Economics in the Global Age
9.4 Economics in the Global Age
Essential Question
How did the global economy change and remain the same from 1900 to the present?
Introduction
A market economy is viewed as a decent but flawed choice among bad alternatives, similar to how democracy is viewed in government.
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These policies included cutting taxes, regulations, and government assistance to promote economic growth.
This approach, while generating wealth, also created hardships for some.
Revolutions in information and communications technology led to the growth of knowledge economies.
Industrial production and manufacturing increasingly shifted to Asia and Latin America.
Acceleration of Free-Market Economies
Globalization involves interaction among peoples, governments, and companies worldwide.
Examples of globalization include the Indian Ocean trade and European imperialism.
The term "globalization" typically refers to the increased integration of the global economy since the 1970s.
The Eastern Bloc nations gained the ability to trade freely with capitalist democracies.
India and other nonaligned countries relaxed trade restrictions in the 1990s.
Economic liberalization refers to the opening up of a country's economy.
Reagan and Thatcher advocated for free markets, which are economic systems based on supply and demand with minimal government control.
Corporations used the shift in emphasis to move jobs to countries with lower wages, taxes, and regulations.
Critics argue that globalization led to labor exploitation and environmental damage.
Economic Liberalization in Chile
In 1973, Augusto Pinochet took power in Chile through a U.S.-backed coup, ousting Salvador Allende, a democratically elected socialist leader.
Pinochet ruled from 1974 to 1990 and was later ousted due to his violent tactics.
He faced indictments for kidnapping, torture, money laundering, and murder but died in 2006 before conviction.
During his rule, Chile's economy shifted from state control to a free-market approach.
Goals included privatizing state-run businesses and controlling inflation.
Economists known as the Chicago Boys, influenced by Milton Friedman, helped design these reforms.
The reforms were unpopular due to their failure to address poverty and social concerns, leading to repression under Pinochet.
Subsequent administrations adopted a balanced approach, combining economic growth with government programs to reduce poverty.
Chinese Economic Reforms
Economic liberalization also occurred in China, with Deng Xiaoping becoming the leader in 1981.
The Communist Party shifted away from economic equality to promote economic growth, with Deng's policy of "Let some people get rich first."
The government opened up the economy while maintaining overall control.
Communes were replaced with peasant-leased plots, allowing peasants to grow and sell their crops, leading to agricultural surpluses.
Factories were allowed to produce more consumer goods.
Foreign companies were encouraged to set up factories in special economic zones due to low wages and lax environmental laws.
The Shanghai stock market was reopened, and private ownership of some businesses was allowed.
Some Chinese individuals wanted political reforms, such as freedom of speech and the press, and an end to the Communist Party's monopoly on political power alongside economic reforms.
While political discourse became somewhat freer, a peaceful student-led demonstration in Tiananmen Square in 1989 was suppressed by the government, resulting in numerous deaths.
Economic Change: New Knowledge Economies
In the late 1900s, revolutions in information and communications technologies led to the development of knowledge economies.
A knowledge economy creates, distributes, and uses knowledge and information; designers, engineers, and teachers participate in it.
In the United States, Silicon Valley exemplifies the knowledge economy.
Knowledge Economy in Finland
Knowledge economies have evolved with advancements in information and communication technology.
Governments and investors invest in research, education, innovation, and technological infrastructure.
Finland transitioned from an agrarian economy in the 1950s to industrialization following World War II.
The collapse of the Soviet Union led to an economic crisis in Finland.
In the 1990s, Finland entered the global marketplace, encouraged competition, and established the Science and Technology Policy Council to direct economic growth through technology and innovation.
Finland experienced substantial economic growth and excelled in mobile phone development.
By investing in education and communications technology, Finland expanded into software companies, requiring highly educated workers, while outsourcing hardware production to countries with lower labor costs.
Japanese Economic Growth
Japan implemented economic policies similar to 18th-century mercantilism after World War II to increase exports and decrease imports, as well as enhance competitiveness.
The government coordinated finance and labor policies with large corporations, providing subsidies to lower costs and boost exports.
High tariffs and trade restrictions were used to discourage imports.
Japan emphasized rigorous education to prepare its citizens for productive work.
These policies, along with investments from the United States and other countries, transformed Japan into a manufacturing powerhouse.
Low-wage workers often could not afford the products they made, and Japanese-made cars were often more expensive in Japan than in the United States.
Over time, stronger unions negotiated higher wages, and international pressure led to relaxed trade restrictions.
Japan's economy diversified into a knowledge economy and became a center for banking, finance, and information technology.
Although growth slowed after the 1980s, Japan remained the world's third-largest economy in 2014.
Asian Tigers
The Asian Tigers—Hong Kong, Singapore, South Korea, and Taiwan—closely followed Japan's economic model.
These states prospered through government-business partnerships, high exports, intense education, and a low-wage workforce.
The success of the Asian Tigers and China significantly reduced poverty for hundreds of millions of people.
Economic Continuities: Shifting Manufacturing
As knowledge economies develop in some regions, industrial production and manufacturing have declined, shifting to Asia and Latin America.
Countries in Asia and Latin America are known for their contributions to the textile and apparel industries, among other products.
Manufacturing remains a key part of the global economy, even as its location shifts.
Vietnam and Bangladesh
Importers have found alternatives to China in Asian countries like Vietnam and Bangladesh due to lower labor costs.
Vietnam and Bangladesh are known for their clothing exports.
Garment manufacturers, funded by foreign investors, produce clothing for developed countries.
Clothing accounts for 80 percent of exports from Bangladesh.
Phones are the largest export from Vietnam, worth about billion in 2017, with apparel and electronic goods each bringing in billion.
Workers in Vietnam and Bangladesh have protested low wages and poor working conditions, leading to slight wage increases that have failed to keep pace with rising living costs.
Manufacturing in Mexico and Honduras
In 1994, the North American Free Trade Agreement (NAFTA) was negotiated between the United States, Canada, and Mexico.
NAFTA encouraged U.S. and Canadian industries to build maquiladoras (factories) in Mexico, utilizing low-wage Mexican labor to produce tariff-free goods for foreign export.
Many factories hired young women and subjected them to harsh working conditions.
Labor unions in the United States claimed NAFTA led to the export of thousands of U.S jobs to Mexico, where wages and benefits were lower with weaker safety and environmental standards.
Honduras, the second-largest exporter of textiles in the Americas, has sought to upgrade its manufacturing through sustainability principles, recycling waste materials, and fair labor practices, including housing and education plans for workers, through business-government partnerships.
Considerable business investment comes from enterprises in South Korea and Taiwan.
Transnational Free-Trade Organizations
Several organizations contributed to the growth of the global economy after World War II, including regional organizations like the European Economic Community, Mercosur, and ASEAN.
Many countries signed the General Agreement on Tariffs and Trade (GATT) to lift restrictive barriers to trade.
Protective tariffs, which are taxes on foreign imports, had been at a world average rate of 40 percent before GATT.
By lowering and eliminating tariffs, GATT promoted international trade and helped restore economic prosperity to war-ravaged Europe.
By the 1990s, average tariff rates had sunk below 5 percent, easing the movement of goods across national borders and lowering prices for consumers.
World Trade Organization (WTO)
In 1995, the World Trade Organization (WTO) took over GATT's operations.
The WTO made rules that governed more than 90 percent of all international trade.
The WTO has been controversial because its meetings were closed to the public, and its board members represented mostly corporate interests.
The WTO's rules favored trade over concerns of moral concerns.
For example, a member nation that refused to buy clothing made by sweatshop labor could face trade sanctions from the organization.
Multinational Corporations
A multinational corporation is legally incorporated in one country but makes or sells goods or services in one or more other countries.
Examples include British East India Company and Dutch East India Company
Multinational corporations were the business means through which imperialist nations made their wealth during the age of imperialism, exploiting the resources and labor of the colonized regions for profit in home countries.
Today's multinational corporations take advantage of both knowledge economies and more traditional manufacturing and industrial economies.
They employ leading-edge workers in the knowledge economy and hire low-wage workers abroad to make their products.
They have a global market in which to sell their goods and services.
Free-market supporters believe multinational corporations produce the greatest gains for both developed and developing countries.
India's Example
In the early 1990s, India opened its markets and allowed in more imports.
With its highly educated, English-speaking workforce, India became a software and information technology powerhouse, attracting investments from American and European companies that wanted to outsource jobs and lower labor costs.
Multinational corporations, such as Microsoft and Google, also invested in the Indian economy.
The influx of corporate wealth and foreign goods created a thriving consumer culture among India's middle class, which grew significantly after 2000.
In 2014, the Indian middle class was estimated to be the largest of any country in the world, with more than 350 million people.
Mahindra & Mahindra
The India-based multinational corporation Mahindra & Mahindra produces cars, farm equipment, military vehicles, and electrical energy.
Headquartered in Mumbai, India, it has operations throughout India and in South Korea, China, Australia, the United States, South Africa, and other African nations.
Some multinational corporations are criticized for lacking a strong national identity and not adhering to the ethical standards of their home country or exploiting workers and avoiding taxes.
Mahindra & Mahindra has received awards for its socially responsible corporate practices and is considered one of the most trusted businesses in India.
Nestlé
Swiss-based multinational Nestlé, the largest food company in the world, has faced controversies and criticisms, including purchasing cocoa from suppliers who use child labor and engage in cocoa production on protected lands.
Nestlé has also been criticized for its bottled water business and its attitude toward drinking water as a product rather than a human right.
Nestlé invests in research programs aimed at sustainable agriculture and training for farmers.
9.4 Economics in the Global Age
Essential Question
How did the global economy change and remain the same from 1900 to the present?
Introduction
A market economy is seen as a decent but imperfect option compared to worse alternatives, similar to democracy in government.
Global trade grew significantly after the Cold War.
The new global economy focused more on market-oriented policies promoted by leaders like Ronald Reagan and Margaret Thatcher.
These policies included cutting taxes, reducing regulations, and offering less government support to boost economic growth.
While this approach made some people wealthy, it also caused difficulties for others.
Advancements in information and communication technology led to the growth of knowledge economies.
Manufacturing increasingly moved to Asia and Latin America.
Acceleration of Free-Market Economies
Globalization means that people, governments, and companies around the world are interacting more.
Examples of globalization include historical trade routes and colonial expansion.
The term "globalization" often refers to the increased integration of the global economy since the 1970s.
Countries in the Eastern Bloc could begin trading freely with capitalist democracies.
In the 1990s, India and other nonaligned countries relaxed their trade rules.
Economic liberalization means opening up a country's economy.
Reagan and Thatcher supported free markets, which rely on supply and demand with minimal government control.
Companies took advantage of this shift by moving jobs to countries with lower wages and fewer regulations.
Critics say globalization led to worker exploitation and environmental harm.
Economic Liberalization in Chile
In 1973, Augusto Pinochet came to power in Chile through a U.S.-supported coup, removing the democratically elected socialist leader Salvador Allende.
Pinochet ruled from 1974 to 1990, using violent methods, and faced many legal charges after his fall from power.
During his rule, Chile moved from a state-controlled economy to a free-market system.
His goals included privatizing state businesses and controlling inflation.
Economists known as the Chicago Boys, influenced by Milton Friedman, helped design these reforms.
These changes were unpopular because they did not address poverty, leading to repression during Pinochet’s rule.
Later governments tried to balance economic growth with programs to reduce poverty.
Chinese Economic Reforms
Economic liberalization also occurred in China under Deng Xiaoping, who became the leader in 1981.
The Communist Party shifted focus from equal wealth to economic growth, promoting Deng's idea of "Let some people get rich first."
The government opened the economy but maintained overall control.
Collective farms were replaced with leased land for peasants, allowing them to grow and sell crops, leading to agricultural surpluses.
Factories were allowed to produce more goods for consumers.
Foreign companies were encouraged to set up operations in special zones due to low wages and relaxed laws.
The Shanghai stock market reopened, and some private ownership was permitted.
Some Chinese citizens wanted political reforms alongside economic changes.
A peaceful protest in Tiananmen Square in 1989 called for these reforms but was suppressed by the government, resulting in many deaths.
Economic Change: New Knowledge Economies
In the late 1900s, advancements in information and communication technologies led to knowledge economies.
A knowledge economy focuses on creating and using knowledge and information and includes designers, engineers, and teachers.
Silicon Valley in the United States is an example of a knowledge economy.
Knowledge Economy in Finland
Knowledge economies grew with improvements in information and communication technology.
Governments and investors invested in research, education, and technology.
Finland changed from an agricultural economy in the 1950s to a more industrialized economy after World War II.
The fall of the Soviet Union caused an economic crisis in Finland.
In the 1990s, Finland opened up to the global market, encouraged competition, and created a council to promote economic growth through technology.
Finland experienced significant economic growth and became a leader in mobile phone technology.
By investing in education and technology, Finland developed software companies that required highly educated workers while outsourcing cheaper production to other countries.
Japanese Economic Growth
Japan adopted economic policies similar to those of the 18th century after World War II, aiming to increase exports and reduce imports.
The government worked with large corporations, providing them with subsidies to lower costs and boost exports.
High tariffs were placed on foreign imports to protect domestic production.
Japan emphasized rigorous education to prepare workers.
These strategies, along with foreign investments, turned Japan into a manufacturing powerhouse.
However, low-paid workers sometimes could not afford the goods they produced, and Japanese cars were often cheaper in the U.S. than in Japan.
Over time, stronger labor unions secured higher wages, and international pressure led to relaxed trade restrictions.
Japan later diversified into a knowledge economy and became a center for banking, finance, and technology.
Although growth slowed after the 1980s, Japan remained the third-largest economy in 2014.
Asian Tigers
The Asian Tigers—Hong Kong, Singapore, South Korea, and Taiwan—followed Japan's economic model closely.
These countries thrived through strong partnerships between government and businesses, high exports, focused education, and low-wage labor.
The successes of the Asian Tigers and China reduced poverty for millions.
Economic Continuities: Shifting Manufacturing
As knowledge economies grow in some areas, manufacturing has declined in others, moving to Asia and Latin America.
These regions are known for their textile and apparel industry contributions.
Manufacturing remains crucial to the global economy, even as its location changes.
Vietnam and Bangladesh
Importers have found alternatives to China in Vietnam and Bangladesh for lower labor costs.
Both countries are known for clothing exports.
Garment factories produce clothing for developed countries, heavily supported by foreign investors.
Clothing makes up 80 percent of Bangladesh's exports.
Vietnam's phone exports were worth around billion in 2017, with apparel and electronics also significant.
Workers in both nations protested for better wages and conditions, leading to some minor wage increases that didn't keep up with living costs.
Manufacturing in Mexico and Honduras
In 1994, the North American Free Trade Agreement (NAFTA) was created between the U.S., Canada, and Mexico.
NAFTA encouraged U.S. and Canadian companies to establish factories (maquiladoras) in Mexico, using low-wage Mexican labor for tariff-free exports.
Many of these factories hired young women and exposed them to tough working conditions.
Labor unions claimed NAFTA caused many U.S. jobs to go to Mexico due to lower wages and weaker worker protections.
Honduras, a major textile exporter in the Americas, has sought to improve manufacturing sustainability through recycling and fair labor practices supported by government and business collaboration.
Transnational Free-Trade Organizations
Several organizations contributed to global economic growth after World War II, including regional groups like the European Economic Community and ASEAN.
Many countries agreed to the General Agreement on Tariffs and Trade (GATT) to reduce trade barriers.
Prior to GATT, protective tariffs averaged 40 percent, but it lowered and eliminated many tariffs, promoting trade and helping European nations recover economically.
World Trade Organization (WTO)
In 1995, the WTO took over from GATT, overseeing more than 90 percent of international trade rules.
The organization faced criticism due to its lack of transparency and focus on corporate interests over moral concerns.
Countries could face trade penalties for refusing to buy goods made under poor labor conditions.
Multinational Corporations
A multinational corporation is based in one country but operates in others, like the British East India Company and the Dutch East India Company during imperialism.
Now, multinationals take advantage of both advanced knowledge economies and traditional manufacturing.
They employ skilled workers in developed countries while hiring low-wage workers abroad.
They have a global market for their products.
Supporters believe they help both developed and developing nations.
India's Example
In the early 1990s, India opened its markets to more imports.
With a well-educated, English-speaking workforce, India became a major player in software and IT, attracting investments from U.S. and European companies looking to cut costs.
Multinational corporations like Microsoft and Google invested in India.
This led to a growing middle class in India, making it one of the largest in the world by 2014 with over 350 million people.
Mahindra & Mahindra
The Indian multinational Mahindra & Mahindra produces cars, farm equipment, military vehicles, and energy.
Headquartered in Mumbai, it operates in various countries.
Some multinational corporations are criticized for not having a strong national identity and for exploiting workers.
However, Mahindra & Mahindra is known for its socially responsible practices and is one of India's most trusted companies.
Nestlé
Swiss multinational Nestlé is the largest food company globally and has faced criticisms over child labor in cocoa production and its approach to selling bottled water.
Nestlé invests in sustainable agriculture and training for farmers to improve practices and standards.