Globalisation and Anti- globalisation The World Economic System The World Economic System Introduction Globalisation receives an enormous amount of attention in the popular press, much of it unfavourable. Unfortunately, the term “globalisation” is vague with many meanings: The World Bank defines globalisation as “the growing integration of economies and societies around the world”. Wikipedia, the Internet Encyclopedia, describes globalisation as “the changes in societies and the world economy that result from dramatically increased international trade and cultural exchange”. The economist, Edward Leamer describe it as “Globalization is the increased international mobility of goods, people, contracts (including financial claims) and thought (facts, ideas, and beliefs)”. In general, it is some notion of interdependence among national economies or, even more generally, of interconnectedness among nations. It is broader than interdependence of markets and includes non-economic aspects such as cultural exchange. But we shall consider the economics of globalisation and treat it in terms of links between the markets of different nations. The World Economic system 1.The World Economic System The Historian‟s View Some economic history helps. Francis Fukuyama, in a famous article and later a book, coined the phrase “The end of history”. By this he meant that the economic-political systems of individual nations had all converged to one model, the liberal-democratic model. In the realm of economics, this meant that “liberalism”, the belief in free markets, had triumphed over Marxism, Socialism, Fascism and other rival ideologies. This occurred in the last quarter of the Twentieth Century, after the fall of the Berlin Wall and the break up of the USSR. The World Economic System 2. The Economist‟s View Look at the world economic system as a unit. Markets across national borders are linked by international trade. There are four general categories of economic markets Markets for goods Markets for services Markets for capital, i.e. capital assets Markets for labour, i.e. labour services These markets have become increasingly linked through the liberalisation of trade, i.e. the removal of various restrictions on goods, services, capital and labour moving across national borders. [Slides from WTO, WB, and IMF] Freeing international trade occurs at three different levels Multilateral Regional/bilateral Unilateral, i.e. one nation acting alone We will study mostly multilateral actions, especially those regulated by the WTO, and also regional/bilateral, especially those formed by regional trading agreements (RTAs). In addition to the reduction in national restrictions on international trade, the opening up of economies has taken place through other domestic reforms, particularly, Privatisation and marketisation [Slide] Deregulation of markets If globalisation of markets is to be given a precise meaning, it must mean more than the linking of growing international trade. I shall call the growth of trade and the growing interdependence of national economic because of this “Internationalisation”. Economic Integration The term “globalisation” is still useful if we use it not as a general description for trends in the world but as a more particular economic phenomenon. All of this globalisation/liberalisation of markets is best approached through the analysis of markets. Globalisation will be taken to mean the development of global markets. To make this precise, economists have developed the notion of economic integration. Loosely, economic integration is the process of merging national markets. To be more precise, one can define the limit of this process. A completely integrated world economy is one in which the Law of One Price holds in every market; that is, in each market, there is only one price. We must for this purpose define products as homogeneous products and we must allow for the costs of transport and insurance which involve real costs and are unavoidable. Economic integration is a movement towards a completely integrated economy. For the Law of One Price to hold in a market, we require the removal of all border barriers to international trade in this market National Treatment to ensure that foreign goods or services or, in the case of capital flows, foreign- owned enterprises are treated in the same way legally as domestic goods, services or enterprises the harmonisation of national laws and regulations which otherwise hinder international trade, e.g. industrial standards and other standards With this concept of economic integration, we can see that the world is still a long way from being fully integrated. However, groups of nations in some regions have become fully or highly integrated, notably those in the EU. Some former socialist/communist countries are in transition to market economies. We call them “transition economies”. Thus, history has not yet ended. Globalisation The term has a particular meaning when applied to multinational corporations (= “International Business”). Here “globalisation” is taken to mean the development of an integrated production process within a corporation. This treats all affiliates and subsidiaries of a parent corporation as a single entity which acts as one to maximise the interests of the corporate group collectively. This leads to concepts of integrated production chains, outsourcing and the like. Another particular meaning of globalisation is in “financial globalisation”. This refers to the linking of financial markets across national borders. One can approach this in terms of reducing barriers to trading financial assets across borders. One can again apply the Law of One Price to these markets to see the extent to which they are integrated. Finance specialists look at the similarity or convergence of rates of return on various assets across national borders as a test of financial market integration. Generally speaking financial markets are more integrated than goods or services markets. The Movement towards Global Governance If economies are to be more closely integrated, the laws and regulations of countries have to change. This can occur at three levels The evolution of international laws - through the WTO and other multilateral bodies and through other international treaties Regional law under RTAs Harmonisation of national laws though agreements, codes, mutual recognition and other instruments The growing demands for greater uniformity of laws and regulations has given rise to the rapid development of new agreements and laws in a number of areas that were previously thought to be the exclusive domain of sovereign nation states. For example, we shall have lecture topics devoted to international agreements and laws relating to Corporate taxation Corporate governance Competition policy The environment These lectures explore international agreements relevant to each of these areas, and their effects on MNCs. Question of the Day Take your home country. Is it a member of the following organisations The World Trade Organisation (WTO) ? The International Monetary Fund (IMF) ? The World Bank ? The Bank for International Settlements (BIS) ? The International Competition Network (ICN) ? Anti-globalisation The process of “globalisation‟ or, more precisely, the linking of national markets for goods, services, capital and labour, has led to a counter-movement “anti-globalisation‟. There have been street protests at meetings of the WTO, World Bank and IMF and of business meetings such as the World Economic Forum. There is a whole raft of discontent emanating from NGOS - environmental and civil rights groups, labour organisations and others aimed at the perceived costs of unbridled liberal global capitalism. Much of this is emotion-charged and badly informed. We can focus on some specific allegations such as the charge that „globalisation” has increased the gaps between rich and poor nations or, even more seriously, that it has impoverished people in poor nations. Globalisation and Economic Growth What effect has the growing economic integration of national economies had on rates of economic growth? This topic is hotly debated among economists (see references). There is a positive statistical correlation between the rate of growth of per capita income and an index of openness [see slides from the Fraser Institute] However, it is not clear what is cause and what is effect. The scientific approach is to treat this association as an hypothesis. Economic theory predicts that the countries with lower per capita incomes should grow faster because they have a higher rate of return on capital and can adapt freely the technologies of more advanced countries. This is called the Convergence Hypothesis. To test it, one should regress the initial per capita income at the beginning of a sample period on the rate of growth of per capita incomes of different nations over the period. There is evidence of convergence. [slides from Sachs and Warner] One also needs to consider other factors which affect the rate of economic growth and to test for causality. The consensus view among economists is that opening up economies to international trade has promoted growth in rich and poor nations alike, with the obvious proviso that countries that have not lowered their own border barriers to trade have received less or little benefit. Globalisation and Income Inequality A growth in income inequality is another alleged cost of “globalisation”. This is another hotly debated aspect. There is a weaker consensus on this topic. Much depends on what you mean by “inequality”. One can look at absolute poverty or relative poverty. One can look at the distribution of real incomes within a nation, or among sub-groups of countries or throughout the whole world. The dominant view among economists is that growing economic integration has not impoverished poor people generally and it has reduced absolute poverty generally, especially in China and India, but it has created some losers in particular markets. Where growing economic integration in the world economy has left some nations behind, we need to study why. To the extent that it is due to particular international agreements, we need to address this, e.g. the African cotton exporting nations in WTO negotiations. We need also to consider bad national laws and governance and national restraints on trade as a cause of poverty. Globalisation and Financial Market Instability One generally accepted cost of “globalisation” or, more precisely, increased economic integration is a greater vulnerability in some countries to financial market instability. This has become a big concern since the 1997 Asian Crisis. [see handout from ADB] We refer to the “emerging market” economies, i.e. poorer countries that have opened up their financial markets to a greater or lesser extent but still have underdeveloped financial markets. In particular, they lack the governance structure to adequately regulate these markets, e.g. they have poor prudential control over bank lending and deposit-taking. And they often have volatile exchange rates and lack instruments of risk reduction such as derivative markets for hedging. These economies need to establish better governance of financial markets and to stabilise the macro-economies before wholesale capital market liberalisation.
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