Globalization; Today and Tomorrow

Gerard F Adams, Gerard Adams

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136682438
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book seeks to examine the basis of economic globalization, yesterday, today, and tomorrow, and to link the outcome of globalization into the context of the new economic geography. It shows how the phenomenon is exhibited in the light of current events, providing a good way to keep understand today's world economy.

PART I

How globalization happened

1

INTRODUCTION

Globalization has been the catchword of the late 20th and early 21st century. It refers to the growing integration of the world, linking together into one global whole what had, heretofore, been independent activity centers all over the world. Globalization is an ongoing process. Although the world is becoming smaller as trade barriers are reduced and as communications and transportation improve, we do not yet live in a fully globally integrated universe. We have come a long way in that direction and we have seen much progress as a consequence, yet there is still a long way to go.

Today, we stand at a crossroads. The financial and economic crisis that has overwhelmed the world, itself perhaps a result of globalization, threatens to raise barriers to continued global economic integration. Gideon Rachman wrote: “there is little sign that the global financial crisis has led to any rethinking of the assumptions underlying globalizationthe virtues of free-market principles and international economic integration remain largely unchallenged” (Financial Times, February 3, 2009). However, as the crisis has worsened and calls for protectionism and state aid to national banks and industries have become more frequent, can we be confident that international linkages will continue to serve as a basis for economic progress? At this time, the worst of this crisis seems to be in the past, but we can no longer be as confident as we were that there will not be another one, perhaps one that is even more serious and that might sever some of the linkages between countries and regions.

Globalization

It has been customary to measure economic globalization in terms of international flows of trade and capital. Human migration and, especially, the flow of knowledge and information across the world are also of great importance. As international trade and capital movements increase, as people migrate, and, as information is spread more widely, the world becomes more integrated; it is said to become more “globalized”. The term globalization has important economic, political, social, and cultural dimensions. This book focuses on economic globalization, recognizing that cultural, social, and political factors may also feed back in important ways on the global economy.

International economic integration has caused overwhelming change across the world. Until recently, the world economy was dominated by the “advanced” countries of Europe, North America, and Japan. That is changing rapidly. New patterns of trade and international specialization have been the road toward rapid economic development in East and South Asia. The pace of economic growth in this part of the “third world”, particularly in China and India, far outstrips growth in the “first world”. Developing countries that not so long ago had been primarily producers of agricultural products and raw materials, far out on the periphery, are today core producers of manufactures supplying the older, more mature economies. As their living standards rise, they are also increasingly becoming their own best customers, draw-ing heavily on the world’s supply of energy, raw materials, and food products.

On the other side, global trade has also been advantageous to advanced countries, supplying them with imports of manufactures at low cost. Losing much of their “old” industrial base, the United States, Europe, andJapan have, in turn, been refocusing their economies on high-tech, information technology, and, paradoxically, on services.

Capital flows have also swung in new directions. In place of traditional capital flows from the wealthy countries to the poor countries, from West to East, in recent years capital from some developing countries (China) and the oil producers have financed the trade deficits of the advanced countries in the West (United States). Some observers have seen this as a result of a world savings glut, outside the United States; others have seen it as a consequence of excess consumption in the United States. The international flow of capital may take on new directions as this disequilibrium is eliminated.

The globalization of business management and manufacturing skills, disseminated through foreign direct investment, international migration, and education, plays a major role. The increasing spread ofinformation, as television and the Internet reach into the far corners of the world, is a harbinger of things to come. It has brought vast improvements in living standards to people in far-off corners of the world. The information revolution will be the ultimate basis for a globalized world.

But we must also note that global interaction has the potential of new, more serious problems. The financial crisis and recession of2007 to 2009 illustrates how global interactions can swing the entire world economy from prosperity to recession. Other threats of worldwide problems are also apparent, not the least being global warming and its impact. Under the title “Globalism Goes Viral” David Brooks warns:

[W]e face a series of decentralized, transnational threats: jihadi terrorism, a global financial crisis, global warming, energy scarcity, nuclear proliferation and…possible health pandemics like swine flu.

(New York Times, April 28, 2009, p. A21)

These risks are real; but, on balance, the gains from globalization exceed the likely costs. Globalization continues to promise substantial gains for developed and developing countries alike.

The world is “flat”?

With the striking book title The World Is Flat, Thomas Friedman (2005) describes globalization, presenting a widely fashionable view of this new world economy. Businesses are said to be competing on a flat global playing field almost without regard for location or nationality.¹ As barriers to international trade have diminished and as costs of transportation and communication have fallen, the geographic scope ofmarkets has expanded. Trade has increased greatly and trade patterns have changed. This can be observed widely. However, while the market is larger geographically, today’s burgeoning trade and other international interactions, like capital movements and migration, are not taking place because the world has become flat. On the contrary, it may be argued that the current headlong pace of internationalization is a result of reductions in trade and transport barriers in the face of the massive differences that remain between trading regions in living standards, costs, and prices. Much of today’s trade is the result of the very unflatness of the market, the huge gap that still remains between production costs in advanced and developing countries.

Water behind a dam is a convenient analogy. The level of water on one side of the dam is different from the water level on the other. Now, suppose the dam is breached. The water will pour from one side to the other until the level of water is equalized on both sides. Once that has occurred, the flow of water will cease or, if it continues, it must be justified on a different basis.

Similarly, an important distinction is between the process of globalization and a world where a high level of globalization has been achieved. While international flows may be increasing greatly during the process of globalization, a large part of these surging flows represents a response to international differences. It is simply cheaper to produce manufactures in Asia than in the United States. At this time, the production potential in the developing countries of Asia is still increasing, and barriers to trade and communication are still coming down. As differences between high-income and low-income countries diminish in a more globalized world, trade may have a different basis.

Globalization of trade, human, capital, and information flows will eventually reduce the differentials in wages and technology between the “old” economies and the “new”. As living standards in the developing countries rise and as costs increase, the rationale for trade in manufactured goods may be reduced. That will indeed be a “flatter” world. Once globalization is complete, if that will ever happen, the basis for continued international flows may be very different from that which prevails while the globalization process is under way. Space and specialization will remain. There will still be trade, as we observe between and within today’s advanced countries. The basis for that trade will reflect the gains that can be made from operating on a large scale, from specialization, from technology, and from advanced design.

In the long run, the world seems bound to become more globalized, because opportunities have grown enormously. But this certainly does not mean the death of distance. Distance will always matter because we are physical beings located in a specific place.

The economics of location, what is today called the “new economic geography”, (Fujita et al., 2000) suggests, even in the long run, a world of peaks and plains, whose population is concentrated in urban centers and whose business activities are scattered so as to obtain maximum advantage from specialization, internal and external economies of scale, and optimal transportation. Florida (2005) refers to such a world as “spiky”, a world where “the tallest peaks — the cities and regions that drive the world economy — are growing ever higher, while the valleys mostly languish”.

There will be a spatial organization of the world economy that may have a different basis from today’s, one that may be more broadly geographically integrated than it is today, but also one that will continue to have important elements of diversity rivalry and trade.

Globalization and economic performance

Increased global integration has profound implications for the performance of the world economy. We often focus on the positive elements, the efficiencies that can be gained from the proliferation of knowledge and international specialization and the resulting gains in living standards. Over the years, for many people these changes have been beneficial, increasing knowledge, advancing technology, raising income. This is the process we have been seeing as countries develop, and it is what is taking place on a vast scale in today’s China and India. But this process may not benefit everyone. Industrial workers in the advanced countries or peasants remaining behind in backward countries, for example, face difficult adjustments. Young people who lack education are finding it increasingly hard to participate in the world’s rising living standards. However, there is no doubt that in the aggregate, the world is better off as a result of globalization.

We must also recognize the costs. A high living standard on a worldwide basis will draw heavily on the planet’s limited resources. Potentially, there are huge costs as economies of the individual countries are more closely linked. Requirements for fuels and industrial materials may become increasingly hard to meet. The natural environment, even the climate, may suffer. We will discuss the impact of globalization on resource requirements and on the atmosphere, and we will consider the potential impacts on climate change. Will resources be sufficient and/or will countries cooperate to conserve so that resource pressures can be avoided?

Finally, one cannot be sure about the effect of global integration of the economy on financial markets and the business cycle. Current circumstances suggest that we cannot ignore the risks and adverse consequences that may also result as the world becomes more tightly linked. Will the global world economy be less stable, cyclically, than its less integrated precursors? A globalized world may be a more unstable world. Will we be able to avoid financial crises? Can economic stabilization policy be made effective in a global economic setting? Can independent nations cooperate in managing their affairs? In better times, many economists believed that wise policy makers could achieve the objectives of economic stability and growth. In today’s world we cannot be so sure; we cannot afford to ignore the risks. These are central questions to which answers will be required.

The principal lines of thought that motivate and integrate this book may be summarized as follows:

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Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures and tables
• Preface
• PART I How globalization happened
• PART II Theoretical constructs
• PART III The critical questions
• PART IV Institutions and policies
• PART V A look ahead
• Notes
• References
• Index