1. ECON3315 International Economic Issues Instructor: Patrick M. Crowley Issue 10a: Globalization - Orthodoxy

2. Overview Defining globalization Defining globalization History History Economics of globalization Economics of globalization Globalization: the orthodox view Globalization: the orthodox view Trade and globalization Trade and globalization FDI and globalization FDI and globalization Other effects Other effects

3. Defining globalization Wikipedia definition: Globalization, also globalisation, refers to a process of increasing integration between units around the world, including nation-states, households/individuals and organizations, including corporations. In economics, globalization refers to increased inter-connectedness between countries due to trade, FDI, and capital flows.

4. History Economic 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.

5. Measuring globalization Two dimensions of globalization can be considered: (a) growth of international trade relative 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)

6. The economics of globalization Main argument (Adam Smith) is that larger market permits finer division of labor Main argument (Adam Smith) is that larger market permits finer division of labor In turn leads to greater specialization (learning by doing) and innovation In turn leads to greater specialization (learning by doing) and innovation To achieve larger market requires that countries lower trade barriers and restrictions on FDI and equal treatment of foreign firms To achieve larger market requires that countries lower trade barriers and restrictions on FDI and equal treatment of foreign firms Cheaper transportation and communication also aids trade in g&s. Since 1920 sea freight costs have declined by 2/3rds, cost of telelphone call has gone down by 99%. Cheaper transportation and communication also aids trade in g&s. Since 1920 sea freight costs have declined by 2/3rds, cost of telelphone call has gone down by 99%.

7. The economics of globalization Flows of FDI and financial assets are called “international capital flows”: significant since 1980 Flows of FDI and financial assets are called “international capital flows”: significant since 1980 Flows of FDI important as it transfers knowledge to LDCs and also Flows of FDI important as it transfers knowledge to LDCs and also Flows of labor also important, but not biggest effect in recent globalization Flows of labor also important, but not biggest effect in recent globalization  In this wave of globalization, trade and FDI biggest factors

8. The economics of globalization As FDI is important, MNEs also major part of globalization as they move parts of production to best location As FDI is important, MNEs also major part of globalization as they move parts of production to best 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/200 7/globalisation/default.stm for example on location of vehicle assembly plants http://news.bbc.co.uk/2/hi/in_depth/business/200 7/globalisation/default.stm for example on location of vehicle assembly plants http://news.bbc.co.uk/2/hi/in_depth/business/200 7/globalisation/default.stm http://news.bbc.co.uk/2/hi/in_depth/business/200 7/globalisation/default.stm

9. Globalization: the orthodox view Globalization also depends on countries being open to it. If countries do not embrace it, they lose out. Globalization also depends on countries being open to it. If countries do not embrace it, they lose out. But developing economies must be ready to stand up to international competition But developing economies must be ready to stand up to international competition So, domestic policies and attitudes to globalization are likely more important than external considerations (such as WTO membership). So, domestic policies and attitudes to globalization are likely more important than external considerations (such as WTO membership).

10. Globalization: the orthodox 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 have grown faster because of increased trade and FDI than have other countries.

11. Trade & globalization

12. Openness of LDC trade regimes  Opening up trade doesn’t necessarily cause a wave of imports, but…  High growth countries seem to trade more

13. LDC trade Although 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.

14. FDI Capital flows to LDCs have gone from $104bn (1980) to $472bn (2005) Capital flows to LDCs have gone from $104bn (1980) to $472bn (2005) Capital flows can be Capital flows can be - equity - equity - debt - debt - remittances - remittances - FDI - FDI  FDI is the most important flow for LDCs

15. FDI  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

16. FDI FDI can also lead to higher domestic investment, as new capital influx can cause other related firms to increase investment. FDI can also lead to higher domestic investment, as new capital influx can cause other related firms to increase investment. Research shows that a 1% increase in FDI leads to a 0.6% increase in domestic investment Research shows that a 1% increase in FDI leads to a 0.6% increase in domestic investment This, in turn, fosters economic growth This, in turn, fosters economic growth

17. Other effects Financial globalization can also discipline governments Financial globalization can also discipline governments Leads to lower budget deficits and therefore lower debt levels Leads to lower budget deficits and therefore lower debt levels