Macroeconomics – Globalisation

Globalisation: refers to the free movement of goods and services, factors of production (predominantly labour and capital) and financial flows such as FDI and Hot money across international boarders, leading to the economic integration of the worlds economies through the erosion of national boundaries.

• Globalisation is conceptualised as a process that erodes national boundaries, integrates national economies, cultures, technologies, and governance.

• Globalisation produces complex relations mutual interdependence.

• Globalisation is a multifaceted and multidisciplinary term that can be used in many contexts:

social, political, and economic

• Globalisation is particularly supported by free market economists who regard economic growth as a result as inevitable.

free market economists believe that the economic benefits of production and higher standards of living outweigh the negatives such as a loss of culture.

• Opponents of globalisation argue that it is simply a method of exploiting the poor through international capitalism and US cultural imperialism.

Core drivers of globalisation

• The internet: ebay, facebook, online shopping – “click and mortar”
• Political freedoms e.g. fall of the Berlin Wall
• Export led growth
• Free trade
• Shipping
• Comparative advantages

• Leapfrogging of skills

• According to the KOF Index of Globalisation as of 2013, Belgium was the most globalised country in the world, followed by Ireland and then the Netherlands.

How is it measured?: personal international contact, cultural proximity, actual capital FDI flows, international treaties, membership in international organisations etc.

Globalisation and Trade

• As part of globalisation, trade barriers are removed and international trade increases.

• Most often the trade model of ‘free trade’ is adopted by countries as encouraged by the WTO.

In a closed economy with no trade:

SDomestic = DDomestic while the price = PDomestic

• That is to say, in the absence of free trade, the production and consumption possibilities of a country are limited to the goods and services that the countries narrow production base can produce.

EV: Ireland suffered from this problem but opened up its economy pre-financial crisis to such an extent that its banking sector which had grown hugely from trade liberalisation, had grown far larger than the domestic economy could sustain.

Ireland owned ‘toxic assets’ that were riddled with fraud.

• But, in an economy that does free trade with the rest of the world, the supply curve becomes SWorld.

The supply curve is drawn perfectly elastic because it assumes that this economy is a small economy – that it to say, it is a price taker and therefore cannot influence the world         price. The economy can buy as much as it wants and not push up the         world price.

EV: therefore the diagram is not applicable for country’s like China/US etc.

Benefits

• Choice

• countries have access to far larger markets through free trade
• therefore they are not limited by their own production base (which may be narrow, especially if the country is small)
• given access to larger markets, economies of scale can be exploited, LRAS falls, prices fall, and therefore consumer surplus increases.

e.g Japanese plasmas/Chinese electronics/German BMWs etc.

e.g at Christmas one in three shoppers on Oxford Street is Chinese

e.g. for countries like China who have relatively low domestic demand, the economic growth of China has been supported by international demand for its specialization in manufacturing

• Specialisation

• Adam Smith’s Wealth of Nations (concept of the division of labour)
• further specialisation is made possible by globalisation and free trade

because countries can specialise in areas of comparative advantage 

EV: developing countries could become stuck in a primary product trap

• Gains in allocative efficiency

• free trade improves the efficiency of resource allocation
• the more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services

• Free trade can make labour markets more flexible

• globalisation increases labour opportunities by increasing the geographical mobility of labour.

• the entrance of MNCs into LEDCs have brought employment opportunities, skills and training courses for labour in these countries.

• this potential increase in employment would shift the LRAS rightward and thereby increase the productive potential of an economy.

– there have been increases in unemployment in developed countries

EV: for the UK, structural changes have been exacerbated by globalisation

EV: the introduction of MNCs has led to the loss of many traditional jobs in the LEDCs as businesses are unable to achieve the lower prices of the MNCs do due to their economies of scale.

MNCs sometimes bring foreign labour over themselves, e.g Zara (Spanish), Coca Cola

MNCs sometimes enter into certain economies due to the lack of health and safety regulations, cheaper labour, and tax advantages.

in this situation, the MNCs have the ability to exploit labour, offer awful working conditions, and unequal labour opportunities – e.g. US firms in Mexico

moreover, workers may be dependent on the work offered by the MNCs.

e.g South Asian migrant workers working on Qatar football stadium

workers were promised wages they couldn’t earn at home

Firms should but do not increase standards unilaterally

• Wages

• some countries show that wages increased due to globalisation

e.g average incomes in Tanzania have increased almost fourfold since the country’s economy has become more open

• on average, a 10% increase in trade exposure leads to a 4% increase in income per capita. – OECD Growth Project

EV: wages must be accessed on a case by case basis – not always positive!

• Increased competition leads to cheaper prices, reductions in the abuse of monopoly power, and increased consumer surplus.

EV: but increased competition may lead to protectionism

• Increased efficiency means more consumer benefits as firms strive for more dynamic efficiency and do more research and development. – quality of goods improves to compete on an international level

• Sharing of ideas and skills – leapfrogging

• Deeper relationships between markets across boarders allows producers and consumers to benefit from economies of scale.

• Foreign Direct Investment grows with free trade, which in turn boosts LRAS, employment
• Globalisation has allowed developed countries to maintain low levels of inflation, at least in its initial stages.

the plentiful supply of labour in developing countries led to relatively low wages…

these low unit labour costs enable a high degree of price competition…

…this has reduced the pricing power of firms in developed nations, who are unable to raise prices for fear of losing business.

• this is an significant explanation for why economies such as the UK were able to enjoy 15 years of continuous growth from 1992 to 2007 without substantial inflation.

EV: this effect has changed over time – there is now upward pressure on commodity prices due to increased global demand – source of cost push inflation

Globalisation helping LEDCs 

• Employment opportunities (see benefits page) -> the world supply of low skilled labour has increased significantly -> reductions in cyclical and structural unemployment

– subsequent positive multiplier effect boosting AD and economic growth

EV: potential brain drain from developing economics, e.g Ghana – 68% of trained medical staff left the country between 1993 and 2000

• LEDCs can gain from export led growth

• emerging economies often have low domestic demand
• with more stable and prosperous trade markets they can boost their aggregate demand through their exports.
• globalisation is one of the reasons as to why many emerging economies are running large trade surpluses.

e.g countries such as Argentina are growing due to their Agricultural exports, exportation of coffee beans from Brazil

EV: negative externalities due to increased trade, e.g environmental consequences

unintended consequences of transport can cause things like the 2010 BP Oil Spill

Tragedy of the Commons

Economists have suggested that in the future, the extent of negative externalities caused by globalisation may lead to de-globalisation.

• Increased international trade has allowed LEDCs to exploit their comparative advantages

• therefore economies can move outside of their PPF curves by trading
• production possibilities increase

e.g. Zambia has grown through its exportation of copper – has a comparative advantage in the resource sector

• Gains from FDI

• Historically FDI was between developed countries but now this is not the case.
• Many emerging market economies have accumulated large trade surpluses and have used these to invest overseas and develop a stock of external assets

e.g Tanzanian sovereign wealth fund – August 2012

• Increased access to financial markets

• often LEDCs have weak financial institutions which lack domestic savings

• Governments and firms are able to get loans which in turn means that they can invest more

EV: will increase the interdependence of economies and increase the knock on effect of exogenous shocks – exacerbates the risk of contagion

• A key negative is that the environmental effects as a result of globalisation are far more likely to be felt by developing countries than developed ones. – given their greater reliance on agriculture etc.

A key negative of globalisation is that it may worsen inequality.

• Although benefits are brought to developing countries, developed countries benefit more.

• There have been increases in the Gini co-efficient for many developing countries.

• There are growing rural and urban divides in countries like India and Brazil.

• Often FDI only goes to the fastest growing economies rather than LEDCs

e.g China – investment accounts for 45% of real GDP v. Chad – 9.6%

• The profits of FDI are often repatriated, which dilutes the impact of the FDI and of any multiplier effect.

• Increased trade can lead to a dependency culture – if trade is ever removed, the effects could be detrimental.

• Loss of cultural diversity through the standardisation of the world

Trade versus technology debate

• The destruction of low skilled jobs is not just due to trade

trade actually probably only accounts for around 10% of the loss of low skilled jobs

• What is actually causing the loss are improvements in technology:

-> skill-bias technical change means that capital replaces labour input at low skilled levels

-> automation of much of the manufacturing industry

-> technology also complements higher skills

Globalisation in terms of the Balance of Payments

Increased demand for currency leads to the appreciation of that currency, and therefore an increase in the price of exports.

• This is bad for export reliant developing countries.

EV: depends on who their trading partners are – PED of their exports

• One could argue that globalisation mitigates the extent to which an appreciating currency actually matters, because countries are so specialised that they rely on others.

Most favoured nation Principle

• The MFN is a status accorded by one state to another in international trade.

• The term means the country which is the recipient of this treatment must receive equal trade advantages as the ‘most favoured nation’ by the country granting such treatment.

• Any trade concessions offered to the country must therefore be offered to others.