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

– MERCOSUR

– 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