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UNIT II THE STRUCTURES OF GLOBALIZATION
Coverage: Week 3, 4, and 5
Duration: 9 hours
The Global Economy (2.25 hours; week 3)
Market Integration (2.25 hours; week 3 and 4)
The Global Interstate System (2.25 hours; week 4 and 5)
Contemporary Global Governance (2.25 hours; week 5)
Learning Objectives: After studying the unit, the students should be able to:
define economic globalization
explain the two major driving forces of global economy
differentiate economic globalization from internationalization
trace the origin of economic globalization
1.The Global Economy
2. Market Integration
3.The Global Interstate System
4. Contemporary Global Governance
THE GLOBAL ECONOMY
Economic globalization refers to the increasing interdependence of world
economies as a result of the growing scale of cross-border trade of commodities and
services, flow of international capital and wide and rapid spread of technologies. It reflects
the continuing expansion and mutual integration of market frontiers, and is an irreversible
trend for the economic development in the whole world at the turn of the millennium (17).
According to the International Monetary Fund (18) economic globalization is a
historical process, the result of human innovation and technological progress. It refers to
the increasing integration of economies around the world, particularly through the
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movement of goods, services, and capital across borders. It also refers to the movement
of people (labor) and knowledge (technology) across international borders.
In economic terms, globalization is nothing but a process making the world
economy an organic system by extending transnational economic processes and
economic relations to more and more countries and by deepening the economic
interdependencies among them (19).
Two Major Driving Forces for Economic Globalization
1. The rapid growing of information in all types of productive activities
2. Marketization (A restructuring process that enables state enterprises to operate
as market-oriented firms by changing the legal environment in which they operate
(20)
and can be achieved through reduction of state subsidies, organizational
restructuring of management such as corporatization, decentralization, and
privatization (21).
Rapid development of science and technologies served as basis for immediate
globalization of the world economies which in turn provided an environment where there
is a swift spreading of market economic system all over the world. It is also developed
based on the increasing cross-border division of labor which penetrates within the
enterprises of different countries on the level of production chains.
Dimensions of Economic Globalization
1. The globalization of trade of goods and services
2. The globalization of financial and capital markets
3. The globalization of technology and communication
4. The globalization of production
Difference between Economic Globalization from Internationalization
Economic globalization is a functional integration between internationally
dispersed activities which means that it is a qualitative transformation rather than a
quantitative change while internationalization is an extension of economic activities
between internationally dispersed activities (22).
Economic globalization produces its own major players in the form of transnational
corporations (TNCs), the main driving forces of economic globalization of
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the last 100 years or roughly two-thirds of world export (23). Transnational corporation
otherwise known as multi -national corporation is a corporation that has a home base, but
is registered, operates and has assets or other facilities in at least one other country at
one time (24). Examples are the US-based General Electric (GE), the Coca-Cola Company
of Atlanta, Georgia, US Nike and others.
Origin of Economic Globalization
Economic globalization is a process that creates an organic system of the world
economy.
In the 16th century world system analysts identify the origin of modernity and
globalization through long distance trade in the 16th century (25). This best known example
of archaic globalization is the Silk Road, which started in western China, reached the
boundaries of the Parthian empire, and continued onwards towards Rome (26). It also
connected Asia, Africa, and Europe (27).
In the 17th and 18th century global economy exists only in trade and exchange
rather than production as the world export to World GDP did not reached 1 to 2 percent
(28).
In the 19th century the advent of globalization approaching its modern form is
witnessed. A short period before World War I is referred to as golden age of globalization
characterized by relative peace, free trade, financial and economic stability (29). Growth
in international exchange of goods accelerated in the second quarter of the 19 th century.
Global economy in the 19th and 20th centuries grew by an average of nearly 4 percent per
annum, which is roughly twice as high as growth in the national incomes of the developed
economies since the late 19th century (30).
International Monetary Systems and Gold Standard
International monetary system (IMS) refers to a system that forms rules and
standards for facilitating international trade among the nations. It helps in reallocating the
capital and investment from one nation to another. It is the global network of the
government and financial institutions that determine the exchange rate of different
currencies for international trade. It is a governing body that sets rules and regulations by
which different nations exchange currencies with each other (31).
IMS as rules, customs, instruments, facilities, and organizations for effecting
international payments with the main task of facilitating cross-border transactions,
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especially trade and investment (32). It also reflects economic power and interests, as
money is inherently political, an integral part of high politics or diplomacy (33).
Evolution of the International Monetary System
In 1870 to 1914, with the help of gold and silver, trade was carried without any
institutional support. Monetary system during that time was decentralized while market
based and money played a minor role in international trade in contrast to gold.
Gold was believed to guarantee a non-inflationary, stable economic environment,
a means for accelerating international trade (34) and the gold standard functioned as a
fixed exchange rate regime, with gold as the only international reserve.
Gold Standard is a system of backing a country’s currency with its gold reserves.
Such currencies are freely convertible into gold at a fixed price, and the country settles all
its international trade transactions in gold (35)
After World War I, the use of gold declined due to increased expenditure and
inflation which were caused by war. Major economic powers were on gold standards but
could not maintain it and failed because of the Great depression in 1931.
In 1944, 730 representatives of 44 nations met at Bretton Woods, New Hampshire,
United States to create a new international monetary system called as the Bretton Woods
system, the aim of which is to create a stabilized international currency system and ensure
a monetary stability for all the nations.
Since the United States held most of the world’s gold, all the nations would
determine the values of their currencies in terms of dollar. The central banks of nations
were given the task of maintaining fixed exchange rates with respect to dollar for each
currency. The Bretton Woods system ended in 1971 as the trade deficit and growing
inflation undermined the value of dollar in the whole world. In 1973, the floating exchange
rate system, also known as flexible exchange rate system was developed that was market
based (36).
To assess whether the gold standard was successful, the following roles of a
properly designed IMS must be considered: to lend order and stability to foreign exchange
markets, to encourage the elimination of balance-of-payments problems, and to provide
access to international credits in the event of disruptive shocks (37). The gold standard
has never worked satisfactorily in controlling inflation or maintaining equilibrium in
international transactions.
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European Monetary Integration
European monetary integration refers to a 30-year long process that began at
the end of the 1960s as a form of monetary cooperation intended to reduce the excessive
influence of the US dollar on domestic exchange rates, and led, through various attempts,
to the creation of a Monetary Union and a common currency. This Union brings many
benefits to Member States.
However, over the past decade, the build-up of macroeconomic imbalances, and
the imprudent fiscal policies of some Member States, resulted in the continuing double
crisis in banking and sovereign. As a result of this crisis, many individual Member States
face difficult re-adjustment processes, and Members States collectively must reappraise
the governance architecture of Monetary Union and adopt new mechanisms to detect,
prevent, and correct problematic economic trends (38).
The European Monetary System (EMS) on the other hand is a 1979 arrangement
between several European countries which links their currencies in an attempt to stabilize
the exchange rate. This system was succeeded by the European Economic and Monetary
Union (EMU), an institution of the European Union (EU), which established a common
currency called the euro.
The European Monetary System originated in an attempt to stabilize inflation and
stop large exchange rate fluctuations between European countries. Then, in June 1998,
the European Central Bank was established and, in January 1999, a unified currency, the
euro, was born and came to be used by most EU member countries (39).
According to the European Commission in 2008, the first ten years of the EMU
were an evident success for participating countries in terms of increased trade and capital
transactions, more integrated economies, restored macroeconomic stability and the
utilization of Euro as the second most widely used reserve currency. But in 2008 to 2009
the European Union (EU) is presented with dramatic challenges brought by global
financial and economic crisis.
The EU in 2010 in response to the crisis enacted the three- pillar financial rescue
program which includes: the European Financial Stability Mechanism, the European
Financial Stability Facility, the financial assistance of International Monetary Fund (IMF).
Since the three -pillar system is temporary EU in 2013 activated its own permanent
European Stability Mechanism. The future of EMU depends on the willingness of member
states to agree on more fundamental changes in the governance of Eurozone.
The European Financial Stability Mechanism (EFSM) is a permanent fund
created by the European Union (EU) to provide emergency assistance to member states
within the Union. It raises money through the financial markets, and is guaranteed by the
European Commission. Fund raised through the markets, use the
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budget of the European Union as collateral. The European Financial Stability Facility
(EFSF) on the other hand, is an organization created by the European Union to provide
assistance to member states with unstable economies. The EFSF is a special purpose
vehicle (SPV) managed by the European Investment Bank, a lending institution. The fund
raises money by issuing debt, and distributes the funds to eurozone countries whose
lending institutions need to be recapitalized who need help managing their sovereign debt
or who need financial stabilization (40).
International Trade and Trade Policies
International trade is the exchange of goods, services and capital across national
borders. It is a multi-million dollar activity, central to the Gross Domestic Product (GDP)
of many countries, and it is the only way for many people in many countries to acquire
resources (41). In acquiring products where demand is inelastic and domestic supply is
inadequate absent traders, consumers and suppliers are forced to either develop
substitute goods or devote a large percentage of their income.
International trade is the exchange of goods or services along international
borders. This type of trade allows for a greater competition and more competitive pricing
in the market (42). The two key concepts in the economics of international trade are
specialization and comparative advantage. Comparative advantage comes in; so long as
the two countries have different relative efficiencies, the two countries can benefit from
trade – the country with absolute advantage will still benefit by directing its resources to
those goods where it is most productive and trading for the others while specialization
refers to this process; countries as well as individual businesses can maximize their
welfare by specializing in the production of those goods where they are most efficient and
enjoy the largest advantages over rivals (43).
More affordable products for the consumer is also the result of competition. The
economy of the world is also affected by the exchange of goods as dictated by supply and
demand, making goods and services obtainable which may not be available globally to
consumers. Trading globally gives consumers and countries the opportunity to be
exposed to goods and services not available in their own countries. Almost every kind of
products can be found on the international market aside from services being traded like
banking, tourism, etc. Global trade allows wealthy countries to use their resources such
as labor, technology, or capital more efficiently. Because countries are endowed with
different assets and natural resources, some countries may produce the same good more
efficiently and therefore sell it more cheaply than other countries (44). Specialization in
international trade happens if a country cannot efficiently produce an item and obtain it by
trading with another country that can.
Trade policies on the other hand refer to the regulations and agreement of foreign
countries (45). It defines standards, goals, rules, and regulations that pertain to
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trade relation between countries (46). Each country has specific policies formulated by its
officials. Boosting the nation’s international trade is the aim of each country. Taxes
imposes on import and export, inspection, regulations, tariffs and quotas are all part of
country’s trade policy.
Focuses of Trade Policy in International Trade
Tariffs
These are taxes or duties paid for a particular class of imports or exports.
Imposing taxes on imported and exported goods is a right of every country. Heavy
tariffs on imported goods are levied by some nations for the protection of their local
industries. The prices of imported goods in local markets are inflated due to high
imported taxes to ensure demand of local products.
Trade barriers
Theses are measures that governments or public authorities introduce to
make imported goods or services less competitive than locally produced goods and
services (47). They are state-imposed restrictions on trading a particular product or
with a specific nation. It can be linked to the product, service like technical
requirement and it can also be administrative in nature such as rules and
procedures of transactions. Tariffs, duties, subsidies, embargoes and quotas are
the most common trade barriers.
Safety
This ensures that imported products in the country are of high quality.
Inspection regulations laid down by public officials ensure the safety and quality
standards of imported products.
Types of Trade Policies
National Trade Policy
This safeguards the best interest of its trade and citizen.
Bilateral Trade Policy
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To regulate the trade and business relations between two nations, this policy
is formed. Under the trade agreement the national trade policies of both the nations
and their negotiations are considered while bilateral trade policy is being
formulated.
International Trade Policy
This defines the international trade policy under their charter like the
International economic organizations, such as Organization for Economic Cooperation and Development (OECD), World Trade Organization (WTO) and
International Monetary Fund (IMF).The best interests of both developed and
developing nations are upheld by the policies.
Trade Policy and International Economy
In most developed countries where open market economy prevails, the
international economic organizations support free trade policies. In the case of developing
nations partially-shielded trade practices are preferred to protect their local trade
industries. The following are dependent on globalization: sound trade policies for market
changes, establishment of free and fair trade practices and expansion of possibilities for
booming international trade.
The World Trade Organization (WTO)
The World Trade Organization (WTO) deals with the global rules of trade between
nations with the main function of ensuring that trade flows smoothly, predictably and freely.
It is the only global international organization dealing with the rules of trade between
nations with WTO agreements, negotiated and signed by the bulk of the world’s trading
nations and ratified in their parliaments at its heart (48). WTO is viewed as the means by
which industrialized countries can gain access to the markets of developing countries (49).
Global Economy Outsourcing
Outsourcing is an activity that requires search for a partner and relation-specific
investments that are governed by incomplete contracts and the extent of international
outsourcing depends on the thickness of the domestic and foreign market for input suppliers,
the relative cost of searching in each market, the relative cost of customizing inputs and the
nature of the contracting environment in each country (50). Subcontracting is a central element
of the new economy (51). It is the practice of assigning part of the obligations and tasks under
a contract to another party known as a subcontractor and
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especially prevalent in areas where complex projects are the norm like construction and
information technology (52).
Outsourcing is a means of finding a partner with which a firm can establish a
bilateral relationship and having the partner undertake relationship-specific investments
so that it becomes able to produce goods and services that fit the firm’s particular needs.
Often, the bilateral relationship is governed by a contract, but even in those cases the legal
document does not ensure that the partners will conduct the promised activities with the
same care that the firm would use itself if it were to perform the tasks (53).
One of the most rapidly growing components of international trade is the
outsourcing of intermediate goods and business services. There are three essential
features of a modern outsourcing strategy.
1. Firms must search for partners with the expertise that allows them to perform
the particular activities that are required.
2. They must convince the potential suppliers to customize products for their
own specific needs.
3. They must induce the necessary relationship-specific investments in an
environment with incomplete contracting.
Possible Determinants of the Location of Outsourcing
1. Size of the country can affect the “thickness” of its markets.
2. The technology for search affects the cost and likelihood of finding a suitable
partner.
3. The technology for specializing components determines the willingness of a
partner to undertake the needed investment in a prototype.
4. The contracting environments can impinge on a firm’s ability to induce a
partner to invest in the relationship.
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