Unit 2 - Economic Globalization PDF

Unit 2 - Economic Globalization ​ How did 20th century world events shape contemporary economic globalization? -​ What is one factor that led to World War I? Imperial powers wanted to protect or expand their colonies and trade -​ What were some economic costs o...

Unit 2 - Economic Globalization ​ How did 20th century world events shape contemporary economic globalization? -​ What is one factor that led to World War I? Imperial powers wanted to protect or expand their colonies and trade -​ What were some economic costs of World War I? European cities, towns, farms were destroyed, many european government borrowed from the U.S and were in debt -​ What is communism? Complete government control -​ How did Joseph Stalin transform the Soviet Union into a superpower? Why would a capitalist oppose Stalin’s methods? A capitalist wouldn’t agree with the controlling government, capitalists support limited government ​ Karl Marx -​ Born May 5, 1818, in the Kingdom of Prussia -​ ​ Milton Freeman -​ Modern day supporter of Adam Smith's idea of government non-involvement in the economy -​ Less government regulation of economy would lead to greater individual prosperity -​ Maximum freedom to make personal choices-what to buy and sell and who to work for leads to maximum economic, political and social freedom -​ Government's role not to support people through tough economic times -​ People are better off by learning to adapt to changing conditions and in thee demand for their goods and services -​ Ideas greatly influenced U.S president Ronald Reagan and British prime ministerMarget Thatcher -​ Both countries began a greater move towards a market economy ( an economy in which government regulations are reduced to a minimum and businesses are free to make their own decisions) -​ Many however, remain critical of Friedman’s ideas ​ Trade Liberalization and Comparative Advantage -​ Economic trend since end of World War II -​ Lower tariffs and encourage trade -​ No country in recent decades has achieved economic success without being open for trade -​ Lower tariffs has contributed to decline in poverty by 14% between 1993 and 1998 -​ Countries like India, Vietnam and Uganda have experienced growth and a reduction in poverty -​ Trade liberalization for developing countries has led to them developing a comparative advantage in producing certain products -​ Theory of comparative advantage attributed to British economist David Riccardo in 1817  -​ Maintains a country should specialize inn good it can produce more easily than other countries -​ Example: one country is better at producing wine than another, while the other produces cloth better; each will focus on what they are better at and both will benefit through trade -​ If trade liberalization is supposed to bring prosperity to all countries that adopt it, why are there still so many poor countries in the world? ​ Protectionism -​ Also known as economic nationalism and economic patriotism -​ Generally opposed to globalization as it questions benefits of unrestricted free trade -​ Policies guided by belief that domestic industries require protection from competition -​ Encourages consumers to purchase goods and services produced in their own country ( domestically or locally produced goods); “Be Canadian, Buy Canadian” -​ Accomplishes this through tariffs on imports and other restrictions on movement of labor, goods, and capital -​ Examples of restrictions ❖​ Import substitution- impose restrictions on imports produced by foreign competition to encourage domestic production of those imports ❖​ Block foreigners from purchasing domestic companies -​ Criticisms: ❖​ Consumers have fewer choices ❖​ Gives domestic producers selling advantage which allows them to raise prices even though foreign imports may be less expensive ❖​ Foreign made goods ( due to cheaper production costs) may be passed off as locally produced at a high price; for example, a car may be assembled in Canada, but many of its parts may be made in other countries; brings up the issue of definition of domestically produced ​ Five Main Ideas that counter Protectionism and support the belief that globalization is overwhelmingly positive  -​Education aligned with global marketplace ❖​ Producing enough specific workers that are in high demand ❖​ Ensures competitive vitality -​ Make global trade literacy a priority ❖​ Train teachers on global trade so they can teach students/so they become knowledgeable -​ Support programs and policies that addresses training for displaced workers ❖​ Help and support those who lost their jobs because of international trade ❖​ Train them for new jobs -​ Innovation ❖​ Adapt and accept globalization - create new jobs ❖​ Higher wage - same thing happened with technology -​ Corporate diplomacy is as important as political diplomacy ❖​ Localize businesses ​ Foundations of contemporary Global economics -​ Bretton Woods Conference ❖​ Met july 1944 in Bretton Woods, New Hampshire ❖​ Delegates figuring out how future economic turmoil could be prevented ❖​ Economic turmoil had led to war: so the goal was an important one ❖​ Mapped out creation of IMF and World Bank to expand international trade -​ John Maynard Keynes ❖​ Unrestricted capitalism failed ❖​ Proof was in the collapse of world trade, great depression, unemployment ❖​ Government had direct role to play during economic hard times ❖​ Set up programs to hire unemployed people who would have money to spend; economy picks up -​ Friedrich Hayek ( supporter of Adam Smith ) ❖​ Mistrusted government control whether complete or partial ❖​ Government to protect market by safeguarding competition ❖​ Competition would keep the market healthy ❖​ Minimal government involvement -​ General Agreement of Tariffs and Trade ( GATT) and world trade organization (WTO) ❖​ GATT- goal to eliminate tariffs and trade barriers among members ❖​ WTO emerges out of GATT in 1995 ❖​ WTO regulate trade in services (telecommunications, banking and goods) ❖​ WTO sets rules to protect copy-right and intellectual property -​ International Monetary Fund (IMF) ❖​ Provide emergency short-term loans to countries ❖​ Demand reforms in a country to promote good governance and eliminate corruption -​ World Bank ❖​ Increase growth and reduce poverty in developing countries ❖​ Fund specific infrastructure projects  -​ Shared Characteristics and purpose of IMF and the World Bank ❖​ Headquarters in Washington,D.C with 185 members (2006) ❖​ Established by international treaty to help countries in economic trouble ❖​ Under control of united nations ❖​ Help countries get on a stable financial footing after WWII ❖​ Agree on rules on how countries deal with monetary affairs ❖​ Govern international trade and finance ​ Cash Crop -​ A crop grown predominantly for export to earn money. The term is used to differentiate from subsistence crops, which are those fed to livestock or grown as food for the general populace. In developed countries today, almost all crops are mainly grown for cash. In non-developed nations, cash crops are usually crops that attract demand in more developed nations, and hence have some export value ​ Commodity -​ An article of trade or commerce,especially an agricultural or mining product that can be processed and resold ​ Debt Servicing -​ The repayment of interest and principle to external creditors ​ Globalization -​ A process that is making the world’s citizens increasingly interdependent economically, socially, environmentally, technologically, and politically ​ Infrastructure -​ The basic facilities, services, and installations needed for the functioning of a community or society, such as transportation and communication systems, water and power lines, and public institutions including schools, post offices, and prisons ​ Liberalization -​ A relaxation of government restrictions, usually in areas of social or economics policy ​ North -​ Wealthy, industrialized, 1st World countries ​ Privatization -​ The transfer of ownership from government owned to a privately owned corporation ​ Public Sector -​ That part of the economy controlled by the government ​ Recession -​ An extended decline in general business activity, typically two consecutive quarters of falling real gross national product ​ South -​ Poor, undeveloped, 3rd World countries ​ Social Services  -​ Services, such as health care, provided by a government for the welfare of its citizens ​ Structural Adjustment Programs (SAPs) -​ A set of policy changes countries are required to undertake in order to receive loans ​ Subsidy -​ Financial assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest ​ Sweat Shop -​ A shop or factory where employers work long hours at low wages under poor conditions ​ Tariff/Duty -​ A tax imposed on goods and services imported into a country. Also known as a duty tax ​ Terms of Trade -​ The price of a country’s exports relative to the price of its imports, and the changes that take place over time ​ Third World Debt Crisis -​ International Monetary Fund (IMF) and World Bank set up after World war II to assists struggling countries -​ Many countries are members, but organizations dominated by 1st World countries, particularly the U.S -​ After WWII developed countries exported manufactured goods to 3rd World in exchange for raw materials -​ While price of manufactured goods increased price of raw materials did not -​ 3rd World forced to borrow money to continue importing manufactured goods and to finance development -​ Many times corrupt leaders in many countries diverted this money into their private bank accounts or spent it on useless projects or the military -​ Adding problems of 3rd World, oil prices and interest rates increased along with the value of the U.S dollar; these factors made it impossible for the 3rd World to repay its debt -​ In an effort to make payments 3rd World countries are forced to borrow more money; this leads to a debt spiral where, currently, the 3rd World has paid out more in interests than the value of the original debt ​ Food Exports -​ To earn revenue for debt repayment 3rd World countries forced to export natural resources, typically agricultural commodities -​ Not only have\ prices for 3rd world commodities remained low, but this has resulted in switching from traditional crops to feed its people ( rice, corn, beans, etc.) to cash crops in demand in the 1st World ( coffee, bananas, peanuts, ect.) -​ Situation created where poor countries exporting food to 1st World even though they dont have enough for themselves; 3rd World now forced to borrow more money in order to import food  -​Often the land on which cash crops are grown is controlled by foreign companies so profits from the sale of crops leave the country anyway -​ Malnutrition and even famine exists in some 3rd World countries so the 1st World can have a variety of food ​ How IMF debt management works -​ Countries have to strictly abide by IMF programs for six years in order to secure debt relief. Countries that fail to meet program targets, even if for just one year, go back to square one. Even those countries that do stick it out have found that the debt relief is not enough to make much difference to over-stretched national budgets. ​ Drawbacks to the IMF and the World Bank: Structural Adjustment Programs ( SAPs) -​ IMF often called in to assess indebted countries in order to force them to pay -​ IMF and World BAnk funded by 1st World countries that believe capitalist economies policies will solve most problems -​ Loans come with strings attached - SAPs ( a set of policy changes countries are required to undertake in order to receive loans) -​ In short: SAPs promote the idea that less government is better government, and call for fewer subsidies ( financial assistance given by a government to a person orr a group to support a business) and regulations, and more competition; countries are told to liberalize - open up - their economies to free trade -​ SAPs force cutbacks in all forms of social spending ( health, education, ect,); causes tremendous hardship for people -​ In some 3rd World countries IMF referred to as the “Institute of Misery and Famine” -​ While SAPs may bring some order to a 3rd World countries economic chaos, this is only temporary, a real solution requires a reordering of the world’s trading system -​ Six types of SAPs, all promoting same philosophy, “ spend less, export more” 1.​ Massive Public Sector Layoffs -​ The public sector is the part of the economy that deals with the delivery of goods and services by the government -​ Privatization of government -​ Owned enterprises like water and electricity utilities -​ Workers laid off, wage slashed, price rise 2.​ Spending Cuts in Basic Social Services -​ As money for services is slashed, not only are jobs lost but the well-being of the country is hurt 3.​ Wage Freezes and Labor Suppression -​ Rights of unions weakened to stop wage increases -​ Lower wages pushed to attract foreign investment -​ No cuts for the military however, as it can be used to put down worker demonstrations 4.​ Devaluation of Local Currencies  -​ Devaluation ( a reduction in value ) makes a country’s exports cheaper and imports more expensive -​ 1st World countries benefit from cheap exports, but prices for goods in the 3rd World increase and wages don’t keep up with price increases 5.​ Promotion of Production for Export -​ Land shifted away from production of basic food crops for people toward export - oriented cash crops such as coffee or cocoa -​ This shift is damaging to the environment -​ People forced off their land to make room for these new crops -​ As less land devoted to feeding people, food prices rise, but because of low wages the poor cannot feed themselves and malnutrition increases -​ Promotion of free trade zones where sweatshops ( a factory where employers work in poor conditions for low pay) produce manufacturers goods for the 1st World 6.​ Elimination of Price Controls on Basic Foodstuffs -​ Common subsidies on price of basic goods like bread and cooking all eliminated -​ result : people cannot afford to feed themselves ​ The “Rigged” Global Trading System -​ World’s trading system is rigged: the South is stuck with reliance on exports of a few commodities (an article of trade or commerce, especially an agricultural or mining product that can be processed and resold ), but prices are set by the North , and are set low in order to benefit industrialized countries -​ Farmers in the 3rd World cannot compete with 1st World farmers in the production of the same commodity since governments of the North will protect their farmers from world competition through subsidies and tariffs ( taxes on imports or exports) -​ For example , sugar can be more cheaply produced in the South through the processing of sugarcane than its manufacture in the North using corn syrup or beets; in order to protect its sugar industry from low-cost imports, the U.S places imports quotes on sugarcane and heavily subsidizes its beet and corn farmers, while the European Union has closed its borders to sugarcane imports completely -​ Farmers in the North can now sell their surplus sugar on the world market cheaper than farmers in the South whose governments cannot afford to subsidize them; this further drives prices down -​ Another trade barrier deals with tariffs on processed goods ( raw materials that have undergone a series of changes in the making of a product; for example, roasting and grinding coffee beans before packaging); 3rd World countries could earn more if they were permitted to process and package a commodity , such as coffee beans, before export to the North; to protect their manufacturing industries, however, 1st countries will only purchase raw coffee beans, imposing  high tariffs on processed beans, so that they can benefit from the value added by processing and packaging; the grower earns tiny fraction in comparison to the 1st corporation -​ The agricultural policies of the North costs the South tens of billions of dollars in lost income yearly; income the South desperately needs for debt servicing ( debt repayment) and development -​ The North can be accused of hypocrisy: SAPs force indebted countries to eliminate subsidies and liberalize trade, but governments in the North refuse to implement the same policies