International Finance Relations Lecture Source Sean Erhlich Professor of Intro to International Relations Florida Book Source World Politics Interests Interactions Institutions Second Edition State University What Is International Finance o Investments money that crosses borders o Actors include individuals corporations states and international organizations Supporters see finance as a force that can bring the world s nations together in ways that are economically and politically desirable welcoming capital to global borrowers allowing poor countries to finance investments they couldn t afford otherwise Critics see finance as extremely controversial and a potential threat to their nations sovereignty o A sovereign debt lending When sovereign countries borrow money from Types private banks o Portfolio Investments Bonds Stocks Investments that do not include management control o Foreign Direct Investment FDI Investments that do include management control Investing directly in another country Why And Why Not Make International Investments o There are risks to every investment If something has no risk it likely has no profit o Heckscher Ohlin and differential returns to capital Capital is scarce in developing countries thus more demand for it In developing countries where capital is scarce they often pay a higher interest rate Higher interest rates yield higher profits There are risks to every investment If something has no risk it likely has no profit Sovereign risk more difficult to enforce legal bargains in other countries Discriminatory treatment Macroeconomic risk Information risk Likely to have more domestic local knowledge than global knowledge within a market Why Do Countries Want Or Not Want Foreign Investment o More capital to invest in economic growth or other activity specially important for developing countries o Distributional costs of foreign investment may harm domestic capital o Interest payments on loans Banks won t give their already scarce money away for free so they charge interest This is a downside to loans o Risks of liquidity Portfolio Bubbles and panics Financial crises from mobile capital 1 Mexican Peso Crisis 2 Asian Financial Crisis 3 Capital controls that limit mobility decrease the amount of investment Sovereign Lending o States borrow money from banks other states or IOs Can be used directly and spent in any manner Many states countries take out sovereign loans o If loans don t lead up to economic growth paying off debt can eat up more and more of GDP o Sovereign default When a country defaults or doesn t pay back their loan because they can t afford to do so and thus the bank suffers o Concessional Loans Loans given at 0 interest rates from one country to another World Bank state to state lending o Latin American Debt Crisis When one bank loans to another country and the country goes under so does the bank and the nation it belongs to This occurred during the 1970s and 1980s when the US loaned to Argentina and they were unable to repay the money back The International Monetary Fund IMF o A Bretton Woods institution designed as a lender of last resort for fixed exchange rates o The IMF was charged with overseeing currency relations and with providing support to countries in need of short term assistance in keeping their exchange rates stable o The IMF made information available to members and provided standards of behavior that countries were expected to follow with respect to their currencties o The backing of the major Western financial powers along with the intuitional support of the IMF were central to the stability of the Bretton Woods system FDI MNCs o Why FDI The process at which foreign multinational corporations occur Multinational corporations may engage in foreign direct investment in order to gain access to markets or resources Cheaper labor Lower environmental standards and tax rates Access to natural resources o Can lead to more jobs exports and tax rates The costs to host countries MNCs can manipulate prices and employment structure to reduce the benefits Gives up management control Not much FDI flows to developing countries Can invite foreign meddling
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