AFCE 410
Globalization and the world economic order
1. The nature of globalization
Globalization is a term often used to describe the ongoing transformation of the
world economy from exchange of goods between nations towards a unified and
interdependent global market. But so divergent are the views expressed on the subject
among world leaders, economists and even people in the streets, that one wonders: do
they all speak of the same phenomenon?
Doubts have been expressed by researchers about the very existence of the
phenomenon of globalization: Based on studies of geographic patterns of commodity
trade and foreign direct investment, it has been argued that in the particular case of
the European Union, we witness ‘classical’ economic integration within the EU, not
globalization as such, and that during the last forty years, the European Union has not
become relatively more integrated with the world's other trade blocs. It has also been
argued that the US economy is no more globalized today – measured by the share of
trade in its total output in the early 20th century.
Therefore, we have to make a difference between the concepts of
internationalization of capital and production, on the one hand, and the globalization
of economic life, on the other hand.
Internationalization is a broader concept, indicating the establishment of
international economic relations between national economies.
The simplest form of internationalization is international trade. It has existed since
the ancient times but only after the industrial revolution of the 18th century it became
an immanent feature of the emerging market economy. This first industrial revolution
has been triggered by the invention of the steam engine, the replacement of hand
labor and the shift to more capital intensive methods of production. The invention of
the steam engine established the manufacturing as a major sector of the economy and
set the foundations of a broader international specialization and put international trade
at the basis of large scale production. Reductions or interruptions of trade flows
would significantly impede smooth production process and economic development.
The second industrial revolution came in the late 19th century with the
development of electrical engine. Large scale manufacturing transformed economic
life and penetrated all industries, agriculture and services. It enabled multiplant
operations, provided a vehicle for large scale financing, and led to the growth of
centralized staff and geographically decentralized line operations in the firms. This
pushed the corporations into large vertically integrated structures, based on
international capital movement. International capital outflows and inflows became a
major form of internationalization. Big multinational corporations (MNCs) became
the driving force of economic development.
The third industrial revolution is marked by the development of the new
information and communication technologies. It put the IT sector at the foundations
of economic development. In the last decade of the 20th century information
technologies replaced manufacturing as a leading sector in the US economy.
This major technological change is the first feature of the modern process of
globalization. It reshaped all industries, agriculture and services and led to significant
structural changes in the economy. A major feature of these changes became the
leading role of the information based services in the world economy.
One of the fundamental characteristics of this process has been the shift from
centralized large corporations to decentralized units made up of a plurality of sizes
and forms of organizational units. Communications networks allow tasks to be dome
in different places. For financial and managerial reasons, large firms outsource work
they used to do in house. The new coordination technology creates electronic
networks and enables microbusinesses to tap into global reservoirs of information,
expertise, and financing that used to be available only to large companies. This new
technology often splinters big firms into many smaller pieces. The big bureaucratic
corporation is replaced by the new small and medium size international businesses as
a driving force of the process of globalization. This is an indication of the third
feature of globalization – institutional changes. The nature of the game has been
changed. In the world economy these institutional changes are presented by the rise of
the liberalization of trade and investment. Moreover, information and communication
technologies made it possible to outsource services from abroad.
Instead of hiring workers in house, firms can use services, provided by other firms
or individuals, who reside in other countries. One can sit at the computer somewhere
in Europe, or in Asia and answer a call made in the US about local American
directions. Moreover, one can sit at home in New Zealand and trade securities in the
stock exchanges all over the world. These transformations made it much more
difficult to regulate financial markets. Deregulation of business in both financial and
real sector became a salient feature of globalization.
To summarize: the ongoing process of globalization makes the
internationalization of economic life irreversible and establishes a new type of an
economy. Global processes take the primary role in economic life. National
economies develop on the basis and as a function of the global economic process.
Globalization is presented by three interrelated dimensions: technological, structural,
and institutional changes in the world economy.
Advantages and shortcomings of globalization
a) advantages (Everyone wins?)
It is often argued that the global economy is a game, in which all participants stand to
win.
The defence of the existing global system is based on a set of arguments, which may
be summarized as follows:
 Trade liberalization brings more or less automatically economic welfare to all the
nations that practice it. The outward orientation is a necessary and sufficient
condition for enhancing economic welfare.
 The crises that hit at one time or another world economic and financial system
and individual nations, such as the Asian scare or the crisis in Russia, are the
result of insufficient national efforts to promote liberal policies.

Attempts to regulate the process either by governments or through the
international institutions distort the natural play of market forces and bring about
crises and misery.
A few illustrations of these views:
 Jon Corzine, Senior Partner of Goldman Sachs: global capitalism is delivering
results and doubters should not judge its success by events in the last few months.
The challenge is not to reconfigure capitalism, but to broaden the benefits that
open markets offer, through sound monetary and fiscal policies. Capital controls
to curb fund flows are blunt weapons, since “no one will invest in a country if
they do not believe that they can get the money out.”
 Thomas A. Russo, Managing Director and Chief Legal Officer, Lehman Brothers:
Sophisticated financial instruments such as derivatives are not the root cause of
market chaos: “It is not the instruments that are the problems, it’s the
fundamentals… So you’ve got to be very, very careful, because although you
could ban all the instruments you want, you don’t solve the underlying problems.”
 Rudi Dornbush, Professor of Economics and International Management at
Massachusetts Institute of Technology: dismissed capital controls as a “terrible
idea” and questioned the tendency to blame hedge funds for the financial crisis.
Capital controls have not proven effective anywhere in the world
 Horst Siebert, President of Kiel Institute of World Economics: societies need
competition and a market economy to realize the full extent of their potential. But
for competition to be effective, societies have to be truly open and allow for
vertical mobility, since openness provides tremendous opportunities and sets free
energies that reinvigorate economies.
The proponents of globalization in its present form provide figures to substantiate the
claims. According to R. Ruggiero (the first president of the World Trade Organization):
In particular, over the past 10 to 15 years, when developing countries have more
and more embraced trade-liberalizing policies, the benefits have been clear. The
share of developing countries in world trade overall has increased from 20 to
25%. For the manufactured sector it has doubled from 10 to 20%, and on current
trends could exceed 50% by the year 2020. Furthermore, in this same period of
time, 10 developing countries with a combined population of 1.5 billion people
have doubled their income per head.
And while the gap between countries is in some cases widening, it is also true that
from 1990 to 1996, developing countries recorded an average growth of 5.4%,
three times more than advanced economies. In this same period of time, exports
from the industrialized countries to the developing countries grew each year by
an average of 10.1%, while exports from developing countries to the
industrialized world grew an average of 7.3%. This is the virtuous circle of
globalization.
b) disadvantages (Survival of the richest?)
The heading above encapsulates the essence of the various critiques of globalization, as
we know it today. The depth of the critique and the remedies suggested vary, but the core
ideas remain:
 The existing global market system benefits the rich nations, the multinational
monopolies and the international speculators. Globalization increases further the
disparity between rich and poor nations and between rich and poor within the
nations.
 Globalization exposes individual countries to shocks generated elsewhere, limits
their ability go exercise their own macroeconomic policies.
 Unfettered markets destabilize world economy with devastating socio-political
consequences for some countries. New regulatory mechanisms are needed to tame
the global market and to insure that it will have not only ‘an invisible hand’, but
also ‘a visible heart’.
The moderate critics of the existing system recognize the inevitability of globalization,
but stress the urgent need to rethink the overall architecture of the global economy. Quite
unsurprisingly, developing countries (or even some of the newly developed Asian tigers)
are in this group. International agencies, dealing with humanitarian issues and
development, are also usually among the critics.
Some of the points that focus the attention of the critics, illustrated once again from the
panel discussions at the 1999 Davos summit (World Economic Forum, 1999):
 Jean Chretien, former Prime Minister of Canada: “To me capitalism hasn’t come
up with all the answers”. Currency traders should be controlled: “We cannot see
prosperity disappear overnight because some boy in red suspenders in New York
decides this is not the good currency.” The free market system has to be
restructured.
 Yashwant Sinha, former Finance Minister of India: India has pursued a growth
path that emphasized equity and social justice. “Unless globalization is also
influenced by such concepts, it will continue to be a doubtful concept.”
Globalization is there to stay and technology has made it an irreversible process.
But a consensus for a “rule-based regime for monitoring” capital flows is urgently
needed.
 Karel Van Miert, former European Commissioner in charge of competition
policy: the authorities can not allow liberalization to proceed without supervising
the process, because the monopoly companies would resist outsiders. “If you have
no regulation authority, things go wrong”.


Lester C. Turnow, Professor of Management and Economics at Sloan School of
Management: democracy and capitalism do not go hand in hand. Democracy is
predicated on the belief of equality, while inequality drives capitalism. “That’s
why we invented the social welfare state – to make it compatible.”
Wolfgang H. Reinicke, Senior Economist of the Corporate Strategy Group at the
World Bank: Under present circumstances, globalization will create more
marginalized groups possibly resulting in direct backlashes. With the private
sector playing a lead role, governments need to step out in order to help create a
global public policy network.
According to a report by the United Nations Development Programme (UNDP):
 More than 80 countries have per capita incomes lower than a decade or more
ago.
 55 countries, mostly in Sub-Saharan Africa and Eastern Europe and the
Commonwealth of Independent States (CIS) have had declining per capita
incomes since 1990.
 The fifth of the world's population living in the highest income countries has 86
per cent of world GDP, 82 per cent of world export markets, 68 per cent of
foreign direct investments and 74 per cent of world telephone lines; the bottom
fifth, in the poorest countries, has about one per cent in each sector.
 The income gap between the richest fifth of the world's people and the poorest
fifth, measured by average national income per capita, increased from 30 to one
in 1960 to around 80 nowadays.
The lines of globalization
The world economy has begun the transition from an international marketplace, where
nations used to trade their “comparative advantages”, into an integrated global market,
where global companies would use global capital and global labor to meet global
demand. Two factors have greatly sped up the process: (i) the advent of truly global
communication technologies into the workplace; and (ii) the quasi-universal acceptance
of the market as the only viable economic system throughout the entire world.
If we treat the market as a complex system where goods, capital and labor flow freely,
governed by uniform rules and regulations, then the making of the global market looks
still in its beginning. The different components evolve at their own, uneven pace:
a) Capital flows around within the established framework of liberalization of
economic life. The current financial crisis affects the flow, we do not know
whether the world economic system can balance itself again effectively enough.
b) The flow of goods is also a well-established component, steadily liberalizing
throughout the years under the auspices of the World Trade Organization.
Routinely emerging controversies (banana wars, genetically engineered products
or farm subsidies, to name but a few) seem to be rather the result of a fairly
advanced process of coordination.
c) Labor, on the other hand, remains quite static, subdivided into the narrow national
labor markets, with their particular productivity levels, their own regulations on
social security, safety and health and distinct income expectations. It is a buyer’s
market for labor – free flow of capital against segmented labor – that provides
short-term bargaining advantages to the global entrepreneurs. The information
revolution offers a way to overcome geographic immobility of labor, but still
national rules of the game impose barriers to the globalization of this market.
d) Market rules and regulations remain quite remote from the exigencies of a unified
world market. No provisions exist to compensate for the global market
deficiencies and no bodies (either inter-national or supra-national) to supervise
competition, enforce anti-monopoly measures, require disclosure, prohibit insider
trading, promote social security, to name but a few of the components of a healthy
developed market.
So far most of these responsibilities remain within the prerogatives of the nationstates (with the possible exception of the regional EU market block). On the
global level, the disparity between the authority of the national governments and
the power of the supranational capital is growing larger than ever. Individual
national governments trying to regulate the international flows of capital quickly
discover how ‘blunt are their weapons’. On the other hand, it the national
governments that continue to bear the ultimate responsibility to guarantee, among
others, fair conditions for the economic activity of their citizens.
The existing international bodies in their present form are still very much what the
word ‘international’ implies – meeting places where nations settle their
divergences and try to define their concurring interests. The bigger the economic
wealth and the political ‘weight’ of a country, the better chances it has to impose
its momentary interests as universal values to the rest of the world. Since the
motives rarely take into account common interest, they rarely produce results in
the interests of all. Quite often, actually, practices that would have been banned
by a liberal pro-market government within the country are defended as legitimate
national interest on the world scene in the existing international bodies (antimonopoly regulations are the first to come to mind, but so are labor protection
laws and many other).