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Chapter 11

Chapter 11. Globalization and the New Economy. Introduction. Globalization refers to the ongoing social, political and economic integration that has been taking place since World War II

stephanie-potter
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Chapter 11

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  1. Chapter 11 Globalization and the New Economy

  2. Introduction • Globalization refers to the ongoing social, political and economic integration that has been taking place since World War II • Trade, investment, tourism, intellectual property, telecommunications, financial transactions are a few of the areas where globalization has taken place • In Asia, these trends are evident in the growing importance of APEC, ASEAN and foreign trade and investment

  3. Introduction • Globalization and the increasing usage of information communication technology has caused changes to the traditional methods of production and operations • It has resulted in “The New Economy” which is relatively more knowledge and technological based

  4. World Trends in Globalization • International Trade • Financial Flows • Foreign Direct Investment (FDI) and Multinational Enterprises (MNE) • Labor Migration

  5. International Trade • International trade has expanded rapidly • It has been increasing twice as fast as world income in the 1980s and 1990s on average (Table 11.1) • It has also been substantial for large land-based economies where trade has traditionally been a smaller percentage of GDP

  6. Table 11.1

  7. Financial Flows • Financial flows have increased dramatically and volatility has also increased • Short term flows have gone in cycles – big inflows in the second half of 1970s and also in late 1980s and early 1990s • Short term portfolio flows and international loans fell in second half of 1990s with advent of the Asian financial crisis

  8. Financial Flows • Liberalization and globalization has also worked on capital outflows. • The growth of capital flows has been more volatile than the growth of trade • While trade balance has to add up to zero, capital can flow in one direction in a particular year or period • For example, net capital inflows grew faster than net capital outflows in the 1990s (Table 11.2)

  9. Table 11.2

  10. Foreign Direct Investment (FDI) • FDI serves as a way to link best practice international MNEs with domestic producers • From next to nothing in the 1970s, FDI in both developed and developing countries has risen at a dramatic rate • By 2000, annual FDI inflows totaled around US$830 billion world wide, with nearly 25% going to developing countries • This is about 2.7% of world GDP, an enormous transfer of investment funds

  11. Foreign Direct Investment (FDI) • FDI inflows have been resilient to external shocks such as the two oil shocks and recession in developed countries • However in 2001, it started slowing down due to the slowing world economy and sluggish international stock markets

  12. FDI and MNEs • Multinational enterprises (MNE) are the main vehicles for FDI • They engage in cross border production and transactions – no other entities do this • FDI is only one aspect of these MNEs • Production is the other main aspect of their activities

  13. FDI and MNEs • Defined using a cut off of at least 25% of output/sales being outside the country of origin, MNEs are estimated to produce about 25% of world output • Globalization has also resulted in the tremendous rise in cross-border mergers and acquisitions (M&As) since 1990s

  14. Pros and Cons of MNEs • There is considerable debate about the impact that MNEs have on developing countries • Supporters say that MNEs bring technology and organizational skills that are transferred to domestic companies

  15. Pros and Cons of MNEs • Critics argue that MNEs don’t transfer the state of the art technology and they repatriate funds to their home country • They are footloose and can leave when other offshore locations look more attractive leaving the developing country without tangible benefits from the FDI

  16. FDI and MNEs • As noted in Chapter 6, MNEs are more efficient and there is little evidence that they have systematically transferred this efficiency to local firms • On the other hand, those countries where there hasn’t been significant inflows of FDI (except Korea & Japan), have been unable to develop new technology and have not grown rapidly • Conclusion is that MNEs are, on balance, an effective way to implement new technology and develop greater efficiency

  17. Labor Migration • Globalization also involves the movement of labor as well as capital • Push factors that lead to international migration include flight to avoid persecution at home, to avoid war or other social disruption and to seek a better life economically • Pull factors include greater freedom, better standards of living and to be with family

  18. Labor Migration • Globalization has not had a significant impact on international migration in the past few decades • Why? – because of restrictions on the inflow of labor on the part of the recipient country

  19. Labor Migration • As the labor forces of the developed countries age, there will be an increasing need to import labor in the working age categories • This is particularly true for Japan, followed by some countries in Europe and finally North America and Australia/New Zealand • Are they making adjustments to attract workers in these age groups and with needed skills from developing countries? • Only in a few industrialized countries

  20. Asia and Globalization • Trade within Asia has risen dramatically (Table 11.4) • The Asian share of exports to Japan has generally decreased, sometimes quite dramatically (Table 11.5) • There has been a shift of the balance of trade in favor of Southeast Asia and East Asia, particularly NIEs and PRC

  21. Table 11.4

  22. Table 11.5

  23. Asia and Globalization • There is rising importance of PRC as a major trading partner with other Asian countries • External trade has also grown dramatically particularly from PRC to rest of world (Table 11.6)

  24. Table 11.6

  25. Asia intratrade Table 2.1 Intra-regional Trade – total intraregional trade as percent of total trade ASEAN +3 includes ASEAN, China, Korea and Japan, Pan Asia includes ASEAN +3 + Hong Kong, Taiwan, and South Asia Source: IMF Direction of Trade Statistics (DOTS) CD-ROM April 2005 and Rana (2005)

  26. Asia and Globalization • Capital inflows to Asia have been more rapid than to any other developing region • In recent years, the flow of FDI has moved rapidly toward greater China, particularly the PRC • There has been a squeeze on the FDI flows to East and Southeast Asia • Though there has been an increase in the round tripping of capital flows into PRC through Hong Kong and Taiwan

  27. Asia and Globalization • Labour migration within Asiahas increased with the relaxation of restrictions and growing regional integration • Flows of international assistance has fallen and is primarily confined to South Asia in recent years (Table 11.10)

  28. Table 11.10

  29. Globalization Experience(PRC) • Reforms in PRC began in late 1970s, including one child policy, which reduced population growth dramatically, paving the way for reforms in the industrial sector later on • Reforms in agriculture in 1980s – household responsibility system – helped establish markets and pricing system for agricultural products

  30. Globalization Experience(PRC) • This was followed by development of town and village enterprises (TVEs) • They grew at a rate of 30% per year in the 1980s • These developments prepared the economy for trade reforms, FDI and export led growth

  31. Globalization Experience(PRC) • Trade and FDI rose as a result of 3 sets of reforms: • First, licensing of foreign trade corporations and domestic firms with trading rights both increased dramatically • Second, liberalization of FDI with formation of special economic zones on the coast, particularly in the south • Third, greater freedom in foreign exchange transactions – relatively free monetary moments on the current account of the balance of payments (but not the capital account)

  32. Globalization Experience(PRC) • Eventually these changes in regulations led to the accession of PRC to WTO • This will lead to greater relaxation of trade restrictions, penetration of the domestic market by foreign firms, deregulation of state owned enterprises and further commercialization of agriculture

  33. Globalization Experience(India) • India’s external economic relations were highly regulated for most of the years after WW II, up until the 1990s • There were many nationalized industries, including the financial sector • Government had to give licenses to transact business, and the expansion of industrial capacity!

  34. Globalization Experience(India) • All of these regulations smothered initiative, transfer of technology and innovation • It was only when the country was close to bankruptcy in the early 1990s that the bureaucratic nightmare began to unwind • Regulations have been reduced and competition introduced in some sectors

  35. Globalization Experience(India) • Rupee was devalued and made convertible on the current account • Efforts made to reduce the role of public sector • Some private banks were allowed entry • Regulations on FDI relaxed and tariffs lowered

  36. Globalization Experience(India) • Still a long way to go to make the economy fully competitive and with competition allowed • Labor markets are still controlled and there isn’t a good exit policy for business • Regulations on FDI are still cumbersome and state industrial sector is still strong

  37. Globalization Experience(Malaysia) • Malaysia initially favored import-substitution strategies and the development of heavy industries • There was a switch to export-oriented trade regime in the mid-1980s after noting the importance of foreign markets to economic growth • Reforms such as liberalization of foreign investment and privatization were carried out • International best practices, such as ISO certificates, were introduced • Partnerships with private sector were established tofurther boost growth in the IT industry

  38. Globalization Experience(Malaysia) • Most initiatives appear to be in place • It appears to be seen if its degree of implementation is effective and sufficient • Some problems to be overcome • For e.g. opposition from local Chinese business groups over the establishment of English as medium of learning in schools

  39. Globalization Experience(Philippines) • Philippines have actively developed an export-oriented sector, mainly agricultural based, to repay foreign debts incurred since 1960s • Trade reforms did not really take off until the early 1990s • Domestic manufacturing production was further stimulated with the setting up of export process zones

  40. Globalization Experience(Philippines) • In the early phases, exports were mainly concentrated in primary commodities such as food crops, minerals and timbers • There has been a rise in manufactured exports in recent years • In addition, the government has also established the Foreign Investment Act which attracted substantial capital inflows

  41. Globalization Experience(Philippines) • Previous protected inefficient state industries and the banking sector were deregulated • Land reforms were also carried out to improve the domestic effectiveness of agricultural sector – which accounts for 2/3 of the workforce • Such policies have generally improved Philippines’ level of openness and competitiveness • Philippines has an added advantage in its skilled and relative low-cost English fluent labor force

  42. Globalization Experience(Philippines) • However, political uncertainty in Philippines is a cause of concern • It would greatly affect the level of investors’ confidence • And more would also need to be done for income distribution and provision of infrastructure in Philippines

  43. Has Globalization been Good for Developing Countries? • Some criticisms include: • Industrial countries do not transfer enough technology to developing countries • Intellectual property of industrial countries is protected at the expense of developing countries • Subsidies to farmers in industrial countries are in violation of free trade

  44. Has Globalization been Good for Developing Countries? • The structure of aid, technological transfer and local content requirements makes it difficult for agricultural exporters to move up the ladder to export manufactured goods • International agencies have not served the interests of developing countries • Restrictions on immigration is still prevalent

  45. Information Technology and the “New Economy” • The nature of the new economy in industrial countries emphasizes three developments: • Globalization of business – more than half of world output is now “contestable” –subject to competition from external producers • Growth of information technology and the knowledge economy – now the driving force in growth, supplanting durable goods • These developments have led to rapid growth in productivity, reduction in costs and growth of international value chains • Production platforms are now worldwide

  46. Information Technology and the “New Economy” • Because the “new economy” is based on knowledge based innovations and technology, many of the developments have extensive external economies, which can lead to increasing returns to scale • More easily accessible information results in more competition, scale economies, lower costs of transport and information • All of these should help increase labor productivity

  47. Information Technology and the “New Economy” • Estimates made of labor productivity gains in the US in the late 1990s convinced many economists that this was indeed the case and that it might have lowered the unemployment rate consistent with low inflation • However, since the downturn of 2001 and the bursting of the high tech stock bubble, there have been revisions in this thinking • Still IT, transportation and other developments have created a lot of new products and many high tech service sector jobs and products

  48. Potential impact of the new economy on Asia Growth of trade will create more jobs Skill intensive exports will grow (programmers, internet experts, website designers, other computer technicians) Internet could create a more level playing field, although risks of digital divide exist Greater payoff in education Greater opportunities for venture capital, mergers and acquisitions, foreign partnerships, strategic alliances Asia and the “New Economy”

  49. Asia and the “New Economy” • Historically open economies with limited resources are in a make or break situation • These include Hong Kong and Singapore • Those with resources have been slower to buy into the “new economy” • E.g. Indonesia, South Asia • Other countries are in between • Large countries have a bigger challenge • The digital divide is greater and PRC is reluctant to let the Internet be free in the country

  50. Asia and the “New Economy” • Policies for promoting the “new economy” in Asia include: • Encouraging a strong entrepreneurship culture • Closing the digital divide. Local businesses should be encouraged to undertake more training in ICT • Develop and increase the use of IT in global production networks

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