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GLOBAL ECONOMY SPECIALIZATION The result of the development of an economy Specialization is the second fundamental that rises above borders and is free moving principle associated with trade, and results betwee...

GLOBAL ECONOMY SPECIALIZATION The result of the development of an economy Specialization is the second fundamental that rises above borders and is free moving principle associated with trade, and results between the different nation states of the from the division of labor. Given that each world. worker, or each producer, is given a specialist A direct result of an economy that defies role, they are likely to become efficient borders or governments is that it has openly contributors to the overall process of called into question not only how much room production, and to the finished product. governments have to maneuver but how much Specialization can generate further benefits in they can affect such an economy in the future. terms of efficiency and productivity. States are beginning to see themselves playing Specialization can be applied to individuals, a diminished role when it comes to their own firms, machinery and technology, and to whole economies (Shively, 2012). countries. GLOBAL ECONOMICS INTERNATIONAL SPECIALIZATION Looks at how trade has shaped the global International specialization is increased when economy and considers the costs and benefits countries use their scarce resources to produce of free trade – it also provides an analysis of the just a small range of products in high volume. major problems facing the global economy in Mass production allows a surplus of goods to the 21st Century, and provides an analysis of be produced, which can then be exported. This the financial crisis and the rise of powerful means that goods and resources must be trading blocs. imported from other countries that have also specialized, and produced surpluses of their BUT WHY DO COUNTRIES TRADE? own. Countries trade with each other when, on their ABSOLUTE ADVANTAGE own, they do not have the resources, or capacity to satisfy their own needs and wants. We can say that a country has absolute By developing and exploiting their domestic advantage in one commodity over another scarce resources, countries can produce a country if that country can produce the surplus, and trade this for the resources they commodity more efficiently than the other need. country can. Goods and services are likely to be imported COMPARATIVE ADVANTAGE from abroad for several reasons. Imports may be cheaper, or of better quality. We say that a country has comparative They may also be more easily available or advantage in the production of a commodity if simply more appealing than locally produced that country can produce that commodity goods. In many instances, no local alternatives more efficiently (or at a lower opportunity exist, and importing is essential. This is costs) than another commodity relative to highlighted today in the case of Japan, which another country. has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and THE ADVANTAGES OF TRADE must import all it requires. International trade brings a number of valuable DIVISION OF LABOR benefits to a country, including: Means that countries produce just a small The exploitation of a country’s comparative range of goods or services, and may contribute advantage, which means that trade encourages only a small part to finished products sold in a country to specialize in producing only those global markets. goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost. R.M.B  Producing a narrow range of goods and based on factors like climate, natural services for the domestic and export market resources, labor productivity, and factor means that a country can produce in at higher endowments. While these theories provide volumes, which provides further cost benefits some insights, they struggle to fully explain the in terms of economies of scale. complexity of modern trade patterns. Trade increases competition and lowers world HECKSCHER–OHLIN THEORY prices, which provides benefits to consumers by raising the purchasing power of their own Emphasizes the interplay between the income, and leads a rise in consumer surplus. proportions in which the factors of production Trade also breaks down domestic monopolies, (such as land, labor, and capital) are available which face competition from more efficient in different countries and the proportions in foreign firms. which they are needed for producing particular The quality of goods and services is likely to goods. This explanation rests on the increases as competition encourages assumption that countries have varying innovation, design and the application of new endowments of the various factors of technologies. Trade will also encourage the production. Tests of this theory, however, transfer of technology between countries. suggest that it is a less powerful explanation of Trade is also likely to increase employment, real-world trade patterns than once thought. given that employment is closely related to THE PRODUCT LIFE-CYCLE THEORY production. Trade means that more will be employed in the export sector and, through the Introduced by Raymond Vernon, suggests that multiplier process, more jobs will be created products are typically produced and exported across the whole economy. from their country of origin during their early stages. As they become more widely accepted, THE DISADVANTAGES OF TRADE production may shift to other countries, Despite the benefits, trade can also bring some potentially leading to re-export back to the disadvantages, including: original country. One early response to the failure of the Trade can lead to over-specialization, with Heckscher–Ohlin theory to explain the workers at risk of losing their jobs should world observed pattern of international trade was demand fall or when goods for domestic the product life-cycle theory. consumption can be produced more cheaply abroad. Jobs lost through such changes cause NEW TRADE THEORY severe structural unemployment. Developed by Paul Krugman, emphasizes that Certain industries do not get a chance to grow in certain industries, the world market can only because they face competition from more support a limited number of firms. This can established foreign firms, such as new infant lead to first-mover advantages for early industries which may find it difficult to entrants, influencing trade patterns. establish themselves. Michael Porter's theory of national Local producers, who may supply a unique competitive advantage highlights the product tailored to meet the needs of the importance of factors like domestic demand domestic market, may suffer because cheaper and rivalry in determining a nation's success in imports may destroy their market. Over time, specific industries. the diversity of output in an economy may diminish as local producers leave the market. TRADE: FREE TRADE VS PROTECTIONISM THE PATTERN OF INTERNATIONAL TRADE Overview One view says that we should make it as easy as possible for goods and services to move between It explores the theories that explain countries. This approach is based on the argument that international trade patterns. It discusses the more trade makes us wealthier and is therefore a good contributions of Smith, Ricardo, and thing. It is known as free trade. Heckscher-Ohlin, who proposed theories R.M.B Another approach says that we should restrict trade. ✓ As more countries experience industrial We might do this to protect certain jobs. We might development, traditional domestic industries think that we need certain industries – such as food can decline. In the UK, for example, the production or steelmaking – just in case things go shipbuilding industry has declined in the face wrong in the wider world. We might want to restrict of international competition since the 1950s imports from countries with lower labor or and currently steel production faces increasing environmental standards so they can’t undercut our competition. Protectionism can help preserve industries. This approach is known as protectionism. jobs in these sectors, or at least slow the process of change. Many economists agree that some restrictions on trade ✓ Protectionism can also help build up new are desirable, but that we should be careful, as such industries. In sectors with high start-up costs, restrictions can make us poorer overall. For example, new firms might find it difficult to compete if limits on agricultural imports may be good for British there is not support from government in the farmers, but they also increase food prices. form of tariffs or subsidies. Once they have ARGUMENTS FOR FREE TRADE become competitive, such barriers can be removed. There are several key arguments in favor of free trade: ✓ Protectionism can be used to safeguard ✓ Free trade increases the size of the economy as ‘strategic’ industries such as energy, water, a whole. It allows goods and services to be steel, armaments and food. For example, ‘food produced more efficiently. That’s because it security’ may be seen as important so that we encourages goods or services to be produced can feed ourselves if something terrible where natural resources, infrastructure, or happens to disrupt the system of world trade. skills and expertise are best suited to them. It ✓ Some people worry that free trade deals can increases productivity, which can lead to higher lead to a lowering of standards. Such deals wages in the long term. There is widespread might require us to let in goods and services agreement that rising global trade in recent even though they don’t meet our standards, decades has increased economic growth. which might then be cheaper than those made ✓ Free trade is good for consumers. It reduces by domestic industries. For example, some prices by eliminating tariffs and increasing people have been worried recently that a free competition. Greater competition is also likely trade deal with the US might let in imports of to improve quality and choice. Some things, chlorine-washed chicken. There might also be such as tropical fruit, would not be available in pressure to reduce our standards for workers’ the UK without trade. rights or environmental protection so that our ✓ Reducing non-tariff barriers can remove red companies can compete with companies in tape, thus reducing the cost of trading. If countries that have lower standards. companies that trade in several countries have MARKET INTEGRATION to work with only one set of regulations, their costs of ‘compliance’ come down. In principle, The Post-World War II Economic System and The Role this will make goods and services cheaper. of international financial institutions in the creation of ✓ In contrast, protectionism can result in a global economy destructive trade wars that increase costs and The Bretton Woods Conference in July 1944, uncertainty as each side attempts to protect its formally known as the United Nations own economy. Protectionist rules can tend to Monetary and Financial Conference, marked favor big business and vested interests, as they the birth of a new international economic have the resources to lobby most effectively. framework. Delegates from 44 countries ARGUMENTS FOR PROTECTIONISM convened in Bretton Woods, New Hampshire, United States and agreed on the creation of While free trade increases the size of the economy as a two international economic organizations: whole, it isn’t always good for everyone: International Monetary Fund (IMF) and World R.M.B  Bank or the International Bank for fixed exchange rate in instances of the Reconstruction and Development. temporary balance of payment deficits. These institutions are known as the Bretton The institution was designed for the mandate Woods Institutions. It also includes a third of ensuring international financial cooperation entity, the General Agreement on Tariffs and and reinforces international trade (Benczes, Trade (GATT). 2014). Albeit created in 1947 after the Bretton Woods IMF's role changed when the fixed-exchange- Conference, this much more informal rate system collapsed and was replaced by institution than the IMF and WB served as the floating exchange rates in 1971.It still had the primary global trade organization. role of providing liquidity but has more focus The postwar institutional framework was on countries tied to major currencies instead of created to address the problems that occurred countries supplying them (Garber, 1993). during the interwar period, trade The IMF is an institution based on quotas which protectionism and exchange controls, which determine the maximum number of financial led to the Great Depression and the World War resources that a state is obliged to provide to II (Cohn, 2011). the fund. The Bretton Woods system was designed to The quota of states reflects their relative promote economic stability and cooperation position is the global economy and determines among nations. It established a fixed exchange the voting power of states in IMF decisions. rate system where currencies were pegged to The IMF has since been dominated by the West the U.S. dollar, which was in turn convertible to and has been much criticized for marginalizing gold. This system aimed to prevent currency the South and failing to include emerging fluctuations and facilitate international trade. economies in its decision-making. The IMF and World Bank played crucial roles The Global Financial Crisis of 2007-2009 has within the Bretton Woods system. The IMF prompted the IMF to undergo a reform process focused on maintaining international financial consisting of two elements: stability, providing loans to countries facing 1. IMF resource expansion to enhance balance of payments difficulties, and capacity for financial crisis management, overseeing exchange rate adjustments. The and World Bank, on the other hand, concentrated 2. increase in quota and voting power of on promoting economic development, emerging economies within the institution primarily through providing loans for (Lesage et al., 2013). infrastructure projects and economic INTERNATIONAL BANK FOR RECONSTRUCTION AND development programs. THE DEVELOPMENT OR WORLD BANK INTERNATIONAL MONETARY FUND (IMF) The role of International Bank for The primary purpose of the IMF is to promote Reconstruction and Development (the World global monetary cooperation and Bank) was created to grant long-term loans for international financial stability. The the economic development of less developed institution, created in 1945, was designed to countries and the reconstruction of war-torn monitor the system of pegged or fixed countries in Europe. exchange rates. In this system, official The World Bank today is made up of two exchange rates of currencies were related to institutions. One is the International Bank for gold and U.S. dollar. It was designed to prevent Reconstruction and Development (IBRD) the trade wars that occurred during the which provides International Development interwar period due to competitive Association (IDA) which grants credits and devaluations of states of their currencies loans to lowest income countries. The World (Cohn, 2011). Bank is only a component of the World Bank The role of IMF is to provide short-term loans Group which is comprised of three other to prevent devaluation and retain the state's institutions: International Finance Corporation (IFC), Multilateral Investment Guarantee R.M.B  Agency (MIGA), and the International Centre increase the price of oil, which in the past had for Settlement of Investment Disputes. a relatively low price and had failed in keeping up with inflation. Today, the United Arab GENERAL AGREEMENT ON TARIFFS AND TRADE Emirates, Algeria, Libya, Qatar, Nigeria, and (GATT) AND THE WORLD TRADE ORGANIZATION Indonesia are also included as members. (WTO) The European Union (EU) is made up of 28 The purpose of the GATT was to avoid trade member states. Most members in the wars by raising protectionist barriers as Eurozone adopted the euro as basic currency witnessed during the interwar period. The but some Western European nations like the forum was created years after the Bretton Great Britain, Sweden, and Denmark did not. Woods due to the refusal of the U.S. Critics argue that the euro increased the prices While it was effective in liberalizing trade, GATT in Eurozones and resulted in depressed was unable to address the expansion of trade economic growth rates, like in Greece, Spain, in services, investment, and intellectual and Portugal. The policies of the European property. It was also incapable of providing a Central Bank are considered to be a significant strong and efficient system for dispute contributor in these situations. settlement. GATT was eventually superseded NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) by a more formal World Trade Organization (WTO) in 1995 that managed to address these (NAFTA) is a trade pact between the United issues. States, Mexico, and Canada created on January 1, 1994 when Mexico joined the two other nations. It was first created in 1989 with only Canada and the United States as trading partners. NAFTA helps in developing and expanding world trade by broadening international cooperation. It also aims to increase cooperation for improving working conditions in North America by reducing barriers to trade as it expands the markets of the three countries. The creation of NAFTA has caused manufacturing jobs from developed nations THE ORGANIZATION FOR ECONOMIC COOPERATION (Canada or the United States) to transfer to less AND DEVELOPMENT (OECD), THE ORGANIZATION OF developed nations (Mexico) in order to reduce PETROLEUM EXPORTING COUNTRIES (OPEC), AND the cost of their products. THE EUROPEAN UNION (EU) The free trade, however, gave a modest impact The most encompassing club of the richest on US GDP. It has become $127 billion richer countries in the world is the Organization for each year due to trade growth. One can argue Economic Cooperation and Development that NAFTA was to blame for job losses and (OECD) with 35 member states as of 2016, with wage stagnation in the United States because Latvia as its latest member. It is highly competition from Mexican firms had forced influential, despite the group having little many U.S. firms to relocate to Mexico. This is formal power. This emanates from the member because developing nations have less countries' resources and economic power. government regulations and cheaper labor. In 1960, the Organization of Petroleum This is called outsourcing. Exporting Countries (OPEC) was originally INTERNATIONAL MONETARY SYSTEM comprised of Saudi Arabia, Iraq, Kuwait, Iran, and Venezuela. They are still part of the major The International Monetary System is defined exporters of oil in the world today. OPEC was as "a set of general rules, legal norms, formed because member countries wanted to instruments, and institutions shaping R.M.B  payment conditions in foreign trade IMF allows flexibility among member states to (international scale)" (Mikita, 2015, p. 505). determine their exchange rates or tie them to It is brought by the multilateral international major currencies such as the dollar or the SDR. agreements of trading participants, facilitated The IMF also allows a managed float system by international financial organizations. The where central banks are allowed to intervene Gold Standard adopted by England in 1816, to address the fluctuations in the exchange rate being the first country to industrialize, was the by buying and selling currencies. However, first international monetary system (Mikita, countries are not allowed to manipulate their 2015). currencies to achieve short-term gains at the The primary features of the gold standard were expense of other economies. the unlimited convertibility of currencies into GLOBAL INTERSTATE SYSTEM AND GLOBAL gold and high stability facilitated by trade GOVERNANCE among countries that eliminated exchange rate fluctuations and risks (Mikita, 2015). GLOBAL GOVERNANCE The system maintained the equilibrium of the trade balance automatically. Brings together diverse actors to coordinate The deficit in balance-of-payments due to gold collective action at the level of the planet. reserve outflows would result in the fewer The goal of global governance, roughly defined, money supply in the domestic market, causing is to provide global public goods, particularly a decline in domestic prices. peace and security, justice and mediation This is beneficial to exporting cheaper goods systems for conflict, functioning markets and but not on imports of higher priced goods, unified standards for trade and industry. which then contributes to the balance. One crucial global public good is catastrophic An attempt to return to modify the gold started risk management – putting appropriate was held in a 1922 conference in Genoa. The mechanisms in place to maximally reduce the new international monetary system was likelihood and impact of any event that could named the "Gold Bullion Standard." In this cause the death of 1 billion people across the standard, bank notes were exchangeable for planet, or damage of equivalent magnitude. gold bullion of fixed weight, therefore involving The leading institution in charge of global only the exchange of large sums of money. governance today is the United Nations. It was Free convertibility of currencies to gold, and it founded in 1945, in the wake of the Second collapsed in 1931 with the outbreak of Great World War, as a way to prevent future conflicts Depression in the 1930s (Mikita, 2015). The on that scale. first symptoms of the economic crisis were the The United Nations does not directly bring Great Crash or the Wall Street Crash of 1929, together the people of the world, but of stock market prices which delivered a wave sovereign nation states, and currently counts of bankruptcies, a decrease in trade and 193 members who make recommendations production, and unemployment in the United through the UN General Assembly. States, also hitting hard cities around the The UN’s main mandate is to preserve global world. security, which it does particularly through the In the Bretton Woods Conference of 1994, 44 Security Council. In addition, the UN can settle countries agreed in creating a new international legal issues through the international system that would prevent the International Court of Justice, and implements chaos that occurred during the interwar its key decisions through the Secretariat, led by period. The Bretton Woods System was the Secretary General. established, an adjustable-peg system that is The United Nations has added a range of areas also known as the dollar-gold standard or to its core mandate since 1945. It works gold-exchange standard, with the US dollar as through a range of agencies and associated the only convertible currency that is institutions particularly to ensure greater considered to be as good as gold. shared prosperity, as a desirable goal in itself, and as an indirect way to increase global R.M.B  stability. As a key initiative in that regard, in The organ is composed of 54 elected members 2015, the UN articulated the Sustainable by the General Assembly for overlapping three- Development Goals, creating common goals year terms (Chapter X). for the collective future of the planet. Beyond TRUSTEESHIP COUNCIL the UN, other institutions with a global mandate play an important role in global The Trusteeship Council was established as a governance. main organ of the UN (Chapter XIII) to provide Global governance is more generally affected international supervision of Trust Territories through a range of organizations acting as that are under the administration of seven intermediary bodies. member states, to ensure that adequate steps In summary, global governance is essential but are being made to prepare the peoples of Trust fragmented, complex and little understood. In Territories for self-governance. this context, the key questions raised by the All 11 Trust Territories achieved independence Global Challenges Foundation are, how to in 1994. The council's operation was reform institutions, how to develop suspended and will meet whenever an alternative institutions, and how to use the occasion necessitates it. new possibilities of technology to improve governance. INTERNATIONAL COURT OF JUSTICE THE UNITED NATIONS The International Court of Justice is the United Nation's principal judicial organ (Chapter XIV). The United Nations (UN) serves as the primary Its role is to settle legal disputes between states organization for international cooperation, (contentious cases) and to provide advisory peace, and security. opinions on legal questions referred by the UN It is the only international organization that can organs and specialized agencies, in accordance authorize the use of force against an aggressor. to international law (adviso proceedings) Its primary concern is collective military (International Court of Justice, 2018). security (Chapter VII of the UN Charter) through the facilitation of peaceful settlement THE SECURITY COUNCIL (SC) of disputes among member states (Chapter VI) The Security Council (SC) is the most potent or by [commanding allegiance of the entire UN organ with the power to make legally binding membership; sanctions). resolutions. It is comprised of the strongest While its primary objective is to ensure peace military states and is a concrete manifestation and order, the UN as an organization can be a of the reality of power dynamics. conflict actor in itself or an instrument for Article 24 of the UN Charter states that the SC action driven by the interests of particular is mandated to act on behalf of the entire UN states. With that, it must be emphasized that body to fulfill its primary responsibility for "UN is a membership directed organization and maintaining international or threat; impose the members are all states. This strongly affects economic sanctions and other measures; what it can do" (Wallensteen, 2012: 241). determine the existence of a peace and ECONOMIC AND SOCIAL COUNCIL'S (ECOSOC) security. Functions may include investigating any situation that has the breach of peace and The Economic and Social Council's (ECOSOC) actions to be pursued. primary objective is to advance the economic, The council has the authority to determine social and environmental dimensions of breach in international as stipulated in Article sustainable development. It serves as a 39 under Chapter VII. Crisis situations can be gateway of the UN's partnership with the rest categorized as a threat to the peace,' a 'breach of the world for the coordination, policy of the peace' or an act of aggression. review, dialogue, recommendations, and To maintain peace and order, the SC adopts a implementation of international set of instruments such as sanctions, development goals. peacekeeping, and peace enforcement. Sanctions can take in forms of non-military R.M.B  measures of economic, trade or diplomatic serves as a potential solution. This is sanctions, and targeted measures on groups or imperative especially with two permanent particular individuals such as travel bans, members ensuring that no international financial and diplomatic restrictions. These are intervention would occur in the Syrian armed enforcement tools applied when diplomatic conflict. relations have been fruitless, and the threat to As argued by Carswell (2013), "the General international security persists, and if deemed Assembly, representing the entire international inadequate, military sanctions may be taken community, has a moral authority that should (Articles 41 and 42). not be downplayed, particularly where the Aside from sanctions, peacekeeping is also a issues at hand have a direct impact on state useful tool employed by the UN to assist host sovereignty". The resolution ought to be fully countries struggling from armed conflict. UN realized and maximized for it has bestowed the peacekeepers are deployed to provide security assembly the capacity to check the Security to populations and political and peace building Council in its proper and rightful exercise of support to countries transition from conflict to veto, in accordance to what is mandated by the peace. UN Charter. GENERAL ASSEMBLY (GA) RECAP The General Assembly (GA) is the only UN o Countries trade with each other because they organ with universal representation, with all gain from trading. Countries specialize in the 193 member states represented in the body. production of commodities where they have The GA decides on essential questions with a comparative advantage. With specialization simple majority, while concerns related to and trading, production and consumption peace and security, budgetary matters, and possibilities are expanded. new membership admissions require a two- o We say that a country has comparative thirds majority Yearly. advantage in producing a commodity over The GA meets for the annual General Assembly another country if it can produce that Session and general debate participated by commodity at relatively lower cost than the several heads of state. other country can. This means that in terms of commodities that have to be given up, a Reforming the United Nations country with comparative advantage on the Reform has only been met once in 1963 when commodity will give up less of the other the UNGA voted for the expansion of the UNSC commodity than the other country will. from 11 to 15 member-states (UNGA o International trade policy can be looked upon Resolution of 1963). In 1994, the Open-ended as a spectrum of policies with the policy of Working Group on the Question of Equitable free trade at one extreme and the policy of Representation and Increase in the protectionism on the other. Simply defined, Membership of the Security Council was free trade means that there is no government created where members were invited to interference with the flow of international submit comments on the reformation and trade. Any departure from free trade designed review of the Security Council. to give some protection to local or domestic Since then, the negotiations have been industries from foreign competition is called fruitless, and it has been dubbed as a "Never- protectionism. ending Working Group” for the endless years of o Some countries adopt protectionist trade consecutive deliberations (Gould and Rablen, policy because they want to achieve social 2017). goals other than increasing national income. If reforms are unforeseeable in the near future, Others adhere to the infant industry argument. what can be done? The awakening of the latent o Economic globalization can be understood as potential of the General Assembly to a process of absorbing national economies counteract the powers of the Security Council into an interlinked and interdependent global through the "Uniting for Peace" resolution market economy. R.M.B o The Bretton Woods institutions created by the victors of the World War II in 1944 are the International Monetary Fund, World Bank and the General Agreement on Tariffs and Trade. These institutions were created to aid the recovery of war-torn countries and to foster economic cooperation among states. o The international economic system has been anchored in the neoliberal paradigm since the 1980s. It involves reducing the government regulation in order to extend the role of the private sector in the market and the society. Global justice movements have sought to expose the inadequacies of the system in addressing the needs of the developing world and its frailties and vulnerability to financial crises. o The United Nations (UN) was created in 1945 by the Allied Powers, the victors of the Second World War. The mandate of the organization is to maintain international peace and security and to foster international cooperation in addressing humanitarian, social, economic, and cultural issues, o The United Nations Charter is comprised of six principal organs. These are the Economic and Social Council, Trusteeship Council, and the International Court of Justice, General Assembly, Security Council, and the Secretariat. o The Security Council is the most potent organ with the power to make legally binding resolutions. However, it becomes easily incapacitated whenever security interests involving the permanent members are at stake. o Reforms have long been raised to change the structure of the Security Council to distribute the concentration of power and to foster inclusive decision making for marginalized and excluded member-states. R.M.B