Globalization Notes KMLI Definition: growing economic interdependence of countries through increasing volume and variety of cross-border transactions

s in gds, svs, free intl capital, labour flows. These involve greater intl movement of commodities, $, info, people; dev of tech, org, legal sys, infrastruc allows it to happen. Globalization involves: 1. intl trade at faster rate > growth in world economy 2. intl flow of capital including FDI 3. WTO, IMF deal with intl transactions 4. intl outsourcing, offshoring by MNCs closer integration of countries and people with reduction in costs of transportation and communications, and breaking down of artificial barriers to flow of gds, svs, capital, knowledge, labour. Institutions that govern Globalization IMF provides funds if countries engage in policies e.g. cut deficits, raise taxes, raise interest rates that lead to contraction of economy. World Bank post-war reconstruction, development, develop developing countries. WTO govern intl trade relations, forum for trade negotiation and arbitrates disputes & encourage free flow of goods and services. Stages of Economic Integration - Process of eliminating restrictions on intl trade, payments and factor mobility. 1. Free trade Area - assoc. of trading nations. Members agree to remove tariff/NT barriers among themselves - But members retains independence to establish trade policies with non-members - Scheme can apply to select group of goods, while other goods still protected - Non-member ctries may find it profitable to export pdt with lowest level of outside protection, then through it to other ctries. - Without Rules of Origin by members regarding source ctry of pdt, nothing to preclude non-member ctries from using transshipment strategy to escape trade restrictions - E.g. NAFTA, Singapore-US FTA. 2. Customs Union - Agreement among 2 trading partners to remove T/NT barriers - Each member imposes identical trade restrictions against non-members common external trade policy - Limitation: must give up independence of setting indiv. tariff rates - E.g. Benelux 3. Common Market - In addition to (2), free movement of labour and capital between members represent a more complete stage of economic integration and further of ctrl of indiv members. - EC 1958 EU 1993 - Difficulties: member nations surrender sovereignty in immigration & capital flows, factor integration 4. Economic Union - national, social, taxation, fiscal policies harmonized

Each ctry remains separate political entities but economic sovereignty surrendered to supranational instituition

5. Monetary Union - Ultimate Degree of economic integration - unification of national monetary policies and acceptance of common currency administered by supranat. Monetary authority. - EU requirements (Maastrict Treaty) o Price stability 1.5% inflation above lowest 3 ctries inflation rate o Low LT i/r 2% average o Stable ER target bands of monetary union o Sound public finances budget deficit 3% GDP, outstanding deficit 60% GDP Regional Trading Arrangements Regional trading agreements Globalization - When structured according to principles of openness and inclusiveness, regional blocs can aid global free trade and investment - Regional agreements deeper economic integration among members than multilateral accords with greater common interests and simpler negotiating processes. - As mkt encompassed by free trade area , opp. cost of remaining non-member . - in economic size of union = bargaining power - Regional liberalization encourages partial adjustment of workers out of export competing industries where comparative adv. Is low political support. Effects of Globalisation By forming a trade bloc, there is integration ( movement towards free trade for member countries), but there is also trade diversion (from lower-cost-non-member to member). Trade creation economic integration leads to shift in product origin from domestic producer whose resource costs are higher to a member country whose resource costs are lower. shift represents a movement in direction of principle of comparative advantage brings welfare gains from more efficient resource allocation. Trade diversion shift in production origin from non-member producer with lower resource costs to member country producer where resource costs are higher. shift represents movement away from principle of CA, reducing overall welfare. Regional trading agreements Globalization - Under WTO, trade liberalization policies extends to all w/o discrimination - Regional trading blocs discretion of member nations to pursue trade liberalizatn with outsiders. - Regional trade bloc members may not enjoy addn EOS from further global trade liberalization. - Interests: trade bloc members may wish to invest their time and energy in est. strong regional linkages rather than investing in global negotiations. [ little incentive for regional trade bloc members to work towards globalization.]

Benefits of economic integration depends on factors contributing to trade creation & diversion Member countries More likely effect of integration of markets will be positive. Nations prices nearer to lowwhose pre-union economies are quite competitive are likely to benefit cost world price from trade creation because forming union offers opportunity for production specialization. Initial Tariff rate Effect more +ve if initial tariff rate is higher. Areas b and d will be larger.If tariff initially prohibitive (0 import from ctry A), no welfare loss from trade diversion. Elasticity High elasticity of supply and demand curves = greater quantity response by producers and consumers = larger areas b and d. Great number of Integration more beneficial, since there is smaller group of countries participant countries from which trade can be diverted. If entire world integrated, there will be only trade creation; no trade diversion! International movements of factors of production Economies of factor flows - Productive factors move from nations where they are abundant (low productivity) to where they are scarce (high productivity). - Flow in response to differences in returns (wages/yields of capital). If returns > cost of moving, move! - If labour is scarce import labour or labour-intensive products. - Intl trade in g & s = substitutes for = productive factors. International movement of capital - Foreign portfolio investment: does not involve ownership or control of foreign production units. Just financial capital. - FDI involves movement of capital that involves ownership and control of production facilities. By MNCs. E.g.: o Parent company obtains sufficient common stock in foreign company o Parent company acquires/constructs new plant and equipment ovs o Parent company shifts aborad to finance expansion of foreign subsidiary What affects capital flows: o Expectation of higher rate of return economic agents maximize their wellbeing Economic determinants (How is the host countrys) o Market-Seeking FDI: Market size, per capital income, market growth, access to regional/global markets, specific consumer preferences, market structure o Resource/asset-seeking FDI: raw materials, availability of skilled/unskilled labour, technology, innovation and other created assets, physical infrastructure o Efficiency-seeking FDI: cost of physical human resources, membership of country in regional networks to facilitate regional corporate networking Political Framework o Eco/soc/pol stability, rules regarding entry/operations, policies of market structure regarding competition, treatment of foreign firms, tax policies, trade policies Business Facilitation o Investment promotion (image-building) o hassle costs by corruption, admin inefficiency o Social amenities (int schools, SOL)

Effects of International Capital Movements Benefits Costs DONOR - foreign firms may stifle efforts to develop - more open economies enjoy higher homegrown industry. SMEs have difficulty competing with MNCs. rates of private investment - Intl firms drive out local competition to gain determinant of economic growth monopoly power and job creation - During international crisis, MNCs may - by participating in local labour mkt, move funds rapidly from one financial dd for labour , wages for all centre to avoild losses /make profit from workers - SR: UE as production shifts changes in exchange rates. does not overseas help governments stabilize economies. - LR: foreign sales increase RECIPIENT overtime; foreign labour consumes - Dutch Disease: Inflow of capital leads to and produces. As Investment appreciation of currency imports increases, Employment and become cheap, exports expensive. Makes income increases. it difficult for host to export and grow - LR: Investment abroad stimulates economy. export of machinery and other - Dual Economy: Small pockets of wealth capital goods created, but domestic sector poor. - LR: FDI generate return flow of - Decreased domestic Investment. Foreign income e.g. interests and dividends firms may partially finance investment, back to source country firms borrowing from host countrys capital stay competitive, support market. This increases interest rates and employment at home. leads to crowding out effect. - Instable BOP and ER: capital inflow, import RECIPIENT of inputs, repatriation of profits to home - generates spillovers e.g. improved country cause instability difficult for LR management, better technology planning (knowledge as to production of - Large foreign firm drive out domestic firms goods) and exist as monopoly. - Tech spreads faster with personal contact demonstration effect Performance Requirements e.g. minimum % of - Competitive effect: other firms local employees, max. % of profits repatriated to innovate and improve production home country, min. % of output that must be processes. exported to earn ForEx, ban from key industries - Firms and sectors with intense FDI have higher average productivity and pay higher wages. - FDI total output/unit of input, employment and wages, exports and foreign exchange earnings - tax revenue for host govt - tech, managerial skills improvement and new technology enhances recipient countrys production possibilities

Dont forget to study International Labour Movements. Lecture Notes.

Overall Costs & Benefits of Globalization Benefits - (static gain) trade creation - (static gain) greater world efficiency (allocative) - economic integration results in administrative savings by eliminating need for govt officials to monitor movement of g&s that cross countrys borders (less red tape etc) - LR: (dynamic gains) creation of larger markets producers enjoy EOS - Larger markets permit greater specialization of workers and machinery, use of efficient equipment, complete use of by-products - Broader markets also promote greater competition among producers. - Producers undertaking investments in new equipm and tech hold down costs and expand levels of output. - Integration can stimulate greater investments from i) structural changes, ii) IEOS, EEOS iii) increase in income and demand. - Common market level: increased factor mobility. Moving to areas of scarcity will increase economic efficiency and factor incomes increases! Bottom Line International trade helps economic development esp. when countrys exports drive economic growth. There is aggregate global improvement given (access to knowledge, asias rise as export-oriented region, declining infant mortality, increasing income (oops and prices) and longevity) Condition: Governments are able to improve education system, provide better infrastructure and investment incentives! A country (e.g. mexico) can benefit less from NAFTA because of poor education, corruption, crumbling infrastructure, lack of credit and small tax base) compared to another under the same agreement. Economic Integration is actually providence for additional gains that govt may choose to allocate correctly. If bad government spends additional wealth wrongly, in LR, adv. of free trade erodes. Improvements: Global institutions capable of securing greater stability in economic regulation, environmental security, containment of crime/terrorism and enhancing welfare. Climate for globalization must maintain/improve. The marriage of competition and productivity will not last if conditions for globalization threatened. E.g. 40 yrs after WWI. Costs - Growing income divide reminds us rapid growth SOL - Labour market tensions (white-collar UE in developed countries as result of outsourcing) govt must ensure retraining benefits available some benefits from trade must be channeled to temporary income assistance & retraining for UEed. E.g. workfare scheme in Spore - Cost to developed country: closure of undustries that relocate to low-wage countries where environmental regulations less stringent (lower COP) and exports from developed country decreases too ): - Environmental damage