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International economic integration
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The global economy
- The global economy is where the economies of individual countries are linked to each other
and how changes in a single economy can have ripple effects on each other
Gross world products
- GWP is the aggregate value of all goods and services produced worldwide each year in the
global economy.
Globalisation
Globalisation is the integration between different economies and the increased impact of
international influences on all aspects of life and economic activity.
- Trade in goods and services
 International trade in goods and services is an important and indicator of globalisation
because it is a measure of how goods and services are produced in an economy are
consumer in other economies worldwide
 Trade in goods and services has grown rapidly in recent decades, increasing from $US 8.7
trillion (38% of global output) in 1990 to $US 40.8 trillion (70 % of global output) in 2009.
The size of the gross world product is now over ten times its level in 1950,but the volume
of world trade has grown to over 40 times its 1950 level
 The size of global trade reflects the fact that economies do not produce all the items they
need, or they do not produce them as efficiently as other economies (comparative
advantage).
 Composition of trade is the mix of what goods and services that an economy trades.
Global trade is dominated by manufacturing (e.g. vehicles, clothing and electronic goods)
 The direction of trade flows has changed in recent decades, reflecting the changing
importance of different economic regions. Between 1995 and 2009, high –income
economies saw their overall share of global trade fall from 82% to 70% of world
merchandise exports.
 With China’s economy playing an increasingly important role in the global trade, other
economies have placed an increased priority on their trade relationships with China.
China’s economy has grown rapidly in recent decades, and this points towards an
expanding market for exports in the future
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- Financial flows (portfolio)
 Finance is the most globalised feature of the world economy because money moves
between counties more rapidly than goods and services or labour
 International financial flows have expanded substantially flowing financial deregulation
around the world, which is the most countries occurred in the 1970s and 1980s.
deregulation such as controls on foreign currency markets, flows of foreign capital,
banking interest rates and overseas investment in share markets were lifted
 Technological change also played an important role in the expansion of international
financial flows. New technological advancement and global communication networking
have linked financial markets through the world and have reduced the cost of world trade.
 An important feature of international finance are foreign exchange markets (FOREX
markets), which are networks of buyers and sellers exchanging one currency for another
in order to facilitate flows of finance between countries. Foreign exchange markets have
experience extraordinary growth in recent years, with average daily turnover reaching $4
trillion in 2010
 Speculators are investors who buy or sell financial assets with the aim of making profits
form short term price movements
 95 % of foreign exchange transactions are undertaken for the main purpose of deriving
short-term profits from fluctuations of currency assets and shares, rather than being
directed towards trade and long-term investment.
 The main benefits of greater global financial flows is that it allows counties to obtain funds
that are used to fund domestic investment
- Investment and transnational corporations (FDI)
 Another indicator of globalisation is the rapid growth of investment between countries
over the past two decades.
 One measure of globalisation of investment is the expansion of foreign direct investment
(FDI), which involve long term movement of funds in order to buy over 10% of an existing
company or to establish a market position overseas
 FDI flows are strongly influenced by the level of economic activity. the recent GFC saw FDI
flows fall significantly, because of the great risk of investment in a recession period
 FDI flows have traditionally favoured developed nations, with greater industrial capacity
and larger consumer markets; these advanced economies (USA, Japan & Europe) were the
natural destination. However, in the 2010 for the first time in history, emerging
economies received more FDI flows than developed economies (China, Brazil and India).
 Transnational corporations (TNCs) play a vital role in global investment flows. Often, they
will have production facilities in counties around the world, sourcing inputs from some
counties, doing most of the manufacturing in another country and doing packaging and
marketing tasks in another country (from the 1990s the number of TNCS have grown from
37000 to 104000)
 Because of the capital and job opportunities they bring governments often encourage
TNC’s to set up in their country through supportive policies like subsidies or tax
concessions
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Another significant cause of the growth of international investment is the increased level
of international merges and takeovers which typically move line with changes in economic
conditions
- Technology, transport and communication
 Technological development facilitate the integration of economies consider the following:
- Advancements in freight(transportation) technology like standardised shipping
containers (containerisation), cargo tracking and more efficient logistics systems
- Advancement in telecommunication industry (cheaper and faster) has allowed
provision of commercial services to customers worldwide
- Advancements in computer and communication networks have allowed money to
move around the world in fractions of a second
- Advancements in transportation technology such as air craft and high speed rail
networks allow greater labour mobility between economies as well as accessibility
to tourism and travel for customers
- Technology influences globalisation as the driver for growth in trade and
investment
- International division of labour, migration
 Labour market differ from markets for goods and services, finance and incensement, in
that they are for less internationalised. While money can move rapidly around the world.
Goods and services can move in days and investment can be made in weeks, people can
no move jobs quite as freely
 The world bank estimates that there are almost 200 million people who have migrated to
work in different countries in the orld, and that rising labour supply pressure and income
inequality could increase this level
 The movement of labour between economies appears to be concentrated at the top and
bottom ends of the labour market
- At the top end, highly skilled workers are attracted towards riches economies
because of the higher pay and better opportunities available in these countries.
In effect, there is a global market for the most highly skilled labour (scientists)
- At the bottom end of the labour market, low skilled labour is also in demand in
advanced economies where it may be difficult to attract sufficient people born
locally to do certain types of work (basic skilled: taxi)
 These trends (high & low skilled movements of labour) reflects and international division
of labour whereby people move to the jobs where their skills are needed, while
globalisation of the labour market is increasing but there are still significant barriers to
working in other countries (migration restrictions)
 The international division of labour is also evident from aspect of the world economy
(shifts in businesses between economies, rather than the shift of people). Just as people
may move between countries in search of the best jobs opportunities, corporations shift
production between economies in search of the most efficient and cost efficient labour. In
a globalised business environment, many producers operate what is sometimes a global
supply chain (where production facilities are in several countries). This is known as
offshoring or outsourcing
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The international division of labour reflects the economic concept of comparative
advantage (economies produce what they are good at)
 The regional and international business cycle
o International business cycle
- Business cycle refers to the fluctuating patterns that
Outputs
economies go through overtime, from above to below
average growth. This is caused by changes in the level
of aggregate demand and supply
- Just as individual economies experience stronger and
weaker periods of economic growth, so too does the
global economy.
- The ebb and flow of world economic growth is known
as the international business cycle, which refers to
fluctuations in economic activity in the global economy
Time
over time
- Although economic growth differs greatly between countries, for most countries, economic
growth is stronger when the rest of the world is growing strongly and weaker when other
countries are experiencing a downturn this primarily highlights the strong relationship
between the economic growth performance of the words major economies and how
intergraded economies have become.
 Evidence: the RBA has revealed that 63% of changes in the level of output
(performance) in Australia rely on interest rates, growth levels, and inflation rates
(external forces) for the group of seven (G7) largest economies.
- The transmission of economic conditions from one country another is made more immediate
by the increased integration of economies during the globalisation era (how economies are
linked)
- Trade flows
 There is a boom or reception in one country, this will affect its demand for goods and
services from other nations, the level of growth in an economy will have a flow on
effect on economic activity on other economists
- Investment flows
 Strong economic conditions in one country will make it more likely that businesses in
that country will invest in new operations in other nations, which will then add to their
economic activity. in the late 2000s one of the causes of slow FDIs in flows in
developing countries was weaker economic performance in the USA
- Transnational corporations
 TNCs are an increasingly important means by which global upturns and downturns are
spread throughout the global economy. In 2011 for eg, Toyota temporarily reduced its
manufacturing operations in Australia because of the impact of earthquakes and
tsunamis in Japan and on the company
- Financial flows
 Short term financial flows also play an important role in transmitting the international
business cycle. A 2009 IMF paper “how linkages fuel fire”, conclude that 70% of
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financial market volatility in advanced economies is transmitted to emerging
economies and the transition takes one to two months
- Financial market and confidence
 Consumer confidence and the ‘animal spirit’ of investors are constantly influenced by
conditions in other countries. This is highlighted by the strong correlation between
movements in share prices of the world’s major stock exchange i.e. they lead to
synchronised fluctuations
- Global interest rate levels
 Monetary policy conditions in individual economies are increasingly influenced by
interest rate changes in other countries. If weak economic growth makes it necessary
for the central banks to lower interest rates in the USA, this places pressure on central
banks in other economies to follow suit
- International organisations
 International forums such as the Group of Twenty (G20) or Group eight (G8) can play
an important role in influencing global economic activity. Discussions of global
economic conditions at summit meetings means that the G20 or G8 can act as the
unofficial forums coordinating global macroeconomic policy especially during periods
of economic uncertainty
Never the less, it is important to note that despite these linkages, the pattern and the pace of economic
growth differ between countries. Even countries that are at similar stages of economic development, such
as the USA and European economies, experience differing levels of economic growth. Despite the global
linkages described above, many of the factors that influence the business cycle differ between economies:
− Interest rates
 Interest rates have a significant influence, through monetary policy, in the stimulation
or dampening of economic activity. therefore, differences in interest rates between
economies would reduce the level of influences that economies have on each other
 Our interest rate levels relatively high compared to other advanced economies,
reflecting our better economic position
− Fiscal policies
 Government fiscal policies also have significant effect upon the level of economic growth
in the short & medium term. For instance, an economy that raises taxes and another that
reduces taxes will have adverse levels of economic growth
 Our budget is returning to fiscal consolidation (returning to balance), while other
economies are struggling with record budget deficit as they desperately attempt to
stimulate their economies
− Exchange rates
 Exchange rates (value of currency) differ between countries and impact on the level of
trade competitiveness and confidence with economies
 The Australian dollar is currently experiencing upward trend of appreciation while other
currencies after the GFC are struggling with a depreciating currency. This reflects
Australia’s strong trade performance and confidence in our economy
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− Structural factors
 Economies have different comparative advantage, resources and attitude towards
consumption and savings. They vary in terms of reliability and resilience in their financial
systems, population growth rates and age distribution and different methods of regulating
labour markets, educating and training employees and regulating business. These
structural factors influence the competitiveness of economies and their level of growth
− Regional factors
 The physical location of economies and their involvement in trade relationships, trade
agreements and international organisations, to a large extent will affect an economy’s
involvement in the global market (e.g. Australia is geographically isolated)
o Regional business cycle
− Similar to the international business cycle, regional business cycle refers to the changes in
economic activity in a particular region. In the same way that countries activity can be affected
by global changes, they can also be affected by regional changes. While changes in US economy
will have ripple effect around the world, they can have more profound impacts in North
America on the nearby Canadian and Mexican economies because of their integration through
the North American Free trade Agreement
− In the East Asian region, economic conditions are dominated by the influence of Japan & China
(2nd and 3rd largest economies). While historically, a regional business cycle in Asia has been less
pronounced, it has strengthened in recent years because of increased integration between
Asian economies. This has had implications for countries like Australia which is now more
synchronise with conditions in East Asia that it is with the USA & European business cycle.
− Other regions around the world have a higher proportion of developing of low income
economies and they tend to be less regionally integrated. In Sub-Sahara Africa, for example,
many economies such as Uganda are dependent on high income economies for more than 80%
of their exports and are therefore as likely to be influenced by conditions in the world economy
as they are by neighbouring African economies
− While regional business cycle ted to be dominated by the largest and most global economies, it
is also important to recognise the complexity of conditions at the regional level. For example,
while the Greek economy is one of the smaller economies of the European Union, its sovereign
debt problems in 2011 triggered a less confidence in financial that spread to neighbouring
economies, contributing to regional financial instability
− Clearly, regional business cycles can be quite different from pattern in global economic activity,
with some regionals performing more strongly than others, and fluctuating more independently
from other regions
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Trade, financial flows and foreign investment
Trade is vital for economies in pursing economic growth. It allows economies to produce greater output
that they preciously did by exporting their comparative advantages. Economies today are trading greater
proportions of what they produce creating greater wealth for individual economies around the world
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The basis of free trade
− Free trade can be defined as a situation where governments impose no artificial barriers to
trade that restrict the free exchange of goods and services between countries with the aim of
shielding domestic producers from foreign competitors
− The argument for free trade is based on the economic concept of comparative advantage
 Comparative advantage is the economic principle that nations should specialise in the
areas of production with comparative efficiency which is measured as the lowest
possible opportunity cost, and trade with other nations so as to maximise both nation’s
standards of living
 Example: if Australia gives up fewer computers to produce another unit of wine that
does United states, then Australia has a lower opportunity cost that united states, thus is
said to have a comparative advantage in wine production
Advantages of free trade
Disadvantages of free trade
Trade allows countries to obtain goods and services that they cannot
produce themselves, or in sufficient quantities to satisfy domestic
demand. This would generally occur because of a lack of adequate
resources. For example, a country may lack the necessary technology
to produce certain manufactured goods
An increase in short term unemployment may occur as
some domestic business may find it hard to compete
with imports. However, the short term rise in
unemployment should correct itself in the long term, as
the domestic economy redirects resources to areas of
production in which it has a comparative advantage
Free trade allows countries to specialise in the production of the
goods and services in which they are most efficient. This leads to a
better allocation of resources and increased production within
countries, and throughout the world
Free trade may encourage environmentally
irresponsible production methods because producers in
some nations may produce goods at a lower cost
because of weaker environmental protections and
environmentally damaging practices
Free trade encourages the efficient allocation of resources. Resources
will be used more efficiently because countries are producing the
goods in which they have a comparative advantage
Production surpluses form some countries may be
dumped (sold for unrealistically low prices) on the
domestic market, which may hurt efficient domestic
industries
A greater tendency for specialisation leads to economies of scale,
which will lower average costs of production and increase efficiency
and productivity even further
It may be more difficult to establish new businesses and
new industries if they are not protected from larger
foreign competitors
International competitiveness will improve as domestic businesses
face greater competitive pressures from foreign producers, and
governments will encourage domestic industrial efficiency
Free trade encourages innovation and the spread of new technology
and production processes throughout the world
Free trade leads to higher living standards as a result of lower prices,
increased production of goods and services and increased consumer
choice as countries have access to goods that a lack of natural
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resources may otherwise prevent. The opening up of global markets
leads to higher rates of economic growth and increased real income
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Role of international organisations
− World Trade Organisation (WTO)
 The World trade organisation is one of the most powerful global economic institution
 The role of the WTO is to implement and advance global trade agreements and to
resolve trade disputes between economic
 Prior to the WTO the General Agreement on Tariffs and Trade (GATT) was responsible
for developing trade agreements (1997)
 The Uruguay Round led to the WTO agreement. For the first time, the scope of the trade
agreement went beyond trade in goods to include trade in services (such as insurance
and banking) and intellectual property (such as patent, copyright, trademarks, etc.)
 The WTO’s membership is growing with 155 countries in 2010 and 29 further countries
applying to join.
 If the Doha Round is successful in its ambitions of deregulations, the World Bank
estimates that the resulting increase in global trade would increase global economic
activity by $520 billion by 2015 and lifting over 140 million people out of poverty in the
developing world.
 However, the Doha Round’s ambition to lift millions of people out of poverty is under
jeopardy after difficulty negotiations with member nations in implement these goals (
the developed would not free up its agricultural market to the developing world) (2008)
 The WTO intends to broaden its agenda to include issues such as economic
development, exchange rates, and climate change and foods security.
− International Monetary Fund (IMF)
 The international Monetary Fund is one of the most important institutions in the global
economy. It has 186 members, covering almost all nations
 The role of the IMF is to maintain international financial stability
 In situations where a financial crisis occurs in an economy, region or even across the
world the world, the IMF plays a critical role in minimising the crisis
 In response to the GFC, the IMF injected $250 billion into the global economy, to
promote liquidity in the global financial system, and provided specific support for
countries hard-hit by the crisis to stimulate their economy
 The IMF’s policies are to support the free trade of goods and services and the free
movement of financial and capital throughout world markets. The IMF often require
countries to change their economic policies and open up their market before they
receive financial assistance (structural adjustment policies)
 The impact of the IMF’s policies approach is increased by the fact that many
international banks and other private leaders require that country to adopt IMF’s
support policies before they are willing to lend to those nations
 The IMF’s structural adjustment policies have played an important role in the process of
globalisation, effectively ensuring that most economies have adopted similar economic
strategies in recent years
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Part of the IMF’s structural adjustment policies is that it asks developing economies
embrace the global economy by advising them to:
- Cut the size of government
- Privatise government owned industries
- Deregulate market policies that inhibit business practice
- Open Market to foreign competition
The IMF advices economies to:
- Embrace globalisation
- Export led growth
- Embrace deregulation and privatisation
- Embrace budget balancing
− World Bank
 The World Bank’s role in the global economy is primarily concerned with helping poorer
countries with their economic development
 The official title of its main organisation is the international Bank for reconstruction and
development
 The focus of the main organisation (IBRD) is to:
- Fund investment in infrastructure
- Reduce poverty
- Help countries to adjust their economies to the demand of globalisation
 Other Organisations within the World bank that provide specific assistance to lower
income countries:
- The international Development Association provides ‘soft loans’ (i.e. loans at
little or no interest to developing countries
- The International Financial Corporation has the role of attracting private sector
investment to the Bank’s project
- The Multilateral Insurance Guarantee Agency provides risk insurance to private
investors
 The World Bank is funded by contributions from member countries and from its own
borrowing in global financial markets
 The World Banks major aim (as set out in the millennium Development Goals) has been
to reduce the proportion of people living on less than $1 a day to half the 1990 level by
2015 (from 29 precent to 14.5 precent of all people in low-and-middle income
economies
 In response to the GFC in 2008, the World Bank has provided over US$280 in assistance
to developing countries. Furthermore, immediately after the GFC the World Bank tripled
lending from $13.5 billion to 35 billion to assist lower income economies.
 The World Bank in recent years has been its support of the ‘Heavily Indebted Poor
Countries Initiative’ (where the World bank relieves countries that are in debt because it
has borrowed)
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− United Nations
 The United Nations was established in 1945 aid has grown to cover 192 member states. Its
agenda is broader than any other organisations, covering the global economy, international
security, the environment, poverty and development, international law and global health
issues
 The UN has historically played an important role in supporting greater linkage between
economies and promoting globalisation
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− Organisation for Economic Co-operation and Development (OECD)
 The organisation for Economic Co-operation and Developments an international
economic organisation of 31 countries committed to democracy and to the market
economy
 The primary goal of the OECD is to promote policies to achieve the highest sustainable
economic growth and employment and a rising standard of living in member countries,
while maintaining fiscal stability, and thus contributing to the development of the world
economy
Influence of government economic forums (G20 – G8)
− Group of Eight Nations (G8/G7)
 The group of eight (G8) largest industrialised nations include the US, UK, France,
German, Canada, Japan Italy and Russia along with the European Union (it was
previously now as G7 because Russia was not included)
 The G8/G7 has effectively operated as the economic council of the world’s wealthiest
nations, meeting annually to discuss conditions in the global economy
 Because of the G8’s status as the forum for the world’s most powerful economies, its
agenda has often included general political issues and current priorities such as climate
change, global poverty and security
− Group of Twenty Nations (G20)
 The G20 emerged as the leading council of nations responsible for the management of
the global economy
 The meeting achieved agreement on measures to improve coordination of fiscal
stimulus being implemented by governments around he world, as well as on a plan for
improved supervision of the global financial system and international financial
institutions
 The Toronto summit in 2010 focussed on balancing the need for a long term place to
reduce fiscal deficits while continuing to support global economic recovery
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Trading blocs, monetary unions and free trade agreements
As trade has grown and economies have become more integrated countries have in recent years
moved to form agreements and trading alliances to ensure that they are in the best position to
gain from growing trade opportunities and also to avoid being excluded from emerging trading
blocs
− There are two major types of trade agreements existing in the global economy
 Preferential free trade agreements (which are regional or bilateral agreements)
 Multilateral agreements (which are open to all nations)
− A trading bloc occurs when a number of countries join together in a formal preferential trading
agreement to the exclusion of other countries, such as European Union (EU) and the North
American free trade Agreement (NAFTA)
− Monetary union is where two or more countries share a common currency (EURO)
− Free trade agreements (or preferential trade agreements) are formal agreements between
countries designed to break down barriers to trade between those nations. When the
agreement is between two countries it is said to be bilateral and when the agreement is
between two countries it is said to be bilateral and when the agreement is between three or
more economies it is said to be multilateral or regional. While these agreements are generally
described as free trade agreements because in effect they give more favourable access to goods
and services from one nation or a group of nations compared to another. Sometimes they can
make it harder for nations outside the preferential trade agreement to trade at all. In contrast,
global free trade agreements, conducted through the World Trade Organisation (WTO), are
designed to break down all trade restrictions and free up world trade
− Regional trade agreements have multiplied in recent decades, with the number of agreements
in force jumping from 27 agreements in 1990 to 278 in 2010. In fact, only one WTO member
(magnolia) is not a party to a regional or bilateral trade agreements in recent years had led to
what some economist have describe as the emergence of regionalisation, not globalisation
 Evidence: around two0thirds of European trade occurs within the European Union,
demonstrating both its vast size and its tendency to be a more closed trade bloc due to
protectionist policies
Trade Agreements
Global agreements
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WTO
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Multilateral or Regional agreements
−
−
−
−
−
EU
NAFTA
APEC
AFTA
AANZFTA
Bilateral Agreements
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CERTA
SAFTA
TAFTA
AUSFTA
CHAFTA
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— Advantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN) and bilateral agreements
− Asia-Pacific Economic Cooperation (APEC) forum
 Asian-pacific Economic Cooperation (APEC) forum was formed in response to the
formation of trading blocs around the world (EU, NAFTA)
 Its member include: Australia, Brunel, Canada, Chile, Hong Kong , Indonesia, Japan
Malaysia, Mexico, New Zealand, Pap New Gunnie, Peru ,The Philippines, Russia,
Singapore, South Korea, Taiwan, Thailand, USA and Vietnam
 The APEC forum is intended to be a free trade group that supports the WTO and
addresses all impediments to the objective of free and open trade and investment in
the region. It is intended to be non-discriminatory group (not a secluded trading bloc
like EU), in that it will trade with countries outside of the grouping on the same basis
of members of the forum if they are prepared to give equal access to their market
 However, the APEC meetings has not succeeded in its origin ambition to create a
regional area of free trade, instead the APEC meetings have increasingly served simply
as an opportunity for leaders to meet and address whatever issues were the priorities
if the day (i.e. financial crisis, climate change and terrorism)
 APEC forums has 40% of the world’s population, 54% of world GDP and 48% of world
trade
− The European Union
 The European Union (EU) is the most important trade bloc in the world economy. Its
member span across the European continent, with membership growing to 27 nations
in 2007, giving it a pollution of around 500 million people. Currently three additional
countries
 The EU is a single market for European goods and services was established in 1992, and
this has helped drive strong trade growth within the EU. However, the EU has tended
to raise tariff barriers against non-member countries, resulting in accusations that the
EU is a closed trading bloc
 The increase in protection has had major implications for non-European countries
(some large international traders, such as USA and some relatively small as Australia)
 In particular, the high rates of protection applied to agricultural product in the EU
(almost 40 precent of EU’s budget of $A220 billion is spent on agriculture) and the huge
oversupply of agricultural commodities that this generated, has prompted a retaliation
from the USA with similar protection policies. This has left smaller agricultural trading
countries around the world , including Australia suffering in this ongoing conflict
− North American free Trade Agreement (NAFTA)
 NAFTA was established in 1994 and is composed of United States, Canada and
Mexico
 NAFTA is a free trade agreement in which agricultural protection is being completely
eliminated and other tariffs are being phased out over a period of 5 – 15 years
 NAFTA has resulted in substantial increase in trade among its members. Access to
the United States market has resulted in significant increases in exports for the two
other members, while the US has benefited from shifting the production facilities to
Mexico where wage costs are substantially lower
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Free Trade Area of the Americans (FTAA) is a potential trading bloc between America
− Bilateral trade agreements
 A bilateral trade agreement occurs between two economies
- A good example of this is the Closer Economic Relations Trade Agreement
(CERTA) (between Australia and New Zealand)
 CERTA has gradually been extended in recent years, such as with the harmonisation
of business regulations, and tax laws between the two economies. This agreement
has led to an 8% annual increase in trade between Australia and New Zealand
 Bilateral trade agreements have experienced a resurgence in recent years
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This resurgence is due to:
- Show progress of the WTO to create multilateral negotiations
- United States using its economic power to negotiate bilateral agreements
more favourable for itself
However, economist are divided over the extent to which bilateral agreements claim
OF delivering large increase in trade is not always true. In fact, the cost of
implementing these agreements are underestimated and the benefits exaggerated
− Association of South East Asian Nations (ASEAN)
 The ASEAN group covers emerging economies in South East Asia but doesn’t include
any f the large economies. ASEAN has acted as a counter-weight to the APEC forum,
which tends to be dominated by large advanced economies such as US, Japan and
China. ASEAN is now the most important force for trade negotiations within the Asia
Pacific region.
 The ASEAN Free Trade Area (AFTA) comprises of Indonesia, Thailand, Malaysia,
Singapore, The Philippines, Vietnam, Brunei, Burma, Cambodia and Laos
 The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) agreement came into
effect in 2010, with ASEAN nations committing to lowering and eliminating tariffs on
96% of Australian exports to the region. This is the largest preferential trade
agreement that Australia has concluded representing 20% of Australia’s trade in
goods and services and covering economies with a GDP of over $US 1 trillion
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Protection
Protection can be defined as any type of government action that has the effect of giving domestic
producers an artificial advantage over foreign competitors. The main protectionist measure include tariffs,
import quotas and subsidies
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Reasons for Protection
- Despite the economic argument in favour of free trade, historically most countries have
tend to impose at least some form of protection to assist local producers in the face of
foreign competition. A number of arguments have been put forward to justify why countries
impose protectionist barriers to trade, including the need to assist infant industries,
protecting industries from overseas firms dumping goods, reducing unemployment and
argument of self-sufficiency in certain times (war)
- Infant industries (major reason)
 During establishment phase new industries generally face many difficulties and risks.
They usually start out on a small scale (have not achieved economies of scale yet),
with costs that are relatively higher than those of the more established firms
competing in the international arena. It is argued that these ‘infant industries’ may
need protection in the short run to enable them to expand their scale and reduce
their cost of production so that they can compete with the rest of t the world
 For this argument to be valid, the protection should be temporary, otherwise there
would be no real incentive for the industry to reach a level of efficiency that would
enable it to compete with protection and a good chance of achieve a comparative
advantage in the long run
- Prevention of dumping
 Dumping occurs when foreign firms attempts to sell their goods in another country’s
market at un realistic prices
 The practice of dumping may occur for two reasons:
- To dispose of large production surplus
- To establish a market position in another country
 These low prices are usually only of a temporary nature but can harm domestic
producers, local firms that could normally compete with such foreign producers may
be forced out of business, causing a loss in country’s productive capacity and higher
unemployment
 The only gain from dumping is that it results in lower prices for consumers in the
short term, but this does not last, as foreign producers will put up their prices one
the local competition is eliminated. Under such circumstances, it is generally in the
economy’s best interest to impost restrictions on such imports
 However in recent years the WTO has questioned whether countries might be
abusing their entitlement to prevent dumping and falsely accusing efficient low-cost
foreign producers (economies with comparative advantage) of dumping as an excuse
to give domestic producers on artificial advantage
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
- Protection of domestic employment
 One of the most popular arguments in favour of protection is that it saves local jobs.
If local producers are protected from competition with cheaper foreign imports, the
demand for local goods will be greater and this will create more domestic
employment
 However, economists argue that protection will tend to distort the allocation of
resources in an economy away from areas of more efficient production towards
areas of less efficient production (survival of the fittest)
 In the long run, this is likely lead to higher levels of unemployment and lower growth
rates. On the other hand, by phasing out protection it is hoped that better and more
lasting jobs will be created other sectors within the economy that are internationally
competitive
 Furthermore, if a country protects its industries, it is possible that other countries
will retaliate and adopt similar protectionist polices. The net result could be that
country would maintain employment in less efficient protected industries but lose
employment in more efficient export industries. Also, the increased cost of foreign
imposters worldwide results in higher prices for everyone as firms aim to main
profitability
- Defence and self-sufficiency
 Major superpowers generally want to retain their own defence/weapons industries
so that they are able to produce their own defence equipment in periods of war
regardless whether it is cheaper to be produced overseas
 Similar to defence, economies need to be self-sufficient in food supplies (e.g. Japan)
- Other arguments
 Economies need to protect their country from foreign goods that could harm their
environment
Methods of protection and effects of protectionist policies on the domestic and global economy
- Methods of protection
 Tariffs
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-
-
A tariff is a government imposed tax on imports. It has the effect of raising the
price of the imported goods, intending to making the domestic producers more
competitive
The diagram to the right reveals the
following

The curve SS and DD represents domestic supply
and demand
 OP is the price of imported goods in there was no
tariffs applied (i.e. in a situation of free trade). At
this price demand 0Q1, domestic producers supply
0Q, and the quality imported would be QQ1
 If a tariff of PP1 is imposed, all of which is passed
on to consumers, demand will contract to 0Q3,
domestic supply will expand to 0Q2, and imposts
will fall to Q2Q3
 Following the imposition of the tariff the
government will raise revenue of ABCD
-
Economic effect of tariffs
 Domestic producers supply a greater quantity of the good. Therefore the tariff
stimulates domestic production and employment
 More domestic resources are attracted to the protected industry. This leads to a
reallocation of resources towards less efficient producers (i.e. those who are unable
to compete on a n equal footing with foreign producers +
 Consumers pay a higher price and receiver fewer goods, this redistribution of
income away from consumers to local producers
 The tariff raise revenue for the government, but that is not the primary objective. In
fact, the more successful the tariff as a protectionist device (the import it restricts)
the less revenue it will raise
 A retaliation effect can be experienced. In response to tariffs on imports, other
countries may impose tariffs on the goods that are exported to them. In that case
any increased production and employment gains got the import-competing
industries would be offset by losses in the nation’s export industries.
 Quotas
- An import quota controls the volume of goods that is allowed to be imported over a given
period of time
- The diagram to the right reveals:



-
The curve SS and DD represent domestic supply
and demand
0P is the price at which the imported goods
would sell if there was no quota imposed. At this
price consumers demand 0Q1, domestic
producers supply 0Q1 and the quantity imported
would be QQ1
If the government imposed a quota restring
imports to Q2Q3, this would have the effect of
raising the price of imported good to 0P1. This
price would allow domestic expand to 0Q2
Countries sometimes use a system of tariff quotas.
Under this protectionist method, good s imported
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up to the quota pay the standard tariff rate, whereas goods imported above the quota pay a
higher rate
- Economic effect of a quota
 Domestic producers supply a greater quantity of the good. Therefore, the quota
stimulates domestic production and employment in the protected industry
 More resources in that economy will be attracted to the protected industry , leading
to a reallocation of resources from other sectors of the economy (where production
and employment will fall)
 Consumers pay a higher price and receive fewer goods. This redistribution away
from consumers to domestic producers in the protected industry, and results in
lower overall levels of economic growth
 Unlike tariffs, quotas do not directly generate revenue for the government.
However, governments can sometimes raise small amount of revenue from quotas
by administering the quota through selling import licence allowing firms to import a
limited number of goods
 As with tariffs, the imposition of a quota on imports can invite retaliation from the
country whose exports may be reduces because of the quota this can result in lower
exports for the country that initiated the import quota
 Subsidies
- Subsidies are cash payments from the government to businesses to encourage
production of goods or services and influence the allocation of resources in an
economy to allow them to compete with overseas competition
- The diagram to the right reveals:





-
The curve SS, S1S1 and DD represent domestic demand and supply
Because of the subsidies
domestic producers are able to
reduce their price resulting in a
rightward shit of domestic supply
curve from SS to S1S1, resulting in
a lower market price
Businesses will be able to sell a
higher quantity od their product
on bother domestic and global
markets
The quantity produced increases
from Q to Q1
The size of the subsidy in per unit
terms is the vertical distance
between S and S1
Economic effects of a subsidy
 Domestic producers supply a greater quantity of the good. Therefore, the tariff
stimulates domestic production and employment in the protected industry
 More resources in that economy is attracted to the protected industry, leading
to reallocation of resources from other sectors of the economy (where
production will fall)
 Consumers pay a lower price and receive more goods, because the subsidy
shifts the supply curve from the sector to the right, However , consumers still
pay indirectly through higher taxes
 Subsidies impose direct costs on government budget because they involve
payments from the government to the producers of goods and services. This
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

-
means that governments have fewer resources to allocate to other priorities
such as healthcare and education (reallocation of income)
 While economist are opposed to protectionist policies, they often prefer a
subsidy to tariff because subsidies tend to be abolished more quickly (since
they impose costs on the budget, rather than generating revenue)
Local content rules
- Local content rules specify that goods must contain a minimum percentage of locally
made parts. In return for guaranteeing that a contain percentage of a good will be
locally made, the imported component may not attract a tariff.(e.g. Australian
television is protected by local content restrictions to maintain Australian culture)
Export incentives
- Export incentive programs give domestic producers assistance such as grants, loans or
technical advice (such as marketing or legal information), and encourage businesses to
penetrate global markets or expand their market share
Overall Economic effect of protectionism on global economy
 Global protectionist policies have the overall effect of reducing trade between nations (Global
protectionist policies cost global economies between US$180 billion and US$20 billion in
exports yearly according to the WTO)
 Overall, protectionist policies reduce living standards and reduce global economic growth by
shielding inefficient producers ( the international institution for international economics
estimates that protectionism reduces GWP by US$400 billion yearly)
 Protectionist policies make it more difficult for individual economies to specialise in production
in which they are most efficient. Businesses are less likely to achieve economies of scale and
therefore lower profits and lower dividend. With less completive pressure, prices of goods and
series in individual economies are higher
 The negative economic impact of the protectionist policies of trading bloc tends to be greatest
for developing economies, which are excluded from accessing advanced economies markets
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Globalization and economic development
The most distributing feature of the global economy is the significant difference in the standard of the living
between countries and stark inequality of income
While there is a large gap between rich and poor countries, it is also true that in overall terms, living
standards are improving in most countries rich and poor. This evidence by the following facts:
- Between 1981 and 2005, those living extreme poverty in developing countries, living on less than
$us 1.25 per day, fell from 52% to 25%. if we exclude china from these calculations, however,
extreme poverty rates fell much less significantly over the same periods
- Life expectancy in developing countries rose from 56 to 67 years between 1920 and 2009. Child
mortality for those under five declined from 1 to 10 children in 1990 to 1 to 5 in 2009
- The primary education completion rate in developing countries increased form 78% in 1991 to *7%
by 2009, while the adult literacy rate in developing countries reached 80%
While these figure show progress they also demonstrate how wide the gap are for many people in the
developing world, compared to the one billion people in developed countries who enjoy what is described as
a high level of human development


Difference between economic growth and economic development
 Economic growth occurs when there is a measure of welfare in a nation that includes
indicators of health, education and environmental quality as well as material living standards
 Economic development is a broad measure of welfare in a nation that includes indicators of
health, education and environmental quality as well as material living standards
Distribution of income and wealth
 Income
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


High income economies receive around two-thirds of the world’s income as
measured in raw GNI figures or over half o the world’s income using PPP-adjusted
GNI figures
While the richest nations are far better off than poorer countries, the gap appears to
be falling, though very slowly.
Technological change has shifted production process away from low-skilled labour
towards higher skilled labour. This benefits people with higher levels of education by
increases unemployment for less skilled workers (division of labour)
 Wealth
 Another dimension to global inequality is the unequal distribution of global wealth
 According to United Nations University, global wealth is concentrated among
households in North America (34% of global wealth), Europe (30 %) and rich AsiaPacific countries like japan and Australia (24%). The remaining countries share only a
little over 10 % of world’s economic wealth.
 There is a higher disparity in wealth than income

Income and quality of life indicators
 Economic growth
 Gross National Income
- The most popular method of comparing living standards between economies
is income, because it is a measure of the ability of a nation’s citizens to satisfy
their material wants
- GNI is the sum of value added by all resident producers in an economy plus
receipts of primary income for foreign sources
- One of the limitations in making such comparisons between the size of
economies Is the exchange rate used to make the comparisons.(for example,
if the price of a good or service in developing countries is low relative to the
price in the United States, them measuring GNI in terms of US dollar will
underestimate the true income of the developing countries, is how far your
dollar goes)
- For this reason, economists usually make an adjustment using what is known
as Purchasing Power Parity (PPP). This theory states that exchange rates
should adjust to equalise the price of identical goods and services in different
economies throughout the world
- Given that the high-income economies have just over one billion people out
of a world population of almost seven billion, a high level of inequality clearly
exists in the low-income economies receive an economic output that is only
a fraction of the output of the high-income economies
- People who live in the developing world (one in six people in the world) enjoy
income levels that, even after adjusting for purchasing power parity, are six
times as great as those in low and middle income countries.
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-

While the richest nations are far better off than poorer countries, the gap
appears to be falling, though very slowly. Almost all nations have experienced
some economic growth in recent decades, enjoying higher income as a result
of an income increase as in their Gross Domestic Product (GDP). For the rich
nations, wealth is needed to create more wealth
- Another dimension to global inequality is the unequal distribution of global
wealth. Wealth is an important safety net for people when they do not have
income and can be used to start a businesses and generate income (wealth
creates more wealth)
 Evidence: according to 2008 research by economist at the United
Nations University Global Wealth is concentrated among household in
North America (34%), Europe (30%) and rich Asia-Pacific countries like
Japan and Australia (24%), with the remaining countries across Latin
America, Africa, Asia (China & India). Sharing only a little over 10% of
the world’s economic wealth. Hence wealth is distributed even more
unevenly than income global
- Economic growth refers to an increase in an economy’s income and
production
- GNI and economic growth and income cannot measure living standards
accurately
 Economic development
Economic development also takes into account other quality of life indicators such as
health standards, education levels, and domestic work that is not given a financial value,
the level of damage to the level of damage to the environment and inequalities income
distribution
 Human development index (HDI)
- The main alternative measure to GNI is the HDI, devised by the Uniter\d
Nations Development Program (UNDP) to measure economic development
- HDI takes into account:
 Life expectancy at birth (health and nutrition standards in a country)
 Levels of education attainment (education levels = future development
potential)
 Gross Nation Income per capita (income of domestic producers +
foreign sources by PPP)
 The HDI (Admeasured of economic development in an economy from 0
to 1)
- Comparing HDI and GDP statistics reveal the difference between economic
growth and development across the globe, Highlighting the Importance of a
broader measure of welfare
- Economic development relies on economic growth but not the other way
around
Developing economies, emerging economies, advanced economies
 Categories of development in the global economy
 Advanced economies (industrialised/developed)
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These are countries that have high levels of economic development
Have close ties with each other (i.e. OECD)
Have liberal-democratic political/economic institutions
The IMF identifies 34 advanced economies, that make up half of the high income
economies in the world (the other hand have very small nations) and comprises
most of the members of OECD
- High income economies have Gross National Income per capita levels above $US
12 246 and arte mostly found in North America and Western Europe, with a
smaller number in the Asia-Pacific region
 Emerging economies
-
-


These are economies that are in the process of industrialisation or modernisation and
are experiencing sustainably high levels of economic growth
This classification includes a range of economies that are nether high income, nor share
the traditional characteristics of developing economies
They include the economies that used to be known as newly industrialised economies
(i.e. Malaysia and the Philippines)
They include economies that used to be known as transition economies which were
making the transition from social economies (i.e. China & Hungary)
They include developing economies with improved prospect (i.e. India & Indonesia)
Developing economies
- These are countries generally suffering from low income levels
- Suffer from weak human resources
- Have experienced industrialisation to a limited extent
- Have large number of people living in absolute poverty (less than $US1.25 per
day)
- Developing countries are often divided into the two groups, low income and
middle income
- While there are significant differences between developing countries some
common characteristics include
 High levels of income inequality within their economies
 Dependence on agricultural production for income, employment and
trade opportunities
 Reliance on foreign aid and development assistance as a major source of
income
 Reliance on foreign aid and development assistance as a major source of
income low levels of labour productivity, industrialisation, technology
innovation and infrastructural development
 Weak political and economies institutions, and a high prevalence of
corruption
Least developed countries
- The United Nations conference on Trade and Development has also identified
48 countries that it this sub-group
- These countries suffer from the lowest GNI per capita level in the world (less
than $US905 per year)
- They suffer from weak human assists (based on economic structure)
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-
33/48 LDC’s are located in Sub-Sahara Africa (Africanisation of poverty)
Types of Economy
Income levels
Economic Growth
Structure of
economy
Examples
Advanced
High income levels,
with GNI per capita
above $US 12,276
Slower growth in
recent decades
Large service
industries and
advanced
manufacturing
United States
Developing
Emerging
Germany
Korea
Low income levels,
with around half of
population in absolute
poverty
Moderate growth
rates, but
population
growth also high
Heavily reliant on
agriculture and
foreign aid
Bangladesh
Zimbabwe
Income levels vary but
what these economies
have in common is fast
growth in income
levels
Strongest growth
rates in the world
(5 – 10 per cent)
and favourable
prospects
Industrialising ,
usually with
substantial
manufacturing
sectors
China
Ethiopia
Brazil
Indonesia
Copyright © 2013 | Majd Abdulwali

Reasons for differences between nations (cause of global inequality)
 Global factors:
 Global trade system
- Wealthy countries protect their domestic agricultural sector because it is not
competitive with agricultural producers in many developing nations.
Developing countries that export commodes are severely affected by
continued high levels of local protectionism in the agricultural sector (OECD
nations provide $US253 billion in agricultural protection)
- Expanding regional trading blocs like EU and NAFTA exclude poorer nations
from gaining access to lucrative (highly profitable) global consumer markets
- WTO negotiations that focus on improving development in poorer nations
seem to always tell short on providing any actual benefits to developing
countries because of the resilience of high income nations
- The benefits of free trade agreements are often not accessible to developing
nations because of the substantial cost in implementing international
agreements and lodging against other countries’ protectionist measures. A
one percent increase in administrative costs would result in a decrease in GDP
by $US 75 billion

Global financial architecture
- Historically, long term International flows heavily favoured developed
countries. That has changed in recent years, with developed economies now
accounting for only hand of global FDA inflow. However, FDI flows now mainly
benefit a handful of emerging economies includes China, Brazil, India and
Russia. In 2010 the World’s 48 least developed economies, by contrast
received only 2 precent of global FDI inflows
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Short term financial inflows s favour the more prosperous emerging
economies, which offer better financial return for currency and stock market
spectators. However, these regions have also experienced greater economic
volatility (i.e. East Asia Crisis)
- The major criticism of the IMF is that the ‘structural adjustment’ policies it
advocates serve the interest of rich countries, and may not be appropriate to
the conditions of many developing countries
- Many developing countries have massive foreign debt burdens. As a result,
many developing countries spend more on debt servicing that public
healthcare, education and infrastructure which could promote growth and
development. The existence of debt can also precent potential investors
 Global aid and assistance
- The total level of developing aid provided by high-income economies was
$US133 billion or 0.31% of GDP in 2011. This is less than half the level of which
high income economies have been committed for four decides (0.7 % of GDP)
- Critics of aid policies argue that a significant portion of official development
assistance is ‘Phantom aid’ (which is temporary aid that does not improve the
lives of poor). Additionally, another proportion of aid is ‘tied aid’ (which is
conditional aid that must be spent on overpriced or unnecessary goods and
services that are produced by the donor country (America assisting Africa with
its own crops)
- The distribution of aid by high-income countries often reflects strat4gic and
military considerations rather than the needs of the poorest nations (America
assisting Iraq & Afghanistan after war rather the LDC’s)
 Global technology flows
- Recent World Bank research found that around half of the difference in living
standards between US and developing economies can be linked to the slow
adoption of new technologies in poorer nations. Differences in access to new
communications technologies is called the ‘digital divide’
- New technologies are also largely geared to the needs of high-income countries
because they choose the priority areas of scientific research (e.g. labour saving
devices) and have little benefit to poorer nations
- Developing nations also find it difficult to gain access to new technologies
intellectual property rights restricts the benefits of technological transfer to
poorer countries because they cannot py developed country prices for those
technologies
 Domestic Factors:
 Natural resources
- Economies that have an abundant and reliable supply of cheap natural resources
clearly have a better opportunity for economic development than those that do
not, even if some have been spectacularly unsuccessful in using these
opportunities
-
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But an abundance of natural resources can also hamper a country’s economic
development if it leads to an overvalue exchange rate, narrow export base and
becoming over reliant on a small number of industries to drive economic growth
Labour Supply and quality
- Labour is an output to the production process for many sectors of the economy
and is thus an important factor influencing development levels. Whereas high
income countries tend to have highly educated & skilled labour resources, low
income nations are characterised by high population growth, poor education n
levels and low health standards, which reduce the quality of the labour supply
Access to capital and technology
- Difficult in gaining access to capital for investment and development in another
major structural weakness of developing nations that contributes to their lower
living standards low income levels provide little opportunity for savings that can
be used for investment. Poorly developed financial systems make it difficult for
businesses to gain easy access to loans for investment purposes
Entrepreneurial culture
- The value of individual responsibility, enterprise, wealth creation and a strong
work ethic can assist the industrialisation process, and the transition towards
sustainable economic development
-



 Institutional factors:
 Political and economic institutions
- Political instability, corruption and a lack of law enforcement by governments
tend to undermine the confidence of investors who will be reluctant to take risks
if their business interests are threatened by an inadequate structure for resolving
legal disputes, corruption or other institutional problems (i.e. Syrian war)
 Economic policies
- If all major decisions are left to market forces, a country may achieve a high level
of economic growth, but it may not improve education, health care and quality of
life. On the other hand, excessive government control over economic decision
making can constrain entrepreneurship and innovation, reducing economic
growth. Courtiers with the highest levels of human development, such as
investment in human development
 Government response to globalisation
- Policies relating to trade, financial flows, investment flows, transnational
corporations and the country’s participation in regional and global economic
organisations will influence on economy’s ability to take advantage of the
benefits of integration, such as economic restructuring, efficient, access to
foreign capital and technology and access to overseas goods markets

Effects of globalization (impact of globalisation)
 Economic growth and development
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





Developing economies have greater opportunities to grow by producing goods for
global consumer market, and can also benefit from greater access to new
technologies and foreign investment
On the other hand, some regions have not gained as much as might be expected from
globalisation and greater economic integration has cause disruptive structural change
in some regions
Overall, there is no clear evidence that globalisation has produced an acceleration of
economic growth. As the world economy has become more integrated over recent
decades, world growth slowed from 3.3% per year (1990s) to 2.8% (1990s) and to
2.7% (2001-2011)
However, globalisation does nevertheless appear to be contributing to a convergence
in living standards in the global economy. In recent decades, the fastest growing
economies have been emerging economies such as China and India, while the slowest
growing economies have been the advance economies. Since 1990, emerging and
developing economies have been ‘catching up’ to advance economies
- The East-Asia and Pacific region has been the fastest growing region in the world
(8.7% per year, on average, between 1991 and 2011). In particular, strong growth
in China during this period (10.4%) demonstrates the role of industrialisation and
globalisation in economic growth
- Economies in South Asia have also experienced successful growth over this
period (6.1%), in particular India after becoming more integrated in the global
economy (6.5%) as well as Bangladesh (5.4%)
- Latin American economies (3.4%) such as Brazil and Argentina experience
stronger growth than in 1980s (1.4%) due to greater integration with regional
economies as well as rising commodity prices
- High income economies grew by just 2.1% on average in the 1991-2011 period,
slower than the 3.3 % recorded during the 1980s
The implications of these trends are mixed. On one hand, the remarkable growth
experienced by emerging and developing economies that have embraced
international trade, foreign investment and the participation of translation
corporations may indicate that globalisation facilitates higher rates of economic
growth. For example, sustainable economic growth in China and India is liked to
policies in both countries that have encouraged increase trade and foreign
investments
On the other hand, the most globally integrated economies, advanced economies,
experienced comparatively weak growth over the past two decades and were most
impacted by the global recession of the late 2000s. In particular, economies with
highly globalised financial markets, such as United States and Europe, suffered the
worst effect of global recession and were again the centre of economic instability in
2012. Global forces have also contributed negatively to other growth outcomes in
recent years, such as through foreign indebtedness (Africa) and exchange rate
volatility (Latin America & East Asia crisis). Therefore, while certain features of
globalisation clearly facilitate economic growth, other features may destabilise or
constrain economic growth
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




If globalisation lifts economic growth rates in individual economies it also raises
income levels, and provides more resources for education and health care, and for
programs to clean up the natural environment
However economic growth has negative consequences for development if, while
contributing to growth in individual countries, it also caused income inequality to
increase and accelerate climate change and environmental damage.
In analysing the trends of recent decades, it is clear that the impacts of globalisation
are dominated by the rising economic power of China, since China has the world’s
largest population. The rise of China is a major structural change in the global
economy that is occurring in parallel to the process of globalisation. There is no
question that globalisation has also contributed to the extraordinarily speed of
China’s economic development. Trade has been central to China’s rapid
industrialisation since China’s growth has been led by export-oriented manufacturing
industries. China’s growth is also in turn accelerating the process of globalisation, by
deepening trade and financial links among economies
The speed and scale of China’s economic expansion dwarf any other emerging
economy and so in examining the impact globalisation is important to examine
particularly the role of China
Trends in the Human Development Index (which is a measure of material living
standards, education and health outcomes), shows that over long periods of time
(1980-2011) almost all countries have experience major improvements in economic
development
 The role of financial markets
 Global financial markets can have positive impacts on economies. Countries would be
unable to conduct international transactions without foreign exchange market.
Businesses would find It more difficult to access loans or a attract investors if they
were confided so domestic financial market. Efficient international financial markets
should encourage greater transparency of the action of businesses and governments
and should foster economic development
 However, global financial markets have also produced negative results during the
globalisation era. Financial markets shift massive volumes of money around the world
every day. If investor’s sentiment turns against a particular economy, it can result in a
collapse in exchange rates, a shock to the economy and a recession accompany by
rising unemployment. This was seen in Mexico in 1995, in East Asia in 1997 (East Asia
crisis), in Russia in 198, in Brazil in 1999, and in Argentina in 2002
 With its origin in the United States housing market, the global financial crisis of 2008
saw a collapse in worldwide investor confidence and the seizure of the global financial
system. Central banks subsequently flooded financial markets with liquidity,
governments guaranteed banking deposits to improve confidence and many
governments provided ‘bail-out’ to prevent troubled banks and financial institutions
from collapsing. While these emergency measures helped avoid global economic
depression, the world economy sill contracted by 2%
 Income inequality
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Globalisation Also has impacted on income inequalities within countries because as
trade and financial flows grow, it changes the structure of economies
- Increased openness to trade provides more export opportunities, which raises
the income of agricultural workers in developing countries. Lower tariff or
imports improve standards of living for the poor by reducing the price of
goods
- Increase financial flows provide greater employment opportunities and fuel
economic growth, but FDI flows also tend to be concentrated in high skilled
and high technology sector favouring those who are already better off
 According to IMF, one fifth of the increase in income inequality seen in
countries is because of globalisation
Trade, investment and transnational corporations
 Globalisation has resulted in substantial increases in the size of trade flows and foreign
investment. Because of the key role played by transitional corporations (TNC’s) in both trade
and investment flows, TNC’s are increasingly dominating business activity around the world
 An important feature of trade growth during the globalisation era is how goods are produced
in different stages in different economies, this is known as vertical specification (global
supply chain)
 The globalisation of financial markets has seen an increased reliance on foreign sources of
finance for investment. Foreign direct investment is now playing a greater role in creating
more economic activity for every region around the world
 The Growth of short term financial flows has created great volatility, it in many economies
 Merge activities continues to concentrate the number of the companies, as TNC’s prepare for
a world where many global industries will feature just a handful of global companies
Environmental sustainability
 Low income countries that are desperate to attract foreign investment and earn higher
export revenue may engage in economic behaviour that harms the environment (disposal of
production waste)
 Additionally, the growth in global trade itself is increasing consumption of non-reliable fuels
for transport by air, road, rail and sea vehicles
 On the other hand, globalisation also affects the best opportunity to protect the world’s
environment from harm by forcing individual nations to face up to their global responsibility
for environmental preservation. It makes it possible for the cost of preservation to be
shared, and to increase scrutiny of the environmental practices of transitional corporations.
Globalisation has also facilitated the transfer of environmental friendly technology.
Overtime, globalisation may create international institutions with the power to enforce
orders on individual countries to stop environmental damage
The international business cycle
— The closer linkage between economies hold benefits and risks fro countries in the global
economy. The benefit of integration is that it allows countries to achieve faster rates of
economic growth by specialising in certain types of production and by engaging in trade.
Countries that have a higher level of trade also experience faster economic growth. In
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particular, during ties when world economic growth in higher, individual economies are
likely to benefit from the upturn in growth
— However, closer economic integration also makes economies more exposed to downturns in
the international business cycle and to developments in their regions. One of the reasons
for the strength of global economic growth in the mid-2000s was the simultaneous
upswings in the US and China which propelled the global economy to its fastest growth rate
in 30 years. Equally, the closer the links between economies resulted in the downturn in the
US economy in the late 200s spreading quickly to other developed and developing
economies
— Nevertheless, as the extent of trade and financial integration continues to increase , there is
a likely to be greater synchronisation of the international business cycle, intensifying both
the downturns and upturns in the global economy
Copyright 2013 | Majd Abdulwali
Majd Abdulwali |Economics Notes
29 | P a g e