Globalization and the Transformation of Foreign Economic Policy

Pawel Bozyk

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781351157100
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The onslaught of globalization has brought with it sweeping changes to the foreign economic policy of the last 50 years. As the international political economy of nations and regions continues to be drawn and redrawn, this book traces the goals and instruments of foreign economic policy during this period, providing insight into the long-run trends and developing new theoretical generalizations. The book charts the journey from the point when foreign economic policy was solely concerned with foreign trade - pursued to promote the interests of individual countries - to the current globalization of the world economy that creates a uniform market in goods, services and factors of production that embrace all countries and regions.

Chapter 1
Globalization and Economic Policy

1.1. The Concept of Globalization of the World Economy

Globalization of the world economy denotes a process based on the formation of a single market for goods, services and factors of production, including capital, labour, technology and natural resources, covering all countries and economic regions.¹ In the process, national and international markets are combined into a single complex whole. From a theoretical point of view, globalization means an unlimited access to these markets for all interested businesses regardless of country of origin and economic region. It also means increased feedback between these markets.

Uniform economic mechanisms governing the functioning of national and international markets are a condition, as well as consequence, of globalization. Without similar mechanisms, globalization would have been impossible. At the same time, a globally uniform mechanism in the world economy would be unfeasible without globalization. Today the free market and free trade constitute such a mechanism. That is why globalization is defined as a process rooted in the creation of a liberalized market of goods, services and factors of production in the world as a whole.

Contemporary globalization was preceded by the liberalization of commodity markets, a process limited to specific sectors or regions. Efforts soon began to remove barriers to a free movement of goods, initially on select international markets and subsequently on a global scale. Understood in this way. globalization should be treated as a long-term process initiated when businesses (including both corporate bodies and self-employed individuals) began to transgress national borders in search of more favourable sources of supply and better possibilities for selling goods. Global trends continued marginal and sporadic, as long as the international division of labour grew slowly and without impact on individual countries. These processes were invisible in daily practice, though they intensified with time.

Globalization gained momentum in the second half of the 20th century as a result of several simultaneous trends that intensified in the world. This primarily was true of technological progress witnessed by production automation and computerization accompanied by universal access to information. The international division of labour deepened, leading to a rapid growth of commodity trade. Trade in finished products began to be accompanied by growth in production and investment cooperation and also the emergence of international and transnational corporations. The last quarter of the 20th century witnessed a rapid international movement of production factors, including capital, labour and technology'. Finally, as the century came to close, the movement of speculative capital reached unprecedented proportions. All this combined explains why the world economy as a whole rather than individual countries and regions became the point of reference for decision-making by national and multinational companies.

One sign of globalization is regional integration, a transitional form between doing business within a single country and global operations. Understood in this way, integration and globalization can be treated as complementary trends. To a large extent regional integration is programmed by a group of countries and expressed by institutional solutions that determine its development. In other words, integration is a territorially restricted form of globalization 'commissioned by' interested countries. Globalization, on the other hand, is a spontaneous process that has not been programmed institutionally by countries subject to mechanisms regulating the functioning of the world economy.

Both integration and globalization are the result of liberalization of the economy. In the case of integration, liberalization exclusively applies to the movement of goods, services and factors of production within a specific group. Relations with 'third' countries remain limited. In the case of globalization, liberalization applies to the movement of goods, services and factors of production in the world as a whole, so by definition it rules out all and any limitations whatsoever. From a formal perspective, integration and globalization create equal chances for participating countries and enterprises. Integration offers such opportunities to members of regional groups, while globalization does so to all countries and enterprises, subject to the principles governing the 'opening' of the world economy. In practice, these chances vary. In the case of integration, they are equal only when partners represent similar competitive capabilities, which requires an identical or similar level of economic development, especially technological and industrial. That is why regional integration is treated as merging economic capacities equal in terms of development and with similar economic and institutional (particularly legal) infrastructures.

Globalization, which creates conditions for free movements of goods, services and factors of production in the world as a whole, by definition offers greater opportunities to economically stronger entities to secure a competitive advantage. This applies to both countries and national and multinational enterprises. In this context, regional integration is seen as a form of protecting smaller and weaker countries from the dangers inherent in globalization, by merging their economic capacities. Separately, they would lose in global competition, together they can cope with the requirements of this competition. Understood in this way, integration can represent a stage on the road to globalization.

Globalization in the world economy is accompanied by increased economic dependence in the world as a whole. This involves the sensitivity of individual economies, groups of countries and regions to changes taking place on a global scale, and at the same time the global economy's dependence on changes in different geographic regions, groups of countries and individual countries. Global dependence can be either unilateral (involving the dependence of a specific count ry on the global economy) or bilateral (the dependence of a countury on the global economy and of the global economy on the country). In the second case, interdependence is the motive force at work.² At the same time, global dependence can be quantitative or qualitative. The former is exemplified by a relationship between the growth of an individual country and the development of global trade. Qualitative dependence is exemplified by the influence of changes in global prices on prices secured and paid on international markets by an individual countury. as well as on internal prices within this country.

The same group includes technological and structural relationships making countries mutually dependent (when they all contribute to technological progress) or unilaterally dependent (when technological progress is driven by only some countries). In structural dependence, differences in natural resources possessed by individual countries as well as other factors of production (such as capital and labour) play a key role. When natural resources are spread equally among countries, one can speak of interdependence, but when some countries are awash with resources, while others suffer from shortages, the situation is indicative of dependence rather than interdependence.

The scope of interdependence and dependence is dynamic, changing in step with the growth of the world economy. If the world economy grows at a faster rate than a given country, and world technological progress, for example, is faster than in the country' in question, then the scope of economic dependence increases. Vice versa, increased interdependence is feasible between a given country and the world economy.

1.2. The Advantages and Dangers of Globalization

From an economic point of view, globalization is seen as a positive process, since it contributes to increased average global prosperity. This creates conditions for the dissemination of modern technology and methods adapted to the requirements of modern enterprise management, economic growth financing and so on. In this way. globalization increases labour productivity and contributes to the more efficient employment of factors of production.

In this generally positive assessment, globalization exerts a multiform influence on the participants of this process, giving preference to the economically strong while eliminating the weak. This results from the essence of the free market, on which globalization is based, in which the most competitive enterprises, equipped with the most modern technologies and efficient financial and management systems, reap the greatest benefits. They are capable of offering buyers top-quality and relatively cheap products. Technologically uncompetitive entities with outdated management systems are ranked at the opposite end, without access to cheap sources of finance and incapable of competing in quality or price in the production of goods and services. In a free market, such enterprises are crowded out by stronger entities.

Consumers benefit from this process, gaining access to better quality and more modern products at prices lower than those previously available. In this manner, globalization positively influences consumption and quality, thereby contributing to technological advancement, primarily in such finished manufactured goods as computers, cars and household appliances

At the same time, globalization accelerates the international movement of factors of production, especially capital and technology, followed by know-how, modern production management methods, marketing and advertising. The expansion of modem financial and banking services also plays an important role. Taken as a whole, globalization leads to improved technological, financial and managerial knowledge around the world (including less developed countries), contributing to modern methods for managing the economy and increased management effectiveness.

The division of benefits from globalization does give rise to controversy, mainly as regards the disproportionately high benefits derived by the key actors of globalization and the incomparably smaller gains of the remaining entities.³ The share of the former in globalization is many times greater than that of the latter.

The chief cause is the concentration of physical capital, accompanied by the concentration of production and trade. The most important entities are transnational corporations, which control 75% of the global commodity market.⁴ Ties among the 500 largest corporations account for as much as 40% of global trade. At the same time, the rules determining these ties are a far cry from the laws of a free market and free trade.

The division of globalization benefits has no less influence on the unusually rapid growth of financial, especially speculative, capital. In the late 1970s, speculative capital accounted for some 10% of financial transactions. The proportions have now reversed, the share of speculative capital exceeding 90%.⁵ In 2004, the value of speculative transactions was 22 times higher than the value of global GDP. The key entities shaping the world speculative capital market are active in highly industrialized countries, so it is no wonder that profits from speculative transactions are invested there as well.

A third factor influencing the division of globalization benefits is the privatization of production assets. Foreign capital participates in this process on an equal footing with domestic capital. The absence of private domestic capital is why in less developed countries, including Central and Eastern Europe, privatization boils down to the takeover of production and commercial enterprises as well as banks and insurance institutions by foreign capital, mainly held by transnational corporations.

A fourth factor influencing the division of globalization benefits is deregulation based on the withdrawal of the state from the economy, including the protection of domestic enterprises from stronger foreign competitors, especially transnational corporations. The opening of borders to unrestricted imports of goods and services leads to the bankruptcy of domestic enterprises unable to compete with them. At the same time, weaker domestic enterprises oriented toward exports find it impossible to sell their products abroad when deprived of state assistance.

These factors lead to a division of the global economy into a centre and peripheries. The centre belongs to transport corporations and economically developed countries in which these corporations are based. The directions of technological progress are determined by the centre, where the main financial, scientific, cultural and educational units are located. Peripheries are treated as areas subordinated to the centre and representing markets where finished products manufactured according to technologies created in the centre are to be sold. Peripheries are also a reservoir of cheap labour.

Qualified technical and research personnel, computer scientists, doctors and engineers tend to emigrate from peripheries to the centre in search for jobs meeting their qualifications and professional ambitions. They want access to modern equipment, know-how and technology and can also count on higher incomes in the centre than in the peripheries. Low-qualified and unskilled labour emigrates to the centre to seek employment in sectors treated as inferior; many of them do find work since their financial demands are more modest.

Despite this, unemployment in peripheral countries is much higher than in those of the centre. This primarily results from the elimination of a substantial portion of domestic production from the market due to competition from goods imported from the centre. The outflow of capital from the peripheries to the centre in search of stable investment conditions, especially in terms of ownership and taxes, also plays an important part. Labour-saving technology introduced by transnational corporations through direct capital investments is responsible for job losses in the peripheries.

The high mobility of speculative capital is a painful problem facing the periphery. In particular, countries where banks are held by foreign capital (subsidiaries of parent organizations based in the centre) report an increased share of speculative investments and a reduced share of physical investments undertaken on loans provided by these banks. This generates greater benefits for these countries and protects them from losses linked with misdirected physical investments by local entrepreneurs. At the same time, the growth of speculative investments in peripheral countries undermines the grown of these economies. Speculative capital may pose such a threat if it suddenly decides to move abroad. Massive outflows of capital have occurred in Argentina. Russia. Southeast Asia and a few other countries. To keep foreign investors interested in buying securities and to prevent a sudden flight of capital, peripheral countries - especially those troubled by a permanent budget deficit - are forced to maintain interest rates higher than those in the centre. This negatively affects investment rates and limits their endogenous economic growth, but has a positive influence on inflation and increases speculative capital profits transferred to the centre.

1.3. Economic Policy under Globalization

Highly divisive opinions exist regarding which economic policy individual countries should follow under globalization. Some economists argue that the role of the state should be restricted to three functions: making laws, enforcing them, and preventing violation of free market and trade rules.⁶ Moreover, individual countries should perform these three functions in a uniform manner, which means creating similar laws, exerting a similar influence on businesses so that they respect the law, and act in a similar manner when counteracting violations of free market and free trade rules.

The 'Washington consensus' reflects this point of view.⁷ Under its terms, the basic condition of equal participation in globalization of countries with an equal level of economic growth...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures and Tables
• Preface
• 1 Globalization and Economic Policy
• 2 The Concept of Foreign Economic Policy
• 3 Macroeconomic Instruments Applied in Foreign Economic Policy
• 4 Microeconomic Instruments Applied in Foreign Economic Policy
• 5 Globalization and International Economic Policy
• 6 The Concept of Global Economic Policy
• 7 Exemplification of Foreign and International Economic Policy
• 8. Foreign Economic Policy in Central and East European Countries
• 9 Chinese Foreign Economic Policy
• 10 Conclusion: From Autonomic to Global Policy
• Bibliography