ECON3315 International Economic Issues

ECON3315ECON3315International Economic IssuesInternational Economic Issues

Instructor: Patrick M. CrowleyInstructor: Patrick M. Crowley

Issue 10a: Globalization - Orthodoxy

OverviewOverview

Defining globalizationDefining globalization HistoryHistory Economics of globalizationEconomics of globalization Globalization: the orthodox viewGlobalization: the orthodox view Trade and globalizationTrade and globalization FDI and globalizationFDI and globalization Other effectsOther effects

Defining globalizationDefining globalization

Wikipedia definition:Wikipedia definition:

GlobalizationGlobalization, also , also globalisationglobalisation, refers to a , refers to a process of increasing integration between units process of increasing integration between units around the world, including nation-states, around the world, including nation-states, households/individuals and organizations, households/individuals and organizations, including corporations.including corporations.

In economics, globalization refers to increased inter-In economics, globalization refers to increased inter-connectedness between countries due to trade, connectedness between countries due to trade, FDI, and capital flows.FDI, and capital flows.

HistoryHistoryEconomic integration is nothing new…lots of examples littered through history

Roman empire essentially caused economic integration from England down to Iraq by having an advanced transportation network, common currency and being pro-trade.

1500-1650 saw new inventions in ship transportation lead to imperialist ambitions on the part of Western European countries. Led to trade between all parts of the globe and Western Europe.

1815-1914: Industrial revolution in Britain and new steam ships caused rapid expansion of British interests worldwide and transfer of technology and know-how to far flung parts of the planet. Examples are the transatlantic cable and abolition of the corn laws (1846) in Britain.

Inter-war period might have been a period of rapid integration as air travel began allowing individuals and goods to travel to far-flung parts of the globe. All unravelled with the Great depression and Smoot-Hawley, increased tariffs in Europe, and WWII.

Post-WWII: 1950-80 manufacturing technology improves, and advent of the computer.

Measuring globalizationMeasuring globalization

Two dimensions of globalizationcan be considered: (a) growth of international traderelative to population and

income and (b) convergence in the prices of

traded commodities.

Measured on this basis 1800s globalization similar to today’s increase in income and trade, and impact similarly dramatic (income from trade 2% in 1850 and 30% in 1914)

The economics of globalizationThe economics of globalization

Main argument (Adam Smith) is that larger market Main argument (Adam Smith) is that larger market permits finer division of laborpermits finer division of labor

In turn leads to greater specialization (learning by In turn leads to greater specialization (learning by doing) and innovationdoing) and innovation

To achieve larger market requires that countries To achieve larger market requires that countries lower trade barriers and restrictions on FDI and lower trade barriers and restrictions on FDI and equal treatment of foreign firmsequal treatment of foreign firms

Cheaper transportation and communication also Cheaper transportation and communication also aids trade in g&s. Since 1920 sea freight costs aids trade in g&s. Since 1920 sea freight costs have declined by 2/3rds, cost of telelphone call has have declined by 2/3rds, cost of telelphone call has gone down by 99%.gone down by 99%.

The economics of globalizationThe economics of globalization

Flows of FDI and financial assets are called Flows of FDI and financial assets are called “international capital flows”: significant since 1980“international capital flows”: significant since 1980

Flows of FDI important as it transfers knowledge to Flows of FDI important as it transfers knowledge to LDCs and also LDCs and also

Flows of labor also important, but not biggest Flows of labor also important, but not biggest effect in recent globalizationeffect in recent globalization

In this wave of globalization, trade and FDI biggest In this wave of globalization, trade and FDI biggest factorsfactors

The economics of globalizationThe economics of globalization

As FDI is important, MNEs also major part of As FDI is important, MNEs also major part of globalization as they move parts of production to globalization as they move parts of production to best locationbest location

What determines best location?What determines best location? - domestic government policies- domestic government policies - wages- wages - quality of labor force- quality of labor force - communication and transportation infrastructure- communication and transportation infrastructure

http://news.bbc.co.uk/2/hi/in_depth/business/2007/globalisation/default.stm for example on location of vehicle assembly plants for example on location of vehicle assembly plants

Globalization: the Globalization: the orthodox vieworthodox view

Globalization also Globalization also depends on countries depends on countries being open to it. If being open to it. If countries do not embrace countries do not embrace it, they lose out. it, they lose out.

But developing But developing economies must be ready economies must be ready to stand up to to stand up to international competitioninternational competition

So, domestic policies and So, domestic policies and attitudes to globalization attitudes to globalization are likely more important are likely more important than external than external considerations (such as considerations (such as WTO membership).WTO membership).

Globalization: the Globalization: the orthodox vieworthodox view

Argument here is that economic growth is much more important as a driver to alleviate poverty than is the amount of trade or FDI being done.

More globalized countries More globalized countries have grown faster have grown faster because of increased because of increased trade and FDI than have trade and FDI than have other countries.other countries.

Trade & globalizationTrade & globalization

Openness of LDC trade regimesOpenness of LDC trade regimes Opening up trade doesn’t necessarily cause a Opening up trade doesn’t necessarily cause a

wave of imports, but…wave of imports, but… High growth countries seem to trade moreHigh growth countries seem to trade more

LDC tradeLDC tradeAlthough LDC exports to developed countries has been falling as a % of total LDC exports, it has been rising to other LDC markets

Similar pattern is observed when looking at exports of developed countries to LDCs.

FDIFDI

Capital flows to LDCs Capital flows to LDCs have gone from have gone from $104bn (1980) to $104bn (1980) to $472bn (2005)$472bn (2005)

Capital flows can beCapital flows can be - equity- equity - debt- debt - remittances- remittances - FDI- FDI

FDI is the most FDI is the most important flow for important flow for LDCsLDCs

FDIFDI

FDI can either be:

- greenfield

- acquisition of existing productive assets

FDI is also more stable than other capital flows

Relationship between FDI and trade is complex, as FDI will substitute for some trade but will also lead to increased exports

FDIFDI

FDI can also lead to FDI can also lead to higher domestic higher domestic investment, as new investment, as new capital influx can cause capital influx can cause other related firms to other related firms to increase investment. increase investment.

Research shows that a Research shows that a 1% increase in FDI leads 1% increase in FDI leads to a 0.6% increase in to a 0.6% increase in domestic investmentdomestic investment

This, in turn, fosters This, in turn, fosters economic growtheconomic growth

Other effectsOther effects

Financial globalization Financial globalization can also discipline can also discipline governmentsgovernments

Leads to lower budget Leads to lower budget deficits and therefore deficits and therefore lower debt levelslower debt levels