Globalization in the Historic Context

Globalization, unemployment and government policy

Tony Blair argued in 1996 the notion of the nation state becomes more diffuse and Technological change is reducing the power of the nation state

• Is this true and what are the implications?
• What should be the response of Government?
• Is there clarity over what Globalization means?

To the extent that there is Globalization and nation states are becoming powerless most commentators have exaggeratd the phenomenon

Has Technology 'taken' power from nation states or have countries 'transferred' power to MNC's and global financial markets.

Trends and patterns in globalization

During 1870 -1913 almost continual increase in trade and world output. After the war and Great Depression there was a movement towards a closed world economy. Post second world war with the Bretton Woods agreement there was significant rise in the openness of the world economy but it still took until 1968 to reach pre WW1 levels. The stability (and instability) was based around semi-fixed exchange rated pegged to the dollar (in turn pegged to gold). This cemented US monetary hegemony but also meant it needed to run surplussed to avoid devaluation. Over time the US domestic ecomony became less aligned with the needs of the Global economy, expensive wars and declining economic supremacy put further pressure on the mechanism .

The collapse of the system ushered in a period of slower growth. The oil shocks of the 1970's and power shifting from industrialized nations towards energy producers.

Other patterns that were noted include

• 'regionalism' ASEAN, EU etc.
• Competitive devalutions and
• Technological globalization
  • National exploitation of innovations in global markets. Trade and patents flows have increased across borders
  • Collaboration across nations to exchange know-how
  • Generation of innovations across companies driven by MNC's. MNC's more inclined to seen this as home-based strategic asset and there is a fear that less developed nations can exploit techology at a lower cost.(Hisense, Foxconn, Lenovo)

Far from technological forces sweeping away nation states the need for active governments (nationally locally and globally) is more important.

Trade and economic performance

Common wisdom is that as globalization increases nations should focus on convergence and stability through interest rates, exchange rates and fiscal balances (like ERM). However increased integration could increase the need for economic arguments to target growth and employment

Implications for economic policy

There is a need for international initiatives to target stability and growth and prevention of volatility in financial markets to create financial crises. Authors argue that the BoE focus on interest rates to control inflation does not target growth and employment. An effective industrial and technology policy that embodies ntrainig, innovation, R&D and cultural factors and the ability for developing nations to increase social capability. This requires

• Incentives to attract companies to innovative activities
• Infrastructures to support this.

The evidence shows that there is little evidence towards converging economic policies. There is a bigger divergence between high and lower govt expenditure to GDP. Also the free movement of capital for speculative purposes can destabilize and contrain expansion due to volatility, and large movements in price (oil price doubling in 2008?)

Even 150 years ago economists argued that globailization was constraining national response. So the response should be for nations to work colloboratively at an international level and that globalisation can be controlled by nations.

Did Political instituions foster the economic globalization in the post war period

How they helped economic globalization

Following on from the Second World War the political and economic climate was radically different to the pre-war years and I think there is a strong argument supporting the notion that global political institutions such as Bretton Woods Exchange Rate System and the other institutions that also emerged from the conference (IMF, World Bank, GATT) and later Marshall Plan, WTO and EU helped rather than hindered the increased globalization of economic activity. I think it would have helped in the following ways

A. A pegged exchange rate to the dollar would have encouraged other countries to adopt similar mildly expansionary economic policies and fostered a tendency towards longer term planning by companies and countries knowing that exchange rates would not materially diverge in the future and there would be stable economic policies

B. The IMF and World Bank would have been able to provide finance and expertise to developing regions and to countries whose economic infrastructure was decimated by the war.

C. GATT and later the WTO liberalized international trading and pressured countries to reduce trade, tariffs and protectionism of home-based industries beyond that required to get those industries competitive in an international market

D. Finally, the EU helped to develop democratic habits and trade standardization that helped countries sell to different countries using a common set of standards.

How they hindered

A. Although Bretton Woods helped Exchange Rate stability, when countries started to implement divergent economic policies it built up in imbalances that resulted in major shocks that set countries back more than they would if their currencies had been able to float freely (e.g UK in 1967).

B. Bretton Woods, IMF and World Bank tended to US and Western European-centric view of the world which tended to favor them and impose economic austerity on poorer nations in order to obtain financial aid, which may have prevented the population sharing the benefits of the global economy.

A free-market development would not have been so successful but I would argue that since the 1980’s a more flexible mechanism of free floating exchange rates has absorbed economic shocks more successfully and led to longer periods of expansion. (Except of course this recession)

1. It is well documented in the reading that Economic Globalization was a phenomenon is previous eras most notably between 1870 and 1913 when trade and world output grew considerably as the result of trade between Britain and its Empire (and the French and Dutch trading empires) and the emerging dominance of the US economy. In fact world trade did not reach pre-1913 levels again until 1968[i]. What is unprecedented is the globalization the financial system; especially the flow of money and the interconnectedness of financial systems so much so that defaulting mortgage holders in the US can eventually cause a run on the bank in the UK!

How did different countries fare in the credit crunch

Singapore

10 years ago I lived in Singapore; a country with no natural resources other than its highly educated population. The main drivers of the economy were consumer manufactured products, shipping and financial services. Singapore had never known a period of negative growth in recent decades. The Asian Banking crisis of 1997 merely slowed their rapid growth and it responded to the crisis by allowing the currency to slowly devalue . In 2008 they experienced their first severe recession in living memory. The financial sector was hit hardest as well as manufacturing and cargo. Singapore has many migrant workers who were sent home but the impact on the average Singaporean was less severe.

Singapore’s rebound has been remarkable with GDP growth at 16% last quarter year on year [ii]. The record growth rate was mostly driven by a rebound in exports of manufactured products. I think part of the recovery is due to the fact that it maintains strong trading ties with both Chinese-dominated Asian markets as well as Western trading blocs, thus reducing its exposure to economic downturns in either market. Singapore is an enigma in that it has weak democratic structures yet there is little governmental interference in the running of the economy and low taxes. This is a sucessful model for them but not a model that is easily exported to other countries perhaps.

1. Germany`s role in the global economy

as stated in the Guardian and elsewhere (e.g. http://www.guardian.co.uk/business/2010/dec/08/german-exports-show-surprise-drop?INTCMP=SRCH or http://www.financemarkets.co.uk/2010/08/13/germany%E2%80%99s-economic-growth-boosted-by-exports/) the export sector still is the engine of our economy. Till recently Germany was well-recognized as the "export world champion" although it lost its pole position to the emerging superpower of China (e. g. http://www.dw-world.de/dw/article/0,,2340069,00.html). Due to its economic power German media often tend to call Germany the "milkmachine" of the EU - which is highly polemic in fact. Our main exports are: Machinery, vehicles and chemicals.

The future prospect for the German export sector is rather optimistic since the demand for (high-standard) cars is very high in countries like India or Brazil.

Our (economic + political) influence might grow further in case of receiving a permanent membership in the security council of the UN which is yet undecided.

A negative "side-effect" of our economic strenght has to be acknowledged as well: German companies have been involved in supplying material for developing atomic bombs.

2. Germany`s recovery from the recession

As stated previously Germany has recovered quite quickly from the slump it suffered under. Now I would like to give some reasons.

•In most companies the employees agreed on working short-hours. In fact the role of the German unions - which are recognized to be very influential - has to be appreciated as well since they have been really modest while bargaining with the employers. By doing so about 1 million jobs could be saved.

•The German governmet raised the VAT (3 points up). •The German government bailed banks and companies out by providing financial back-up. In sum about 80 billion Euros have been spent on stabilising the German economy. •Some sort of "scrapping bonus" has been introduced in order to stimulate consumer spending - especially cars or other vehicles

Bretton Woods-Reversed

This is an paper by Andrew Rose, academic at Haas School of Business, Berkeley CA. He argues that inflation targeting countries can manage their exchange rate volatility without the need for international co-ordination, institutions, IMF or gold stanadard and can can succeed in this endevour for longer periods. It is the diametric opposite of Bretton Woods

http://faculty.haas.berkeley.edu/arose/ReverseBW.pdf

Other References