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Global EconomicsEco 6367
Dr. Vera Adamchik
The International Economy and Globalization
Chapter 1
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Textbook
• Robert J. Carbaugh International Economics, 12th Edition © 2009
• Publisher: South-Western, Cengage Learning
• ISBN-10: 0-324-58148-3ISBN-13: 978-0-324-58148-5
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Online Learning Center &Other Supplements
• http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&flag=student&product_isbn_issn=9780324581485&discipline_number=413
• http://academic.cengage.com/economics/carbaugh
• http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&flag=student&product_isbn_issn=9780324581485&discipline_number=413
• http://academic.cengage.com/economics/carbaugh
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The purpose of Eco 6367 Global Economics
The purpose of Eco 6367 Global Economics is to introduce students to the forces, processes, and actors that shape economic globalization.
Eco 6351 Economics for Managers covered the basic ideas underlying the economic behavior of individuals, individual firms and businesses, and markets; Eco 6367 Global Economics will expand the scope of inquiry to cover the economics of the nation in a global economy. Students will study the larger economic forces that shape production, trade flows, capital flows, exchange rates, international labor migration and other variables that create the global economic landscape.
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What is globalization?
The world is moving away from self-contained national economies toward an interdependent, integrated global economic system.
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What is economic globalization?
• Economic globalization is a historical process of an increasing integration of economies around the world, particularly through trade and financial flows. The term also refers to the movement of people (labor) and knowledge (technology) across international borders.
• In other words, globalization is merely the extension of markets across frontiers.
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What is economic globalization?
Economic globalization is the process that expands international trade, international investment, and immigration relative to national output, investment, and population growth. In short, globalization is the increase in international economic activity relative to overall world economic activity.
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Other dimensions of globalization
In addition to economic globalization, there are also broader cultural, political and environmental dimensions of globalization.
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Major aspects of globalization
The economic literature usually identifies the following major aspects of economic globalization:– globalization of consumption,– globalization of production and ownership,– globalization of labor.
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Globalization of consumption
Globalization of consumption implies that the nation in which a product was made becomes independent of the nationality of the consumer. It typically refers to the growing volume of international trade and the speed and ease with which goods and services move across national borders
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Globalization of production and ownership
Globalization of production and ownership implies that the nationality of the owner and controller of productive assets becomes independent of the nation housing them. It typically refers to the phenomenon of rising cross-border financial flows (financial globalization).
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Globalization of production and ownership (cont.)
• A closely related, often overlooked, aspect of globalization is spread of knowledge and technology. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation, knowledge about production methods and management techniques.
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Globalization of labor
Globalization of labor implies an increasing number of workers who make products and services for export or cross borders for work. The development of technology, combined with the progressive removal of restrictions on cross-border trade and capital flows, has made it possible for production processes to be unbundled and located further from target markets for a growing universe of goods and services.
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Globalization of labor (cont.)
The location of production has become much more responsive to relative labor costs across countries (the global labor market). There have also been increasing flows of migrants across borders (international labor migration), through both legal and informal routes. Workers move from one country to another partly to find better employment opportunities.
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A complete view of globalization
Most discussions of globalization tend to focus on one of these three components, but the process really consists of all three. The international movement of goods and services, the cross-border sales and purchases of assets, and the international movement of people are related in many ways. All three components of globalization have been growing rapidly in recent decades.
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The structure of the course
I. IntroductionII. International TradeIII. International Factor Movements
(International Investment and International Labor Migration)
IV. Payments among Nations: A Summary of International Transactions
V. Globalization and Macroeconomic Policy
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Waves of globalization
• First wave (1870-1914)• Second wave (1945-1980)• Third wave (1980-present)
Source: Globalization, Growth, and Poverty: Building an Inclusive World Economy. A World Bank Policy Research Report, 2001.
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The first wave (1870-1914)• The first wave of globalization lasted from 1870 to the start of
World War I. It was sparked by advances in transport and reductions in trade barriers. The level of exports to world income doubled to 8 percent as international trade boomed.
• It sparked massive migration as people sought better jobs. About 10 percent of the world's population moved to new countries. Sixty million people migrated from Europe to North America and other parts of the New World. The same thing happened in densely populated China and India where people moved to less densely populated countries like Sri Lanka, Burma, Thailand, the Philippines and Vietnam.
• The end of the First World War ushered in an era of protectionism. Trade barriers such as tariffs were erected. World economic growth stagnated and exports as a percentage of world income fell back to the 1870 level.
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The second wave (1950-1980)
• Following World War II, a second wave of globalization emerged, lasting from about 1950 to 1980. It focused on integration between rich countries as Europe, North America and Japan restored trade relations through a series of multilateral trade liberalizations.
• During this period there was a surge in the economies of the countries in the Organization for Co-operation and Development that participated in this trading boom. Developing countries were largely isolated from this wave of integration, remaining stuck in primary commodity exports.
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The third wave (1980-present)• The most recent wave of globalization started in 1980 and
was spurred by a combination of advances in transport and communications technologies and the choice of large developing countries to seek foreign investment and open themselves up to international trade.
• Countries that strongly increased their foreign trade included Brazil, China, Hungary, India, Uganda, Vietnam and Mexico. The more globalized developing countries saw their aggregate per capita growth rate rise from 1 percent in the 1960s, to 3 percent in the 1970s, 4 percent in the 1980s and 5 percent in the 1990s. Other developing countries, home to about two billion people, actually experienced negative growth in the 1990s.
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Driving forces of globalization
Three macro factors underlie the recent trend toward greater globalization:
• the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II;
• technological changes -- falling costs of transport and communications;
• policy changes -- greater reliance on market forces.
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Declining trade and investment barriers
After World War II, advanced countries made a commitment to lower barriers to trade and investment.Since 1950, average tariffs have fallen significantly and are now at about 4%.
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Declining trade and investment barriers
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Declining trade and investment barriers
Table: Average Tariff Rates on Manufactured Products as Percent of Value
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Declining trade and investment barriers
• Countries have also been opening markets to FDI.
• A favorable investment climate gives investors confidence in the market and encourages them to invest more capital. It also encourages businesses to improve efficiency and productivity in order to increase revenues and capital available for investment.
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Declining trade and investment barriers
Lower barriers to trade and investment mean:• that firms can view the world, rather than a single country, as their market;• that firms can base production in the optimal location for that activity.
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The changing world output and world trade picture
•In 1960, the United States accounted for over 40% of world economic activity.•By 2006, the United States accounted for less than 20% of world economic activity.•A similar trend occurred in other developed countries.•The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020.
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The changing world output and world trade picture
• Table: The Changing Demographics of World GDP and Trade
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The changing foreign direct investment picture
•In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows.•Today, the United States accounts for less than one-fifth of worldwide FDI flows.•Other developed countries have followed a similar pattern.•In contrast, the share of FDI accounted for by developing countries has risen from less than 2% in 1980 to almost 12% in 2005.•Developing countries, especially China, have also become popular destinations for FDI.
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The changing foreign direct investment picture
• Figure: Percentage Share of Total FDI Stock 1980-2005
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The changing foreign direct investment picture
• Figure: FDI Inflows 1988-2006
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The role of technological change
Technological change has made the globalization of markets a reality. Important advances have occurred in:• microprocessors and telecommunications• the Internet and World Wide Web• transportation technology
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The role of technological change
Implications of technological change for the globalization of production include:• lower transportation costs that enable firms to disperse production to economical, geographically separate locations;• lower information processing and communication costs that enable firms to create and manage globally dispersed production systems;
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The role of technological change
Implications of technological change for the globalization of markets include:•low cost global communications networks help create electronic global marketplace;•low-cost transportation help create global markets;•global communication networks and global media are creating a worldwide culture, and a global market for consumer products.
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Policies and market forces
The speed of the globalization process is closely related to the ability of the state to supply the conditions of a successful market economy. Globalization appears as the new ideology of capitalism.
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Policies and market forces
Newly empowered neo-liberal and neo-conservative regimes in the advanced capitalist world championed a new discourse of free trade, deregulation, marketization, and privatization. These governments pushed to (re)negotiate regional and global trade agreements (NAFTA, GATT, EEC) and gave new life and power to international regulatory agencies (WTO) and transnational economic institutions (The World Bank and the IMF).
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The globalization debate
The term “globalization” has acquired considerable emotive force. Some view it as a process that is beneficial—a key to future world economic development—and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress.
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The globalization debate
Is the shift toward a more integrated and interdependent global economy a good thing?• Supporters believe that increased trade and cross-border investment mean lower prices for goods and services, greater economic growth, higher consumer income, and more jobs.• Critics worry that globalization will cause job losses, environmental degradation, and the cultural imperialism of global media and MNEs.
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The globalization debate
• Globalization critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries.• Supporters of globalization contend that the benefits of this trend outweigh the costs—that countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit.
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The globalization debate
• Globalization critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced.• Globalization supporters claim that tougher environmental and labor standards are associated with economic progress, so as countries get richer from free trade, they get tougher environmental and labor regulations.
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The globalization debate
• Critics of globalization worry that today’s interdependent global economy is shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN.• Supporters of globalization contend that the power of these organizations is limited to what nation-states agree to grant, and that the power of the organizations lies in their ability to get countries to agree to follow certain actions.
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The globalization debate
• Critics of globalization argue that the gap between rich nations and poor nations is getting wider.• Supporters of globalization claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment and implement economic policies based on free market economies, and to receive debt forgiveness for debts incurred under totalitarian regimes.
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Why some people fear globalization?
Some resistance to further globalization is understandable and probably inevitable. The growth of international trade, foreign investment, and immigration implies many changes in the way a national economy functions. An open economy is very different from a closed economy. Globalization causes change, and change can cause hardship.
“I’m all for progress; it’s change I don’t like.” (Mark Twain)
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Why some people fear globalization?
Globalization offers marvelous opportunities to increase standards of living and raise human welfare. But globalization and economic growth imply change, and people do not always like change. International trade, foreign investment, and immigration may cause some people to lose their current jobs or their established businesses. Some people’s incomes may fall in the short run. Globalization causes some people to experience failure, and no one likes that.
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Why some people fear globalization?
The changes and failures that accompany globalization and economic growth can be especially problematic when the gains and losses are not equally shared. Unfortunately, the many changes that accompany globalization are never uniformly distributed throughout the economy.
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Judging the whole by just a few of its parts
People’s negative views of globalization are often the result of their tendency to focus on only a small part of the complex process of globalization. That is, people view individual events, but they miss the broader picture. An accurate assessment of globalization requires that we look at all the changes, direct and indirect, that the growth of international trade, international investment, and immigration causes throughout all economies of the world. Any partial view of globalization will tend to leave the wrong impression.
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Global economics provides a complete picture
Global Economics seeks to provide a complete picture. The complexity of the process of globalization implies that such a complete understanding of globalization is not easily acquired. The complexities of international trade, foreign investment, foreign competition, and immigration are sometimes difficult to understand. A course such as this one would not be necessary if international economics was easy and obvious. The material covered in this course provides the underlying explanation for global economic activity. This should be standard knowledge for anyone expecting to live and work in the increasingly global economy. Your improved understanding of globalization will let you be a more informed, active participant in the process.
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Globalization is still far from complete
Less than 2 percent of the world’s population lives outside their country of birth. That is a historically high percentage, but it is still very low if you consider how much people move around within countries. Political borders are still formidable barriers to the movement of goods as well. International trade is still a small percentage of most economies’ aggregate activity. Major economies such as Japan and the United States export only about 10 percent of their production. This means that 90 percent of everything produced is for the domestic markets.
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Continued globalization is not inevitable
It is clear, therefore, that globalization can continue to progress for quite some time before reaching levels compatible with a truly integrated world economy. But that does not make the continued expansion of international trade, international investment, and immigration inevitable. Some people do not want to see further expansion of international trade, international investment, or immigration. It is not clear whether those who favor continued globalization will continue to win over those who oppose globalization.
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Continued globalization is not inevitable
Globalization has in fact been stopped or reversed many times throughout history. Trade liberalization inevitable creates new competition for domestic producers, which generates opposition to trade. Depending on domestic producers’ political connections and clout, trade liberalization often generates new protectionist trade policies. The immigration of foreigners into a country sometimes results in ethnic strife and the closing of borders to foreigners.
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Continued globalization is not inevitable
Cycles of liberalization and isolation can last for centuries, and they can be easily distinguished from even a casual reading of history. The arguments for and against globalization will no doubt be part of political discussions in most countries in the near future, as they have been in the recent past. The course of future globalization therefore remains uncertain.
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In-class exercise How would you define globalization in your own words? How
does your textbook define globalization?
What factors should be taken into account while assessing the degree of globalization? Compare and contrast the methodologies of calculating the A. T. Kearney Globalization Index (http://www.atkearney.com/main.taf?p=5,4,1,127 ) and the KOF Index of Globalization (http://globalization.kof.ethz.ch/ ). Are these methodologies similar or different? Do they produce similar or different results/rankings?
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In-class exercise• What are the most globalized economies in the world? Try to
name 5-10 countries that you believe are most globalized.
Then download the 2006 A. T. Kearney Globalization Index file (http://www.atkearney.com/main.taf?p=5,4,1,116 ), the 2007 A. T. Kearney Globalization Index (http://www.foreignpolicy.com/story/cms.php?story_id=3995 ), and the 2009 KOF Index of Globalization (http://globalization.kof.ethz.ch/static/pdf/rankings_2009.pdf ). Find out who is up, who is down, and how they got there. What countries are the top ones in the rankings? What countries are the last ones in the rankings? What is the position of the U.S.? Are you surprised?
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In-class exercise
• Download the 2006 A. T. Kearney Globalization Index file (http://www.atkearney.com/main.taf?p=5,4,1,116 ), the 2007 A. T. Kearney Globalization Index (http://www.foreignpolicy.com/story/cms.php?story_id=3995 ), and the 2009 KOF Index of Globalization (http://globalization.kof.ethz.ch/static/pdf/rankings_2009.pdf ).
Choose any country of your interest (other than the U.S.) and comment on its position in the rankings and the factors determining this position.
