Globalisation Notes

1. Globalisation - Growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods, services, free international capital and labour flows Increase in international trade Increase in international flow of capital including FDI Increase in international outsourcing and offshoring by MNCs Increase in labour mobility Extent of globalisation Political engagement Personal contact Technological connectivity Economic integration

2. International Institutions 2.1 International Monetary Fund - Ensuring global economic stability through governing of international financial relations - Preventing another global depression - Put international pressure on countries to help maintain global aggregate demand - Provide loans: alleviate poverty and reduce debts 2.2 World Bank - Finance development of countries in developing world 2.3 World Trade Organisation - Govern international trade relations - Create a forum within which international trade agreements are negotiated - Encourage the free flow of goods and services 3. Stages of Economic Integration - Economic integration: process of eliminating restrictions on international trade, payments and factor mobility - Uniting national economies in regional trading agreement - Eg: EU 40% of world trade 3.1 Free Trade Area - Least economic integration - Association of trading nations which agree to remove tariff and non-tariff barriers among themselves - Members retain independence in establishing trading policies with non-members: sovereignty - Eg: NAFTA, US-Singapore FTA - Non-members may use transshipments strategy to escape some trade restrictions Export product to member country with lowest level of outside protection, then routed to other member countries with higher protection levels 3.2 Customs Union - Agreement among two or more trading partners to remove all tariff and non-tariff barriers among themselves

Last modified: 24th April 2008

Globalisation Notes
Imposes identical trade restrictions against non-members Permit free trade within customs union, while all trade restrictions imposed against outsiders are equalized Reduces transshipments Eg: Benelux: Belgium, Netherlands and Luxemburg in 1947

3.3 Common Market - Free movement of goods and services among members and imposition of common restrictions against non-members - Free movement of labour and capital - Eg: European Union - Need to surrender sovereignty in immigration and capital flows 3.4 Economic Union - National, social, taxation and fiscal policies harmonized and administered by supranational institution 3.5 Monetary Union - Unification of national monetary policies and acceptance of a common currency administered by a supranational monetary authority - European Monetary Union: Euro 4. Regional Trading Arrangements Stumbling or Building Blocks to Globalisation? 4.1 Stumbling Blocks - Discriminating against the rest of the world But under WTO, trade liberalization by any one nation extended to all 148 member countries on a non-discriminatory basis - Reduce discretion of member nations to pursue trade liberalization with non-member countries Invest time and energy establishing strong regional linkages rather than global negotiations - Provide only modest openings of foreign markets export demand smaller may not enjoy additional EOS 4.2 Building Blocks - Deeper economic integration among members due to greater commonality of interests and simpler negotiating processes - *Increasingly attractive for non-members to join Economic size greater bargaining power in trade negotiations with the rest of the world Opportunity cost of remaining outside an arrangement increases, especially when nonmember exporters face possible decreases in market share - Economic restructuring and movement of workers from industries with comparative disadvantage to industries with comparative advantage SR: structural unemployment LR: benefits workers 5. Effects of Economic Integration 5.1 Trade Creation vs Trade Diversion

Last modified: 24th April 2008

Globalisation Notes
Trade creation: shift in trade from higher-cost domestic producer to lower-cost member country In line with principle of CA welfare gains + more efficient resource allocation Trade diversion: shift in trade from lower-cost non-member country to higher-cost member country Shift away from more efficient producer against principle of CA

5.2 International Factor Flows - Productive factors move from nations with lower rate of return to nations with higher rate of return - Flow where wages, yields on capital large enough to outweight cost of moving - International trade in goods and services and flows of productive factors substitutes International capital flows (investment) trade in capital-intensive products International mobility of labour trade in labour-intensive products 5.2.1 Capital Flows - Foreign portfolio investment: flow of financial capital Movement of money across boundaries: not so beneficial for economy since no long run potential growth may destabilize economy - Foreign direct investment: movement of capital that involves foreign ownership and control of production facilities Actual spending in economy Eg: Wal-Mart Stores, Exxon Mobil 5.2.1.1 Factors Affecting Capital Flows - Application to Singapore Open up economy and free up movement of goods, people, technology and ideas Pursue sound macro and microeconomic policies with fairness and transparency, emphasis on stability and implementation process mindful of poor and vulnerable Build capabilities for the future eg. infrastructure, effective institutions (competent and non-corrupt) 5.2.1.2 Benefits of Capital Flows - For receiving country Higher rates of private investment economic growth and job creation, increased wages due to additional total demand for labour by MNCs Improved management and better technology o MNCs bring in executives o Demonstrative effect: transfer of knowledge and skills o Competitive effect: domestic firms innovate and improve production processes Increased tax revenue Increased exports and thus foreign exchange earnings Increased total output and output per unit input Enhance recipient countrys production possibilities - For source country SR: structural unemployment, but other industries may find foreign sales rising o Host country: increased investment employment and income increases purchase more exports o Investment abroad stimulates exports of capital goods

Last modified: 24th April 2008

Globalisation Notes
o Imports into home country could increase if FDI plant assembles / produces relatively labour-intensive goods when it is relatively capital-abundant LR: generate return flow of income (interest and dividends) back to source country o Outward investment firms remain competitive supports employment at home

5.2.1.3 Costs of Capital Flows - For receiving country May stifle growth of home-grown industries o SMEs difficulty competing if MNCs drive out local competition and gain monopoly power MNCs not very concerned with working conditions in developing nations During international crises, MNCs move funds rapidly from one financial center to another to avoid losses difficult for national governments to stabilize economies Dutch disease: inflow of capital appreciation of currency imports cheaper and exports more expensive obstacle to growth Dual economy: small pockets of wealth from FDI but domestic sector poor Decreased domestic investment: foreign firms partially finance investment, borrowing from capital market demand for loanable funds increase or supply drops interest rates increase crowding out effect Instability in BOP and exchange rates difficult for LR planning Environmental degradation Corruption - For source country Reduction in GDP, reduction in total domestic wages, increase in total return to investors Loss of tax revenue, loss of jobs Exports from source country could fall if new plant set up aboard supplies overseas market directly from foreign country - Performance requirements Minimum percent of local employees Maximum percent of profits repatriated Minimum percent of output exported to earn scarce foreign exchange Compulsory domestic content o Eg. Volkswagen have to work with Chinese firm when they entered China 5.2.2 Labour Flows 5.2.2.1 Benefits of Labour Flows - Enhance global economic efficiency: migrants workers flow from countries of lower productivity to those of higher productivity - Equalisation of wages - Increase in world output Outflow of labour from B smaller reduction in output value compared to increase in output value from immigration of workers into country A - Increase in capital returns to firms in recipient countries For country A

Last modified: 24th April 2008

Globalisation Notes o Influx of workers into A average wage rate falls to $6 from $9, total labour income $60 (a + d) o Remaining value of output shown by b + c + e increase in capital returns to firms b + e For country B o Average wage ratein B rises from $3 to $6, total labour income $24 (f + h) o Workers in B experience increase in income when h > g o Returns to firm fall by h + I Changes in income distribution Country A o Gain in income accrue mostly to migrant workers at expense of local workers (unskilled domestic workers) who suffer losses o Skilled workers still retain their jobs, of greater demand due to output expansion o Capital owners in A gain from higher returns on investment and greater availability of low-cost labour o 10% increase in migrant share of population reduces native wages by 1% at most Immigrants complementing native labour Country B o Workers remaining enjoy higher wages o Capital owners suffer loss of returns o Overall national income falls if wage income from abroad not repatriated Increases in remittances from workers overseas for source country Important source of foreign exchange and safety cushion against domestic unemployment in source country Eg: Remittances to developing countries US$93b in 2003 Income, employment and capital formation from remittances substantial, while costs of emigration limited Positive production and consumption effects for recipient countries Lower wage rates benefits producers lower product prices benefits consumers

5.2.2.2 Costs of Labour Flows - Drain on government resources from immigration of unskilled labour Welfare benefits at expense of domestic residents Illegal immigration BUT children of immigrants enter labour force pay taxes net positive contribution to public coffers in LR Eg: Singapore: limited by work permits granted by government o Dependent on needs of economy o Building boom more construction workers o Temporary labour migration o Workers not qualified for citizenship and have to leave country at governments request o Minimise unemployment among domestic workers during recession and moderate rises in labour costs during boom - Brain drain Emigration of highly educated and skilled people Higher salaries, lower taxes, greater professional and personal freedom

Last modified: 24th April 2008

Globalisation Notes
Source country faces limitations to potential economic growth in LR Skilled labour scarce in source country loss of skilled labour fall in NY opp cost larger if skilled workers could have generated other benefits like improving level of tech With education subsidies, loss of scarce capital on which a social rate of return was expected Recipient country: productivity of immigrant skilled labour higher than possibility of greater positive externalities Reduces domestic price of non-traded services like medical care Widens income gap Countries with aging population and shrinking labour force may face serious constraints on future economic growth without immigration of foreign talents Eg: Singapore: 0.5% talent loss will hit Singapore hard

5.2.2.3 Conclusion - Diversify economy: prices fall + enable economy to domestically produce wider variety of goods than natives could alone - Overall effect of immigration on US GDP between US$1b and US$10b a year - Normally leads to gain than drain 5.2.3 Overall Benefits and Costs of Globalisation 5.2.3.1 Benefits - Administrative savings Need for government officials to monitor movement of goods and services across countrys borders eliminated - EOS Dynamic gains Free trade larger markets - Greater competition Potential for successful collusions lessened Domestic producers forced to be more productive and cost-efficient to survive Holding down costs and permitting expanded levels of output - Increased investment Structural changes as economies strive to make themselves internationally competitive EOS Expected increase in income and demand Reduced risk and uncertainty due to larger economic and geographic markets - Increased factor mobility Dynamic benefits due to increased economic efficiency + higher factor incomes in integrated area - Possible fall in inflation rate Singapore: trade-off between high economic growth rate and rising inflation minimized by globalisation Entry of countries like China put downward pressure on import prices Flexibility of labour supply offsets escalating wage growth Acceleration of job growth in Singapore in past three years double rate of early 1990s boom facilitated by influx of foreign workers 5.2.3.2 Costs (more for developing world)

Last modified: 24th April 2008

Globalisation Notes
Income inequality Actual no. of people living in poverty increased Rapid growth does not always boost living standards broadly Loss of jobs in developed countries Loss of white-collar jobs from global sourcing of services to developing countries BUT educated kept their jobs or have gotten better ones Governments to ensure re-training benefits available to those displaced o Provision of temporary income assistance and retraining for unemployed o Eg: Singapore: Workfare scheme to tackle income disparity Environmental damage Closure of industries in DCs to low wage countries with lax environmental regulations BUT more prosperous and more open recipient LDCs usually more able and willing to enforce environmental regulations and embrace modern tech Side agreements like fines or trade sanctions and be imposed on countries which fail to enforce environmental laws Growing corruption Not enough time for countries to culturally adapt to rapid pace of change

Last modified: 24th April 2008