Globalisation and politics of international economy

1
Globalisation and politics of international
economy

2

• Three directions pulling the issue of
  TRADE-reflecting the three main schools of
  thought in International Economics
• 1) a large consensus that a liberal international
  trading system is desirable
• 2)Within that liberal consensus individual nation
  states try to pursue mercantilist policies of
  tariff based protectionism for certain
  industries.
• 3)This can result in direct subsidies and various
  other forms of direct state aid to certain
  activities (structuralist)

3
Class Outline

• Political and economic case for global spread of
  liberal approach to trade
• Structuralist arguments against dominance of free
  trade
• - modernization vs. dependency theory
• - periphery vs. center
• - arguments against the Washington consensus
  and international financial facilities and
  Structural Adjustment Programmes (SAPs)
• - Aid dependency
• - Case for mercantilism

4
1) Political and economic case for global spread
of liberal approach to trade

• Liberals fear the heavy hand of government
• Liberals believe in freedom, individual rights
  and free markets

5

• What are the fundamental elements of classical
  liberal theories of Smith and Ricardo?
• How were they refined by Mill and Keynes?
• Theory of Hegemonic Stability

6
Theory of Hegemonic Stability

• Observes that international markets work best
  when certain international public goods are
  present
• Public goods such as free trade, peace security
  and a sound system of international payments
• Free rider problem
• One nation dominates the hegemon which
  benefits so much from success of global economy
  that it is willing to bear the costs of providing
  the international public goods

7

• Generally recognized three instances of hegemonic
  stability in modern history
• the United Provinces (Holland) 18th C
• Britain 19th C
• USA post world war II

8

• Questions arising
• Is the USA still a hegemon?
• Is a sort of group hegemony possible involving
  the USA and the EU?
• the motives and effects of hegemony
• benign and unselfish eventually draining
  itself dry?
• - selfish and imperialistic draining the rest
  of the world to fill its coffers?

9
Globalization and ascendance of neo-liberalism

• Influenced by works of F. Hayek and M. Friedman
• Aided by the failure of USSR
• Promoted by US administrations as a key to
  conduct international trade and help the
  developing countries
• Washington consensus?

10
Washington consensus

• Originally coined by economist John Williamson in
  late 1980s
• A set of recommendations that are believed to be
  universally applicable to any ailing economy
• Applied by Washington-based institutions IMF,
  WB, US treasury

11

• The consensus included ten broad sets of
  recommendations
• Fiscal policy discipline
• Redirection of public spending from
  indiscriminate (and often regressive) subsidies
  toward broad-based provision of key pro-growth,
  pro-poor services like education, health and
  infrastructure investment
• Tax reform broadening the tax base and adopting
  moderate marginal tax rates
• Interest rates that are market determined and
  positive (but moderate) in real terms
• Competitive exchange rates
• Trade liberalization liberalization of imports,
  with particular emphasis on elimination of
  quantitative restrictions (licensing, etc.) any
  trade protection to be provided by low and
  relatively uniform tariffs
• Liberalization of inward foreign direct
  investment
• Privatization of state enterprises
• Deregulation abolition of regulations that
  impede market entry or restrict competition,
  except for those justified on safety,
  environmental and consumer protection grounds,
  and prudent oversight of financial institutions
  and,
• Legal security for property rights.

12
Reading

• http//en.wikipedia.org/wiki/Liberalism
• http//en.wikipedia.org/wiki/Washington_consensus

13
2) Structuralist arguments opposing free trade

• Originate in mercantilist opposition to liberal
  policies staged by German economist Friedrich
  List and teachings of Karl Marx and his followers
• Currently adopted by academics around the world
  and leaders in developing countries, mainly Latin
  America (Chavez, Lula, Castro)

14

• Karl Marx (1818-1883)as a young man

15

• Karl Marx (1818-1883). Somewhat later on.oh
  well it happens to us all
• The main tenets of Marxism?

16
Opposing liberal ideas historical perspective

• FREE TRADE - no more than an academic
  justification of English trade hegemony in 19th
  Century (F. List)
• Compare with the situation today
• Infant industries of the USA must be protected
  (Alexander Hamilton)
• Comparative advantage the shift in industries
  not easy especially painful for developing
  economies
• Resources not as flexible as free traders assume

17
Influence of Marxism

• Flawed assumption that Marxism died with USSR
• Traditionaly popular in Latin America
  inspiration for all major socialist/labor parties
• Counterweight to the American influence
• Structuralism a general heading for
  contemporary theories viewing international
  economy through prisms of Marxism and mercantilism

18
Structuralism and global economy

• Structure conditions outcome both the domestic
  and global economic structures are the most
  significant determinants of subsequent economic
  and political developments.
• Liberals make individuals and the state their
  basic units of analysis
• Structuralists focus on the nature of class
  relations across the globe and examine the power
  relations across the world derived from economic
  power.

19

• Structuralists believe that developed countries
  needed to impose such a world order that would
  enable them to grow rich and satisfy their
  domestic voters
• These policies are in the interests of powerful
  corporations
• Developed nations of the world impose the
  conditions of lending and intellectual property
• keeping the poorer ones underdeveloped and deep
  in debt, dependent on imported manufactured
  goods, jobs and financial resources.
• Exemplified by dependency theory

20
Dependency Theory

• A reaction to modernization theory developed
  countries prescribe treatment for LDCs
  provide loans investment ? LDCs become
  developed
• D.T. claims that such an involvement is always
  disastrous
• Such relationship is always one of dependency and
  exploitation

21
Periphery vs. Centre

• LDCs often depending on one key product ?
  dependant on the buyer countries
• Between 1960s and 1990s exports of West-African
  countries increased by 25, but profit fell by
  20
• The indebtedness of weak peripheral LDCs made
  them even more dependant on the developed states
  and international financial institutions

22
Structuralism vs. Washington Consensus

• The Structural Adjustment Programmes (SAP)
  prescribed by IMF WB considered another way to
  weaken already weak LDC governments
• SAP usually involve draconic measures that
  provoke electorate
• Fiscal discipline usually dominates the agenda at
  the expense of sound policies (Bulgaria)
• Debt repayment being often the first imperative
• Disregard for specific local conditions
  (Argentine)

23
Structuralism vs. Washington Consensus (2)

• Structuralist treatment
• - Keep up the trade barriers to protect infant
  industries
• - Import substitution by domestic production
  (Tata group in India)
• ? caveat countries often incapable to create
  competitive industries without FDI (car industry
  in Brazil)

24
The Role of Aid in World Economy

• Humanitarian/rescue aid vs. development aid
• Is development aid beneficial per se?
• Under what conditions would development aid be
  beneficial?

25

• Aid and conditionality - requirements set by IMF
  WB, developed countries and their domestic
  interests
• Aid affects structure of recipient society
  elites benefit disproportionately
• Aid may distort structure of local economy
• Concept of aid ownership

26

• Since 1990s total amount of aid declined (due to
  ending of Cold War)
• However, contemporary aid policies better
  targeted (largely due to influence of NGOs)
• Give the means rather than giving the products

27
Case for Mercantilism

• STATES naturally desire to protect themselves and
  their industries from the negative effects of
  trade
• - Farmers for example often appeal to and
  receive protection form the rigors of FREE TRADE
• - they tend to have strong lobbies in USA,
  Western Europe and Japan
• Nation states FEAR becoming too dependent upon
  other nations for certain goods
• Developing nations feel that under WTO rules they
  are deprived of their opportunity to develop
  their fledgling industries

28
Conclusions

• Liberal ideas are the main driving force behind
  economic globalization, but often challenged for
  serving political goals
• Major challenge through various structuralist
  theories
• Structuralism very salient among intellectuals in
  developing world ? provides means to pass the
  blame for LDCs failures
• However, some of its criticisms seem valid (such
  as imposition of tough liberal requirements on
  struggling economies)

29
Reading

• http//americas.sas.ac.uk/about/die_structuralism.
  pdf
• http//www.mtholyoke.edu/acad/intrel/depend.htm

30
National Competitiveness in Global Economy
31
Introduction

• Models building on classical liberal premises
• View the international economy as a system based
  on units (states, firms, individuals)
• Explain trade flows around the globe using
  empirical data and projections

32
Outline

• Factor proportions theory
• Country similarity theory
• International product life cycle theory
• Theory of national competitive advantage

33

• FACT0R PROPORTIONS THEORY Heckscher-Ohlin 
• Maximize output Factor endowment varies among
  countries 
• China has a large pool of unskilled labour  
• Saudi Arabia has large crude oil reserves
• Goods differ according to the types of factors
  that are used to produce them
• Wheat requires land, clothing requires unskilled
  labour
• Countries will have a comparative advantage in
  producing products that intensively use resources
  it has in its advantage.

34

• The H-O theory presents the issue that
  international and interregional differences in
  production costs occur because of the differences
  in the supply of production factors
• The model essentially says that countries will
  export products that utilize their abundant
  factor(s) of production and import products that
  utilize the countries' scarce factor(s)

35

• The model is simplified and does not account for
  differences in technology
• The theory also operates with certain assumptions
  such as that prices of factors depend only on the
  factor endowment
• Untrue factor prices not set in a perfect
  market
• Factors to consider such as legislated minimum
  wages and benefits force the cost of labour to
  rise to a point greater than the value of the
  product than many workers can produce

36
Country Similarity Theory

• Developed by a Swedish economist Steffan Linder
• Rests on the concept of Intra industry trade
• Intra industry trade accounts for approximately
  40 per cent of world trade.
• Countries at the same stage of economic
  development that shared the same consumer
  preferences greatest potential for trade

37

• More recent developments in theoretical
  approaches in Economics to International Trade
  move away from a COUNTRY BASED approach and
  move towards a FIRM BASED approach.
• International Product Life Cycle Theory (IPLC)
  analyses the effects of product evolution on the
  global scale.

38
International Product Life Cycle Theory (IPLC)

• Applies to established companies in
  industrialised countries who expand their product
  range
• The theory is broken up into five major stages

39

• 1) Release
• Competition in Industrialised countries tends to
  be fierce
• Producers look for better ways to satisfy
  customer needs
• Customer feedback from previous models - the core
  element of research
• Once the product enters the domestic market and
  begins to create a positive reputation the
  demand increases

40

• 2)Exports
• As the product receives positive customer
  response, the international demand for the
  product begins
• The manufacturer begins exporting to increase its
  market share
• Example PCs

41

• 3)Foreign Production begins
• As demand increases with the new global market ?
  feasible to begin local production in various
  countries
• By sharing technology on the manufacturing of the
  product, the company has lost an advantage
  (China)
• The end of this stage signifies the highest point
  in the International Product Life Cycle Theory.

42

• 4)Foreign Competition in exports markets
• A threatening stage for the original company
• Local manufactures gained experience and scale in
  producing and selling their product, hence their
  costs have fallen
• Their initial market saturated ? they begin to
  look elsewhere to promote their product
• ? Possibly they threaten original companys
  domestic market

43

• 5)Import Competition in Home Market
• Competitors have a quality product which is able
  to undersell the original manufactures
• They have a competitive edge with their low
  labour costs.
• Disadvantages of the IPLC theory
• Assumption that products are released initially
  in the domestic markets
• Many globalised companies tend to release their
  new product lines internationally, not
  domestically

44

• MICHAEL PORTEROriginator of the THEORY OF
  NATIONAL COMPETITIVE ADVANTAGE

45

• Michael Porters Theory of National Competitive
  Advantage/Porters Diamond published in 1990 was
  based on a study of 100 firms in 10 developed
  nations
• Porter questions how Switzerland and Japan could
  become success stories without assumed
  prerequisits

46

• FACTORS which MICHAEL PORTER BELIEVED EXTENDED
  BEYOND NATURAL ENDOWMENT INCLUDE.
• a sizeable demand from sophisticated consumers,
• an educated and skilled workforce,
• intense competition in the industry
• the existence of related and supporting suppliers

47

• Porter also discusses external influences such as
  government and chance Demand Conditions
• A company facing a more competitive environment
  will strive to make itself more efficient
• Factors of production are nothing more than the
  inputs to compete in any industry, such as
  Labour, arable land, natural resources, capital,
  and infrastructure
• These are clearly important but PORTER now
  believes they are less vital to success than
  before.

48

• Factors most important to competitive advantage
  in most industries, especially in the industries
  most vital to productivity growth in advanced
  economies, are not inherited but are created
  within a nation, through processes that differ
  widely across nations and among industries

49
Porters single diamond framework
Government
Structure of Firms and Rivalry
Demand Conditions
Factor Conditions
Chance
Related and Supporting Industries
Adapted from Michael E. Porter, The Competitive
Advantage of Nations (New York, Free Press,
1990, pg. 72)
50
Factor conditions

• These include
• the quantity, skills, and cost of the personnel
• the abundance, quality, accessibility, and cost
  of the nations physical resources such as land
  water, mineral deposit, timber, hydroelectric
  power and fishing grounds
• the nations stock of knowledge resources,
  including scientific, technical, and market
  knowledge that affect the quantity and quality of
  goods and services
• the amount and cost of capital resources that are
  available to finance industry
• the type, quality, and user cost of the
  infrastructure, including the nations
  transportation system, communications system,
  healt-care system, and other factors that
  directly affect the quality of life in the
  country.

51
Demand conditions

• These include
• the composition in the home markets as reflected
  by the various market niches that exists and
  buyer sophistications
• the size and growth rate of the home demand
• the ways through which domestic demand is
  internationalized and pulls a nations products
  and services abroad

52
Related and supporting industries

• These include
• the presence of internationally competitive
  supplier industries that create advantages in
  downstream industries through efficient, early,
  or rapid access to cost-effective inputs
• internationally competitive related industries
  that can coordinate and share activities in the
  value chain when competing or those that involve
  complementary products.

53
Firm strategy, structure, and rivalry

• These include
• the ways in which firms are managed and choose to
  compete
• the goals that companies seek to attain as well
  as the motivations ot their employees and
  managers
• the amount of domestic rivalry and the creation
  and persistence of competitive advantage in the
  respective industry.

54
The role of chance

• Chance events can nullify the advantages of some
  competitors and bring about a shift in overall
  competitive position because of developments such
  as
• new inventions
• significant shifts in world financial markets or
  exchange rates
• discontinuities in input costs such as oil shocks

55
The role of government

• Government can influence all 4 of the major
  determinants through actions such as
• subsidies
• education policies
• the regulation or deregulation of capital
  markets
• the establishment of local product standards and
  regulations
• the purchase of goods and service
• tax laws
• antitrust regulation.

56
Conclusions

• Modern models of national competitiveness prefer
  to use firms as units of analysis
• Factor endowment matters less
• Governmental policies should be providing
  beneficial environment rather than spend
  resources by picking winners
• Theories of national competitiveness do not
  account for power relations between states