Theme 4: A Globalisation Perspective

4.1 International Economics

4.1.1 Glob
What is Glob?

• Glob is a process by which economies and cultures have drawn deeper together and have
become more interconnected through global networks of trade, capital flows, and the rapid
spread of technology and global media.
• Glob is driven by advancements in communication, transportation, and technology, which have
made it easier for people and businesses to connect and operate on a global scale.
• The biggest companies are no longer national firms but multinational corporations (MNCs) with
subsidiaries in many countries.
• Global markets are international markets created by firms exporting, importing or offshoring.

Key Characteristics of glob:

• An increase in the ratio of the value of overseas trade to a nation’s GDP

• Expansion of financial capital flows from one country to another
• Increasing foreign direct investment flows moving across national borders
• More global brands – including a rising number from emerging countries
• Deeper specialisation of labour in making specific parts or technology transfers
• Creation of global supply chains & new trade and investment routes in the world economy
• High levels of labour migration across national borders (pre-pandemic)
• Increasing connectivity of people, communities and businesses through networks
Characteristics of Glob:

• Glob is the ever-increasing integration of the world’s local, regional and national economies into a
single, international market.
• It involves the free trade of goods and services, the free movement of capital and labour and the
free interchange of technology and intellectual capital.
• With the spread of globalisation came more trade between nations and more transfers of capital,
including FDI (foreign direct investment).
• Moreover, brands have developed globally, and labour has been divided between several
countries. More migration and more countries are participating in global trade, such as China and
India, as well as higher levels of investment.
• Additionally, countries have become more interdependent, so the performance of their own
country depends on the performance of other countries. This could be seen in 2008 and 2009,
when the effects of the global credit crunch spread across the globe.

Factors contributing to globalisation in the last 50 years:

• Trade in goods:
 Developing countries have acquired the capital and knowledge to manufacture goods. The
efficient forms of transport make it easier and cheaper to transfer goods across
international borders.
 Some developing countries have the cost advantage of cheaper labour, so MNCs move
their production abroad. This causes developed countries to trade with these developing
countries, so they can access the same manufactured goods.
• Trade in services:
 For example, the trade of tourism, call centre services, and software production
(particularly from India) has increased from developing countries to developed countries.
• Trade liberalisation:
 The growing strength and influence of organisations such as the World Trade Organisation
(WTO), which advocates free trade, has contributed to the decline in trade barriers.
• Multinational Corporations (MNCs):
 MNCs are organisations which own or control the production of goods and services in
multiple countries.
 They have used marketing to become global, and by growing, they have been able to take
advantage of economies of scale, such as risk-bearing economies of scale. The spread of
technological knowledge and economies of scale has resulted in lower costs of
production.
• International financial flows:
 For example, the flow of capital and FDI across international borders has increased.
 China and Malaysia have financed their growth with capital flows. Also, the foreign
ownership of firms has increased. There has been more investment in factories abroad.
The removal of capital controls has facilitated this increase.
 • Communications and IT:
 The spread of IT has resulted in it becoming easier and cheaper to communicate, which
has led to the world being more interconnected.
 There are better transport links, and the transfer of information has been made easier. This
is sometimes referred to as the ‘death of distance’.
• Containerisation:
 This has resulted in it becoming cheaper to ship goods across the world. This causes
prices to fall, which helps make the market more competitive.
 Containerisation means that goods are distributed in standard-sized containers, so it is
easier to load and cheaper to distribute using rail and sea transport. This helps to meet
world demand. Cargo can be moved twenty times as fast as before, economies of scale
can be exploited, and less labour is required.
 However, it is mainly MNCs which have been able to exploit this, and it could result in
some structural unemployment.
• Impact of emerging economies:
 The collapse of communism has meant that more countries, especially developing
countries, are participating in world trade.
 International trade is arguably more important for developing countries than developed
countries. It contributes towards 20% of LDC economies compared to 8% of the US
economy.
 Between 1995 and 2005, India’s share of textiles and clothing fell from 35% in 1995 to 16%
in 2005. Instead, India’s manufacturing sector seems to produce more engineered goods
than clothing and textiles. This has resulted in UK manufacturers selling fewer
manufactured goods abroad.
 China and India are important for African infrastructure. They have invested in their
infrastructure in exchange for natural resources.
 Both China’s and India’s share in agriculture, mining and fuel has declined. Both countries
are important in the Euro area, with trade and financial relations. China is a main import
source, whilst both are important for capital.

Key factors driving glob

• Containerisation – the real prices/costs of ocean and air shipping have come down due to
containerization & economies of scale in freight industries and the huge ports built to serve them.
• Technological advances, which lower the cost of transmitting and communicating information
• Differences in tax systems - Some countries have adjusted their corporate tax rates in a bid to
attract inflows of foreign direct investment (FDI)
• Trade deals – overall, import tariffs have fallen – but we have seen a rise in non-tariff barriers such
as import quotas, domestic subsidies and tougher regulations, leading some to see a new period
of de-glob.
Impact of containerisation on global trade:

• In 2021, about 1.95 billion metric tons of cargo were shipped globally, up from some 0.1 billion
metric tons in 1980
• Between 1980 and 2022, the deadweight tonnage of container ships grew from about 11 million
metric tons to roughly 293 million metric tons
• 5,574 container ships were operating in the world economy in January 2022

Tech advances and glob:

• Good internet connectivity allows people & businesses to exchange information, ideas and data
across borders has facilitating real-time communication.
• E-commerce has enabled firms of all sizes to access international markets without the need for
extensive physical infrastructure.
• Payment systems have transformed the way goods and services are bought and sold, facilitating
cross-border trade and opening new avenues for global economic participation
• Outsourcing/ Freelance services: Technological advancements have facilitated remote
collaboration and outsourcing across borders. Firms can engage with talent and services from
around the world without the need for physical presence.
What are transnational corporations?

• Transnational businesses (TNCs) base their manufacturing, assembly, research and retail
operations in several countries.
• Many TNCs have become synonymous with glob such as Nike, Apple, Vodafone, Netflix, Uber,
Amazon, Facebook (Meta), Google and Samsung.
• TNCs are a key driver of globalisation because many have been relocating manufacturing to
countries with relatively lower unit labour costs to increase their supernormal profits and equity
returns for shareholders.
• Some transnationals are now reshoring manufacturing as labour costs rise in many emerging
countries. The pandemic has also caused some firms to shorten their manufacturing supply
chains
 China Mobile is in the top ten consumer brands in the world
 Tata Group from India has made significant investments in Western economies, including
Jaguar Land Rover
 Infosys from India is one of the world’s biggest information systems businesses, employing
over 160,000 people worldwide
 TikTok is a video-sharing social media app owned by Beijing-based ByteDance
 Huawei Technologies is a major competitor to Samsung & Apple
• MNCs are major contributors to FDI, often establishing subsidiaries in foreign countries.
• According to the WTO, around two-thirds of global trade is now conducted within multinational
enterprises or their subsidiaries
• OECD data shows that foreign affiliates of multinational corporations employ around 60 million
people worldwide.
• In 2019, global trade in intermediate goods accounted for over 50% of total trade. TNCs are at the
heart of the creation of global value chains.
• But …. data from the OECD's Base Erosion and Profit Shifting (BEPS) project estimates that
revenue losses from base erosion and profit shifting could be between $100 billion and $240
billion annually

What are global value chains?

• A global value chain (GVC) refers to the interconnected network of activities involved in the
production and delivery of goods and services that are performed by multiple firms, operating in
different countries.
• In a GVC, different stages of production, such as design, research and development,
manufacturing, marketing, and distribution, are performed by different firms in different
countries, with each firm adding value to the final product or service.
• For example, consider the production of a smartphone. Components like microchips, displays,
batteries, and camera modules might be manufactured in different countries, and the final
assembly could occur in yet another country. According to the WTO, the total trade value of parts
and components for smartphones reached nearly $490 billion in 2019.
Economic benefits of glob:

• Glob encourages both producers and consumers to reap benefits from the division of labour and
harnessing economies of scale across many industries
• More competitive markets reduce the level of monopoly profits and can incentivise businesses to
seek cost-reducing innovations
• Trade can help drive faster economic growth, which leads to higher per capita incomes. This has
reduced extreme poverty in many lower-income countries.
• There are advantages from the freer movement of labour between countries, including helping to
relieve skilled labour shortages and promoting the sharing of ideas from a more diverse
workforce, which can then promote innovation.
• Glob has increased awareness among people of the many long-term challenges from climate
change and the impact of wealth & income inequality

Economic & social costs of globalisation

• Rising inequality – the gains from globalisation are unequal, leading to growing political and social
tensions when inequality of income and wealth increases
• Threats to the global commons, including irreversible damage to ecosystems, land degradation,
deforestation, loss of biodiversity and water scarcity. Glob can lead to the exploitation of the
environment, including the impact of trading toxic waste to countries
• Macroeconomic fragility – in an interconnected world, external shocks in one region can rapidly
spread to other centres (this is known as systemic risk)
• Trade imbalances - increasing trade imbalances (both surpluses and deficits) lead to
protectionist tensions, more import tariffs and quotas and a move towards managed exchange
rates – this can then lead to de-glob
• Jobs - Workers may suffer structural unemployment from the outsourcing of manufacturing to
lower-cost countries and a rise in the share of imports in GDP

What is de-glob?

• De-glob, also known as anti-glob, refers to a process in which countries or regions become less
integrated with the global economy.
• It involves a reduction in the value of the flow of goods, services, capital, information, and people
across international borders.
• De-glob is characterised by a shift away from the principles of increased economic
interconnectedness and openness that are associated with glob.
Causes of de-glob:

• Protectionism: Governments might implement protectionist measures such as tariffs, quotas,

and trade barriers to shield domestic industries from foreign competition.
• Economic Shocks: Economic downturns or recessions can lead countries to focus more on
domestic priorities and reduce their reliance on global trade and investment.
• Changing Trade Agreements: Countries might renegotiate or withdraw from trade agreements that
were previously promoting global trade.
• Environmental Concerns: Growing concerns about climate change and environmental
sustainability might lead to policies that prioritise local production and reduce the carbon
footprint associated with long-distance trade.
• Health Crises: Global health crises, such as pandemics, disrupt travel, trade, and supply chains.
• Economic Nationalism: Governments might adopt policies to protect domestic industries and
jobs, even if it means reducing international trade.

External Shocks in the global economy:

• External shocks are unexpected and significant events or developments that originate from
outside a country's or region's economy but have substantial impacts on it.
• These shocks can disrupt economic activity, financial markets, and overall economic stability.
• External shocks can be positive or negative and can affect various aspects of the economy, such
as growth, inflation, employment, and trade. They are often difficult to predict and can lead to
sudden changes in economic conditions.
• Examples of external shocks include the COVID-19 Pandemic, financial crises, natural disasters,
currency crises, geopolitical shocks, commodity price fluctuations and unexpectedly large
changes in global interest rates.

Globalisation Winners:

• Vietnam
 Vietnam has been a major beneficiary of glob. Once a heavily centralised economy
(govt/state control) after the Vietnam War, the economy was allowed to open up to the
powers of the market through a series of economic and political reforms known as the
Doi Moi reforms. Trade was liberalised through a vast reduction in tariffs, FDI was
encouraged, domestic bureaucracy and red tape were reduced, and alongside these
powerful market reforms, the government invested heavily in human capital and
infrastructure. More recently, Vietnam also joined the trading bloc ASEAN. Such
acceptance of globalisation has seen Vietnam specialise in and become the largest
exporter of textiles and the second largest exporter of electronic goods in the Southeast
Asia region, with exports accounting for 99.2% of the country’s GDP. From being one of
the world’s poorest countries in 1985 with a GDP per capita of only $230, incomes now
stand at roughly $6000. Annual growth rates have always been between 5 – 6.8% since
 2010, beaten in the world only by China, with much of this growth inclusive of many
opportunities for both men and women.
• Eurozone:
 Countries in the Eurozone have benefited from glob and greater economic integration
by boosting exports and running large trade surpluses that contribute strongly to
economic growth and overall prosperity. Once more, these countries have been open
to FDI and migration to add to growth, but also to fill skills shortages and boost
productivity domestically.
• Indonesia
 Indonesia has experienced rapid economic expansion, growth of the middle class and
poverty reduction over the past two decades, fuelled by primary commodity exports,
avoiding the resource curse and high population growth, driving high consumption.
Smart government policy has promoted freer trade and FDI whilst ensuring that
diversification away from key minerals such as nickel and bauxite towards clothing and
electronic goods has occurred. Since 1990, per capita income has increased by 350%
to $14,500 with an open and non-corrupt government, especially post-colonisation,
ensuring that the fundamental development pillars of infrastructure, healthcare, and
education were prioritised. Challenges remain going forward, however, in particular
the negative impact of climate change and deforestation on exports and whether
Indonesia can continue to diversify away from low-value primary commodities into
higher value-added industries.

Glob Losers:

• Sub-Saharan African
 Sub-Saharan African countries have seen the slowest rate of HDI growth since the
1980s, with the average in the region being 0.55, indicating a basic medium level of
development. Many of these countries are primary commodity dependent without
diversifying their economies and thus have suffered from the ‘resource curse’, falling
into deep recessions whenever commodity prices fall or overseas demand weakens.
Once more, overseas protectionism in the agriculture sector has proven to be a major
barrier to growth, but perhaps the biggest contributor is unstable governments,
corruption, and war, which have prevented the benefits of trade and FDI from spreading
to the wider population. The role of government in managing the globe has been very
poor, which is why improving education, health, and infrastructure, and poverty
alleviation, remain urgent goals. Once more, these countries have been poor at
managing FDI, with many foreign MNCs stripping resources, leaving lasting
environmental damage, not paying tax and exploiting local workers.
• South American nations
 South American nations have benefited from glob, but the gains have been limited due
to opening up their financial markets too early, which has caused destabilising capital
flows to enter and exit the region quickly, leaving some countries like Argentina in
economic ruin. Liberalising financial markets can fuel rampant economic growth,
 particularly if that inward flow of finance is used for productive means; loans for capital
investment and industry diversification for example but if inward flows are mainly
speculative; exchange rate, stock market, bond and derivative investments causing
bubbles, leveraged by large scale borrowing it can trigger a banking crisis when bubbles
burst and deep recessions that are difficult to recover from, as experienced by
Argentina.
• People on lower incomes in high-income countries
 Those on lower incomes in developed countries such as the UK, other developed
European nations, the USA, and Canada have lost due to glob. The move to greater
trade liberalisation has led to the destruction of many industries in the developed world
with jobs transferred to mainly East and South-East Asia especially in textiles, metal,
and manufacturing industries. With that, large pockets of the population have been left
structurally unemployed, adjusting to lives on low incomes and reliant on benefits.
These groups of people have actually seen their incomes reduce as a result of glob.

Advantages of glob

• Advantages from the freer movement of labour between countries

• Helped many of the poorest countries to achieve higher growth
• Increases the opportunity for developing countries to borrow money
• Dynamic efficiency gains flowing from the sharing of ideas, skills/ tech

Disadvantages of glob

• Trade imbalances
• Exploitation by some global multinationals
• Caused higher structural unemployment in some countries
• Dominant global brands