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ENTELEQUIAENTELEQUIArevista interdisciplinarrevista interdisciplinar

owadays economies throughout the world are experiencing the impact of modern

globalization. In the last past decades many economies have developed and grown

consistently, whereby some of these were able to acquire a major economic status. The

concept of modern globalization, which is based on the neo-liberalistic view, suggests the

cooperation between economies, where each economy specializes in its comparative advantageand removes trade barriers in order to achieve maximum effectiveness, that should contribute to

global equally distributed wealth.

N

However, the situation faced in the beginning of the 21st century does not look like this.

Although economies have experienced major economic growth, and countries like China and

India are now receiving increased attention due to their progress, there is still the major

domination of very few economies. In fact, economies that had been relatively developed

previously to the Second World War, have further increased their economic strength. As a result

there is Japan, together with the US and the European Union (EU), that account for around 68%

of the World Gross Domestic Product (GDP). Hence, there is a clear domination of these

economies.

This phenomenon can also be seen in the industrial market structure of an oligopoly. An

oligopoly is usually described as a market in which there are just a small number of dominant

companies that hold the major shares of the market’s revenues, and where each of the main

competitors is sensitive to the other’s marketing strategies. Indeed, many of the trade

agreements that have been established over the last decades have increased the connectivity and

interdependence among economies. As a result sensitivity among these has been growing as

well.

One of the main developments, where interdependence has been probably by far the highest,

is the creation of the European Union. In 1957 a custom union consisting of six Europeancountries was established. It has grown to an economic union with 27 member states and

simultaneously achieved greater economic importance than the sum of its pieces.

Today the EU represents one of the strongest economies in the world. Through the removal

of trade barriers the EU is able to allocate resources most effectively and so improve the

productive capacity of its economy, which so enforces and facilitates intra- and extra-EU trade.

This gained position of the EU, in context of the time of Globalization, together with the

other main players of the economic market, raises the question of the comparability of this

situation with the one of an oligopoly.

The analysis of this will provide a clearer picture of the current state of today’s economies,as well as it will indicate parallels with historical economic developments. The EU will hereby

be the major focus of this work, as its creation and development is seen as a main pioneer of

economic integration and thus the realization of the neo-liberalist theory.

Market Structures in an economical context

Generally the concept of market structures can be essential to marketing and economics.

Both emphasize the environment in which these companies operate and its importance it has on

strategic decision-making. Economics is more concerned about the degree of market

Núm. 11 (primavera 2010)Núm. 11 (primavera 2010) Nadia Hushke /Nadia Hushke / 216216

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competition and the pricing strategies of these firms. Marketing, on the other hand,

concentrates its focus on consumer behaviour.

Basically there are four major market structures – perfect competition, monopolistic

competition, oligopoly and monopoly. Market Structures categorize companies based ondifferent characteristics like the number of sellers in the overall market, the kind of product,

market share, barriers to entry, pricing power, efficiency and profits. For each of these specific

criteria is used to describe the circumstances and the environment in which they operate. Table

I will illustrates this criteria in more depth.

Table I. Market Structures in the Industrial Context

CriteriaPerfect

Competition

Monopolistic

CompetitionOligopoly Monopoly

Number of

Sellers

Very high number

of sellersMany sellers Few Sellers

One dominant

seller

Pricing Power Price takersSome control

over pricePrice makers Price Makers

Supply Perfect InformationHigh degree of

information

Minimal

informationNo information

Barriers to

EntryNone/very low Relatively low High Very high

Efficiency High Medium Relatively low Low

Competition HighLimited

competition

High

interdependenceNo competition

Profits Zero-profitSmall positive

profitsAbnormal Profits Abnormal profits

Based on: “Market Structures,” www.bized.co.uk/educators/1619/economics/firms/.../structure.ppt, 9 July2009.

This concept, how it is illustrated above, will now be applied on a macroeconomic scale. To

do so, a redefinition of the categorization criteria will be necessary and will be as follows:

• Pricing: Degree of economic power GDP, Share in world trade, Foreign Direct

Investment (FDI)

• Supply: Development perspective based on the endogenous growth theory

• Barriers to entry: Capital and human endowment, Level of advancement

• Efficiency: Income growth, GDP growth rates, Inflation

• Degree of Cooperation: degree of collaboration and dependence

• Profits: Human Development Index (HDI)

Based on this criteria a new framework can be created (Table II):

Table II. Market Structures in the economic context

Cr iter ia Perfect Monopolisti c Oligopoly Monopoly


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Competition Competition

Existence of

DominanceNo Yes Yes No

Share of World

GDP

Equally

distributed

Relatively equal,

some with slightly

bigger share

Dominance of share

by few economiesOne big share

Development

PerspectiveMedium High

Medium to relatively

lowLow

Barriers to

EntryNone/very low Relatively low High Very high

Economic

EfficiencyLow Medium

Medium to

potentially highLow

Degree of

cooperationNo cooperation Few cooperation

Relatively high

interdependenceVery high

HDI Low Relatively low Medium High

Source: The Author

This study will use the above framework in order to explain the development of the EU in its

international economic context. It will be the main aim to analyse to which extent the EU

nowadays can be considered to be an oligopolistic player. However, a brief introduction about

the other market structures and their fountainheads will be given, as well as a brief elaboration

about the development of Globalization will be provided, as this is the environment the EU

operates in.

Furthermore this study will use another classification of the economic players. By putting all

economies in the concept of a market structure, each economy will therefore represent a

“player” in the market. As each player holds a different share, a categorization will be

necessary. This will be based on two major indicators – the share of World GDP and GDPgrowth rates. Therefore the Boston Consulting Group- Matrix (BCG-Matrix) will be used. This

matrix is a concept that is often used in Marketing, in order to determine the position and

profitability of a product or service, but will here be reformulated (see Figure I).


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The categorization will be based on two determinants. Firstly there is the market/GDP

Growth, showing at which percentage-rate a product/economy is growing. This can occur at a

high rate, which exceeds percentage growth rates of over 3% and low rates (below this

percentage). Secondly, there is the market share a product holds within the overall market. For

the economy this would represent the relative share it holds in terms of World GDP. To hold a

strong position in the World GDP share the economy will need to have a share of 10%. In very

general terms, the majority of today’s developed countries will represent a cash cow, whereas

emerging economies will represent a question mark. Dogs will be developing and

underdeveloped countries, which hold a very small World GDP share and experience a

relatively low growth of GDP. A star will be an economy that already holds a large share of

World GDP and it still growing at a rate that exceed 3% annually. This position could be

achieved already, but only on a short-term basis, as for example for the EU in 2006 with a GDP

growth rate of 3.1%.

Figure III tries to illustrate the development of World GDP share throughout the past. As it

can be seen the distribution of World GDP was relatively equal until the end of the 17h century.

After this time period small changes occurred, which continued with the beginning of the 19th

century, and are furthermore enforced until nowadays. And thus shows the economic

progression, which will here be the major focus of this work.


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Perfect Competi tion

Prior the 15th century most economies in the world were self-sufficient and were mainly

based on agricultural production. Families and households grew their own goods like corps and

cattle. Production surpluses would be traded in order to acquire other goods.There was very little transnational trade. The majority of trade rather took place on a

regional level. Most economies had relatively identical conditions in terms of productive

capacity. There were differences in labour and capital endowment, as well as natural resources

and climate that affected production. However, as agriculture is an almost zero-profit business,

the economies themselves grew by very little and the majority of the world can be claimed to

have had the same share of GDP1. World GDP was relatively equally distributed and growth

rates were considerably low. This categorises most of the economies at that time as a Dog.

As such, it can be claimed, that there was no economic anarchy and that the majority of the

countries enjoyed a high degree of sovereignty and there was just little interaction and trade

with other economies. Productivity and so economic efficiency at that time was relatively low. 2

Economic performance and thus the performance in the agricultural sector was mainly based

on human resources and the natural endowment of the economy, including its natural resources,

geographical conditions and climate. Entry barriers, as defined previously, can be said to have

not existed.

1 China here represented an exception in terms of GDP, this is however not due to a higher level of production,

but to the size of its land mass, which so gives it a higher aggregate GDP:2 Rondo E. Cameron, A Concise Economic History of the World, (Oxford University Press, 1993) 15.


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Monopolistic Competition

With the beginning of the 15th century international trade was starting to catch up and

experienced its first peak during the era of the British Industrial Revolution. This time period,

which covers the 15th century until the early 19th century, is often also said to be the firstGlobalization period.

International Trade and the idea of Mercantilism

Definition: Globalization is the increasing world integration through trade, financial flow

and knowledge.3

By defining globalization as such, it is not a new phenomenon. Already in the 15th century

until the 18th century, increased trade among national economies was common. Eurasian 4

countries during that time based their economic performance of trade on the mercantilist idea,which was popularized by Adam Smith (1776). However, it was Thomas Mun who first

introduced the idea of Mercantilism. In the late 1620s he stated in his book “England’s Treasure

by Forraign Trade” that “The ordinary means therefore to increase our wealth and treasure is by

Forraign Trade, wherein wee must ever observe this rule, to sell more to strangers yearly than

wee consume of theirs in value” 5. It is this main idea on which Mercantilism is built. It says

that each national economy must aim to achieve a positive trade balance, where exports exceed

imports, so that more precious metals would flow into the country, that could be used to invest

in the country’s military and so enhance its national wealth and power.6

Government intervention played a key role in shaping and controlling the national economy.

Trade has been seen as a zero-sum game, where one economy gains and the other loses out. Inorder to achieve this favourable trade balance high tariffs were set on imports. These were

considerably higher for manufactured goods, whereas the tariffs on raw materials were

relatively low.7 The state thus held a high degree of control over the nation’s economy, by

controlling corporations and trading companies, as well as regulating production in order to

secure goods of high quality at a relatively low cost, so that the nation was able to maintain its

position in the foreign markets.8 Manufacturing goods were here favoured over agriculture.

However, agricultural production was essential, so that there is a low need for the import of

these goods, as well as national security would be provided.

Hence it was seen as important to engage in international trade in order to increase the

holding of precious metal and thus power. Indeed, international trade began to blossom by thelate 15th century which also led to an increase in money circulation. The increase in precious

metals that several European countries experienced, was reinvested in strengthening the army,

navy and merchant marine. As a consequence of these investments several improvements for

example for the marine, could be achieved, as longer distance and faster shipping was enabled

and so fostered trade additionally.

3 “Economic Globalization,” http://www.freeworldacademy.com/newbizzadviser/fw6.htm, 8 June 2009.

4 Eurasia compromises the European and Asian continents.

5 “Thomas Mun,” http://www.maths.tcd.ie/local/JUNK/econrev/ser/html/tommy.html, 14 July 2009.

6 “Mercantilism,” http://www.newworldencyclopedia.org/entry/Mercantilism, 8 June 2009.

7 Ibid.8 Ibid.


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In order to improve the nation’s success it would be highly favourable to access larger

markets and expand the sources for raw materials, which was often achieved in this time

through colonisation, which experienced its peak in the 16th century, due to the technological

improvements in navigation.9 As many of the colonising states exploited these colonies, these

were able to increase their productivity in trade and thus increase their power. Trade wasconsequently fostered by colonisation, as it could be used as a low-cost source of raw materials,

agricultural products and as a potential market for manufactured exports from the colonising

state.10

Nation states at this time were still relatively sovereign and cooperation between national

economies was rather limited, as it just served the purpose of purchasing raw materials for

production, as well as for the general trade. Following on, growing integrated world markets

were created. In 1851 the English Channel developed the first successful submarine telegraph

cable, linking financial markets in London with other European capitals.11

This increase in trade and productivity was furthermore enforced through the industrialrevolution towards the end of the 18th century.

With the British industrial revolution many economies entered the second stage of the

structural change, that is, the shift of the main focus on the primary sector to the secondary

sector. With that the distribution of labour force changed. Priory 80-90% of the labour force

was occupied in agricultural production. This proportion decreased to 50% by the end of the

nineteenth century.12 Through industrialization some countries were able to enjoy improved

productivity and high economic growth. Due to that some countries like Britain, Germany,

France and other European countries were starting to develop a slight dominance in terms of

World GDP share and thus economic power.

Simultaneously with the industrialization, the development of industry, capital investmentand increased productivity and know-how the first barriers to entry were established. However,

these were still relatively low as the process of industrialization was still in its early stages.

Also increased international trade and increased interdependence took place, due to growing

demand for natural resources, such as coal and oil. Hence a shift in the factors of production

took place. Before the factors of production were mainly based on human and natural resources,

afterwards physical resources in form of industry add on to this. Thus the high degree of

sovereignty could not be sustained anymore, and the belief in the mercantilist idea started to

erode

Oligopoly

The stage of oligopoly represents the current time of the modern globalization that emerged

in the 1980s. In this time international trade was starting to increase in importance as trade

barriers were removed and the opening up of several economies after the fall of the Berlin Wall,

are seen as major historical events and as the beginning of the stage of Oligopoly.

9 “Colonialism,” http://plato.stanford.edu/entries/colonialism/, 8 June 2009.

10 Dennis R. Appleyard, International Economics, (McGraw-Hill Irwin, 2006) 19.

11 Kevin H. O’Rourke & Jeffrey G. Willliamson, Nineteenth-Century Atlantic Economy, (The MIT Press, 2001)

xiii.12 Rondo E. Cameron, A Concise Economic History of the World, (Oxford University Press, 1993) 15.


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Through the growing international trade that takes places nowadays resources can be

allocated most efficiently and each economy is enabled to specialize on its comparative

advantage and so engage in international trade. As a consequence there is a growing

interdependence among economies, as these depend on each others imports and exports.

Furthermore through the free movement of the factors of production increased efficiency is

achieved and can often together with FDI, contribute to positive GDP and GDP per Capita

growth. As a consequence of major investments that have been taken place in many developing

countries such as in China and India, there is a growing proportion of the middle-class, and

thus there seems to be more equally distributed wealth.

However, still the major economic position and World GDP Share is held by three major

economic players.

The European Union

Table VIII aims to show the distribution of World GDP share, under which it becomes clear

that North-America, the EU and South-East Asia clearly own the major share.

The US13, EU and Japan account for over 68% of world GDP. This underlies the concept of

an oligopolistic market structure, as a minority of players hold the major share of World GDP

and so of the world’s wealth. This concept is also manifested in Pareto’s principle, which claims

13 The US accounted for 26% of World GDP in 2006. “World GDP Share,”http://mjperry.blogspot.com/2008/04/world-gdp-shareemerging-economies.html, 7 August 2009.


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that roughly 20% of (in this case) the world’s population hold about 80% of wealth. 14 As

already mentioned, there are just few dominant economic players in world, of which the EU is

one.

The following section will provide a more detailed explanation of the reasons and aims of itscreation and how the EU has performed and developed since its creation.

The rise of developing countries as a tool for economic growth

However, although Neo-liberalism suggests positive economic growth, wealth and

international cooperation, this development can also be seen from a different perspective.

The development of developing economies brings several favourable aspects. Through

increased FDI in several economic sectors, as well as infrastructure, technology and other

sectors can be made. By doing so the economy will be able to improve its productive capacity

and therefore be more competitive. Consequently economies experience positive GDP growth.

It is clear that FDI, which often comes from developed economies, tends to invest in an

economy by, for example, outsourcing supply chain activities to a country with relatively low

labour costs, as it is often the case for companies that use the Global Product Development-

strategy (GPD)15. This creates benefits for both parties.

In the long run the developing economy grows, which mostly comes along with increased

GDP per Capita. Increased incomes, as it would the case in India, often occurs in a parallel

fashion with increased demand for consumer goods. Most notably this increased demand will

be for goods from developed countries, and so increases the demand for imports.

This fact increases exports for the developing countries and contributes again to economic

growth. Statistically developing countries grow at a much faster rate, due to the catch-up effect.

Developed economies in turn seem to grow at a much lower rate.

Therefore the developed economy is able to increase demand for its exports, thus making

more sales. With increased wealth in developing countries developed countries can so expand

the size of their current target markets and in best case find new markets. In marketing this

process is often described as market expansion and market development – sales and demand are

stimulated and created in markets where they have not been before.

This situation can be compared to a specific extend with the US’s European Recovery

Program (ERP) in Europe – through the development and strengthening of the Europeaneconomy the demand for US goods has grown significantly, which at the same time benefited

the economy of the US. Therefore the increased demand from today’s developing countries also

strengthens the economic position and competitiveness of develop countries.

However, what the main purpose behind the stimulation of growth of developing countries is

remains an open question. Just time will be able to show, to which extend all developing

14 “Pareto’s Principle: The 80-20 Rule,” http://www.bsu.edu/libraries/ahafner/awh-th-math-pareto.html, 29 July

2009.

15 GPD: Global Product Development-Strategy, that aims to maximize the financial and operational productivity

of the product development process by spreading product development activities across multiple regions of the

world in order to better match value-add to cost.”, “Gaining Competitive Advantage through Global ProductDevelopment,” www.ptc.com/WCMS/files/76863/en/3425_GPD_WP_EN_FINAL.pdf, 12 March 2009.


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countries can liberalize sufficiently and thereby enjoy a “developed” level of income and

wealth, and how much this will be equally distributed. As such the world is now economically

dominated by three major players, and so marks the time of the Oligopoly.

The Eastern European Enlargement

Another similarity can be drawn in the case of the eastern European enlargement of the EU.

The continuous expansion of the EU towards the eastern European economies was a critical

step in many ways. Firstly many of these countries showed a considerably lower level of

development and technological advancement.

The economic integration of the eastern European members seemed to be a critical process

due to the countries’ negative balance of trade and account balance. The difficulties and costs

that arose with the eastern European integration raised the question whether these are seen as

extractive economies16

, which in this case represented the eastern European members whichreceived only a low and declining share in the global distribution of wealth. 17 As Gernet Köhler

and Emilio José Chaves claim the east seems to be unable to reap the benefits of technical

progress and is being forced to export heavily which makes the economy increasingly reliant on

the export sector. At the same time there did not seem to be any advances in energy and income

balance. Due to this they proposed the throw-back into this old pattern of extractive economy. 18

However, if this will be the case remains to be seen.

The enlargement of the European market led to an increase of human capital and the benefits

associated with it, increased capital, economic and natural resources. The size of the European

common market increased from about 370 million to 470 million people. Furthermore all

members are going to benefit from the reduced barriers to trade, investment and movement of labour. Through this increased trade liberalization in the European zone economic growth and

strength will be enhanced.19 Following the increase of the common market economies of scale

can be achieved much easier and productivity of capital and labour increases, which will drive

down prices in the long run, and thus make the EU increasingly competitive and enhance its

economic strength and power.

As such the EU is having an increased access to new markets and resources, as there are no

trade barriers. This increased access however, can be compared to a specific extend to

colonization, which took place during the Mercantilist-area, in a way that a further expansion of

the own market, which here is the EU that established out of six member states, expanded to 27

member states. Surely the membership of the new states was voluntarily, but the fact of marketand resource expansion shows similarities.

16 This term is used to describe a situation of unequal exchange whereby raw material exporting sectors in the

periphery

17 Gernot Köhler & Emilio José Chaves, Globalization, (Nova Biomedical, 2003), 173.

18 Ibid., p. 173.19 “EU Enlargement,” http://www.cato.org/pubs/pas/pa489.pdf, 3 August 2009.


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For the new EU-members Latvia, Poland, Eastland, Lithuania, Slovakia, Czech Republic,

Slovenia and Hungary the membership has been showing many positive effects. With the

adaptation of the EU more stability could be achieved and so made the countries more attractive

for direct investment.20 Overall, since the membership all eight countries record an average

increase of 25% in GDP, which represents an increase three-times as high as the old EU-

member states (see Figure IX). Additionally the GDP per Capita increased and corruption

problems decreased.The further development of Eastern European countries will continue to be a main issue in

the future.

For example the markets of Poland, the Czech Republic and Hungary represent three of

Germany’s main 15 export-partners, and are representing an even bigger importance for trade

than Japan, Brazil and India.21

The London Centre for European Reform claims that the new enlargement helps the EU as a

whole to be more competitive in the world market.

Furthermore with the widening of the European markets and enforced economic integration

where trade barriers are removed, the EU is widening its production-scale. As a resulteconomies of scale can be achieved easier, thereby decreasing production cost, which makes the

European economy more competitive.

Based on the main idea of this study the widening of the European market could be

compared with company-mergers. Companies merge in order to benefit from various aspects,

like sharing and reducing various costs, strengthening of market power, access to increased

know-how and assets. In simple terms the merging or takeover of the eastern European

countries is not very different from this.

20 Nils Kreimeier, “Großer Sprung nach vorn,” Financial Times Deutschland, 30 April 2009, 13.21 Ibí d.


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The EU as an oligopolistic player

In order to give a more in-depth insight into the current market structure of oligopoly, a

detailed analysis of the EU will be conducted, as it is considered to be one of the major players.

Therefore the categorization-criteria will be recalled.

Pricing : Degree of economic power GDP, Share in world trade, FDI

Supply: Development perspective based on the endogenous growth theory

Barriers to entry: Capital and human endowment, Level of advancement

Efficiency: Income growth, GDP growth rates, Inflation

Degree of Cooperation: degree of collaboration and dependence

Profits: HDI

Pricing

Foreign Direct Investment (FDI) is defined as a “category of international investment that

indicates an intention to acquire a lasting interest in an enterprise operating in another

economy”22, FDI is an important indicator for the international economic climate. Furthermore,

in the time of globalization, it plays a major role as it is an important indicator for international

relations and development, as it can encourage increased efficiency in production, increase

technological and managerial know-how and thus improve the productive capacity of the

economy and its competitiveness. Reasons for FDI can be access to new markets and the better

knowledge of these markets, the need for local market presence and lower labour, raw material

and intermediary input costs, and thus the overall decreased production costs.

From 2004 to 2005 world FDI inward flows increased by 9%. The EU records an increase of

77% in the same time.23 The EU recorded a holding of 19% of the world FDI inflows in the year

2005. The majority of this investment (43%) came from the European continent (non-EU

countries), followed by North-America with a share of 18%.24 Main destination for EU-FDI

outflow were the United States, Switzerland and Canada, and thus underlines the fact, that most

of the FDI-flows take place among developed countries, rather than to developing countries.

Just 36% of the EU total FDI outflows went to emerging markets, whereby East Asia was the

main receiver. The EU’s Net FDI income recorded a high of 68 € Billion in 2005.

22 “European Union foreign direct investment yearbook 2007,”

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BK-07-001/EN/KS-BK-07-001-EN.PDF, 5 July 2009.

23 “European Union foreign direct investment yearbook 2007,”

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BK-07-001/EN/KS-BK-07-001-EN.PDF, 5 July 2009.24 Ibid.


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As illustrated in Figure XII there is a positive trend for FDI inward and outward flows. EU

inward stocks increased by 10% in 2005, and outward stocks increased by 16%. Overall net

assets increased in 2005, after recording a continuous decline in the years before.

Supply

Research and development expenditures which are considerably good, can promise long term

growth and development .Based on the endogenous theory of growth it is crucial for a country

to invest in Research and Development (R&D25), as technological innovations are becoming

increasingly important contributor for economic growth. R&D contributes to the overall stock

of knowledge of the economy and so enhances its productive capacity, which in turn increases

its competitiveness. Technological development, scientific research and innovation are a key

factor for economic growth and competitiveness and are therefore important to be developed on

a continuous basis. In 2004 R&D expenditures accounted for 1.90% of GDP in the EU-25. At

the moment Japan and the US still record the highest expenditures on R&D development.

However, launched at the Lisbon European Council and later on established at the Barcelona

European Council in March 2000, the EU planned to increase this percentage to 3% until

2010.26 With this percentage the EU would catch up with the US (2.8%) and Japan (more than

3%). However, the amount of R&D allocated to applied research in the EU is considerably

higher, compared to the US (see Figure XIII).

25 R&D Definition: “ Activities that compromise creative work undertaken on a systematic basis in order to

increase the stock of knowledge, including knowledge of man, culture and society and the use of this stock of

knowledge to devise new applications”, “R&D expenditure in Europe,”

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-NS-06-006/EN/KS-NS-06-006-EN.PDF, 6 July

2009.

26 “R&D expenditure in Europe,” http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-NS-06-006/EN/KS-NS-06-006-EN.PDF, 6 July 2009.


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Countries like Japan and China tend to focus their expenditures more on experimental

development.27 The biggest spending sector is manufacturing, followed by the service sector.

For the manufacturing sector the EU records similar R&D expenditures as the US. 28 Following

on, the highest amount of R&D investments was provided to Germany, France and the United

Kingdom. Increased efforts is also planned to be invested on information and communication

technologies, biotechnology and nanotechnology, aeronautics and hydrogen energytechnology.29

For the service sector positive trends for the EU are predicted, this would close the gap

between in the R&D spending with the US, on which at the moment the US is spending

considerably higher amounts.30 Over the years the EU recorded constant growth in R&D

expenditures. From 2001 until 2004 EU expenditures rose by 2.7% per year. This fact will be

another important issue that will contribute to the EU future economic outlook and

performance.

27 “R&D expenditure in Europe,” http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-NS-06-006/EN/KS-

NS-06-006-EN.PDF, 6 July 2009.

28 Ibid.

29 “Communication from the Commission,” ftp://ftp.cordis.europa.eu/pub/era/docs/com2004_353_en.pdf, 7 July

2009.

30 “R&D expenditures in Europe and the US,” http://www.euractiv.com/en/science/rd-expenditures-europe-us/article-180737, 6 July 2009.


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Bar r ie r s to e ntr y

The EU’s economic and trade policies are generally created in a way that makes the EU the

strongest and most competitive single economy in the world. 31 With the continuous enlargement

of the EU, human resources have been increasing greatly. With over 491 Million inhabitants theEU holds 7% of the world’s population share. Several strong partners and trade agreements the

EU holds, puts it in a strong economic position throughout the world. The continuous

strengthening of common fundamental values with trading partners, the rule of law, property

rights and the practise of free trade, the European economy has been able to benefit and grow

greatly. The EU together with the US represent the largest bilateral trade relationship in the

world, and make both of them the key players in the global trade system, 32 Together both

economies account for almost 60% of the global GDP, 33% of world trade in goods and for

about 42% of world trade in services, and thus shows the strong power of these two economies.

Efficiency

GDP growth rates, the inflation rates and unemployment rates are three of the main

economic indicators. These are said to be important, as they can give some information about

future economic performance.

Favourable Real GDP growth rates33 are essential for an economy, as it will reflect the health

of an economy. The healthier an economy is, the more likely it will be a target for FDI and be

more likely to enjoy positive economic growth and development, this in turn might also

contribute to decreased unemployment rate and thus increased consumer spending. 34 The EU is

considered as a cash cow – as it holds a big share of World GDP and small GDP growth.Throughout the years the EU enjoyed constant economic growth (see Figure XIV).

31 “Trade,” http://www.eurunion.org/eu/index.php?option=com_content&task=view&id=52&Itemid=48, 7 July

2009.

32 “Bilateral Trade Relations,” http://ec.europa.eu/trade/issues/bilateral/countries/usa/index_en.htm, 7 July 2009.

33 Real GDP growth rates take inflation into account, and will consequently here not be considered separately.

34 “Economic Indicators: Gross Domestic Product (GDP),”http://www.investopedia.com/university/releases/gdp.asp, 28 July 2009.


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Although the world is facing an economic recession at the current time, it is still predicted,

that the EU will be able to stand up again quickly, due to its economic strengths and advantages.

The EU’s economy is considered as being highly stable, as well as the continues growth in the

past and the development and growth of the new member states, it can be predicted that the EU

is furthermore going to have positive GDP growth rates and will so additionally strengthen its

economic position. But not only the high level of advancement in the industrial and

technological sector contribute to these favourable growth rates. Also the development and

increased productivity furthermore strengthens the EU’s position throughout the world. The

role as one of the main agricultural producers could additionally be enforced in the future by

the World Climate Change. Through increased temperatures, droughts, floods and increased

sea-levels more and more countries find their agricultural future threatened. For the future

Middle- and South-America will suffer heavily from the climate change. 35 Although the EU is

also surely affected by this, the degree of damage will still be relatively lower than in South-

America. This could give the EU additional power, as agricultural exports from the EU will be

increasingly demanded.

Unemployment rate is often used an indicator of general economic activity. This so reflects

the labour force utilization of an economy. A high unemployment rate would thus indicate that

human resources are idling and productive capacity is foregone. 36

35 Appendix II shows a World Map of the consequences of Global Warming

36 “The Unemployment Rate as an Economic Indicator,”http://research.stlouisfed.org/publications/review/76/09/Unemployment_Sep1976.pdf, 29 July 2009.


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As the evidence shows (Figure XV) the EU enjoyed a lower unemployment rate than Japan

and the US from the end of the 1970s on. Generally the EU’s unemployment rate shows a

decreasing trend, whereas Japan and the US show positive unemployment rate growth.

Following on, the EU seems to have used its resources more efficiently as well as it was able to

increase their productive capacity, which goes hand in hand with GDP growth.

Degree of Cooperation

The degree of economic cooperation, in form of trade agreements, has increased

significantly since the 1980s. More and more countries liberalized their economy, lowered or

reduced trade barriers, in order to facilitate trade. As a result of economic liberalization the

amount of imports and exports has grown significantly, and strategies, such as GPD and

outsourcing have become more common. Because many companies receive their raw materials

and services from other countries, produce their products throughout the world and sell their

goods to different markets, today’s degree of cooperation and interdependence among nation-

states became crucial. As such, it is the goal of the neo-liberalistic idea to create this stronger

cooperation, in order to allocate resources more efficiently, ensure stability and so reduce the

potential and risk for conflict.

Companies and economies can so work together, which will so benefit all participants in the

long run. This fact can be explained by the Nash Equilibrium. This theory is used to describe

the relationships among companies and industries in an oligopoly. Each participant will be

affected by the actions of the other – they are interdependent. Following on, it will be most

beneficial if participants decide to cooperate with each other. In international relations this can


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take place in forms of negotiations over mutual tariff reductions, the formation and reservation

of custom unions, issues of international common property and others.

Further on, if all participants and economies agree on one strategy and to cooperate, none of

them will lose. In this way today’s economies will try to adjust their behaviour to the one of theother’s in the game, so that strategy choices will be created in a way that all participants will

experience better results.37 As a result the created Nash equilibrium will be a self-enforcing

agreement among most economies nowadays. As the agreement of mutual economic

cooperation was reached, it will be in the self interest of each player to follow this agreement.

As a consequence economic cooperation and integration could be furthermore developed and

enforced than in the beginning of the modern globalization.

Profits

Profits normally refer to surplus remaining after all total costs have been deducted from thetotal revenue of a company. It is often used as a measure of the success and is often important

for stockholders, as an increase in profits can lead to increased profits for equity holders. Thus

it is an indicator of the comparative performance of the company. 38 In economic terms the sales

of the company would reflect the country’s GDP. Increased sales/GDP thus often seem

favourable and is what most economies aim for. However, how well off a country is really is, is

often described by the Human Development Index (HDI), and shows how much the society

really takes “profit” out of increased GDP. Comparable to a company this would mean, how

much did the increased sales really reflected in the increased profits, or could only increased

sales be achieved through lowering profits, which could be compared with economic growth for

the suffering of the society. The Human Development Index is a widely accepted measure foreconomic development and thus the standard of living of the country’s society. The HDI takes

into account the following indicators:

1- Life expectancy

2- Literacy

3- Educational attainment

4- GDP per Capita

The closer the HDI of a country is to one the “better” the society’s standard of living.

37 “The Nash Equilibrium: A perspective,”

http://kuznets.harvard.edu/~aroth/papers/HoltRoth.nash_perspective.pdf, 8 August 2009.38 “Profit,” http://www.businessdictionary.com/definition/profit.html, 18 July 2009.


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As it can be seen in Table X Japan here records the highest HDI, followed by the USA. For

the EU the HDI has been divided into three groups, based on the different memberships. This

comparison might be useful, as the new members, especially in the last eastern Europeanenlargement still face major imbalances with the rest of Western Europe in terms of GDP per

capita as well as the productive capacity. Following this the HDI of the EU is decreasing

consistently by adding its new member-states.

However, apart from China it can be said, that these countries enjoy a considerably high HDI

compared to the world average HDI of 0.741.39

It can be concluded, that the countries that enjoy high GDP together with a high share in

world trade also enjoy a high HDI, from which the society benefits as a whole, eventually. For

these countries economic liberalization thus has been a favourable step in order to improve

wealth.

Results from the EU’s current economic status

The economic development of the EU and other rising economies, has changed the

economic power relationships in the last past decades. After the Second World War, there were

the two superpowers – the United States and the Soviet Union. As the U.S. took on

responsibility to help and rebuild Europe, it increased its own share of economic, but also of

political power and thus made it the 20th century hegemony.

39 Appendix III shows a Map of the World HDI distribution.


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The successful implementation of the neo-liberalistic approach, embedded in the EU, which

expanded and grew over the past time, made the EU rise and become one of the world’s main

economic players. As a result the U.S. lost its hegemonic status, although it is still holding the

position of a dominant player.

The new era of Globalization, together with the increased connectivity and interdependence,

changed economic and international relations, whereby each participant had to gave up a certain

degree of sovereignty, in order to benefit. The implementation of the neo-liberalist idea has

increased international security, in which international organizations and institutions play a key

role for the stabilization of the international system, as these have established a set of

international rules, which are precise and well obeyed.

The European Union, which is the economy that has realized the neo-liberalist idea to

probably the largest extend, has lead to the further strengthening of countries, that have been

powerful before, such as Germany, but is also contributing to the development of countries, that

have not been as fortunate, like Slovakia, and are now experiencing the benefits of economicintegration.

Therefore the positive results from the implementation of the neo-liberalist thinking can be

best seen in the European Union. Although the European Union has been criticized to a major

extend, and although some of its policies are highly questionable and do create inefficiency in

some areas, the EU has improved economically and so underline the main goals of its creation.

Some economies, namely the question marks, are about to acquire a major economic status,

and would so change the composition and increase the number of dominant players in the

economic market. But these should not represent a threat for the European Union, as it would

be in the past, where trade has been seen as a zero-sum game.

With the retention of the European strategy and the further development of its new member

states, this should result in the maintenance of the EU’s powerful economic status and will so

make it remain competitive in the future, whereby other economies are also able to develop and

so will increasingly show the results of the positive-sum game of international trade.

As such, the overall results of the development of the EU can be evaluated as being highly

positive, and can so serve as a role model for other developing economies and encourage these

to shift more to a neo-liberalistic thinking and open themselves up to international trade.

Surely there is no perfect model for economic growth. Each economy will have to develop a

model for economic growth and development for itself, whereby domestic factors and

circumstances have to be taken into consideration. However, the increased need for connectivityand collaboration, together with increased interdependence should be seen as necessary and

positive, as it so contributes to international security and development. The overall development

within the world might be uneven, whereby some economies will develop quicker and more

efficient than others, however this might, step by step, contribute not necessarily to overall

wealth, but to a more equally distributed wealth.


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Monopoly

This final stage of monopoly would represent a world of fully globalized free trade and a

high degree of interdependence among all economies. In this scenario resources would be

allocated most efficiently throughout the world, whereby each country can focus on itscomparative advantage without facing barriers. This in the long run would result in a relatively

low economic efficiency, as the results of the catch-up effect have been overcome. Following

on, wealth would be distributed more evenly and would so contribute more to global justice,

where no dominant economy exists anymore. As a consequence of the international economic

integration there exists one overall market within the world – thus a monopoly.

Whether and when this scenario will happen remains questionable, as there are still many

other factors, such as political, environmental, social, religious and others, that can diminish the

possibility for sufficient economic development.

Conclusion

In the modern globalization a few economies were able to acquire and maintain a major

economic status, whereby several other economies that opened themselves up to international

trade, are about to grow and develop.

The European Union, as one of the pioneers of the economic integration, has risen from six

initial members countries to 27 and so increased it’s competitiveness by far, as a large amount

of markets, resources and capital can be accessed. However, the EU, such as other economies

remains and even enforces its interdependence with others economies and nation-states. Thisfact represents one of the main differences to the first globalization, where countries were rather

sovereign and governments controlled trade heavily, whereas today economic growth is said to

be based on a free market and collaboration among economies.

However, the modern Globalization has not brought all the benefits yet, for which many

economies were aiming for. In fact, up until now, just three major players have developed and

grown so much, that these can be considered to dominate world trade.

The EU together with the US and Japan can be considered as one of the main holders of the

World GDP share. These cash cows grow at a relatively low rate, compared to question marks,

but can be forecasted to remain strong in the future, whereby the EU with its further expansion

and the development of the eastern European countries could even contribute to a bigger

economic weight in the future. Other economies such as China and India, which are some of

the emerging markets at the present time that will contribute to growth and so probably lead to

an expansion of the oligopolistic market, will be some of the stronger players to come.

According to the specific criteria that has been used for the analysis on the EU, and due to

the fact that there is a presence of economic powers, a relation to an oligopolistic market

structure can be drawn.

Globalization has contributed to increased interdependence, economic growth and

international security. However, it remains highly questionable whether globalization is going to

reach the final stage of monopoly.


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Glossary

CAP = Common Agriculture Policy

CEECs = Central and Eastern European Countries

CEFTA= Central European Free Trade Agreement

ECA = Economic Cooperation AdministrationEMU= Economic and Monetary Union

EEA = European Economic Area

EC = European Community

EEC =European Economic Community

ERP = European Recovery Plan (Marshall Plan)

EU = European Union

FDI= Foreign Direct Investment

GATT = General Agreement on Tariffs and Trade

GDP = Gross Domestic Product

HDI = Human Development Index


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IMF = International Monetary Fund

MNC = Multinational Corporations

NAFTA = North American Free Trade Agreement

OEEC = Organization for European Economic Co-Operation

OPEC = Organization of Petroleum Exporting CountriesR&D = Research & Development

SEM = Single European Market

SU= Soviet Union

SAFTA = Singapore-Australian Free Trade Agreement

TNC = Transnational Corporations

UN = United Nations

UNDP = United Nations Development Programme

WB = World Bank

WTO = World Trade Organization


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