Globalization and the International Economy
Definition of Globalization:
Process of greater interdependence among countries and their citizens.
Process of greater interdependence among countries and their citizens.
Globalization is the broad process of global integration, interconnection and interdependent of international business, economic activities, societies, and culture. It included and increase of international:
1) Trade and Competition
2) Production and industrial markets
3) Product and services
4) Migration, Labor force movement and jobs market.
5) Investment and Financial market
6) Technology usage and R&D
7) Legislation and justice
8) Exchange of idea, information and knowledge.
9) Lifestyles and cultures
10) Politic and political structure
Type of Globalization:
1) Globalization of production
2) Globalization of product
3) Globalization of Market
Other major dimension that can be distinguished are :
4)Globalization of services
5)Globalization of labor ( work, people and talent)
6)Globalization of the financial system ( banking and insurance)
7)Globalization of information (knowledge)
Reason of Globalization:
This increasing world wide integration of market of goods, services, labor and capital is caused by development in :
- Moderns communication technology (TV,internet, mobile phone)
- Transport Mechanisms
- Free international capital flows
- Changes in economic, culture, political, social, and legal system
•No nation exists in economic isolation
•All aspects of a nation’s economy are linked to the economies of its trading partners
•Reflects the historical evolution of the world’s economic and political order
•Complex and its effects uneven
•Steps toward international cooperation
•Mutually advantageous for trading nations
•Specialization, efficiency of large scale production
•Wider variety of products at lower cost
•Protectionist pressures
•Developing nations
•Liberalized trading system - serves to keep the developing nations in poverty
• Technological change
• Multilateral trade negotiations
• Continuing liberalization of trade and investment
• Widespread liberalization of investment transactions
• Development of international financial markets
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• Decreases in tariff barriers & new technologies
• Declining transportation costs
• Shift from sail to steamships; Railways
• Driven by European and American businesses and individuals
•Exports as a share of world income
•Nearly doubled to 8%
•Per capital incomes increased 1.3% per year
•Previous 50 years: 0.5% per year
•Countries that actively participated in globalization
•Became the richest countries in the world
•Brought to an end by World War I
The International Economy
•High degree of economic interdependence
Definition: The field of international economics concerns itself with the interaction of economic agents (such as individuals and firms) across borders. Natural topics for inquiry in international economics includes foreign trade, free trade, tariffs and exchange rates.
•No nation exists in economic isolation
•All aspects of a nation’s economy are linked to the economies of its trading partners
•Reflects the historical evolution of the world’s economic and political order
•Complex and its effects uneven
•Steps toward international cooperation
•Mutually advantageous for trading nations
•Specialization, efficiency of large scale production
•Wider variety of products at lower cost
•Protectionist pressures
•Developing nations
•Liberalized trading system - serves to keep the developing nations in poverty
Globalization of Economic Activity
• What forces are driving globalization?• Technological change
• Multilateral trade negotiations
• Continuing liberalization of trade and investment
• Widespread liberalization of investment transactions
• Development of international financial markets
Waves of Globalization
First Wave of Globalization: 1870–1914• Decreases in tariff barriers & new technologies
• Declining transportation costs
• Shift from sail to steamships; Railways
• Driven by European and American businesses and individuals
•Exports as a share of world income
•Nearly doubled to 8%
•Per capital incomes increased 1.3% per year
•Previous 50 years: 0.5% per year
•Countries that actively participated in globalization
•Became the richest countries in the world
•Brought to an end by World War I
Great Depression of the 1930s
•Governments – protectionism
•Tariffs on imports
•Try to shift demand into domestic markets
•Promote sales for domestic companies
•Promote jobs for domestic workers
•Exports as a share of national income
•Falls to 5%
Second Wave of Globalization: 1945–1980
•Horrors of the retreat into nationalism
•Falling transportation costs
•Decrease previously established trade barriers
•Trade liberalization – discrimination
•Which countries participated
•Which products were included
•Horrors of the retreat into nationalism
•Falling transportation costs
•Decrease previously established trade barriers
•Trade liberalization – discrimination
•Which countries participated
•Which products were included
Trade liberalization – discrimination
•Developed countries, manufactured goods
•Largely freed of barriers
•Greatly increased the exchange of manufactured goods
•Raise the incomes of developed countries
•Developing countries
•Eliminate barriers only for those agricultural products that did not compete with agriculture in developed countries
•Manufactured goods - sizable barriers
Second Wave of Globalization: 1945–1980
•New kind of trade
•Rich country specialization in manufacturing niches
•Gained productivity through agglomeration economies
•Firms clustered together
•Some clusters produced the same product
•Others were connected by vertical linkages
•Agglomeration economies
•Benefit those in the clusters
•Bad news for those who are left out
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•Developed countries, manufactured goods
•Largely freed of barriers
•Greatly increased the exchange of manufactured goods
•Raise the incomes of developed countries
•Developing countries
•Eliminate barriers only for those agricultural products that did not compete with agriculture in developed countries
•Manufactured goods - sizable barriers
Second Wave of Globalization: 1945–1980
•New kind of trade
•Rich country specialization in manufacturing niches
•Gained productivity through agglomeration economies
•Firms clustered together
•Some clusters produced the same product
•Others were connected by vertical linkages
•Agglomeration economies
•Benefit those in the clusters
•Bad news for those who are left out
Agglomeration Economies
Agglomeration economies are a powerful force that help explain the advantages of the "clustering effect" of many activities ranging from retailing to transport terminals.Major categories of agglomeration economies:Urbanization economies.
Benefits derived from the agglomeration of population, namely common infrastructures (e.g. utilities or public transit), the availability and diversity of labor and market size.
Industrialization economies.
Benefits derived from the agglomeration of industrial activities, such as being their respective suppliers or customers. This favors the emergence of industrial clusters.
Localization economies.
Benefits derived from the agglomeration of a set of activities near a specific facility, let it be a transport terminal (logistics parks), a seat of government (lobbying, consulting, law) or a large university (technology parks).
Second Wave of Globalization: 1945–1980
•Most developing countries
•Did not participate in the growth of global trade in manufacturing and services
•Continuing trade barriers in developed countries
•Unfavorable investment climates
•Anti trade policies in developing countries
•Dependence on agricultural and natural-resource products
•Increased per capital incomes within the developed countries
•Developing countries as a group were being left behind
•World inequality
Latest Wave of Globalization, began in 1980
•A large number of developing countries
•China, India, and Brazil
•Broke into the world markets for manufacturers
•Other developing countries
•Increasingly marginalized in the world economy
•Decreasing incomes
•Increasing poverty
•Significant international capital movements
•Some developing countries
•Competitive advantage in labor-intensive manufacturing
•Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines
•Tariff cuts
•Lower barriers to foreign investment
•Technological progress in transportation and communications
•Protectionist policies in developed countries
Latest Wave of Globalization, began in 1980
•World
•More globalized - international trade, capital flows
•Less globalization - labor flows
•Foreign outsourcing
•Certain aspects of a product’s manufacture are performed in more than one country
•Manufacturing - moved to wherever costs were the lowest
•Job losses for blue-collar workers
•Cries for the passage of laws to restrict outsourcing
Latest Wave of Globalization, began in 1980
• By the 2000s, foreign outsourcing of white collar work
• Information Age
• Digitization, Internet, and high-speed data networks around the world
• Sending upscale jobs offshore
• Accounting, chip design, engineering, basic research, and financial analysis
• Foreign outsourcing
• Reduce costs of a given service: 30 to 50%
The United States as an Open Economy
• Trade patterns
• Openness
• Rough measure of the importance of international trade in a nation’s economy
• Nation’s exports and imports as a percentage of its gross domestic product (GDP)
Openness = (Exports +Import)
GDP
The United States as an Open Economy
•Openness
•Large countries – lower measures of openness
•Less reliant on international trade
•Many of their companies can attain an optimal production size without having to export to foreign nations
•Small countries – higher measures of openness
The United States as an Open Economy
•Openness of the U.S. economy, 1890 to 2007
•Less open to international trade, 1890 to 1950
•Relatively high openness in the late 1800s
•Rise in world trade: technological improvements in transportation and communications
•Two world wars + Great Depression of the 1930s
•Reduced dependence on trade
•National security reasons
•Protect home industries from import competition
The United States as an Open Economy
•Openness of the U.S. economy, 1890 to 2007
•After World War II - negotiated reductions in trade barriers
•Rising world trade
•Technological improvements in shipping and communications
•U.S. trade
•In 1890, mostly raw materials and agricultural products
•Today, manufactured goods and services
Labor and Capital
•Movements in factors of production
•Measure of economic interdependence
•Labor mobility in U.S.
•1900, 14% of U.S. population: foreign born
•1920s to 1960s
•Sharply curtailed immigration
•Foreign-born U.S. population: 6%
Labor mobility in U.S.
•1960s, liberalized restrictions
•By 2009
•12% the U.S. population was foreign born
•Foreigners: 14% percent of the labor force
•Half – from Latin America
•One quarter – Asians
Capital flows to the U.S.
•Foreign ownership of U.S. financial assets
•Risen since the 1960s
•1970s, OPEC - investments in U.S. financial markets
•1980s, major flows of investment funds to U.S.
•By late 1980s
•U.S. - consuming more than it produced
•Net borrower from the rest of the world
International banking
•Average daily turnover in foreign-exchange market
•Today: almost $2 trillion
•1986: $205 billion
•London - the largest center for foreign-exchange trading
Commercial banking
•U.S. banks
•Worldwide branch networks, 1960s and 1970s
•Loans, payments, foreign-exchange trading
•Foreign banks
•Increased presence in U.S., 1980s and 1990s
•Today: 250 foreign banks
Securities firms - globalized their operations
•By 1980s, U.S. government securities
•Traded on a 24-hour basis
•Citizens of each nation can gain
•Spend more of their time and resources doing those things in which they have a relative advantage
•If a good or service can be obtained more economically through trade
•Trade for it instead of producing it domestically
•How the available resources can be used to obtain each good at the lowest possible cost
Open economies
•Produce a larger joint output
•Competition - essential to both innovation and efficient production
•International competition
•Domestic producers - strong incentive to improve the quality of their products
•Weakens monopolies
Open economies
•More competition
•More firm turnover
•Improvements for the industry
Economic growth rates - close relation to:
•Openness to trade
•Education
•Communications infrastructure
Globalization
•Rapid growth in some countries
•Increased demand for commodities
•Crude oil, cooper, steel - higher prices
•Increased supply of substitutes
•Biodiesel, ethanol
•Domestic economy
•Vulnerable to disturbances initiated overseas
•Increased competition from abroad
•Schwinn Bicycle Company, Dell Computer Corporation
•Collapse of the U.S. housing market
•Resulting surge in mortgage loan defaults
•Undermined the financial institutions that originated and invested in them
•Creditors and uninsured depositors
•Pulled their funds and cashed out of securities issued by risky institutions
•Invested in U.S. Treasury securities
Immediate cause of the global economic crisis
•Many institutions failed, others struggled to survive
•Banks - fearful about making loans
•The credit spigot closed
•The global economy withered
•Global stock investors dumped their holdings
•Self-reinforcing adverse economic downturn
•Crisis in confidence
Roots of the problem
•Lack of fear - booming housing market of 2006
•Mortgage-backed securities
•Booming housing market
•Government pressured banks to serve poor borrowers and poor regions of the country
•Community Reinvestment Act
•Default mortgages
The crisis goes global
•Europe
•Exposure to defaulted mortgages in the U.S.
•Emerging economies
•Lacked resources
•Extremely poor countries
•Decrease in foreign aid
•China - depressed its export markets
•Crisis in confidence
Combating a crisis in confidence
•Pump liquidity into troubled financial institutions
•Provide increased or unlimited deposit insurance
•Central banks
•Coordinated interest-rate reductions
•Purchased commercial paper & money market instruments
Governments
•Large fiscal stimulus packages
•Tax cuts
•Increased government spending
•International Monetary Fund
•Financial aid to emerging countries
“Trade is a zero-sum activity”
•Both partners gain from trade
•“Imports reduce employment and act as a drag on the economy, while exports promote growth and employment”
•Failure to consider the link between imports and exports
“Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment”
•Failure to recognize that a reduction in imports does not occur in isolation
Free trade
•Increases competition, lowers prices
•Makes better products available to consumers
•Higher consumption
•Higher consumption
•More smoking, disease, and death
Globally - 4 million people die each year from:
•Lung cancer, emphysema
•Other smoking-related diseases
Antismoking activists
•Cigarettes are “bads”
•Require their own set of regulations
•Benefits of free trade do not apply to cigarettes
World Health Organization
•Some nations
•Support provisions to emphasize antismoking measures over free-trade rules
•United States
•Promoted freer trade in cigarettes
•Challenged rules imposed to aid local cigarette makers
Current trade rules
•Countries can enact measures to protect the health and safety of their citizens
International trade benefits many workers
•Cheaper consumption goods
•Employers – better technologies and equipment
•Workers - more productive
•Exports - generates jobs and income for domestic workers
Not all workers gain from international trade
•Cheap imports
•Rising unemployment and wage inequality
•Threatening to unskilled workers in the import-competing sectors
•Lobby to restrict imports
International trade
•Domestic prices - aligned with international prices
•Wages increase
•Workers whose skills are scarce
•Wages decrease
•Workers who face increased competition
•Jobs lost in one industry
•Replaced by jobs gained in another industry
The long-run effect of trade barriers
•Does not increase total domestic employment
•Reallocates workers
•Away from export industries
•Toward less efficient, import-competing industries
•Leads to a less efficient utilization of resources
International trade
•Just another kind of technology
•Adds value to its inputs
•Countries prosper
•New ideas and technology flow freely around the world
•Productivity growth
•Increasing living standards
•Lower consumer prices
•Increased variety of goods and services
Critics of free trade and globalization
•Benefit large corporations
•Rather than average citizens
•Environmentalists
•Elitist trade organizations make undemocratic decisions
•Undermine national sovereignty on environmental regulation
•Unions
•Unfettered trade permits unfair competition
Critics of free trade and globalization
•Human rights activists
•World Bank and International Monetary Fund support governments that:
•Allow sweatshops
•Pursue policies that bail out governmental officials at the expense of local economies
Advantages
•Productivity increases faster when countries produce goods and services in which they have a comparative advantage. Living standards can increase more rapidly.
•Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth.
•An open economy promotes technological development and innovation, with fresh ideas from abroad.
•Jobs in export industries tend to pay about 15 percent more than jobs in import-competing industries.
•Unfettered capital movements provide the United States access to foreign investment and maintain low interest rates.
Disadvantages
•Millions of Americans have lost jobs because of imports or shifts in production abroad. Most find new jobs that pay less.
•Millions of other Americans fear getting laid off, especially at those firms operating in import-competing industries.
•Workers face demands of wage concessions from their employers, which often threaten to export jobs abroad if wage concessions are not accepted.
•Besides blue-collar jobs, service and white-collar jobs are increasingly vulnerable to operations being sent overseas.
•American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States
•Companies – increased security costs
•Heightened border inspections
•Slow shipments of cargo
•Companies - stock more inventory
•Tighter immigration policies
•Reduce inflows of skilled and blue-collar laborers
•Greater preoccupation with political risk
•Companies – fewer investments
International trade
•Weapon in the war against terrorism in the long-run
•Increasing living standards in impoverished regions
•Eliminating an important cause of war and terror
1982, average cost per ton of steel
•U.S. producers: $685 per ton
•52% higher than for Japanese producers
•Cost differential
•Strong U.S. dollar
•Higher U.S. costs of labor (25% of total cost)
•Higher U.S. cost of raw materials (45% of total cost)
•High fixed costs of production
U.S. steelmakers
•Reduce production costs, regain competitiveness
•Long-term contracts for raw materials (lower prices)
•Labor contracts - 20 to 40 percent improvement in labor productivity
•Problems
•Large unfunded pension obligations
•Large healthcare costs for retirees
•Shrinking employee base
•Movements in factors of production
•Measure of economic interdependence
•Labor mobility in U.S.
•1900, 14% of U.S. population: foreign born
•1920s to 1960s
•Sharply curtailed immigration
•Foreign-born U.S. population: 6%
Labor mobility in U.S.
•1960s, liberalized restrictions
•By 2009
•12% the U.S. population was foreign born
•Foreigners: 14% percent of the labor force
•Half – from Latin America
•One quarter – Asians
Capital flows to the U.S.
•Foreign ownership of U.S. financial assets
•Risen since the 1960s
•1970s, OPEC - investments in U.S. financial markets
•1980s, major flows of investment funds to U.S.
•By late 1980s
•U.S. - consuming more than it produced
•Net borrower from the rest of the world
International banking
•Average daily turnover in foreign-exchange market
•Today: almost $2 trillion
•1986: $205 billion
•London - the largest center for foreign-exchange trading
Commercial banking
•U.S. banks
•Worldwide branch networks, 1960s and 1970s
•Loans, payments, foreign-exchange trading
•Foreign banks
•Increased presence in U.S., 1980s and 1990s
•Today: 250 foreign banks
Securities firms - globalized their operations
•By 1980s, U.S. government securities
•Traded on a 24-hour basis
Why Is Globalization Important?
Law of comparative advantage•Citizens of each nation can gain
•Spend more of their time and resources doing those things in which they have a relative advantage
•If a good or service can be obtained more economically through trade
•Trade for it instead of producing it domestically
•How the available resources can be used to obtain each good at the lowest possible cost
Open economies
•Produce a larger joint output
•Competition - essential to both innovation and efficient production
•International competition
•Domestic producers - strong incentive to improve the quality of their products
•Weakens monopolies
Open economies
•More competition
•More firm turnover
•Improvements for the industry
Economic growth rates - close relation to:
•Openness to trade
•Education
•Communications infrastructure
Globalization
•Rapid growth in some countries
•Increased demand for commodities
•Crude oil, cooper, steel - higher prices
•Increased supply of substitutes
•Biodiesel, ethanol
•Domestic economy
•Vulnerable to disturbances initiated overseas
•Increased competition from abroad
•Schwinn Bicycle Company, Dell Computer Corporation
The Global Recession of 2007 – 2009
•Immediate cause of the global economic crisis•Collapse of the U.S. housing market
•Resulting surge in mortgage loan defaults
•Undermined the financial institutions that originated and invested in them
•Creditors and uninsured depositors
•Pulled their funds and cashed out of securities issued by risky institutions
•Invested in U.S. Treasury securities
Immediate cause of the global economic crisis
•Many institutions failed, others struggled to survive
•Banks - fearful about making loans
•The credit spigot closed
•The global economy withered
•Global stock investors dumped their holdings
•Self-reinforcing adverse economic downturn
•Crisis in confidence
Roots of the problem
•Lack of fear - booming housing market of 2006
•Mortgage-backed securities
•Booming housing market
•Government pressured banks to serve poor borrowers and poor regions of the country
•Community Reinvestment Act
•Default mortgages
The crisis goes global
•Europe
•Exposure to defaulted mortgages in the U.S.
•Emerging economies
•Lacked resources
•Extremely poor countries
•Decrease in foreign aid
•China - depressed its export markets
•Crisis in confidence
Combating a crisis in confidence
•Pump liquidity into troubled financial institutions
•Provide increased or unlimited deposit insurance
•Central banks
•Coordinated interest-rate reductions
•Purchased commercial paper & money market instruments
Governments
•Large fiscal stimulus packages
•Tax cuts
•Increased government spending
•International Monetary Fund
•Financial aid to emerging countries
“Trade is a zero-sum activity”
•Both partners gain from trade
•“Imports reduce employment and act as a drag on the economy, while exports promote growth and employment”
•Failure to consider the link between imports and exports
“Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment”
•Failure to recognize that a reduction in imports does not occur in isolation
Free trade
•Increases competition, lowers prices
•Makes better products available to consumers
•Higher consumption
Does Free Trade Apply to Cigarettes?
Free cigarettes trade•Higher consumption
•More smoking, disease, and death
Globally - 4 million people die each year from:
•Lung cancer, emphysema
•Other smoking-related diseases
Antismoking activists
•Cigarettes are “bads”
•Require their own set of regulations
•Benefits of free trade do not apply to cigarettes
World Health Organization
•Some nations
•Support provisions to emphasize antismoking measures over free-trade rules
•United States
•Promoted freer trade in cigarettes
•Challenged rules imposed to aid local cigarette makers
Current trade rules
•Countries can enact measures to protect the health and safety of their citizens
Is International Trade an Opportunity or a Threat to Workers?
•Cheaper consumption goods
•Employers – better technologies and equipment
•Workers - more productive
•Exports - generates jobs and income for domestic workers
Not all workers gain from international trade
•Cheap imports
•Rising unemployment and wage inequality
•Threatening to unskilled workers in the import-competing sectors
•Lobby to restrict imports
International trade
•Domestic prices - aligned with international prices
•Wages increase
•Workers whose skills are scarce
•Wages decrease
•Workers who face increased competition
•Jobs lost in one industry
•Replaced by jobs gained in another industry
The long-run effect of trade barriers
•Does not increase total domestic employment
•Reallocates workers
•Away from export industries
•Toward less efficient, import-competing industries
•Leads to a less efficient utilization of resources
International trade
•Just another kind of technology
•Adds value to its inputs
Backlash Against Globalization
Proponents of free trade and globalization•Countries prosper
•New ideas and technology flow freely around the world
•Productivity growth
•Increasing living standards
•Lower consumer prices
•Increased variety of goods and services
Critics of free trade and globalization
•Benefit large corporations
•Rather than average citizens
•Environmentalists
•Elitist trade organizations make undemocratic decisions
•Undermine national sovereignty on environmental regulation
•Unions
•Unfettered trade permits unfair competition
Critics of free trade and globalization
•Human rights activists
•World Bank and International Monetary Fund support governments that:
•Allow sweatshops
•Pursue policies that bail out governmental officials at the expense of local economies
Advantages and disadvantages of globalization
Advantages
•Productivity increases faster when countries produce goods and services in which they have a comparative advantage. Living standards can increase more rapidly.
•Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth.
•An open economy promotes technological development and innovation, with fresh ideas from abroad.
•Jobs in export industries tend to pay about 15 percent more than jobs in import-competing industries.
•Unfettered capital movements provide the United States access to foreign investment and maintain low interest rates.
Disadvantages
•Millions of Americans have lost jobs because of imports or shifts in production abroad. Most find new jobs that pay less.
•Millions of other Americans fear getting laid off, especially at those firms operating in import-competing industries.
•Workers face demands of wage concessions from their employers, which often threaten to export jobs abroad if wage concessions are not accepted.
•Besides blue-collar jobs, service and white-collar jobs are increasingly vulnerable to operations being sent overseas.
•American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States
Terrorism Jolts the Global Economy
Continuing terrorism•Companies – increased security costs
•Heightened border inspections
•Slow shipments of cargo
•Companies - stock more inventory
•Tighter immigration policies
•Reduce inflows of skilled and blue-collar laborers
•Greater preoccupation with political risk
•Companies – fewer investments
International trade
•Weapon in the war against terrorism in the long-run
•Increasing living standards in impoverished regions
•Eliminating an important cause of war and terror
Competition in the World Steel Industry
•U.S. producers: $685 per ton
•52% higher than for Japanese producers
•Cost differential
•Strong U.S. dollar
•Higher U.S. costs of labor (25% of total cost)
•Higher U.S. cost of raw materials (45% of total cost)
•High fixed costs of production
U.S. steelmakers
•Reduce production costs, regain competitiveness
•Long-term contracts for raw materials (lower prices)
•Labor contracts - 20 to 40 percent improvement in labor productivity
•Problems
•Large unfunded pension obligations
•Large healthcare costs for retirees
•Shrinking employee base
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