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115_problem_set_answers_sp07 - Department of Economics...

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Department of Economics Economics 115 University of California The 20th Century World Economy Berkeley CA 94720 Spring 2007 Problem Set Guide Prepared by Jonathan Rose 1 Identifications 1.1 Portfolio Investment Flows These flows refer to the ownership of foreign securities, including equity, and private and public bonds; the last two were particularly large during the first wave of globalization. The Nayyar article contains some descriptive statistics to indicate the growth of this type of investment during the first wave of globalization. Portfolio flows were certainly important in the growth of recipient countries during the first wave; for example, there were large flows from Britain for infrastructure development in the United States, Canada and Australia. While this form of investment accounted for the majority of international capital flows during before 1913, since 1970 the dominant form has been foreign direct investment, in which investors actively control the operation of the assets in the recipient country. This reversal can be understood in the context of the lesser quantity and quality of information flows during the first wave, which encouraged investors to invest in relatively more secure bonds, and in projects with clearly defined physical assets, such as railroads. Those long term flows contrast with were less susceptible to sudden stops as many forms of modern investment, though, creating a tradeoff between growth and financial crises. 1.2. Laissez Faire With respect to the world economy, laissez faire characteristics typically include the minimization of government interference with cross border transactions such as trade, capital flows, and migration. Not all liberalization was voluntary, however, since some of the liberalization is attributable to the impositions of colonial powers. Nevertheless, these cross-border liberalizations were a defining characteristic of the first wave of globalization when considered in contrast with pre-1870 history, and with the interwar period. The gold standard is a helpful context in understanding these policies. Capital restrictions would have been a barrier to the maintenance of gold parities, and trade barriers would (arguably) have blocked a potential adjustment mechanism. In many senses, the gold standard entailed subservience of domestic priorities to international ones, which naturally complements laissez faire policies. From a modern perspective, freedom of migration during the first wave has few modern parallels. However, tariffs are lower in many countries today, and indeed while tariffs may have fallen during the first wave of globalization, they remained substantial and many European countries relapsed into protectionism beginning the late 1890’s. Capital restrictions were historically high during the Bretton-Woods era, but today are beginning to resemble the liberality of the first wave.
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