Globalization and the Anti-Globalization Movement PDF

Globalization and the Anti-Globalization Movement ================================================= Globalization is the process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment. This process has...

Globalization and the Anti-Globalization Movement ================================================= Globalization is the process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world. Globalization is a deeply controversial topic, however. Proponents of globalization argue that it allows poor countries and their citizens to develop economically and raise their standards of living, while opponents of globalization claim that the creation of an international free market has benefitted multinational corporations in the western world at the expense of local enterprises, local cultures, and common people. The anti-globalization movement is a social movement critical of the globalization of corporate capitalism which has taken shape at both a popular and governmental level. What is shared among participants is the opposition of what they see as large multi-national corporations having unregulated political power, exercised through trade agreements and deregulated financial markets. Specifically, corporations are accused of seeking to maximize profit at the expense of work safety conditions and standards, labor hiring, and compensation standards, environmental conservation principles, and the integrity of national legislative authority, independence, and sovereignty. People opposing globalization believe that international agreements and global financial institutions such as the WTO and IMF undermine local decision making. Corporations use these institutions to support their own corporate and financial interests. System of National Accounts =========================== Economists use two essential and related tools to describe a country's level of production and international transactions: national income accounting and balance of payments accounting. National income accounts measure production, expenditures, and national income. The main categories used for macroeconomic analysis are therefore gross national product, gross domestic product, national income, and disposable income. - Gross national product is the value of all final goods and services produced by a nation's factors of production in a given period of time - Gross domestic product is the value of all final goods and services produced in a nation (using both domestic and foreign factors of production) in a given period of time - National income is income earned by a nation's factors of production - Disposable income is the amount of money households have available for spending after income tax is deducted In a closed economy, there is no trade, making national income equal to the value of production. In an open economy, however, there is trade which makes national income equal to the value of production plus net export. The current account is balanced when export is equal to import, consumption is equal to absorption, and national saving is equal to investment. In this case, the economy is in both internal and external balance. Balance of payments is a record of all economic transactions between the residents of one country and the rest of the world over the period of one calendar year or shorter. International transactions include the exchange of goods, services, or assets. Each transaction is a debit or credit transaction. With the implementation of double-entry bookkeeping, every debit transaction has a balancing credit transaction, and vice versa, so the overall balance of payments is technically always balanced (equal to zero). If a deficit or surplus does occur, it is because one or more of the subaccounts of the balance of payments is not in equilibrium. Balance of payments shows the changes in debit and credit while balance of international indebtedness shows cumulative deficits and surpluses -- it shows the international investment position of a country. Concept and Structure of Balance of Payments ============================================ Balance of payments is a record of all economic transactions between the residents of one country and the rest of the world over the period of one calendar year or shorter. International transactions include the exchange of goods, services, or assets. Each transaction is a debit or credit transaction. With the implementation of double-entry bookkeeping, every debit transaction has a balancing credit transaction, and vice versa, so the overall balance of payments is technically always balanced (equal to zero). If a deficit or surplus does occur, it is because one or more of the subaccounts of the balance of payments is not in equilibrium. - Credit transactions result in the receipt of payment from abroad and thus form the supply of foreign currencies. Debit transactions result in payments to abroad and thus form the demand for foreign currencies. Balance of payments shows the changes in debit and credit while balance of international indebtedness shows cumulative deficits and surpluses -- it shows the international investment position of a country. The balance of payments consists of three accounts: 1. Current account a. Trade balance b. Services balance c. Income from investment d. Unilateral transfers 2. Capital account -- records mostly nonmarket, nonfinancial asset transfers (transfers of ownership of fixed assets, debt forgiveness, copyrights, etc.) 3. Financial account e. Private sector capital transactions i. Direct investment ii. Portfolio investment f. Official capital transactions g. Statistical discrepancy If a country is running down its reserves or borrowing from foreign central banks, it has a deficit, in the opposite case, it has a surplus. Exchange Rate and the Foreign Exchange Market ============================================= The exchange rate is the price of one country's currency in terms of another country's currency. The foreign exchange rate is the price of a foreign currency in terms of the domestic currency -- it shows how many units of the domestic currency should be paid for a unit of a foreign currency. - If the foreign exchange rate increases, the domestic currency depreciates. If the foreign exchange rate decreases, the domestic currency appreciates. Exchange rates play a central role in international trade because they allow us to compare the prices of goods and services produced in different countries and they enable the conversion of value. They are determined in the foreign exchange market by market forces. The supply of foreign exchange refers to the amount of foreign exchange that will be offered to the market at various exchange rates, all other factors held constant. The supply of foreign exchange results from credit transactions. The demand for foreign exchange is derived from debit transactions. Overvalued currency makes import cheaper, stimulating import and consumption while undervalued currency makes domestic goods cheaper for foreigners, thus stimulating export and allocation of resources towards export industries. The foreign exchange market is the international money market. Because of international trade and international capital movements as well as the existence of different national monetary systems, a forex market needed to be established. It is a financial market in which currencies are traded under organized conditions. There are two types of currency convertibility in the forex market: 1. External convertibility -- the right of non-residents to convert domestic currency into any other currency both in the domestic forex market and a forex market abroad. 2. Internal convertibility -- the right of residents to convert the domestic currency into any other currency in the domestic market. The main function of the forex market is to assist international trade and investment by allowing the conversion of one currency into another currency. Other functions include determination of the exchange rate, indicating of balance of payment situations, and foreign exchange risk covering. There are different types of transactions and instruments in the forex market: - Exchange arbitrages -- simultaneous purchase and sale of a currency in different forex markets in order to take advantage of exchange rate differences in different markets. - Speculations -- purchase or sale of a currency in the expectation that its value will change in the future - Options -- contract giving the owner the right, but not the obligation, to buy or sell a standard amount of a traded currency on a stated date or at any time before the stated date at a stated price - Currency swaps -- a combination of a spot sale of a currency with a forward repurchase of the same currency and vice versa. - Futures -- a forward contract for standardized currency amounts delivered/received on a standard date on an organized market exchange - Hedging -- using of forward contracts or options in order to avoid foreign exchange risk Exchange Rate Systems ===================== An exchange rate system is a system of rules for the determination of the value of one currency in relation to other currencies. There are two main exchange rate systems (fixed and floating) and many combined systems. **Fixed Exchange Rate:** In the fixed exchange rate system, the value of one country's currency is expressed in the value of another country's currency in a fixed amount. The official exchange rate is defined by the government. The domestic currency is pegged to a single convertible currency or exchange rate anchor so fluctuations are limited. The fixed exchange rate is determined by supply and demand, which can be manipulated. Stabilization of the exchange rate means an impact on supply and demand at the forex market. Intervention would occur when the exchange rate approaches a level which is regarded as inappropriate by monetary authorities. There have been two different approaches to exchange rate stabilization: 1. Passive -- gold standard -- currencies were converted into gold at a fixed rate. The interval of fluctuations was limited by gold points. 2. Active -- Bretton-Woods system and modern monetary systems -- central bank sells currencies from its international reserves and fills the gap between supply and demand for foreign exchange. **Floating Exchange Rate:** In the floating exchange rate system, exchange rates are determined in the forex market by market forces. The supply of foreign exchange refers to the amount of foreign exchange that will be offered to the market at various exchange rates, all other factors held constant. It results from credit transactions. Demand for foreign exchange is derived from debit transactions of the balance of payments. The exchange rate is determined in the forex market at the level equalizing supply and demand for foreign currencies without any intervention of monetary authorities. Because of this, the exchange rate is always real -- domestic currency cannot be over or undervalued. A time lag is a long period from the moment of the change in the exchange rate until the moment of its effect on trade balance. This is best represented by a J-curve in which we see a worsening in trade balance and then a positive effect once the effect has taken place. **Combined Exchange Rate Systems:** There are many combined exchange rate systems: - Crawling peg -- small and frequent changes in the par value several times a year. - Crawling band -- central bank interventions prevent exchange rate from moving outside the allowed limits. There are changes in par value from time to time. - Monitoring band -- no central bank interventions, but there are changes in par value from time to time - Managed flexible exchange rates -- exchange rate is stabilized by intervention of monetary authorities but it can vary inside a broader interval. A broader interval enables achieving the real exchange rate. - Multiple exchange rates systems -- officially set exchange rate and a second parallel rate that is freely determined by the market. The central bank determines the proportions of imports that can be purchased at the official rate, with the remainder being settled at the parallel rate. The Theory of Exchange Rate Determination ========================================= In practice, exchange rates are determined by simultaneous and interactive impacts of many factors both economic and non-economic ones. Major determinants of exchange rates are different in the short, medium, and long run. Exchange rates are simultaneously determined by short-run speculative, medium-run cyclical, and long-run structural forces. **Balance of Payments Approach:** In the balance of payments approach, the exchange rate is determined by the supply and demand in a forex market. The supply of foreign exchange results from credit transactions of the balance of payments and demand for foreign exchange is derived from debit transactions of the balance of payments. Exchange rates depend on the current account balance: when there is a deficit, domestic currency depreciates, when there is a surplus, domestic currency appreciates. **Theory of Purchasing Power Parity:** In the theory of purchasing power parity, the key determinant of the exchange rate is purchasing power parity (the ratio between purchasing powers of domestic and foreign currency). Purchasing power depends on prices: if prices increase, purchasing power decreases, and vice versa. The law of one price states that a given commodity should have the same price in all markets, expressed in terms of the same currency. It explains the link between the prices of goods and the exchange rate. In the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. In the absolute version of this theory, the equilibrium exchange rate is equal to the ratio of the price levels in two countries. In the long run, the exchange rate between the two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Purchasing power parity exists if price levels in the two countries are equal, represented in the same currencies. In the relative version of this theory, the change in the exchange rate over a period of time should be proportional to the relative change in the price levels in the two nations over the same period. The exchange rate will stay the same if percentage changes of prices in both countries are the same. The PPP theory is valid in the long run, for periods of high inflation, and for the analysis of individual traded goods. **Monetary Approach:** In the monetary approach, the key determinants of the exchange rate are changes in the money market. There are two models in the monetary approach: model with one country and one currency, and a model with two countries and two currencies. Equilibrium in the money market is when supply and demand are equal. Disequilibrium in the money market stems from a change in money supply and/or money demand. Changes in money supply or demand influence changes in balance of payments and in exchange rate. Under the fixed-exchange rate system, money supply depends on monetary reserves and under the flexible-exchange rate system; money supply depends on central bank activities. When we have fixed exchange rates, changes in balance of payment conditions cause changes in monetary reserves that lead to changes in money supply. Interventions by the central bank result in changes of money supply. Changes in foreign prices and real income affect money demand. When we have flexible exchange rates, changes in the money market influence the change of exchange rates. In this situation, there are no interventions by the central bank in the forex market. Flexible exchange rates automatically lead to a balance of payments equilibrium; if BP is balanced, there is no change in monetary reserves -- money supply only depends on domestic credit. Exchange rate increases when money supply increases or money demand decreases. This increases the exchange rate (depreciation of domestic currency). Exchange rate decreases when money supply decreases or money demand increases. This decreases the exchange rate (appreciation of domestic currency). **Asset-Market (Portfolio Balance) Approach:** In the asset-market approach, the key determinants of exchange rate are changes and conditions in money market and capital market as well as behavior of asset owners in the process of optimization of their portfolio. It emphasizes the impact of financial transfers. According to the simplest portfolio-balance model: financial wealth = domestic money + domestic bonds + foreign bonds. The financial market equilibrium in the short-run means the balance between supply and demand of all three forms of assets: domestic money, domestic bonds, and foreign bonds. Money as a cash brings no yield. Yield from domestic bonds depends on domestic interest rate while yield from foreign bonds depends on foreign interest rate. Increase of money supply results in a change in the interest rate and thus marginal utility of money decreases. Also, a surplus of money as a cash in portfolios of individuals and firms leads to purchase of domestic bonds. Purchases of foreign bonds result in capital outflow. Consequences are exchange rate growth and depreciation of the domestic currency. A change in the structure of financial wealth is caused by central bank open-market operations. The exchange rate is the result of the relationship between supply and demand of all forms of financial assets. In the long-run, flexible exchange rates mostly reflect relative prices while in the short run, equilibrium exchange rate is determined by other factors. The Theory of Purchasing Power Parity ===================================== In the theory of purchasing power parity, the key determinant of the exchange rate is purchasing power parity (the ratio between purchasing powers of domestic and foreign currency). Purchasing power depends on prices: if prices increase, purchasing power decreases, and vice versa. The law of one price states that a given commodity should have the same price in all markets, expressed in terms of the same currency. It explains the link between the prices of goods and the exchange rate. In the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. In the absolute version of this theory, the equilibrium exchange rate is equal to the ratio of the price levels in two countries. In the long run, the exchange rate between the two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Purchasing power parity exists if price levels in the two countries are equal, represented in the same currencies. In the relative version of this theory, the change in the exchange rate over a period of time should be proportional to the relative change in the price levels in the two nations over the same period. The exchange rate will stay the same if percentage changes of prices in both countries are the same. The PPP theory is valid in the long run, for periods of high inflation, and for the analysis of individual traded goods. The Gold Standard ================= The gold standard was the first organized international monetary system that lasted from 1870-1914 and from 1918-1931. There are two variations of the gold standard: 1. Gold standard (1870-1914) 2. Gold-exchange standard (1922-1931) Around 1870, most countries accepted the gold standard and the convertibility of currency into gold. Gold became a medium of payment, a medium of settling debt, medium of reserves, etc. In the period of the gold standard, currency was converted into gold and there was an official fixed price of gold. There was also free import and export of gold, fixed exchange rates, and other economic goals were based on maintaining external equilibrium and convertibility of currency into gold. There were two mechanisms for maintaining external equilibrium: 1. Price-specie flow mechanism 2. Strict "rules of the game" The automatic mechanism was the inflationary-deflationary adjustment method -- when there was an inflow of gold, prices increased and when there was an outflow of gold, prices decreased. Gold moved from countries with a deficit to countries with a surplus; deficit countries had deflation adjustment -- reduction in income and increase in unemployment. The downfall of the gold standard came in the great depression (1929-1931). The Bretton Woods System ======================== The Bretton Woods system was present from 1944 to 1973. It was developed at the UN monetary and financial conference held in Bretton Woods, New Hampshire. The duration of the Bretton Woods system is divided into two main periods: - From 1944-1958 -- "hunger" for the dollar and shortage of dollars - From 1959-1971 -- excessive use of the dollar Some main characteristics of the Bretton Woods system was the gold-dollar standard in which the dollar took on the same role as gold in the gold standard, convertibility of dollar into gold at a fixed price, the dollar became the world currency, the system of international payments as well as the exchange rate were defined in the dollar. There was also a system of fixed exchange rates and devaluation was allowed only in the case of a fundamental disequilibrium of balance of payments and with the approval of the IMF. Major outcomes of the Bretton Woods conference were the formation of the IMF and the International Bank for Reconstruction and Development. There was also the proposed introduction of an adjustable pegged foreign exchange rate system and new monetary order. The Theory of Optimum Currency Area and the Practice of Monetary Integration ============================================================================ Monetary integration is a specific monetary agreement among two or more countries which can occur in two different ways: national currency system with agreement upon fixed exchange rates or a full monetary union. The first condition for the creation of monetary integration is the convertibility of member currencies. Monetary integration should bring greater mobility of production factors and internationalization of production and trade among members. Advantages of monetary unions are: elimination of foreign exchange risk, greater movement of capital, and movement of labor force. The theory of optimal currency area was pioneered by Robert Mundell. Optimum currency area is a currency theory based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries in order to maximize economic efficiency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. An optimal currency area is often larger than a country.