Effects of Globalisation Benefits and Costs

There are hugely diverging viewpoints on the costs and benefits of the current process of globalisation. Employment effects Concern has been expressed in some quarters that investment and jobs t in the advanced economies will drain away to the developing countries. Inevitably some jobs are lost as firms switch their production to countries with lower unit labour costs. But past experiences suggest that all nations in the globalization process will gain providing they can find areas of expertise and competitive advantage as trade is a determinant of growth and rising living standards. That has not allayed concerns that certain sections of the population in richer countries notably relatively unskilled workers - will lose as an abundance of low-skilled labour in developing countries makes itself available to the world's companies at cheaper costs leading to a fall in the demand for lower skilled workers in industrialised countries. Critics of globalisation in some developed countries point to the risks of increasing income equalities and greater job insecurity together with the threat of structural unemployment in industries where demand for labour falls. Most workers in industry and, especially, manufacturing in rich advanced countries produce goods that could be imported from abroad. Static and Dynamic Efficiency Gains For consumers and capitalists, the rapid expansion of global trade and foreign investment is a normally considered good thing. Textbook theory suggests that increased competition from overseas leads to improvements in static and dynamic efficiency and gains in welfare. Trade enhances the division of labour as countries specialise in areas of comparative advantage. Deeper relationships between markets across borders enable producers and consumers to reap the full benefits of economies of scale. Competitive markets reduce monopoly profit margins and provide incentives for businesses to seek cost-reducing innovations and improvements in their products. The combined effects of these gains in efficiency should be over time an improvement in growth and higher per capita incomes. The OECD Growth Project found that a 10 percentage-point increase in trade exposure was associated with a 4% rise in income per capita. But these gains represent an average we must also consider the distributional consequences of rising incomes.

Expansion of Multinational Activity Capital does not always flow in one direction!
China's Mountain of Foreign Currency Reserves
Billions of US dollars

2.25 2.00 1.75

US $s (thousand billions)

2.25

2.00

1.75

1.50 1.25 1.00 0.75 0.50 0.25 0.00

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

1.50

1.25

1.00

0.75

0.50

0.25

0.00
Source: Reuters EcoWin

China's Net Foreign Assets

Yuan, trillion (trillion = thousand billion)
20.0
20.0

17.5

17.5

National Currency (thousand billions)

15.0

15.0

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5

0.0 00 01 02 03 04 05 06 07 08

0.0

Source: Reuters EcoWin

Many developing countries are now exporters of capital and are increasingly willing to use their foreign exchange reserves to buy up the rights to mineral deposits in other countries and to engage in merger and takeover activity with long established businesses in the developed world. Chinas foreign exchange reserves tipped over the $2 trillion level in 2009 and many other emerging market countries and oil and gas exporting nations have accumulated large trade surpluses that have allowed them to establish sovereign wealth funds for investment in overseas assets. The main motivations for the rapid expansion of multinational activity are as follows: o Higher profits and a stronger position and market access in global markets o Reduced technological barriers to movement of goods, services and factors of production o Cost considerations a desire to shift production to countries with lower unit labour costs o Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost) o Avoidance of transportation costs and avoidance of tariff and non-tariff barriers

thousand billions

12.5

12.5

thousand billions

o Extending product life-cycles by producing and marketing products in new countries o The urge to merge the financial incentives created by the global deregulation of capital markets is making it easier to achieve acquisitions and mergers and thereby encouraging the external growth of a business The UK economy has seen a huge rise in foreign investment over the last fifteen to twenty years. Some of this has been in portfolio investment (stocks and shares, bonds and property). Direct investment including capital investment by foreign businesses has also been strong.
Foreign Investment in the UK Economy
Value of external liabilities - direct and portfolio investment 2.00 2.00

1.75

1.75

1.50

1.50

GBP (thousand billions)

1.00

1.00

0.75

0.75

0.50

Direct investment

0.50

0.25

0.25

0.00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0.00

Source: Reuters EcoWin

thousand billions

1.25

Portfolio investment

1.25

Globalisation and the UK Economy The UK is a highly open economy. Openness to the global economy can increase the size of commercial markets available to domestic producers, encourage the transfer of technology and knowledge and also permit countries to specialise in those goods and services they produce efficiently by exploiting their comparative advantage. Thirty years ago, the UK abolished its foreign exchange controls and the major financial markets have been subject (until recently) to light-touch regulation. This means that each day there is a huge amount of trade within our stock markets, the short-term money markets and the bond markets. Little wonder that the City of London has become a hugely important global centre for financial trading. UK trade continues to take a high and rising percentage of our total national output. Clearly, the globalisation process impacts significantly on the British economy with benefits and costs along the way: BENEFITS OF GLOBALISATION FOR THE UK Opportunities for UK businesses to trade and invest overseas an injection into the UK circular flow, investment income helps finance current account deficits Access to cheaper goods and services from emerging market countries leading to higher real incomes Opportunities to live, study and travel overseas COSTS AND CHALLENGES OF GLOBALISATION FOR THE UK Risks of increase in structural unemployment in industries / regions that lose demand to lower-cost competition from overseas Globalisation may lead to rising income and wealth inequality (a higher Gini co-efficient) average incomes have risen but so too has the level of relative poverty Increase in global trade / output has an environment effect increased use of nonrenewable resources and CO2 emissions growing threats to the global commons Globalisation of brands perhaps a loss of cultural diversity UK government has less control over the economy businesses are footloose, economy may become more vulnerable to external shocks The surge in inward migration of labour has brought economic and social tensions and increased fiscal costs for the government Globalisation contributed to the sharp fall in interest rates and widening trade imbalances that were part of the root cause of the subprime lending boom and bust and the credit

Bigger export markets chance to exploit economies of scale More intense competition drives innovation and gains in allocative, productive and dynamic efficiency Britains creative industries have successfully exploited the opportunities of expanding global markets Globalisation has lifted hundreds of millions of people out of absolute poverty around the world and the emergence of an extra one billion middle class consumers is a huge

export opportunity for the UK Falling cost and rising speed of global communications and transport has helped to bring people closer together

crunch High food and fuel price inflation has hurt lower income families most

Threats and Challenges to Globalisation

The political openness generated by, first, the adoption of outward looking policies by the Chinese under Deng Xiaoping in the early 1980s and, second, by the fall of the Berlin Wall in 1989 are massive shocks that have rocked the competitive equilibrium of the world economy through both labour and capital flows. Source: Stephen King, chief global economist of HSBC, February 2008

Globalisation is not an inevitable process. 2009 marked a year when global trade contracted for the first time in many years and the term de-globalisation started to appear frequently in international economics news coverage. o The paradox of inequality: Globalisation has been linked to a widening of inequalities in income and wealth. The paradox is that globalisation has reduced inequalities between countries but widened income and wealth gaps within nations. Evidence for this is a rise in the Gini-coefficient for many developed nations and a growing rural urban divide growing in countries such as China, India and Brazil. o The return of inflation: In many ways globalisation has reduced costs and prices for many goods and services. But the driving down of interest rates caused by a glut of global savings allied to fast economic growth rates in emerging market countries led in 2007-08 to a surge in the prices of virtually all traded commodities. Food price inflation is the obvious symptom of this and it placed millions of the worlds poorest people at great risk. o Bursting of the financial euphoria / bubbles: A decade or more of strong growth, low interest rates, easy credit created the conditions for a boom in share prices and property valuations in many countries. The bursting of these speculative bubbles prompted the credit crunch and the spreading of contagion from that across the world in 2008-09. o Threats to the global commons: Perhaps the biggest long-term threat to globalisation is the impact that rapid growth and development is having on the global environment. The threat of irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflicting millions of the most vulnerable people are just some of the vital issues facing policy-makers. o Huge trade imbalances: World trade has grown over recent years but so too have trade imbalances. Some countries are running enormous trade and current account surpluses. Whatever the causes, trade imbalances are creating tensions for globalisation. There is growing political pressure towards

(1) Economic nationalism where governments block takeovers and mergers of domestic industries and businesses by foreign owned multinationals (2) Resource nationalism: Where countries protect their own factor resources such as natural raw materials. And countries with trade surpluses but high levels of import dependency use foreign exchange reserves to buy up the right to import minerals from other countries. (3) Trade protectionism to cut balance of payments deficits and protect output and jobs (4) Smaller agreements: There has been a shift away from multi-lateral trade towards bi-lateral trade agreements a process that will be strengthened after the collapse of the Doha trade negotiations.
Global Trade Shrinks in 2009
Quarterly Value of World Trade
4.5 4.5

4.0

4.0

US Dollars (thousand billions)

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0 00 01 02 03 04 05 06 07 08 09

1.0

Export, EXPORTS,F.O.B.

Imports, IMPORTS,C.I.F.
Source: Reuters EcoWin

Germany - Real GDP

National output measured at constant prices, seasonally adjusted, 2000=100 111 110 109 108 107 106 111 110 109 108 107 106 105 104 103 102 101 100 99 98 00 01 02 03 04 05 06 07 08 09

Index

105 104 103 102 101 100 99 98

Source: Reuters EcoWin

The World Trade Organisation has published a pessimistic short forecast for global trade in 2009 predicting that global trade flows will shrink by 9% this year with developed countries such as Germany and Japan feeling the worst effects of the downturn in trade and exchange. Poorer countries will see exports fall 2-3%. The report emphasizes the growing importance of global supply chains which increases the size of the trade multiplier effect. In a recession the multiplier effect works in reverse and hits those countries

thousand billions

where exports are a large percentage of national output. Production for many products is sourced around the world so there is a multiplier effect as demand falls sharply overall, trade will fall even further. Germany is facing a severe recession because of the shrinkage in global trade. Germanys merchandise exports in 2008, at $1.47 trillion, were slightly larger than Chinas $1.43 trillion. This meant that Germany retained its position as the worlds leading merchandise exporter. But economists at Commerzbank forecast that German GDP may shrink by more than 7% this year. 40% of German GDP is exported and it is heavily reliant on machine tools and engineering that is leveraged to global industrial cycle. Germanys traditional heavy focus on exporting manufactured goods is coming to be seen as an Achilles heel especially given the lack of an alternative source of domestic demand. Japan too is suffering from a collapse in exports and industrial production Source: Tutor2u economics blog

The Rise of Sovereign Wealth Funds Investment funds run by foreign governments, also called sovereign wealth funds have been in existence since the 1950s. As a result of high commodity prices and the success of exportoriented manufacturing economies, countries such as China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have built up a sizeable surplus of domestic savings over investment. This surplus has been transferred into sovereign wealth funds worth by some estimates over $2.5 trillion today, and controlling more money than hedge fund. According to Standard Chartered, sovereign wealth funds will be valued at more than $13.4 trillion in just a decade. To some people sovereign wealth funds are a threat to global trade partly because of fears of a protectionist backlash from western governments whose countries are running huge current account deficits on their balance of payments. There are many questions up in the air at the moment. 1. How will the SWFs use their gigantic surpluses? 2. Do they have an incentive to invest strategically perhaps for quasi political reasons and not simply with the aim of maximising returns? For example, an investment into another nations telecoms industry might result in a high rate of return and perhaps more importantly, an influx of research and development information. Sovereign wealth funds are already having an important effect on the UK economy. Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye. Many sovereign wealth funds have provided an injection of fresh financial capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to recapitalise to repair their balance sheets and improve their chances of survival.
Container ships left stranded by downturn in global trade

World Freight Index - Baltic Dry (BDI)

Daily closing index 12000 11000 10000 9000 8000 7000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 01 02 03 04 05 06 07 08 09

Index

6000 5000 4000 3000 2000 1000 0

Source: Reuters EcoWin

The global shipping industry is associated with huge internal economies of scale and where demand is tied to the fortunes of industries such as iron ore, oil and coal but also to the world trade cycle. Things are looking grim for shipping operators who have bet hundreds of millions of dollars on expanding a fleet for which there is now substantially less demand. Containerisation is an idea which developed from an idea developed by the US entrepreneur Malcolm McLean. Stackable steel boxes have been at the heart of globalisation. But as the world economy weakens, the global shipping industry is facing a problem of excess capacity. This industry is a good example of what can happen when there is a lengthy time lag between changing demand for container vessels, their construction and the new capacity coming on stream. Expensive investments in new ships which looked a sure fire bet just a couple of years ago are now albatrosses around the necks of some shipping giants. Container trade between Asia and Europe is shrinking for the first time in history according to some estimates. Fleet capacity is forecast to expand rapidly by more than 10 per cent per year from 2008 2012 the result of a huge rise in capital investment in new container ships. But annual container growth has collapsed due to the downturn and the steep fall in Chinese manufactured exports in particular. The early signs came from a sharp reduction in shipping costs for dry carriers shipping iron ore and coal around the world shown by fluctuations in the Baltic Dry Index. Now the container shipping industry is witnessing a meltdown in the charges for moving a standard 40 foot container the price has fallen by more than 90 per cent. Many operators are cutting services, merging operations and encouraging pilots to slowdown to save fuel. Many of the operating costs of the shipping industry are fixed container ships operate to fixed timetables in a similar fashion to airlines. So when they are full, the average fixed cost falls, improving the profit margins of container operators. Conversely in a falling market the average fixed cost of each container rises. Suddenly the economics of smaller dry bulk and container ships looks more attractive. Source: EconoMax

Globalisation and the African Continent For many years Africa appeared to have largely missed out from the beneficial effects of globalisation. The gap in real per capita incomes between Sub-Saharan Africa and emerging market countries grew wider. More recently the region has seen an improvement in her relative economic position and performance helped in some cases by the strength of global commodity prices (many African countries rely on exports of primary products as a key source

of income and foreign exchange reserves) and a pick-up in foreign direct investment into the continent.
Macroeconomic indicators for Sub-Saharan GDP at market prices Private consumption spending Fixed investment Exports Imports Investment (as a % of GDP) Exports (as a % of GDP) GDP per capita, current US$ Real per capita GDP growth 2007 6.2 7.1 20.5 4.1 11.9 2008 4.8 3.3 12.4 4.7 6.6 2009* 1.0 0.8 -2.6 -3.2 -3.0

20.9 21.4 22.3 35.9 39.3 32.4 1079.4 1240.8 1072.5 3.8 2.8 -0.9 Source: World Bank Global Economic Prospects, June 2009 *forecast

Africa has yet has not been directly hit by the credit crisis. The major African banks have invested little in the problem assets that have brought western financial institutions to their knees. It has also been helped by the fact that a growing share of output is agriculture for domestic markets, and is less exposed to declining global markets. Africa is likely to experience some indirect effects of the global crisis. The global demand for many commodities, which are at the heart of the export industry in some countries, has fallen. This includes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia. Other export markets have also been hard hit, for instance the Zambian flower exporting industry has suffered. Falling demand means falling prices. Crude oil is down by about 70% from its peak in July and copper about 66%. Money sent home by African nationals working abroad (remittances) also looks set to fall. This money sent home is often used to support family income and provide funds for small businesses. In 2007, 13bn was sent home in the form of remittances. The problem in 2009 is that 75% of all remittances come from employment in Western Europe and the US, areas already in recession. With a lower level of funds injected into the economy the national income multiplier effect will likewise be smaller. Foreign direct investment into Africa is also set to fall. More than $30bn was injected into Africa in 2007 in the form of FDI, nearly the same level as the $39bn received in aid. Falling commodity prices are going to make firms less attracted to an FDI projects in Africa (along with the inability of firms to access funds for investment, due to poorly functioning credit markets). Foreign owned banks with problems in their domestic markets may want to pull funds out of African banks. This will mean a lower level of loanable funds for the creation of loans for local businesses. As with many countries across the globe, the indirect effects of the slowdown may well be a decline in government revenues for many African administrations. With a lower level of tax revenues African government may have less flexibility with regard to fiscal policy. Indirect tax revenues account for over a third of all money flowing in African treasuries - there is no doubt that once again the African economy is facing uncertain waters. (Source, adapted from EconoMax April 2009, author Jon Mace)

China versus America From Currency to Energy

Chinese Imports of Selected Primary Products
20.0 20.0

17.5

17.5

15.0

15.0

12.5

12.5

USD (billions)

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5

0.0 00 01 02 03 04 05 06 07 08 09

0.0

Inedible crude materials, except fuels Mineral fuels, lubricants and related materials
Source: Reuters EcoWin

Chinas phenomenal growth over the last 30 years can be put into perspective as its economy has leapfrogged Germany as the worlds third largest economy after the US and Japan. The initiator of growth in the Chinese economy has been the expansion of its manufacturing base and the export demand from the US consumer. Recent data indicates that China has amassed $2 trillion worth of US$ reserves through the sale of goods and purchase of US government bonds. Dollar versus Yuan Catch 22 A lot has been written about the power that China has over the US with its holdings of US dollars. Ultimately the Central Bank of China Peoples Bank of China could collapse the dollar by selling its supply of dollars/US Bonds in the foreign exchange market. Indeed, many economists believe that Chinas continuing demand for US dollars is the only thing stopping it from collapsing. However, the fact is China has a stake in the stability of the dollar and if they push too hard to destabilize it theyll erode the value of their own dollar reserves. Essentially the more dollars China acquires the more wealth it has to lose if the dollar crashes in value. Furthermore, a fall in the dollar will reduce the competitiveness of Chinas currency in the US, which would damage Chinas economy. It seems that the two competing powers are too closely tied and too concerned with stability of the dollar to risk taking each other on, but with energy, (especially oil) the winner can take the gains without exposure to a corresponding loss If we move away from the currency market and focus on oil, the US is being outmanoeuvred by China with respect to energy policy. At present China holds 2% of the worlds oil reserve whilst the US holds 3%. The US consumes up to 20 million barrels a day and China is quickly approaching this level and directly competing against the US and Europe for prime Middle East oil presently the Middle East holds over 70% of the worlds known oil reserves. Therefore, to secure their oil reserves China has avoided the larger oil producers in the area Saudi Arabia and Iraq as they have strong ties with the US. Instead Chinese authorities have forged links with Iran and Sudan which on the periphery of the main oil reserves of the Middle East. Also the way they have approached these countries is in the role of a developer and peacemaker in contrast to the US method which has been seen as an aggressor. But it is not just the Middle East where the Chinese have been active in securing oil supply see table below. The Chinese authorities put great importance in clinching these deals, to the extent that Chinese President Jintao met in person with the leaders of Russia, Brazil, and Venezuela. Source: EconoMax, Mark Johnston, June 2009

billions

Oil Rich but Chalk and Cheese Norway and Nigeria Both Norway and Nigeria rank among the top 6 oil exporter revenue earners. However once you take into consideration the quality of life and GDP per Capita the figures tell a different story. How can these countries be at different ends of the economic spectrum when you consider their oil wealth and the level of output daily? Norway Norway is the worlds third-largest exporter of oil (after Saudi Arabia and Russia). It is a country so wealthy that despite having a population of just 4.5 million, it is a major player on the world stage. Oil was discovered off Norways western coast in 1969, and the country has ridden several busts and booms. In 1990s Norway declared that all state petroleum income would be put aside in a protected fund and invested outside the country. But oil can be as much a curse as a blessing. Since 1960s Hollands sudden gas wealth pushed up its currency and crippled its manufacturing sector, economists have been wary of easy money, even coining a term Dutch Disease for its impact on the rest of the economy. However, by spending the real return in a controlled manner Norwegians can enjoy their oil without ever suffering the diseases symptoms. The countrys wealth has allowed one of the most generous welfare states in the world. The sick get free healthcare and up to a year of fully paid leave. When a woman gives birth she can choose between taking 10 months off at full pay or a full year at 80% of her salary. Students are not only exempt tuition fees, they are eligible for 10,000 in loans each year, nearly a third of which gets written off upon graduation. Unemployment is at 2.7%, but the country has the highest sick leave figures in the world and one in four working-age Norwegians gets their main income from the state social security system. In the early 1990s Norway declared that all state petroleum revenues would be put aside in a protected fund and invested outside the country. The countrys wealth has also afforded it a place in the world stage, letting it hit far above its weight. Norwegians have twice voted not to join the EU but nonetheless as it wealth increases so does its responsibility. Norway is the leading nation in the provision of foreign aid 0.98% of GDP in 2006, but it hasnt reached its goal of 1%. Nigeria Life couldnt really be more different in the African nation of Nigeria. It was a country blessed with enormous sudden wealth as oil gushed out from the Niger Deltas marshy ground in 1956. Oil accounts for 95% of the countrys export earnings and 80% of its revenue. In 1960 agricultural production such as palm oil and cacao beans made up nearly all Nigerias exports; today, they barely register as trade items, and Africas most populous country, with 130 million, has gone from being self sufficient in food to importing more than it produces. A recent UN report shows that the quality of life in Nigeria rates below that of all other major oil exporting countries. Its annual per capita income of $1,400 is less than that of Senegal, which exports mainly fish and nuts. Despite its ranking as the worlds sixth largest oil exporter and Africas top producer, Nigeria falls behind major oil nations in alleviating poverty. Export sales prop up the economy but the frustration at the uneven distribution of profits has triggered nearly constant violence in the Niger Delta, with unemployed youth increasingly attacking oil facilities and personnel. Corruption siphons off as much as 70% of annual oil revenues; most Nigerians live on less than a dollar a day. Blame for the lack of development lies with the multi-national oil firms and the government, partners in onshore operations. Whilst Norway debates over its embarrassment of riches from oil revenues and how to increase its foreign aid, Nigeria is a fragile state, beset by risk of armed conflict, epidemic disease, and failed governance. Nigerias absurdity is that poverty perseveres as oil flows. Source: Mark Johnston, EconoMax

A Third Wave of Outsourcing in the Global Economy Comparative advantage shows that it is efficient to cut production in those activities where the producer faces a relatively high opportunity cost. That is the idea behind outsourcing. A generation ago, firms in the rich world increasingly shifted industrial production out into the developing world. A decade ago, services followed, with numerous back office functions shifting from high cost locations to those with lower costs. Now a third wave is gathering pace: rich food importers are acquiring vast tracts of poor countries' farmland to grow their own supplies. Is this a good thing?
Index of World BioFuel Prices
Goldman Sachs Commodity Price Index, Daily closing value 190 180 170 160 150 190 180 170 160 150 140 130 120 110 100 90 Jul 07 Sep Nov Jan Mar May Jul 08 Sep Nov Jan Mar May 09 Jul

Index

140 130 120 110 100 90 Jan Mar May

Why not encourage countries that export capital, but import food, to outsource farm production to countries that need capital, but have land to spare? Recently, food grown in Ethiopia has been shipped to Saudi Arabia. But Ethiopia is a hungry country that needs a significant amount of food aid. This is the heart of the dilemma.

Source: Goldman Sachs

The scale of current land deals is staggering. Sudan will set aside roughly a fifth of the cultivated land in Africas largest country. China secured the right to 2m hectares in Zambia and will grow palm oil for bio fuel on 2.8m hectares in Congo. Since 2006 the amount of land handed over globally is equivalent to the whole of Frances agricultural land, or a fifth of all the farmland in the European Union. Thanks to rising land values and rising commodity prices, farming has been one of the few sectors to remain attractive during the credit crunch. When private investors put money into cash crops, they tend to boost world trade and international economic activity. But now, governments are investing in staple crops in an attempt to avoid world agricultural markets altogether. Why? Over the last couple of years, food prices soared and food stocks slumped. This did not particularly scare importers; most of which (especially oil states) could afford higher prices. Their problem was the spate of trade bans that grain exporters imposed to keep food prices from rising at home. The obvious answer for food importers has been to access food directly by finding land (and water) abroad. The investors promise a lot: new seeds, new marketing, better jobs, schools, clinics and roads. Sudans agriculture ministry say investment in farming by Arab states would rise almost tenfold to represent half of all investment in the country. China has set up 11 research stations in Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less than India on agricultural R&D. Even without new seed varieties or improved irrigation,

investment should help farmers. One of the biggest constraints on African farming is simply the inability to borrow money for fertilisers. But the deals produce losers as well as winners. Host governments usually claim that the land they are offering for sale or lease is vacant or owned by the state. But empty land often supports herders who graze animals, or farmers who have worked it for generations without legal title. Most economists and pressure groups would rather see freer, and fairer, trade in agriculture. Source: EconoMax, Author Tom White

De-globalisation In 2009 the progress of globalisation appeared to come to a halt and go into reverse gear. The world economy suffered its deepest recession for over sixty years and global trade was set to shrink by more than 10 per cent. De-globalisation became a buzz word. There are several aspects of de-globalisation that have become apparent: A steep slowdown in world economic growth followed by a recession Unemployment worldwide is forecast to rise by around 30m above 2007s level Sharp fall in global trade in goods and services A large fall in net private debt and equity flows to developing countries Worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion A partial reversal of migrant flows and also remittances from migrant workers Evidence of a return towards economic nationalism and other forms of protectionism Geographical Seepage in the World Economy Geographical seepage occurs because of deepened inter-relationships between economies, supply-chains and financial markets across countries. One example is how developing countries that were really not part of the financial bubble and subsequent crisis of 2007-08 are now suffering economically because of the spread of the global downturn. Seepage is partly due to the changing structure of the world economy arising from outsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth. And developing nations reliant on exporting commodities to advanced economies will suffer from a fall in demand for and price of their output. Developing countries as a whole are expected to grow by only 1.2% in 2009, after 8.1% growth in 2007 and 5.9% growth in 2008 The Ukraine is likely to see her GDP fall by 15% in 2009 because of a collapse in the price of metals one of its major exports Remittance flows to developing countries are expected to be $304 billion in 2009, down from an estimated $328 billion in 2008 The global credit crisis has also led to a drying up of capital flows into developing countries - one consequence is that some emerging markets find it really hard to get hold of the bank loans needed to finance their continued expansion. According to the World Bank, private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007 and they are forecast to fall below $400bn in 2009. Both developed and developing countries will be left with huge amounts of spare capacity the global output gap might be as high as 8 or 9 per cent in 2010. This matters for the inflationary or deflationary risks facing the world economy as we head into 2010. Decoupling

Can China and India Decouple Growth from Rich Nations

Annual percentage change in real national output

15.0

15.0

12.5

12.5

10.0

China

10.0

7.5 India
Percent

7.5

5.0 UK

USA

5.0

2.5

2.5

0.0

0.0

-2.5

-2.5

-5.0 00 01 02 03 04 05 06 07 08 09

-5.0

Source: Reuters EcoWin

Decoupling is the idea that the emerging market economies can survive and continue to grow even when many of the richest advanced nations are in a recession or slump. Globalisation ought to make the business cycles of countries more closely aligned as trade and capital flows between nations become ever more important. But there are grounds for thinking that China, India, Brazil and Russia and other emerging economies can maintain growth momentum independent of what is happening in the United States, Japan and the European Union. The main reason is that emerging markets now account for a bigger proportion of global economic activity. Their share of global GDP is heading towards 25 per cent and their share of global investment spending including house building and infrastructure investment is nearly 30%. Their share of world trade continues to rise year by year. China was not immune to the global slowdown of 2007-08 but her growth rate stabilised in 2009 largely as a result of an enormous fiscal stimulus launched by the Chinese government. A 4 trillion Yuan ($585bn, 390bn) stimulus programme was introduced in November 2008 and China has made huge efforts to kick-start domestic demand (consumption and investment) to offset the decline in her exports. Suggestions for reading on globalisation Articles on globalisation from the Guardian Articles on the global economy (Guardian) Can Chinas frugal savers help her economy? (BBC news, July 2009) Global economic downturn in graphics (BBC news) Global recession (BBC news special reports) Globalisation and the wages of highly skilled workers (Economic Journal, July 2008) Globalisation is a benefit for the UK (Jim ONeill, Telegraph, July 2008) Goldman Sachs BRIC country analysis (research reports) World Bank World Development Movement

World Trade Organisation Worlds cheapest car goes on sale (BBC news, April 2009)