Introduction:
Globalisation: integration of national economies into the international economy through trade, FDI, capital flows, migration and the spread of technology
Broadly defined as a complex series of economic, political, social, cultural and technological changes which lead to increasing international interdependence, integration and interaction among people and corporations of different nations
Economic definition: the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods, services and free international capital (and labour) flows
Involves:
- Increase in international trade at much faster rate
- Increase in international flow of capital including FDI
- Increase in movement of labour across boundaries
- Increase in international outsourcing and offshoring by multinational corporations (MNCs)
- Organisations like WTO and IMF that deal with international transactions
Contributing factors:
- Technological advancement in communication, transportation and information management (cut cost and broke down barriers)
- Recognition of the cost of protectionism (enhanced by agreements to remove barriers to free trade)
Measurement of Globalisation:
- (a) Goods and services, (b) labour / people, (c) capital, (d) technology
- Globalisation Index: tracks and assesses changes in (a) incorporating measures, (b) movement of people across borders, (c) volume of international telephone calls, internet usage, (d) participation in international organisations
- AT Kearney: (a) Political engagement, (b) Personal contact, (c) Technological connectivity, (d) economic integration
Economic effects of Globalisation and its implication:
Realisation of a global common market based on the freedom of exchange of (a) final goods and services and (b) resources:
- Emergence of worldwide and broader access to a range of foreign products for consumers and companies (greater variety leading to higher SOL)
- Movement of resources between and within national boundaries
- Firms have access to resources worldwide, enabling relocation of production, adjusting cost based on factor endowment comparative advantage (CA) of the country
- Emergence of worldwide financial markets, better access to external financing
Implications:
- Equalisation of Cost of Production (COP)
- Contagion Effects (transmission of shocks)
- Trade channel (TOT and income effects)
- Financial channel (financers re-evaluate investment positions)
- Mechanical spillovers (shift in market sentiment, changing demand for FOPs and final goods and services)
- Increase in information flow between geographically remote locations
- Faster catch up (of emerging economies)
- Stronger, faster contagion effects
Policy implications:
Monetary Policy:
- Higher degree of mobility and interdependence of capital and foreign exchange markets, quicker moving expectations of the term structure of i/r, lesser exchange rate arbitrage, interconnections between prices in different countries
- i/r targeted policy
- Loss of independency of the use of i/r as the country loses control of capital flow
- Inflation less sensitive to domestic demand conditions, more sensitive to global demand
- Exchange Rate targeted
- CPI more responsive to changes in world prices (due to increased share of imports / traded goods)
- More attractive policy to target inflation than i/r policy
Fiscal Policy:
- Budgetary receipts decrease substantially (lower taxes on imports, corporate profit)
- Government might obtain more tax revenue through increase in income
- Widening income gap, need to restructure economy, government expenditure in economic and social infrastructure will increase
- Higher change for increase in public debts
- Need to ensure FP is pre-positioned
- Weakened fiscal discipline
Trade Policy:
- More FTAs, increased pressure for countries to lower import tariffs
- Increased competition for domestic producers
- Increased protectionism especially during recession
Supply-side Policy:
- Government may need to help business indentify new niche areas and assist in development (due to new range of tradable goods)
- Greater need to climb up the technology ladder to gain CA, more money pumped into R&D
Benefits of Globalisation:
- Economies of scale (EOS): larger market
- Greater competition: Erosion of monopoly power, promoting efficiency, preventing exploitation of consumers
- Increased access to resources
Costs of Globalisation:
- Growing income gap: lowly skilled labour wages grow slower than highly skilled labour, SOL not necessarily improved
- Contagion effect: Crisis in one country will affect others adversely
