality by twothirds by 2015 (5) To reduce by two-thirds the maternal mortality ratio (6) To reduce the spread of HIV/AIDS and malaria by half by 2015 (7) To secure environmental sustainability (8) To develop a partnership for development that includes an open, rule-based, predictable, and nondiscriminatory trading and financial system LDC criticisms: Dominated by industrialized countries; Asymmetrical liberalization; Selective protectionism; Agriculture exemption; Non-discrimination and reciprocity are obstacles to the development of preferential trading relationships; WTOs interest in labor standards referred to Trojan Horse (eliminates competitive advantage; "global minimum wage," The Camel's Nose "If the camel once gets his nose in the tent, his body will soon follow." - Arabian proverb, made famous by Senator Barry Goldwater; Nature of Manufactured Goods vs. Primary Products; Substitutability (commodities); Volatility of prices: Accentuation-in the downturn, manufactured goods drop much further in a down cycle; Attenuation-in the upturn, manufactured goods don't rise as much; Problem heightened in "mono-crop" and "mono-mineral" economies (export earnings are highly volatile); Enclave development; Strategic Product and Political Vulnerability | Hindu Rate of Growth: 3.5%, from 1950s to 1980s - "Terms of Trade" thesis: Overtime the terms of trade favor manufactured products over primary products (made by LDCs) - W.W. Rostow & the Classical Explanation: Stages of Growth: (1) Traditional society (2) Pre. Take-off stage (3) Take-off (4) Road to Maturity (5) Society of Mass Consumption - RISE OF THE MULTINATIONAL CORPORATOINS (MNCs aka TNCs) Transfer Pricing: Est. 1/3 of total aggregate global trade flows is attributed to intra-firm trade | For the Nation-State, their goal is to garner their "fair share" of taxes Transnational Corporation (TNC): an organization with productive activities in two or more countries | Wide degree of variety between each other-critical differences: (1) Nature of their industry (2) Segmentation of the value-chain (3) Range and scope of product lines (4) Varied relationships with subsidiaries No universal definition of an accepted min. to constitute FDI, thus to qualify as FDI, the intent of the investor must be to control significant strategic and operational decisions Reasons why firms invest abroad: Product Life Cycle Theory; Ownership-Locational-Internationalization (OLI) framework: (Chinese expression: "Same bed, different dreams."); Locational advantages = the "pull": i.e. Regional Economic Agreements; Internationalization: access global best practices and technology; Exploit What Is "In the air" - Clustering; 24-Hour Research Capability, "Follow the Sun" - Self-defeating step of multinational expansion: Knowledge Transfer - "Technology Diffusion" (Paul Kennedy) - ARGENTINA: ANATOMY OF A FINANCIAL CRISIS - World's largest sovereign default on foreign debt ($132 B) in Dec. 2001 | During 1st Qtr of 2002, Argentine GDP contracted by a 16.3% | 5 presidents between Dec. 2001 - Jan. 2002 - Convertibility Plan (CP): Cornerstone of Argentine economic stability since 1991, pegged the value of the peso to the dollar; officially ended on January 6, 2002 Structural Flaw in Argentine political system: Provinces able to spend money and take on debt while the federal government was responsible for generating the revenues to pay for those expenditures. IMF facilities from 1992 - 2001: 2 Extended Fund Facilities (EFFs), 1992 and 1998, 2 Standby Arrangements (SBAs), 1996 and 2000, approx. 50 IMF missions 1991 - 2002 From 1973 to 2002: major financial crisis every 18 months, crises in emerging economies occurred at 2x the rate in the OECD (Org. of Econ. Coop. & Development) countries 1980s was the "lost decade" for Latin America | In Argentina, real GDP peaked in 1980 and then declined 10% by 1985 | Drowning in USD denominated debt (DDD) from the 1970s Hyperinflation of 1989 monetized the government domestic debt (virtually eliminating it); still faced $80 billion in dollar-denominated external debt. Carlos Menem, Peronist president, introduced orthodox economic policies | Economy minister-Domingo Cavallo | Cornerstone of Menem Admin was the Convertibility Plan (CP): meant to control government spending and central-bank printing of currency to finance government expenditures | Restraining factor 100% reserve requirement legislated into Law | Stabilization was achieved quickly, inflation rate tumbled from 4000% a year in 1990 to single digits within 3 yrs | Argentina survives Tequila crisis | Real GDP growth of 28% 1990-1993 masked profligate ways - Government privatized some assets; Brady Bond (meant to combat "debtor cartel") restructuring involved back-loading of interest payments - "interest deferred payments" - To have continued access to Int'l credit markets countries need: (1) Growth, (2) Collectible tax revenues, (3) Exchange rate that fosters competitive pricing - Indicator of financial health: external debt-to-export ratio (more than 400% for Argentina) | Juan Peron, president in the 1950s made labor the central power element in his Justicialist Party (Peronist Party) Quiet before the storm (1998 - 1999): External shocks: Russian default, LTCM crisis in August-September 1998, Fall of Brazilian real in Jan. 1999 - High profile: resignations (1) VP Carlos Alvarez, (2) Minister of Economy Ricardo Lopez Murphy Squeezing Liquidity (Letes, Swaps, and Mutual Funds): Imposing the government financing constituents issued 91-day, 182-day, and 364-day treasury bills called Letras del Tesoro (Letes); (2) May 2001 Resolution 369/01 requiring mutual funds to hold 10% of their assets in fixed-income securities with an average life of less than 95 days | Nov. 6, 2001, gov't exchanged $60 bn of bonds with avg. interest rate of 11-12% for extended maturity notes with only 7% interest--Effective Default | Zero-Deficit Policy and the Patacones: zero-deficit policy July 2001 - gov't can spend only its tax revenues | Provincial bonds were used as scrip to pay public salaries, these IOUs that became known as "patacones" began on August 2 as a part of the pensioners' monthly pay | June 20, 2001 new convertibility law was approved | Shortly thereafter deposits fell by $2 billion in one day; President de la Rua imposed a $1000/month limitation on personal bank account withdrawals; Dec. 1, 2001 country was in chaos, publicly announced... no longer guarantee payment on foreign debt Economic Conditions in an Ideal World: NIFEG: Non-Inflationary Full Employment Growth (4% target, allows growth and labor mobility), Efficient allocation of surplus funds CHAD-CAMERON PETROLEUM DEVELOPMENT AND PIPELINE PROJECT - Should the WB & the International Finance Corporation (IFC) provide financing for the $4 billion Chad-Cameroon Petroleum Development and Pipeline Project (2000) Chad: various states of civil war since independence from France in 1960; receive up to $125 MM/year from project, increasing government revenues by more than 50%; President: General Idriss Deby; 1999 Chad was one of the poorest and least developed nations in the world; ~ 80% of the 7 M citizens lived on < $1.00/day; Few natural resources other than oil; 3x the size of France; Life expectancy of 49 years, infant death rate of 115/1000; UN ranking of 167 out of 174 countries in terms of development Cameroon: Independence from France in 1960; GDP fell by more than 60% from 1986 to 1994; UN ranking of 134 / 174 countries in terms of development; President Biya a similar dictator type to Deby; 99 worst ranking out of 99 countries in terms of corruption according to Transparency International The Project: conceived in 1970, Memoranda of Understanding (MOU) in 1996 with Chad & Cameroon; Private Cos: ExxonMobil (majority), Chevron, and Petronas | $3.7 billion project: $1.5 bn Field System to extract oil from Doba Basin in Chad; $2.2 bn Export System to transport oil to the coastal city of Kribi (Cameroon) Tchad Oil Transportation Company (TOTCO): JV between Upstream Consortium and Chad Gov't would own Chad portion of pipeline | Cameroon Oil Transportation Company (COTCO): JV between Upstream Consortium, Chad Gov't, and Cameroon Gov't would own Cameroon portion of pipeline | $2.3 bn of equity, $2.2 from private sponsors | $1.4 bn of project debt: IFC & Two export credit agencies (ECAs) French and US lenders that inserted national equip. conditions for the project: Projections based on average Brent Crude prices of $20/barrel, cost to develop of $5.20/barrel WB founded in 1944: mission was to stimulate economic development and alleviate poverty in its 183 member countries | Lrgst source of development assistance > $15 bn in loans to LDCs in 1999 alone Five Distinct Entities: (1) International Bank for Reconstruction and Development (IBRD): provided market-based loans and development assistance to help governments in middle-income countries. (2) International Development Association (IDA): provided subsidized loans, technical assistance, and policy advice to the poorest countries. (3) Mutlilateral Investment Guarantee Agency (MIGA): provided investment (political risk insurance) guarantees. (4) International Center for Settlement of Investment Disputes (ICSID): helped resolve investment disputes between foreign investors and host countries. (5) International Finance Corporation (IFC): advised investors and was the largest source of debt and equity financing for private-sector projects in developing countries. Acted as an "honest broker" between the public and private sectors and for structuring fair deals. Maybe the only opportunity to help Chad, WB is the best inst. to take on the challenge, WB could help protect the environ. & indigenous, Sudan/Libya happy to step in w/out R&R Revenue Management Plan (RMP): How to deal w/ influx of oil $$$ | Opposition: When has Econ. Dev. worked in Africa $$$ goes to MNCs..."What emerges is a case of corporate welfare." Classical Marxism: Capitalism sows the seeds of its own destruction. (1) Law of Disproportionality (underconsumption) - markets do not tend toward equilibrium, (2) Law of Concentration - wealth moves toward the efficient few and impoverishes the many, (3) Law of Falling Long-term Profits | Marx: History evolves through epochs or stages: primitive communism, slavery, feudalism, capitalism, socialism, then pure communism.

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