Comprehensive Notes on the Global Economy and Economic Globalization
Defining Economic Globalization
According to the International Monetary Fund (IMF) (2008), economic globalization is a historical process that reflects the result of technological progress and human innovation.
According to Benczes (2014), economic globalization is not substantive. This perspective argues that it primarily reflects quantitative change rather than qualitative transformation.
Stiglitz (2008) views economic globalization as a "great hope." This perspective posits that it will help raise living standards globally by providing poor countries with several opportunities:
Access to foreign markets to sell products.
Inviting foreign investments to facilitate the emergence of new products at lower prices.
Opening borders to allow the easy movement of people globally for training, work, and the establishment of new businesses.
Five Principal Forms of Economic Globalization
According to Stiglitz (2003), the growth in cross-border economic activities is categorized into five principal forms:
International Trade: Transactions between countries involving goods and services.
Foreign Direct Investment (FDI): Cross-border investments establishing lasting interests.
Capital Market Flows: The movement of money for investment across borders.
Migration: The movement of people/labor across international borders.
Diffusion of Technology: The spread of technology and technical knowledge among countries.
International Trade and Economic Theories
Definition: International trade consists of transactions made between countries involving both goods (tangible) and services (intangible).
Benefits:
Specialization in efficient production.
Provision of a wider variety of goods at lower costs for consumers.
Mercantilism: Prior to the century, most European countries prioritized self-sufficiency. This system aimed to minimize imports and maximize exports while increasing the national supply of gold.
Classical Economics (Comparative Advantage): In the late century, economists led by David Ricardo contested mercantilism. They campaigned for societies to trade with one another based on "comparative advantage." This suggests that specialization allows countries to focus on producing goods they make most efficiently while importing others, which leads to increased efficiency, trade, and innovation.
Protectionism and Trade Liberalization
Protectionism: The practice of protecting a country's domestic industries from foreign competition by creating trade barriers. Tools of protectionism include:
Tariff: A tax levied by a government on imports and exports.
Import Quota: Limits on the total number of products that can be imported into a country.
Bans: A complete prohibition of specific imported goods.
Trade Liberalization: Often called "free trade," this is the act of reducing trade barriers to facilitate easier international trade between countries.
Foreign Direct Investment (FDI) and Capital Market Flows
Foreign Direct Investment (FDI): As defined by the Organization for Economic Cooperation and Development (OECD), FDI is a category of cross-border investment where an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.
Capital Market Flows: This refers to the movement of capital (money for investment) from one country to another as a consequence of investment flows. Stiglitz (2003) notes that the volume of these flows indicates the level of international financial integration. Rajan (2019) characterizes capital flows as being neither an "unmitigated blessing nor an undoubted curse."
Migration and Labor Movement
Economic Context: In economics, migration is viewed as the movement of labor from one country to another.
Remittances: According to the World Bank (2019), global remittances totaled $689 billion in 2018. Of that total, $529 billion flowed into developing nations.
Top 10 Remittance-Receiving Countries (2018, in billions of U.S. dollars):
India: $78.6
China: $67.4
Mexico: $35.7
Philippines: $33.8
Egypt: $28.9
Nigeria: $24.3
Pakistan: $21.0
Vietnam: $15.9
Bangladesh: $15.5
Ukraine: $14.4
Diffusion of Technology
Economic Linkage: Technological growth and economic growth rates are linked. An increase in technological progress helps improve the socioeconomic situation of the poor.
Facilitator of Globalization: Technology acts as a major driving force and facilitator in globalization processes. This is significantly accelerated by "technological diffusion," defined as the spread of technology among countries.
Cost Reductions: Innovations in telecommunications, information technology, and computing have dramatically lowered communication and transportation costs. Stiglitz (2003) notes that this facilitates the cross-border flow of ideas, technical knowledge, and concepts like democracy and free markets.
Impact on Global Industry: Without the reduction in costs provided by technological progress, outsourcing, long-distance trade, and global value chains would be impossible.
International Economic and Financial Institutions
The Bretton Woods Conference (1944):
Attended by countries after World War II.
Goal: Establish international economic cooperation.
Created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank.
Keystone International Economic Organizations (KIEOs): These organizations focus on trade, development, and monetary relations. This includes the World Bank, IMF, and the General Agreement on Tariffs and Trade (GATT) which was created in 1947.
The World Bank: Mission and Organization
History: Established in 1944 as the IBRD. Its initial goal was to rebuild Europe after World War II. The first loan was granted to France in 1947 for $250 million for post-war reconstruction.
Historical Focus Evolution:
1950s–1960s: Infrastructure projects (roads, dams, irrigation, electrical grids).
1970s: Agriculture, poverty eradication, health, nutrition, food production, and rural/urban development.
Current Missions:
End Extreme Poverty: Reduce the percentage of people living on less than $1.90 a day to no more than by 2030.
Promote Shared Prosperity: Improve the income of the bottom of the population in each country (World Bank, 2013).
The Five Organizations of the World Bank Group:
International Bank for Reconstruction and Development (IBRD): Lends to middle-income and creditworthy low-income countries.
International Development Association (IDA): Provides interest-free loans to the world's poorest countries.
International Finance Corporation (IFC): The largest global development institution focused on the private sector.
Multilateral Investment Guarantee Agency (MIGA): Provides guarantees and insurance to protect foreign investors from non-commercial risks.
International Centre for Settlement of Investment Disputes (ICSID): Settles investment disputes between foreign investors and developing countries through conciliation or arbitration.
World Bank Top 10 Borrowers (Original Principal Amount in Millions of U.S. Dollars):
Peru: $2,850
India: $2,820
China: $1,982
Indonesia: $1,700
Ukraine: $1,560
Egypt: $1,550
Iraq: $1,550
Poland: $1,504
Colombia: $1,400
Kazakhstan: $1,080
The International Monetary Fund (IMF)
Definition: Created in 1944, the IMF promotes global monetary cooperation, financial stability, trade, economic growth, and poverty reduction. It is often called the "guardians of good conduct" regarding the balance of payments.
Core Functions:
Surveillance: Overseeing and monitoring the economic conditions, monetary systems, and financial policies of member countries.
Lending: Providing financial support to members facing balance of payments problems. IMF loans come with "policy conditions" (e.g., trade liberalization, privatization, tax reforms, reduced government spending) to ensure repayment.
Capacity Development: Providing technical assistance and training to help nations build effective economic institutions.
Funding Sources:
Primary: Quotas paid by member states. Quotas reflect a state's relative position in the global economy and determine its voting power.
Secondary/Tertiary: Multilateral and bilateral borrowing used if quotas are insufficient.
World Trade Organization (WTO): History and Principles
Timeline (Crowley, 2003):
1944: Discussions begin for an International Trade Organization (ITO).
1947: GATT is created as support for the ITO wanes in the U.S. Congress.
1950: The U.S. formally withdraws from the ITO concept.
1951–1986: Periodic negotiating rounds occur to reform GATT; dispute resolution remains a problem.
1986–1994: The Uruguay Round occurs, culminated in the 1994 treaty creating the WTO.
1995: The WTO is officially created, replacing GATT.
Functions of the WTO:
Implementing trade agreements.
Providing a forum for trade negotiations.
Handling trade disputes.
Monitoring national trade policies.
Providing technical assistance for developing countries.
Cooperating with other international organizations.
Principles of the WTO Trading System:
Without Discrimination: Countries must not discriminate between trading partners.
Most-Favoured-Nation (MFN) Treatment: Standardized non-discrimination; every member treats every other member as its "most-favoured" partner.
National Treatment: Imported and locally-produced goods must be treated equally.
Free Trade: Trimming trade barriers through negotiation.
Predictability: Achieved through binding commitments and transparency.
More Competitive: Discourages unfair practices like dumping (exporting at low prices to increase market share) and export subsidies.
More Beneficial for Less Developed Countries: Provides greater flexibility, more time to adjust, and special privileges.
Transnational Corporations (TNCs) and Outsourcing
Definition: A Transnational Corporation (TNC) is an enterprise that undertakes FDI, owns or controls income-gathering assets in more than one country, and produces goods/services outside its country of origin (Biersteker, 1978).
Role in Globalization: Gereffi (2005) argues TNCs are the main driving forces of economic globalization, accounting for approximately two-thirds of world exports. They are active participants in the development and diffusion of Information and Communication Technologies (ICTs) (Gillies, 2011).
Reasons for Becoming a TNC/MNC (Multinational Corporation):
Access to Lower Production Costs: Manufacturing in developing countries often lowers costs.
Proximity to Target Markets: Setting up business where the consumers are located.
Avoidance of Tariffs: Local production exempts companies from import quotas and tariffs.
Top 10 Largest Companies by Market Capitalization (as of August 1, 2019):
Microsoft (U.S., Technology): $1,058 billion
Apple (U.S., Technology): $959 billion
Amazon (U.S., Consumer Services): $959 billion
Alphabet (U.S., Technology): $839 billion
Facebook (U.S., Technology): $550 billion
Berkshire Hathaway (U.S., Financial): $496 billion
Tencent (China, Technology): $436 billion
Alibaba (China, Consumer Services): $431 billion
Visa (U.S., Financial): $389 billion
JPMorgan Chase (U.S., Financial): $366 billion
Outsourcing: The practice of obtaining goods and services from foreign suppliers. Deloitte’s Global Outsourcing Survey (2016) highlights this as a continuing trend. Reasons for outsourcing include:
Faster and Quality Service
Resources
Shared Risks
Operational Risks
Focus
Overhead Costs
Prices
Flexibility
Global Supply Chains
Definition: Networks consisting of individual producers, companies, transportation systems, and information flows that extract raw materials, transform them into finished products, and deliver them to consumers.