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The Global Economy and Globalisation - 2002

Anthony Stokes Lecturer in Economics Australian Catholic University, Strathfield. While there is a great deal of talk about the ' lobal Economy' and ' lobalisation', they are often s!oken of, as if everyone understands "hat is meant by the terms or, alternatively, as giant mysterious forces that control the "orld, that no one has any kno"ledge or understanding of. #he aim of this !a!er is to e$amine the ' lobal Economy' and ' lobalisation' and to see "hat is ha!!ening in these areas.

#he lobal Economy


#he lobal economy is the "orld economy. %t is the economic activity going on in the "orld. %t is the combined economic activity that takes !lace in each individual economy !lus the activity bet"een countries. %t includes all !roduction, trade, financial flo"s, investment, technology, labour and economic behaviour in nations and bet"een nations. #he estimated total out!ut of the "orld economy in &''( "as valued at almost )**,''' billion US +%,-, &''&.. A concern "hen dealing "ith the global economy is the sharing of this global out!ut. #he /uman 0evelo!ment 1e!ort +(222. estimated that in (223, 456 of World 07 "as o"ned by the richest &'6 of the global economy, "ith the !oorest &'6 o"ning 8ust (6 bet"een them.

%s the lobal Economy ro"ing9


#he "orld economy has been gro"ing, averaging :.* 6 annual !ercentage gro"th during the (22';s. %n &''' it gre" by *.36 but according to the %,- +&''&. global gro"th slo"ed to &.<6 in &''(. %n &''( advanced economies gre", on average, by only (.&6, "ith 07 gro"th in the United States revised do"n"ard to(.(6, the lo"est level for a decade. #he rate of gro"th has also been inconsistent over the !eriod. World Economic ro"th "as slo" at the start of the (22''s, due to lo" gro"th rates in much of Euro!e, the USA and =a!an. #he global economy then gre" by an average of *6 !er annum in the mid> nineties but suffered another slo"do"n after the Asian currency crisis in (223 and the share market do"nturn and terrorist attacks in &''(, as sho"n in ra!h (. #he %,!redicts the "orld economy to gro" by &.46 in &''&.

ra!h (. World 07
5 4 3

2 1 0 1991 1992 1993 1994 1995 1996 1997 199 1999 2000 2001 2002 !ea"s

!ea"s
Source? %,- +&''&.

#he global economy, like individual economies, goes through cycles of gro"th and decline. #hese cycles are referred to as the %nternational @usiness Cycle. #he u!s and do"ns of this cycle have a ma8or im!act on most of the economies in the "orld. #he stages of the cycle are the same as national business or trade cycles, see ra!h &. ra!h &. #he %nternational @usiness Cycle.
@oom

W7

U!s"ing

0o"ns"ing

#rough

BEA1S

What is lobalisation9
-or the !ur!ose of this !a!er and in light of the ne" /SC Economics Syllabus +&'''., % "ill define lobalisation as having t"o key as!ects. (. #he actual movement across nations of A #rade A %nvestment A #echnology
&

A A

-inance and Labour

&. #he ca#acity to move and the #otential movement across nations of A #rade A %nvestment A #echnology A -inance and A Labour 1. The actual movement across nations of Trade #he level of global trade has been gro"ing dramatically since the end of World War %%. #he rate of gro"th in "orld trade doubled from 26 in the (25';s to &'6 in the (23';s. %t continued to gro" by <6 in the (24';s and by over 56 in the (22';s. .. Cverall "orld trade gro"th in the (22';s "as more than double the gro"th in W7. 0es!ite a slo"do"n after (223 due to the Asian economic crisis, "orld trade gre" by (&.*6 in the year &''' but fell by (.*6 in &''( +see ra!h :.. ra!h :. World #rade in oods and Services $nnual %e"centa&e G"o'th in T"ade (olumes
14 12 10 8 % 6 4 2 0 -2 -4

!ea"s
Source? %,-, World Economic Outlook, &''&.

#he gro"th in e$!ort volumes in advanced economies averaged 56 !er annum in the (22';s com!ared to 46 for develo!ing economies. A similar !attern occurred in regard to im!ort gro"th. While this might seem !ositive, the United Dations /uman 0evelo!ment 1e!ort +(222. finds that the richest &'6 of nations have 4&6 of the goods and services e$!orted in the "orld. #his com!ares to only (6 for the !oorest &'6 of

nations. A ma8or concern for develo!ing economies is their #erms of #rade, ie the relative !rices of e$!orts com!ared to im!orts > E$!ort 7rice %nde$ %m!ort 7rice %nde$ #he #erms of #rade for develo!ing economies fell on average by '.46 !er annum, com!ared to an increase of '.&6 !er annum in advanced economies, during the (22';s. #his follo"ed on from an annual decline of &.36 !er annum in the (24';s for develo!ing economies and a '.46 increase !er annum for advanced economies +%,-,(222.. While trade is increasing in the develo!ing countries the decline in the #erms of #rade can lead to a greater debt burden for the develo!ing economies and increased income transfers to advanced economies. 2. International Investment #his relates to investment by #ransnational Cor!orations +#DC's.. #his is also kno"n as %nternational 0irect %nvestment +%0%.. %nternational direct investment continues to gro" at a rate even faster than "orld trade. Annual outflo"s of foreign direct investment e$!anded more than :' times to reach US)(&3' billion at the end of the t"o decades to &''' and the stock of direct investment has more than trebled in the last (< years. #here are a!!ro$imately 5',''' transnational cor!orations +#DC;s. "ith over <'',''' foreign affiliates. #hey account for about one Euarter of total global out!ut and !roduction of foreign affiliates currently e$ceeds the level of "orld trade by (.: times. %n addition UDC#A0 estimates than (F: of all "orld trade involves transfers "ithin #DC;s. 3. Technology De" information and communication technologies are driving globalisation. #he cost of global communication is declining and innovative tools are becoming easier to use. #he %nternet, mobile !hones and electronic funds transfer are o!ening u! the global market !lace. #he internet had more than (*' million users in the middle of (224, but 2:6 of users "ere in the richest &'6 of nations +UD07, (222.. %m!roved communication can foster great advances in health care and education. %t also breaks do"n barriers of siGe, time, and distance. Costs are falling for small businesses, as they move from a domestic market !lace to a global one. Consumers can !urchase !roducts from any country in the "orld through the internet and Australia !roducers have to com!ete against the !rices that are on offer there. #he internet does, ho"ever, o!en the door for innovative Australian !roducers to reach a much larger market !lace and take advantage of economies of scale. %n the future, Australian consumers may 8ust as readily look at sho!!ing catalogues on the internet, as those delivered to their mail bo$es at their homes. %m!rovements in technology also bring u! the issue of intellectual !ro!erty rights. #ighter !ro!erty rights are increasing the !rice of technology transfer, blocking many develo!ing countries from their use, "hether it is in !roduction, communication,

education or health care. #his in turn increases the !o"er and "ealth of those "ho largely o"n the !ro!erty rights, the transnational cor!orations. 4. International Financial Flo s %nternational financial flo"s have gro"n most ra!idly of all, at (' times the rate of World 07. Since the !hasing out of controls on foreign e$change trading in the (23';s, international financial flo"s have gro"n e$!onentially. %n (24' global foreign e$change trading "as (' times the value of "orld trade. %n (22<, foreign e$change trading "as estimated, by the @ank of %nternational Settlements +@%S. to be 3' times the value of "orld trade and gro"ing. #he level and direction of international financial flo"s are no" the main determinants of the value of most nations' e$change rates. #rade in goods and services has little im!act on the e$change rate today, e$ce!t !erha!s as a !sychological influence on the behaviour of international financial traders. -inancial flo"s take many forms. #he fastest gro"ing area has involved interest rate, currency, eEuity and commodity derivatives. %nterest rate and currency derivatives make u! over 236 of the total value of derivatives traded see ra!h *. #he turnover in the derivatives markets is no" much larger than the cash markets. Cnly (6 of the foreign e$change market involves !ayments for trade. ,ost of it involves forms of derivatives trading. What are 0erivatives9 0erivates are sim!le financial contracts "hose value is linked to or derived from an underlying asset, such as stocks, bonds, commodities, loans and e$change rates. #hey are international financial instruments for s!reading risk or hedging. #hey include? A futures, A o!tions, A s"a!s, A for"ard rate agreements and A other hedging instruments. -utures? A currency future is a contract that you can effectively lock in the !rice at "hich you buy or sell a foreign currency, at a set date in the future. C!tions? A currency o!tion gives the buyer or holder of the o!tion the right to buy or to sell foreign currency at some time in the future, at a !rice set today. S"a!s? A currency s"a! is an agreement to e$change currency during a s!ecified !eriod of time. -or e$am!le, s"a!!ing ('' million Australian dollars for US dollars no" and an agreement to reverse the s"a! "ithin : months. #he 1eserve @ank of Australia +1@A, (222. engaged in a currency s"a! to cover a shortage of cash in the money market, during the floating of #elstra & in Cctober (222. #he 1eserve @ank raised )< billion in funds by engaging in a currency s"a!, "ith the funds largely returned in the first half of &'''.
<

-or"ard 1ate Agreements? #his is a contract bet"een t"o !arties to lock in a given interest rate or e$change rate starting at some time in the future for a set !eriod of time. -or e$am!le guaranteeing to lend )(' million at 46 interest in 5 months time for (& months. Cther hedging instruments include issuing debt securities and undertaking re!urchase ra!h *? 0erivative #rading

An im!ortant !oint to note is the amount of foreign e$change traded in one day is the eEuivalent of all the reserves of the "orld;s Central @anks. #his severely limits the ability of Central @anks to influence the flo" of finance in the global economy and thus the im!act these flo"s can have on a nation's e$change rate, as "as seen in the Asian currency crisis in (223. #he amaGing rate of gro"th in the financial flo"s, and as a result their ability to im!act on the global economy, can be seen in ra!h <. #he total estimated notional amount of outstanding derivative contracts stood at )((( trillion at the end of 0ecember &''(. ra!h <. #he ro"th of 0erivatives Global )e"ivatives *a"+ets ,-./bn0 amounts outstandin&1
120000 100000 $Million US 80000 60000 40000 20000 0 1990 1992 1994 1996 1998 2000 2001

!ea"s

Source? @%S, Annual 1e!orts +various.

!. The International "ovement of #a$our #he international movement of labour has been gro"ing since the (25';s. About &.:6 of the "orld !o!ulation live outside their country of birth and (.<6 of the "orld;s "orkforce "orks in countries other than those of its citiGenshi! +@ryan, (222?<.. #his trend is on the increase "ith the World Wide Web o!ening the door for skilled individuals to a!!ly for !ositions in any almost any country in the "orld. De"s!a!ers, such as the Australian or Sydney ,orning /erald, offer Australian school teachers 8obs in !laces such as China, %ndonesia, Saudie Arabia, England, Canada and the USA at "age levels, often, more than double, that "hich they currently receive. %n develo!ing countries, students are studying sub8ects that "ill give them a !assage, from their current e$istence, to one of e$!ected "ealth in a rich nation, rather than those that "ould hel! their o"n nation's develo!ment. #his brain drain "ill accelerate as the global economy e$!ands. The ca%acity to move and the %otential movement across nations #he second com!onent of globalisation involves the !otential im!act of changes in the global market on economies. %t means businesses consider the !otential entry of international com!etitors into their markets. @usinesses !lan !ricing strategies and em!loyment !olicies based on "hat could ha!!en if chea! foreign !roducers or #DC;s entered the market. %t also means businesses consider, or threaten to set u!, their o!erations in countries "here !rofits are e$!ected to be greatest, eg lo" "age countries, "here unions are su!!ressed and there are lo" cor!orate ta$ rates. overnments and em!loyers use these fears to !ush for labour market and "ork!lace reforms. overnments reduce business ta$es to ensure ta$ com!etitiveness to attract transnational cor!orations and international finance, "hile the average ta$ of "orkers rises to balance the budget. #he globalised financial market, and the ease "ith "hich funds can be transferred, means that finance is allocated according to international criteria of e$!ected !rofitability and risk. overnments, businesses, "ealthy individuals and financial organisation make decisions based on !leasing international financial markets and gaining greatest income and "ealth. #his often generates asset inflation and s!eculative bubbles that go through !eriods of boom and bust, "ithout necessarily adding to the !roductive ca!acity of a nation. lobalisation has the !otential to benefit all of humanity or create income and em!loyment insecurity, destroy traditional values and cultures, create environmental degradation, increase crime, decrease health standards and increase the ga! bet"een the haves and the have nots. #he "illingness and ability of governments to deal "ith the s!read and im!act of globalisation could "ell determine the eventual outcome.

1eferences

@ank for %nternational Settlement +@%S., &nnual 'e%ort, various, @asle, S"itGerland, @%S. @ryan, 0. and 1afferty ,. +(222., The (lo$al Economy in &ustralia , Sydney, Allen and Un"in. %nternational ,onetary -und +(222>&''&., World Economic Outlook, available at htt!?FF""".imf.orgF 1eserve @ank of Australia +various years., 'eserve )ank of &ustralia )ulletin, Sydney, 1@A. #reasury +(222., Im%lications of the (lo$alisation of Financial "arkets, submission to the /ouse of 1e!resentatives Standing Committee on Economics, -inance and 7ublic Administration? %nEuiry into the %m!lications of the lobalisation of %nternational -inancial ,arkets for ,acroeconomic 7olicy and the C!eration of -inancial ,arkets, available at htt!?FF""".a!h.gov.auFhouseFcommitteeFef!aFifmFsubs.htm United Dations 0evelo!ment 7ro8ect +(222., *uman +evelo%ment 'e%ort 1,,,, available at htt!?FF""".und!.orgFhdroF

%nternet 1esources
reenacre Educational 7ublications, htt!?FFhome!ages.ihug.com.auFHge!Feconomics.htm International "onetary Fund, htt!?FF""".imf.orgF -roductivity .ommission, htt!?FF""".!c.gov.auF The *ouse of 'e%resentatives /tanding .ommittee on Economics0 Finance and -u$lic &dministration0 htt!?FF""".a!h.gov.auFhouseFcommitteeFef!aFifmFsubs.htm The *uman +evelo%ment 'e%ort, htt!?FF""".und!.orgFhdroF The World )ank (rou%, htt!?FF"""."orldbank.orgF The World Trade Organisation, htt!?FF"""."to.orgF