Thomas Friedman expressed the optimistic assessment of globalization as he defined it in The Lexus and the Olive Tree.

Friedman stated, “Globalization is the inexorable integration of markets, nation-states, and technologies to a degree never witnessed before in a way that is enabling individuals, corporations, and nation-states to reach around the world further, faster, deeper and cheaper than ever before.”

The Evolution of the International Economy; Ideas and Institutions

• The British East India Company, the Hudson’s Bay Company, and the Dutch East India Company facilitated trade in goods and enslaved people; provided capital for investments in the agricultural development of the new lands; and transported cotton, tobacco, and sugar to Europe.

• Adam Smith believed that human beings act in rational ways to maximize their self-interest

• Economic Liberalism: Ideas based on Adam Smith that when individuals pursue their own self-interest, efficiency for everyone is achieved; markets function best when governments interfere the least

• Mercantilism: Economic theory that international commerce should increase a state’s wealth, especially gold; state power is enhanced by a favorable balance of trade

• The goal of a mercantilist government was to build economic wealth as an instrument of state power

• Mercantilist government encouraged exports over imports and industrialization over agriculture, protected domestic production against competition from imports, and intervened in trade to promote employment

• Alexander Hamilton advocated protectionism

• Protectionism: policies designed to restrict imports from other countries

• Alexander Hamiliton argued that such policies limit the competition domestic industries face from foreign producers, and using protectionist policies would protect the growth of the ner nation’s manufacturers.

• In Hamilton’s “Report on Manufactures” to Congress, Hamilton supported high tariffs and encouraged investment in inventions

• Economic Nationalism: Modern version of core mercantilist ideas that economic policies should be subservient to the national interest. Reduce imports and investment from other countries.

• Economic Nationalism has seen a resurgence in the 21st century

• Trade is a zero-sum game where the goal is to gain as much as possible for one’s own state rather than creating mutual gains

• The expansion of colonialism and the Industrial Revolution occurred as a result of major technological improvements in communications, transportation, and manufacturing processes

• Britain was the center of the Industrial Revolution and the major trading state and source of international capital

• Britain facilitated trade by lowering its own tariffs, opening its markets, policing the sea, and encouraging investment abroad

• Economic Radicalism: Beliefs drawn from Marxist and neo-Marxist writing that poor labor conditions, colonial expansion, and divisions between the rich and poor are blamed on international capitalism

• Economic radicals blamed the capitalist system under liberalism

• Beggar Thy Neighbor Policies: Policies designed to solve a state’s own economic problems at the expense of others

• To protect themselves from the effects of the economic crisis by increasing domestic employment, states used policies such as the imposition of high tariffs and currency devaluation

• Currency Devaluation: Reducing the price of your currency to make your exports more competitive in other countries and imports from those countries more expensive in your own

• To avoid the consequence of a worsening economic problem in neighboring countries, the western victors of WWII sought to promote openness of trade and stimulate capital flows while establishing a stable exchange-rate system

• States, multination corporations, and the institutions of the Bretton Woods system are to play a major role in the economy of the 21st century

The Role of States

• Macroeconomic Policies: Government policies designed to address macroeconomic conditions, including fiscal and monetary policies

• Fiscal Policies: affect a government’s budget, including the level of government spending and the tax rates

• To stimulate the economy, the government may choose to increase government spending and/or decrease tax rates

• To slow the economy down or balance the budget, states may select to cut government spending or increase tax rates

• Monetary Policies: Policies affecting national interest rates or exchange rates designed to affect employment and inflation rates

• Microeconomic Policies: Policies on regulation, subsidies, competition, and antitrust actions

• A State’s actions do not occur in a vacuum; what one state decides affects other states

• Exchange Rates: The price of money depends on, and the price of one currency in relation to another

• Under floating exchange rates, individuals and governments buying and selling currencies determines the actual value of one currency compared with other currencies

• Under a Fixed Exchange Rate, a government keeps its money at an established value, in terms of gold or another currency

• A weaker domestic currency stimulates exports and makes imports more expensive, whereas a stronger domestic currency curtails exports, making imports cheaper

• Tariffs: The taxes on goods and services crossing borders

• Nontariff Barriers: the restrictions on international trade designed to protect health, safety, or national security

• Tariff policies may be used to protect the domestic economy,, the consumer, new industries, and even national security

• Current Accounts: Measure the net border flows between countries of goods, services, governmental transfers, and income on capital investments

• Capital Accounts: Measure the flows of capital between countries, including foreign direct investment and portfolio investment in and out

• Balance of Payments: A country’s current and capital account balances

• The balance of payments is either positive (in surplus) or negative (in deficit)

• In a surplus balance of payments, (Ex. Germany) the value of exported goods, services and investment income is greater than the value of imported goods, services, and investment income

• In a deficit balance of payments, (U.S.) the value of their imported goods, services and investment income exceeds the value of their exported goods, services, and investment income

• In economic liberalism, markets, multinational corporations, and international gov. organizations are the major determinant of a state’s policy, which states providing market rules and a level playing field

The Role of Multinational Corporations

• MNC/Multinational Corporations: Corporations that span state borders either through their actual presence in several countries or through investment in and trade with other corporations within them

• Before WWII, most MNCs were in manufacturing such as General Motors, Ford, Siemens, Nestle and Bayer

• MNCs account for 50 percent of worldwide trade and constitute up to 40 percent of the value of the stock markets in the west

• MNCs engage in activities such as investing in foreign countries, importing and exporting goods and services, negotiating licenses in foreign markets, and opening facilities abroad

• MNCs seek to obtain incentives such as tax advantages, and labor concessions from host governments; cut production costs and increase profitability, meet the competition and customers, capitalize on cheaper labor markets, or to obtain the services of foreign technical personnel

• MNCs may move abroad to circumvent tough governmental regulations at home, such as banking rules, currency restrictions, or environmental regulations

• Multinational Corporations play a key role as engines of economic growth, providing international finance and items to trade

• Economic Nationalists view MNCs as instruments of the state whose power needs to be harnessed in the national interest by imposing national controls, denying market entry to some of them, taxing profits, and imposing currency controls

The Role of Economic Institutions

• World Bank: A global lending agency focused on financing projects in developing countries; formally known as the International Bank for Reconstruction and Development established as one of the key Bretoon Woods institutions to deal with reconstruction and development after WWII

• Currently, the World Bank generates capital funds from member-state contributions and from borrowing in international financial markets

• A high portion of the World Bank’s funding has been used for infrastructure projects such as hydroelectric dams, basic transportation needs such as bridges and highways, agribusiness ventures, and governments to carry out an array of economic-development activities

• Cross-border financing is available through other instruments such as MNCs, bilateral lending, and alternative multilateral instruments

• Two examples of multilateral development banks are AIIB and NDB; strongly funded by China

• AIIB: Asian Infrastructure Investment Bank

• NDB: New Development Bank

• The AIIB has partners in China’s Belt and Road Initiative

• The AIIB supports loans to stimulate long-term growth through massive investment in diverse infrastructure related to energy, transportation, and water

• The NDB was founded by Brazil, Russia, India, China, and South Africa referred to as the BRICS.

• BRICS: An informal group of emerging economic powers, including Brazil, Russia, India, China and South Africa

• NDB supports projects such as sustainable infrastructure and renewable energy

• At the Bretton Woods Conference in July 1944, world leaders agreed to create 3 institutions to facilitate worldwide economic coordination and development. The 2 of these institutions were the World Bank and the IMF, the International Trade ORganization was never created

• International Monetary Fund (IMF): Institution to guarantee exchange-rate stability; today its purpose is to act as a lender of last resort to keep debtor countries from collapsing

• The U.S. guaranteed the stability of the IMF system by fixing the value of the dollar against gold at $35 an ounce.

• In 1972, the IMF system collapsed when the U.S. announced that it would no longer guarantee a system of fixed exchange rates

• The IMF was revised in 1976; it formalized the system of floating exchange rates, relying on market forces to define currency prices

• Group of 7 (G7): Group of the traditional economic (U.S., Great Britain, France, Japan, Germany, Italy, Canada) who meet annually to address economic problems; when Russia joins, the G8 discussions turn to political issues

• IMF was supposed to provide short-term loans for member states confronting temporary balance of payments deficits but it was expanded to include policy advice on macroeconomic issues and economic restructuring

• Bank policies that have been rigidly developed without considering local conditions and local knowledge end up disproportionately affecting the disadvantaged sectors of the population: the unskilled, women, and the weak

• General Agreement on Tariffs and Trade (GATT): Founded by treaty as the Bretton Woods institution responsible for negotiating a liberal international trade regime that included the principles of nondiscrimination in trade and most facored nation status; reformed as the World Trade Organization

• 1/4 liberal principles for the GATT: Support of trade liberalization, because trade is the engines for growth and economic development

• 2/4 liberal principles for the GATT: the most favored nation principle

• 3/4 liberal principles for the GATT: Preferential access in developed markets to products from the less developed countries to stimulate economic development

• 4/4 liberal principles for the GATT: support for national treatment of foreign enterprices

• Most Favored Nation Principle: Nondiscrimination in trade whereby states agree to give the same treatment to all other GATT members as they gie to their best (most-favored) trading partner

• National Treatment: Treating foregin enterprises in the same way that domestic firms are treated

• Exemptions: safeguards to accomodate any domestic or balance of payments difficulties that might result from existing trade agreements

• In 1995, the GATT became a formal institution, renaming itself the World Trade Organization (WTO).

• The WTO incorporated the general areas of the GATT’s jurisduction and expanded jurisdiction in services and intellectual property

• The function of the WTO is to serve as a forum for trade negotiations and provide a venue for trade review, dispute settlement, and enforcement

• Trade Policy Review Mechanism (TPRM): conducts periodic surveillance of the trade practices of member states

• Dispute Settlement Body: An authoritative panel to hear and settle trade disputes

• The WTO has the power to authorize affected states to sanction violaters (raising tariffs on certain goods)

• Trade Related Aspects of Intellectual Property Rights (TRIPS): protects intellectual property such as patents, trademarks, creative material, and software

• China’s tariffs on imported goods is an average of 27 percent

• The U.S.’s tariffs on imported goods is 9 percent

• The United States refused to participated in the recruitment of new judges for the Dispute Settlement Body, leading to the suspension of the dispute settlement process at the end of 2019 and the hamstringing of the entire WTO

• Since then, the WTO has been left out of the trade renegotiations between the United States and China while the two have engaged in a tit for tat trade war

• Non governmental organizations (NGOs) are some of the major critics of WTO activities

• Some oppose the WTO’s power to make regulations and settle disputes in high handed ways that intrude on or jeopardize national sovereignty

International Finance

• International capital traditionally moves through international private finance including MNCs, other private companies, pension funds, investors, and other nongovernmental sources

• Foreign Direct Investment (FDI): constuction of factories and investment in the facilities for extraction of natural resources by MNCs and through portfolio investment

• Portfolio Investment: Investment in another country’s stocks or bonds, either short or long term, without taking direct control of those investments

• International capital also moves through currency manipulations

• The International Finance Corporation (IFC) and the International Development Association (IDA) were created for the purpose of providing capital to states that were unable to attract private investment alone

• The IFC provides loans to promote the growth of private enterprises in developing countries

• The IDA provides capital to the poorest countries usually in the form of interest free loans

• Multilateral Investment Guarantee Agency (MIGA) was added to the World Bank group in 1988

• The MIGA angency meets its goal of augmenting the flow of capital to developing countries by insuring investments against losses

• Losses may result from expropriation, government currency restrictions, or civil war or ethnic conflict

• Sovereign Wealth Funds: State controlled investment funds composed of financial assets, including stocks, bonds, precious metal, property, or other financial instruments formed in capital surplus countries such as China and in the major petroleum exporters such as Kuwait, United Arab Emirates, Norway, Russia, and Canada.

• The sovereign wealth funds have been able to move quickly across national boundaries, taking advantage of currency differentials and buying and selling new financial instruments to maximize long term economic return

• Derivatives: Financial instruments often derived from an asset (mortages, loans, foreign exchange, interest rates) which parties agree to exchange over time; a way of buying and selling risk in international financial markets

• Markets developed new financial instruments such as derivatives where investors bet on the future prices of package asset classes including loans and mortgages

• Offshore Financial Centers: States or jurisdictions with few regulation on banking and financial transactions ofthen with low taxation; used by individuals and international banks to transfer funds

• An example of Offshore Financial Centers is the Cayman Islands, Bermuda, and the British Virgin Islands

• GDP: Gross domestic product

• The Asian financial crisis of the 1990’s is an example of the possible outcomes of the globalization of finance

• Dissatisfaction with IMF policies led many in developing countries to conclude that these institutions were captive to the interests of the developed world

International Monetary Policy

• Historically, gold was the linchpin of the world currency system

• During the 1920’s, the value of the U.S. dollar was linked to gold

• After WWII the U.S. dollar returned to the gold standard although since it was the only currency to do so, other countries attempted to peg their currencies to the U.S. dolla

• The dollar-gold standard helped consolidate the role of the United States as the world’s creditor and the manager of the international financial system

• The three interrelated components of the managed international monetary system are: reserve currencies, central banks, and international banks

• The U.S. dollar serves as the world reserve currency and gives the U.S. enormous power

• The U.S. Federal Reserve can run external deficits as it is insulated from pressures applied by foreign powers holding the debt, and it can push favorable regulatory policies, and it can target states and individuals with financial sanctions, hindering their capacity to use the international banking system as it has against Iran, Russia, and North Korea

International Trade

• Economic growth is fueled by both financial and trade flows

• British economist David Ricardo developed a theory that states should engage in international trade according to their comparative advantage

• Comparative Advantage: The ability of a country to make and export a good relatively more efficiently than other countries; the basis for the liberal economic principle that countries benefit from free trade among nations

• Under the principle of Absolute Advantage, the U.S. would manufacture both cars and trucks, and them export both to Canada

• Under the principle of Comparative Advantage, each country should specialize; the United States should produce the car, for which it has a relative advantage in production, and Canada, the truck.

• By trading cars for trucks, each country gains by specialization

• The Heckscher-Ohlin Theory: Posits that countries will export goods that use the most intensive endowments of the state

• Both liberal economists and economic nationalists may want to maintain domestic employment levels and minimize unemployment as well as enforce their own domestic labor and environmental standards

International Trade Negotiations

• In 1986, the Uruguay Round began, convering new items such as telecommunications, financial services, insurance, intellectual property rights (copyrights, patents, trademarks) and agriculture

• In late 1994, the most comprehensive trade agreement in history was finally reached, a 400 page document covering everything from paper clips to computer chips

• With the WTO replacing the GATT, the Doha Development Round launched in 2001, ended in a stalemate in 2016 with agribusiness lobbies in the U.S. and the EU unable to reach a compromise with India, Brazil, and China on the liberalization of agricultural markets

• While a trade-facilitation agreement to streamline customs procedures and upgrade border and port infrastructure was signed, the Doha Round was essentially dead

The Regionalization of Trade and Beyond

• No regional economic agreement has been as strong or as copied as the European Union

Economic Integration in the European Union

• European economic integration was predicated on the notion that a larger market along with the free movement of goods and services, would permit economies of scale (producing more goods for a larger market would lower the cost of production per unit) and specialization to stimulate growth, competition, and innovation

• The Single European Act of 1987 accelerated the integration process, setting the goal of achieving a single market by 1992. This effort involved removing physical, fiscal, and technical barriers to trade and harmonizing national standards by adopting more than 300 community directives

• The European Monetary Union set forth in the Maastrict Treat in 1992, called for the establishment of a single currency, the euro; it became the unit of exchange for business in 1998 and for consumers in 2002

• The manager of the euro is the European Central Bank

• The European Central bank sets the interest rates for banks lending in the Eurozone and controls the euro’s money supply

• CAP: Common Agricultural Policy

• The EU adopted the CAP because of agricultural supplies and foodstuffs are vital for national security

• The CAP has changed over time, moving gradually away from a production oreinted policy in which the EU purchases surplus crops from farmers at guaranteed prices to a Single Payment Scheme, wherein agricultural support was decoupled from production in order to prevent overproduction and allow farmers to produce according to market demands

• The Basic Payment Scheme replaced the Single Payment Scheme in 2015, requiring farmers to be paid annually based on their entitlements derived from their land

North American Trade Agreements; Canada, U.S., and Mexico

• NAFTA: North American Free Trade Agreement

• USMCA: U.S. Mexico Canada Agreement

• The subsequent phasing out of many restrictions on foreign investment and most tariff and nontariff barriers allowed MNCs to shift production to low wage labor centers in Mexico and to gain economically by creating bigger companies through mergers and acquisitions

• Under NAFTA, trade expanded among the three partners and most tariffs were eliminated

• Cross-border supply chains made the participating MNCs more competitive and profitable

• However, NAFTA also caused 600,00 people to lose their jobs, relocation to Mexico, and a trade deficit of 63.2 billion

• NAFTA also caused the negative outcome of the slide in real manufacturing wages due to the movement of lower skilled jobs to China; the failure to develop backward linkages in its main export sectors; and the relative stagnation of Mexican wages with poverty remaining about the the same level

• Backward Linkages: Growth in one sector leads to growth in the industries that supply them

• The USMCA was initiated by Trump and made changes in 5 areas. 1. Automobile manufacturers were required to include 75% of their parts from a USMCA country to avoid having tariffs imposed and more parts were to be made by workers earning at least $16 an hour-provisions designed to boost auto production in the U.S. 2. Mexican labor laws were strengthened and a monitoring system put in place. 3. U.S. dairy farmers were given greater access to Canadian markets. 4. Provisions were included dealing with digital products. 5. An environmental protection fund of 600 million was established to address cross-border environmental problems

Mercosur and the Pacific Alliance

• Common Market of the South: Mercosur

• Mercosur was founded in 1991 by Brazil, Argentina, Uruguay, and Paraguay with Venezuela joining in 2012

• Mercosur eliminated customs duties and implemented a common external tariff of 35% on certain imports from outside the bloc, and adopted a common trade policy toward outside countries and blocs

• Mercosur was an attempt to reverse decades of authoritarianism, crises, and antagonism, especially between Argentina and Brazil

• Progress has been blocked by disagreement on the level of the common external tariff, by economic crises in both Brazil and Argentina, by individual countries falling back on protectionist policies, and by Venezuela’s erratic government

• Mercosur wished to reach an agreement with the EU to eliminate tariffs, open up of government procurement to companies, and more stable rules for trade and investment. However, the EU is requiring Mercosur members to address climate change and deforestation before the agreement with the EU becomes effective

• The Pacific Alliance includes Chile, Colombia, Mexico, and Peru represents Latin America’s 2nd largest trade group

• The Pacific Alliance aims to promote trade and investment linkages among its members but also to serve as a platform for economic and commercial integration between Latin America and Asia-Pacific

Transregional Economic Arrangements

• Trans-Pacific Partnership: TPP

• The TPP includes Canada, Chile, Mexico, United States, Japan, and other Pacific Rim countries are included in this agreement

• The TPP agreement is touted as a global trendsetter for commerce and a way to strengthen alliances in the region, included a phasing out of import tariffs, a strengthening of macroeconomic cooperation, and an enhancement of labor, environmental, and copyright/trademark protection. Obama supported, Trump halted

• CPTPP: Japan, Austrialia, New Zealand and 11 other states signed the Comprehensive and Progressive Trans-Pacific Partnership

• The CPTPP became the 1st regional agreement to include rules on digital commerce, including consumer privacy protections and committed members to improve workplace conditions and strengthen environmental protections

• The removal of an extension of the length of time for copyright protection and automatic patent extensions caused the U.S. to leave but will rejoin CTPP if stronger labor and environmental provisions are renegotiated

The Debate over Bilateral, Regional, and Transregional Trade Agreements

• Bilateral and regional agreements are not becoming a stepping stone to global trade arrangements but rather an approach used when global negotiations have broken down

International Development

• The end of colonialization following the end of WWII led not only to geopolitical competition between the U.S. and the Soviet Union but also to the emergence of newly independent states that were poor and lacking the material resources and expertise to deliver economic goods to their citizens

• Global North: The developed countries mostly in the northern hemisphere including the countries in North America, Europe, Japan, and South Korea

• The Global North basks in relative wealth with high consumption habits, levels of education and health services, and social welfare safety nets

• Countries in the Global South struggle to meet basic needs, with poor educational and health services and no welfare nets

• Global South: The developing countries of Africa, Latin America and Southern Asia

• Human Development Index: HDI

• The Development Gap/Development Trap: Colonialism, earlier industrialization of Europe, geography, poor government policies, unaccountable governments

Strategies to Achieve Economic Development

• Most of the debates over the best approach to promote development have focused on variations or adaptions of the liberal economic model

• The 1980’s saw a shift toward reliance on private-sector participation to meet the task of restructuring economies and reconstructing states torn apart by ethnic conflict

• When areas of the economy are privatized, the government’s fiscal burden is reduced, and state spending in education and health can then increase

• Washington Consensus: A version of economic liberalism that holds that through specific liberal economic policies, privatization, government deregulation, broad tax reform, and trade liberalization can economic development occur

• In the early 1980’s, the IMF began to provide longer-term loans conditional on states adopting structural adjustment programs consistent with the Washington Consensus

• Structural Adjustment Programs: IMF policies and recommendations aimed to guide states out of balance of payment difficulties and economic crises, consistent with the Washington Consensus

• If a state adopted these policies-economic reforms (limiting money and credit growth, forcing currency devaluation, reforming the financial sector, introducing user fees), trade liberalization reforms (removing tariffs), government reforms (privatizing public enterprises), and private-sector policies (ending government monopolies) then the IMF gave its stamp of approval

• The World Bank, IMF, and the G7 economic powers adopted the Heavily Indebted Poor Countries (HIPC) initiative for debt cancellation which 36 countries received debt relief

• Beginning in 2009, the loans are tailored according to the respective state’s needs, a direct response to criticism of the cookie cutter approach of strctual adjustment lending. Monitoring loans is also done more quietly to reduce the stigma of conditionality

• Ideas that were previously unacceptable to the IMF-that capital flows may need regulation and that states might take a proactive role in coordinating economic development-became more acceptable in response to the market failures of the global financial crisis

• Sustainable Development: An approach to economic development that incorporates concern for renewable resources and the environment

• The political dimension of development: strong economic and political institutions are needed to protect private property, foster competition, and ensure the rule of law to prevent corruption

• Involving NGOs in development was one approach for improving the accountability and effectiveness of both multilateral and bilateral donor programs.

• However, NGO funding has gone much more to short-term humanitarian aid, rather than focusing on long-term development

• The Grameen Foundation supports loans worldwide, including to American ctitizens, the only developed country included.

• Using a variety of funds, the Grameen Foundation gives microloans, savings accounts, and other financial services, programs have been incubated in India, Indonesia, the Philippines, and Ethiopia, among others

• Microcredit does offer clients freedom in how the funds are used, even though it does not transform their lives

• Systemic cross-national studies of programs suggest that providing cash ranging from $350-$500 produces positive results in lifting the very poorest out of poverty and is less costly than alternative programs.

• Remittances: Money sent by foreign workers to individuals in a home country compete with international aid as one of the largest sources of financial inclow to developing countries

• Most remittances flow through estabilished institutions like Western Union and MoneyGram, an increasing amount is channeled in informal ways such as mobile phones and the internet which makes it harder to verify the exact amounts

• Remittances do not make a major contribution to the economic growth of a country; instead it’s often used to pay for young people to emigrate, making the country even more reliant on exporting labor

Is Development Being Achieved?

• In general, proponents of economic liberalism point to success in closing the development gap

• Average per-capita incomes in both emerging markets and developing economies have grown

• The UN has undertaken the tasks of setting and monitoring a broad set of development goals that emphasize not just GNI per capita but also other indicators of human development like education and health

• In 2001, the UN sponsored Millennium Summit set forth 8 goals designed to reduce proverty by 2015 and promote sustainable human development in direct response to globalization

• The MDG goals included poverty reduction, better education, improved health, environmental sustainability and global partnerships and these goals had specific targets, time frames and performance indicators

• In 2015, the UN General Assembly passed the Sustainable Development Goals for 2030 after widespread consultation with businesses, civil society, citizens, and UN agencies

• The SDGs highlight the connections between poverty, gender equity, and environmental sustainability

• The SDG includes 17 goals such as ending poverty and hunger, ensuring healthy lives in safe and inclusive cities, and developing reliable and sustainable modern energy supplies

• Skeptics say that the SDV goals are too encompassing and unwieldy and that success will be impossible to measure as well as the costs outweigh the benefits

• Detractors of economic liberalism including economic radicals and some working within the development community see that more radical approaches are needed

• The Radical approaches to development include: more stringent regulation of MNCs, improved means of delivering technology to poorer countries, better terms of trade through commodity pricing, more debt relief, and radical restructuring of international financial institutions. Out of all these, only debt relief and modest restructuring have occurred

• The Beijing Consensus: Experimenting with policies that are compatible with a state’s political structure and cultural experience (doing what works)

Crises of Economic Globalization

• Petroleum is a key commodity necessary for economic growth in the industrial era and a major driver of economic success for the oil-exporting countries that depend on revenue for foreign exchange

• Reforms were undertaken after many of the historic crises to ensure that the underlying conditions would not recur.

• Two examples of reform would be the Great Depression and the banking system reform and the Bretton Woods institutions when states encountered economic difficulties

The 2008-2009 Global Financial Crisis

• The Bretton Woods institutions did not include actual surveillance and temporary fixes for richer countries or the economically strong United States.

• This lack of surveillance led to excess credit against insufficient equicty in the housing market, the financial sector, and consumer credit markets

• The U.S. spending spree was accompanied by the importation of cheap goods from China which caused an unsustainable trade imbalance with China and the oil-exporting countries

• Because financial companies and international banks were carrying unsustainable debt with no assets to back up the loans, defaults increased, credit became more difficult to acquire, and private investment dried up

• Oil prices dropped, and other countries were effected by market shrink, export earnings, and investment falls

• The crisis rippled outward to deloping countries that faced the prospect of sharply reduced or negative grwoth and the erosion of gains from globalization-driven growth

• Both the United States and various EU member governments took unprecedented steps, bailing out banks and insurance companies to get credit markets functioning again and stimulate investor confidence

• Japan and China responded with substantial economic stimulus packages to encourage economic growth

• The U.S. Federal Reserve, the European Central Bank, and the Bank of England engaged in currency swaps

• The IMF responded to the crsis by making available almost $250 billion for credit lines

• The IMF with an infusion of $750 billion, created the Short-Term Liquidity Facility for emerging market countries suffering temporary liquidity problems

• The Exogenous Shocks Facility was designed to help low income states by providing assistance more rapidly

• PIGS: Portugal, Italy, Greece, and Spain

• A number of European states had since early 2000 been spending beyond their capacity borrowing from international banks, and an imbalance of trade from Germany caused the global 2008,2009 crisis

• After 25 summits, the PIGS undertook numerous reforms to reduce government debt, slashing expenditures, increasing the retirement age, promising to improve the tax collection system, and using financial transfers to avert backruptcy

COVID-19 And the Resulting Economic Crisis

• In 2020, global trade flows collapsed at the peak of the pandemic, global trade flows were the lowest since the Great Depression. The Financial loss was as twice as great as the recession caused by the 2008,2009 crisis

Responses to Economic Crises

• Moral Hazard: Problem when states or individuals are not made to pay the consequences of recless behavior; they have little incentive to change that behavior

• The response to the pandemic was enhanced by the actions taken more than 10 years before: the establishment of special facilities and programs, richer states able to run deficits in order to prevent a more devasting economic impact, and the ability and willingness of the European Union to design a program to aid its member states through the issuance of EU bonds rather than bonds tied to individual states

The Debate over Globalization; The View from Economic Theories