Now, we are gonna talk about the global financial crisis and the challenges to neoliberalism. • • Global Financial Crisis happened between 2007-2009, and it was marked one of the most challenging phases in the economic history. It was the greatest economic downturn since the Great Depression. It can be traced back to the 1980’s when US Systematically removed various banking and investment restrictions. The crisis brought profound impacts which led to unemployments, reduced consumer spending, stock market crashes and global recessions. There are several causes of Global Financial Crisis • First is the subprime mortgages. Subprime mortgages are a type of mortgage that is offered to borrowers with dubious credit history, they were people who were unlikely to pay their loans back. Because these borrowers were riskier, the loans had higher interest rates. When a lot of these people couldn't pay back, it created big problems. This caused a big mess in the housing market. • Cheap Housing Loans in US. Americans began building houses that were beyond their financial capacities. As a result, unpaid loans bloated. When the US offered really cheap loans for buying houses, many Americans jumped at the chance to own homes. During that time, banks assumed that the housing prices would continue to increase so even if homeowners could not pay off their loans, these banks could simply reacquire the houses and sell at a higher price, turning a profit, but in 2007, home prices stopped increasing as supply caught up with demand. So when families could not pay off their loans. more and more people struggled to pay back these loans, More unpaid loans meant more financial trouble for individuals, but also for the banks that had lent the money in the first place. • The bankruptcy of financial institutions was a key factor in the global financial crisis. Many big financial institutions, especially investment banks, invested heavily in financial products tied to subprime mortgages. They thought these investments were safe and would bring them significant returns. Lehman Brothers is a notable example. It invested heavily in these risky subprime mortgage-backed securities. When the housing market collapsed, Lehman Brothers faced massive losses. In 2008, unable to meet its financial obligations, Lehman Brothers declared bankruptcy. This bankruptcy sent shockwaves through the global financial system because Lehman Brothers was a major player in the financial world. • Foreign Investors. The crisis expanded beyond the united states since many investors where foreign governments, corporations and individuals. The loss of their money quickly rippled throughout their nations. For example, Iceland's banks heavily depended on foreign capital, so when the crisis hit them, they failed to refinance their loans. As a result of this credit crunch, three of Iceland's top commercial banks defaulted. From 2007 to 2008, Iceland's debt increased more than seven-fold.This interconnectedness highlighted how the global economy is linked, and when one major player faces a crisis, it affects others around the world. • IMF or the international monetary fund ordered debt-laden countries to cut back social and public spending. During economic crises, the IMF often advises debt-laden countries to implement austerity measures as part of broader economic adjustment programs. The global financial crisis is also a result of international monetary fund cutting back on public and social spending. The decrease in government spending, despite being an austerity measure, has slowed down growth and ensured high levels of unemployment. These cuts, which affect pensions, healthcare, and various types of social protection, have been felt most keenly by the poor. CHALLENGE TO NEOLIBERALISM 1. Russia's Experience and Flaws in Neoliberal "Shock Therapy": o In the early 1990s, Russia underwent a rapid transition from a state-controlled economy to a market-oriented one, commonly known as "shock therapy." This involved swift and drastic economic reforms, including the privatization of stateowned enterprises and the removal of price controls. o Russia's experience demonstrated flaws in the neoliberal approach. The abrupt implementation of reforms led to economic instability, a decline in living standards for many citizens, and a concentration of wealth among a few individuals. Critics argued that the shock therapy strategy neglected social considerations, resulting in adverse consequences for a significant portion of the population. 2. Emergence of the Russian Oligarchy: o The flawed implementation of neoliberal policies in Russia gave rise to the Russian oligarchy. During the privatization process, a small group of individuals acquired valuable state assets at significantly discounted prices, amassing immense wealth. o The emergence of the Russian Oligarchy underscored concerns about the potential for economic inequality and the concentration of power under neoliberal economic reforms. The unequal distribution of wealth and influence raised questions about the fairness and inclusivity of the market-oriented approach. ECONOMIC GLOBALIZATION TODAY 1. Continuing Improvements in Technology: • • Ongoing advancements in transportation and communication technology have significantly accelerated global connectivity. This interconnectedness means that economic events in one part of the world can have rapid and far-reaching effects on other regions. Faster and more efficient transportation enables the swift movement of goods and services across borders, while advanced communication facilitates instant transmission of financial information, influencing global markets. 2. Very Substantial, Progressive Reduction in Artificial Barriers to International Commerce: • • Over time, there has been a significant and continuous reduction in artificial barriers to international commerce. Trade agreements, tariff reductions, and efforts to streamline cross-border transactions have created a more integrated global economy. While this reduction in barriers has facilitated international trade and economic growth, it has also created a situation where challenges in one part of the world can quickly impact the entire interconnected system. Conclusion: In conclusion, economic globalization has led to a complex and interconnected world where the persistence of the global financial crisis is shaped by technological advancements and the substantial reduction of barriers to international commerce. Recognizing the challenges posed by this level of global integration is crucial for developing effective and sustainable solutions to ensure the stability and prosperity of the world economy. The advent of free trade, facilitated by the World Trade Organization (WTO)-led liberalization, has profoundly reshaped the dynamics of the global economy. Advanced Nations' Prosperity in Free Trade: • • Advanced nations found significant success in the era of free trade, leveraging their technological prowess and established industries to sell goods on a global scale. The liberalization efforts led by the WTO played a pivotal role in dismantling trade barriers and fostering an environment conducive to international commerce. Shift in Global Trade Patterns: • • Developing countries experienced a remarkable rise in exports, increasing from 29% to 51%. This shift signifies their enhanced participation in global trade, presenting newfound economic opportunities. In contrast, advanced nations witnessed a decline in their share of global exports, falling from 65% to 45%. This shift reflects the evolving landscape of economic competitiveness. Unprecedented Spike in Global Growth: • • The increase in exports, driven by free trade, contributed to an unprecedented spike in global growth rates. Global GDP soared five-fold, with large Asian economies emerging as key players in this era of economic expansion. Conclusion: In conclusion, the era of free trade, propelled by WTO-led liberalization, has marked a transformative phase in the global economy. Advanced nations thrived by selling goods, but the shift in global trade patterns brought about a significant rise in exports from developing countries. This resulted in an unprecedented spike in global growth rates, shaping the economic landscape and elevating large Asian economies to prominent positions on the world stage. The dynamics of international trade continue to evolve, underscoring the intricate interplay between economic policies, globalization, and the prosperity of nations ISSUES IN ECONOMIC GLOBALIZATION TODAY Economic Globalization remains an uneven process. A) Global wealth inequality persists, favoring some unfairly. Despite the interconnectedness brought about by economic globalization, global wealth inequality remains a significant concern. Certain regions and individuals continue to benefit disproportionately from economic activities, while others struggle to access and enjoy the rewards of globalization. b) Developed nations' protectionism hampers progress in poorer countries. Protectionist measures adopted by developed nations, such as trade barriers and subsidies, can impede the progress of poorer countries. These policies create unequal conditions for trade and hinder the ability of developing economies to compete on an equal footing in the global market. c) Transnational corporations prioritize profits, hindering underprivileged communities' programs due to lax tax laws. Transnational corporations, driven by profit motives, may exploit lax tax laws to minimize their contributions to the communities where they operate. This practice diverts potential revenue from underprivileged communities, hindering the funding of essential programs and exacerbating social and economic disparities. d) Governments prioritize foreign investors, worsening income disparity and poverty alleviation. Some governments prioritize attracting foreign investors over addressing income disparity and poverty within their own borders. Policies that favor foreign investors may exacerbate existing inequalities, as the benefits of economic activities may not be equitably distributed among the population. e) Rapid global production shifts hinder development in poorer nations. Rapid shifts in global production, while contributing to economic efficiency, can have adverse effects on developing nations. Industries relocating to countries with lower labor costs may lead to unemployment and economic challenges in the regions left behind, hindering sustainable development. POSITIVE EFFECT OF GLOBALIZATION 1. Enhancing Global Quality of Life: • Globalization has facilitated the sharing of knowledge, technologies, and best practices across borders. This exchange has contributed to advancements in healthcare, education, and other sectors, enhancing the overall quality of life on a global scale. 2. Global Companies Meeting Local Needs: • Multinational corporations operating globally have the capacity to adapt and cater to local preferences and needs. This adaptability allows them to contribute to local economies 3. 4. 5. 6. while providing employment opportunities and bringing innovative products and services to diverse markets. Fostering Positive International Trade: • Globalization has led to increased international trade, fostering economic cooperation between nations. This facilitates the exchange of goods and services, promoting specialization based on comparative advantages and contributing to economic development. Boosting Global Economic Growth: • The interconnectedness of economies through globalization can lead to synergies that boost overall global economic growth. When one part of the world prospers, it can positively impact other regions through trade, investment, and shared economic activities. Consumers Access Diverse Products/Services: • Globalization has expanded consumer choices by making a wide array of products and services from around the world accessible to consumers. This not only provides more options but also fosters competition, encouraging innovation and quality improvement. Economies of Scale (Efficiency): • Globalization allows businesses to benefit from economies of scale. By operating on a larger scale, companies can reduce production costs per unit, leading to increased efficiency. This efficiency can result in lower prices for consumers and improved profitability for businesses. NEGATIVE EFFECTS OF GLOBALIZATION 1. Global Inequality: • Globalization has led to an uneven distribution of wealth and resources, contributing to global inequality. While some regions experience economic growth and prosperity, others face persistent poverty and lack of development opportunities. 2. Increased Corruption and Inefficient Systems: • The pursuit of global economic opportunities can sometimes lead to increased corruption and inefficient governance systems, particularly in developing countries. The pressure to attract foreign investment may result in compromised ethical standards and weakened institutions. 3. Exploitation of Workers: • In the quest for lower production costs, multinational corporations may exploit workers in developing countries. This exploitation can manifest in low wages, poor working conditions, and inadequate labor rights, perpetuating social and economic disparities. 4. International Interdependence: • While interdependence can foster collaboration, it also means that economic problems in one part of the world can have widespread consequences. Financial crises or economic downturns in one region can quickly spread globally, affecting economies and livelihoods beyond national borders. 5. Tax Evasion: • Globalization has created opportunities for multinational corporations to engage in complex tax avoidance strategies, leading to tax evasion. This deprives governments of essential revenue needed for public services, infrastructure, and social programs. 6. Climate Change and Environmental Impact: • The increased movement of goods and services across borders contributes to a rise in carbon emissions and environmental degradation. Globalization can lead to unsustainable practices, deforestation, and pollution, contributing to climate change and harming ecosystems.
