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Unit 4: The Global
Economy: International
Trade and Development
Chapter 12: Trade Theory, Agreements, and Patterns
Chapter 13: Financing International Trade
Chapter 14: International Economic Issues
Chapter 14: International
Economic Issues
• Over the years, Canadians have taken to the streets
to voice their opinions on many social movements,
including civil rights, women’s right to vote, nuclear
disarmament, and protection of the environment
• In recent years, as global organizations have met
behind closed doors, activist groups from around the
world have reacted with persistent, sometimes
violent, protests
Chapter 14: International
Economic Issues
• Globalization, in its
present form, is perceived
by many to promote the
exploitation of the poor by
the rich, through the
spread of capitalism
• In this chapter, we’ll
investigate many issues
arising from the
globalization movement
What is Globalization?
• Globalization is the process of creating a global economy
• Driven by three forces
• Technology
• Removal of trade barriers
• International finance system
What is Globalization?
• Technology
• Improvements in telecommunications, computer
technology, and transportation infrastructure allows
large companies to produce goods and services on a
global basis and market them around the world
What is Globalization?
• Removal of trade barriers
• Many nations have removed, or are removing, various
barriers to cross-border trade, resulting in a huge
increase in the volume of international trade
What is Globalization?
• International finance system
• A vast international financial system is facilitating trade
and financing international business activity
What is Globalization?
• Each of these three forces have been promoted by
globalization’s defenders as beneficial for national
economies and their citizens
• They have also been just as strongly attacked by
globalization’s detractors as damaging to people
• Let’s examine each in greater detail
The Multinational
Corporation
• As introduced in Chapter 6, the multinational
corporation (MNC) is fundamental to globalization
• Remember that an MNC is a firm that operates in
several countries
• Also called transnational corporations
• These large businesses can now…
• Set up production in any number of companies
• Communicate orders and production plans by
computer and satellite links
• Sell their products and services
The Multinational
Corporation
• Consider the example of
Caterpillar, a Canadian tractor
manufacturer located near
Toronto
• The various parts for the
tractor are manufactured in
several countries
•
•
•
•
Engines in Japan
Transmission in the US
Winches in Brazil
Axles in Belgium
The Multinational
Corporation
• The parts are all shipped to an Ontario plant, where they
are assembled into tractors
• The completed tractors are sold to Japan, the US, Brazil,
Belgium, and other countries
• Computer and satellite links enable companies such as
Caterpillar to…
• Send their specifications for parts from the home office to
their foreign parts manufacturers quickly
• To test a finished part while it is still on the factory floor on
another continent
The Multinational
Corporation
• The business arrangement of hiring outside
contractors to produce either parts or finished
products is called outsourcing
• Using this strategy, multinationals can “shop around”
in many countries for the subcontractor that will
produce the good for the least amount of money
• The business arrangement of setting up a subsidiary,
or branch plant, in another country, is another way
of conducting an international operation
The Multinational
Corporation
• In the case of multinationals that sell services, arrangements
usually depend on the transfer of data via computers and
satellite links
• For example, Ireland has become a major centre for the
processing of US insurance claims
• A US insurance company, New York Life, sends the day’s
claims to an Irish branch office at the end of the business day in
the US
• Because of the 5-6 hour time difference, Irish employees can
spend their workday processing the claims before their US
counterparts even wake up
• They then relay the processed claims back to the US, where
American employees can begin their day by sending out
processed claims to the company’s insurance claimants
The Multinational
Corporation
• With this international
arrangement, the US
company takes advantage of:
• Lower labour costs in Ireland
• Favourable tax levels offered to
foreign companies by the Irish
government
• The fact that the Irish
employees speak English
• The time difference between
the two countries to create a
comparative advantage for
itself
The Multinational
Corporation
• Caterpillar and New York Life give us what appear to be
positive examples of the global economy
• If the manufacturer or service company opens a branch
plant…
• It builds, buys, or leases a plant for its operations in the host
country
• It hires and trains local people, sometimes introducing them
to new technology
• Pays wages to these employees
• Pays taxes to the host government
• May use local suppliers for component parts needed in its
production process
Foreign Multinationals in
Canada
• The debate today over foreign multinationals in Canada
has shifted…
• From concern over their presence…
• To concern when they shift their operations to other
countries and eliminate jobs for Canadians
• On the one hand, many foreign multinationals moved
operations from Canada while they continued to sell
products here
• On the other hand, many Canadian firms have expanded
their operations to export products and services to
markets in other countries
Foreign Multinationals in
Canada
• Over the last 30 years, larger and larger companies have been
expanding their operations to larger and larger markets in their
quest for profit
• According to Fortune magazine, by 2000, the list of world’s top
30 economies included 5 multinationals:
•
•
•
•
•
General Motors
Wal-mart
Exxon Mobil
Ford
DaimlerChrysler
• The multinationals, therefore, are a fundamental force driving
globalization
Removing the Barriers to
International Trade
•
The second major force that’s
driving globalization is the
removal of numerous barriers to
international trade
• As a consequence on this, trade
among countries is now much
more important than it was in the
past
•
Figure 19.2 illustrates that
international trade has been
increasing far more quickly than
world output since the 1970s
• Increasing at a rate of about 7%
per year
• Trade now constitutes 21% of
total world income and is likely to
keep increasing
Removing the Barriers to
International Trade
• The major reason for the dramatic increase in the volume
of world trade over the last 30 years or so stems directly
from absolute and comparative advantage
• These theories promise great gains from trade if it’s open and
free from trade barriers such as tariffs
• Industrialized countries made a determined effort among
themselves to lower barriers to trade
• A series of international agreements, first negotiated under
the General Agreement on Tariffs and Trade )GATT) and
later under the World Trade Organization (WTO) steadily
lowered tariff barriers from as high as 40% to an average of
5% today
Removing the Barriers to
International Trade
• Other international changes contributed to a
worldwide trade expansion
• The Cold War ended in the late 1980s when
communism fell in Russia and Eastern Europe
• Russia, East Germany, Poland, and other Eastern
European countries replaced their command
economies with capitalist economies
• Central to this process, they opened up their economies
to trade and investment
Removing the Barriers to
International Trade
• In another major shift in East Asia, the “Asian
tigers” of South Korea, Singapore, Taiwan, and
Hong Kong flourished under capitalism
• Became industrial powers and major trading nations
• China, though still technically communist, opened
its doors to international investment
• Many subsidiaries of foreign multinationals are now
located in China
• Recently joined the WTO
The World Trade
Organization (WTO)
• The one organization most
responsible for removing trade
barriers is the WTO
• The WTO is the focus of much
of the debate and protest
surrounding globalization
• Most governments, economists,
and businesspeople support the
WTO
• Most labour organizations,
environmentalists, and social
activists oppose it
• The general population holds
mixed opinions
The World Trade
Organization (WTO)
• As of 2002, the WTO had 144 members
• The large numbers of members makes governing the
organization somewhat unwieldy
• Trade rules are set by a simple majority vote of the
members
• Trade disputes that arise between members are brought
before special tribunals of trade experts and lawyers
• The tribunals decide who is at fault, and the country found at
fault might be asked to change its law to conform to the
WTO rule, face economic sanctions, or pay compensation to
the wronged country
The World Trade
Organization (WTO)
• The WTO has had to deal with newer kinds of
international trade items and issues than the GATT,
which dealt mostly with trade in goods
• At present, trade in services such as
telecommunications, insurance, finances, health, and
education, accounts for over 60% of world GDP
The World Trade
Organization (WTO)
• Another area of concern for the WTO is the issue of
intellectual property rights
• Patents for such products as technology, recorded
music, and pharmaceutical drugs
• Rules regarding foreign investment by multinationals
are another area in which the WTO tries to achieve
consensus among its members
The World Trade
Organization (WTO)
• Proponents of the WTO claim that these
negotiations lead to a “level playing field” for all
nations that want to participate
• Opponents claim that only the most powerful
nations can finance the permanent lobbyists who
can sway WTO rulings to their benefit
Globalized Financial Markets
• The third force driving the creation of a global economy
is the global financial market
• A network of 100 or so of the world’s banks and large
brokerages linked by computers
• Enables traders to buy or sell foreign currencies, along
with government and corporate bonds or stocks,
exceedingly quickly, using specialized computer
technology
• The amounts traded are vast
• It’s estimated that $2.5 trillion is traded daily on these global
money markets
Globalized Financial Markets
• The traders who work for major financial
institutions specialize in performing one of several
functions
• First, they may carry out currency conversions for
individuals or businesses buying or selling with
foreign countries
• The buyer (importer) contacts a bank trader, who
purchases the exporter’s currency in the world money
market and arranges payment to the seller
Globalized Financial Markets
• Second, another groups of traders specializes in bonds
sold worldwide by corporations and businesses
• To finance deficits, governments sell these bonds to investors
abroad through the global market
• The bond market alone trades over $300 billion per day
• A third group of traders buys and sells shares for
multinationals
• This global stock exchange buys and sells about $40 billion
per day, but this figure is likely to increase quickly
Globalized Financial Markets
• The traders in these global markets make money by
charging their clients for the service of buying currencies,
bonds, or stocks
• Also profit by taking advantage of small differences in
prices of currencies or assets between different countries
• If a currency, bond, or share sells for a lower price in one
country, the trader will buy it there and then sell it in another
country where the price is slightly higher
• A trader can make these transactions from a computer
terminal using computer technology that acts at lightning
speed
Concerns about Global
Finance
• The very speed and efficiency of the global markets that
allow sellers and buyers to transact business have become
an issue of concern
• In 1997, the countries of East Asia suffered a devastating
financial crisis that spread to many countries around the
world
• Exact causes are still disputed
• Some say the governments and banking systems in these
countries were inefficient
• Most experts agree that the responses of the global money
markets intensified and spread the financial crisis
Concerns about Global
Finance
• Thailand, South Korea, Malaysia, and Indonesia had been
economic success stories before 1997
• Their economies boomed, and the markets pumped in billions
of dollars into real estate, new factories, and financial assets
• In 1997, the markets grew pessimistic about these countries
• Their currencies appeared to be overvalued
• Their exports had fallen
• It seemed their comparative advantage in production was
slipping away to China with its lower wages
• Investors pulled out of these countries, businesses closed, and
the currencies were devalued
Concerns about Global
Finance
• The crisis soon spread to:
• Hong Kong, where the stock market fell 25% in 4 days
• South Korea, the world’s 11th largest economy, where the
currency collapsed
• The International Monetary Fund attempted to fix the
situation by engineering a large loan to South Korea, but that
only resulted in the crisis spreading to economies with no
connection to East Asia
•
•
•
•
Brazil’s currency was sold, driving its value down by 33%
Russia’s government defaulted on its debt
The US stock market fell by 2000 points
The Canadian dollar depreciated due to a drop in demand from
Asia for natural resources
Concerns about Global
Finance
• In human terms, this financial crisis…
• Plunged 10 million people into “extreme poverty”
(income of $1 or less a day)
• Threw 24 million into “poverty” (2$ a day)
• Left an estimated 27 million workers without jobs in
the 5 countries most severely hit
Concerns about Global
Finance
• At present, the global financial system has no
mechanism to regulate international flows of capital
• Regulations to prevent sudden withdrawals of
capital have been proposed to reform the global
financial system
Underdevelopment: The
Status Quo?
• Although the proportion of poor Canadians continues to
increase statistically, most Canadians live a relatively
comfortable lifestyle in contrast to the majority of Earth’s
people
• To help recognize the disparities that exist between rich
and poor nations, the World Bank classifies national
economies into 3 groups based on annual per capita GDP
data:
• High-income
• Middle-income
• Low-income
Underdevelopment: The
Status Quo?
• High-income economies (also called industrially
advanced countries or IACs) are nations with per
capita GDPs high enough to provide a substantial
majority of citizens with prosperity
• In its 2000/2001 report, the World Bank set
US$9266 (about Can$15,000) as the minimum GNP
per capita for this group
• In this report, 52 nations qualified for this distinction,
representing 903 million people
Underdevelopment: The
Status Quo?
• Middle-income economies are those in which a
sizable minority of the population avoids living in
acute poverty
• In the 2000/2001 report, 92 nations, representing 2.7
billion people, were classified in this group
• Included China, Russia, the Eastern European
countries formerly under Soviet domination, several
Central and South American nations, the Middle East,
the extreme northern and southern regions of Africa,
and the newly industrializing countries of Southeast
Asia
Underdevelopment: The
Status Quo?
• Low-income economies (also called less developed
countries or LDCs) include the poorest nations of
the world
• In the 2000/2001 report, the maximum GNP per
capita was set at $755
• 63 nations were placed in this category, representing 2.5
billion people
Underdevelopment: The
Status Quo?
• Many of these low-income nations share a common
history as former colonies, at one time under the
control of other nations
• In many cases, the economies developed under
colonialism were designed to benefit the home country
and exploit the colonies for their natural resources
• Consequently, colonialism crippled healthy economic
development in these nations
Underdevelopment: The
Status Quo?
• Many contemporary economists have concluded
that the gap between high- and low-income nations
continues to widen
• It has been stated by various economists, relief
workers, and religious leaders that in order for the
world to experience lasting peace, it must first do
away with existing injustices that serve to keep lowincome nations from achieving sustained economic
process
Underdevelopment: The
Status Quo?
• Unfortunately the 80/20 rule appears to be a
permanent economic fixture in the world economy
• More than 80% of the world’s productive resources are
effectively controlled by 20% of the world’s people
• Conversely, the 80% of the world’s people control only
20% of the resources
• Under these circumstances, it seems like a more
equitable distribution of global wealth is virtually
impossible
Underdevelopment: The
Status Quo?
• Some of the more radical voices suggest that the rich
are rich precisely because of their advantageous
position over the poor and vulnerable
• Famines, as the arguments go, are not as much a
case of insufficient food production to meet global
needs as they are of distribution breakdowns
between the :”have” and “have-not” nations
Barriers to Economic
Development
• Economists judge the economic success of a country by
noting whether living standards are growing
• An economy shows economic development when a
nation’s living standards have increased
• We can easily see this when there is a measurable increase in
per capita GDP that is shared by the bulk of its population
• To achieve this, a country requires both economic growth
and a widespread distribution of the benefits of this
economic growth
• In attempting to facilitate economic growth, low-income
nations generally face a series of obstacles
Barriers to Economic
Development
Lack of economic freedom and stability
• Many low-income countries have politico-economic systems in
place that limit economic freedom and the individual pursuit of
self-interest
• Some of these nations, such as Afghanistan, Angola, Cambodia,
and Somalia, have experienced long civil wars that have further
devastated their already fragile economies
• In some low-income countries, military and other forms of
dictatorship control the governments
• The stability present in a strong dictatorship comes at the price
of lost personal and economic freedom
• In these “controlled” economies, national wealth rarely
manages to trickle down to the majority of citizens
Barriers to Economic
Development
Malnutrition
•
Nations with a low GDP per capita usually have insufficient food
supplies to distribute, resulting in a malnourished population
• Other goods and services that contribute to improved health standards
are also in short supply
•
To complicate matters, available food and productive resources
may be controlled by a small minority of the population and used
only for their benefit
• For example, many low-income countries grow cash crops intended for
export
• Usually grown on huge plantations owned by a small minority
• The majority may be powerless to do anything about this imbalance
Barriers to Economic
Development
Low levels of investment
•
Because individuals, households, and firms must use most of their
income to purchase essential goods and services, only a minor
portion of income can be saved
•
Without substantial savings in banks, the financing of investment
projects and the development of a capital-goods infrastructure are
very difficult to achieve
•
Further, when foreign interests supply money or real capital, their
interests (profit maximization) may not always be in the best
interests of the host nation, so they may be unwelcome
•
Finally, traditions that discourage self-interest, competition, and
profit may inhibit local entrepreneurship
Barriers to Economic
Development
• Without high levels of investment capital, production
tends to rely on labour
• Labour is relatively cheap and offers the only means of
achieving profitability
• Labour-intensive industries provide many people with
jobs
• As long as people receive a wage they can live on, often
referred to as a living wage, this situation is not problematic
• However, in many low-income nations, the earnings of the
majority of workers are not sufficient to provide the
necessities of a healthy life
Barriers to Economic
Development
Population growth
•
Population growth in most low-income economies tends to be too
high to be sustained by the existing levels of production growth
• Consequently, living standards decline steadily over time
•
Rapid population growth and low incomes are linked
•
Large families are seen as an economic necessity in low-GDP
nations, especially in areas where the child mortality rate is high
• In economies with limited social security programs in place (such as
retirement pensions) children provide labour to help the family survive
• Later, they provide security for aging parents
Barriers to Economic
Development
Dependence on child labour
• According to the International Labour Organization, by
the end of the 20th century, the number of working
children had climbed to more than 250 million
• In many low-income countries, children are required to
work in factories or at home sewing garments, stitching
baseballs, weaving rugs, making bricks, treating leather,
hawking wares in markets, and serving as domestics for
wealthy families
• One of the most dangerous activities involves scavenging
through refuse dumps in order to find materials that can be
sold
Barriers to Economic
Development
• Many families run home businesses in which all family
members must work in order to put food on the table
• In other cases, businesses hire children because they can be
paid very low wages and are easier to control than adults
• In the case of rug weaving, the agility of tiny fingers is an asset
• Often, the parents must stay at home unemployed because the
local factory will not hire them, preferring to employ children
• As a result, millions of ch8ildren miss the chance to go to
school, and most never learn to read or write
• High levels of illiteracy are always associated with high levels of
poverty
Barriers to Economic
Development
Natural-resource-intensive production
•
For many of the world’s less developed countries, economic enterprise is
limited largely to primary industrial activity
• Their economic revenue is based on the exportation of limited natural resources
such as bauxite, latex rubber, coffee, bananas, and sugar cane
•
Exporting relatively inexpensive natural resources, while importing
expensive manufactured goods, usually results in a steady drain of money
out of an economy
• This imbalance serves to limit the economy’s ability to grow
•
If discounted prices (whether as a result of market forces or exploitation)
are being paid for the resources purchased from less developed countries,
than economic growth potential can be even more adversely affected
Barriers to Economic
Development
•
In Figure 19.5, you can see
that banana growers receive
very little of their product
•
This situation is made worse
if foreign interests control the
natural resources, taking
potential profits out of the
country
• An example would be a
foreign company that owns
agricultural land in a lessdeveloped nation, where it
grows flowers for export to
developed nations
Barriers to Economic
Development
Debt burden
• Many less developed nations have borrowed money from
foreign banks, governments, and international institutions such
as the World Bank and the International Monetary Fund
• Monies were borrowed to:
• Finance infrastructure projects (to build roads, schools, and
water works)
• Feed hungry citizens
• Prevent the collapse of the domestic currency and banking
system
• Pay for import
Barriers to Economic
Development
•
Debt repayment can happen only when the nation that owes the
debt has a surplus of exports over imports
• Results in a positive flow of money into the country and, ultimately, in
economic growth
•
In order to achieve this, industrialized nations must open their
markets to exports from less developed nations
• Few low-income economies have ever managed to achieve this
situation, particularly as many more developed countries maintain trade
barriers to protect their own industries
•
As a result, many less-developed nations fall deeper and deeper
into debt, and the interest payments get larger
• Having to pay the interest on the incurred debt becomes a further
burden for debtor economies and serves to limit their ability to invest
and grow
Development Strategies:
Breaking the Cycles of Poverty
•
While it would be a difficult task, it is not impossible to break the
cumulative downward cycles presented in the previous section and shown
in Figure 19.6
•
Breaking the cycle involves the efforts of many individuals and
organizations, working on many different fronts
Political and Economic
Stability
• A stable politico-economic system is a prerequisite for lasting
development
• Political and economic stability discourages the flight of
investment funds and profits out of a less developed economy to
safer markets
• Political stability permits long-term planning and promotes
capital investment
• If investors are confident that their investments will not be
seized by government, they are more likely to invest
• Political stability is usually not assured until a country
experiences a substantial period of rule by a democratically
elected government
Population Control
• In many nations experiencing rapid population growth (relative
to GDP) great effort is expended on state-sponsored birthcontrol programs
• For example, in India birth-control programs have been in place
for decades
• Nonetheless, the national birth rate remains relatively high
• In another example, China’s severe “one-child” policy has
reduced that country’s birth rate substantially
• The success of the program depends on the state-imposed limits
on the number of children allowed to each couple
• There are certainly drawbacks to China’s approach, such as the
extreme measures families go to to ensure they have a male
child
Population Control
• In another approach, population-control programs
focusing on raising income and education levels have
proven to be both effective and respectful of human
dignity and life
• Government programs that improve basic social services
(health care, nutrition, and education) and provide
programs that improve income distribution and
employment opportunities also tend to encourage people
to have fewer children
• Evidence of this result appears in almost all industrialized
nations, where birth rates are extremely low
Investing in Productive
Resources
•
For many low-income economies, natural resource endowment is limited
•
In the absence of these resources, governments can instead work toward
the development of human resources by focusing on education, health
care, and nutrition
• Education and training increase the supply of skilled labour, which in turn
increases productivity and living standards
•
Government programs can also work toward the development of capital
resources by encouraging savings
• Financial institutions then have capital that they can use to lend to entrepreneurs
•
Developing “intermediate technology” that makes good use of plentiful,
low-cost labour is an effective strategy for less developed countries
Freer Trade
•
Lasting and healthy development for many low-income economies
requires the efficient use of whatever productive resources the
economy has, especially labour
• For example, by offering efficiency, in the form of low production costs,
the economy has something to trade internationally
•
When industrially advanced countries open their markets to the
goods (especially labour-intensive manufactured goods) produced
by low-income economies, in the long and in fair trade
arrangement, both parties share the benefits of the law of
comparative advantage
•
In the last two decades, a considerable number of manufacturing
jobs have shifted from industrially developed countries to less
developed nations
• Many people in low-income nations have gained employment
Foreign Aid
• Direct aid from developed nations is needed to help break the
vicious circles of poverty at work in less developed nations
• Relief programs are needed to deal immediately with crises
resulting from drought, famine, civil war, earthquakes, and
other natural disasters
• Structural programs are necessary to help build the
infrastructure, education systems, and capital resources
necessary to provide a foundation for lasting economic
development
• In Canada, government aid is administered by the Canadian
International Development Agency (CIDA)
Debt Reduction
• During the 1990s, actions were taken to help debtor
nations
• Negotiations with bankers helped to reduce some debts
• The World Bank provided low-interest loans and technical
assistance for large-scale development projects
• The International Monetary Fund provided loans to
governments in return for specific corrections to the
economy, such as reductions in government spending
• These tactics did little to help
• Money infusions do not address the cycle of exploitation
• In time, the money flows back to wealthy nations
Debt Reduction
• By 1998, Brazil, the most indebted less-developed nation, owed
$374 billion to other nations
•
•
•
•
Mexico owed $258 billion
China owed $250 billion
Argentina owed $232 billion
India owed $158 billion
• By 2000, it had become clear that the debt crisis continued to
be an insupportable burden for many debtor nations
• Led by Pope John Paul II, many concerned world leaders
began to advocate an international debt forgiveness plan to free
less-developed countries from the burden of paralyzing debt
Debt Reduction
• In 2001, Argentina defaulted on its loan payments
because it was unable to pay
• This plunged the bankrupt nation into a political,
economic, and financial crisis
• When Argentine banks closed their doors, people were
unable to get their money out
• Street riots led to several changes in government