5.3: Economic Globalization

industrialization

the use of energy to drive machinery and the accumulation of such machinery along with the products created by it

Smoot Hawley Tariff Act (1930)

imposed tariffs on imports; contributed to the severity of the Great Depression by provoking retaliation and reducing world trade

transitional economies

countries in Russia and eastern Europe that are trying to convert from communism to capitalism, with various degrees of success

China is unique

China’s government has a marxist political line but has shifted toward a market economy (the government still controls major industries)

State owned industries

industries such as oil production companies and airlines that are owned wholly or partly by the state because they are thought to be vital to the national economy.

Competition from low wage countries

______ holds down wages in those industries in the industrialized countries and creates pressures to relax standards of labor regulation, such as those protecting worker safety. Can lead to job losses if manufacturers close down plants in high-wage countries and move operations to the global South.

Human Rights NGOs

_______ have joined labor unions to push for trade agreements to include requirements for low wage countries to improve working conditions such as minimum wages, child labor, and worker safety

Child Labor

more than 200 million children under the age of 14 work in the global south

more than half of these work in hazardous labor

In Ivory Coast, tens of thousands of children work from low wages or as slaves on cocoa plantations

Environmental groups and trade

these have actively opposed the unrestricted expansion of trade which they see as undermining environmental laws in industrialized countries and promoting environmentally harmful practices worldwide

Examples of Environmental Regulation

US requires commercial shrimp boats to use devices that prevent endangered species of sea turtles from drowning in shrimp nets

• south asian countries complained to WTO, arguing that US regulation discriminated against them

• US lost the WTO ruling and sea turtles became a symbol of environmental opposition

Portrayal of the WTO

labor, environmental, and consumer groups see the WTO as a secretive bureaucracy outside democratic control that serves the interest of big corporations at the expense of ordinary people

distrust corporate driven globalization

Integration of global financial markets

investors in one country buy and sell assets or exchange currency

Banks’ investment portfolios often contain millions of dollars in assets located in other countries

3 trillion dollars a day are exchanged on currency markets because investors need various currencies to do business in other countries

Advantages of financial integration

offers investors and businesses access to overseas markets to spur economic growth

allows for the possibility of better returns on investment for individuals investing for college tuition or retirement

Risks of financial integration

economic crisis in one state can quickly spread to another, then another

spread of economic difficulties can quickly lead to a global economic crisis affecting small and large economies alike

2008 economic downturn that began in the US when many Americans who had taken out loans on their homes could not pay them back; home value began to fall; banks were on the verge of failing. Led to a global banking crisis

world economy recovered but faced ripple effects of a debt crisis in Europe (financial interdependence of today’s world)

Impact of Currency on Trade

a strong currency makes imports more affordable while a weak currency makes exports more competitive

hyperinfaltion

extremely high, uncontrolled inflation (more than 50% per month or 13,000% per year)

Ex: $100 trillion notes in Zimbabwe, Venezuela

nonconvertible currency

currency that is inflating so rapidly that holding them for even a short period means losing money

hard currency

money that can be readily converted to leading world currencies

states maintain reserves of this currency

Fixed exchange rates

governments decide to establish official rates of exchange for their currencies

Ex: Canadian and U.S. dollars were equal in value for many years

Floating exchange rates

rates determined by global currency markets in which private investors and governments alike buy and sell currencies

there is a supply and demand for each state’s currency, with prices constantly adjusting

these rates are more commonly used for the world’s major currencies

International Currency Markets

operate in New York, London, Zurich (Switzerland) Tokyo, and Hong Kong

Linked together by instantaneous computerized communications

These markets are driven by the question: What will a state’s currency be worth in the future relative to what it is worth today?

Managed float system

a system of occasional multinational government intervention in currency markets to manage otherwise free floating currency rates

leading industrialized states tend to work together when determining interventions

2001 Argentine financial collapse

in 1990s Argentina had pegged the value of its currency at a fixed rate to the US dollar

represented a loss of sovereignty over monetary policy

2001, Argentine economy collapsed, two presidents resigned, and a populist took power

Argentina defaulted on a 3 billion dollar payment to IMF, the largest default in IMF history

differentiated exchange rate

official exchange rate varies depending on what is being bought and sold

Ex: Venezuela (led to hyperinflation)

China’s currency

current policy of pegging China’s currency to the dollar did not adjust to different economic conditions in China and the United states

China has trade surplus and US has trade deficit; critics say the dollar-yuan ratio is artificially high, making Chinese exports to US cheaper

China has slowly allowed its currency to appreciate in value

Coordinating Currency Policies

2006, China, Japan, and South Korea announced plans to work together regarding their currency

2017, South Korea extended a currency exchange agreement with China

All three are studying the creation of an Asian currency unit that would track the aggregate value of the region’s currency

Exchange rates in short term

depend on speculation about the future value of currencies

Exchange Rates in long term

the value of a state’s currency tends to rise or fall relative to others because of changes in the long-term supply and demand for the currency

tend to adjust automatically toward equilibrium (preferred liberal outcome)

Devaluation

unilateral move to reduce the value of one’s own currency by changing a fixed or official exchange rate

generally, this is a quick fix for financial problems in the short term

But it can cause losses to foreigners who hold one’s currency; reduces the trust people place in the currency so demand for the currency drops; investors become wary of future devaluations

Discount rate

the interest rate the government charges when it loans money to private banks

controls how fast money is injected into the economy

Central banks

are constrained by the limited share of world money they own