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Transcript of Globalization - University of kumara/econ420/ ¢  Globalization...

  • Globalization

    • International Trade

    • Foreign Direct Investment

    • Remittances

    • Foreign Aid

  • Globalization

    • Globalization- many interpretations

    • Core economic meaning- the increased openness of economies to international trade, financial flows, foreign direct investment, and international co-ordination in policy making.

    • ``The division of labor is limited to the extent of market” (Adam Smith 1776 in Wealth of Nations).

    • Concerns with globalization center around the unevenness of the process

  • Trade and Development: Key Issues

    • How does international trade affect economic growth?

    • How does trade alter the distribution of income?

    • How can trade promote development?

    • Can LDCs determine how much they trade?

  • Merchandise Export of Selected Countries:2012

  • Problems of Primary Exports

    • Low income elasticity of demand for primary products

    • Low price elasticity of demand and supply

    • Export earnings instability

  • The Terms of Trade and the Prebisch- Singer Thesis

    • Total export earnings depend on: – Total volume of exports sold AND

    – Price paid for exports

    • Prebisch and Singer argue that export prices fall over time, so LDCs lose revenue unless they can continually increase export volumes

    • Terms of trade moves against LDCs and it leads to income transfer from poor to rich countries.

    • Prebisch and Singer think LDCs need to avoid a dependence on primary exports

  • Traditional Argument for Trade

    • All countries gain from trade (expansion of market, economies of scale)

    • World output increases with trade

    • Countries will tend to specialize in products that use their abundant resources intensively (idea of comparative advantage)

    • International wage rates and capital costs will gradually tend toward equalization

    • Returns to owners of abundant resources will rise relatively

    • Trade will stimulate economic growth

  • Critical Assumptions Behind Traditional Trade Theory

    • Fixed resources, full employment, and international factor immobility (skilled labor and capital)

    • Fixed, freely available technology and consumer sovereignty

    • Internal factor mobility and perfect competition

    Governmental non-interference in trade

  • Industrialization Strategies

    • Infant Industry Argument: Developing countries should protect domestic industries from foreign competition in order to make strong enough to withstand foreign competition.

    • Import Substitution Strategy: A deliberate effort by a country to replace major imports by promoting the emergence and expansion of domestic industries.

    • Export-Led Growth Strategy: A deliberate effort by a country to increase exports by promoting and expanding domestic industries which are competitive in the foreign market.

  • Trade and Development

    • Trade can lead to rapid economic growth under some circumstances

    • Trade seems to reinforce existing income inequalities

    • Trade can benefit LDCs if they can extract trade concessions from developed countries

    • Regional cooperation may help LDCs

  • South-South Trade and Economic Integration: Looking Outward and Inward

    • Economic Integration: Theory and Practice

    – The growth of trade among developing countries.

    – Integration encourages rational division of labor among a group of countries and increases market size

    – Provides opportunities for a coordinated industrial strategy to exploit economies of scale

    – Provides a regional buffer stock from adverse effects of globalization

  • Is Economic Integration Always Good?

    The Effects of integration depends on following two forces:

    – Trade creation: Trade creation occurs when common external barriers and internal free trade leads to a shift in production from high to low cost members.

    – Trade diversion: Trade diversion occurs when common external barriers leads to a shift in production from low cost non-member to high cost member.

  • Regional Trading Blocks

    • Regional trading blocs (economic unions) and the globalization of trade

    – NAFTA


    – SADC

    – ASEAN

  • The International Flow of Financial Resources

    • Three sources:

    – Private direct and portfolio investment

    – Remittances of earnings by international migrants

    – Public and private development assistance

  • FDI Flows:1980-2012 By Group of Economies(Billions of Dollars)

  • Net Capital Flows to Developing Countries, 2000–2009

  • Private Foreign Direct Investment and the Multinational Corporation

    • Definition of MNC: Corporations which conduct and control productive activities in more than one country.

    • Foreign Direct Investment (FDI): Overseas investment by MNCs.

  • Sources of External Financing for Developing Countries, 1990–2008

  • Private Foreign Investment: Pros and Cons for Development

    • Traditional arguments in support of private investment:

    1. Filling savings

    2. Foreign exchange,

    3. Tax revenue

    4. Management gaps

    5. Technology

  • Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries

  • Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries

  • Private Portfolio Investment: Boon or bane for LDCs?

    • Portfolio Investment: Portfolio investment consists of foreign purchases of stocks, bonds, and other financials instruments.

    • Benefits:

    1. Domestic firms can raise capital.

    2. Development of domestic financial market.

    3. Source of foreign exchange

    • Costs:

    1. These flows are highly volatile and can destabilize domestic financial market and the broader economy.

    2. The domestic financial market may be dominated by foreign firms.

  • The role and Growth of Remittances

    Remittances: The income repatriated by international migrants to domestic countries.

    Major Concerns with remittances:

    • “Brain Drain”

    • Uneven flow of remittances

  • Major Remittance Recipient Countries, 2008

  • Foreign Aid: The Development Assistance Debate

    • Conceptual and measurement problems

    • Amounts and allocations: public aid

    – Official development assistance (ODA)

  • Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2008

  • Official Development Assistance (ODA) by Region, 2005

  • Foreign Aid: The Development Assistance Debate

    • Why donors give aid

    – political motivations

    – economic motivations:

    • Foreign exchange constraints (two gap model)

    • Growth and savings

    • Technical assistance

    • Absorptive capacity

    • Self interest

  • Foreign Aid: The Development Assistance Debate

    • Why LDC recipients accept aid

    • The role of nongovernmental organizations (NGOs)

    • The effects of aid

  • Conclusions: Toward a New View of Foreign Aid

    • Dissatisfaction among donors and recipients may create the possibility for new aid arrangements

    • Future aid is likely to be linked to market reforms and institutional capacity-building

  • Conflict and Development

    • The scope of violent conflict and conflict risks

    • The consequences of armed conflict

    – Health

    – Destruction of wealth

    – Worsening hunger and poverty

    – Loss of education

    – A torn social fabric

  • Global Trends in Armed Conflict, 1946– 2008

  • Causes of Conflict

    • The causes of armed conflict and risk factors for conflict

    – Horizontal inequalities

    – Natural resources for basic needs

    – Struggle to control exportable natural resources

  • Potential Solutions

    • The resolution and prevention of armed conflict

    – Importance of institutions; e.g. addressing commitment problems

    – Global actors

    – Regional actors: an Africa-wide approach

    – National actors

    – Focus on education

    – Local, “community-driven” economic development