A2 Macro - Aspects of Globalisation (2015)

A2 Macro-Economics - March 2015
A2 Macro-Economics Revision Workshop
March 2015
Session 4:
Globalisation, Development &
Inequality
Geoff Riley
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Globalisation is a process in which national economies have
become increasingly integrated and inter-dependent

Trade to GDP
ratios are rising
Expansion of
Financial Capital
FDI and Cross
Border M&A
Rise of truly
global brands
Deeper
specialization
Global supply
chains & new
trade routes
Many aspects of globalisation can be mentioned

Nissan, Sunderland Cummins Power Generation, Ramsgate
AkzoNobel, Ashington Siemens, Hull
Examples of foreign direct investment into the UK economy

Advantages from Globalisation
1. Encourages producers and consumers to reap benefits
from deeper division of labour and economies of scale
2. Competitive markets reduce monopoly profits and
incentivize businesses to seek cost-reducing innovations
3. Enhanced growth has led to higher per capita incomes –
and helped many of poorest countries to achieve higher
growth and reduce extreme poverty
4. Advantages from the freer movement of labour
5. Increased awareness among consumers of challenges
from climate change and wealth/income inequality
Many of the effects of globalisation are disruptive to
established industries and organisations

Many of the effects of globalisation
are disruptive to established
industries and organisations

Poverty Reduction
The percentage of people living in extreme poverty has fallen across all regions
but progress in Sub-Saharan Africa has (until recently) been slower
MENA: Middle East and North Africa

Disadvantages from Globalisation
1. Growing inequality leading to political & social tensions
2. Threats to the global commons e.g. irreversible damage to
ecosystems, land degradation, deforestation, water scarcity
3. Macroeconomic fragility – external economic shocks in
region can rapidly spread to other centres …. Systemic risk
4. Trade imbalances leading to calls for protectionism and a
move towards countries using managed exchange rates
5. Higher structural unemployment in countries where
production has shifted to lower labour cost nations
6. Less cultural diversity as global brands dominate

Imbalances between countries Imbalances within countries
Trade imbalances i.e. current
account surpluses and deficits
Rising income and wealth
inequalities
Unbalanced flows of foreign direct
investment between countries
Large structural differences in
unemployment rates
Imbalances in access to global
markets, ideas, health &
education
Imbalances between rural and
urban areas / different regions
Key Argument: Globalisation and Imbalances

Imbalances between countries Imbalances within countries
Trade imbalances i.e. current
account surpluses and deficits
Rising income and wealth
inequalities within countries
Unbalanced flows of foreign direct
investment between countries
Large differences in structural
unemployment rates
Imbalances in access to global
markets, ideas, health &
education
Imbalances between rural and
urban areas / different regions
Key Argument: Globalisation and Imbalances

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“Human progress is neither automatic nor inevitable . . .” Martin Luther King, Jr

Evaluating the HDI
• HDI fails to take account of qualitative factors,
e.g. cultural identity and political freedoms
(gender opportunities, human rights)
• Environmental indicators are not included
• Inequitable development is not sustainable
human development
• Key awareness point: 2010 saw launch of new
Inequality-adjusted HDI, a Gender Inequality
Index and a Multidimensional Poverty Index

Source: African Development Report, 2014
Some SSA countries
have made substantial
progress in lifting
people out of extreme
poverty and in raising
health and education
outcomes – Ethiopia is
a striking example

Source: UNDP Human Development
Report, 2014
Inequality-adjusted HDI
Average loss in HDI due to
inequality is 23 percent—
adjusted for inequality, the global
HDI of 0.682 in 2011 would fall to
0.525

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Human Sustainable Development Index
• Adds ‘ecological footprint’ to the indicators used in the HDI
Gender Inequality Index
• Measures equality of women by looking at maternal mortality
ratio, labour market participation
Multi-dimensional poverty rate
• Uses the indicators in the HDI to identify the proportion of the
population in poverty across several indicators
Happy Planet Index
• Includes well-being, life expectancy and ecological footprint

Happy Planet
Index
lighter colour = higher
score= greater happiness

Source: UNDP Human Development Report, 2014
Rwanda has made significant
progress in addressing gender
inequalities – in Rwanda, female
lawmakers make up 64% of
parliament, outperforming the
world average of one in five

Infrastructure
Gaps
Primary Export
Dependency
Macroeconomic
Instability
Conflict and
Corruption
Human Capital
Weaknesses
Insufficient
Savings
Natural Capital
Depleted
Rising Income
Inequality
Although many developing countries have enjoyed rapid growth in
recent years, for others there are crucial constraints

Republic of Congo: Primary Product Dependence
Despite large deposits of iron, potassium, phosphate, gold and
diamonds as well as great agricultural potential, the Republic of Congo
relies heavily on oil. It accounts for 75% of government revenue, 90%
of exports and 60% of GDP.
Weak government effectiveness together with the aftermath of the
civil war (1997- 1999) results in a low level of human development.
For a middle-income country (GDP per capita around USD 3,500 in
2015), the extreme poverty rate is high despite a decline from 51% in
2005 to 46% in 2011. The business environment remains challenging
(178 out of 189 countries in the Ease of Doing Business ranking from
the World Bank).

Absolute (Extreme) Poverty –
lacking essentials necessary
for survival. Defined by World
Bank as living on < $1.50 or $2
per day (PPP)
Relative poverty - poor in relation to the
remainder of the population. Lack the
minimum income to maintain an average
standard of living in the society in which
they live – e.g. income <60% of median level
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Poverty

Gini Coefficient =
Area A
Area A + Area B
A
B
The closer the Gini
Coefficient is to 1,
the higher the
degree of
inequality
Measuring Income Inequality
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Social unrest, tensions and civil disobedience
• Social tensions and a breakdown in trust
• This causes external costs e.g. rising spending on policing
and more spending on insurance and security services
A self-perpetuating poverty cycle can become embedded
• The poor have limited access to health care and education
– causing under-consumption of merit goods
• Volatile incomes can lead to high debts paying high
interest rates e.g. dependence on payday lenders
Inequality and a loss of allocative efficiency
• Capital investment is skewed to preferences of the rich
• Low collateral /low savings – limits entrepreneurship

Cause Explanation Evaluation
Development of
Human Capital
Adding to education & skills can boost
productivity
Better educated may
emigrate - brain drain (or
human capital flight)
Aid and Debt
Relief
Foreign aid can give short term support
after natural disasters
Can lead to aid dependence;
‘Dead Aid’, Dambisa Moyo
Microfinance
Helps support borrowing small sums in
poorer communities
Interest rate on loans can
often be high, creating
financial problems
Development of
tourism or
alternative sectors
Helps re-balance an economy so it is
better prepared for economic shocks
Needs investment, much of
the profits may flow to
overseas multinationals
Role of the IMF
and World Bank
Funds capital and infrastructure
development
IMF tends to have a market-
based approach an
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Micro-credit - small-scale loans to the poor
Micro-savings – e.g. local savings organisations
provided by charities
Micro-insurance - for people and businesses not
served by commercial insurance businesses
Remittance management – e.g. transfer
payments made through mobile phone solutions

Poverty
reduction
through
financial
inclusion
Raising
domestic
savings in
lowest
income
countries
Protection
against
income
volatility
(insurance)
Sustainable
finance for
new
enterprises
Gender
Opportunitie
s
Microfinance has long been used in developing countries to help poor
entrepreneurs who cannot access mainstream finance

Page 40
P
POINT
Microfinance helps ensure people on low incomes can borrow for
small capital investment such as farm equipment or mobile
technology
E
EXPLANATION
This way, they add to a nation’s capital stock and use the asset to
raise their income, boosting aggregate demand and real GDP.
E
EVIDENCE/EXAMPLE
For example, the farmer in the case study took out “a starter loan
of about £15” and used this to boost output on his farm by buying
new tools. This way labour productivity increased.
E
EVALUATION
However, farmers can only borrow sums based upon what they
can pay back and interest rates on loans are often high. This limits
the long-run impact on growth of micro-finance schemes.
L
LINK BACK
Overall micro finance can play a role in boosting small scale
investment and also in encouraging new enterprises

P
POINT
Microfinance can help boost the capital stock of the economy but
can lead to over-indebtedness.
E
EXPLANATION
This is because, in many developing countries, there is often
political and economic instability, as well as natural disasters. This
means debts may go unpaid and the microfinance schemes
collapse.
E
EVIDENCE/EXAMPLE
For example, a fall in the world price of wheat may reduce a
farmer’s income / profit and so make it harder for them to pay
back their microfinance loan.
E
EVALUATION
However, although there is much instability, small landowners my
manage to increase their income with the support of
microfinance. This way it can help raise living standards.
L
LINK BACK
Overall, microfinance schemes are too small to make a significant
difference to growth rates and need to be used along side other
development programmes such as targeted aid
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Building Trust /
Social Capital
Growing Intra-
Regional Trade
Improving
Institutions
Growing a Dynamic
Private Sector
Sound Macro
Policies
Focus on Equity /
Fairness

Exam question: to what extent would a
reduction in world inequality contribute to
greater economic growth?
Source:
World
Bank, 2014
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P
POINT
A reduction in world inequality could help boost growth by
raising the incomes of the poorest, who have a higher marginal
propensity to consume.
E
EXPLANATION
This means that a redistribution of income and wealth, via
progressive taxes, could raise consumer spending and boost AD,
creating employment.
E
EVIDENCE/EXAMPLE
For example, measures to raise government revenue in India by
reducing tax evasion are being used to help increase
infrastructure spending and health coverage
E
EVALUATION
However, higher taxes on enterprise may reduce investment
and benefit payments to the poor can lead to dependence. This
way, reducing inequality may not always boost growth.
L
LINK BACK
If the tax revenues are effectively spent, reducing income
inequality through progressive taxation can lift the incomes of
the poorest households and stimulate real growth

P
POINT
High rates of inequality are a natural feature of a free market
system as higher wages are paid to people with higher skills
E
EXPLANATION
This can provide an incentive for those on lower incomes to get
better education and training and so boost their employment
prospects and wages in the long run.
E
EVIDENCE/EXAMPLE
For example, low cost private schools are growing in number in
India and are providing an opportunity to improve the skills of
children from lower income families.
E
EVALUATION
However, in many developing countries, social mobility is low as
the poor face financial and other barriers to accessing
education
L
LINK BACK
Overall, the strength of the incentive effects depend on
whether there is enough social mobility in a country
Page 40

Key Takeaway Points
• Globalisation is not inevitable
• Regionalization of trade & investment
• New development / growth buzzwords!
– Systemic risk
– Value added industries
– Resilience
– Capabilities
• Become a mini expert on two or three
developing /emerging countries

A2 Macro - Aspects of Globalisation (2015)

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