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Economics of Globalisation

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The document elaborates on globalization, defining it as an interconnection of economies and cultures through trade, technology, and media. It discusses the characteristics, causes, and impacts of globalization on various stakeholders including consumers, countries, and transnational corporations, while evaluating both its advantages, such as increased competition and lower prices, and disadvantages like trade imbalances and environmental risks. Additionally, it highlights the evolving landscape of global trade and the role of emerging economies in shaping future economic dynamics.

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Economics of Globalisation
Revision Notes Completed Confident? Explain what is meant by globalisation Explain the characteristics of globalisation Explain the causes of globalisation / factors contributing to globalisation Evaluate the impact of globalisation and global companies on individual countries, governments, producers and consumers, workers and the environment Evaluate the impact of the performance of emerging economies on other economies. Explain how the pattern of global trade has changed over time Evaluate comparative advantage as an explanation of global trade patterns Explain how countries achieve international competitiveness
WHAT IS MEANT BY GLOBALISATION? What is globalisation? Globalisation is a process by which economies and cultures have been drawn deeper together and have become more inter-connected through global networks of trade, capital flows, and spread of technology and global media. What is the key benefit of globalisation? Globalisation allows businesses and countries to specialise in producing goods and services where they have a comparative advantage. Specialisation and trade enables a gain in economic welfare, for example through lower prices for consumers which then increases their real incomes. THE GLOBAL CONTEXT
THE GLOBAL CONTEXT WHAT ARE THE KEY CHARACTERISTICS OF GLOBALISATION? Trade to GDP ratios are increasing for many countries Expansion of financial capital flows across international borders Increasing foreign direct investment and cross border acquisitions Global brands – including a rising number from emerging countries Deeper specialization of labour e.g. in making specific component parts Global supply chains & new trade and investment routes Higher levels of cross- border labour migration Increasing connectivity of people and businesses through networks
WORLD GDP – SHARE BY COUNTRY 17.65% 15.71% 7.31% 4.15% 3.33% 3.12% 2.62% 2.33% 2.29% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% China USA India Japan Germany Russia Brazil United Kingdom France ShareinglobalGDP Percentage share of the main industrialized and emerging countries in global gross domestic product (adjusted for purchasing power) in 2016, Source: IMF World Outlook Note: “Adjusted for purchasing power” means that the US dollar value of each country’s annual GDP has been altered to take account of differences in the estimated cost of living in different nations. THE GLOBAL CONTEXT
58.71% 41.29% 16.47% 7.66% 7.58% 6.69% 3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Emerging market and developing economies Advanced economies EU Latin America / Caribbean Middle East, North Africa, Afghanistan, and Pakistan Middle East and North Africa Africa Sub- Sahara ShareinglobalGDP WORLD GDP in 2017 – SHARE BY REGION (adjusted for PPP) Share of global regions in world gross domestic product (adjusted for purchasing power) in 2017. Source: IMF THE GLOBAL CONTEXT
WHAT ARE THE KEY FACTORS DRIVING GLOBALISATION? Containerisation Lower trade barriers Business demands Technological advances THE GLOBAL CONTEXT
WHAT ARE THE KEY FACTORS DRIVING GLOBALISATION? Containerisation – the real prices/costs of ocean and air shipping have come down due to containerization, bulk shipping, and other efficiencies. This reduces the cost of transporting products. Technological advances – reducing the cost of transmitting and communicating information – this is a key factor behind trade in knowledge-intensive products using the latest digital technology. Economies of scale - Many economists believe that there has been an increase in the minimum efficient scale in some industries Differences in tax systems - Some countries have adjusted their corporate tax systems to attract foreign direct investment (FDI) Less protectionism – overall, average import tariffs have fallen – but in the last few years there has been a rise in non-tariff barriers such as quotas, domestic subsidies and tough regulations. THE GLOBAL CONTEXT
ECONOMIC GROWTH IN ADVANCED & EMERGING NATIONS THE GLOBAL CONTEXT 0 2 4 6 8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 World Advanced economies EMDEs Percent EMDEs = emerging market and developing economies World Bank Forecast
LEADING EXPORT COUNTRIES IN THE WORLD ECONOMY THE GLOBAL CONTEXT 2098 1455 1340 645 570 517 501 495 462 409 396 390 374 330 0 500 1000 1500 2000 2500 China United States of America Germany Japan Netherlands Hong Kong, China France Korea, Republic of Italy United Kingdom Belgium Canada Mexico Singapore Leading exporters in merchandise trade, 2016, Annual value of exports, US$ billion, Source: WTO World Trade Report, 2017 Value, US$ billion Share of global trade Hong Kong, China 517 3.2 domestic exports 26 0.2 re-exports 491 3.1 Value, US$ billion Share of global trade Singapore 330 2.1 domestic exports 154 1.0 re-exports 176 1.1
TRANSNATIONAL BUSINESSES Total number of Nike retail stores worldwide from 2009 to 2017 674 689 756 826 753 858 931 1,045 1,142 0 200 400 600 800 1000 1200 2009 2010 2011 2012 2013 2014 2015 2016 2017 Totalnumberofretailstores THE GLOBAL CONTEXT
TRANSNATIONAL BUSINESSES Transnational businesses (TNCs) base their manufacturing, assembly, research and retail operations in a number of countries. Many TNCs have become synonymous with globalisation such as Nike, Apple, Wal-Mart, Uber, Amazon, Google and Samsung. For example, Google has offices in more than 60 countries The biggest 500 TNCs together account for nearly 70% of world trade. TNCs are a key driver of globalisation because they have been re- locating manufacturing to countries with relatively lower unit labour costs in order to increase their profits and returns for shareholders. For example, Volkswagen, Toyota, Nissan and General Motors all have plants in Mexico which has helped this country to build a comparative advantage in manufacturing and then exporting vehicles within the NAFTA free trade area (involving Mexico, the USA and Canada) THE GLOBAL CONTEXT
TRANSNATIONALS IN EMERGING COUNTRIES China Mobile Alibaba Tata Group Infosys Geely Auto Huawei THE GLOBAL CONTEXT
TRANSNATIONALS IN EMERGING COUNTRIES There are many TNCs from emerging/developing countries. China Mobile is in the top ten consumer brands in the world Alibaba has expanded to be the biggest global online retailer. It is known as the Amazon of China! The Tata Group conglomerate from India has made significant investments in Western economies e.g. Jaguar Land Rover Infosys from India is one of the world’s biggest information system businesses employing over 160,000 people worldwide Chinese car-maker Geely bought Swedish firm Volvo in 2010 for $1.8bn and took a 49.5% stake in Malaysian car-maker Proton (including the Lotus brand) in 2017 China’s Huawei Technologies is a competitor to Samsung & Apple THE GLOBAL CONTEXT
WHAT ARE THE MAIN ADVANTAGES OF GLOBALISATION? Cheaper goods and services for consumers More competition in consumer markets Reduction in extreme poverty rates Gains from specialisation of factors of production Transfer of ideas stimulates innovation Gains from improved labour mobility THE GLOBAL CONTEXT
WHAT ARE THE MAIN ADVANTAGES OF GLOBALISATION? 1. Encourages both producers and consumers to reap the benefits from deeper division of labour and economies of scale – leading to gains in welfare 2. Competitive markets reduce monopoly supernormal profits and incentivize businesses to seek cost-reducing innovations 3. Enhanced growth has led to higher per capita incomes – and helped many of the poorest countries to achieve higher growth and reduce extreme poverty 4. Advantages from the freer movement of labour between countries 5. Dynamic efficiency gains flowing from the sharing/diffusion of ideas, skills and technologies across national borders 6. Opening up of capital markets increases the opportunities for developing countries to borrow money to help overcome a domestic savings gap 7. Increased awareness among people around the world of the systemic challenges from climate change and wealth/income inequality 8. Competitive pressures of globalisation may prompt improved governance and better labour protection through improved business standards THE GLOBAL CONTEXT
GAINS FROM TRADE – ECONOMIC WELFARE Price of coal Output of coal EU Demand EU Supply EU price Q (EU) Non EU SupplyGlobal price Q1 Q2 A BC DE F G The EU price is the equilibrium price if the only coal available is coal supplied from EU coal producers We assume non-EU countries can export coal into the EU at a lower world price. This causes EU demand to expand and EU domestic supply to contract. Quantity Q1Q2 will be imported into the EU market THE GLOBAL CONTEXT
GAINS FROM TRADE – ECONOMIC WELFARE EU Demand EU Supply Q (EU) Non EU Supply Global price Q1 Q2 A BC DE • Producer surplus before trade = EFD • Producer surplus after trade = CFG • There is a net loss of producer surplus F G • Consumer surplus before trade = AED • Consumer surplus after trade = ACB • There is a net gain in consumer welfare EU price Output of coal Price of coal THE GLOBAL CONTEXT
WHY IS TRADE IMPORTANT FOR DEVELOPMENT? Generates foreign currency reserves Creates jobs and raises per capita incomes Funds imports of key technologies / materials Trade stimulates market competition THE GLOBAL CONTEXT
KEY POINTS: IMPORTANCE OF TRADE FOR DEVELOPMENT Successful trade provides for developing/emerging nations: 1. A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves) 2. An important way of financing imports of essential imports of capital equipment / technologies and energy supplies 3. An injection of demand into the circular flow of income and spending + creating positive export multiplier effects 4. Increased employment in export industries and related industries which can lead to rising per capita incomes and also stronger Human Development Index scores 5. Falling prices for consumers helps to increase real incomes e.g. by opening up markets to new competition THE GLOBAL CONTEXT
ADVANTAGES OF FOREIGN DIRECT INVESTMENT FROM TNCs Infrastructure accelerator effects – a rise in investment/GDP Higher capital intensity / capital deepening i.e. more capital per worker Better training for local workers – improved human capital Grows a country’s export capacity (e.g. via special economic zones) Technology & know-how transfer / diversification of the economy More competition in markets which then lowers consumer prices Creates new jobs – higher incomes and household savings Lift in level of labour productivity which then increases GNI per capita THE GLOBAL CONTEXT
WHAT ARE THE MAIN DISADVANTAGES OF GLOBALISATION? Trade imbalances Dominant TNCs Environmental risks Growing relative poverty THE GLOBAL CONTEXT
WHAT ARE THE MAIN DISADVANTAGES OF GLOBALISATION? 1. Rising inequality / relative poverty – gains from globalisation will be unequal leading to growing political and social tensions if inequality increases 2. Threats to the global commons e.g. irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and severe water scarcity 3. Globalisation and pollution – can lead to greater exploitation of the environment, e.g. greater production of raw materials, trading toxic waste to countries with weaker environmental laws 4. Macroeconomic fragility – in an inter-connected world economy, external shocks in region can rapidly spread to other centres (known as systemic risk) 5. Trade imbalances - Increasing trade imbalances lead to protectionist tensions and a move towards managed exchange rates 6. Higher structural unemployment in countries where production has shifted to lower labour cost centres – domestic firms face competition 7. Dominant global brands – businesses with dominant brands and superior technologies may squeeze out local producers THE GLOBAL CONTEXT
RISKS FROM INWARD FOREIGN DIRECT INVESTMENT Inequality – profits from FDI are flow disproportionately to powerful elites Land grabs / extractive FDI which generates little extra tax revenues Ethical standards from TNCs may be poor – especially in mining, farming and textiles Volatile / footloose FDI flows – e.g. FDI is more volatile than remittance flows Limited job creation effects / small spillover for local content suppliers Monopsony power of TNCs who are able to negotiate highly favourable prices THE GLOBAL CONTEXT
GLOBAL TRADE IMBALANCES Current account surplus (% of GDP) 2017 Macao SAR 33.0 Singapore 19.6 Papua New Guinea 18.6 Taiwan 13.8 Thailand 10.1 Netherlands 10.0 Switzerland 9.9 Malta 8.9 Germany 8.1 Denmark 7.3 Iceland 6.2 Korea 5.6 Norway 5.5 Current account deficit (% of GDP) 2017 Bhutan -29.4 Mozambique -25.6 Sierra Leone -21.1 The Bahamas -17.8 Turkmenistan -15.4 Rwanda -10.2 Malawi -9.1 Cambodia -8.6 Ethiopia -8.3 Kenya -6.1 Egypt -5.9 THE GLOBAL CONTEXT
WHAT IS MEANT BY DE-GLOBALISATION? 50 60 70 80 90 100 110 120 130 140 150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Pre-crisis trend Index = 100 in 2008 Index of Volume of World Trade since 2000 Globalisation is not inevitable – since the Great Recession of 2008-09 there has been a slower annual growth of world trade. It remains well below the pre-crisis trend. THE GLOBAL CONTEXT
WHAT IS MEANT BY DE-GLOBALISATION? Why is world trade growing more slowly? Weak growth in many of the world’s richest countries. Some economists believe that Western nations are suffering from secular stagnation Slowing pace of trade liberalization. The big gains to trade from cutting import tariffs may have already happened. Non-tariff barriers (NTBs)) have grown and regional trade blocs such as ASEAN have become more common Rising prosperity itself. As people become richer they spend a higher proportion of their income on services, such as education, leisure and health. Trade in services is lower as a share of GDP than manufactured products in part because there are more trade barriers in services. Technological change – e.g. 3D printers are being used to manufacture a set of orders e.g. for aircraft equipment or artificial joints used in medicine – they no longer always have to be shipped around the world THE GLOBAL CONTEXT
KEY EFFECTS OF GLOBALISATION ON UK ECONOMY Inflation Jobs Market competition Labour migration Innovation / dynamic efficiency Inward investment UK transnational businesses Real wages in the labour market Wealth & income inequality THE GLOBAL CONTEXT
KEY EFFECTS OF GLOBALISATION ON UK ECONOMY Has globalisation been of benefit to the UK economy? Many micro & macro aspects can be considered: 1. Expanded choice and higher consumer surplus 2. Effects on retail prices and the rate of inflation 3. Impact of growing volumes of imports on domestic jobs 4. Impact of UK firms relocating to low wage economies 5. Impact of net inward migration on real wage rates and on government spending / tax revenues 6. Impact of inward investment into FDI on employment 7. Impact on share prices and profits of UK companies THE GLOBAL CONTEXT
GLOBALISATION AND EXTERNAL SHOCKS Global Financial Crisis 2007-2009 Euro Zone Economic Crisis Volatile World Commodity Prices Slowdowns in emerging nations International & Regional Trade & Investment Deals Currency volatility and policy changes e.g. devaluation Extreme weather events (drought, flooding etc.) Geo-political uncertainty & risk of terrorism THE GLOBAL CONTEXT
GLOBALISATION AND EXTERNAL SHOCKS What are external shocks? External shocks are events that come from outside the domestic economic system The biggest external shock in recent times was the Global Financial Crisis (GFC) from 2007 onwards Negative external shocks create instability and can lead to persistent periods of weaker economic growth, higher unemployment, falling real incomes and rising poverty. External shocks can also be positive e.g. the emergence of and widespread adoption of general purpose technologies used by businesses and households in many countries. THE GLOBAL CONTEXT
TRADE BALANCE OF LEAST DEVELOPED COUNTRIES THE GLOBAL CONTEXT -100.0 -80.0 -60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 80.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trade balance of least-developed countries (LDC), 2006-2016, US$ Billion LDC exporters of agriculture LDC exporters of manufactures LDC oil exporters LDC exporters of non-fuel minerals
LEAST DEVELOPED COUNTRIES – MERCHANDISE EXPORTS THE GLOBAL CONTEXT 0.0 50.0 100.0 150.0 200.0 250.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Merchandise exports of least developed countries, 2006-2016 (US$bn) LDC exporters of agriculture LDC exporters of manufactures LDC oil exporters LDC exporters of non-fuel minerals
COMMODITY PATTERN OF TRADE FOR BANGLADESH (2016) THE GLOBAL CONTEXT
COMMODITY PATTERN OF TRADE FOR KENYA (2016) THE GLOBAL CONTEXT
CASHEW EXPORTS - 2016 THE GLOBAL CONTEXT Source: Observatory of Economic Complexity
COMMODITY PATTERN OF TRADE FOR CHINA (2016) THE GLOBAL CONTEXT
IS TOURISM A DEVELOPMENT DRIVER FOR LDC’S? THE GLOBAL CONTEXT 0 5 10 15 20 25 30 0 2 4 6 8 10 12 14 16 18 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LDCs' Travel exports and international tourist arrivals Travel exports US$ billion (LHS) International tourist arrivals (million, (RHS)
HAS GLOBALISATION IMPROVED HUMAN DEVELOPMENT? HDI rankingCountry Human Development Index (HDI) Life expectancy at birth Expected years of schooling Mean years of schooling Gross national income (GNI) per capita 188 Central African Republic 0.352 51.5 7.1 4.2 587 187 Niger 0.353 61.9 5.4 1.7 889 186 Chad 0.396 51.9 7.3 2.3 1,991 185 Burkina Faso 0.402 59.0 7.7 1.4 1,537 184 Burundi 0.404 57.1 10.6 3.0 691 183 Guinea 0.414 59.2 8.8 2.6 1,058 HDI rankingCountry Human Development Index (HDI) Life expectancy at birth Expected years of schooling Mean years of schooling Gross national income (GNI) per capita 1 Norway 0.949 81.7 17.7 12.7 67,614 2 Switzerland 0.939 83.1 16.0 13.4 56,364 2 Australia 0.939 82.5 20.4 13.2 42,822 4 Germany 0.926 81.1 17.1 13.2 45,000 5 Singapore 0.925 83.2 15.4 11.6 78,162 5 Denmark 0.925 80.4 19.2 12.7 44,519 THE GLOBAL CONTEXT
ABSOLUTE AND RELATIVE POVERTY Absolute poverty Relative Poverty The World Bank has a key aim of fostering the growth in the income or the consumption spending of the poorest 40 percent of the population in each country. According to the World Bank, in 2013, 10.7 percent of the world’s population lived on less than US$1.90 a day (PPP) compared to 12.4 percent in 2012. That’s down from 35 percent in 1990. THE GLOBAL CONTEXT
EXTENT OF PROGRESS IN CUTTING EXTREME POVERTY THE GLOBAL CONTEXT Source: World Bank, 2018
CHANGES IN GLOBAL INEQUALITY THE GLOBAL CONTEXT
COUNTRIES WITH HIGHEST INEQUALITY Income inequality (Source World Bank, data for 2015) Quintile ratio: Income of 80th/ Income of 20th Palma ratio Top10%/Bottom 40% Gini coefficient (Max figure = 100) Seychelles 18.8 6.4 65.8 South Africa 28.5 8.0 65.0 Namibia 19.6 5.8 61.3 Botswana 22.9 5.8 60.5 Haiti 26.6 5.5 59.2 Zambia 17.4 4.8 57.5 Honduras 23.5 5.0 57.4 Central African Republic 18.0 4.5 56.3 Colombia 17.5 4.0 53.5 Brazil 16.9 3.8 52.7 Chile 12.6 3.3 50.8 Rwanda 11.0 3.2 50.8 Costa Rica 12.8 2.9 48.6 Mexico 11.1 2.8 48.1 Paraguay 13.0 2.9 48.0 Kenya 11.0 2.8 47.7 Malawi 9.7 2.6 46.2 THE GLOBAL CONTEXT
GLOBALISATION AND GLOBAL INEQUALITY THE GLOBAL CONTEXT 20 24 26 28 30 35 80 76 74 72 70 65 30 40 50 60 70 80 0.0 0.2 0.4 0.6 0.8 1.0 1988 1993 1998 2003 2008 2013 Within-country Between-country Gini index (RHS) Mean log deviation Gini Index Source: World Bank Global Economic Prospects, January 2018
FACTORS AFFECTING COMPARATIVE ADVANTAGE Natural Resources Unit Wage Costs Infrastructure Non-Price Factors Import Controls Exchange Rate THE GLOBAL CONTEXT
FACTORS AFFECTING COMPARATIVE ADVANTAGE Comparative advantage is a dynamic concept it changes over time: 1. The quantity and quality of natural resources available 2. Demographics – factors such as an ageing population, net migration, levels of women’s participation in the labour force 3. Rates of capital investment including infrastructure spending 4. Investment in research which can drive business innovation 5. Fluctuations in the exchange rate which then affect the relative prices of exports and imports 6. Import controls such as tariffs, export subsidies and quotas used to create an artificial comparative advantage 7. Non-price competitiveness of producers – e.g. product design, innovation, product reliability, branding, technical standards. THE GLOBAL CONTEXT
POLICIES TO IMPROVE COMPETITIVENESS Improving the functioning of labour markets • Investment in all levels of education and training • Encouraging inward migration of skilled workers • Improvements in management quality Critical (Core) Infrastructure Investment •Better motorways, ports, hi-speed rail, new sewers •Communications e.g. super-fast broadband, 4G networks Supporting Enterprise / Entrepreneurship • Improved access to business finance e.g. for start-ups • Incentives for business innovation and invention • Reductions in business red tape Macroeconomic Stability • Maintaining low inflation / price stability to help confidence • A sustainable and more competitive banking system • A competitive exchange rate versus major trading partners THE GLOBAL CONTEXT
Economics of Globalisation

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Economics of Globalisation

  • 2. Revision Notes Completed Confident? Explain what is meant by globalisation Explain the characteristics of globalisation Explain the causes of globalisation / factors contributing to globalisation Evaluate the impact of globalisation and global companies on individual countries, governments, producers and consumers, workers and the environment Evaluate the impact of the performance of emerging economies on other economies. Explain how the pattern of global trade has changed over time Evaluate comparative advantage as an explanation of global trade patterns Explain how countries achieve international competitiveness
  • 3. WHAT IS MEANT BY GLOBALISATION? What is globalisation? Globalisation is a process by which economies and cultures have been drawn deeper together and have become more inter-connected through global networks of trade, capital flows, and spread of technology and global media. What is the key benefit of globalisation? Globalisation allows businesses and countries to specialise in producing goods and services where they have a comparative advantage. Specialisation and trade enables a gain in economic welfare, for example through lower prices for consumers which then increases their real incomes. THE GLOBAL CONTEXT
  • 4. THE GLOBAL CONTEXT WHAT ARE THE KEY CHARACTERISTICS OF GLOBALISATION? Trade to GDP ratios are increasing for many countries Expansion of financial capital flows across international borders Increasing foreign direct investment and cross border acquisitions Global brands – including a rising number from emerging countries Deeper specialization of labour e.g. in making specific component parts Global supply chains & new trade and investment routes Higher levels of cross- border labour migration Increasing connectivity of people and businesses through networks
  • 5. WORLD GDP – SHARE BY COUNTRY 17.65% 15.71% 7.31% 4.15% 3.33% 3.12% 2.62% 2.33% 2.29% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% China USA India Japan Germany Russia Brazil United Kingdom France ShareinglobalGDP Percentage share of the main industrialized and emerging countries in global gross domestic product (adjusted for purchasing power) in 2016, Source: IMF World Outlook Note: “Adjusted for purchasing power” means that the US dollar value of each country’s annual GDP has been altered to take account of differences in the estimated cost of living in different nations. THE GLOBAL CONTEXT
  • 6. 58.71% 41.29% 16.47% 7.66% 7.58% 6.69% 3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Emerging market and developing economies Advanced economies EU Latin America / Caribbean Middle East, North Africa, Afghanistan, and Pakistan Middle East and North Africa Africa Sub- Sahara ShareinglobalGDP WORLD GDP in 2017 – SHARE BY REGION (adjusted for PPP) Share of global regions in world gross domestic product (adjusted for purchasing power) in 2017. Source: IMF THE GLOBAL CONTEXT
  • 7. WHAT ARE THE KEY FACTORS DRIVING GLOBALISATION? Containerisation Lower trade barriers Business demands Technological advances THE GLOBAL CONTEXT
  • 8. WHAT ARE THE KEY FACTORS DRIVING GLOBALISATION? Containerisation – the real prices/costs of ocean and air shipping have come down due to containerization, bulk shipping, and other efficiencies. This reduces the cost of transporting products. Technological advances – reducing the cost of transmitting and communicating information – this is a key factor behind trade in knowledge-intensive products using the latest digital technology. Economies of scale - Many economists believe that there has been an increase in the minimum efficient scale in some industries Differences in tax systems - Some countries have adjusted their corporate tax systems to attract foreign direct investment (FDI) Less protectionism – overall, average import tariffs have fallen – but in the last few years there has been a rise in non-tariff barriers such as quotas, domestic subsidies and tough regulations. THE GLOBAL CONTEXT
  • 9. ECONOMIC GROWTH IN ADVANCED & EMERGING NATIONS THE GLOBAL CONTEXT 0 2 4 6 8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 World Advanced economies EMDEs Percent EMDEs = emerging market and developing economies World Bank Forecast
  • 10. LEADING EXPORT COUNTRIES IN THE WORLD ECONOMY THE GLOBAL CONTEXT 2098 1455 1340 645 570 517 501 495 462 409 396 390 374 330 0 500 1000 1500 2000 2500 China United States of America Germany Japan Netherlands Hong Kong, China France Korea, Republic of Italy United Kingdom Belgium Canada Mexico Singapore Leading exporters in merchandise trade, 2016, Annual value of exports, US$ billion, Source: WTO World Trade Report, 2017 Value, US$ billion Share of global trade Hong Kong, China 517 3.2 domestic exports 26 0.2 re-exports 491 3.1 Value, US$ billion Share of global trade Singapore 330 2.1 domestic exports 154 1.0 re-exports 176 1.1
  • 11. TRANSNATIONAL BUSINESSES Total number of Nike retail stores worldwide from 2009 to 2017 674 689 756 826 753 858 931 1,045 1,142 0 200 400 600 800 1000 1200 2009 2010 2011 2012 2013 2014 2015 2016 2017 Totalnumberofretailstores THE GLOBAL CONTEXT
  • 12. TRANSNATIONAL BUSINESSES Transnational businesses (TNCs) base their manufacturing, assembly, research and retail operations in a number of countries. Many TNCs have become synonymous with globalisation such as Nike, Apple, Wal-Mart, Uber, Amazon, Google and Samsung. For example, Google has offices in more than 60 countries The biggest 500 TNCs together account for nearly 70% of world trade. TNCs are a key driver of globalisation because they have been re- locating manufacturing to countries with relatively lower unit labour costs in order to increase their profits and returns for shareholders. For example, Volkswagen, Toyota, Nissan and General Motors all have plants in Mexico which has helped this country to build a comparative advantage in manufacturing and then exporting vehicles within the NAFTA free trade area (involving Mexico, the USA and Canada) THE GLOBAL CONTEXT
  • 13. TRANSNATIONALS IN EMERGING COUNTRIES China Mobile Alibaba Tata Group Infosys Geely Auto Huawei THE GLOBAL CONTEXT
  • 14. TRANSNATIONALS IN EMERGING COUNTRIES There are many TNCs from emerging/developing countries. China Mobile is in the top ten consumer brands in the world Alibaba has expanded to be the biggest global online retailer. It is known as the Amazon of China! The Tata Group conglomerate from India has made significant investments in Western economies e.g. Jaguar Land Rover Infosys from India is one of the world’s biggest information system businesses employing over 160,000 people worldwide Chinese car-maker Geely bought Swedish firm Volvo in 2010 for $1.8bn and took a 49.5% stake in Malaysian car-maker Proton (including the Lotus brand) in 2017 China’s Huawei Technologies is a competitor to Samsung & Apple THE GLOBAL CONTEXT
  • 15. WHAT ARE THE MAIN ADVANTAGES OF GLOBALISATION? Cheaper goods and services for consumers More competition in consumer markets Reduction in extreme poverty rates Gains from specialisation of factors of production Transfer of ideas stimulates innovation Gains from improved labour mobility THE GLOBAL CONTEXT
  • 16. WHAT ARE THE MAIN ADVANTAGES OF GLOBALISATION? 1. Encourages both producers and consumers to reap the benefits from deeper division of labour and economies of scale – leading to gains in welfare 2. Competitive markets reduce monopoly supernormal profits and incentivize businesses to seek cost-reducing innovations 3. Enhanced growth has led to higher per capita incomes – and helped many of the poorest countries to achieve higher growth and reduce extreme poverty 4. Advantages from the freer movement of labour between countries 5. Dynamic efficiency gains flowing from the sharing/diffusion of ideas, skills and technologies across national borders 6. Opening up of capital markets increases the opportunities for developing countries to borrow money to help overcome a domestic savings gap 7. Increased awareness among people around the world of the systemic challenges from climate change and wealth/income inequality 8. Competitive pressures of globalisation may prompt improved governance and better labour protection through improved business standards THE GLOBAL CONTEXT
  • 17. GAINS FROM TRADE – ECONOMIC WELFARE Price of coal Output of coal EU Demand EU Supply EU price Q (EU) Non EU SupplyGlobal price Q1 Q2 A BC DE F G The EU price is the equilibrium price if the only coal available is coal supplied from EU coal producers We assume non-EU countries can export coal into the EU at a lower world price. This causes EU demand to expand and EU domestic supply to contract. Quantity Q1Q2 will be imported into the EU market THE GLOBAL CONTEXT
  • 18. GAINS FROM TRADE – ECONOMIC WELFARE EU Demand EU Supply Q (EU) Non EU Supply Global price Q1 Q2 A BC DE • Producer surplus before trade = EFD • Producer surplus after trade = CFG • There is a net loss of producer surplus F G • Consumer surplus before trade = AED • Consumer surplus after trade = ACB • There is a net gain in consumer welfare EU price Output of coal Price of coal THE GLOBAL CONTEXT
  • 19. WHY IS TRADE IMPORTANT FOR DEVELOPMENT? Generates foreign currency reserves Creates jobs and raises per capita incomes Funds imports of key technologies / materials Trade stimulates market competition THE GLOBAL CONTEXT
  • 20. KEY POINTS: IMPORTANCE OF TRADE FOR DEVELOPMENT Successful trade provides for developing/emerging nations: 1. A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves) 2. An important way of financing imports of essential imports of capital equipment / technologies and energy supplies 3. An injection of demand into the circular flow of income and spending + creating positive export multiplier effects 4. Increased employment in export industries and related industries which can lead to rising per capita incomes and also stronger Human Development Index scores 5. Falling prices for consumers helps to increase real incomes e.g. by opening up markets to new competition THE GLOBAL CONTEXT
  • 21. ADVANTAGES OF FOREIGN DIRECT INVESTMENT FROM TNCs Infrastructure accelerator effects – a rise in investment/GDP Higher capital intensity / capital deepening i.e. more capital per worker Better training for local workers – improved human capital Grows a country’s export capacity (e.g. via special economic zones) Technology & know-how transfer / diversification of the economy More competition in markets which then lowers consumer prices Creates new jobs – higher incomes and household savings Lift in level of labour productivity which then increases GNI per capita THE GLOBAL CONTEXT
  • 22. WHAT ARE THE MAIN DISADVANTAGES OF GLOBALISATION? Trade imbalances Dominant TNCs Environmental risks Growing relative poverty THE GLOBAL CONTEXT
  • 23. WHAT ARE THE MAIN DISADVANTAGES OF GLOBALISATION? 1. Rising inequality / relative poverty – gains from globalisation will be unequal leading to growing political and social tensions if inequality increases 2. Threats to the global commons e.g. irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and severe water scarcity 3. Globalisation and pollution – can lead to greater exploitation of the environment, e.g. greater production of raw materials, trading toxic waste to countries with weaker environmental laws 4. Macroeconomic fragility – in an inter-connected world economy, external shocks in region can rapidly spread to other centres (known as systemic risk) 5. Trade imbalances - Increasing trade imbalances lead to protectionist tensions and a move towards managed exchange rates 6. Higher structural unemployment in countries where production has shifted to lower labour cost centres – domestic firms face competition 7. Dominant global brands – businesses with dominant brands and superior technologies may squeeze out local producers THE GLOBAL CONTEXT
  • 24. RISKS FROM INWARD FOREIGN DIRECT INVESTMENT Inequality – profits from FDI are flow disproportionately to powerful elites Land grabs / extractive FDI which generates little extra tax revenues Ethical standards from TNCs may be poor – especially in mining, farming and textiles Volatile / footloose FDI flows – e.g. FDI is more volatile than remittance flows Limited job creation effects / small spillover for local content suppliers Monopsony power of TNCs who are able to negotiate highly favourable prices THE GLOBAL CONTEXT
  • 25. GLOBAL TRADE IMBALANCES Current account surplus (% of GDP) 2017 Macao SAR 33.0 Singapore 19.6 Papua New Guinea 18.6 Taiwan 13.8 Thailand 10.1 Netherlands 10.0 Switzerland 9.9 Malta 8.9 Germany 8.1 Denmark 7.3 Iceland 6.2 Korea 5.6 Norway 5.5 Current account deficit (% of GDP) 2017 Bhutan -29.4 Mozambique -25.6 Sierra Leone -21.1 The Bahamas -17.8 Turkmenistan -15.4 Rwanda -10.2 Malawi -9.1 Cambodia -8.6 Ethiopia -8.3 Kenya -6.1 Egypt -5.9 THE GLOBAL CONTEXT
  • 26. WHAT IS MEANT BY DE-GLOBALISATION? 50 60 70 80 90 100 110 120 130 140 150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Pre-crisis trend Index = 100 in 2008 Index of Volume of World Trade since 2000 Globalisation is not inevitable – since the Great Recession of 2008-09 there has been a slower annual growth of world trade. It remains well below the pre-crisis trend. THE GLOBAL CONTEXT
  • 27. WHAT IS MEANT BY DE-GLOBALISATION? Why is world trade growing more slowly? Weak growth in many of the world’s richest countries. Some economists believe that Western nations are suffering from secular stagnation Slowing pace of trade liberalization. The big gains to trade from cutting import tariffs may have already happened. Non-tariff barriers (NTBs)) have grown and regional trade blocs such as ASEAN have become more common Rising prosperity itself. As people become richer they spend a higher proportion of their income on services, such as education, leisure and health. Trade in services is lower as a share of GDP than manufactured products in part because there are more trade barriers in services. Technological change – e.g. 3D printers are being used to manufacture a set of orders e.g. for aircraft equipment or artificial joints used in medicine – they no longer always have to be shipped around the world THE GLOBAL CONTEXT
  • 28. KEY EFFECTS OF GLOBALISATION ON UK ECONOMY Inflation Jobs Market competition Labour migration Innovation / dynamic efficiency Inward investment UK transnational businesses Real wages in the labour market Wealth & income inequality THE GLOBAL CONTEXT
  • 29. KEY EFFECTS OF GLOBALISATION ON UK ECONOMY Has globalisation been of benefit to the UK economy? Many micro & macro aspects can be considered: 1. Expanded choice and higher consumer surplus 2. Effects on retail prices and the rate of inflation 3. Impact of growing volumes of imports on domestic jobs 4. Impact of UK firms relocating to low wage economies 5. Impact of net inward migration on real wage rates and on government spending / tax revenues 6. Impact of inward investment into FDI on employment 7. Impact on share prices and profits of UK companies THE GLOBAL CONTEXT
  • 30. GLOBALISATION AND EXTERNAL SHOCKS Global Financial Crisis 2007-2009 Euro Zone Economic Crisis Volatile World Commodity Prices Slowdowns in emerging nations International & Regional Trade & Investment Deals Currency volatility and policy changes e.g. devaluation Extreme weather events (drought, flooding etc.) Geo-political uncertainty & risk of terrorism THE GLOBAL CONTEXT
  • 31. GLOBALISATION AND EXTERNAL SHOCKS What are external shocks? External shocks are events that come from outside the domestic economic system The biggest external shock in recent times was the Global Financial Crisis (GFC) from 2007 onwards Negative external shocks create instability and can lead to persistent periods of weaker economic growth, higher unemployment, falling real incomes and rising poverty. External shocks can also be positive e.g. the emergence of and widespread adoption of general purpose technologies used by businesses and households in many countries. THE GLOBAL CONTEXT
  • 32. TRADE BALANCE OF LEAST DEVELOPED COUNTRIES THE GLOBAL CONTEXT -100.0 -80.0 -60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 80.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trade balance of least-developed countries (LDC), 2006-2016, US$ Billion LDC exporters of agriculture LDC exporters of manufactures LDC oil exporters LDC exporters of non-fuel minerals
  • 33. LEAST DEVELOPED COUNTRIES – MERCHANDISE EXPORTS THE GLOBAL CONTEXT 0.0 50.0 100.0 150.0 200.0 250.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Merchandise exports of least developed countries, 2006-2016 (US$bn) LDC exporters of agriculture LDC exporters of manufactures LDC oil exporters LDC exporters of non-fuel minerals
  • 34. COMMODITY PATTERN OF TRADE FOR BANGLADESH (2016) THE GLOBAL CONTEXT
  • 35. COMMODITY PATTERN OF TRADE FOR KENYA (2016) THE GLOBAL CONTEXT
  • 36. CASHEW EXPORTS - 2016 THE GLOBAL CONTEXT Source: Observatory of Economic Complexity
  • 37. COMMODITY PATTERN OF TRADE FOR CHINA (2016) THE GLOBAL CONTEXT
  • 38. IS TOURISM A DEVELOPMENT DRIVER FOR LDC’S? THE GLOBAL CONTEXT 0 5 10 15 20 25 30 0 2 4 6 8 10 12 14 16 18 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LDCs' Travel exports and international tourist arrivals Travel exports US$ billion (LHS) International tourist arrivals (million, (RHS)
  • 39. HAS GLOBALISATION IMPROVED HUMAN DEVELOPMENT? HDI rankingCountry Human Development Index (HDI) Life expectancy at birth Expected years of schooling Mean years of schooling Gross national income (GNI) per capita 188 Central African Republic 0.352 51.5 7.1 4.2 587 187 Niger 0.353 61.9 5.4 1.7 889 186 Chad 0.396 51.9 7.3 2.3 1,991 185 Burkina Faso 0.402 59.0 7.7 1.4 1,537 184 Burundi 0.404 57.1 10.6 3.0 691 183 Guinea 0.414 59.2 8.8 2.6 1,058 HDI rankingCountry Human Development Index (HDI) Life expectancy at birth Expected years of schooling Mean years of schooling Gross national income (GNI) per capita 1 Norway 0.949 81.7 17.7 12.7 67,614 2 Switzerland 0.939 83.1 16.0 13.4 56,364 2 Australia 0.939 82.5 20.4 13.2 42,822 4 Germany 0.926 81.1 17.1 13.2 45,000 5 Singapore 0.925 83.2 15.4 11.6 78,162 5 Denmark 0.925 80.4 19.2 12.7 44,519 THE GLOBAL CONTEXT
  • 40. ABSOLUTE AND RELATIVE POVERTY Absolute poverty Relative Poverty The World Bank has a key aim of fostering the growth in the income or the consumption spending of the poorest 40 percent of the population in each country. According to the World Bank, in 2013, 10.7 percent of the world’s population lived on less than US$1.90 a day (PPP) compared to 12.4 percent in 2012. That’s down from 35 percent in 1990. THE GLOBAL CONTEXT
  • 41. EXTENT OF PROGRESS IN CUTTING EXTREME POVERTY THE GLOBAL CONTEXT Source: World Bank, 2018
  • 42. CHANGES IN GLOBAL INEQUALITY THE GLOBAL CONTEXT
  • 43. COUNTRIES WITH HIGHEST INEQUALITY Income inequality (Source World Bank, data for 2015) Quintile ratio: Income of 80th/ Income of 20th Palma ratio Top10%/Bottom 40% Gini coefficient (Max figure = 100) Seychelles 18.8 6.4 65.8 South Africa 28.5 8.0 65.0 Namibia 19.6 5.8 61.3 Botswana 22.9 5.8 60.5 Haiti 26.6 5.5 59.2 Zambia 17.4 4.8 57.5 Honduras 23.5 5.0 57.4 Central African Republic 18.0 4.5 56.3 Colombia 17.5 4.0 53.5 Brazil 16.9 3.8 52.7 Chile 12.6 3.3 50.8 Rwanda 11.0 3.2 50.8 Costa Rica 12.8 2.9 48.6 Mexico 11.1 2.8 48.1 Paraguay 13.0 2.9 48.0 Kenya 11.0 2.8 47.7 Malawi 9.7 2.6 46.2 THE GLOBAL CONTEXT
  • 44. GLOBALISATION AND GLOBAL INEQUALITY THE GLOBAL CONTEXT 20 24 26 28 30 35 80 76 74 72 70 65 30 40 50 60 70 80 0.0 0.2 0.4 0.6 0.8 1.0 1988 1993 1998 2003 2008 2013 Within-country Between-country Gini index (RHS) Mean log deviation Gini Index Source: World Bank Global Economic Prospects, January 2018
  • 45. FACTORS AFFECTING COMPARATIVE ADVANTAGE Natural Resources Unit Wage Costs Infrastructure Non-Price Factors Import Controls Exchange Rate THE GLOBAL CONTEXT
  • 46. FACTORS AFFECTING COMPARATIVE ADVANTAGE Comparative advantage is a dynamic concept it changes over time: 1. The quantity and quality of natural resources available 2. Demographics – factors such as an ageing population, net migration, levels of women’s participation in the labour force 3. Rates of capital investment including infrastructure spending 4. Investment in research which can drive business innovation 5. Fluctuations in the exchange rate which then affect the relative prices of exports and imports 6. Import controls such as tariffs, export subsidies and quotas used to create an artificial comparative advantage 7. Non-price competitiveness of producers – e.g. product design, innovation, product reliability, branding, technical standards. THE GLOBAL CONTEXT
  • 47. POLICIES TO IMPROVE COMPETITIVENESS Improving the functioning of labour markets • Investment in all levels of education and training • Encouraging inward migration of skilled workers • Improvements in management quality Critical (Core) Infrastructure Investment •Better motorways, ports, hi-speed rail, new sewers •Communications e.g. super-fast broadband, 4G networks Supporting Enterprise / Entrepreneurship • Improved access to business finance e.g. for start-ups • Incentives for business innovation and invention • Reductions in business red tape Macroeconomic Stability • Maintaining low inflation / price stability to help confidence • A sustainable and more competitive banking system • A competitive exchange rate versus major trading partners THE GLOBAL CONTEXT

Editor's Notes

  • #23: The gainers from globalisation were those who have skills that are valued internationally and those who own capital that can be combined with cheaper labour abroad. The losers were those who are now competing with cheaper labour in distant lands.  (Roger Farmer)