The Global Economy

An Overview

An overview

• There are 189 countries belonging to UN with a diverse range of political systems.

• Holly See, Switzerland, and Palestine have permanent observers to the UN.

• The World Bank identifies over 200 countries/entities.

• 75% of the world’s population live in developing countries (including some with transitional economies)

World Bank’s Classification

P/C Inc Pop% Output% • Low Income • Lower Middle Income • Upper Middle Income • High Income $500 $1,320 $5,600 $32,111 40% 3% 34% 11% 7% 10% 15% 80%

< $766 ; $766 - $3036 ; $ 3036 – 9366 ; $9366 >

Structural Differences

• Natural/Land Resources • Labor • Labor force Participation • Female labor force participation • Skilled and semiskilled labor • Capital • Physical capital • Human Capital • Infrastructure » Physical infrastructure » Institutional Infrastructure » Social/Cultural Infrastructure • Capital stock and labor productivity

< 10% ; 10%-20% ; 20% -29% ; 30% 40%; >50%

Low Lower Mid Upper Mid High

GDP

1,253,353 3,941,575 2,988,438 32,715,777 Low

POP

2,338,083 Lower Mid 2,430,310 Upper Mid 575,920 High 1,000,814 Worl 40,887,837 World 6,345,127

World's Household Consumption Pie-1999 4% 18%

Low Inc Mid Inc High Inc

78%

Source: The World Bank

GDP Low Low er Mid Upper Mid High 3% 10% 7% 80% POP Low Low er Mid Upper Mid High 9% 16% 37% 38%

Capital Stock & Labor Distribution

100 90 80 70 60 50 40 30 20 10 0 LowInc Source: World Bank LowerMid UpperMid High CapStock Labor

2 0 6 4 14 12 10 8 0.8

Low

CO2 PER CAPITA 2003 (MT)

3.2

Middle 12.3

High

CO2 TOTAL 2003: 23,800,414 M. Tonnes

Low Middle High 8% 52% 40%

Capital Accumulation per Labor Unit

12000 10000 8000 6000 4000 2000 0 Low LowerMid UpperMid High

Some Important Post-WWII Developments

• • • • • • • • • • • • • • • • • The formation of the United Nation : Oct 24, 1945 The Marshal Plan The Bretton Woods System The IMF and the World Bank The formation of the European Common Market gradually evolving into the European Union The GATT Rounds The division of the world into two/three blocks The formation of NATO and the Warsaw Pact The Cold War Emergence of new independent nations as old colonies gained their independence The end of the Cold War and the collapse of the Soviet regime Emergence of the old soviet republics and the Eastern Block countries as new “independent” nations Economic liberalization (Marketization) in China Emergence of newly industrialized countries The global privatization movement/Deregulation in trade and finance The formation of WTO The growth of international investment/multinational business entities/the globalization movement

Developments since the mid 1970s toward an economically more integrated world:

• Lower tariffs have led to increased trade (GATT) • Regional economic agreements: free trade zones, the common market, the European economic union, NAFTA, CAFTA, etc.

• Financial deregulation within and among nation states leading to freer movements of capital (portfolio investments as well as FDIs) and the creation of new financial instruments • Technological evolution leading to better and more efficient communication and higher productivity

What is globalization?

The removal of regulatory, economic and political barriers to the movement of goods, services, capital, and labor across national borders, and the establishment of international institutions (and norms and regulations) to govern international economic activities and transaction

• Recent Developments

The collapse of the Soviet regime and the (partial/gradual)adoption of the market system by the former soviet republics and the Eastern Block countries

•

The emergence of newly industrialized countries (with more liberalized economies) in the international economic scene: the shift in the distribution of the world’s industries

•

The emergence of China (with a partially reformed economic system) as a major participant in the global economy

•

The formation of WTO and more active roles for IMF and the World Bank in promoting economic liberalization especially among developing economies and emerging transition economies

•

The emergence non-American MNCs and US becoming a net capital importer

Important political developments

• The war in the Middle East and the Oil Embargo (1970s) • The US leaving Vietnam • Continued negotiations on disarmament • Emergence of new nuclear powers (China, Pakistan and India) • The UN becoming more involved/active in the affairs of the world • The political dimensions of the function of WTO, IMF and World Bank • The collapse of the Soviet Union and the US being perceived as the sole super power of the world • Expansion of NATO • The formation of EU and its expansion • Realignments in the alliances and movements toward a new political order • Democratic movements in the developing world • The emergence of international NGOs and “advocate” groups • China adopting a more active and visible role in international affairs • Radicalism and terrorism

Questions to be asked?

• Are nation states disappearing? • Have most of the economic/political problems of the world been caused by globalization and inadequate international checks and balances ?

• Inequalities within and among countries • Exploitation of workers • Declining or stagnating real wages in developed countries • Environmental degradation • International conflicts/wars • Displacement of populations • Illegal immigration

How “globalized” have we become? (2000) Exports Imports

$B % Ch $B % Ch

Extra-EU 813.2 20.1 0 944.4 22.3 5 United States 682.5 16.8 -1

800.7 18.9 5

Japan 387.9 9.6 -8

280.5 6.6 -17

China 183.8 4.5 1

140.2 3.3 -2

Korea 132.3 3.3 -3

93.3 2.2 -35

Mexico 117.5 2.9 6

129.0 3.0 14

Singapore 109.9 2.7 -12

101.6 2.4 -23

The Potentials

• Free trade will lead to more efficient use of economic resources and thus making the global output pie grow bigger • Everyone’s share of the pie including the poor gets bigger/reducing poverty • Economic interdependence among nations lessens international tensions and conflicts • As economies grow and international communication improves populations become more alike, allowing for more cooperation among nations in protecting natural resources and environment

The Problems

• Globalization and free trade have benefited mostly developed countries, widening the gap between the poor and the rich • Transition costs with countries have not been equally distributed; there have been losers and gainers • Still protective trade policies in developed countries continues, hurting some poor developing countries • In pursuing their national interests, countries have often sacrificed free trade/free market principles • Capital market has benefited some countries including some developing ones while hurting some other countries that have been exposed to excessive speculation

Gilpin:

The

technological changes

that have taken place in recent years aided by

political changes

are likely to have resulted in most of these problems. Many of these problems would have occurred with or without globalization. Besides, most of the developments identified as part of the globalization movement have taken place among a handful of countries; they include mostly developed countries, a few newly industrial countries in Asia, China, and a few countries in Latin America.

Exports-Imports as % of GDP 2003

Exports Imports 40 30 20 10 0 Low Lower Mid Upper Mid High

Developing an approach to studying the global economy

• Studying the global economy from a “purely” economic perspective: the Neoclassical approach • The role and function of political systems as well social norms and cultures in the formation of economic goals and the manners by which they are pursued • Economic forces versus political forces

A Neoclassical Approach

• Market mechanism, specialization and trade trade (free trade) • The promise of capitalism/market • Market, information, and knowledge • Information and expectations

Dynamics of Globalization

• Costs of Economic transition • How developing (poor) countries have fared in the process of globalization • What happened in Russia? • Have western countries been true to the free market/free trade principles? • The conflicts between economic interests and social and humanitarian concerns • Economic growth at the cost of environment • Different countries/different rules

The Performance of International Organizations

• World Bank • International Monetary Funds (IMF) • World Trade Organization • The United Nations