Globalization and Economics ECO613 Handouts (PDF)

Globalization and Economics ECO613 VU GLOBALISATION AND ECONOMICS CONCEPT OF GLOBALISATION...

Globalization and Economics ECO613 VU GLOBALISATION AND ECONOMICS CONCEPT OF GLOBALISATION Lesson 01 Topic 01-Topic 04: The introduction of globalization has been mentioned with some basic definitions. No need to memorize these definitions only need is to understand the phenomenon of globalization by focusing the key words in each definition. Meaning, Definition and Concept 1. Initially non-refined but raw definition of Globalization may be described as: ‚Emerging of an international network, belonging to socio-economic system; Interdependence in its economical and Informational dimensions‛. 2. According to [Anthony Giddens]: The intensification of social relations throughout the world, linking distant localities in such a way that local happenings are formed because of events that occur many miles away and vice versa. 3. [Martin Albrow & Elizabeth King] (sociologists): All those processes by which the people of the world are incorporated into a single world society. 4. Properly defined by [Ronald Robertson]: The understanding of the world and the increased perception of the world as a whole. 5. [Friedman, 1999] ‚Globalization is the integration of markets, finance and technologies in a way that is shrinking the world from size medium to size small and enabling each of us to reach around the world farther and cheaper than ever before.‛ 6. [Stiglitz., J. 2004] ‚The closer integration of the countries and peoples of the world “ brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders.‛ Term used in 1930 referring new educational scenario, in 1897 by Charles Russell mentioning ‘Giant Corporation’ biq_p_l in 1940 this term has become the part of literature but less frequently used till 1980. There are various aspects where globalization needs to explain (explore) in details: i. Globalization is multifaceted and multidisciplinary: It means scope and coverage of globalization consists of many forms (shapes) and linked with many disciplines of life. ii. Economic integration: it helps to connect the economies of the world through trade of goods & services; cross border corporate investments & capital flows; migration of human resources (as a Factors of Production); and especially increase in economic freedom, competition & productivity. iii. Poverty mitigation (lowering down) as more capital resources are available to labor or land abundant countries that can employ their idle or underutilized resources more productively and raise the level of their per-capita incomes by generating more employment opportunities. iv. Providing models for economic development perspectives: EU model, China model, US-UK model v. Brand of capitalism: it has three main characteristics based on generation of knowledge & skills; (a) Management; (b) Productivity; (c) Competitiveness. vi. Economies have been transformed into New Economy: As digital economy has changed the concept of economics because distance is replaced with virtually everyone is connected, trade relations are now business network across © Copyright Virtual University of Pakistan Page 1  Globalization and Economics ECO613 VU the world, geographical space is measured in virtual space and the speed of communication & transportation is following the speed of light. Negative side effects of Globalization process First the power of multinational corporations (MNCs) has been increased intensively because such giant corporations are able to use of cheap labor and resources across the world beyond jurisdiction of a given country. These MNCs has changed the consumer mind set through advertcm_g_hn nb[n ‘Brand is more important than the product itself’. Tb_m_ [l_ ][j[\f_ ni influence the policies of poor nations because such businesses usually afford to finance projects where poor communities can be engaged like health and education through non-governmental organizations (NGOs) to acquire benefits much larger than nb_ ]imn. Ep_h nb_m_ [l_ mi go]b ch`fo_hnc[f nb[n nb_s ][h ‘penetrate in and reshape the social life of the people’ nblioab g_^c[. Mimn i\pciom ion]ig_ i` nb_cl jl_m_h]_ cm nb_ ‘distorting local production process’ because they enjoy economies of scale where production of more output leads to lower down their per unit cost, as a result they become able to sell better quality products at lower price compared to local industry. Second, the most dangerous outcome of their presence is the remarkably increased ‘income inequalities’ [m mo]b ]iljil[ncih `[pilm lc]b m_ag_hn i` nb_ mi]c_ns [m [ n[la_n g[le_n [h^ _p_h bribe in various forms like financing foreign tour for professional, frequent dining, and offering precious gifts etc. Consequently, the gap between rich & poor segment of the society in a given country further intensified. The increased dependence of poor on rich paves the way towards economic and political crises. There is need for devising the rules and regulation for such corporate business that can impose some limitation regarding their behavior and level of penetration within the host economy. The purpose should not discourage them but to reduce the negative impact their presence may cause. The possible framework of such regulations must ensure that: a. Cross-generation needs must not be compromised (common resources should be used carefully and must be available to the next generation of population of the given country, e.g., minerals, fisheries, clean environment, land fertility etc.) b. Cultural identities of nations should not change suddenly (as naturally change over long time) c. Labor rights parity viz. such corporation must not exploit the poor labor of low-income countries (although these corporations provide job opportunities to the labor of such countries and justifies low wages compare to their homeland, however, exploitation of labor in various other forms must be dealt with legal actions) d. Production capabilities and people of the host countries must be considered real assets by these businesses rather considering the local productive capacity as a threat and people as slaves.) e. Regulation for safety of information from being misused and environmental damages must be incorporated when foreign business are allowed because it will help to immune local people and business both and provides a shield against potential risk accompanied by foreign businesses. f. It should be made essential to these businesses to impart technical knowledge and skill to the workers of host country for their wellbeing because it is paid back in form of new ideas and creativity that evolves in such countries. It further regenerates innovations. g. Rules and regulations must be standardized across the countries of the world to make sure no corporate business has the option to avoid them, and these should have been fully driven by international organizations by restructuring their policies in favor of poor communities. When countries implemented ‘CAPATALISM1’ as their economic system to allocate resources, private businesses use this opportunity to excel and grow rapidly till they get the ability to expand their business beyond the geographical limitations of their homeland. Once these businesses learnt to come out of political and legal jurisdiction of the state governments (of their own countries) they start replicating this style to other (host) countries as well where they 1 Private people can own their assets and increased as much as they need. 2 Doing full scale business by opening offices, factories or participating in local trading with physical infrastructure. © Copyright Virtual University of Pakistan Page 2  Globalization and Economics ECO613 VU set in their businesses. This behavior causes greed (that can be controlled by moral and religious obligations, but separation of religion from worldly life wipes out this potential self-regulating mechanism by default existing within every human being), the outcome of this greed ‘hurts’ societies. Globalization Hurts: Loss of Quality of Life 1. Remarkable inequalities among communities have been introduced by MNCs through foreign direct investment (FDI2) a good example is the two brands Adidas & Nike as they pay 13 cent/hour wage to the labor in china which is extremely lower than whatever they use to pay $10/hour in United States. 2. As these businesses specialize in specific field of production therefore to get economies of scale, they have to creating market-need for selling their products groups (tobacco, drinking water, pampers, smart phone etc.). To achieve their objectives of target sales across the world markets these corporations instigates brand phobia among children and youth through various media with diversified advertisement strategies (even through cartoons and movies) 3. Extensive expansion of business especially in well-populated areas needs physical space which usually have already been occupied by local businesses. Therefore, these corporate giants use political and economic leverages to get such space for their office/ production units /warehouses by inducing local governments to privatize the recreational spaces including public parks and playgrounds by excluding children, youth and aged people from the source of physical activities. 4. As International institutions like World Bank and European Union are either operated by or financed through these corporate giants hence shape up the policies of highly influenced countries in favor of corporate needs by defeating the people needs for hospital/roads/prisons/education etc. 5. Biotechnology companies have assumed the control of food chains and start influencing the taste of consumer. 6. Management theories taught during 1980s ihq[l^m b[p_ g[^_ ‘\rand’ gil_ p[fo[\f_ compared ni ‘a_hoch_ jli^o]n’ m_lp_^ nb_ joljim_ i` ]iljil[n_ m_]nil compared to establish true knowledge for the wellbeing of humanity. Corporate sector established the logic nb[n ‘build brand with virtual bricks don’t spend resources on mortal resources like plants and employees’ mainly followed by the popular brands like NIKE, LEVI’m, COCACOLA _n]. Folnb_l []]il^cha ni ]iljil[n_ gch^m_n ‘Brand can damage disproportionately the sales and profit margins.’ Ti \ocf^ nb_ brand image ‘personality referring’ is everything. Explore the Key Aspects of Globalization Themes and Multi-Directional Context  Spread of technologies (ICT) relocation & over-territoriality  Connectivity (social-economic-cultural-political linkages Speed & power of technical innovation & risk with peripheral to central dependence) Growth of multinational corporations Instability & division due to free global markets  Shift of power (Nation state to TNCs) Economic dimension  Spreading of ideas (universalization) Financial dimension  Power of change Business dimension  Science/knowledge (prosperity drive) Political dimension  Technology (3rd FOP) Technological dimension  Alive science of capitalism (idea transformed into Environmental dimension commercial product leads to generate consumer wants) Cultural dimension  5-Vector effect human society (economics; military; political; Educational dimension religious; cultural) Int. relations dimension Int. security dimension  Intellectual property rights  Risk trapping & boomerang effect 2 Doing full scale business by opening offices, factories or participating in local trading with physical infrastructure. © Copyright Virtual University of Pakistan Page 3  Globalization and Economics ECO613 VU Lesson 02 CHALLENGES OF ECONOMIC GLOBALISATION AND POVERTY ALLEVIATION The process of globalization is a long-time process where in history variety of events have been occurred and contributed for the emergence of a this ‘situation’ which is named as globalization now. Since ‘globe’ refers to the earth (world) where human and other life coexists as an establish fact therefore increased connectivity and mutual interaction of all living creatures (mainly human being) across the globe considered to be the process of converting many small worlds into one big world where all human beings are linked through the systems of networks (through business and trade). This networking is ‘dynamic’, means changing overtime (increase or decrease) in its nature, scope and capabilities to connects not only human themselves but many other elements (commodities) of life with the humans as well. Consequently, the word ‘Globalization’ was coined to capture and comprehend this process and situation. In present day this terminology primarily refers the business and trade linkages across nations. Topic 05: Economic Globalization Historical Process 1. Waves of integration & dismantling 2. Components of Globalization  1492 – 1870“ varieties of discoveries and inventions have  Exchange“[m ch nb_ _[lfs bcmnils _r]b[ha_ i` goods and occurred which favors the process of integration of world services, movement of factor of production were the basic source communities with each other via increased scope of doing of linkages within and across communities. business. New form of business strategies emerged as well  T_]bhifiac][f ]b[ha_ “ch l_]_hn bcmnils n_]bhifias \_]ig_m nb_ (presently known as Multi-National Corporations) major factor that connects the communities or nations.  1870 – 1914“encouraged integration, more trading.  Level of Diffusion (Technology, Culture) if increased more would  1914 – 1945... discouraged integration because some societies be the globalization. prefer to apply protection for their local business.  Convergence in Prices of commodities and Wages of laborer will  1945 – 1970“after two world wars establishment of World be more with increased globalized world. Bank and IMF helped to increase the connectivity by resolving  Institutional innovations have been emerged such as Federal their conflicts. reserve system (state bank) moving beyond their original role of  1970 – 2000“reformation of GATT into WTO and managing monetary policy to the premises of fiscal policy propagation for free trade slow down the process because of management. losing marketing share in international and even local  Legitimacy & Efficiency of the Markets may be intensified as an business by developing countries if free trade is fully opted. outcome of globalization. Increased Trade-offs: (viz. you must choose one option at a time out of more) Countries have to make choice of two amongst three possible options: ‚Globalization; Nation states; Democracy‛ in such a way that either accept ‘Market dictatorship’ (like European Union) at the cost of democracy to allow independent nation states to join globalized world or compromise independence of states governments in favor of ‘global federalism’ to ensure coexistence of democracy with globalization or sacrifice globalization to hold democracy and nation-states as committed under Bretton Wood Agreement Opportunities created due to the process of globalization:  Availability of cheap capital and technology that will be accessible to the poor communities/countries those otherwise could not be able to attain the benefits technological development.  Labor immigration/emigration has happened to raise the both the flow of remittances for low income developing world and even generated the reverse Brain drain. It happens because those migrated earlier to developed areas for © Copyright Virtual University of Pakistan Page 4  Globalization and Economics ECO613 VU availing better growth and skill development opportunities have learnt such technical skills and innovative knowledge that can be applied now in their own homeland. Hence the journey of growth and development across poor or low-income communities (countries) over time attracted their own citizens working abroad or doing business there to come back and apply both capital resources as well as innovative skills to propagate the process of development in their own homeland.  As referred by (Sala-i-Martin, 2006) that the opportunities explored by globalization process have various positive effects on growth. Challenges imparted through the process of globalization:  Governments are losing slowly the abilities to regulate Markets and redistribute their national resources as per their own preferences [National Sovereignty Trilemma (Rodrick,2000)]  Competitive advantages are successfully replacing the comparative advantages of the countries in terms of trade and business. Because although comparative advantages still have importance based on specialization and division of labor potentials but application of innovative behaviors for raising the demand of commodities a given country supplies in international market became extremely important. While use of advance technology in production and design has made possible to improve the quality, durability and even the utility of the product much more that ensures the long-term commitment by raising market share with decreasing cost viz., high and sustainable profit margins.  Institutional strength has proved to be the best nurturing field for the exponential growth and retrieve solid fruits by making globalization more mature. In contrast, the weak and poor institutional setup (which is the obvious outcome of poor policies and management of low-income countries with vision of growth) has lead such countries or communities unable to manage the fruits of globalization.  Malfunctioning of international financial markets has become obvious through various financial and currency crises. The problem is that in this globalized world any type of financial or currency crises cannot be restricted to the one or few countries only because virtually all the countries across the world are now financial integrated (united) via internet and banking systems. The international financial institutions were established to stabilize the financial flows to keep the trade and business smooth amongst countries, \on nb_m_ chmncnoncihm ]iof^h’n jf[s nb_cl role and even failed to warn the economies about the crisis and provide the solid solutions to prevent reoccurrences.  Presently international institutions have assumed the responsibility to dictate the laws, make standards (ISOs) rules- regulations to impose on poor and low-income developing world which has increased the cost for developing countries and made their commodities less competitive in the international markets. Actual purpose of existence for such international institutions must be to become instrumental and facilitator for developing countries and ensure their integration with globalized world quickly.  Widening income inequalities across countries (even within a given country) has been another challenge where role of high-income countries to ensure resources sharing with developing world is essentially needed otherwise this gap may reverse the process of globalization, because there are large number of developing countries and poor economies as compared to developed one. Major beneficiaries of globalization process are (high income) OECD countries, China, India, Mexico. © Copyright Virtual University of Pakistan Page 5  Globalization and Economics ECO613 VU  Distribution of power in international system is favorable towards developed countries which are the major decision makers for resource allocation in the world.  Politics interests has made the process of globalization a bit more difficult or inconsistent. As the policies design be the governments (both developing and developed countries) are following their respective political and vested interests. So, the level of trade openness, permission for FDI through multinational enterprises as well as capital flows are deviating from the true needs of communities to whom it is meant for. Topic 06: Geopolitical competition reshaping global connections: Win-Win situation for companies & states Since various economies of the world bound to reshape their relationship because of various changes happening across the globe including repositioning of existing relationships or establishing links with new allies (European Monetary Union as an example). This phenomenon is very obvious with emerging growth patterns where the countries, who have made strong link through trade, investments and human resource exchanges, have achieved remarkably high levels of output and crossed the millstones of development process. For effective governance, new strategies have been evolved including control over fuel and energy resources, water source, minerals, financial markets, flow of internet etc. Consequently, if single country is poor in terms of such governance than more powerful trade or political partner of that country get more influence and dominance in their internal policy mechanism and ultimately causes her sovereignty under threat. An emergence of power hierarchy has also been observed based on national and religious conflicts within the country and even in cross country ties induced another type of crisis which is referred as terrorism. The appearance of terrorist organizations on international landscape like ‘Af-Qaida’ and ‘ISIS (named: Islamic State of Iraq and Syria)3 has initiated a new war for gaining economic and political control in various regions of the globe. This has converted the whole world into an economic battlefield. Which includes strategies from imposing economic sanctions to military strikes on the one hand and establishing trade blocks to military alliance on the other. This war has ]b[ha_^ cnm `ilg[ncih `lig q[l `il ‘i]]ojscha territory’ to ‘][jnolcha _]ihigc] jiq_l nblioab currency war’. Conventional arms are used to control resource price such as oil, energy and food etc. These developments across the globe have changed the rules for competition as well where pursuit of both power and profit f_[^m gimn i` nb_ ]iohnlc_m niq[l^m _cnb_l ‘gil_ economic integration’ il ‘_conomic warfare’. Tbcm jli]_mm `olnb_l i\pciom qb_h [n l_acih[f il ]iohnls f_p_f gultilateral regimes set in, and individual country has to declare her position. Th_ lif_ i` nl[^_ ch j_nlif_og ‘icf’ [m [ jlcg_ miol]_ i` energy has become very important because variation in its price causes impact on all economies of the world (few gainers more losers) hence focus of competition deviates from resources towards other factors. The main outcome i` nbcm m]_h[lci cm nb_ `ilg[ncih i` mig_ ]iohnlc_m [m ‘qinners’ fce_, China; US; and EU because they can shape their own future, [h^ g[hs inb_l ]iohnlc_m [m ‘fosers’ \_][om_ nb_s fail to become independent and hedge from the influence or support from large economies or even from international institutions/companies. Ahinb_l ion]ig_ cm nb_ ‘[ntithesis’ nb[n b[m \__h _pifp_^ [m q_ff l_`_llcha nb_ ‘iverwhelming dependence of each individual country on the global economy’ [h^ l[cm_ the new challenges for interdependence and corresponding benefits. Topic 07: Challenge One: Energy and Environmental Security 3 A long list of ‘declared terrorist’ organizations can be found at https://www.state.gov/foreign-terrorist-organizations/ (it not necessary that we may agree with this list but to know the true level of biasedness against Muslims community, it will be helpful) © Copyright Virtual University of Pakistan Page 6  Globalization and Economics ECO613 VU 1. US Energy Information Administration (EIA) has identified two major concerns of increased globalization: (i) Increased consumption of electricity across the globe; and (ii) Use of Gas & Coal for production of electricity. These two situations are the considered the reasons behind high level CO2 emission which is an ‘environmental threat’ \_][om_ i` jimmc\f_ ^_jf_ncih i` ‘OZONE’ fayer ‘a thin part of the Earth's atmosphere that absorbs almost all of the sun's harmful ultraviolet light’ and ‘with a weakening of this shield, we would be more susceptible to skin cancer, cataracts and impaired immune systems’ (Google it and find more). 2. Kyoto Protocol process ‘commitment mad by industrialized countries and economies in transition to limit and reduce greenhouse gases (GHG) emissions in accordance with agreed individual targets4’ b[m \__h chcnc[n_^ ch 1997 \on failed to obtain full international cooperation on carbon emission, to date. Issues related to Carbon & Sulfur reduction are need. To achieve this purpose different strategies have been opted and suggested. Perpetual permits for GHG emission have been issued that leads to evolve different types of interest group. Annual permits are also considered with expected efficiency through carbon tax and the most import is the Investment for the introduction of production technologies that helps to reduce carbon emission per unit of industrial output. Topic 08: Challenge Two: Conflict and Poverty Economic Conflict due to weak economic growth and highly vulnerable socio-economic conditions in many countries of the world. The low but even more volatile (unstable) income sometimes drive these countries into civil conflicts. The studies conducted by the British department of international development reveals that the probabilities of conflicts are high (15%) in those countries where income level is around $250, and very low (1%) where per capita income is around $5,000. Further according to the World Bank study5 ‘risk of civil war’ cm nb_ mcahc`c][hn ion]ig_ i` ‘primary commodity export’ and ‘low income’. Logically higher income generates more jobs opportunities and potentials for higher wages allow to retrieve higher tax revenue, consequently being the part of rebellions is too much costlier. Inducing and recruiting people for such purposes become unaffordable this means very high opportunity cost to join conflict for an individual or a group. In contrast Poverty is the source of Conflict because low income causes a vicious cycle of low income due to no/low savings and short of investment the outcome is high level of unemployment which rises as well, it puts pressure on the existing wage structures and reduce the capacity of existing worker to ask for rise in wage, sometimes they even have to accept low wages or work more hours for the same wage because of obvious exploitation. This accumulates the anxiety amongst workers and encourage them to move into conflicts for any prospective relief, consequently the opportunity cost of joining rebellions or strikes or mobs becomes zero if not negative. If dominant sector of economy is facing such situation, then it goes beyond the capacity of law enforcement agencies so ultimately political and social conflicts arise for limited resource with full force. As being a Primary commodity exporter, the countries can produce on low value exports whereas growth in technologies in developed countries ensure availability of better substitutes for such commodities in these low income developing countries hence causes further decrease in their volume of exports. This leads to have low and diminishing export earning even with sometimes rising volumes of output (or efforts to generate that output). Divergence between export earnings and import payments intensify the balance of payment (BOP) deficits. These BOP deficits bound such countries to raise the level of their 4 Get more details at: https://en.wikipedia.org/wiki/Kyoto_Protocol 5 Source: https://www.globalpolicy.org/component/content/article/182/33884.html © Copyright Virtual University of Pakistan Page 7  Globalization and Economics ECO613 VU borrowings so that they can clear their accounts with international traders, not only compromise their sovereignty but make them less competitiveness as well because of perpetual dependence on primary commodities-based exports. Over the time they start losing their market share because of more advance technologies that help to increase exploration of raw material in other parts of the world. On financial side it causes decline in foreign exchange reserves and consequent high dependence for finance on international communities and organizations like IMF or World Bank. Such countries become vulnerable to crises and conflicts in financial and political matters. © Copyright Virtual University of Pakistan Page 8  Globalization and Economics ECO613 VU Lesson 03 Challenges of Economic Globalization and Poverty Alleviation Topic 09: Challenge Three: Global Imbalances Balance of Payment Disorder reflects imbalances in Terms of Trade (current account of BOP) because export receipts are lesser than import payments; domestic savings are shorter than domestic investment and even government expenses outpace the government revenues generated via taxes. When loans are taken to fill these gaps and finance the deficits with high frequency (viz. year over year) it accumulates in each year and consequently converts into debt. The debt means two payments on regular (yearly basis) (a) proportion of principal amount and (b) interest payment in each year. Another problem arises when ‚Debt to GDP ratio‛ ]limm_m [ ]lcnc][f f_p_f omo[ffs [mmog_ m[`_ c` _ko[f ni 60% il \_fiq (cn g_[hm 60% i` nb_ total income generated from the economy goes to pay debt. However, if Capital Account is also out of balance, suppose foreign investment inflows are larger than the domestic investment outflows then it is favoring the BOP by compensating some or all imbalance in current account. Foreign Exchange instability will cause loss of foreign exchange reserves lowering capacity to pay for imports, country has to take loan for such payments, if happened frequently the debt burden will intensify. Poor stocks of foreign reserves with rising debts will reduce the trust over domestic currency and credibility of such currency will be lost. Another imbalance is related to income where gap between rich and poor intensified. Scenario 1: For example, a country has deficit of 1 crore rupee in year 2000, and it continues for next 10 years then it will make debt of 10 crores only if every year’s interest is paid and deficit is not growing. Now it needs to pay back in next 5 years (assuming no further deficit after 2010). Principal amount per year will be 2 crores fixed and diminishing interest 2 crore in year 2011 and lower 1.6 crore in 2012 etc. Scenario 2: For example, a country has deficit of 1 crore rupee in year 2000, and it continues for next 10 years then let suppose it may become debt of 15 crores if every year’s 20% interest is not paid and deficit is growing with the rate of 20% as well. (1 crore in 2000; 1.2 crore in 2001; 1.44 crores in 2002 and so on.) Principal amount per year will be 3 crores fixed and diminishing interest 3 crores in year 2011 and lower 2.4 crores in 2012 etc. Topic 10: Challenge Four: Global Competition The scope for the developing countries to become the part of rapidly expanding business across the world has increased. It is needed to be competitive with rising wages however these economies are facing these limitations including low productivity growth; stagnant real wages in business; pro-financial investment behavior due to low returns on real investments; persistently high trade deficit; high tech industries lost market share and with rising Offshoring. In addition, developed countries and other international institutions add fuel to fire by dictating terms for trade and investment which is the need of time for countries like China, India and Middle East. Topic 11: Challenge Five: Rise of New Powers BRICS stands for ‘Brazil; Russia; India; China; South Africa’ consists of 40% of the world population, 17% global trade higher than 25% of the economic market share; 30% of world GDP. This block is challenging European Union as emerging donor. As China and India have become manufacturing and service producing powerhouses, whereas Russia and Brazil take the position of main supplier of food, energy, and raw material. The market capitalization of this block as a % of GDP from1990-2010 was observed as 74% (Brazil); 93% (India); 77% (Russia); 81% (China) and 278% (South Africa). © Copyright Virtual University of Pakistan Page 9  Globalization and Economics ECO613 VU Topic 12: Challenge Six: Economic Exclusion Employment & Economic opportunities (Region-wise) In the middle east it has been observed that the youth unemployment rate approximates to 32%; 50% of the total population consists of 15 – 24 years age; wig_h’m unemployment rate is 50% more than the m_h’m unemployment rate. Whereas compared ni ‘`ilg[f m_]nil’, ch nb_ ‘cnformal sector’ mcno[ncih cm gil_ nlio\f_mig_ qcnb p_ls low wage, poor working condition and high job insecurity. In the developing regions, the observations overtime show that there is a loss in GDP growth, increased intensity of poverty, relatively high Green House Gases mainly CO2 emission, rising unemployment and income inequality with declined expenditures on education (in their respective budget allocations). Topic 13: Challenge Seven: Global Corporations & Governance Global Corporation has expended across border via financial flows. Global-Value chain has been established across countries as well. It has emerged another j_lmj_]ncp_ `il ]iljil[ncihm ch `ilg i` ‘Social Corporate Responsibility’ \_][om_ i` nb_ increased scope of political power these corporations acquired with their business and economic influence. Multinational corporations have been expended in terms of their scope and operations, bound them to be adaptable for goods and services according to the local needs of the local markets and culture. The most suitable examples may be Unilever, Proctor & Gamble, and M]Dih[f^’m fast-food chain amongst many others. Further, transnational corporations (TNCs) delegate some of the powers to the local operators ch n_lgm i` ‘coordinated product offering’ ch]fo^cha ‘decision making’ regarding specifications of commodities, marketing strategies and design, and research & development activities. This happened mostly in Information Technology firms, Pharmaceutical and Petroleum industries. Now the problem is that all international institutions have been deviated from their original agendas or missions that in most of the cases are not align with the objectives of developing countries especially. Such as International Bank for Reconstruction and Development (IBRD) normally referred as world bank, international monetary fund (IMF) primarily established to finance the trade deficit of the various countries to pull them out from crises, world trade organization (WTO) which has been a new formation of general agreement for tariffs and trade (GATT) with objectives6 ni ‚(a) to help raise standards of living; (b) to achieve full employment; (c) to develop the world's resources; (d) to expand production and exchange of goods; (e) to promote economic development‛ In addition the United N[ncihm ‚committed to maintaining international peace and security, developing friendly relations among nations and promoting social progress, better living standards and human rights‛7. Another perspective regarding economies of the world has been evolved as clubbing the democracies to report their performance jointly, such as ‚G7; G8; G20; BRICS‛ (Use google for complete information) Global issues related to international peace and security qcnbch nb_ ]ihn_rn i` ‘terrorism’ b[m \_]ig_ nb_ gimn bcabfcabn_^ one. However many others include ‘sustainable energy source where environmentally friendly policies are extremely desirable’; ‘_mn[\fcmbcha [ fegal frameworks for trade and for foreign investment by introducing the international standard order (ISO) has become imperative to be followed for surviv[f’; ‘nb_ m_hm_ i` ]ompetition has been transformed into the sense of cooperation’; ‘ h__^ `il l_mifpcha ]ih`fc]nm l_f[n_^ ni jifcnc]m, mi]c[f, ]ofnol[f [h^ a_ial[jbc][f [mj_]nm [gihamn 6 https://docs.wto.org/gattdocs/q/GG/MGT/58-44.PDF 7 https://www.un.org/un70/en/content/history/index.html#:~:text=The%20United%20Nations%20is%20an,living%20standards%20and%20human%20rights. © Copyright Virtual University of Pakistan Page 10  Globalization and Economics ECO613 VU ]iohnlc_m ni _mn[\fcmb nb_ momn[ch[\f_ j_[]_’; ‘`il_][mncha [h^ b[h^fcng the financial crises where ‘World Economic Order8’ has been suggested to ensure financial stability across the countries of the world. The global future is now in the hand of such leadership which can design an economic system based on anti-poverty because if they fail to remove poverty then there will be no future for globalization. 8 https://www.csis.org/world-economic-order-present-and-future © Copyright Virtual University of Pakistan Page 11  Globalization and Economics ECO613 VU Lesson 04 Challenges of economic Globalization and poverty (continued-2) Topic 14: Challenge Eight: Global Health Crises & Workforce Health and Social Security status is very poor because of short of health facilities as 2 billion jijof[ncih ^ih’n b[p_ jlij_l health facilities. The staggering level of preventable disease in case of Malaria; Tuberculosis; HIV/AIDS; Polio; Cancer, Diabetes in the poor and developing countries happened due to insufficient health spending. Hence there is need to finance health care whereas aid for health has already been multiplied. Add fuel to fire when in these economies out-of-pocket expenses have shifted from public to private where already poor masses cannot afford the medical expenses due to poor earning potentials. In poor economies and developing countries the workforce needs to be freed from ‘galnutrition’, ‘mickness’, ‘^isability’, [h^ bealth hazardous working environment Topic 15: Globalization may intensify the problems related to: i. Poverty ii. Domestic Income Distribution iii. Global Income Disparities According to economic viewpoint, academic curiosity and political debates need to explore the effect of globalization on wage and income inequalities within and across countries especially large number of poor and developing countries where globalization has been considered as the window of opportunities and growth. Initially expected that globalization guaranteed the success for low-income segments of global society through expansion of trade, intensify specialization and create more employment. However, possible outcomes of globalization for developing economies may include: a. Rise in short term unemployment rate b. Aggravate poverty incidence on unskilled / semiskilled labor because of labor market distortions (viz. low degree of wage flexibility; imperfect labor mobility across sectors or regions) impedes labor market to execute the trade reforms. c. Intensify competitive pressure on domestic firm and some of them may have to exit, due to entry of global firms / transnational corporations (TNCs). d. Slow / nonexistent reallocation of labor from (uncompetitive) non-tradable to (competitive) tradable sectors because scant provisions for re-skilling the newly unemployed workers. Since recent trade theories focus on trade-growth nexus that really matters in high-technology industrial based economies. Mostly developing countries are technologically timeworn with non-dynamic, low-tech export orientation such as textile or raw material. Consequently, globalization-led trade liberalization initially squeezes growth and trade potentials but via increased financial flows and high-tech imports leads to generate dynamic gains over time. The length of the gestation period is uncertain wherein globalization fails to impart any significant impact on poverty alleviation and economic growth. Further, demand for unskilled or semi-skilled labor declines with globalization augment the intensity of poverty and skewed income distribution. Emotional responses and resistance emerge from some societies when low-skill labor wages deviate more, or closure of business add more people in the queue of unemployed. Topic 16: Income Inequality © Copyright Virtual University of Pakistan Page 12  Globalization and Economics ECO613 VU It can be defined as distribution of total income amongst total population with reference to share of each 1/5th (20%) quintile. For equality it is essential to have first strata of 20% population with 20% income; 40% of population must own 40% of total income; 60% of population must own 60% of total income; 80% of population must own 80% of total income; and ultimately 100% of population must own 100% of total income. Inequality occurs if proportion distracts form equality. What does it reflect? Incidence of relative poverty viz. how much poverty exist, and which segment of society is facing it more compare to other segments for example lower 20% population strata is receiving 5% of total income and highest 20% getting 40% of income. Therefore, income distribution is a good indicator for presence or absence of poverty. How to measure? The method cm ^_`ch_^ \s M[r Lil_ht ch 1905 ][ff_^ ‘Lorenz Curve’ qbc]b cm ^_m]lc\_^ nblioab Gini Coefficient i.e., proportion of the total income is in the hands of a given percentage of population. Some other tools are also helpful to record poverty such as: Decomposition of income inequality: Theil’s T index; Decile dispersion ratio; Atkinson's inequality measures; Generalized Entropy measures. Effect of income inequality g[s b_fj om ni _p[fo[n_ ‘is globalization hurting the low-income world?’ biq_p_l, cndividual evidences are available for some countries where especially due to poor productive capacity building these countries are failed to compete in most of their sectors as they mainly relied on less productive labor and short of capital. However, overall evidence suggested that incidence of poverty has declined due to globalization process. According to world bank, absolute poverty line is $1.08 in 1993 dollars in 2001 and $1.90 in 2020. Now another debate has been set in regarding gross domestic product (GDP) as a measure of human wellbeing, because whole economic performance is measured through GDP but if it fails to incorporate the impact on human wellbeing which is the ultimate goal of each economic activity, then this measure will become ineffective. Various debates and research has been conducted to find the alternative solution including: some researchers have mentioned various indicators to capture wellbeing: 1. Freedom from hunger 2. Ensure Healthy life with long expected life and low infant mortality rate 3. No child should be the part of labor 4. Education for all (Human Development Index may reflects some aspects) 5. Access to safe water and availability of sanitation facilities 6. Balanced distribution of income, as initial income level determines the level of development however if globalization benefits the rich (higher decile), the income levels will diverge across countries and the poor countries will become poorer however if globalization improves the income of middle and poor economies (medium & bottom deciles) the income level of countries will converge. © Copyright Virtual University of Pakistan Page 13  Globalization and Economics ECO613 VU Source: https://www.bfs.admin.ch/bfs/en/home/statistics/cross-sectional-topics/city-statistics/indicators-quality-life.html © Copyright Virtual University of Pakistan Page 14  Globalization and Economics ECO613 VU Lesson 05 History of Globalization GLOBALISATION: HISTORY AND TRACING THE PROGRESS Topic 20: History of Globalization: when did globalization start? The process of globalization has begun centuries ago with the expansion of global trade and increased flow of factors of production. The major events that propelled the globalization are (i) Industrial Revolution (initiated in UK) which has made it possible to produce industrial output at very large scale with significantly declined cost per unit; (ii) discoveries through voyages of Christopher Columbus (generally known as the pioneer who discovered USA) & Vasco da Gama (discover sea route from Portugal to India) have provided new markets to sell the mass production of industrial revolution and opened the new routes for trade as well; (ccc) nb_ gimn [h]c_hn ‘Silk Road’ connecting China to Africa, Europe and Asia (Afro-eurasia link) has been serving the as a trade route since from many centuries ago. Now this has become the part o` ‘ONE BELT ONE ROAD’ chcnc[ncp_. [*Further details are mentioned in Lesson 42] ‚Silk Road, also called Silk Route, ancient trade route, linking China with the West, that carried goods and ideas between the two great civilizations of Rome and China. Silk went westward, and wools, gold, and silver went east. China also received Nestorian Christianity and Buddhism (from India) via the Silk Road” (Encyclopædia Britannica, Inc.) Source: https://www.britannica.com/topic/Silk-Road-trade-route Video Link: https://www.youtube.com/watch?v=PAu5SLSLXxU [ Dear students you may watch this video to enhance your knowledge] © Copyright Virtual University of Pakistan Page 15  Globalization and Economics ECO613 VU Topic 21: Globalization: Tracing the Progress _ changing gears of globalization Pace of globalization remains uneven, multidirectional, and dynamic when historical patterns in globalization era are focused. Globalization eras consist of (a) Advancement era with different phases: 1700-1800; 1870-1912; 1945-80; and 1987-2008; whereas (b) Reversal era observed less frequently but able to cause a strong dent on the expansion process of globalization during 1912-45; 1980-86; and 2008-9. Mainly responsible factors are World War I (1914-18) and World War II (1939-45). Topic 22: Globalization: Tracing the Progress _ first modern era of globalization Industrial Revolution in Britain spread over 1760-1830. During this phase various developments have been made such as: Expansion in foreign trade; United Kingdom obtained dominance in industrial power; Rise in ‘Trade to GDP ratii’ in industrial countries; Napoleonic war erupted in Europe due to increased protectionism for import substitution that has been ended till 1820; Shipping technology mainly based on ‘steamships’ [ffiq_^ ni l_^o]_ nb_ transport cost significantly; Opening of Suez Canal in 1869; and Railroad infrastructure has been expanded as well. Topic 23: Globalization: Tracing the Progress _ Dismantling and return to globalization 1914 onwards due to World War many actions already taken to increase globalization faced a reversible trend for example Trade has been disrupted by all multilateral trade partners. Trade and shipping have been placed under the control of governments. Trade quotas, high tariffs, shipping-space allocation restricted the trade flows. However, growth in industrial capacity led to fill the shortage of tradable at international level. Consequently, the benefits acquired by United States, Japan and Sweden remained very high whereas low for Australia, India and Argentina. After the period of world war, the United Kingdom and United States intensified level of protection provided to local producers against foreign imports. The legislation have been conducted in form of Key Industries Act 1919; safeguard of Industries Act 1921; JPN antidumping legislation 1921; US Forney-McCumbers Tariff Act 1922 & Hawley Smoot Tariff Act 1930. Pre-war liberal status mainly focusing on free trade and financial flows has been could not sustain even with the efforts made by both Supreme Economic Council 1922 and World Eco. Conference 1927 & 1933. To add fuel to fire, the Great Depression happened, and ultimately overall economic integration have been totally collapsed across the world. Resultantly, domestic demand has been diverted towards domestic markets only, various trade barriers caused the level of trade to shrink further although freight cost has already been fell down. Many countries retaliated the strategy of raising trade barrier such as Canada, France, Italy, Spain and Switzerland. Immigration of labor has been restricted as well. Topic 24: Globalization: Tracing the Progress _ Contemporary era of globalization As from1980 onwards the developing countries start participating in the process of globalization. Reason is that the developed countries want to harness the abundant human resource available cheaply in developing and poor countries of the world. Since labor intensive techniques of production are very cheap relative to capital intensive both for developed and developing countries and allow the manufacturers to have comparative advantage in export of manufactured products, hence, developed investor start engaging these countries directly or indirectly through direct or indirect foreign investment in these countries respectively. It has been observed that shares of manufacturing exports to total exports increased from 25% to 80% till 1998. In Asian countries China obtained the 7th position of largest global exporter in 2000 an export growth has surpassed the GDP growth rate even Bangladesh and Sri Lanka jointly crossed the world average. Chile, Argentina and Mexico have © Copyright Virtual University of Pakistan Page 16  Globalization and Economics ECO613 VU openly welcome the foreign direct investment (FDI), all this has led to collapse the alternative vision against globalization such as exchange rate control, import substitution policies and reduced the monopolies in international trade. © Copyright Virtual University of Pakistan Page 17  Globalization and Economics ECO613 VU Lesson 06 Economic dimensions of globalization Globalization: History and Tracing the Progress Topic 25: Globalization and Exchange Rate Regimes Tb_ diolh_s i` jlcg_ `ch[h]c[f l_miol]_ ‘MONEY’ b[m \__h m_n ch `lig ‘barter system’ (commodities are exchanged against commodities) and reached to first peak when the ‘gold standards’ has allowed exchange of goods and services even across countries with minimum possible friction. However, the rate of increase the scope of exchange has outpaced the rate of gold supply, consequently nb_ ‘Paper money’ as a legal tender (officially declared money by the government and issued ihfs \s nb_ Sn[n_ il C_hnl[f B[he i` nb_ ]iohnls) b[m l_jf[]_^ nb_ aif^ mn[h^[l^m. Niq ‘plastic money’ ch n_lgm i` ‘debt/credit cards’ [h^ ‘online transfers/payment’ [l_ jl_p[cfchg across the world however this type of money has the ch^cl_]n f_a[f n_h^_l \_][om_ jf[mnc] gih_s cm cmmo_^ \s nb_ ]igg_l]c[f \[hem ihfs. N_q ^_p_fijg_hn ch gih_s cm ‘virtual money’ l_`_ll_^ [m ‘crypto currency’ fce_ \cn]ichm, Dogecoin, Ethereum or Litecoin etc., (neither issued by the governments nor the banks, but cmmo_^ nblioab gchcha qcnbch ]igjon_l msmn_gm \[m_^ ih ‘blockchain technology’ (biq_p_l, nb_ ‘chp_hnil’ i` _[]b ]oll_h]s b[m nb_ ]igj[l[ncp_ [^p[hn[a_m ni ]ihnlif il g[hcjof[n_ cn). Dc``_l_hn ]immunities of the world have launched their money with remarkably different points of time, such as China (618-907 AD)9; Europe (1600s); UK, France, US (1690-1700). During the two World Wars the need for reconstruction of Europe as well as control over financial flows (especially control over the flow of gold) has made it mandatory to establish the autonomous monetary policies for each country respectively. Later Bretton Woods agreement led to establish the International Monetary Fund (IMF) helped to increase the financial integration amongst the countries of the world, with the purpose to ensure free trans-border capital flows and provide financial support in case of trade deficit or Balance of Payment (BOP) problems to especially (low income) countries. One of the benefits of Bretton Wood agreement was to keep the exchange rate fixed across all currencies of the world so that international trade can be promoted and exchange rate fluctuations cannot disturb its flow. The objective was to achieve all these thr__ n[la_nm mcgofn[h_iomfs ch]fo^cha ‘`ree capital mobility’, ‘mtable exchange rate’ [h^ ‘[utonomous monetary policy’. https://theokonomos.wordpress.com/2016/10/27/am-i-a-possible-trinity-the-impossible-trinity/ Hiq_p_l, cn q[m ]ih]fo^_^ nb[n [hs nqi i` nb_ n[la_nm ][h \_ []bc_p_^ mcgofn[h_iomfs [n g[rcgog, [ n_lg ‘Impossible Trinity’ has been coined to refer this trade off. Now the issue is that if let the capital to flow freely across borders, its spurt mobility may cause different types of financial crises, including currency crises, banking crises and debt crises. Mainly it 9 http://content.time.com/time/specials/packages/article/0,28804,1914560_1914558_1914593,00.html © Copyright Virtual University of Pakistan Page 18  Globalization and Economics ECO613 VU happens due to imperfect national and international g[le_nm qb_l_ ‘Asymmetric infolg[ncih’, ‘Noise trading’, ‘Bubbles’, ‘Herd behavior’, ‘Moral hazards’, [h^ ‘Contagion’ [l_ ]iggih [h^ nb_ miol]_m i` ^cmnilncihm. Op_l nb_ ncg_ ‘`cr_^’ exchange rate arrangements has intensified the BOP issues more and countries have to leap_ nb_ ‘`cr_^’ l_acg_ [h^ gip_ towards flexible exchange rate to managed and free float, mig_ ]iohnlc_m ‘jeg’ nb_cl ]oll_h]c_m ni ih_ il gil_ chn_lh[ncih[f currencies either with soft-peg which is more flexible or the hard-peg where currency is strictly tied with other. The further possible arrangements evaluated are currency-bands with three options such as crawling, stationary, moving currency bands; Currency-board; and Dollarization. In last three arrangements the flexibility in exchange rates tapper off consecutively. Topic 26: Globalization and Exchange Rate Regimes – Mitigating Currency Crisis Currency management h__^m ni b[h^f_ \inb ‘volatility issue’ [h^ ‘financial crises. To achieve such purposes, an effective control over the monetary policy (MP) is desirable. So that if there is any kind of external shocks occurs outside the country it can be mitigated by managing MP. However, the most problematic decision is related to exchange rate regime choice because none of the exchange rate regimes has proved unanimously valid. This is why various exchange rate regimes has been tested and opted by different countries in several time periods \s `i]omcha ih ‘]rises management’. BLESSED TRINITY has been l_`_ll_^ \s ‘De la Torre et al. (2002)10’ where all these targets can be be achieved mcgofn[h_iomfs ‘Flexible Exchange Rate’ and ‘Strong International Currency’ [h^ ‘Sound Monetary & Financial Institutions’ if all the given requirements are fulfilled. Crises prevention prediction & management: Symmetric info: White Noise trading; Prevent Bubbles; Educate Herd behavior; Moral hazards; Contagion 1. Strengthen both banking & financial structure 2. Improve Supply of information 3. Ensure transparency across each policy 4. Strengthen corporate governance 5. Improve corporate finance 6. Establish asset management companies 7. Enact bankruptcy laws 8. Upgrade supervisory and regulatory structure for financial chain 9. Control capital flight by rebuilding strong macroeconomic systems that may strengthen the exchange rate Exchange Rate Regimes Characteristics & Benefits Shortcomings Dollarization Foreign currency as a ‘legal tender’ Sacrifice full MP management power Zero RER volatility because domestic currency is just an anchor No buffer for external shock; Loss of seignories revenue Lender of last resort option goes into the hands of Fiscal Policy maker Currency Board Legally Fixed exchange Rate backed by Foreign Reserves High level of foreign reserves requirement ER volatility diminished No ‘lender of last resort’ option available Monetary Union Common currency (Common central bank); Minimize volatility Unequal distribution of financial shocks among members Traditional Peg Fixed rate based on either single currency or the basket of Vulnerable if full capital mobility happens currencies Controlled devaluation Relatively less volatile Crawling Peg Rule based exchange rate adjustments targeting the difference of Ultimately country must straight forwardly select either hard ‘inflation’ across pertinent countries peg or make her currency flexible Bands Exchange rate is adjustable within some range. Range may be Currency may face speculative attacks fixed or flexible as well Helpful to counteract external shock Float with discretionary Market determine but regulated by government; A currency is Both Monetary Policy and Fiscal Policy are constraint free intervention mentioned as nominal anchor Limited transparency Adjustments are made based on ‘Inflation Targeting’ Pure Float Market determined purely; No currency set as an anchor Highly volatile and unstable Topic 27: Economic Dimensions of Globalization: Globalization and Monetary Policy 10 See reference book ‘The Economic Dimensions of Globalization’ (https://link.springer.com/book/10.1057%2F9781403938671) © Copyright Virtual University of Pakistan Page 19  Globalization and Economics ECO613 VU Monetary Policy objectives [l_ l_pifpcha [lioh^ ‘Inflation targeting’ [h^ ‘Macroeconomic stability’ qb_l_[m nb_ gih_n[ls policy tools used to accomplish these targets are money supply through ‘ipen market operation’ (OMO); set the ‘target inflation or interest rate’; and the setting required ‘reserve ratio’ generally. Niq `clmn ko_mncih cm nb[n ‘cs globalization successful’ ni lecede inflation and ensure effective macroeconomic management in each country of the world where the significant impact of globalization is reported. S_]ih^ ni _p[fo[n_ nb_ ‘qb[n cm nb_ ]ist of inflation under globalization’ [h^ nbcl^ cm ‘biq go]b foss of control over monetary policy [ acp_ ]iohnls b[m ni `[]_’ _mj_]c[ffs c` [ ]iohnls cm nb_ g_g\_l i` ‘Monetary Union’ (for example European Union with single currency EURO). Cost of inflation under globalization include 1. It will disturb capital inflows & Foreign Direct Investments 2. Taxation effect and revenue loss weakening fiscal policy 3. Loss of production and decrease factor productivity 4. Deteriorate growth pace, increase price instability 5. Deteriorated terms of trade and cause welfare loss Topic 28: Economic Dimensions of Globalization: Globalization and Fiscal Policy Fiscal Policy has various objectives mo]b [m ‘aenerating revenues’, ‘_stablishing incentive structure’, [h^ ‘_xecuting development plan (annual budget)’. Tb_ tools _gjfis_^ \s `cm][f jifc]s g[h[a_lm [l_ ‘taxes & subsidies’, ‘nransfer payments’ [h^ ‘aovernment expenditures. The fiscal policy may be affected due to the process of globalization both positively and negatively depending upon the institutional strength of the given country. Globalization may change the ‘Tax- to-GDP ratio’ [h^ ‘]omposition of tax revenue’. Ihn_l_mnchafs [ mno^s b[m ]ih^o]n_^ \s Tanzi (2000) has mentioned eight occurrences as a ‘Fcm][f n_lgcn_m’ because ultimately these slurping the fiscal revenue or its sources over the time and consequently imposing a significant dent on the fiscal revenue. Fiscal Termites include E-commerce; E-money; income in portable financial capital; offshore financial markets; derivatives & hedge funds; Inter-Transnational Corporation trade; Foreign earnings by professionals; Shopping of foreigners of highly valuable items but lowest weight. MACROECONOMICS MICROECONOMICS Attract global capital in terms of financial and human resources Convergence across the world market have been observed due Institutional framework like property right and contract enforcement improved to lowering Financial markets became more mature with rise in fiscal discipline - Price markup in goods markets Income distribution and demographic status have changed - Demand for excess wage in labor market Technological and physical infrastructure introduced - Price of capital due to free flow Political stability and Law & Order Impact of China factor - Gap between production techniques due to direct Development objectives are focused on economic growth and increased trade investment - Geographical gap for delivering the products to the consumer directly Topic 29: Economic Dimensions of Globalization: Globalization and Competition Globalization has allowed competition to rise because of the improvement in systematic efficiency in production, distribution, and resource management. Factor price equalization and specialization have increased within the countries. In addition, transaction cost has reduced significantly because of efficient structural change and higher level of technological © Copyright Virtual University of Pakistan Page 20  Globalization and Economics ECO613 VU change. Both telecommunication and transportation cost have been declined with the growing economies of scales and economies of scope in these sectors. © Copyright Virtual University of Pakistan Page 21  Globalization and Economics ECO613 VU Lesson 07 Economic Dimensions of Globalization (Continued-1) Topic 30: Dimensions of Globalization: Globalization and Labor Market Relocation of Production Facilities from high to low-wage economy leads to widen the scope of opportunities for industrial economies; it has allowed to reduce the level of wages to generate more employment. American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) have already been convinced that wage in real sense declined over time whereas inequality increased. Debate is on [\ion ‚cost of free trade‛ because Transnational Corporations (TNCs) usually relocate their production facilities to exploit the cheap resources of the target area. In few cases such kind of transmission generates positive externalities for example China has received such externalities when international investments flow towards low-wage emerging market. It further cl_[n_m ‚mi]c[f ^ogjcha‛ because Least Developing Countries contested to get more and more foreign direct investments (FDI). Neoclassical trade theory (presented by Heckscher-Ohlin and Heckscher- Ohlin-Samuelson) also referred the variation in the level of factors of production available to each country of the world. Technology is basically inducing towards employing abundant factor. If more and cheat capital resources are endowed by a country this will develop and use capital intensive technology but if labor is abundant then application of labor-intensive technologies are more profitable and employment generating. United Sates, United Kingdom and Europe may fall in first category of capital abundant whereas China and many other developing countries of the world fall in second category with labor abundant economies. Sometimes trade liberalization adversely affects the capital abundant country. Topic 31: Economic Dimensions of Globalization: Globalization and Migration Flows After two World Wars the growth rate of organization for economic co-operation and development (OECD) countries remain higher than the rest of the world that has induced the pressure of international migration, it seems that rapid growth preceded migration. The main reasons are the possibility of better economic life and the higher level of wages as well as unemployment gap. Global migration has three main dimensions; Intensity of global migration; Spread across geographical locations; and Distance i` gcal[hnm’ big_f[h^. Topic 32: Economic Dimensions of Globalization: Globalization and Human Capital Wb_h bog[h ][jcn[f cm mcgjfs ^_`ch_^ cn g_[hm ‘people with higher levels of skills and education’. Historically the old concepn i` ‘Brain Drain’ nbl_[n_h_^ nb_ ]iohnlc_m qb_l_ mo]b mecff`of il _^o][n_^ qile`il]_ ^_j[ln_^ nb_cl big_f[h^ [h^ settled somewhere else in the world (especially in developed regions). The main detrimental factors the source country (homeland) have to faced included the loss of medical doctors, PhD researchers and Scientists, Engineers and software expert in addition to others. However, a new concept or phenomenon b[m \__h i\m_lp_^ qb_l_ ‘Reverse Brain Drain’ occurred in some countries of the world and contributed remarkably to the process of development. Information and communication- based technology (ICT) field this reverse brain drain has initiated a strong base of human capital movement ‘Silicon Valley in California’, ‘Bangalore in India’ [h^ ‘Beijing, Shanghai and Shenzhen in China’. Ih nbcm `c_f^, 40% il gil_ n[f_hn i` nb_ world belongs to China and India jointly. Topic 33: Economic Dimensions of Globalization: Globalization and Income Convergence Actually, income inequality has evolved over the millennium. As Industrial Revolution (1870-1914) has intensified this inequality based on remarkable productivity differentials and technology enhancement. First, Great Depression (1914-1945) © Copyright Virtual University of Pakistan Page 22  Globalization and Economics ECO613 VU caused de-globalization (reverse the process of globalization). Second, unstable global financial flows disturb the speed of globalization. In few decades globalization successfully lower down the income inequality across and within countries. For example, income converged amongst OECD countries. Another development was that newly industrialized countries (NIEs) came into existence which have successfully raise their real GDP and totally halted or at least slow down the growth in income equality. This process has revealed that income is indirectly dependent on education and training through development of skill set, which helps to increase the productivity and consequent wages. Topic 34: Summary of Economic Dimensions of Globalization 1. Financial independence was required by war torn European countries with control over Monetary Policy 2. Financial crises, volatility and speculative attacks have forced countries to readjust their exchange rate regimes choices 3. IMF rescue packages has been called upon in repose to financial crises 4. It is expected that openness leads to lower inflation 5. Fiscal policy is facing many potential threats regarding revenue collection from transnational corporations 6. Intensive competition has been set in both at Micro and Macro levels of economies 7. Welfare loss for labor is more apparent due to potential exploitive powers of the international businesses 8. Population relocation and migration is another important outcome 9. Both inter and intra countries wage differential has increased 10. Income convergence happened in some countries as well. © Copyright Virtual University of Pakistan Page 23  Globalization and Economics ECO613 VU Lesson 08 Economic Dimensions of Globalization (Continued-2) Topic 35: China and its Companies Growth rate remains 10% on average over 20 years which has strengthened international competitiveness of Chinese companies. The HAIER11 is a Chinese multinational company which has been set in as Qingdao Refrigerator Plant f[n_l h[g_^ ‘Haier’ in 1992. Mr. Zhang Ruimin, the founder of Haier, was the Plant Director in 1984 has worked amazingly and transform the company into a giant by refocusing the dimensions of enterprise niq[l^m ‘_fficiency’, ‘^iscipline’ [h^ ‘kuality control’ that has been implemented in such a way if there is any defective item produced it costs 20% deduction of all staff involved. Haier’s Journey towards Internationalization Performance from 1984 to 2002 … Sales…$1.24 to $19b  As refrigerator demand fell in Shanghai but rise in Beijing and market research revealed that Employ…600 to 30,000 population has crowded living so smart unit are the need. Profit…(0.525m) to $5.1m  Internationalization of HAIER with investment in USA manufacturing has been set in 1995. Product range…1 to 86 Specification…13000  Air Conditioner were needed in desert area, based on information feedback from the Middle East, Export Volumes…$420m heat resistance capability and anti-erosion ability have been incorporated to address the issues. Once Sale Network…40,000 sample has been launched whole order taken by Middle East and African Customer Trade…160 countries Position…6th largest Topic 36: Haier’s Internationalization: propelling forces Aspired Leadership of the Mr. Zhang Ruimin has allowed the company to use refrigeration technology and equipment to induce foreign investors such as the more advanced German ]igj[hs ‘Liebherr’ b[m chcnc[n_^ mubcontracting nblioab ‘H[c_l’. The internal forces served the purpose of Zhang Ruimin may be mentioned as: increased export earning; enhance the international brand popularity and help to achieve the target to join global 500 home appliances successfully. Boston Consulting Group provide the consultation for managing business globally identifies that probability of export will continue to fall with increased shipping cost hence if a company ensures her regional presence, then capable to counter the international competitors. For example, the advantages to any company for physical presence in USA may include locally available high quality human resources, development design, Research and Development facilities and ability to control marketing and distribution services. The major compelling forces behind H[c_l’m Ihn_lh[ncih[fct[ncih were the saturation of Chinese home appliances markets. Whereas the External Forces include intensify local competition for acquiring high level of market share, in Refrigerators (33%), Freezers (42%), Air conditioners (31%), Washing Machines (31%). Further, Global firms entered in China when China joined world trade organization (WTO). The Chinese government has provided full support to local companies for joint venture with US firm allowed especially in financial field where majority shareholder are commercial banks. Topic 37: HAIER successful Strategy Key components for the successful strategy are 1. Haier has followed the Japanese Model: where products are produced in least developed countries by using cheap resources available there and then exported to the developed country. Only high-tech products or high value added are 11 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.559.1301&rep=rep1&type=pdf © Copyright Virtual University of Pakistan Page 24  Globalization and Economics ECO613 VU produced in developed countries (DCs) and then exports to least developing countries (LDCs). What Haier has done is that it produced in LDCs and exports to USA then produce in USA the more advanced products and export to LDCs and other DCs. After acquiring international experience first joint venture was done with Indonesia in 1996. Then it moved to USA in 1999 with $30m Foreign Direct Investment (FDI). In b[m \__h mjl_[^ []limm USA [m ‘^esign center’ _mn[\fcmb_^ [n Boston, ‘garketing center’ [n New York [h^ ‘ganufacturing center’ at South Carolina. Consequently, US market has increased the reputation, image and even the technology level of HAIER successful Strategy. 2. Strategic objective 3X1/3: 30% locally produce and sold locally; 30% locally produce but sold to foreign countries; and 30% produce in foreign country and sold in foreign as well. 3. Export Strategy: as markets in LDCs are easy to handle but tough in DCs. Whereas German and European Union (EU) are most difficult. Since market research has revealed that DCs distribution and marketing channels need to be compatible in terms of language, culture, environment, marketing practices. 4. Strategy of Product Focus Entry: Haier has established their brand and entered other products as well. The success in refrigerator [ffiq_^ nb_ ]igj[hs ni chnli^o]_ ‘washing machine’ that needs low promotional efforts. 5. Strategy to Reduce Time for Specialized in Requirements: in 2001, Haier unit of USA has proposed redesign the model of Freezers for US customers based on the need. Their learning has become so efficient that the prototype of the suggested ‘Fl__t_lm’ jl_j[l_^ [h^ jresented within 17 hours, consequently remained highly successful to sell as well. 6. Localization Strategy: Company has learned that the local employees with local capital suits to local culture. So they have hired local labor with ransom salaries and by offering performance bonus to attract the most productive resources from the local economy. Whereas the Research & Development centers have been established at USA and Germany with the purpose to develop, acquire and transfer the technology from these centers by using their enriched environment and resourcefulness. Topic 38: Haier’s Limitations There are many limitations Haier has faced that need to address to sustain their success and escalate their growth patterns. As the speed of globalization depends on the capability of a given company to acquire international experience, in terms of operation, promotion, distribution, cultural adaptation and after sales service. First, the language barriers has been faced due to poor brainstorming once the company decided to become international company. Second, as like other companies it is also dependent on technology where high level of research and development capabilities are needed that has been found missing il q_[e ch H[c_l. Tbcl^, _mn[\fcmbg_hn i` nb_ ‘Brand Image’ cm p_ls cgjiln[hn \_][om_ raw material and low value-added product supplier are being attracted by it, however, this limitation has now settled to an extent. Fourth, lack of experience international market and the unexpected risk factors that cost to business such as Indonesia political turmoil and Yugoslavia disaster. The most important thing is that if a company is learning lessons from history and past experiences the rate of successes can be improved so does the Haier. The lessons learnt by the company, and it started paying more attention on the feasibility studies of their future projects; Increase investment in Research and Development; start establishing domestic and foreign ‘Research and Design Centers’ [m q_ff [m `orming international technology alliances with major Multinational Corporations including Mitsubishi; ESS; Philips and with many others. © Copyright Virtual University of Pakistan Page 25  Globalization and Economics ECO613 VU Lesson 09 Trade and Global Integration: Evolution of Global Trading System Topic 39: International Trade Organization With the commitment to liberalize trade more and more, 23 countries launched negotiation following the objective of reduce tariffs (eliminate protectionism) over the time. Initially international trade organization (ITO) has been created in 1947 under Havana Charter but not signed by all participants of the Britain Wood conference. These 23 countries reached to an agreement called General Agreement for Tariff and Trade (GATT) during 1947-48. Later that agreement transformed into World Trade Organization (WTO) in 1995 with the objective to facilitate global integration through trade (Preferential Trade Agreements); to promote economic growth and enhance worldwide productivity. Topic 40: World Trade Organization Various rounds of negotiations have been conducted to-date, purposes of all these collaboration and summits were to develop ]ihm_hmom []limm nb_ ]iohnlc_m i` nb_ qilf^ l_a[l^cha ‘ni g[e_ nl[^_ `l__’ `lig [hs ech^ i` l_mnlc]ncih il ]ihnlif. Ih Uruguay Round different multilateral agreements have been approved: Agreement on Agriculture (AOA); Agreement of on Textile & Clothing (AIC); Agreement on Trade Related Investment Measures (TRIMs); and General Agreement on Trade in Service (GATS). The Marrakesh Agreement 1994/95 where GATT has been transformed into WTO, it has also been settled how to administer the trade agreements and the way to cooperate with international organizations through a forum named ‘Multilateral Trade Negotiations (MTNs)’ b[pcha g[h^[n_ ni bandle trade disputes, monitor trade policies and provide technical assistance and training to the countries in need. Topic 41: Trade Policy Liberalization and Globalization Since there are many instruments of globalization, such as trade in goods & services, capital flows, outward-oriented (open door policy) that lead from high-growth East Asia towards Southeast Asia. Because global trading system has a long history of around half century. Dc``_l_hn mcno[ncihm b[p_ \__h i\m_lp_^ fce_ ‘oneven pace of liberalization’, ‘f_[mn ^_p_fijcha countries treated in a different way viz. unfavorable policy for them, the number and quantum of regional trading agreements (RTAs) has increased through expansion in their scope that has strength of RTAs Topic 42: Facets of Trade Liberalization Macroeconomics implications of this process allowed to have more growth in inputs improve efficiency of allocation and induce more innovations. Whereas Microeconomics implication mainly appeared as a chain reaction: ‚If trade is liberalized it helps to expand economic activities resultantly cost lowers down and magnitude of output rise up ensures more profits which attracts new firm to enter in such profitable industry, rise in number of firms makes an AGGLOMERATION and allow bulk production with large exportable surplus, it facilitates expansion in market and needs more output, it leads to increase the economies of scale by reducing per unit cost further augment the profits margins. Economies of scope and opportunities helps to set up new businesses on the one hand but strengthened the agglomeration further, ultimately market and industry become saturated and due to infrastructural limitation and to ensure quality oriented consumption increased competition intensifies the cost of production‛ © Copyright Virtual University of Pakistan Page 26  Globalization and Economics ECO613 VU Many faces of globalization have been revealed to date such as: Economic Domain where resource allocation across the world has become very important to ensure efficiency at global level. Exchange of commodities has increased in international trade through Local-Global market linkages. Factors of Production have become instrument for financial integration as well qb_l_ nb_ lif_ ‘Labor’ is highly focused, _p_h nb_ [^p[h]_g_hn i` n_]bhifias fce_ ‘Artificial Intelligence’ [h^ ‘Robotics’ [l_ ^_mcah_^ ni [oag_hn il l_jf[]_ nb_ _``ilnm i` ‘L[\il’. D_j_h^_h]_ ih g[le_n `il]_m \[m_^ ih ‘nheory of demand’ [h^ the behavior of universal consumerism b[m ch]l_[m_^ [m q_ff. Tb_ jlcg_ `i]om i` ‘Technological Development’ is to enhance the level of ‘Productivity’. Wb_l_[m nb_ jli\f_g i` iver-production may not be resolved only through competition and even ^cmnol\ nb_ ‘Allocation of Resources’ ]ihm_ko_hnfs [ ‘prudent global leadership’ is needed to manage these resources across countries as well as across generations. Topic 43: Multilateral Trade Negotiation under the GATT/WTO Regimes At trad_ `lihn, nb_ ‘scope of negotiation’ l_pifpcha [lioh^ \lchacha down tariff barriers; designing Anti-Dumping strategies; identify the Non-Tariff Barriers (NTBs) and remove them one by one. The areas of concerns for global economy are ‘Agriculture, Environment, Competition, and Intellectual Property Rights’ where variety of reforms are essentially required to settle the disputes and propagate the flow of trade and investment. © Copyright Virtual University of Pakistan Page 27  Globalization and Economics ECO613 VU Lesson 10 Trade and Global Integration (Continued-1) Topic 44: Multilateral Trade Negotiation Under the GATT/WTO Regimes Since the objectives of minimizing Tariffs and NTBs have been thoroughly focused and negotiated in various regimes under GATT or WTO. The results and consequences are somewhere positive as well. The high tariff on trade in manufactures industrial output has been remarkably deteriorated from 50 percentage points in 1940-50% to only 4.1 percentage points in 1988 but NTBm [l_ s_n ]ihmc^_l_^ ni \_ nb_ l_[mih i` ‘qelfare-losses. Now the main ‘Issues’ developing countries are facing that developed countries are not allowing LDCs to access their markets especially related to Agricultural, Textile and Apparel related products. It means developed countries hold high level of barriers against developing countries in trade. In addition, special and differential treatments or concessions are offered to some developing countries by the developed countries on political grounds that mitigate the prospect of level playing field for competition. Agricultural pricing and subsidies provided by the United States to her own farmers may reflect this biasness. Mechanism of Trade Liberalization includes multilateral trade negotiations (MTNs), Regional Trade Agreements, make trade in goods separately from trade in services, investment regimes and regulatory practices. The evolution leads to old regionalism based on GATT in 1980 towards new regionalism (lead by WTO). It is further enhanced through sectoral trade [al__g_hnm ch nb_ [l_[m i` ‘Information Communication Tecbhifiac_m’, ‘Telecom’ [h^ ‘Financial Servc]_m’ \[m_^ ih ‘FINTECH’. Declining Distortions and Enhancing Market Access Topic 45: Trade Distortions Distortions in trade may be caused due to current account imbalance which appears because of development needs of developing countries. In these countries value of imports is larger than value of exports, so it leads to create a trade deficit. In developing countries because of low value exports small amount of foreign exchange is generated and these countries are unable to finance their imports through exports. In addition, these countries need more capital and technical resources to raise the level of their productivity because most of the firms working in these countries are far away from both economies of scale and economies of scope. In the trade policy framework of such countries there are many inconsistencies and instabilities. To gain higher level of productivity foreign direct investment is direly needed. The share in international market is either deteriorating or stagnant and they need to excel their competitiveness. Whereas international measures like tariff reduction to achieve WTO objective of ‘free trade’ [fihamc^_ `iffiqcha chn_lh[ncih[f mn[h^[l^ il^_lm (ISOm) b[p_ tried to reduce many distortions in the markets these countries are serving. The firms of such countries are also exposed to the world markets even without achieving the critical minimum level of maturity which is by itself a distorting factor. Although to an extent international markets become open to developing countries due to fall in tariff, but simultaneously non-tariff barriers increase, resultantly net effect remains zero and they fail to get any benefit of declining tariffs. Changing Trade Patterns and Growing Integration Topic 46: Trends in International Trade © Copyright Virtual University of Pakistan Page 28  Globalization and Economics ECO613 VU Since the share of world exports in world GDP12 is growing with readjustment in proportion of contribution by agricultural and manufacturing. Country wise variation in the composition of merchandise exports share over the decades because merchandize trade volume is highly elastic, so a small change in price may cause large change in the quantity. Now the more focus is not only to ensure growth in exports but also raise the proportion of value-added in overall exports. The trade is now viewed as the source of interconnectedness among nations as well. Topic 47: GATT, WTO and UNCTAD13 and LDCs After World War-II, GATT has provided institutional support for integration and to increase globalization. In 1947, no developing country is the part of GATT. In Kennedy round (1964-67), 35 developing countries have joined GATT and participated in Tokyo round (1973-9). UNCTAD is supposed to resolves the grievances of LDCs, unluckily developing ]iohnlc_m ^ih’n b[p_ [hs lif_ ni ^_n_lgch_ nb_ lof_m ir policies for global trade. GATT has used the generalized system of preferences (GSP) and incorporate special and differential treatment (SDT) for LDCs. However, Textile and Apparel are placed outside the scope of GATT and even agriculture related matters are removed before Uruguay round (1986-94). Originally these areas are main concern for developing countries. LDCs and Global Trade Since developing countries have joined the global trade effectively after mid-1970s. Some of the progress in industrial sectors of developing countries is observed as well. As the comparative advantages ][h \_ []kocl_^ ih nb_ \[mcm i` ‘Labor intensive commodities’, ‘Capital intensive’ [h^ gil_ l_]_hnfs ‘Technology intensive’ products. Topic 48: Trade and Globalization: Empirical Evidence Since the integration across countries remains uneven because trade depends on size of the economies and population of the country directly but distance between trading partners inversely. United States is losing the leading position, shipping cost is falling as well, and capital dominates labor in overall production scenario because of advancement in capital-oriented technology. Power of buyers and sellers has increased while small business threatened due to the aggressive expansion of multinational or transnational corporations. The loss in tax revenue has been faced by some countries because the distribution of rewards to be the part of globalization are uneven. 12 https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS?end=2020&start=2020&view=map 13 General Agreement on Tariff and Trade (GATT), World Trade Organization (WTO) United Nations Conference on Trade And Development (UNCTAD) © Copyright Virtual University of Pakistan Page 29  Globalization and Economics ECO613 VU Lesson 11 Trade and Global Integration (Continued-2) Topic 49: Trade and Globalization: goods market Uneven sharing of trade returns across nations. Insecurity and low wages are offered to Women. There is remarkable difference between cost of production and prices and lead to higher exploitation of labor and impose excessive burden over ]ihmog_lm. Am ^_p_fij_^ h[ncihm b[p_ cgjim_^ l_mnlc]ncih ch n_lgm i` ‘]hild labor’ om_^ ch jli^o]ncih jli]_mm qcnbion considering the problems of developing countries where due to poverty already large number people are either unemployed or under employed so to finance their family expenses, they are bound to send their children to earn some livelihood, consequently such policies are pro poverty. Technology related to production needs innovation in developing world as per their own resource endowment. Developing countries are mainly producing clothing and footwear. The major benefit available to China is the supply of labor which is either remained fixed or its cost lowers down, allow the products more competitive in international market and increase her share in international market. It is further augmented by assembly line production technology to generate mass output. Topic 50 - 51: Regional Commonalities There are some commonalities across countries of the world that facilitates the collaboration amongst countries of the world. Distance as some countries is adjacent to each other due to common border, some have convenience in connectivity and not facing any communication distortions due to common language and many others have joined the Regional Trade Agreements (RTA) to make strong ties such as Asia 5 of Central Asia and Asia 4 in East Asia Many researchers have evaluated the process and impact of globalization; findings of some are shared through a table: TABLE: STUDIES RELATED TO GLOBALIZATION STUDY FINDING Kim and Hangshin All countries weren’t integrated into the world economy equally. While developed and developing countries (2002) integrated to each other more and more the less developed one stayed behind of the process Karagoz Kadir and panel gravity model introduced that economic size and population of the importer countries have a positive Karagoz Murat (2009) impact on trade volume, whereas the distance between them works on the opposite way Akram Ch. et. al (2011) while USA was dominant in world export before the globalization process is dense Germany, Japan, South Korea and China have seriously challenged the position of USA in the following period Estevadeordal, Frantz, Econometric evidence has subsequently linked shipping cost declines to rapid growth in trade during that first era and Taylor, (2003) of globalization Rodrik (1997) Global trade and investment patterns tend to privilege capital, especially companies that can move quickly and