Chapter 2: The Global Economy

Global Economy or Economic Globalization

• Global Economy Definition:

  • Also referred to as the "world economy."

  • Refers to the international exchange of goods and services.

  • It may also mean the free movement of goods, capital, services, technology, and information.

• Scope and Characteristics:

  • Concerned with globalization of production, finance, markets, technology, organizational regimes, institutions, corporations, and labor.

  • Expanding since the emergence of trans-national trade and increased exponentially due to the increased rate of communication and technology.

  • The creation of world trade organizations made countries cut down trade barriers and open up their current accounts and capital accounts.

Market Integration

• If prices among different locations or related goods follow the same pattern over a long period of time, then market integration exists.

• When a group of prices often move proportionally to each other and this relation is very clear among different markets, then the market is integrated.

• Market integration is an indicator of how much different markets are related to each other.

Role of International Financial Institutions (IFIs)

• International Financial Institutions (IFIs):

  • Chartered by more than one country and therefore subject to international law.

  • Owners or shareholders are generally national governments, although other international institutions and organizations occasionally figure as shareholders.

  • Most prominent IFIs are creations of multiple nations, although some bilateral financial institutions (created by two countries) exist and are technically IFIs.

• Membership Compositions:

  • Only sovereign countries are admitted as member-owners.

  • Broad country membership includes borrowing developing countries and developed donor countries.

  • Membership in regional development banks includes countries around the world as members.

  • Maintains its own independent legal and operational status.

The International Financial Institutions (IFIs)

• International Monetary Fund (IMF):

  • Headquartered in Washington DC.

  • Organization of $190$ countries.

  • Works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

• Multilateral Development Banks (MDBs):

  • World Bank Group: A family of $5$ international organizations that makes leverage loans to developing countries to aid poverty.

  • African Development Bank: Contributes to poverty reduction on economic and social development in the least developed African countries by providing concessional funding for projects and programs as well as studies and capacity building activities.

  • Asian Development Bank: Committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific to eradicate extreme poverty through loans, technical assistance, grants, and equity investments to promote social and economic development.

  • Inter-American Development Bank: Works to improve lives in Latin America and the Caribbean through financial and technical support in countries working to reduce poverty and inequality.

  • European Bank for Reconstruction and Development: International organization comprising $60$ countries in the European Community and the European Investment Bank to foster the economic and democratic transition process and to promote private and entrepreneurial initiative in transition countries.

Main Objectives and Financial Mechanisms

• IMF:

  • Provides temporary financial assistance to member countries to help ease balance of payments adjustments.

• Multilateral Development Banks (MDBs) Financing Categories:

  • Long-term Loans: Maturities of up to $20$ years at interest rates way below market rates. Funding comes from international capital markets and is re-lent to borrowing governments in developing countries.

  • Very Long-term Loans (Credits): Maturities of $30$ to $40$ years at interest rates below market rates. Funding comes from direct contributions by governments in donor countries.

  • Grant Financing: Provided by some MDBs for technical assistance, advisory service, or project preparation.

Global Corporations or Multinational Corporations

• Global Corporation:

  • Operates in more than one country.

  • Michael Porter (Harvard University) Definition: Defines a global business as one that maintains a strong headquarters in one country (its home country), but has investments in multiple foreign locations. Global corporations strive to create economies of scale by selling the same products in multiple locations and limiting local customization.

  • Finance and Investment Definition: Has significant investments and facilities in multiple countries but lacks a dominant headquarters. Governed by the laws of the country where incorporated. Connects talents, resources, and opportunities across political boundaries.

• International Company:

  • Has a headquarters (for example, in the United States), but also does business overseas and might have a large presence in multiple areas.

  • Governed by home-country regulations (such as US regulations, assuming its headquarters remain in the US), while its foreign subsidiaries are governed by local laws.