GLOBAL ECONOMIC FLOWS - Global Flows of Production -

1. GLOBAL ECONOMIC FLOWS- Global Flows of Production - Chapter 4 Dr. Senem SÖNMEZ SELÇUK

2. A good place to get a quick snapshot of global trade, as well as net economic flows in and out of a nation-state, is a nation’s tradesurpluses and deficits. 2 Global Economic Flows

3. International trade of goods is a major avenue of globalization. • More than half of world tradeoccurs between high-income areas such as Japan, the United States, and Western Europe (as well asChina). • Trade is increasing, however, between these high-income countries and developing countriesin Asia, South America, and Africa. • Lowered trade barriers offer opportunities for low-incomecountries, although still limited. Labor-intensive merchandise, such as textiles, can be produced andexported at a low cost from developing nations. 3 Global Economic Flows

4. The rapid growth of global economic exchange during the last twenty years hasrestructured the global economy. • Trade theory tells us that countries open to internationaltrade willspecializein goods that make intensive use of their abundant factors ofproduction. 4 Global Economic Flows

5. In a fully open international economy, therefore, a global division of laborshould emerge in which each country produces goods for which it has a comparativeadvantage and sheds industries in which it has a comparative disadvantage. • Such a divisionof labor is emerging in the global economy. Though this division is far from complete,it is possible to identify four emerging tiers. 5 Global Economic Flows

6. The advanced industrialized countries hold a comparative advantage in capitalandhuman capital-intensive goods. Producers in the advanced industrializedcountries lead the world in the production of knowledge-intensive productssuchas pharmaceuticals, computers and software, telecommunications equipment,commercial aircraft, and other research- and high technology-intensive products. 6 Global Economic Flows

7. The Asian Newly Industrialized Countries (NICs), especially South Korea, Taiwan,HongKong, and Singapore, hold a comparative advantage in mature and relativelystandardized capital-intensive goods such as semiconductors and other computercomponents, automobiles, and steel. These countries have not yet become animportant source of product or process innovation. 7 Global Economic Flows

8. The second wave of NICs, including Indonesia, Malaysia, Thailand, Mexico, andArgentina, hold a comparative advantage in labor-intensive goodssuch as apparel,footwear, and the assembly of finished goods from components. These countrieshave not yet emerged as important international producers of capital-intensivegoods, but are likely to make that transition relatively soon. • Other developing countrieshold comparative advantages in land-intensive primarycommoditiessuch as fuel, minerals, and agricultural products. 8 Global Economic Flows

9. GLOBAL TRADE: ECONOMIC CHAINS AND NETWORKS • Trade in goods and services is clearly central to the global economy. • Much of thattrade takes place in interconnected circuits of one kind or another. • These interconnections are clear, as are the basic flow- and process-oriented themes, in the various chains and networks that exist in the globaleconomy, specifically in global trade. 9 Global Economic Flows

10. Gary Gereffihas outlined several of the most important economic chains andnetworks involved in global trade: • Supply Chainsis a general label for value-adding activities in the productionprocess. A supply chain begins with raw materials and follows the value-addingprocess through a variety of inputs and outputs and ultimately to a finishedproduct. For example, the process might begin with some comparatively inexpensive raw material (say cotton) and at various steps along the way workers andtechnologies add value to the cotton (e.g. transforming it into thread, producinga T-shirt) so that in the end the finished product – the T-shirt in this case – hasgreater value than the cotton with which the process began. 10 Global Economic Flows

11. International Production Networks involve the networks of producers involvedin the process of producing a finished product. MNCs are seen as playing a central role, as being the “flagships”, in these networks. 11 Global Economic Flows

12. Global Commodity Chainsbring together value-adding chains and the global organization of industries. They also accord a central place to the growing importance of the sellers of global products. Thisincludes buyer-drivenchainssuch as Wal-Mart which play an increasing role indetermining what industries produce and how much they produce. Since suchcompanies do not manufacture their own products, they are buyers of products that are then sold under their brand names. Also included here are “brand companies,” or “manufacturers without factories” (the best known of these is Nike). Buyer-driven chains are distinguishedfromproducer-drivenchains(e.g. Toyota). There is a focus on the governancestructure of global commodity chains (e.g. are they governed by producers orbuyers?). Also of concern is the role of lead firms (Wal-Mart, Nike) in the creation of “global production and sourcing networks”. 12 Global Economic Flows

14. Global Value Chain is emerging as the overarching label for all work in this areaand for all such chains. Here is the way he describes global value chains: «Emphasis on the relative value of those economic activities that are required tobring a good or service from conception to, through the different phases of production (involving a combination of physical transformation and the input ofvarious producer services), delivery to final consumers, and final disposal after use.» 14 Global Economic Flows

15. This conceptualization has several advantages: • First, it focuses on value creationand value capture across the full range of possible chain activities and end products (goods and services). • Second, it avoids the limitingconnotations of the word commodity, which to some implies the production ofundifferentiated goods with low barriers to entry. 15 Global Economic Flows

16. Third,while it accepts a number of ideas from earlier approaches – the nature and consequences of organizational and geographic fragmentation; the role of power inthe chain; and “industry (re-)organization, coordination, governance”, the ways in which firms are linked in the global economy – it goesbeyond them to include the broader institutional contexts (e.g. trade policy, traderegulations, trade standards) of these chains. However, the most important advantage of the idea of global value chains is that it encompasses both productionand consumption (and even post-consumption). 16 Global Economic Flows

17. Global Value Chains: Chinaand the US • To give specificity to the idea of global value chains we look at a specific exampleof such chains, which involvestrade between Chinaand the US (although many other countries in the world are involved in these orsimilar chains.) 17 Global Economic Flows

18. The neo-liberalism that undergirds the global market is based on the belief thatmarkets should be free, open, and have no barriers to free and open trade. • Whilethere have been many efforts to lower or remove such barriers, the fact is thatsuch barriers remain in many areas. • One particularly interesting and instructiveexample is found in PietraRivoli’s work on the global value chain for T-shirts. The global value chain here involves, among other things, cottongrown in and shipped from the US; T-shirts manufactured in China; the shippingto, and sale of, those new T-shirts in the US; the eventual disposal (often very quickly) of them; and finally the shipping and sale of those used T-shirts in Africa. 18 Global Economic Flows

19. Is your old t-shirt hurting African economies?«Don't Send Your Used T-shirts to Africa.» • One of the best known and most-referenced articles on the subject is "Used-clothing Donations and Apparel Production in Africa" by Garth Frazer. • Frazer set out to explain why African economies haven't advanced beyond basic manufacturing. He concludes that one major factor prohibiting the development of major textile industries is used-clothing donations by consumers in industrialized countries. That is, if you box up your old t-shirts and take them to Goodwill, you may actually be inadvertently undermining the development of clothing production facilities in Africa. Why? Because with a huge supply of cheap apparel that is ready for sale, there's no need to build factories to produce more. • These are not insignificant effects; Frazer finds that "Used-clothing imports are found to have a negative impact on apparel production inAfrica, explaining roughly 40% of the decline in production and 50% of the decline in employment over the period 1981–2000." In other words, clothing imports result in job loss for people who could probably otherwise lift themselves out of poverty.

20. What Happens to the Losing Team's Championship Shirts?

21. Global Production • Changes in industrial production includenot only howproducts are manufactured,but also whereproducts are manufactured.

22. For much of the twentiethcentury, the most important businessorganizations were large manufacturingfirmsthat controlled both the making ofgoods and their final sales. • Giant automobilecompanies such as Ford and GeneralMotorsin the USA typify this approach. • Such companies employ tens of thousandsof factory workers, making everything fromindividual components to the final cars,which are then sold in the manufacturers’ showrooms. 22 Global Economic Flows

23. Such manufacture-dominatedproduction processes are organized as largebureaucracies, often controlled by a singlefirm. • During the past 20 or 30 years, however,another form of production has becomeimportant –one that is controlled by giant retailers. 23 Global Economic Flows

24. In retailer-dominated production,firms such as the American retailer Wal-Mart–which in 2017was the world's largest retailer –buy products frommanufacturers, who in turn arrange to havetheir products made by independentlyowned factories. • In clothing manufacturing, mostmanufacturers actually employ no garmentworkers at all. 24 Global Economic Flows

25. Instead, they rely on thousandsof factories around the world to maketheir clothing, which they then sell indepartment stores and other retail outlets. • Clothing manufacturers do not own any ofthese factories and therefore are notresponsiblefor the conditions under whichthe clothing is made. 25 Global Economic Flows

26. Two-thirds of all clothingsold in America is made in factoriesoutside the United States, where workersare paid a fraction of US wages. (In China,workers are lucky to make US$40 a month.) • Bonacich and Appelbaumargue that such competition has resulted ina global «race to the bottom», in which retailersand manufacturers will go to any placeon earth where they can pay the lowestwages possible. 26 Global Economic Flows

27. One result is that much ofthe clothing we buy today is likely to havebeen made in sweatshops by young workers- often teenage girls - who get paid merepennies for making clothing or athleticshoes that sell for tens, if not hundreds, of pounds. • If we take a global view of the experienceof work, then there are large differencesbetween the developed world and developingcountries. 27 Global Economic Flows

28. Whilsta series of employment laws in developedcountries have protected the workinghours, health, safety and rights of workersover many years, 'sweatshops', in whichpeople (including many children) workvery long hours for very littlepay, operatein the less tightly-regulated environmentsof developing countries. 28 Global Economic Flows

29. Thisglobal division of labour means that mostof the goods they produce so cheaply aresold to the relatively rich workers in theindustrialized countries. • Employment patterns are also very differentacross the world. 29 Global Economic Flows

30. In most developedcountries, the informal economy (sometimescalled the 'black economy' or 'parallel economy') is relatively small compared to that ofthe formal paid employment sector, thoughmany recent migrant workers earn theirlivings in it. • In manydeveloping countries, most people's mainexperience of work is in the informal sector,which is often seen as the norm. 30 Global Economic Flows

31. INCREASING COMPETITION FOR COMMODITIES • A wide range of commodities constitute the starting point for many of the globalvalue chains. • However, one of the most striking developments inrecent years has been the increasing global competition for various commodities. • The best-known and most obvious example is oil, but much the same thing has happened inthe markets for naturalgas, copper, nickel, silver, gold, as well as even more mundanecommodities such as rice, wheat, corn, and soybeans. 31 Global Economic Flows

32. Theincreasing demand for these commodities, and many others, is no longer fueledmainly by the needs of the countries we traditionally think of as highly developed(e.g. the US, the members of the EU, Japan), but now by massive development inother parts of the world, especially Indiaand China. 32 Global Economic Flows

33. The latter, especially China, are industrializing at a rapid pace (the Chinese economy grew at 10%in 2007; the US economy grew at 2.5% in that year), and those relatively new industries place large and increasing demands on all sorts of commodities, especially theoil needed to power them (China accounted for 31% of the increased demand foroil between 2003 and 2007; in addition, it accounted for 64% of the increased demandfor copper; 70% for aluminum, 82% for zinc). 33 Global Economic Flows

34. Between 2008and 2011, China's economic growth was between 9.2 and 10.4% each year, although it dipped slightly to 7.8% in 2012 (by contrast, the US economy shrank in 2008 and 2009, and grew at 2.2% in 2012). • Those relatively new industries place large and increasing demands on all sorts of commodities, especially the oil needed to power them (China accounted for 40% of the increased global demand for oil in 2012). • While China is now the second-largest consumer of oil in the world, and is the most significant consumer of many base metals, it is important to remember that the North, especially the US, remains the major consumer of most of the world's commodities. 34 Global Economic Flows

35. However, demand for commodities goes well beyond that of specific industriesneeding specific commodities for their production processes. • This industrial development is linked to the emergence of a similarly expanding consumer societywithconsumers in countries like China and India demanding the same sorts of productsthat consumers in the US and the EU possess. 35 Global Economic Flows

36. The result involves the need for everything from more airplanes to transport people who now want to see the world, togas-guzzling and polluting trucks to deliver the things they want to consume, tothe automobiles they now want to have both as consumables and as technologiesthat allow them to consume much else (e.g. tourism within China and Asia). • Allof these planes, trucks and cars require gasoline, need to be produced in factoriesthat consume huge amounts of energy, and in order to be produced all of themrequire a wide range of commodities. 36 Global Economic Flows

37. A global commodities specialist sums this upwell: “It is absolutely a fundamental change in the global economic structure. . . .Global commodities ranging from oil to base metals to grains are moving higheras billions of people in China and around the world get wealthier and are consumingmore as they produce products for us, and increasingly for themselves”. • As an economist put it, “The world is coming alive and the lightsare coming on across Asia. . . . What we are dealing with is a tremendous demandfor resources”. 37 Global Economic Flows

38. The developing countries, especially China, are devouring huge quantities of manycommodities (of course the developed countries long have, and continue to, devourmuch larger quantities of these commodities): • The country accounts for about a fifth of the world’s population, yet it gobbles upmore than half of the world’s pork, half of its cement, a third of its steel and over aquarter of its aluminum. It is spending 35 times as much on imports of soya beansand crude oil as it did in 1999. . . . China has swallowed over four-fifths of the increasein the world’s copper supply since 2000. (Economist 2008: March 13) 38 Global Economic Flows

39. The result of all of this were massive increases in the price of all sorts of commodities (e.g. the price of copper tripled and that of zinc doubled in a five-yearperiod in the early twenty-first century; the cost of both wheat and soybeans increasedby 70% in 2007). • The prices of many commodities reached record highs in 2008,before dropping off quite dramatically as the Great Recession gained momentum.Interestingly, China is in the process of positioning itself for the post-recession yearsby investing in commodities of all sorts. 39 Global Economic Flows

40. The Economic Impactof the Flowof Oil • Not only does greater demand lead to higher prices, but it becomes harder and harderto find additional resources (e.g. new oil fields) and increasingly difficult to obtainthem. • Thus, oilwells far out in the ocean are more expensive to build than those onland, and the oil itself is harder to get and, as a result, more expensive. Getting oilfrom sand pits is more difficult and costly than from underground oil wells. 40 Global Economic Flows

41. All ofthese increasing difficulties translate into higher costs and higher prices. And thesechanges have ripple effects throughout the economy.

42. For example, the high priceof oil and gasoline has led to increased efforts to create and use various biofuels,especially ethanol from corn (among other sources including sugarcane). • The result is a huge increase in demand for (the US accounted for 60% of that increase in 2007), and the price of, corn. 42 Global Economic Flows

43. The increase in the price of oil, and the increasing difficulty in obtaining enoughof it, is both roiling and restructuring the globe and the position of many nations,corporations, and individuals in it. • At the national levelwe have become accustomed to thinking of OPEC nations such as Saudi Arabiaand Abu Dhabi as profiting handsomely from the oil business, but in recent yearsother nations have also become wealthy and more important global players as aresult of the oil boom. 43 Global Economic Flows

44. At the individual level great wealth and affluence is being produced at the verytop. • Individual Russians are traveling the world, buying expensive art, and biddingup the price of the most desirable real estate in, for example, London. In Angolamost of the wealthiest people are current and former government officials. Whilesuch people are clearly skimming a large proportion of oil income off the top, thegreat majority of Angolans are profiting little, if at all, from the oil boom. 44 Global Economic Flows

45. The International Energy Agency has urged advanced nations to work with Indiaand China to reduce the burgeoning use of oil. • It is the increased demand, especiallyfrom China and India, which is playing a huge role in pushing up the price of oilon the world market. • Increased use there, and elsewhere, is also tied, of course, tohigher carbon dioxide emissions (projected to increase by 57% over the next quartercentury) and accompanying disastrous effects on the globe’s climate. 45 Global Economic Flows

46. It is estimatedthat in 2006–7, those two countries accounted for 70% of the growth in the demandfor energy. • Their use of energy is projected to double between 2005 and 2030. • Chinais expected to pass the US as the world leader in energy consumption circa 2010.For their part, representatives of China and India argue that they are being undulysingled out in this issue. • After all, the developed countries have already developedand China and India should be given an opportunity to catch up before there isany discussion of limiting their expansion. 46 Global Economic Flows

47. RACE TO THE BOTTOM AND UPGRADING • A dominant idea in thinking about less developed economies from a global perspective is the so-called race to the bottom. • The basic argument is that for lessdeveloped countries to compete and succeed in the global economy, they must undercut the competition in various ways such as offering lower wages, poorer workingconditions, longer hours, ever-escalating pressure and demands, and so on. Global Economic Flows

48. It isoften the case that one nation is willing to go further than the others in order toattract the interest of MNCs. • An ever-spiralling decline in wages, etc., occurs in the“winning” less developed nation, at least until it is undercut by other countries eagerfor work and willing to offer even lower pay, poorer working conditions, and soon. In other words, the countries that get the work are those that win the race tothe bottom. • These, of course, are almost always pyrrhic victories since the work isearned on the basis of creating poorly paid and horrid circumstances for the workerswithin the “victorious” nation. 48 Global Economic Flows

49. Upgrading in the Less Developed World? • The current global economic system is based, at least in part, on a race to the bottomby less developed countries and the exploitation of them and their industries bythe more developed countries. • However, we must not ignore the fact that there isevidence of a process of upgrading in less developed countries and their industries. • That is, at least some of them enter the global economic market at or near the bottom, but over time begin to move up. 49 Global Economic Flows

50. This, forexample, is clear in Chinatoday, where the early success of Chinese industry wasbased on their victory in the race to the bottom, but the Chinese are now movingaway from that and to the production of higher-value products with higher payand better working conditions for at least some Chinese workers. 50 Global Economic Flows