Global Economy Chapter 4 PDF

Global Economy  GUIDE QUESTIONS: What are the characteristics of a global economy? What are the advantages/disadvantages of the globalizing economy? What are our country’s competitive edge in this global economy? or do we have competitive advantages? How can our country...

Global Economy  GUIDE QUESTIONS: What are the characteristics of a global economy? What are the advantages/disadvantages of the globalizing economy? What are our country’s competitive edge in this global economy? or do we have competitive advantages? How can our country compete in this global economy?  The Global Economy The Bretton Woods Institutions/members Economic Organizations Multi-National Corporations Economic Globalization Refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and widespread use of technologies. A historical process representing the result of human innovation and technological progress – IMF Characterized by: Increasing integration of economies around the world Increased speed and frequency of trading Movements of goods, services, and capitals across borders The Global Economic System: Then Now Transportation Steam ships, Cargo ships, railroads airplanes Communication Telegraphs Internet Capital Dependent on large-scale flows of capital  The Global Economic System: Then and Now In both periods, poor nations were and are subjugated by the operations of the global In other words, economy. the global Not all parts of the world gained/gain equally economy was from the growth of the global economy. not equally Certain industries and social classes lose out good for in the process. everyone and The poor nations tend to suffer most when they was bad for are forced to repay their debts to developed many. nations. The Global Economic System How Economies Interact Today Global economic specialization among the nations of the world was encouraged - “law” of comparative advantage: that is, that nations should concentrate on what they do best e.g. Philippine’s BPO - A nation should concentrate on what it does best in comparison to the other things it does not in comparison to what other nations do Competing with China's labour rates Global Economy in the 20th Century Before World War II Economic collapse in countries involved in WW I, the Great Depression, and later the WW II.  All of these events had negative effects on almost all major economies.  Autarky (turn inward of a nation-state in order to become as economically self- sufficient as possible). After World War II There was a plan for a more open international economy due to the following:  A great fear was the recurrence of the Depression  Difficulties of societies in absorbing the massive manpower created by the demilitarization  Fear of a resurrection of barriers to trade (autarky/ protectionism) and the free flow of money that had become common place prior to WW II.  The focus of the (Allied Powers/ reconstruction) planners was on reducing trade barriers and on creating conditions necessary for the free flow of money and investment.  Bretton Woods Institutions  A landmark system for monetary and exchange rate management established in 1944.  The conference was held in Bretton Woods, New Hampshire.  730 delegates from 44 countries came up with an agreement for an international monetary system.  the principal goals: creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth  Bretton Woods Agreements: 5 Key Elements 1) Each participating state would establish a “par value" for its currency expressed in terms of gold or (equivalently) in terms of the gold value of the US dollar as of July 1944. - gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. e.g. the US pegged its currency at $35/ounce of gold while Nicaragua was 175 Cordobas per ounce. Thus, the exchange rate between these 2 countries was 5 Cordobas = $1.  Bretton Woods Agreements: 5 Key Elements 2) The official monetary authority (central bank) in each country would agree to exchange its own currency for those of other countries at the established exchange rates, plus or minus a one - percent margin ”  makes international trade possible at or near the exchange rate for the currencies of the countries involved without the need for any outside intervention.  Bretton Woods Agreements: 5 Key Elements 3) The International Monetary Fund (IMF) was created to establish, stabilize, and oversee exchange rates.  Forty states became IMF members in 1946 and were required to deposit some of their gold reserves with the IMF.  The IMF was empowered to approve the par values of currencies and member states could not change that value by more than 10 percent.  If a currency was destabilized, the IMF was prepared to lend member states the money needed to stabilize their currency.  Bretton Woods Agreements: 5 Key Elements 4) The member states agreed to “eliminate,“ all restrictions on the use of its currency for international trade.”  Bretton Woods Agreements: 5 Key Elements 5) The entire system was based on the US dollar  The US agreed to make the dollar convertible into other currencies or gold at the fixed par value.  the dollar became a global currency. KEY TAKEAWAYS OF THE BRETTON WOODS AGREEMENT The Bretton Woods Agreement and System created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s. The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. The Bretton Woods System collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank. It came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency. Effects of the Bretton Woods Agreements The most powerful effects of the Bretton Woods global trade the global monetary order global investment Effects of the Bretton Woods Agreements Global Trade Restrictions on international trade were reduced over the years through various rounds of meetings under the guidance of GATT and later the WTO. Effects of the Bretton Woods Agreements The global monetary order: the IMF The goal was to provide security and flexibility to the monetary order. What emerged between 1958 and 1971 was a system in which the US could not change the value of its dollar, while all other countries could. Made exchange rates stable enough to encourage international trade and investment which otherwise would have been discouraged by dramatic fluctuations in rates Effects of the Bretton Woods Agreements Global Investments: World Bank A key development in terms of investment involved MNCs, especially American-based firms the industries involved required very large, often global, organizations in order to function effectively. this kind of investment made it possible to get around trade barriers by opening plants within the countries with such barriers. Economic Organizations Spawned Directly or indirectly by the Bretton Woods Agreement General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) International Monetary Fund (IMF) World Bank  General Agreement on Tariffs and Trade (GATT) Its focus is on the trade of goods Trade-Related International Property Rights (TRIPS) e.g. intangible ideas, knowledge, movies, music etc. Trade-Related Investment Measures (TRIMs) trade agreement on trade measures government can impose on foreign firms. Was superseded by WTO in 1995  World Trade Organization (WTO) With 152 members nations Goal is for all nations to benefit from free and open trade, and it is dedicated to reducing, and eventually eliminating barriers to such trade. The belief that all nations benefit from free and open trade. Strains/Issues: “Green Room” meeting of larger trading powers while small powers are excluded No mechanism for involvement of INGOs in decision-making  Jobs of the World Trade Organization Lower trade barrier Fair competition Encourage developing countries Settle dispute between countries  International Monetary Fund (IMF) Goal is macro-economic stability for both member nations and more generally the global economy. IMF deals with exchange rates, balances of payments, international capital flows, and monitoring members states and their macro-economic policies. Issues: Governance structure is dominated by the US Developed nations control more than 50 percent of the votes  Major Functions of the IMF: Surveillance Giving member nations advice on how to improve their financial systems Technical assistance They are source of financial/currency related info/data Lending money to countries Especially those in need But this comes with conditions set by them  World Bank (WB) Established in 1944 during the Bretton Woods Agreement Has 184 nations as members Provides funds to government-sponsored programs in mostly middle-income or credit- worthy poorer nations. Development of productive facilities and resources in less developed countries Funding for productive purposes Encourage international investments in order to promote international trade and development Helping member countries improve their productivity, standard of living and labor conditions.  Importance of the World Bank (WB) Serves as a forum of nations to discuss development and development financing Source of funds for developing countries Source of info on development and provides valuable advice and support to the nations Criticisms of the World Bank: It is dominated by rich/developed nations A country’s number of votes varies depending on its size and importance in the world economy The president of the WB is appointed by the US president. The bank serves interest and this affects other nations especially the poor and less developed ones. Other Important Economic Organizations 1. Organization for Economic Cooperation and Development (OECD) 30 developed nations as members The most encompassing ‘club’ of the world’s rich countries. 2. The European Union (EU) 27 member states adopted Euro as their currency 3. The North American Free Trade Agreement (NAFTA) US, Canada and Mexico as members 4. MERCOSUR; Southern Common Market common market in South America 5. The Organization of Petroleum Exporting Countries (OPEC) major oil exporters (Iran, Iraq, Kuwait, Saudi Arabia etc.) 6. APEC (Asia-Pacific Economic Cooperation) APEC membership: 21 countries established in 1989, has become the pre-eminent economic forum in the Asia-Pacific region. Its primary purpose is to promote sustainable economic growth, trade and investment, and prosperity in the Asia-Pacific region.  Multinational Corporations: Drivers of Global Economy  Trans-national Corporations = Multinational Corporations?  TNCs involve operations in more than one country  MNCs operate in more than two countries.  MNC has grown more powerful than the nation-state as it has the power to coordinate and control operations in more than 2 countries even if it does not own them. Multinational Corporations: Drivers of Global Economy companies rather than states will be the leading actors in the world economy. ” there are about 61,000 MNCs in the world today carrying out production through over 900,000 affiliates. They account a tenth of the world‘s GNP and about a third of total world exports. Vast majority or 96 of the top 100 are in the developed world However, as we will see, MNCs from developing countries are increasing in number and importance. Multinational Corporations: Drivers of Global Economy MNC activity is usually measured by foreign direct investment (FDI). involves investments by one firm in another firm that exists abroad in a different nation-state, with the intention of gaining control over the latter’s operations. It can also involve setting up a branch (subsidiary) operation in another country. FDI has grown substantially in recent years and this is a major indication of the growth of MNCs. More than two - thirds of the world’s FDI is directed toward developed not less developed countries. Multinational Corporations: Drivers of Global Economy Portfolio Investment (another MNC activity) - involves the purchase of equity in companies in other countries, but the motivation is financial gain and not to obtain control over those companies. How companies become multi-national? Geographic unevenness of markets - A company may reach a saturation point in its domestic market; identify new markets that require its direct presence; - when markets are restricted because of political regulations (e.g. import tariffs); - there are strong cultural and political incentives for it to be present in other countries.  In order to access natural and human resources Benefits of MNCs:  Investments create jobs to people in host countries  Encourage development of infrastructures e.g. roads  Brings technologies to host countries  They create access to world market Negative impacts of MNCs: They de-capitalize other countries - They take profit, money, resources from the country They create inequality around the world They exploit the poor workers/communities/nations They make the countries dependent of their presence  They create competitions to the local companies as they tend to dominate the local market. Economic Globalization Today Global per capita GDP rose over five-fold in the second half of the 20 th century Created large Asian economies like Japan, China, Korea, Hong Kong, and Singapore Economic globalization remains an uneven process First world countries are often protectionists Beneficiaries of global commerce have been mainly transnational corporations and not governments The Global Trade Trade Surplus – when a country exports more than it imports Trade Deficits– a country has more imports than exports. Supply Chain – the sequence of processes involved in the production and distribution of a commodity. - a general label for value-adding activities in the production process. e.g. cotton into thread T-shirt Market The Global Trade International Production Networks – the networks of producers involved in the process of producing a finished product. e.g. production chain of jeans The material is harvested in Kazakhstan before being manufactured into yarn in Turkey. Then it is shipped to Taiwan for coloring, before it is weaved in Poland. France delivers material like buttons and rivets. All components are shipped to the Philippines for sewing. Final processing is taking place in Greece, before it is sold in the market. Global Commodity Chains – a network of labor and production processes whose end result is a finished commodity e.g. Nike Global Value Chains – includes all of the people and activities involved in the production of a good or service and its global level supply, distribution and post sales activities. Example #1: GVC 9 Dragons Paper: 1) Mountains of waste paper are collected in the US 2) These are then shipped to China for re-cycling into container boxes 3) Boxes are used to ship goods to various places around the world 4) After its use, they are turned again into scrap and the process continues…. Example #2: GVC T-Shirts: 1) Cottons grown in the US 2) These are then shipped to China for manufacturing 3) The T-shirts are then delivered back in the US market 4) The American consumers buy the shirts and eventually dispose them 5) Used shirts are then shipped and then sold in Africa. Impact of Global Trade: “Race to the Bottom” - Countries involved in a downward spiral of competitiveness. - For countries to compete in the global economy, they must undercut the competition in many ways e.g. offering low wages, poorer working conditions etc. Impact of Global Trade: “Industrial Upgrading” - Nation-states, firms and even workers move from low value to relatively high-value production - e.g. Case of China as they have begin to move up towards producing high-value products Impact of Global Trade: “Outsourcing” - Transfer of activities once performed by an entity to a business in exchange for money e.g. Marketing: A company outsources the support of social media channels to an external service provider (e.g. an agency). “Offshore Outsourcing” - Transfer of activities to entities in other countries - e.g. call-center industry Impact of Global Trade: Consumption - The expediting of global flows of consumer goods and services of all types and of financial processes and instruments that expedite those flows - e.g. Visa and Master cards are increasingly accepted and used throughout the world. This, however, leads to: Hyper-consumption (buying more than one can afford) Hyper-debt (owing more than one will be able to repay). - This consumption habit of the Americans influences the whole world. Conclusion International Economic Integration is a central tenet of globalization Much of globalization is anchored on changes in the economy (i.e. global culture) Important to ask: How this system can be made more just?