Summary of World Economy

**[Chapter 1: The world Economy Pre-1914]** IWW effects: - Devastation in European economies - Political Instability: War reparations (Germany) and wartime borrowings (France, UK) - Inability of governments to construct a viable international financial system Restoration of the Go...

**[Chapter 1: The world Economy Pre-1914]** IWW effects: - Devastation in European economies - Political Instability: War reparations (Germany) and wartime borrowings (France, UK) - Inability of governments to construct a viable international financial system Restoration of the Gold Standard (1925): - Misalignment of exchange rates - The subordination of the domestic economies to global markets was no longer acceptable Abandonment in 1931 Tariffs rise (from 1930): - Decline of world trade - Concentration in closed imperial blocks Incapacity of the league of Nations **World Economy-Post 1945** Unprecedented rates of economic growth - GDP grew at a faster rate than before 1945 - World trade grew more rapidly than world production - Increasing importance of imports and exports in most economies, which led to greater political support for liberalization - Characterized by: Embedded liberalism and Multilateralism - Embedded liberalism (Ruggie,1992) - Compromise between meeting domestic economic objectives and openness to international trade and investment - Provisions to opt-out of international commitments in trade and finance embodies in IMF and GATT - Multilateralism - Institutionalization of international economic cooperation - Generalized principles of conduct **Key features:** - Growing interdependence of countries - Importance of global trade to economic growth - Globalization of production networks - Globalization of finance and complexity of new financial instruments - Vulnerability of global financial systems to periodic crises - Increasing significance of private actors in the global economy Growing influence and importance of transnational corporations (TNCs) - Companies with ownership and management of assets in more than one country for the purposes of production of goods or services - By 2009, value added by TNC subsidiaries amounted to 10% of world GDP - Sales by TNC subsidiaries are twice total value of world trade - Integration of developing countries into global production networks (or global supply chains) **The breakdown: Global Financial Crisis** Origin of LB problems: involvement in the subprime mortgage market Quickly transmission to financial institutions in other advanced countries and to real economy: Sovereign debt crisis: Policy responses to the crisis: Lessons from the crisis: - Growing interdependence of countries - Vulnerability of the contemporary global financial system to periodic crisis - Speed of problems transmission - Collaboration between governments to seek collaboration - Significant and evolving role of international institutions - Impact on poverty and inequality Merchandise Trade Value increased 1% in the fourth quarter of 2022 over the same period the previous year in value terms. **Great Recession and Great Lockdown** - Slow recovery of world output - Problems in world trade: Protectionism - Trade dispute between US and China - Also: government shutdown in US in 2018-19 - UK departure from the EU - Changes in monetary policy in major economies (Raising tariffs) - Spread of coronavirus 2020 Great Lockdown: quarantines and social distance - Health and financial crisis and a collapse in commodity prices, which interact in complex ways - About 6.7% GDP loss **War in Ukraine and current trends** - Russia invades Ukraine in Feb. 2022 - A slow recovery in 2021 has been followed by increasingly gloomy developments in 2022 - Global output contracted in the second quarter of this year like downturns in China and Russia, US consumer spending undershot expectations - Several shocks have hit a world economy already weakened by the pandemic like: **Growth projections (Real GDP %)**  **[Chapter 2: Historical Evolution of the GDP]** Mercantilism and Nationalist Political Economy Tradition: - Mercantilism is an economic theory that promotes government control over trade to achieve a favorable balance of exports over imports, aiming to accumulate national wealth and strengthen state power - Early forms of Mercantilism: - First writings emerged in 16^th^ century - By 17^th^ century, the core tenants were established like: - Dominance of national interest in economic policy - Central role of state in directing economic activity - Importance of creating trade balance for growth and prosperity - Viewed power and wealth as interrelated and interdependent objectives of - Viner 4 essential elements: 1. States overriding need for security in international anarchy 2. Wealth = condition for state power 3. Short run: it may be necessary to sacrifice economic wealth 4. International system = zero-sum game; economies compete for a given size of economic wealth - Friedrich List & Alexander Hamiltons nationalism: - States economic interests were balanced between long-term and short-term goals - "the" national econ. Interest consists of competing national interests - Specific policies: - Protectionism**:** The state should use trade barriers to protect local industries from foreign competition. - Infant Industries**:** Young industries need temporary support to grow and compete internationally. - Education**:** Developing a skilled workforce through a strong national education system is essential. - Infrastructure: Investing in infrastructure supports industry and boosts economic growth - Nationalism 20^th^ century: leading economies seek refuge in mercantilist policies in interwar period aggressive forms were nazi Germany 1933 and 1945 - Developing countries after WW 2: Theory of Dependency - Break of the exploitation between capitalist center and the dependent south - ISI = Import substitution industrialization - Contemporary mercantilism: Governments continue to pursue trade protection - Classical Liberalism - Adam Smith: It is an inquiry into the nature and causes of the wealth of nations (1776) - Attacking mercantilism: Rejection of state intervention as prescribed by mercantilism [and] State's role is to support, not hinder, the free interplay of market forces - Further development of these liberal principles over the next two centuries - Key principles: - Individualism and individual liberty - Market mechanism natural and most effective mechanism for coordinating individuals' pursuit of self interest - Limited government - Progress in history: Liberal principles will lead to prosperity and peace - International economic relations: - No zero-sum game: all nations can benefit from free trade and international division of labor But: in a world of international anarchy, no nation could ignore security concerns - Free trade liberalism: Further development of "peace-through-trade" principle: - D. Ricardo and the theory of comparative advantages - R. Cobden and the free trade that would end economic nationalism - Critics: Advantages for advanced nations and experience from the interwar period - 20^th^ century liberal theory: - New situation after WW II Construction of an open and liberal system and stop of believing in the link between peace and trade - Major strands of thought 1. Concept of interdependence ( R. Keohane & J. Nye) - Interdependence limits national autonomy and puts a high price on war and military expansion. Force them to more institutionalized and lasting cooperation 2. Theories of international institutions and regimes: - Concept of international regime by S. Krasner - It has brought to more orderly and stable international relations - Marx's Theories: Critique of the social basis of capitalism - The autonomy of individuals is constrained by the need to reproduce the capitalist system - Capitalism depends on an ever more-finely detailed division of labor - Capitalism dehumanizes individuals - Worker's interests do not coincide with interest of the capitalist system - "False consciousness" as a means of procuring consent - The logic of extracting "surplus value" from labor results in a procedural injustice - Seek to uncover exploitative dynamics in capitalist society and to present them as infringements of global justice - Structuralist approach conceives of world economy as a single, integrated capitalist system e.g. Lenin; Imperialism is the "highest stage of capitalism", capitalism had become a world system Conclusion: Simple, clear-cut divisions obscure the complex and diverse theoretical underpinnings of IPE as a fields of study A more accurate understanding of the historical roots of contemporary theories suggests that the categorization of these theories is a problematic exercise **[Chapter 3: The world economy system]** Introduction: Economic globalization is the widening, deepening and speeding up of worldwide interconnectedness it is not inevitable, immutable or irresistible - 1870-1914: First age of globalization - Currently: Second age of globalization this has been far more resilient and socially embedded than many have acknowledged - Economic globalization today is a dominant tendency in the world economy What is Globalization? Different understandings: - Economic dimension vs. a multi-dimensional understanding - Few discussions ignore the economic dimension, but we need to exercise caution when privileging the economic - In global political economy literature: globalization is conceived as a process, rather than a fixed outcome or condition - Globalization vs. globalism or globalized - Globalization generates emergent tendencies or systemic properties such that the world economy increasingly begins to operate as a single system - This integration has been facilitated by: Informatics technologies and infrastructures of communication & transportation has led to a "time-space compression" - Globalization is best conceived as embodying a rescaling of economic space - Is one of many tendencies ( regionalization, nationalization, localization) - Denotes a relative denationalization of economic relations - This rescaling is an uneven process Evidence of Globalization: 1. [Trade:] for post-war period, world trade has grown much faster than world output (since 1990s) now it involves a larger number of countries and sectors very important to economies and reaches deeper than ever before 2. [World trade] remains highly concentrated, geographically and sectoral Geographically: OECD and small number of East Asian countries Sector: manufacturing (58%), fuels (13,9%), services (20%) and agriculture (6,7%) Patterns of trade have changed over time there is a new global division of labor with increasing intra- industry trade and an expansion in South-South-trade 3. Significant non-tariff barriers to trade remain Distance, history and culture still influence patterns of world trade Much trade is conducted regionally there is an on-going debate as to whether the dominant tendency is regionalization or globalization -\> the evidence is inconclusive 4. [Finance:] International finance was previously principally considered an adjunct to trade By 21^st^ century, the direct association between finance and trade has become irrelevant The ratio of foreign exchange turnover to world merchandise trade has increased dramatically The level and geographical scope of global capital flows expanded enormously until 2008 But global financial flows reverse during the financial flows reversed during the financial crisis of 2008-09 and have subsequently been constrained by the euro crisis 5. Major stock markets have been become increasingly synchronized it's accompanied by processes of financial deepening 6. Production: Foreign Direct Investments (FDI) and production have increased dramatically since 1970 Transnational corporations (TNCs) drive this trend. Transnational production is increasingly replacing trade as the main way to serve foreign markets. FDI flows have become more geographically widespread and intense but remain concentrated in major OECD economies 7. Geographical concentration of FDI is lessening. FDI to poorer countries has significantly increased, with flows to developing economies nearly doubling recently. The mobility of productive capital and trade has driven major structural changes in the global economy: Industrialization of many developing countries New global division of labor Intensified transnational and interregional competition Transformation of production processes 8. Labor migration Labor remains relatively immobile, with migration flows mainly moving from South to North. Inter-regional migration grew significantly between 1950 and 2000. Migration is concentrated in urban areas and is increasingly urban-focused. Migrant remittances have become a crucial source of foreign exchange, at times surpassing FDI inflows (e.g., India in 2005). 9. There is broad agreement that trans-border economic activity has intensified significantly since 1945. While globalization has limits, the world can still be seen as imperfectly integrated rather than fully unified. - Economic integration is highly uneven. - Regionalization can complement and even strengthen globalization. - Globalization is neither inevitable nor irreversible, as shown by the Global Financial Crisis, which highlighted the tight interconnections in the global economy. Logics of Economic Globalization: There is no single, determinate cause of economic globalization (there are multiple dynamics at work) Principal logics: Technics - Technological change: modern communications infrastructure & modern modes of transport - New forms of transnational economic organization Second Age of Globalization: - It cannot be determined if second age of economic globalization is more intensive than first age - Qualitative differences between both ages of globalization - Real-time world financial markets - Breadth and depth of cross-border trade and financial activities - Speed of economic exchange - Profound qualitative differences - Scale of gross economic flows of goods and short-term capital - Institutionalization of economic relations at an inter-regional level - Second-age globalization is experienced much more unevenly - These trends produce novel political and economic dilemmas for all governments - Recovery of international trade after the Great Recession is not clear: - Trade tensions between USA-China - Brexit - Rise of Protectionism - Great Lockdown - Would there be a third wave of Globalization in post-covid world? - Merchandise Trade Volume: - Trade rebounded by late 2020, hit records in 2021 - Driven by high demand despite supply chain issues - Evolution of world trade - U.S. goods consumption up 17% (2019-2021) - Pandemic disrupted supply chains - Ukraine war worsens shortages, raises food and fuel prices - Trade retreat unlikely despite tensions - Global Foreign Direct Investment Flows (FDI): - In 2020 FDI, fell below 1\$ trillion for the first time since 2005 - Evolution of FDI - 2021: Surged back to above its pre-pandemic level - War Ukraine has withdrawal more than 400 foreign firms from Russia and reduced the FDI - Russia only hosts 1% of worlds inward FDI stocks - International Tourist Arrivals - Number of people travelling to foreign countries fell 73% in 2020 vs. pre-pandemic levels 2021 Ukraine war will slow the recovery from that (Europe) - Global Connectedness and Current Challenges - Trade hit record highs despite recent shocks like the pandemic, U.S.-China tensions, and Brexit. - The Ukraine war slows global flow growth but won't end globalization. - China, not Russia, will shape future flow dynamics. - March 2022 United Nations voted on a resolution condemning the invasion and demanding the withdrawal of Russian troops from Ukraine 141 countries voted in favor **[Chapter 4: Development in the World Economy]** What is "Development"? a variety of answers: sometimes competing conceptions and understandings In contemporary times, encompasses almost all facets of the good society A powerful term that can be used politically - Economic development: actions that promote the standard of living and economic health of a country/ area areas like human capital, critical infrastructure, environmental sustainability etc. - Economic development differs from economic growth - It's a policy intervention endeavor with aims of economic and social well-being of people - Economic growth is a phenomenon of market productivity and rise in GDP - Consequently, economic growth is one aspect of the process of economic development - Underdeveloped nations are characterized by a wide disparity between their rich and poor populations, and an unhealthy balance of trade. - Underdevelopment: lack of access to job opportunities, health care, drinkable water, food, education etc. - Different ways to measure development: - GDP per capita - HDI: Human Development Index (statistic 3of life expectancy, education and income indices) - Globalization and Development In the contemporary era of globalization large number of populations continues to live in poverty Inequalities between countries, societies increase How do we explain this? Advocates of globalization argue that: - Governments have failed to introduce the right kinds of policies, in the right kinds of ways to the right extent (more, not less neo-liberal reforms are required) - There has been insufficient engagement with globalization - Financial crisis is not explained by excessive levels of "openness" or "vulnerability" Critics of globalization argue that: - Neo-liberal policies work against the goals of growth and human development - They take little or no account of nature and global political economy that impose obstacles to development - The recurrent financial crisis is a crisis of globalization Thinking about Development - Modernization theory - Developed in the US - Development was understood as a process of social change less developed societies acquired characteristics common to more developed societies ("westernization") - Comprehensive view of development focused on social and cultural changes in addition to economic change - Rostow (1960) stages of economic growth - Traditional society - Preconditions for take off - Take off - The road to maturity - The age of mass consumption - Continuity of development theories of the 19^th^ and early- 20^th^ centuries - Underdevelopment theories - Origin in Latin America - Rival to modernization theories in 1960s and 1970s - Raúl Prebisch (1950) - Offered a view of relationship between global system and the conditions of underdevelopment - Global economic system divided into "center" and "periphery" - Terms of trade: "center" = favored, "periphery" disadvantaged - Dependency theory - Development and underdevelopment exist in a relationship of structural symbiosis - The structure of the global system serves to perpetuate underdevelopment and inequality in the periphery as a precondition for development in the center - World Systems Theory - From 1960s newly industrializing economies (NIEs) began to grow spectacularly - The emergence of NIEs fragmented the notions of "third world", "developing countries", "periphery" - This change was a key component in the debate between "neo-liberalism" and "neo-statism" - Neo-liberalism - "Human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets and free trade" - Cynicism about the role of states state interventions result in distortions that are negative to growth - Development requires: the consolidation of market-based mechanisms of organizing economies and allocating resources and engagement in global economy - Development fails because of internal factors: - "incorrect" government policies - Corruption - Institutional underdevelopment - Excessive state intervention in the economy - Neo-statism: " Developmental state" - Markets were "governed" rather than "free" - Challenged the neo-liberal perspective - The state shaped -- promoted the process of development - Key similarities neo-liberalism and neo-statism - Development is conceived as a national process - Development is understood to be economic growth - Human development approach - Economic growth did not always result in beneficial outcomes for the poor - Redistributive measures were required to target the poor and unemployed - Emphasizes the meeting of: basic material needs, access to key services and participation in the political and decision-making processes - Amartya Sen (1999): defined development as a process of expanding the real freedoms that people can enjoy - Other contemporary approaches Gender-focused, environment-focused - Take issues with - The definition of development centered on economic growth - The notion what develops is: countries/ national states/economies rather than people - "People centered" approach - Improving the material and social conditions in which people live - The expansion of opportunities/capabilities/freedom that shape these conditions - Development theory in practice - The Millenium Development goals (MDGs) - All united nations member states committed to help achieve the MDG by 2015 - G8 countries agreed in June 2005 to provide enough funds to cancel \$40 to \$55 billion in debt owed by members of the heavily indebted poor countries (HIPC) to allow them to redirect resources to programs for improving health and education and for alleviating poverty - The sustainable development goals are the blueprint to achieve a better and more sustainable future for all - The SDGs, set in 2015 bx the United Nations General Assembly and intended to be achieved by the year 2030, are part of a UN Resolution called the "2030 Agenda" - Summary: there is still little consensus on: what development actually is and how it might be achieved - Questions: - Why does globalization not solve the problems related to underdevelopment for an import share of world population? - What should these countries do to improve development? - Is Globalization the answer or the problem? **[Chapter 5: The financial and monetary order]** - Introduction Money and finance can serve political, as well as economic purposes At the international level the answers to these questions have profound political implications What money should be used to facilitate international economic transactions? How should such money be managed? What should be nature of the relationship between national currencies be? How should credit be created and allocated at the international level? - Earlier Globally integrated Order - In late 19^th^ and early 20^th^ centuries; the international monetary regime was much more integrated than in the current period - During first world war; cross border financial flows reduced dramatically - After WW 1 the UK and US attempted to restore the pre-1914 international order - 1930s: major international financial crisis triggered the collapse of international lending and gold standard - The Bretton Woods Order - The goal of rebuilding the international monetary and financial order post WW 2 - Key elements: - "Gold Exchange" standard currencies were pegged in relation to the gold content of the US dollar - Currencies were convertible for current account transactions - Capital movements were controlled - Ideas behind it: - Collapse of Gold Exchange Standard - 1960s: US currency grew considerably larger than amount of gold that US held to back it up - 1971: US suspended the convertibility of dollar into gold end of gold exchange standard - Evolving International Monetary Regime - 1978: amendment of the IMFs came into force which legalized floating exchange rates; thus, formally ending the peg system - 1980s: long-term misalignments led to depreciation of US dollar - Plaza Agreement (1986) & Louvre Accord (1987) - Bretton Wood II : (2003) - Undervaluation of national currencies East Asia (China) to support export industries - US gets cheap imports and low-cost foreign funding of its trade deficits - Debate if this situation of "global imbalances" is sustainable - European Monetary Sytem (1979) created mini adjustable peg regime: vulnerable to speculators - Maastricht Treaty (1991) committed members to full monetary union by 1999 - Euro crisis - Intra-regional imbalances - Lack of flexibility in wages and prices (government preferred to borrow) - Resolution requires: **[Chapter 6: Regionalism in the Global Economy]** - Introduction - End March 2013 only 4 of the WTOs 159 members were not party to one or more regional trade agreements - All non-global trade agreements are scrutinized by the WTOs Committee on Regional Trade Agreements (RTAs) - "regional" or "free" trade agreements are probably better termed "preferential" trade agreements (PTAs) because many are not regional in the conventional sense of the word - In recent years large number of PTAs have involved only 2 parties (bilateral agreement) - PTAs can occur between neighbors or between countries that are far away - Regionalism = formal process of intergovernmental collaboration between states - Regionalization = refers to growth of economic interdependence within a given geographical area - Why Regionalism? - Political reasons for entering RTAs - Economic reasons for entering RTAs - The Rush to Regionalism (see chapter 2: industrialization) - First wave of regionalism in early 1960s - Response of the European economic community 1957 - Many linked less developed countries together (south -south oriented) - Second wave since mid-1990s emerged a result of: - End of the cold war opened up new possibilities for economic partners - Growing integration of markets pressure for governments to pursue market-friendly policies - Frustration with the difficulties of negotiating global agreements - Need to ensure compliance with WTO rules - "contagion" effects (=Contagion effects happen when problems in one country spread to others because they are connected) - Political Economy of Regionalism - Why would firms support regionalism? - Regional institutions have to be given more competence and power if members broaden the scope of policy issues for cooperation - Free trade areas (FTAs) are attractive to many governments because no need for strong regional institutions - Economic Consequences - Estimating the trade effect of PTAs is difficult due to many different variables - Factors that can affect the volume of trade between two countries: - PTAs have: - Difficult to estimate the effects of economies of scale and competition dynamics - Generally: the impact of PTAs appears to be minor than other facts like floating exchange rates - Regionalism and the WTO - Will PTAs obstruct global trade liberalization? - PTAs seen to facilitate global negotiations because: - Regional groups reduce number of actors in global negotiations - Deeper regionalism within regional groups can serve as models for global level - Regionalism can lead to a domino effect and broaden the scope of liberalization However: - Regional groups have little flexibility in bargaining - Until now no evidence that deeper regional cooperation has translated to global level - Firms may have little incentive to lobby governments if PTAs are shallow - PTAs hinder global negotiations because: - They magnify power disparities that lead to resentment in smaller, less developed economies - They divert scarce resources away from global negotiations - Spaghetti bowl effect increases the cost of international trade - PTAs enable governments to exempt sensitive sectors from liberalization, thereby strengthening protectionist forces - The link between PTAs and global trade liberalization is debated, but hard to test.