The_Global_Economy

The Global Economy Essay The Global Economy refers to all countries in the world that produce goods and services and contribute to Gross World Product (GWP). Goods are defined as anything that someone wants or needs and services as the performance of any duty or work done by another person. Goods can be consumer goods that satisfy wants or needs, such as food and clothing, producer goods that are used to make consumer goods, such as raw materials or capital goods that are used to make producer goods, such as machinery. Services include construction, education, entertainment, finance and transport although the term refers to any work done by another person. As well as contributing to Gross World Product, these countries engage in world trade, foreign direct investment and portfolio investment as well as the transfer of finance, technology and labour. Globalisation is the process of increasing levels of economic growth between countries, which is achieved through economic integration. This occurs when trade barriers are reduced or removed between countries to facilitate growth in free international trade and investment flows. These trade barriers include tariffs which are a tax enforced on imports, subsidies which provide protection to goods and services within a country making them more competitive against imports and quotas which restrict the quantity of goods that can be imported within a set time period. The main forms of economic integration include a free trade area, custom union, common market or monetary union. A free trade area is characterised by a group of member countries that abolish trade restrictions between themselves but retain their own restrictions against other countries. An example of a free trade agreement is the North American Free Trade Agreement (NAFTA) which has removed tariffs between member countries although each country continues to set their own tariffs against non-member countries. A custom union removes tariffs between member countries but, unlike a free trade agreement, also creates a standardised set of trade restrictions against other countries. The European Economic Community (EEC), prior to 1993 is an example of this type of union; the EEC had abolished tariffs between themselves and set a common external tariff (CET) for non-member countries. Between 1993 and 1998 the European Economic Community became the European Community, a common market which had all the factors of a custom union but also allowed for the free movement of labour and capital, not just goods and services, within member countries. A monetary union is characterised by the formation of a single currency, co-ordination of monetary policy through a central bank and sometimes the co-ordination of welfare, fiscal and competition policies as well as the free mobility of goods and services, labour and capital. In 1998 The European Community, renamed The European Union (EU) set up a monetary union called The Economic and Monetary Union (EMU) which consists of 16 of the 27 EU members who adopted a single currency, the Euro, and have their monetary policy set by the European Central Bank (ECB). The globalisation process has both positive and negative features, which simply means that as countries becomes more integrated and dependant on each another they will all prosper, to varying degrees, when some of them are going through an upturn or boom although they will also share in the repercussions when some countries face a downturn and recession. Some positive features of globalisation include: * Countries are able to specialise in what they are able to produce and manufacture best, due to levels of agriculture, labour and raw materials in the country, allowing them to specialise in these goods and customise then for the particular region they are being sent to, minimising costs and increasing efficiency and profits. * Increased global financial integration through financial deregulation, an ease in regulations which raises international competitiveness and therefore higher productivity, efficiency and lower prices overall. This resulted in the integration of national financial systems to create a global financial system and greater mobility of capital, including flows of direct and portfolio investment between countries and regions. * The formation of Multinational Corporations (MNCs) which seek out locations in other countries that will provide the highest profits and then invest in these countries, setting up subsidiaries which trade between each other, known as intra-firm trade, and with the parent company to achieve low cost of production, high profits and therefore become an economy of scale. This increases trade, efficiency of production and the income and standard of living of these countries, which is necessary for developing countries to become more industrialised and able to compete on a global level. * The information and communications technology (ICT) revolution which has led to new types of products and employment in businesses by providing the convenience and speed of the Internet and electronic commerce that was previously unavailable. How the ICT revolution has assisted globalisation is evident by MNCs creating subsidiaries on other countries and being able to communicate and organise between themselves and conduct intra-firm trading in a much faster, cheaper and more convenient way. * Increased growth of many goods and services including elaborately transformed manufactured goods (ETM) which are finished products with high levels of technology and value such as phones, laptops and digital cameras and specialised services such as finance, business, accounting, insurance, transport, telecommunications, entertainment, music, media and information technology. * Foreign direct investment (FDI) by companies to gain access into foreign markets and to export inputs and expertise from the parent company. This increases world trade and the expertise, income and standard of living in the host countries. * Advanced, emerging and developing nations have developed trade liberalisation policies and microeconomic reforms in commodity, finance and labour markets to allow for greater international competitiveness. Also there has been a trend of emerging economies conducting internal economic reforms to benefit from a more integrated global economy. Some negative features of globalisation include: * ‘Financial contagion’ which occurs due to increased economic and trade linkages between countries and regions. Financial contagion is when regions or countries go into a downturn or recession due to one or more countries they have financial, trade and/or labour ties with suffers a downturn or recession. This was evident in the Global Financial Crisis in 2008-09 which saw the USA facing a downturn which thereby reduced the amount of finished products they bought from China, which led to a downturn in China and reduction in the amount of raw materials they bought from Australia, affecting us too. * A widening of the gap in the distribution of income and wealth between the advanced and developing countries due to the advanced economics having an strong advanced in international competition and despite increasing the wealth and standard of living in developing countries due to subsidiaries most of the profits are sent back to the parent country. Globalisation has had and continues to have a strong effect on many aspects of the global economy and the economies of individual countries. One effect of globalisation is world trade and the dependency of countries on each other to provide trade and a flow of finance. This is both a positive and negative feature as when a country is going through an upturn the countries they trade with and buy from will also experience an upturn, and vice versa when a country is going through a downturn. The positive effect of this increased world trade was seen between 2003 and 2008 when the average annual growth in world trade increased by 14%. The exports of advanced countries grew by 5.6% and 9.7% for emerging economies. The negative effect was felt in 2009 when the exports of advanced economies declined by -13.5% and the exports of emerging and developing countries fell by -9.1% due to the Global Financial Crisis. A recovery was predicted for 2010 in which advanced economies would grow by 8.1% and emerging and developing countries by 8.5%. Another aspect of the global economy that has been greatly affected by globalisation is foreign investment. There are two types of foreign investment, direct, which is where companies establish or buy a controlling interest in a foreign subsidiary and portfolio, where equity and debt securities are bought but foreign shareholders do not have a controlling interest. Total world foreign direct investment in 2008 was US $1 823 282 million, nearly six times the level in 1995. Foreign portfolio investment also increased approximately six times since 1995, declining during the Global Financial Crisis. This decline helps us to understand how foreign investment is linked to and dependant on globalisation, as the growth of foreign direct and portfolio investment is mainly due to financial deregulation globally which caused the easing of capital controls between countries. Financial deregulation includes floating of exchange rates which allows a countries currency value to fluctuate based on the foreign exchange market and the removal of direct lending controls. The turnover in world stock markets has been increased due to new technology which has provided greater access for individuals, companies and governments to raise funds and companies to engage in mergers and acquisitions. Technological improvements have been strongly caused by technology diffusion which is to what extend innovative technologies from technologically leading countries are exported and taken up by the rest of the world. Technology and foreign investment go hand in hand through globalisation although this has led to more than just greater access to raise funds and allowing companies to engage in mergers and acquisitions. By becoming economies of scale, technological improvements have helped companies reduce production costs as well as allowing instantaneous production ordering of stock and inputs which enables firms to quickly respond to changes in demand. Increased efficiency and technology have also allowed for cost reduction and increased efficiency for companies due to the efficient maintenance of inventories, reduction in the role of wholesales through electronic commerce and the use of the internet and electronic commerce to reduce labour costs in marketing and distribution of the final good or service. Technology has also enhanced consumer choices and the speed at which they receive goods and services. This is achieved through the new products and service caused by technology which increases the range of choice and lower prices due to international competition. Likewise international competition has improved the rate of innovation in product development, production methods, marketing and distribution, giving consumers more choice and improved specialisation and customisation for companies. Finance has been highly affected by globalisation, both positively and negatively. The positive of this was seen from 2005 to 2007 where the total global capital market turnover grew from US $3 785 billion to US $6 899 billion, nearly doubling in just three years. In 2008 the global financial crisis hit and caused a significant fall in financial activity in world financial markets. This was a side effect of increased risk aversion of lenders, higher cost of credit and increased volatility is asset prices, such as equities and exchange rates. Between 2008 and 2010 the global financial crisis negatively affected global capital market activity including a decline in the debt securities issued as corporations tried to reduce their debts and equity trading and prices fell in 2008-09 but rose again by 2010 as corporations attempted to raise capital whilst lowering their debt borrowings. At the same time governments issued more bonds to fund budget deficits and stimulate their economies to lift them out of recession. Another very important aspect of globalisation is labour and the division of labour. Division of labour is the specialisation of people according to labour tasks in production, which can be seen by workers who have specialist labour skills in primary, manufacturing and service sectors. MNCs set up subsidiaries in developing and emerging economies where labour is cheaper and selling goods and services to the global market is more profitable. An example of this is the establishment of manufacturing plants in China and Asian newly industrialised economies to utilise the abundant supply of cheap, unskilled labour. This has caused de-industrialisation and job displacement in advanced economies as industries or parts of industries are located offshore such as the outsourcing of telecommunications, computing, information technology, accounting, insurance, finance and banking services to countries where there is an abundant supply of skilled and semi-skilled labour i.e. India, The Philippines, Singapore and Malaysia. Multinational Corporations have played an important role in the international division of labour through the migration and employment of parent country nationals (PCNs), host country nationals (HCNs) and third country nationals (TCNs). Parent country nationals are highly skilled and employed to migrate to the host country and manage the subsidiaries. Host country nationals are generally unskilled or semi-skilled and are employed to work in the subsidiary whilst third country nationals are hired to provide skills that are in short supply or are needed as additional labour due to a growing economy. This has allowed for an international market for specialised labour skills and the increased mobility of skilled, semi-skilled and professional people to work in foreign countries as third country nationals or parent country nationals to earn higher incomes. The migration of labour is not only important for the host and parent economies but also the economies of the third country nationals through what is known as workers’ remittance. This is where payments of foreign workers are sent back to their families at home. These payments are an important part of the growth in these economies, making up 1.6% of developing countries gross domestic product in 2007. Despite the positive effects the migration of labour worldwide there are also negative repercussions including the exploitation of foreign workers as they are not protected by the International Labour Organisation (ILO) minimum standards for wage and working conditions, an emerging black market for illegal migrant workers being smuggled into advanced countries to work in illegal industries such as prostitution and drug trafficking. The growing need for an increased labour supply in advanced countries due to population ageing has led to a flow of illegal migrants for labour and other employment opportunities, higher living standards and appealing for refugee status, which increased levels of unemployment and the cost of apprehending these immigrants and repatriating them to their home countries. Another problem caused by labour migration is brain drain, which occurs when highly skilled workers leave advanced and developing countries to seek employment and higher levels of income in other advanced countries. This reduced the availability of highly skilled labour, i.e. medicine, pharmaceuticals, science and information technology in many countries and have forced governments to increase incentives such as lower taxes to retain or attract highly skilled labour. The international business cycle is the changes in world output or GDP over time, all national economies are affected by these changes and the changes are caused by changes in the levels of world demand, output, trade and finance. The general trend of world trade and output is to grow over time, this is evident by the average world growth in output was 3.9% between 1997 and 2008, with the period of 2004 to 2008 going through the global resources boom increasing average world trade to 5%. However there was a synchronised fall in global output and trade and world GDP fell -0.6% due to the global financial crisis in 2009. The main causes of change in the international business cycle are due to changes in world demand, output, trade and finance. Demand * An increase in demand for a country’s exports, caused by an increase of world spending, output and growth, will help to increase that country’s growth, meanwhile a decrease in world spending, output and growth will lead to the opposite, a decrease in demand for exports and therefore a decrease in the country’s growth. Output * If world growth increases at a faster rate than a country’s domestic growth rate it will cause a greater increase in exports than the increase in imports, improving the country’s current account and move the economy into surplus. If a country’s domestic growth rate is higher than world growth it will lead to a decrease in exports and an increase in imports, leading to deterioration in the country’s current account and move into deficit. Trade * If there is an increase in world growth this will lead to an increase in commodity prices and an appreciation in the currency of the nations that export goods this will lead to an increase in export income. Oppositely in there is a decrease in world growth there will be a decrease in commodity prices and a depreciation in the currency of the exporting nations and cause a decline in export income. Finance * If foreign investor confidence increases this will cause an increase in capital inflows (foreign direct and portfolio investment) into a country thereby leading to growth and appreciation in the currency and raise the value of assets, including shares, real estate and bonds. A decrease in foreign investor confidence with lead to a decrease in capital inflows and growth and cause depreciation in the currency. The international business cycle is characterised by upturns and downturns, known as booms and recessions at their peak. An upturn or expansion is an upturn in demand, a fall in inventories, increased demand for resources including and new investment in plant and equipment. An upturn then becomes a peak when supply or capacity constraints where inflation starts to rise and the growth in global output is no longer sustainable. The international business cycle then faces a downswing when demand and output falls and rates of unemployment rise as global economic activity slows. A downswing then becomes a trough or recession when global output and demand reach their minimum point. Despite having some negative features and repercussions, globalisation has greatly increased world trade, the free flow of labour, finance and foreign investment as well as improving the speed at which new technology is produced and distributed. Through foreign investment and the division of labour Multinational corporations have helped raise developing and emerging economies to become semi-skilled or highly skilled, raise the minimum wage by allowing for competition for labour, providing better working conditions, specialising in what that country is best suited for producing and allowing the economy to better compete internationally. The international business cycle demonstrates how the economies of the world have become more integrated and dependant on each other and, although this will lead to downswings and recessions, overall globalisation has allowed for specialisation, free mobility of goods and services, labour and finance and provided a strong economic base from which all countries that globalise will prosper.