The Complication of IPE

"Although the economics of such schemes are straightforward, the politics are anything but."

-today's reading

"Democracy" in the World Economy

Over the last few weeks, I have noticed that we have, on several occasions, questioned the democracy of national and international financial institutions. In the reading for today's class, Stiglitz criticized the IMF's aversion to democratic practices.  Stiglitz claimed that, in the example of post-Soviet Russia, the IMF too often serves powerful interest groups and often disregards what would be most beneficial to the people of the nation's they set out to help.  He was also critical of the organization's lack of transparency, a characteristic that allows for the organization to avert blame for its actions by keeping interested parties in the dark.  The nature of the organization could be defended with what our class is now referring to as a "Wolf-like" argument: where would we be without the IMF?  This raises an age old debate in politics, especially American politics, where the desire for freedom and liberty is pitted against the desire for security.  This organization, while not exactly democratic in nature, provides the United States and the rest of the world with a sense of global economic stability.  In exchange for this stability, people are willing to sacrifice some of their values, especially people in seemingly desperate situations.  This creates an environment where people are willing to sacrifice the liberty they desire for the protection they need.  In the global economy, perceptions of the democratic nature of the IMF are very dependent on the economic circumstances facing different groups of people.  Critics of the IMF say that it is driven by the interests of powerful nations.  As citizens of a powerful nations, I think we have to wonder if the actions of this body reflect the ideals of that our nation claims to hold dear.

On a semi-related note, Stiglitz's description of the IMF made me think of this years FIFA scandal. FIFA is dealing with a major bribery scandal regarding the 2022 World Cup and is being criticized for its lack of transparency.  The recent developments are that FIFA has now completed an internal investigation, but won't tell anyone what they found...

Here are some links for anyone unfamiliar to the story:
                                            
http://www.ibtimes.com/fifa-bribery-scandal-qatar-2022-issues-casting-shadow-over-brazil-2014-1596296

http://www.bbc.com/sport/0/football/29337509

Ebola!

Since we met in class Tuesday, news outlets have confirmed the first case of Ebola in the United States.  Upon hearing this on NPR this morning, I couldn't help but think about how this relates to International Political Economy and Globalization.  In our globalized world, diseases flow as easily between countries as labor and capital.  We live in a world where West Africa can send us its diseases just as easily as we can send aid dollars or mission workers the other way.  This event also relates back to our discussion of volatility in Hong Kong and the effects of uncertainty on the market, as American and European airline companies saw a marked drop in share prices after reports that the infected individual traveled from Liberia to Texas on major commercial airliners.  While their is little chance that anyone on these flights will experience any medical issues (Ebola is only contracted through contact with the infected person's "bodily fluids"), the fear and uncertainty created by the event was enough to discourage investors in the short run.  It is stories like this one that reinforce the idea of how closely intertwined global society is today and how minuscule events across the globe can have a profound influence on the global economy.

Why FDI?

In Chapter 4 of Wolf's book, he discusses the impact that Foreign Direct Investment (FDI) can have in less developed countries.  On page 84, he says, "Many developing countries recognize that foreign direct investment brings benefits that foreign borrowing does not.  The investor is locked in and cannot flee the country when trouble strikes."  FDI is more than an investment, it is a commitment, tying a corporation or business venture to another country's economic and political environment.  In theory, this bond is what will keep foreign investors from taking advantage of the target nation through unfair agreements or other means, as they will actually become a part of its developing economy.  Wolf previously discussed the importance of trust in the market, and this is where FDI proves potentially dangerous for the investor.  There are many reasons not to trust the economic climate in underdeveloped countries, such as unstable political systems and lack of established banking institutions.  As we discussed in class today, you can't just give a machine to a country with no infrastructure to support it.  Investors are also wary of these markets simply because they are different and uncomfortable.  It is natural that someone looking to invest in Sub-Saharan Africa may lack the knowledge of the intricacies of the market in the region, thus dissuading them from getting involved with the region.  These factors do little to create the trusting relationship needed for FDI to occur, making investing in developing countries a risky proposition.

I recently spent Spring Term 2014 business in Galway, Ireland.  During my time there, I was able to see the possibilities provided by FDI in a stable and trustworthy environment.  Ireland and the U.S. have a very close relationship, and American investment in Ireland has seen prosperity strike a nation that, 35 years ago, was among the weakest in Europe.  Since then, Dublin has become one of Europe's biggest tech hubs, while Galway is a center for medical devices manufacturing companies.   It is obviously unfair to compare Ireland, an English speaking country with a low corporate tax rate, to any underdeveloped nation in terms of investment potential, but it does support that the concept of FDI has a very high ceiling when implemented successfully.

A closing thought: Wolf briefly touches on the fear of nationalization.  This is another fearful prospect facing foreign investors.  As seen in Guatemala in 1954, it can get messy.  If I were an American investor, I wouldn't count on the CIA to bail me out again.