Download The Global Economy

TOPIC 1
THE GLOBAL ECONOMY
4 major indicators of globalisation
1.
2.
3.
4.
International trade flows
a. GWP is now 9 times its level in 1950 but volume of world trade has grown to 33 times its 1950 level
b. Major contributors: global webbing (1/3 of world trade involves transfers of semi-finished products by TNCs) +
removal of trade restrictions (e.g. EU, APEC)
International financial flows
a. Finance=short term, speculative e.g. less than 10% share of company
b. No one measure but all have shown dramatic increase
c. Most globalised feature of world economy
d. Major contributors: financial deregulation since 1970s/80s + new technologies and global communications
networks
International investment flows and transfers of technology
a. Investment=longer term, to buy/est businesses e.g. greater than 10% share of company
b. Over past 15 yrs, 7-fold increase in FDI
c. Heavily favour developed nations
d. Major contributors: international mergers and takeovers (e.g. google and youtube) + technology provides new
industry in which to channel investment (e.g. software and communications – IBM) + internet links businesses,
individuals and nations
The movement of workers bw countries
a. Far less internationalised
b. World Bank says 3% of world’s pop have migrated to work in diff country
c. Concentrated at top at bottom ends of labour market
d. Small advanced economies suffer brain drain e.g. Aus
e. Evident in: shift of ppl bw economies in search of better job opps + shift of businesses bw economies in search
of most efficient and cost effective labour
f. Still sig barriers to working in other countries e.g. immigration restrictions, language, cultural factors
NB. Features = indicators + international business cycle
CHANGES IN INTERNATIONAL TRADE FLOWS
Changes
1.
2.
Composition:
a. Raw materials and capital inputs to production=75% of all international trade
b. Overwhelming importance of manufactured goods in merchandise trade in last 40yrs
c. Traditional transport services have declined in relative importance in last 20yrs
d. Higher value added services have grown strongly during same period e.g. insurance & finance sector
Direction
a. Fast growing economies of E.Asia and Pacific region experienced most rapid increase in trade (to 12%) whereas
high-income economies (N.America and W.Europe) experienced fall (to 71%)
NB. Volume not value!
Impacts of global trade flows
1.
2.
Structure of domestic economy (from changes in composition)
a. If an economy experiences increased demand for particular exports, resources in that country will shift
towards production of that g/s e.g. expansion of mining investment and operations in Aus
b. A decline in overseas demand shift production towards a g/s experiencing greater profits e.g. Aus’s TCF
industries are shrinking
Prosperity of country (from changes in direction)
a. Aus is placing an increasing priority on its relationship with China e.g. encouraging students to learn Mandarin
b. China experienced phenomenal growth due to its trade importance
CHANGES IN GLOBAL FINANCIAL FLOWS
Changes
1.
Global forex markets have experienced phenomenal growth during recent yrs
2.
a. Average daily turnover= US$3.2 trillion/day in 2007
Influence performance of:
a. Individual economies
i. Value of a country’s currency  sig impact on its international competitiveness + eco growth
ii. Movements in currency value  influence on inflation + interest rates + financial flows in short term
b. Global economy
i. Currency falls  speculators sell  destabilize economy
Main participants in forex markets
1.
2.
3.
Exporters
a. Want to be paid in their own currency  importers must convert to make payments
Foreign investors
a. Who are purchasing assets within a country must convert to local currency b4 making purchase
b. Small proportion of forex transactions
Speculators
a. Contribute to short term financial flows
b. 95% of forex turnover is due to actions of speculators
c. Lead to volatility of forex markets
Impacts of global financial flows on
1.
2.
Economy
a. Rapid and large shifts in value of exchange rates
Confidence within a country
a. Value of currency=indication of overseas confidence in country’s future
b. Fall in country’s exchange rate  weaken domestic confidence  slowdown in eco growth
c. Large currency movements  destabilize financial markets
THE INTERNATIONAL BUSINESS CYCLE
Factors that strengthen international business cycle (FIIITTT)
1.
2.
3.
4.
5.
6.
7.
Trade flows: boom/recession in one country affects demand for another country’s g/s
Investment flows: stronger eco conditions in one country  businesses in that country invest in new operations
overseas
TNCs: as above
Financial flows: contagion effect – investors may lose confidence in entire region e.g. late 1990s Asian crisis
Technology and Confidence: herd mentality of investors influenced by conditions in other countries  process sped up
by ease with which money can be shifted bw countries
Global interest rate levels: monetary policy decisions in individual economies are increasingly influenced by interest
rate changes in other countries
International Orgs: e.g. G8 is an unofficial forum coordinating global macroeconomic policy
Factors that weaken the international business cycle (FRIES)
1.
2.
3.
4.
5.
Domestic interest rates: differ bw countries + have sig impact on eco growth e.g. high interest rates in Europe than in
US  slower growth in Europe
Govt fiscal policies: (short-medium term) e.g. 1 govt raises taxes whereas another lower taxes
Exchange rates: differ bw countries + affect trade competitiveness and confidence  eco growth
Structural factors: diff attitudes towards s&c, educating employees  trade competitiveness  eco growth
Regional factors: some countries are closely integrated with neighbours e.g. transition economies of E.Europe have
benefited from close proximity to highly developed nations of W.Europe
Chapter 2: Trade in the global economy
ADVANTAGES AND DISADVANTAGES OF FREE TRADE
Adv (CHOIS)
1.
2.
Obtain g&s
Specialize
a. Better allocation of resources + increased production
b. Increased economies of scale  lower average costs + increase efficiency + productivity
3.
4.
5.
Innovation + spread of technology
Higher living standards  lower prices + increased production + increased consumer choice + opening up of global
markets
International competitiveness will improve  foreign producers + govt
Disadv
1.
2.
3.
4.
Increase in short-term structural unemployment  correct itself in long term, as domestic economy redirects resources
+ ppl retrain
New industries find it difficult to est themselves
Production surpluses may be ‘dumped’  hurt domestic industries
Countries have narrow export base
REASONS FOR PROTECTION (DIODE)
1.
2.
3.
4.
5.
Prevention of dumping (ej by WTO in long term)
a. Used to dispose of large production surpluses or to est market position
b. Temporary but can harm DPs
c. Loss in country’s productive capacity + higher unemployment
d. Country’s abuse their entitlement
e. E.g. Aus dumping lamb on US markets
Infant industries (ej in short term)
a. New industries face many difficulties and risks in early yrs e.g. per unit production costs are higher due to
economies of scale
b. Protection enables expansion  reduced costs  DPs compete in international arena
c. To be valid, protection must be:
i. Temporary  otherwise no incentive to increase efficiency
ii. Given to industries with good chance of achieving comp adv in long run + willing to make effort
iii. In form of direct assistance (e.g. subsidies – reviewed)
d. E.g. Aus’s rice industry protected during 1950s-70s – now most efficient in world
Protection of domestic employment (ej in short term)
a. DP protected from FC  demand for local goods=greater  higher domestic employment rate
b. In long term, leads to higher unemployment + lower growth rates
c. Phase out protection  better and more lasting jobs will be created in other sectors that are internationally
competitive
d. E.g. motor vehicle industry in Aus  money would be better spent on restructuring sectors of the economy
e.g. environmentally cars
Defence and self-sufficiency (pj)
a. Major powers want to retain their own defence industries  confident that in time of war, able to produce
defence equipment
i. E.g. embargo against raw steel imports helps BHP
b. Self-sufficiency of food supplies
i. E.g. Japan retains high tariffs on rice imports
Other arguments (sj)
a. Environmental factors e.g. efforts to block importation of rainforest timber from Borneo
b. Low-cost labour  protects better living standards of workers in high-income economies
c. Prison/child labour
d. Cultural value + spillover benefits e.g. French cheese and wine benefit tourist industry
e. Developing countries argue ‘fair trade’ rather than ‘free trade’ = they should have greater access to high
income countries’ markets than those countries have to their domestic markets
METHODS OF PROTECTION
1.
2.
Tariffs – effects:
a. stimulates domestic production and employment (domestic producers supply greater quantity)
b. reallocation of resources towards less efficient producers
c. consumers pay higher price and receive fewer goods (redistributes income from consumers  domestic
producers)
d. raises revenue for the govt (but the more successful the tariff as a protectionist device, the less revenue it will
raise)
e. a retaliation effect – any production and employment gains for the import-competing industries would be
offset by losses in the nation’s export industries –more efficient export industries would be discouraged
Quotas – effects:
a. Largely the same as those for a tariff, except for the fact that they do not provide tax revenue for the govt
3.
4.
5.
6.
Subsidies – preferred form of protection bc:
a. cost govt money  less likely to keep for long term  preferred bc more likely to be reviewed regularly and
removed when necessary
b. tend to reduce prices, thus lowering inflation and benefiting consumers NB. Flatter the curve, the more
subsidies are passed onto consumers
Voluntary export restraints
Local content rules
Export incentives
** (never been asked about quota diagram)
TRADE AGREEMENTS
Extent to which FTAs assist/obstruct progress toward global free trade
1.
2.
Neg: formation of trading blocs  global trade fragmenting into self-contained regions, hindering spread of global free
trade e.g. ASEAN
Pos: stepping stone – small group  whole world
Factors that caused recent growth in trade agreements
1.
2.
Ensure that countries are in best position to gain from growing trade opps
To avoid being excluded from emerging trade blocs
Regional trade agreements have been popular among both richer and poorer regions
1.
2.
EU and US>1/2 of trade flows within preferential trade blocs
Developing countries embrace regional agreements  little progress in gaining access to rich countries’ markets 
entrench inequality
Trade agreements
1.
2.
APEC forum
a. 21 member nations
b. ¾ of Aus merchandise exports go to economies that are members of APEC forum
c. 1994: Bogor goals est– target of free trade to be achieved by 2020 with developed nations dismantling their
trade barriers by 2010 and newly industrialised nations by 2015
d. Non-discriminatory
e. Shift towards focus on non-trade issues e.g. climate change + terrorism
EU
a. 2007: 27 nations e.g. Germany, Bulgaria
b. Formation in late 1950s helped to dismantle trade barriers within Europe
c. High protection against non-members
3.
4.
5.
NAFTA
a. Est in 1994
b. US, Mexico and Canada
c. Agricultural protection is being completely eliminated and other tariffs are being phased out over a period of
5-15yrs
d. Substantial increase in trade among members
Bilateral agreements
a. Resurgence in recent yrs due to:
i. Slower progress of the WTO negotiations
ii. US is increasingly its economic power to negotiate more favourable trade relationships with other
nations on a country-by-country basis
iii. Failure to regulate multilateral agreements
iv. Freedom to include a wider range of issues e.g. investment bw countries
b. E.g. CERTA est in 1983  since then, it has contributed to an average annual increase in trade bw Aus and NZ
of 8%
ASEAN
a. Primarily trade with countries outside their region
b. Substantially increased the % of trade undertaken among themselves
c. Covers newly industrialised economies in SE Asia (no larger economies)
d. Most important force behind trade negotiations within Asia Pacific Region
INTERNATIONAL ORGS (SAFFE)
 Key problem created by rapid pace of globalisation: inability of domestic institutions to regulate the increasingly complex
nature of business transactions and to manage the effects of global integration
 Egs of problems that can only be addressed on a global level:
o Managing instability on global financial markets and minimising the risk of global financial collapse
o Providing assistance to countries who are experiencing an economic crisis
o Ensuring security of energy and water supply
o Developing global standards for environmental protection
o Establishing global rules on freeing up world trade and resolving trade disputes between countries
 Long term: global economy will require stronger global economic institutions to address these challenges  in mean time,
existing institutions are being forced to deal with probs that they often do not have the ability to solve
1.
WTO
a.
b.
c.
d.
2.
1995: product of final round of GATT negotiations bw 1986 and 1993 – Uruguay Round
Role:
i. To implement and advance global trade agreements
1. 1st international organisation with powers to enforce trade agreements around the world
2. Some success in freeing up world trade eg. some WTO members have made voluntary
agreements to reduce trade barriers in financial services, information technology and
telecommunications, and shipping
ii. To resolve trade disputes bw economies
1. Harm caused by failure to comply with its WTO obligations  complaint heard by WTO panel
 can impose trade sanctions if country refuses to adhere to panel’s decision
2. Proven effective with smaller countries – not EU & US
Membership is growing – 153 nations in 2008
Major focus in recent yrs: Doha Round of trade liberalization talks that were launched in 2001
i. Items addressed: reducing agricultural protection, lowering tariffs on manufactured goods and
reducing restrictions on trade in services  intended to deliver benefits for developing nations
ii. Conflicting interests  little progress
iii. Agreement was nevertheless reached on a few issues:
1. The complete abolition of agricultural export subsidies by 2013
2. Giving the 50 poorest members of the WTO (known as least developed countries) tariff-free
and quota-free access to high-income nation markets for at least 97% of all goods
IMF
a.
b.
c.
185 members
Role: to maintain international global financial stability, particularly in relation to foreign exchange markets
IMF’s ‘structural adjustment policies’ support the free trade of g&s, and the free movement of finance and
capital throughout the world markets
Demands that countries change their economic policies b4 they are entitled to receive assistance 
contributes to globalisation as countries adopt similar economic strategies e.g. deregulating markets,
privatising govt businesses
e. Criticised in recent yrs, particularly after Asian crisis – demanding that govts implement contractionary
macreco policies seemed to make conditions worse
f. But profile has been lifted in recent months due to GFC e.g. bailed out Iceland
g. It tries to achieve its purpose through 3 main activities
i. policy advice and surveillance:
1. the IMF advises countries on their macroeconomic policies – exchange rates, govt budgets,
regulatory policies, structural policies relating to labour markets and employment =
structural adjustment policies
2. bilateral and multilateral surveillance – the former relating to each member country’s eco
situation and policies; the latter relating to global and regional developments and prospects
ii. technical assistance and training (mostly free of charge): to help member countries strengthen their
capacity to design and implement effective policies
iii. lending: depending on the member’s needs, the IMF provides market rate loans, concessional rate
loans and debt relief
World Bank
a. Role: to assist poor countries with their economic development e.g. Provide funds for infrastructure to help
reduce poverty, help countries adjust to the demands of globalisation
b. 3 sub groups:
i. International development association – provides ‘soft loans’ (i.e. loans at little or no interest to
developing countries)
ii. International finance corporation – attracts private sector investment to the Bank’s projects
iii. The Multilateral Insurance Guarantee Agency – provides risk insurance to private investors
c. Funded by contributions from member countries and from its own borrowings in global financial markets
d. Major aim – as set out in the Millennium Development Goals – has been to reduce the proportion of ppl living
on less than $1 day to half the 1990 level by 2015 – from 29% to 14.5%
e. Important action in recent yrs: support of the Heavily Indebted Poor Countries Initiative – aims to reduce debt
by 2/3 in 46 of the world’s poorest countries in Africa, South Asia and Latin America, whose debt levels are
considered unsustainable.
Other orgs
a. G8
i. 8 largest industrialised nations e.g. US, UK, France
ii. Climate change negotiations e.g. Kyoto 2007
iii. Unofficial forum co-ordinating global macroecon policy
b. UN
i. Oversees several agencies that have a central focus on assisting developing countries e.g. World Food
Program
ii. Has overseen the development of a large number of human rights instruments e.g. international
conventions on human rights  improved working conditions  increased efficiency of workforce
c. NGOs
i. Increasingly important role in the global economy
ii. Especially important in development assistance and emergency relief e.g. World Vision
iii. Pressure govts on specific policy issues e.g. Greenpeace
d.
3.
4.
Chapter 3:
DIFFERENCES IN INCOME AND ECO GROWTH
GNI (when measured in terms of US dollars) is a poor indicator of standard of living b/c:
1.
2.
3.
Many developing countries have a poor exchange rate cf. US dollar due to minimal foreign trade and investment +
speculation
Doesn’t reflect purchasing power in those countries
Many goods aren’t actually sold in developing countries; they’re bartered instead
DIFFERENCES IN ECO DEVELOPMENT
HDI takes into account:
1.
Life expectancy at birth: indicative of health and nutrition standards in a country. High levels of longevity are critical for
the country’s economic and social wellbeing
2.
3.
Levels of educational attainment: important for development of skilled workforce + future development potential (ie.
Productive capacity) of an economy. The HDI measures adult literacy and the ratio of ppl in, or having completed,
primary, secondary and tertiary education
Material living standards (as measured by GDP per capita): sum of gross value added by all resident producers in the
economy, on a PPP basis
Due to disparity bw growth and development indexes of countries, need for alternate measures of eco development:
1.
WBDI
2. GPI
3. HPI
CATEGORIES OF DEVELOPMENT IN THE GLOBAL ECONOMY
1.
2.
3.
4.
High-income economies (or advanced industrialised economies or developed economies) defined by:
eg. US
a. High levels of economic development
b. Close economic ties with each other
c. Liberal-democratic political/economic institutions
d. Many belong to org for Economic Cooperation and Development (OECD)
Developing economies defined by:
eg. Niger
a. Low income levels
b. High levels of income inequality
c. Dependence on agricultural production for income, employment and trade opportunities
d. Reliance on foreign aid and development assistance
e. Low levels of labour productivity, industrialisation, technological innovation and infrastructure development
f. Weak political and econ institutions + high prevalence of corruption
The United Nations Conference on Trade and Development (UNCTAD) identified a sub-group of 50 least developed
countries (LDCs) – suffer from:
a. Lowest GDP per capita levels in the world
b. Weak human assets (based on health and education indicators)
c. High economic vulnerability (based on economic structure)
Newly industrialised countries (NICs) or emerging economies defined by:
eg. Malaysia, Thailand
a. Rapid economic growth in national output over an extended period
b. Actively pursuing integration into the global economy, through export-led development strategies and by
encouraging inward flows of FDI
Transition economies defined by:
eg. China
a. Former socialist economies that are now becoming market economies
b. Concentrated in Central and Eastern Europe and Asia
Limitations of these labels:
1.
2.
Some categories too broad – dissimilar economies together e.g. while some transition economies (Croatia) have
benefited from the transition, others have not (Georgia)
Some countries are too complex to fit neatly into any of the above categories eg. China= transition + NIC + developing
Despite such limitations, classifying economies= important step towards a better understanding of:
1.
2.
The reasons for inequalities bw different economies
The necessary steps to overcome inequality and poverty in the global economy
CAUSES OF INEQUALITY IN THE GLOBAL ECONOMY
1.
Global factors (FATT)
a. Global trade system
i. Protectionism in the agricultural sector: wealthy countries protect  developing nations suffer
ii. Expanding regional trade blocs: exclude developing nations
iii. Failure of WTO’s Doha Round: was promoted as ‘development round’
iv. Cost: of implementing international agreements and lodging appeals against other countries’
protectionist measures
v. Complexity: of WTO’s procedures
b. Global financial architecture
i. Long term international flows of investment heavily favour developed nations – 1/3 FDI flows in 2006
received by developing countries (mostly E.Asia)
2.
ii. Short term financial inflows heavily favour the more prosperous ‘emerging’ markets of the developing
world  high volatility e.g. Asian eco crisis ‘97
iii. IMF’s structural adjustment policies serve the interests of rich countries e.g. it bails out richer
countries’ financial institutions so that they do not lose out on their loans to developing countries
iv. As a result of greater access to global financial markets, many developing countries have massive
foreign debt burdens  interest repayments reduce the income available for govts to promote
growth and development e.g. through education – WB and IMF provide debt relief to HIPC
c. Global aid and assistance
i. Total level of annual development aid provided by rich nations is relatively small – 0.2% of GWP
ii. Sig proportion of official development assistance is ‘phantom aid’ (funds that do not improve the lives
of the poor) + ‘tied aid’ (aid must be spend on overpriced/unnecessary g&s that are produced by
donor country) – only 38% of bilateral aid funds development projects and humanitarian assistance
iii. Distribution of aid often reflects strategic and military considerations rather than the needs of the
world’s poorest nations – largest recipient of foreign bilateral aid from US was Iraq (23%)
iv. Multilateral aid is better targeted but<of the value of total development assistance
d. Global technology flows
i. Largely geared to the needs of high-income countries e.g. not towards curing preventable, povertyrelated diseases such as malaria
Domestic factors (IE)
a. Economic factors (CLEIN)
i. Natural resources: abundant and reliable supply of cheap natural resources  better opps for eco
development e.g. oil rich countries of Middle East but danger of narrow export base
ii. Labour supply and quality: highly educated and skilled labour  higher income  higher standard of
living e.g. Singapore
iii. Access to capital: low levels of savings  low income levels  self-perpetuating cycle of low
investment levels + slow expansion of productive capacity
iv. Indebtedness: enterprises find it more difficult to access funds
v. Entrepreneurial culture: the values of individual responsibility, enterprise, wealth creation and a
strong work ethic  assist the industrialisation process  sustainable eco development
b. Institutional factors
i. Political and economic institutions: influence eco environment for businesses, investors and
consumers  implications on nation’s development e.g. political instability low confidence
ii. Govt responses to globalisation: policies relating to trade, financial flows, investment flows, TNCs and
the country’s participation in regional and global economic orgs will influence economy’s ability to
take adv of the benefits of integration
THE IMPACT OF GLOBALISATON
1.
2.
3.
4.
Eco growth and development
a. No overall acceleration in eco growth – GWP gew by 3% in 2000-07 cf. 2.9% during 1990s
b. Globalisation has affected different economies in different ways  divergence of growth trends
i. Newly industrialised vs. developing countries of Africa
c. Eco growth  raises national income + more resources for education and healthcare  improves eco
development but also comes at cost to environment
d. Almost all countries experienced improvement in eco development except Russia (upheaval in transition to
market economy) and DRC (serious political turmoil)
Trade, Investment and TNCs
a. Increase in the size of trade flows and foreign investment
b. Increased reliance on foreign sources of finance for investment + countries have greater access to overseas
funds
c. Growth of short term financial flows  destabilizing effect
d. Exploit areas with lowest govt regulation e.g. lowest labour standards + environmental protection laws
Increased Inequality
a. Some developing nations have experienced ‘catch up’ against the GDP of the developing world (e.g. China) –
businesses have increased access to overseas markets + foreign investment + tech from TNCs
b. Whereas others (E.Europe, Latin America, Africa) have fallen behind – volatile financial flows, increased
competitive pressures on businesses, distortions of global trading system
Environmental consequences
a. Negative
i. Increase in trade  increasing consumption of non-renewable fuel for transport
ii. Low-income economies that are desperate to attract FDI and earn higher export revenue may engage
in economic behaviour that may damage environment e.g. depletion of marine life though
unsustainable fishing practices
b.
5.
6.
7.
Positive
i. Forces individual nations to face up to their global responsibility for environmental preservation
ii. Makes it possible for the costs of preservation to be shared, and to increase scrutiny of the
environmental practices of TNCs
iii. Still, progress in making agreements to combat global environmental problems has been slow eg.
Kyoto Protocol
Role of financial markets
a. Shift large volumes of money from one country to the next on a daily basis
b. Contagion effect  exchange rate volatility
The international business cycle
a. Allows countries to benefit from global eco upturns
b. Renders economies more exposed to downturns in international business cycle
Govt economic policies
a. Greater similarity bw economic policies all across the world – ‘Washington Consensus’ of market-friendly
policies e.g. trade liberalization, privatization of state enterprises
b. Pursuing similar priorities e.g. low inflation
c. WC popular bc
i. ‘most effective’
ii. IMF
iii. Increased global integration has reduced the extent to which countries can manage their
macroeconomic policies independently e.g. interest rates
iv. Otherwise  loss of confidence  fall in value of currency