Session 2 - The Global Economy PDF

THE GLOBAL ECONOMY  GLOBALIZATION Worldwide interconnectedness in all aspects of contemporary social life Multidimensional phenomenon But the economic dimension is one of the major driving forces WHAT IS YOUR ECONOMIC GLOBALIZATION STORY?  ECONOMIC GLOBALIZATION A his...

THE GLOBAL ECONOMY  GLOBALIZATION Worldwide interconnectedness in all aspects of contemporary social life Multidimensional phenomenon But the economic dimension is one of the major driving forces WHAT IS YOUR ECONOMIC GLOBALIZATION STORY?  ECONOMIC GLOBALIZATION A historical process Increasing integration of economies around the world through the movement of goods, services, and capital across borders. (Transportation and Communication Revolution)  CONTEMPLATE : HOW CLOSE IS THE WORLD TO ME ? What’s the origin of the most recent song or piece of music that you listened to? (Identify the nationality of the creator of the music as well as the tradition to which it belongs.) What technology do you most commonly use to listen to music? Where is the technology made? Where is the company that owns the technology based? How have you obtained music – online purchases or physically bought from retail outlets?  ECONOMIC GLOBALIZATION A process making the world economy an “organic system” by extending transnational economic processes and economic relations to more and more countries and by deepening the economic interdependence among them (Szentes)  ATTRIBUTES OF ECONOMIC GLOBALIZATION The globalization of trade of goods and services; The globalization of financial and capital markets; The globalization of technology and communication; and The globalization of production When did economic globalization start? HISTORY OF ECONOMIC GLOBALIZATION Grills and Thompson, globalization began since Homo sapiens began from migrating from the African continent to populate the rest of the world Frank and Grills considered the Silk Road (Asia, Europe, Africa)the best example for archaic globalization 5,000 years ago HISTORY OF ECONOMIC GLOBALIZATION Adam Smith considered the discovery of America by Christopher Columbus in 1492 and the discovery of the direct sea route to India by Vasco de Gama in 1498 as the two(2) greatest achievements of human history British Industrial Revolution spread to Continental Europe and North America  HISTORY OF ECONOMIC GLOBALIZATION 17th – 19th century, economic nationalism and monopolized trade such as the British (1600) and the Dutch (1602) East India Companies 20th century transport revolution The “golden age of globalization because of : Relative peace Free – trade Financial and economic stability What is the role of nation –state in economic globalization ?  NATION – STATE & ECONOMIC GLOBALIZATION For hyperglobalists, states ceased as primary economic organization People consume highly standardized global products and services produced by global corporations in a borderless world There will be no national products, technologies, no national companies  NATION – STATE & ECONOMIC GLOBALIZATION Neo - Liberals claim that nation –states have lost an important element of economic sovereignty “Buy Taiwan, hold Italy and sell France”, Thomas Friedman compared countries to individual stocks. The major players of global economy are the transnational corporations or TNCs  TRANSNATIONAL CORPORATIONS ARE CONSTANTLY EVOLVING AS A RESULT OF OUTSOURCING ACTIVITY - GOINGOUT TO FIND THE SOURCE OF WHAT YOU NEED WE LIVE IN AN AGE OF OUTSOURCING. Firms are subcontracting an expanding set of activities. Some have become “virtual” manufacturers, owning designs for so many products but making almost nothing themselves.  Example : AMERICAN CAR (WTO) KOREA – assembly JAPAN – components & advanced technology GERMANY – design TAIWAN & SINGAPORE – minor parts UK – advertising and marketing services IRELAND/ BARBADOS – data process  THE GLOBAL COMMODITY CHAINS (GEREFFI) TNCs gather resources, transform them into goods or commodities and finally distribute them to consumers in the world market  IMPACT OF ECONOMIC GLOBALIZATION World Bank(WB) claims that globalization can indeed reduce poverty but it definitely does not benefit all nations. IMPACT OF ECONOMIC GLOBALIZATION The debate continues to rage over whether or not global expansion of corporations and the opening of economic markets in developing countries is good for the poorest of the world's nations. Do the poor really benefit from investments made by large corporations in their country, or do the rich only get richer? If there is benefit, is it simply in job creation or are there other factors that influence a developing nation's overall well being? Although many factions weigh in on the subject, several basic ideas should be considered. 1. Wages and Inequality 2. Education 3. Health Status and Longevity  The competitiveness of an economy and the impact of economic globalization depend on the capacity of the nation - state for political intervention in order to regulate TNCs, IGOs and other market players.  Nation –states are not influenced uniformly by economic globalization  INTERNATIONAL MONETARY SYSTEM (IMS) Rules , customs, instruments, facilities, and organizations for effecting international payments Facilitates cross-border transactions involving trade and investment ( Financial Intermediation ) National income can be consumed today or invested in projects that promise future returns ( Investments ) Banks in the role of financial intermediaries connecting savers with investors  BANKS AS FINANCIAL INTERMEDIARIES People who don’t consume all their income today save it, depositing it in banks from were it is chanelled to those who wish to use money to carry out investment projects Banks are able to pool savings from many savings from many people and then transform them and then transform them into loans  THE GOLD STANDARD FIAT VS. COMMODITY MONEY Under the gold standard , currencies are given a set value in terms of gold.This means that their values in terms of other currencies is also fixed.When this works well , it can reduce trading uncertainties. It can also hold governments to the maintenance of price stability because the authorities cannot easily expand a money supply that has to be backed up by gold to honour it. Neg. During depression it limited the ability of governments to stimulate their economies through expansion of money supply prolonging downturn.  THE BRETTON WOODS SYSTEM During the great depression of the 1930’s many countries shut out foreign imports to protect ( Protectionism ) domestic Bretton Woods markets, leading to a disentegration of the international economy. A 1944 conference at Bretton Woods , New Shampshire, lid the foundations for rebuilding global cooperation. International World Bank Monetary Fund Countrie’s exchange rates were tied to the US dollar. The International Monetary fund and World Bank were set up to help governments with financing and economic Exchange development. Short Term Long Term Development Rates Aid Finance Finance The General Agreements on Tariffs and Trades later become Stability the World Trade Organization, oversaw rounds of negotiations that continue to the present.  10 POINTS OF THE WASHINGTON CONSENSUS (1990) Fiscal policy discipline Liberalization of Foreign Direct Effective public spending-GDP Investment Tax reform Privatization Competitive exchange rates Deregulation Peso Vs. Dollar Security of property rights Countries ability to pay loans in dollars Prerequisites for economic life Trade liberalization Buying and selling requires property rights Financial market liberalization  European Monetary Integration Germany, France, Italy, Netherlands, Belgium and Luxembourg created a common market where goods and services, capital and labor moved freely European Economic Community,1957 European Monetary System, 1979 European Exchange Rate Mechanism European Economic and Monetary Union, 1992 European Central Bank, 1999 EURO as a reserved currency  INTERNATIONAL TRADE & TRADE POLICIES David Ricardo’s Comparative Advantage Every single nation must have a relative advantage in something irrespective of its initial condition.  COMPARATIVE ADVANTAGE Suppose that France is better in making cheese , England is at beer. 1. If France specializes in cheese and England in Beer and two countries trade, then both gain: The French get cheaper beer, the English cheaper cheese. 2. The theory shows that even if England was worst in both goods, there are still gains from specialization and Trade. Suppose: To make an extra keg of beer, England has to give up two wheels of cheese output, while france would have to give up three wheels of cheese to make an extra keg. England has a comparative advantage in Beer production because the cost of extra beer in terms of cheese is less than for France What determines countries’ comparative advantage? The availability of capital and labor in a country is one.  MOST – FAVORED NATION (MFN) PRINCIPLE One of the cornerstone of WTO trade law – which prohibits countries from discriminating their trading partners. Grant someone a special favour ( such as lower customs duty rate for one of their products) and you have to do the same for all the other WTO members.  INTERNATIONAL TRADE & TRADE POLICIES Kennedy Round (1962) - tariff cuts Tokyo Round ( 1970)– subsidies and procurement codes Uruguay Round (1986/1994 ) – multilateral trade negotiations World Trade Organization (WTO), 1995 (industrialized countries trade to developing countries, specifically on agriculture) Doha Round – to lower trade barriers United Nations Conference on Trade and Development (UNCTAD) to promote trade and cooperation between the developing and developed nations 1