The Global Economy

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Student Guides to Business and Economics

Taxation
David A. Dieterle
The Global Economy
David A. Dieterle

Student Guides to Business and Economics

Copyright © 2020 by ABC-CLIO, LLC
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Library of Congress Cataloging-in-Publication Data
Names: Dieterle, David Anthony, author.
Title: The global economy / David A. Dieterle.
Description: Santa Barbara : ABC-CLIO, 2020. | Series: Student guides to
business and economics | Includes bibliographical references and index.
Identifiers: LCCN 2019049262 (print) | LCCN 2019049263 (ebook) | ISBN
9781440869853 (print) | ISBN 9781440869860 (ebook)
Subjects: LCSH: Economic history. | International economic relations.
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To Branda, Laura, Jillian, and Mary, my four tax deductions
who grew into beautiful women with beautiful families.
Thank you for a life blessed.
Contents

Preface ix

Acknowledgments xiii

Introduction: History of the Global Economy  xv

Chronology xxxvii

Chapter 1
Economic Rules of the Global Economy 1

Chapter 2
Global Economy, Politics, and Culture 11

Chapter 3
Gains from Trade 17

Chapter 4
Protectionism and Standards 23

Chapter 5
Measuring the Global Economy 33

Chapter 6
Global Financial Systems: Exchange Rates and Exchange
Rate Systems 43

vii
viii Contents

Chapter 7
The Organizations That Influence the Global Economy 57

Chapter 8
International Rules, Trade Agreements, and Trade Unions 77

Chapter 9
Major Controversies of the Global Economy 97

Chapter 10
The Influencers of the Global Economy 111

Conclusion: The Future of the Global Economy 127

Questions for Further Exploration  143

Bibliography 149

Index 169
Preface

At the time of this writing, the United States (the world, actually) is cele-
brating the fiftieth anniversary of Neil Armstrong’s first steps on the
moon. One of the most famous pictures of all time, arguably, is the picture
of the earth from the moon taken during an earlier Apollo space flight.
That picture not only symbolizes man’s quest into space but also shows us
how small and fragile the earth is in the grand scheme of the cosmos. Our
journey through the following pages is a look at why and how the nations
of our small, fragile sphere in the cosmos cooperate, or not, with each
other in a global economy.
There is a saying that if we don’t learn from history, we are bound to
repeat it. There is a lot of truth in that statement as history has shown us
many times. It is important for us to begin by looking backward at the his-
tory of the global economy. The Chronology and Introduction will take
you on a journey back in time to explore what history has to tell us how the
global economy of today took shape.
Chapters 1 and 2 set the background, identifying the rules and back-
drops by which the nations of the global economy participate. Rules keep
us organized. The global economy is no different. Chapter 1 provides a set
of rules that guides us in determining if the global economy is functioning
at its best or falling short. Chapter 2 gives the background against which
the nations are participating. We get an opportunity in chapter 2 to deter-
mine if the nations themselves are functioning so that they can fully par-
ticipate and benefit in the global economy.
Chapter 3 considers the fulcrum on which the global economy teeters.
Albeit brief, it could arguably be considered the most powerful of the chap-
ters. In chapter 3, we will explore the vital concepts of trade: absolute
advantage and comparative advantage. Without trade, there is no global
economy. Why do nations trade? How can all nations trade and be part of
the global economy? We will answer all these questions.
ix
x Preface

The global economy is a dynamic institution, always changing. In chap-

ter 4, we will explore why changes occur in the global economy. We will
dig deeper into why nations feel the need to change the rules from time to
time. We will look at how nations try to protect their domestic economy
and, at the same time, still be a global economic partner.
All nations want to know how their economies are measuring up to
other economies. In chapter 5, we will see how nations measure their
international participation in trade and financial transactions. Chapter 6
extends that discussion, as we explore the money exchanges of trade and
financial transactions across the globe. Exchange rates and exchange rate
systems have become a vital component to the functioning of an efficient
global economy. Companies of different countries with different curren-
cies must exchange currencies. Foreign exchange markets facilitate cur-
rency exchanges, making global trade possible.
In chapters 7 and 8, we will shift to the “who” of the global economy.
Chapter 7 introduces the international organizations that try to make the
global economy function efficiently as well as other major organizations,
such as central banks. In chapter 8, the discussion extends to trade agree-
ments, trade unions, and international rules for the global economy. In
today’s global economy, nations need trading partners. Often, these part-
ners agree to their own set of rules. In this chapter, we will explore some of
those agreements and the ways that they help both the nations and global
economy.
Chapters 9 and 10 and the Conclusion take you into the final part of the
journey. No institution is without controversy; the global economy is no
different. In chapter 9, we will take a look at what keeps nations apart, what
keeps them debating and disagreeing, and what, at worst, prevents their
global participation. An overriding theme here is the continuing battle
between politics and economics.
In chapter 10, you will be introduced to some of the individuals whose
work and writings have had a major influence in determining today’s global
economy landscape. From the earliest explorers of the thirteenth to fif-
teenth centuries to the historical masters Adam Smith and David Ricardo,
to the modern development economists Emily Oster and Paul Collier and
others, their writings, research, and practices have paved the way for
nations to participate in today’s global economy. While we certainly could
not identify all contributors in these few pages, you will note the cross sec-
tion of expertise, experience, and views that makes the global economy the
dynamic mechanism it is today.
Finally, in the Conclusion, we look out with our crystal ball into what
could be the key issues of the future. These are the potential issues of your
future global economy. It will be up to your generation to create solutions.
It will be your generation who takes these challenges and turns them into
 Preface xi

opportunities. There will be issues and challenges for the future global
economy that we cannot even imagine or anticipate today. It is our hope
that this journey will prepare you to address them as knowledgeable, edu-
cated global citizens. To assist your becoming that educated global citizen,
we finalize our journey with a few questions for further exploration.
The global economy is master to over seven billion people and growing.
How nations choose to cooperate and work together in the future global
economy will ultimately dictate the terms by which all nations live, work,
play, and survive. Good luck.
Acknowledgments

No project succeeds in a vacuum. Without the confidence of my editors at

ABC-CLIO, specifically Hilary Claggett for helping start the project and
Maxine Taylor for navigating our way to the end, this book would not have
been possible. I also need to recognize the editing skills of Angel Daphnee.
She definitely made the book look and read better. To all you, thank you.
Of course, no project like this survives without the super support of family.
My daughters and their families exhibited the patience of Job. Thank you
for putting up with me one more time. Babe, as always, you are my inspira-
tion. You are Beautiful.

xiii
Introduction: History of the Global
Economy

“In the beginning”1 seems an appropriate start for a journey about the
global economy. In the beginning, how did one define a global economy?
Certainly they did not understand our economy of the twenty-first cen-
tury. Did the early hunters and gatherers have a global economy? If we use
the literal definition of “global” as round, then we can be confident it was
not global. If the term “global,” however, refers to the economy that the
people of an era know and understand, then they participated in their
global economy. Each era has its own frame of reference for how the world
and its economy are defined.
If one looks up “global” in a dictionary, the term can also mean overall
or relating to the whole system.2 While hunters and gatherers did not have
a “round” economy, hunting and food gathering was their whole economy.
It was their global economy. The human race progressed, invented more
tools, and discovered new ways to make life better. With each step for-
ward, the global economy expanded.

GLOBAL EXPANSIONS
Over time, more and more people banded together to build, grow, and
trade. Soon people were traveling and trading from town to town. More
new lands were discovered, and peoples ventured farther and farther away
from home. With each new venture came a bigger global economy, as there
were more new lands to explore and new opportunities.
During these early economic periods, a person’s local economy was
their global economy. A person’s labor and ability to build their own home,
make their own clothes, or grow their own food was their economic life.
An individual or family could only build or grow with the resources they
xv
xvi Introduction

owned. With time and need for resources, sometimes a person would bar-
ter with a neighbor or towns person to swap skills, utensils, or crops. Pop-
ulation grew, and economies took on different forms.
Trading from town to town was not out of the ordinary. City-states
emerged as peoples and civilizations developed and collectively lived
together as communities. Economic, political, and social institutions
evolved to help peoples live in harmony.

The Cradle of Civilization

Between 4000 and 3000 BCE, large numbers of peoples began to con-
gregate, creating a large population in a central location. They shared not
only geography but also communications (language), along with political
and economic institutions. They also shared social and cultural customs,
such as music, dance, and architecture. They learned to do different jobs
and trade with each other for their necessities.
The earliest-known civilization to have these common characteristics
was the land between the Tigris and Euphrates Rivers, known as Mesopo-
tamia. The major population centers were the cities of Babylon, Sumer, and
Assyria. This area is today’s Iraq, Syria, and Turkey. Another civilization
around this time was the Indus Valley civilization. Today this region is
parts of Pakistan, India, and Afghanistan. The Indus Valley civilization is
known for its size, which is almost over one million kilometers, as well as
for arts and crafts.

The Ancient Egyptians

It is important to distinguish the Egypt of ancient times with the mod-
ern Egypt of today. Relative to other ancient civilizations of the period,
ancient Egypt was a civilization of progress. We are all familiar with the
pyramids and sphinx sculptures. The ancient Egyptians gave us the sun-
dial, our first solar clock. Their economy centered on farming and life
along the Nile River. We are familiar with the pharaohs from their practice
of embalming and creating mummies, many of which are preserved for us
to view today. Their pictorial form of communication, hieroglyphics, left
us a rich picture of life in Ancient Egypt. In this day of emojis, some have
suggested we are returning to a day of communicating in hieroglyphics.

The Early Chinese Civilization

During the periods of ancient China they were an inventive civilization.
They invented paper, silk, gunpowder, porcelain, printing, noodles, alco-
hol, and the compass. We can thank the Chinese for kite flying, as they are
 Introduction xvii

also considered the first to fly kites. Marco Polo is credited as the first
European to travel to China and discover the Chinese products for the
Europeans. It was ancient China the Europeans were trying to reach by
water routes that began the Age of Exploration, which we will discuss
shortly.

The Greeks
The ancient Greek civilization was one of the most influential civiliza-
tions in all of history. The Greeks gave us art, literature, philosophers,
democracy, and, of course, the Olympics. The Greeks invented biology,
geometry, and physics classes. You can blame them for having to take those
classes in school. They created the modern form of democracy and politi-
cal institutions, such as the senate to discuss and pass laws. The Greeks
added to our body of knowledge with mathematicians like Pythagoras (yes,
the same as the theorem) and Euclid and scientists like Archimedes. We
cannot forget arguably the greatest philosophers and teachers of all his-
tory: Plato, Socrates, and Aristotle. Greek history and influence go far
beyond the scope of our discussion, but Greece’s ultimate influence on the
global economy today is immeasurable.

The Roman Empire

Under the Roman Empire, for the first time many different lands and
cultures intermingled. The Roman Empire extended east into the Middle
East, north to Britain, south to Africa, and west to the Atlantic Ocean. All
the countries adjacent to the Mediterranean Sea were part of the empire. It
could be said that the Roman Empire was in fact its own global economy.
Ruled by kings, then emperors, and a senate, the Roman Empire eventu-
ally was a victim of its own vastness. We remember the Roman emperors
like Julius Caesar and Augustus Caesar, whose rules gave us wonderful
works of art and architecture.

Other Civilizations in Other Lands

As the Europeans sought an all-water route to India and China, two
civilizations already occupied some of the lands they were about to dis-
cover. The Aztecs and the Incas were highly developed civilizations in
what is now Mexico and South America.
The Aztecs lived in what is current day Mexico around the fourteenth
century. The civilization itself was the merging of three major cities:
Tenochtitlan, Texcoco, and Tlacopan. For a large civilization, the Aztecs
xviii Introduction

had an interesting form of governance. The Aztecs retained a local rule but
paid a tribute to the Aztec emperor. In 1521, the Aztec civilization eventu-
ally ended, when Hernando Cortez and the Spanish defeated it.
The Incas lived farther south, in what is now Peru and Chile in South
America. The Incas had a very powerful military presence in the lands.
They were ruled by a king and were known for their buildings. The Incas
built the famous site Machu Picchu, which still stands today in Peru.

The Middle Ages

As wars were won or lost, nations emerged and their leaders (kings)
came to own the land. This period of history, known as the Middle Ages,
was a time of feudalism throughout Europe. Under feudalism, the king was
the ultimate landlord and decided who would own the land. Known as bar-
ons, these people would pay the king rents and decide who would work the
land and grow the crops. The farmers, known as serfs, would ultimately
receive a portion of the crop. Most of the rents were paid to the barons and
the king. The barons and kings were very rich, the king obviously being the
richest person in the nation.3
The Middle Ages was the era of King Arthur, the Knights of the Round
Table, Maid Marian, the backdrop for the stories of the fictional Robin
Hood, of castles and moats and drawbridges protecting a city. When the
Middle Ages ended in the 1500s, the kings and queens of Europe realized
they needed to find more efficient routes to India, China, and the spices
and riches of the East.
This is the era in history where we will begin our journey. Power and
wealth of a nation came to be defined by the amount of gold, silver, and
riches held by the royal families. Mercantilism became the dominant eco-
nomic system of the fifteenth century. The royal families of each country
knew that they needed to expand their holdings of wealth, including land.
Within each society were individuals who had ideas about how to find
those riches and lands more effectively and efficiently than the dangerous
land routes currently being used. The nations and royalties of Europe were
about to embark on the first age of globalization.

FIRST ERA OF THE GLOBAL ECONOMY

Marco Polo
Before Marco Polo, there was Maffeo and Niccilo Polo. The brothers left
Venice in 1260 and traveled east on a trading trip. Six years later, they
entered Beijing and met the Great Khan. The Marco brothers were the first
 Introduction xix

Westerners seen by the Great Khan. They stayed in China (then known as
Cathay) for one year before returning to Venice.
When Marco’s father and uncle made their first trip to China, young
Marco was six years old. When they left for their second trip, he was a
young man of seventeen and he joined them. Marco had been well edu-
cated during his youth in Venice, and he was able to write significantly
about his journeys. It is because of his records and accounts of their jour-
neys that we remember him as the famous brother.
On this journey to Cathay, they took many gifts from Venice to give to
the Great Khan. This trip was very difficult, as they traveled the Silk Road.
Their journey to Cathay was quite eventful. Marco was sick, and they spent
one entire year in one place before he was well enough to travel.
As they continued their journey they reached Pamir, the highest spot in
the world. In one river village, they found a local stone that happen to be
jade, which became a very valuable European jewel.
While crossing the Gobi Desert young Polo wrote about what it felt like
to cross such vast nothingness: “This desert is reported to be so long that it
would take a year to go from end to end; and at the narrowest point it takes
a month to cross it. It consists entirely of mountains and sands and valleys.
There is nothing at all to eat.”4
Marco and his brothers arrived in Cathay in May 1275. The trip had
taken them three and one-half years. In his accounts, Marco recalls his
first meeting with the Great Khan:
They knelt before him and made obeisance with the utmost humility. The
Great Khan . . . received them honorably and entertained them with good
cheer. . . . Then they [Polo Brothers] presented the privileges and letters
which the Pope had sent, with which he was greatly pleased, and handed
over the holy oil, which he received with joy and prized very highly. When
the Great Khan saw Marco, who was then a young stripling, he asked who
he was. “Sir” said Messer Niccolo, “he is my son and your liege man.” “He is
heartily welcome,” said the Khan. . . . Great Khan and all his Court wel-
comed the arrival of these emissaries. . . . They stayed at Court and had a
place of honor above the other barons.5
Marco Polo became a favorite of the Great Khan and ultimately was a
member of the Khan’s court. He traveled throughout China, mostly at the
request of and representing the Great Khan. He visited places in China and
Asia that were not going to be seen by other Europeans for several more
centuries.
During his travels, Marco Polo was witness to new products discovered
by the Chinese or other peoples he met during his travels. He and his
brothers were the first to be introduced to asbestos, paper money, and coal.
They were accustomed to firewood, which burns and disintegrates into
xx Introduction

ash. Coal, a substance that burned but did not seem to burn, was known in
Europe but very new to young Marco and his brothers. They thought of
how much firewood could be saved using coal as a substitute.
Paper money was not used in Venice or Europe. Money in thirteenth-
century Europe was weight-based gold or silver. In Cathay, they used
weight­less paper for money and exchange. This was very strange to the Polo
brothers. Other inventions witnessed by these three Europeans included a
postal service, a canal-based internal transportation system, porcelain
bowls, and silk garments.
The Polo brothers stayed in Cathay for seventeen years. They became
very wealthy in gold and jewels. They left Cathay with their fortunes, trav-
eling by sea across the Indian Ocean to the Middle East. It was not an easy
journey, and many of the passengers died while at sea. They had received
the golden tablet of authority from the Great Khan, which allowed them to
travel safely through bandit-ravaged territories of the Middle East. They
completed their travels to Venice by sea, arriving in 1295.
Several years later while a prisoner of war, Marco Polo dictated to
another prisoner the accounts of his travels. The book had two titles. The
first was The Description of the World, and the second was The Travels of
Marco Polo. Much of what we know today about the early Chinese we first
learned from Marco Polo. He wrote of Cathay’s wealth and his journey
adventures in Africa and through India. Very popular in Europe, the book
was mostly thought of as an adventurous book of fiction. The book later
was known as II Milione, or the Million Lies. Most of Europe considered
the book pure fantasy, a modern-day Harry Potter.
Marco Polo died in 1324 at the age of seventy. In the years and centuries
since, there continues to be some question as to whether he really did
travel to China, not so much because of what he wrote but because of what
he did not write. There was no mention of the Great Wall or tea, for exam-
ple. Travelers of eighteenth and nineteenth centuries, however, have con-
firmed much of his accounts in their writings. Regardless, his book
expanded the globe and the idea of an expanded global economy.
In his book, Marco Polo notes, “I believe it was God’s will that we should
come back, so that men might know the things that are in the world, since, as
we have said in the first chapter of this book, no other man, Christian or Sara-
cen, Mongol or pagan, has explored so much of the world as Messer Marco,
son of Messer Niccolo Polo, great and noble citizen of the city of Venice.”6
Fiction or not, Marco Polo’s book gave Europe a glimpse of another part
of the world and a more global economy. Throughout the fourteenth cen-
tury, Europeans traveled the Silk Road. Another group of adventurers,
however, began thinking there must be a more efficient, safer route by
water around Africa, straight into the Indian Ocean, and directly to China.
 Introduction xxi

SECOND ERA OF THE GLOBAL ECONOMY

The Age of Discovery
The land routes once traveled by Marco Polo were becoming harder to
travel. The many cities and nation-states that had to be passed became
more dangerous, as bandits, thieves, and warring cities grew in number
along the route. The odds of successfully reaching one’s destination and
returning were becoming very low. The two powerful seafaring nations,
Portugal and Spain, decided that they had a better idea. They knew the
oceans, so they embarked on finding a water route to the riches of India
and the lands of the East. Each had a plan to reach India by sea, but in two
different directions.

Portugal
One sailor, Prince Henry the Navigator, influenced much of Portugal’s
early seafaring experiences. Believing there was a more effective and effi-
cient southern route to India and China around Africa, he sponsored voy-
ages that began sailing south. Each expedition south increased what was
known of the African coastline. His expeditions sailed only as far south as
the Canary Islands.
While the expeditions only reached the Canary Islands along Africa’s
coastline, they served purposes. First, Prince Henry’s exploits established
Portugal as the sea power of the time. Second, they were the unofficial
launch of the age of exploration, discovery, and an expanding global econ-
omy. Third, they showed that there might be something to this idea that
the earth was round and not flat.
Also sailing for the king of Portugal, Bartholomeu Dias proved that sail-
ing to India was possible when he followed the expeditions of Prince Henry
the Navigator and sailed the African coastline to the Cape of Good Hope
in 1488. His voyages revealed that the Atlantic and Indian Oceans were
indeed one continuous body of connected water. A third Portuguese sailor,
Vasco da Gama, completed the venture, sailing to India in 1498.

Spain
While Portugal was searching for way to the riches of India by a water
route to the south, others were convinced that India could be reached by
sailing due west. This theory was only valid if the earth was round and not
flat, as was still considered by some of the day. Interestingly, some histori-
ans are convinced that the Romans were the first to consider the earth to
xxii Introduction

be round. A young Italian, Christopher Columbus, had an idea to avoid

sailing around Africa and instead to just sail due west. He calculated that
the earth was small and that sailing due west would be shorter than going
around Africa.
Columbus agreed to sail for King Ferdinand and Queen Isabella of
Spain. In 1492, he set sail due west for India with three ships (the Nina,
Pinta, and Santa Maria) to conquer lands and discover treasures for the
king and queen. We know, of course, that he did not reach India but instead
landed in what is now known as the Bahamas on his original voyage.
Columbus made three voyages, landing and claiming for Spain lands that
are now several of the Caribbean Islands and Panama. He had also set foot
in what is now South America.
As you are probably aware, the Vikings had set foot on the “new world”
centuries before, so Columbus was not the first European. He was, how-
ever, the first explorer to begin a series of explorations by not only Spanish
explorers but also Portuguese, English, Dutch, and Italian explorers.
Throughout the sixteenth and seventeenth centuries, Columbus was
followed by Ferdinand Magellan, Hernando De Soto, Juan Pizarro,
Amerigo Vespucci (where we get the name America), John Cabot, Sir Wal-
ter Raleigh, and others to claim new lands in the name of the king and/or
queen who sent them. Along with the new lands, they were to begin settle-
ments and provide resources to be sent back to their native country. The
world was changing. The global economy was growing and changing.
Wealth for the crown and resources for producing goods became the aim
and goal of every new explorer and every new settlement.

Mercantilism
As the population of Europe grew and cities became city-states and
then nation-states and nations, the need for more resources rose. The royal
families of the nations counted their nations wealth in gold, silver, riches,
land conquests, and ownership of resources. The Age of Discovery was in
reality a competition between nations for ownership of the new resources
and wealth of an expanding globe. Beginning around the fifteenth century,
a new economic system was evolving that centered on the accumulation of
a nation’s wealth and power.
To gain power and leverage, countries would sell goods produced in
their country to another country in exchange for gold or silver. In this type
of economic system, there was a constant need for more land, labor, and
tools to produce products they could sell for more gold or silver. Other
countries were, of course, doing the same thing and were selling their prod-
ucts for other countries gold or silver. Trade between nations did not exist.
 Introduction xxiii

Mercantilism was the economic system in which countries would

export but not import. They would sell but not trade. European countries
were fighting wars over their new land discoveries. The European coun-
tries that won the wars won the new lands. The nations colonized their
new lands as part of their domestic economic system. The resources of the
new colonies belonged to the mother country. The larger a nation’s empire,
the larger the cache of resources to make products to use domestically or
sell to other nations. The mercantilist global economic system was at its
height into the eighteenth century.
Local economies were quite different. From the very beginning peoples
started forming social and political units. Individuals would specialize in
what they would produce for the town. Farmers would grow crops and
trade their crops to the seamstress for cloth to make clothes, and vice
versa. In towns and cities, individuals learned to specialize and trade,
either through barter or with money, for their other necessities. This spe-
cialization led citizens within a town or city to be interdependent.
Nationally, however, this form of cooperation did not exist within the
mercantilist global economy. Nations were still laying claim to new lands,
accumulating wealth that did not impact their citizens, who mostly
remained poor, and extracting resources from their colonies without any
regard for their welfare. The global economy was a zero-sum game. On one
side, there was a winner and equally a loser on the other.
The times were beginning to change in the eighteenth century. In the
British Empire, a small group of thirteen colonies across the Atlantic
rebelled and claimed their political independence. Plus, a small-statured
Scotsman professor was about to publish a book that would change this
nationalistic way of thinking and the global economy forever.

THIRD ERA OF THE GLOBAL ECONOMY

Adam Smith
The middle to late eighteenth century was a time of life-altering change
for individuals, nations, and the global economy. In 1759, Adam Smith
published The Theory of Moral Sentiments.7 Adam Smith was a professor of
moral philosophy at the University of Glasgow, and a book with this title
by a moral philosophy professor was no big surprise to the mid-eighteenth-
century reading public.
Very briefly, the book focused on individuals doing and thinking for the
moral benefit of the individual. What was important to the global econ-
omy at the time was Smith’s first references of his famous “invisible hand”
reference and that individual choices add up to better society as a whole. It
was a mid-eighteenth-century best seller.
xxiv Introduction

The theme of The Theory of Moral Sentiments set the stage for his sequel
published in 1776. In his sequel, An Inquiry into the Nature and Causes of
the Wealth of Nations,8 Adam Smith submitted that a nation’s wealth is not
based on how much gold and silver are in the national treasury but on the
wealth and prosperity of the individual citizen. We will spend more time
on the details of Smith and the Wealth of Nations, including his “invisible
hand” and the advantages of trade, in the next chapter.
Other philosophers and groups had thought about some of these ideas
earlier. The Physiocrats in France created a model showing how an econo-
my’s components are interrelated in the farming industry. Earlier we
­discussed how individuals in towns and cities specialize and are inter-
dependent. The Wealth of Nations stands alone, because for the first time,
Adam Smith presented these ideas as an argument against mercantilism
and argued that these concepts also hold true in the interactions between
nations.

Industrial Revolution
Like the American Revolution, the Industrial Revolution was a time of
significant change, especially in Europe and the young United States. The
Industrial Revolution was approximately a century of change from the
mid-eighteenth century to the mid-nineteenth century. Much of this eco-
nomic revolution centered on the relatively new country of the United
States and the writings of Adam Smith. As with most revolutions, the
world would change forever and, with it, the global economy. Virtually
every component of the global economy changed, including transporta-
tion, communication, and agriculture.
The Industrial Revolution brought new technologies in energy, develop-
ment of metals such as iron and steel, and inventions such as the steam
engine. The influence of Adam Smith was reflected as manufacturing
improved processes through the use of Adam Smith’s concepts of division
of labor and specialization. It improved communications with the radio
and the telegraph. Regardless of where the invention or new technology
originated, its influence was being felt universally.
The Industrial Revolution was more than just industrial. It changed the
social, cultural, and political landscapes as well. Initially focused on Brit-
ain in the eighteenth century, it soon spread to other parts of Europe before
coming to the United States. While other parts of the world may not have
participated in the Industrial Revolution directly, they were either indi-
rectly impacted through trade or eventually impacted in the inventions,
technologies, and resources the Industrial Revolution left behind.
 Introduction xxv

The world became more specialized and more productive. The Indus-
trial Revolution saw significant population growth, and living standards
improved for everyone. People were eating healthier as food supplies
increased, resulting in fewer disease plagues. Fewer children were dying at
birth. Throughout Europe and the United States, people were migrating to
the cities to work in the new factories and ever-expanding manufacturing
sector. Even the poor, while still poor in relative terms, were living better
than those considered poor a century ago.
Agricultural and manufactured products were being produced in sur-
plus quantities. Expanding global trade was the outlet for the surpluses
created. In the early nineteenth century, David Ricardo wrote a political
economy textbook that would again bring new ideas and growth to the
changing global economy.
David Ricardo was a proponent of Adam Smith’s ideas about how
nations should trade for wealth. Ricardo took Smith’s idea about the gains
from trade and went one idea further, introducing the concept of compara-
tive advantage.9 Ricardo submitted that every nation regardless of resources
could participate in the global economy. As with Adam Smith, in the next
chapter we will explore Ricardo’s concepts in greater detail.

The World Gets Smaller

The Industrial Revolution was the beginning of a shrinking globe. Since
Europe’s first discovery of the lands beyond the Atlantic, inventions such
as steamships (1819), the telegraph (1844), and the telephone (1876) brought
the two continents closer together. Communications and travel increased
global trade as well. The lands of what is now North America and South
America became very important providers of resources to the empires of
Europe. The American colonies had won their independence from Eng-
land, but the British Empire remained mostly intact. Global trading among
the nations of an empire was as important to the global economy as trade
between nations.
As telegraph and telephone communications continued to improve and
increase in relevance and accessibility, a second era of a shrinking globe
came at the beginning of the twentieth century. With the improved use of
steam engines, building of larger ships, and the early use of air flight, the
world became even smaller and the global economy larger. In the early
years of the twentieth century, the global economy continued to grow in
both trade of goods and global financial transactions.
In 1918, however, the growth of the global economy came to an abrupt
end with the beginning of World War I. Through World War I, the Great
xxvi Introduction

Depression, and World War II, the global economy was virtually nonexis-
tent. The global economy would not come close to its 1918 level of activity
until the mid-1940s, when the end of World War II was in sight.

POST–WORLD WAR II GLOBAL ECONOMY

The post–World War II global economy had a new road map. In 1936 at
the height of the Great Depression, John Maynard Keynes changed the
economic world with the publication of General Theory of Employment,
Interest, and Money.10 Adolph Hitler was trying to change the political and
economic face of Europe. Keynes was succeeding in changing the face of
economics, both domestically and globally.
As the 1930s came to an end, the Great Depression gave way to World
War II. Did World War II end the Great Depression, or did Keynes’s new
economic philosophy? This is still a matter of debate among economic his-
torians. Regardless, the nations of the world united to defeat the Axis pow-
ers of Germany, Italy, and Japan, bringing an end to World War II. Through
these two major global events of the mid-twentieth century, the nations of
the world learned that global trade and a global economy were necessary
for world growth.

Bretton Woods
By 1944, with a victorious end of World War II in sight, forty-four
nations gathered in Bretton Woods, New Hampshire, to create a new world
economy. Commonly known as the Bretton Woods Conference, the con-
ference was formally known as United Nations Monetary and Financial
Conference. It is an interesting formal name, considering that the United
Nations (UN) organization was not officially created until one year later in
1945. A second interesting note is that the Soviet Union was in attendance;
soon after, they would be the Cold War nemesis of the Free World.
Bretton Woods took place throughout July 1944. The two key nation
players during these July days were the United States and Great Britain.
Through the early part of the twentieth century and into the beginnings of
World War II, Great Britain, led by Keynes, was the globe’s economic
power. World War II, however, had imposed very heavy debts on Great
Britain. Keynes and his British colleagues envisioned Bretton Woods as
their way to create a new global economy that would alleviate Britain’s
debt burden. The United States, led by Secretary of the Treasury
Harry Dexter White, envisioned Bretton Woods as the path to assert the
Unites States as a new global partner in the post–World War II global
economy.
 Introduction xxvii

The July summer days in New Hampshire were long and hot. The meet-
ings were long and hot as well. Two primary plans were submitted and
considered by the congregation. Keynes and the British presented a plan
for an international currency and global economy that did not include a
gold standard. The United States presented a plan that did include the gold
standard. The debate over which plan to implement was often as heated as
the New Hampshire summer days.
As the July days wore on, the attendees were getting tired and sick.
Keynes himself had been bedridden for several days. He had not been well
when the conference began. The conference was coming to a close, and an
agreement was close. Most of the debates centered on two key issues, both
important to Great Britain and the United States. One was liquidity to
rebuild Europe and Japan in a postwar environment as well as to assist
nations with their post-wartime debts. The other was to create an exchange
rate system that would benefit and incentivize global trade.
The attendees were not comfortable with the completely flexible
exchange rate that existed during the war. They also were not interested in
returning to the fixed gold standard system prior to the war. What evolved
was a new compromise global monetary system. A blended system between
the fixed and flexible systems, it was closely aligned with the plan pro-
posed by the United States. The United States was now on the verge of
dominating the postwar global economy.
The final agreement for a new monetary system had several components.
One, the U.S. dollar would anchor the new global exchange rate system. The
value of the U.S. dollar would be fixed to gold at thirty-five dollars per
ounce. The other world currencies would be have a value fixed to the dollar.
These currencies would be flexible within a range of values. With other cur-
rencies tied to the U.S. dollar, it soon became the global reserve currency.
For the other nations to maintain their currencies’ predetermined rela-
tionship (known as par value) with the U.S. dollar, they could exchange
their currency for U.S. dollars or gold. This was the beginning of the U.S.
dominance as the world financial power and the dollar as a currency all
governments needed to own. Each nation would only be allowed to change
their values if they had domestic financial emergencies or they did not
have enough dollars on reserve.
To provide stability, a quota system was established. Each nation par-
ticipating was required to provide an amount of gold (25 percent) and their
currency (75 percent). This deposit gave nations borrowing rights to main-
tain appropriate reserve ratios for their fixed exchange rate to the dollar.
The new agreement set up a voting system for the organizations created
based on the size of each nations quota. With the highest quota, the United
States had the most votes. The U.S. global influence was increased signifi-
cantly once again.
xxviii Introduction

Bretton Woods also created two new organizations to deal with the
postwar global economy and a third for trade. We will explore these orga-
nizations in greater detail later in the book. For now, however, it is impor-
tant to introduce them here, as they have become major influences in
today’s global economy. The International Bank for Reconstruction and
Development (IBRD) was created directly for the rebuilding of the world
following World War II. It was the genesis of the broader World Bank,
which would come later.
The other organization created was more aligned with the conference’s
newly created global monetary system. The International Monetary Fund
(IMF) was established to stabilize a nation’s currency and to provide finan-
cial assistance in times of financial or currency crisis. As it was funded
through quotas and subscriptions, the United States had the most votes
and influence on the IMF. With the creation of the IMF’s Special Drawing
Rights (SDRs),11 one of Keynes’ major initiatives came to fruition. Interest-
ingly Keynes had come to Bretton Woods with a plan to create an entirely
new global monetary system based on one global currency. The creation of
the IMF and SDRs was a small success of his plan although Keynes did not
see it that way.
The organization that was created for trade never really materialized as
a functional organization until much later. The free nations of the world
realized that they needed to open trade with one another if postwar growth
was going to occur. As part of the Bretton Woods discussions, the Interna-
tional Trade Organization (ITO) was established. Given all the different
topics covered by the conference attendees, it was agreed that these dis-
cussions would take place after the conference’s conclusion.
With its new monetary system and global organization, the Bretton
Woods Conference became a hallmark turning point of the global econ-
omy. The following year (1945), the United Nations was formally estab-
lished. The IMF and IBRD were officially implemented as specialized
agencies of the United Nations.
The ITO was not approved by the U. S. Congress and was disbanded. In
1947, fifty-five nations gathered once again and created the General Agree-
ment on Tariffs and Trade (GATT) as a replacement of the ITO in order to
promote free global trade. Again, we will explore these and other organiza-
tions in chapter 7, on global institutions and organizations.

A Growing Global Economy, a Smaller World

As the midpoint of the twentieth century arrived, the world was about
to get both smaller and bigger. It was smaller, in the forms of passenger jet
transportation with better access to more cities around the globe, improved
 Introduction xxix

long-distance telephone communication, and the growing popularity of

radio and the new technology called television. The global economy was
bigger in the forms of more new, participating independent countries,
newer and improved goods, and more goods being produced and available
to a growing global economy.
The postwar and post–Bretton Woods world had a new but not neces-
sarily good look. One leftover product from the war was the nuclear
weapon. The 1950s brought on the Cold War and a divided world between
democratic and communist countries with nuclear weapons. Led by the
Soviet Union the communist countries strove for global expansion. Led by
the United States, the democratic countries assembled to prevent the com-
munist expansion. In the background were growing arsenals of nuclear
weapons. The global economy was divided between these two political
forces.

Growing World, New Nations

Following World War II, most of Europe, regardless of allegiance, had
been destroyed by the war, both physically and financially. Great Britain’s
debt had reached crisis level. As the war ended, Great Britain was still a
global empire. Other than the skirmish it had lost with thirteen colonies
two centuries ago, much of the British Empire was still intact. In 1947, the
post–World War II nations grew by two, when both Pakistan and India
gained their independence from Great Britain.
France and other European nations with non-European colonies, many
in Africa, were also struggling financially as World War II ended. The
1950s and 1960s began the end of European dominance in Africa. Many
former European colonies became independent nations. Many of these
new, young independent countries adopted isolationist economic policies
and were not influential players in the global economy in their early years.

China and the Pacific

On the other side of the globe changes were also happening. In 1947, the
Chinese Revolution successfully brought Mao Zedong and the Commu-
nist Party to power. The new communist Chinese government did not fol-
low the Soviet Union. Communist China followed its own path in the
global economy. Early on, communist China was not a participant in the
global economy. Mao Zedong focused on industrializing China and
spreading the communist doctrine throughout the land at any cost, includ-
ing the lives of many Chinese he considered his enemies. Mao’s death in
1976 was to bring significant economic changes to China.
xxx Introduction

A CHANGING GLOBAL ECONOMY

During the 1950s and 1960s, the global economy, on the whole, was
thriving. Consumers across the globe were buying more products than
ever before. Individuals were making more money than ever before and
buying new homes, new cars, new stereos, and a myriad of new products
being produced all over the world. Global trade between the democratic
nations of the world was active as never before in history. The communist
countries traded between themselves. In total, world trade and the global
economy was booming. As the 1970s began, a serious change was about to
occur.

End of the Gold Standard

To understand what happened at the end of the 1960s and early 1970s,
we need a return to 1944. Remember the 1944 Bretton Woods Conference
and the creation of a new global exchange rate monetary system. The U.S.
dollar was the anchor currency fixed to gold at thirty-five dollars per
ounce, and the other nations’ currencies had values set to the U.S. dollar,
with allowances to float within a narrow range, making the dollar the
global economy’s reserve currency. Nations could transact global business
with their currency, the dollar, or gold. They had their choice of these three
options.
In the mid- to late 1960s, these three options became a problem for the
United States where inflation was beginning to rise (we will discuss what
inflation is and its consequences in the next chapter). This was reducing
the world value of the dollar. Nations decided to own gold and not dollars.
As a result, the United States was losing its gold reserves.
In 1971, instead of changing the value of the dollar to gold, President
Nixon chose to completely separate the dollar from gold. With this move,
President Nixon ended the Bretton Woods Agreement and set the global
economy on a new path. The other industrial nations also detached them-
selves from gold. From 1971 to today, the value of the global economy’s
major currencies is based on their relative value to each other.

Oil, War (Again), and Politics

Oil was discovered in Persia at the beginning of the twentieth century.
Persia is now comprised of several Arab nations, including Iran, Iraq, and
Saudi Arabia. These oil-rich nations and several other oil-rich nations
formed the Organization for Oil Exporting Countries (OPEC).12 Oil was
very important to the global economy. In the 1970s, OPEC controlled most
 Introduction xxxi

of the world’s oil. As a result, OPEC was very powerful and could control
how the global economy functioned.
War was not done influencing the global economy. In 1973, OPEC
exerted their power on the global economy when a regional war broke out
between Israel and OPEC’s Arab nations. During this war, OPEC put an
embargo (would not provide oil) on the nations that supported Israel,
including the United States, South Africa, the Netherlands, and Portugal.
Since the United States was by far the largest and most active participant
in the global economy, it was impacted the most. OPEC also cut produc-
tion so that there was less oil for the world.
Eventually, the low oil production impacted the global economy, which
slowed into a recession. Gasoline prices increased significantly as oil com-
panies had to pay higher oil prices. OPEC was proving the significant influ-
ence it had over the global economy. Given the size of the U.S. economy
and its reliance on imported oil, ending the embargo was especially crucial
to the United States. Lines of cars would form at gas stations, as there was
not enough for everyone.
Political leaders of many countries including the United States met with
OPEC officials to end the embargoes and low oil production. At the same
time, they were meeting with Arab and Israeli leaders to end the war. Dur-
ing this time it was a much more difficult than usual for the global econ-
omy to separate economics and politics. Peace agreements for both the
war and oil embargo were reached during 1974. Nations across the globe
became aware of the need to become less reliant on OPEC oil. Over time
the global economy would face another shift.

The Global Economy Really Expands

(the End of the Cold War)
Surviving a global recession and higher-than-normal inflation rates
during the 1970s, the 1980s brought another major shock to the global
economy. This shock, however, was a very good shock.
In 1985, when Mikael Gorbachev became leader of the Soviet Union, he
initiated a major change. He introduced a new plan called “glasnost and
perestroika” to make the Soviet Union more open to trade with the rest of
the world.13 The first part of his plan, glasnost, was to increase trade and
relations with rest of the world. The second half, perestroika, was intended
to bring market ideas and incentives to the Soviet economy.
What Gorbachev may or may not have intended was for the other
nations of the Soviet bloc to also want the trade, incentives, and freedom
he proposed for the Soviet Union. In 1989, Poland voted for a noncommu-
nist government. During events like this in the past, the Soviet Union
xxxii Introduction

would send in military troops or call for new elections. Gorbachev, how-
ever, endorsed the results of the free Polish election. Soon after, the other
Soviet bloc nations of Hungary, Czechoslovakia, Romania, and Yugoslavia
also voted in noncommunist governments.
The ultimate symbol of the Cold War’s end was what occurred later that
year in Germany. Earlier in the year, President Ronald Reagan had visited
the wall separating East and West Berlin. During that visit, he made his
now famous plea to Gorbachev: “If you are serious about freedom, Mr.
Gorbachev, tear down this wall!”14 In the fall of 1989, Berliners from both
sides attacked the wall with hammers, axes, and any tool they could find
that would chip away at history and separation. The Berlin Wall came
down. This was the unofficial symbol ending the Cold War.
The Cold War may have been over, but there was still one more histori-
cal event that would again change the global economy. The Soviet bloc was
no more. The nations that defined it were now independent nations. Sev-
eral like Yugoslavia were about to face their own civil war. The states of the
Soviet Union, however, had yet to be heard. Now it was their turn. One by
one, they, too, demanded their independence.
This was beyond what Gorbachev had intended. Disbanding the Soviet
bloc was one act. Disbanding the Soviet Union was entirely different. The
forces of freedom, however, are indeed forces that often, like the weather,
cannot be controlled. In 1991, the Russian Soviet Republic (Russia) became
an independent nation. The Ukraine and Byelorussia followed Russia and
other states to independence. The Soviet Union was no more. The global
economy had grown significantly, as all these new and free nations pre-
pared their economies to be global economic participants.

European Nations Unite

The twentieth century was not quite finished reshaping the global econ-
omy. Recall that the European nations began to align themselves economi-
cally in the 1950s, as the European Common Market eventually became
the European Union (EU) with six original members. As the end of
the twentieth century approached, there were now fifteen members of the
European Union. You can see who and when they entered in the
Chronology.
The European nations had many different types of trade agreements
throughout modern history. During the 1990s, the European nations met
to discuss how to better achieve what they labeled the “four freedoms”:
movement of goods, services, people, and money (we will discuss these in
broader context in the next chapter). These discussions culminated in sev-
eral treaties and agreements to address the four freedoms, such as the
 Introduction xxxiii

Single Market Treaty in 1993. In 1995, the Schengen Agreement gave all
EU citizens the right to travel between nations without a passport.
For the global economy, the second major event for the European Union
was the introduction of the euro, the EU common currency, in 1999. A
nation using the euro as common currency also needed to belong to the
European Monetary Zone (EMZ). Not all EU nations belonged to the
EMZ. Great Britain and Switzerland are two nations that belong to
the European Union but not the EMZ. Great Britain maintained the pound
sterling, and Switzerland the krona.
At the time of this writing, Great Britain is in the process of leaving the
European Union. The European Union is a major participant in the global
economy. The euro is one of the four reserve currencies. The size of the
EU economy rivals that of the United States. How Great Britain’s exit from
the European Union will impact it, only time will tell. More nations
are interested in joining it, but for now, the union is holding to its member-
ship size.

THE GLOBAL ECONOMY TODAY

The global economy continues to expand in the early twenty-first cen-
tury. It is growing and being reshaped in many ways from the West to the
East that will present challenges in the future. As we begin our journey, we
will mention them here, and they will resurface as we conclude our jour-
ney in the conclusion.

Africa
One of the most noticeable areas of the global economy’s expansion are
the many new participants from the African continent. Many, if not most,
of the African nations are awakening from their early days of indepen-
dence and economic isolation. They are vying for a place in the global
economy as providers of rich natural resources and trading partners. One
of the areas we will explore later is China’s inroads into the economies of
many African nations.

A New Middle East

The nations of the Middle East are still the major providers of oil to the
global economy, but they are not without competition. Will OPEC con-
tinue its influence on the oil market, or will other nations and regions of
the world overtake its dominance? This question we will explore later when
xxxiv Introduction

we discuss future issues. For the present, however, OPEC heavily influences
the price and supply level of oil and the many products that have oil as a
resource component.

A New West
The “West” is generally considered to be the developed nations of
Europe, Canada, and the United States. In the early twenty-first century,
all areas of the Western world are in some form of transition. The Euro-
pean Union’s central focus is dealing the exiting of Great Britain (Brexit),
along with the stability of the euro.
The United States and Canada, along with Mexico, are in the middle of
revising the North American Free Trade Agreement (NAFTA). An agree-
ment has been reached, but ratification still seems far off, as of this writing.
The governments have not ratified the new United States-Mexico-Canada
Agreement (USMCA), which will replace NAFTA. How different the two
are is mostly a matter of perspective. We will explore USMCA in more
detail in several other areas of the global economy, particularly when we
explore laws and regulations and when we focus on future issues.
A second issue is Britain’s exit from the European Union, more com-
monly known as Brexit. Britain is the first nation to exit the European
Union, so it is new ground for everyone involved. Again, we will explore
Brexit and its consequences in more detail throughout our journey.
Oil independence from OPEC continues to be a goal of the West. Can-
ada and the United States have vastly improved and increased their
resources and ability to produce oil. Finding the balance between oil pro-
duction and the environment and other social issues continues to plague
the future of North American oil production.

A New East
We used to consider Japan and the nations of the Pacific as the “Far
East.” In this day of the internet and jet travel, they are not nearly as far
away. The economies of eastern Asia are definitely new and on the rise as
global economy participants. Whether Malaysia, Singapore, Vietnam, or
Thailand, they are all twenty-first-century global economic traders and
resource providers. South Korea continues to be an important global par-
ticipant. New trade agreements including the revamped Trans-Pacific
Partnership (TPP) add to their level of global participation.
Several of these economies have flourished on the heels of China’s
growth.
 Introduction xxxv

The New Economic China

Under Mao, China’s economy had stagnated, as most communist econ-
omies had done in the 1970s. After Mao’s death, a new China began to
emerge. In 1976, China’s new leader, Deng Xiaoping, launched China on a
new road of economic development that became known as “capitalism
with Chinese characteristics.” He promoted development in four areas of
economic concentration: agriculture, defense, industry, and science and
technology. He called these the Four Modernizations.
Under Xiaoping’s leadership, China today rivals the United States for
the title of the largest economy on the planet. They instituted Free Enter-
prise Zones for foreign businesses to set up business in China as well as
initiated incentives and a quota system so that they could keep their sur-
plus and establish outside businesses. Under the Household Responsibility
System, farmers identified their farm production quota. Rural Chinese citi-
zens could move to the cities and work in the manufacturing plants. We
will discuss many of China’s ideas and their impact in future chapters.
Attempts are being made to replicate the Chinese experiment in other
countries around the world. Whether the new nations of Africa or the old
nations of South America, many are vying for a piece of the global eco-
nomic pie. In the next chapter, we will explore the economic concepts that
help us understand the benefits of trade and the reasons why nations
respond to outside influences in the manner they do.
A popular cliché of human nature is “if we do not learn from the past,
we are bound to repeat it.” If you observe closely as we proceed through
our journey, you will notice some of the same themes playing out in the
twenty-first century that we experienced in the twentieth century.

NOTES
  1. These are the first words in the Bible (Genesis I:1).
  2. This definition comes from the dictionary tool of Microsoft Word. Possible
synonyms include “universal,” “comprehensive,” and “total.” The point is that the
term does more than just refer to the globe.
  3. “Medieval Life–Feudalism and the Feudal System,” History on the Net,
https://www.historyonthenet.com/medieval-life-feudalism-feudal-system.
  4. “Marco Polo and His Travels,” Silkroad Foundation, http://www.silkroad
foundation.org/artl/marcopolo.shtml.
  5. Ibid.
  6. Ibid.
  7. Adam Smith, Theory of Moral Sentiments (London: A. Millar, 1759).
 8. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of
Nations (London: W. Strahan and T. Cadell, 1776).
xxxvi Introduction

  9. David Ricardo introduced the economic concept of comparative advantage

in his textbook, On the Principles of Political Economy and Taxation (London:
John Murray, 1817).
10. John Maynard Keynes, General Theory of Employment, Interest, and Money
(London: Macmillan, 1936).
11. Keynes called his global currency the “banknote.” His plan was to replace
domestic currencies with this one currency in order to create a global economy.
More important, it would cancel out all of Britain’s war and trade debts.
12. The original OPEC nations were Iran, Iraq, Kuwait, Saudi Arabia, and Ven-
ezuela. Today there are fourteen members of OPEC, including Algeria, Angola,
Congo, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, and United Arab
Emirates.
13. Glasnost, or openness, was a greater willingness on the part of Soviet offi-
cials to allow Western ideas and goods into the USSR. Perestroika was an initia-
tive that allowed limited market incentives to Soviet citizens.
14. This quote comes from a speech given by President Reagan on June 12,
1987, at the wall that divided East and West Berlin.
Chronology

“All the world’s a stage, And all the men and women merely players; They
have their exits and their entrances” (As You Like It, Act 2, Scene 7, Lines
139–66).1 William Shakespeare wrote these words in the sixteenth cen-
tury, but they seem quite appropriate as we begin our journey into the
global economy. The global economy, like global history, has had its stages
and players and different eras of achievement, failures, growth, and depres-
sion. Let’s begin our journey with a look at some of the major highlights
that impacted how our global economy looks today.
8000 BCE
People learn to farm and domesticate animals.
4000 BCE
People begin to trade, since farmers can grow more food than they need.
Others become other tradesmen and trade for the surplus food.
3300 BCE
Mesopotamia (Babylon) is the first known civilization to have formal
institutions.
3150 BCE
The Ancient Egyptian civilization builds the pyramids and sphinx.
2700 BCE
Ancient Greek civilization governs by democracy and conducts the first
Olympics.
1600 BCE
Ancient Chinese civilization invents paper, silk, gunpowder, and alcohol,
among other things.

xxxvii
xxxviii Chronology

325 BCE
Chandragupta Maurya converts to Buddhism, using the world religion to
expand trade and armies.
Alexander the Great sues for peace and to combine forces with Chandra-
gupta. For the first time, the states of the Mediterranean and India with
Central Asia are connected for trade through overland routes.
6 BCE
The Roman Empire changes, expanding the global economy.
First Century CE
As Buddhism expands around the known world, the Silk Road is founded
to expand economic and cultural links between India and China.
960–1279
During the medieval era, the economies of Europe and the Song Dynasty
of China connect by both Eurasian land routes and Indian Ocean sea
routes.
1100
Genghis Khan comes to power and increases the overland routes to Europe
and Asia (Eurasia).
1275
Marco Polo and his brothers arrive in Kubla Khan, the capital of China.
1297
The Polo brothers return to Venice two years earlier, and he writes his
adventures, The Travels of Marco Polo.
1300
The Ottoman Empire covers parts of North Africa, Middle East, and
Europe. Trade expands between Europe and Asia. As trade expands, so
does the cost of global trade. European royalties begin sponsoring explora-
tion to find a western ocean route to India and parts of Asia.
1324
Marco Polo dies in Venice at the age of seventy.
1350
Trade between Europe and China increases along land routes through
Central Asia. Along the Silk Road through parts of Asia and the Mediter-
ranean to China, trade of goods and migrations of people is increasing.
1400s–1600s
Age of Exploration, also known as the Age of Discovery.
 Chronology xxxix

1418
Prince Henry the Navigator is sailing the coast of Africa in search of a sea
route to India. Other explorers are also searching for the ocean routes to
the East.
1492
Sailing for the Spanish, Christopher Columbus sets sail for India, heading
due west. Instead of India, his voyage lands on a small island he names San
Salvador (known today as the Bahamas). He also explores what is today
known as the island of Haiti and Dominican Republic.
1497
Sailing for the English, Italian John Cabot lands on soil that is not India
(Newfoundland).
1498
Vasco da Gama sails around Africa into the Indian Ocean under the Por-
tuguese flag. Portugal is becoming the world sea power, controlling the sea
routes from Europe around Africa to India, China, and the Indies.
1519
Ferdinand Magellan sails for the Spanish king and queen to find a new sea
route to the Spice Islands (Asia). He passes through the southern tip of
South America (now known as the Strait of Magellan) and becomes the
first European to sail across the Pacific Ocean.
1607
The British establish the first European settlement in Jamestown, Virginia.
1608
The Frenchman Samuel du Champlain begins a settlement in Quebec City.
1624
Holland also establishes a settlement and trading post in the new lands
found by the Europeans, at the site of present New York City.
1650
During the seventeenth century, economic activity expands among the
“new” western lands with Europe and Africa. The economic integration of
economies expands again, as trade between East and West increases across
the Atlantic Ocean.
1763
At the end of the Seven Years’ War and the Treaty of Paris, Great Britain
emerges as the world’s dominant empire, while France’s empire is totally
lost. Spain remains the other dominant global colonial power.
xl Chronology

1776
The American Revolution and ultimate independence of the British thir-
teen colonies changes the global trading landscape across the Atlantic. No
longer are the European countries trading among themselves west to east.
They are now trading with the new United States. Adam Smith publishes
the An Inquiry into the Nature and Causes of the Wealth of Nations (Lon-
don: W. Strahan and C. Cadell)2 where he promotes the positive sum
nature of trade between nations. Smith notes that wealth is created
through trade and not accumulation of gold as practiced by the
mercantilists.
1789
In Europe, the French Revolution changes the European landscape.
National governments and economies emerge during the Industrial Revo-
lution on both sides of the Atlantic.
1815
British Parliament passes the Corn Laws to protect British farmers from
imports of agricultural products. The short supply of grains and other
foods raises prices significantly. Families cannot afford the high prices.
1817
David Ricardo publishes On the Principles of Political Economy and Taxa-
tion (London: John Murray).3 Ricardo claims all nations can benefit from
trade by comparing opportunity costs of production. If nations produce
only those goods with low opportunity costs and trade for other goods,
gains from trade result. His idea of comparative advantage is key to all
nations gaining from trade.
1846
The consequences of the Corn Laws (high prices, insufficient supplies)
cause Parliament to repeal them.
1848
Karl Marx and Friedrich Engels publish The Communist Manifesto.
1878–1900
The Industrial Revolution brings new wealth to nations. Nations are pro-
ducing more goods than the countries of Europe can consume and are
searching for new markets. Africa appears an excellent trading opportu-
nity for their new productivity. The European nations rush to colonize
African lands. The “new” African territories become new markets for
European goods.
1908
William D’Arcy and Burmah Oil Company, a British company, discover oil
in Persia.
 Chronology xli

1909
D’Arcy and Burmah Oil create the Anglo-Persian Oil Co. in order to
expand the exploration and discovery of oil in the Middle East.
1914
The first era of globalization ends as World War I begins. President Wood-
row Wilson takes a stand of neutrality for the United States. Global trade
completely stops.
1916
President Wilson proposes a League of Nations to promote peace among
nations and global open trade.
1917
President Wilson cannot remain neutral. The United States enters World
War I.
1918
President Wilson proposes the Fourteen Points to end World War I. They
include free oceans for open global trade. The Fourteen Points are the
foundation for the League of Nations, which is not popular in the United
States.
1921
Warren Harding is inaugurated president and takes a hard-line isolationist
position on global trade for the United States. He does not support or join
the League of Nations, which dismantles Wilson’s progressive globaliza-
tion ideas.
1921
An Emergency Tariff is being implemented to limit foreign agricultural
products.
1922
The Fordney-McCumber Act is imposed to raise tariffs 25 percent. The act
also allows the president to raise tariffs without congressional approval.
1929
The New York Stock market crashes, beginning a U.S. depression that
spreads globally.
1930
To protect U.S. jobs, Congress passes the Smoot-Hawley Tariff (Tariff Act
of 1930), raising tariffs on all foreign goods coming into the United States.
Other countries retaliate by raising their tariffs on U.S. goods imported
into their countries, which results in all global trade decreasing by 60 per-
cent. The Great Depression affects every country and deepens.
xlii Chronology

1933
In response to the post–World War I hyperinflation happening in Ger-
many, Adolf Hitler is elected chancellor of Germany. Europe begins to
divide, and global trade decreases even more.
1935
The automobile and the need for transportation continue to grow. So does
the economic importance of oil and the Middle East. The Anglo-Persian
Oil Co. becomes the Anglo-Iranian Oil Co.
1939
Hitler’s Germany invades Poland. World War II begins, and global trade
continues virtually nonexistent.
1941
Japan bombs Pearl Harbor, and the United States enters World War II.
1944
The defeat of Germany and the Axis powers seems all but certain to end
World War II. Forty-four nations meet in Bretton Woods, New Hamp-
shire, to design a new postwar global monetary system, resulting in the
establishment of two global organizations: the International Monetary
Fund to provide loans for nations in need of financial assistance and the
International Bank for Reconstruction and Development to provide loans
to nations in order to rebuild their infrastructure post–World War II. The
conference established a new monetary system exchange rate system in
which the U.S. dollar is fixed to gold and the other currencies are fixed to
the dollar.4
1945
Fifty-one nations sign and become charter members of the new United
Nations.5
1947
India and Pakistan gain their independence from Great Britain.
1948
In an effort to eliminate trade barriers and create a freer global economy,
the nations create a General Agreement for Tariffs and Trade.
1949
The reunification discussions for a post–World War II Germany have
ended, and two Germanys are created: the Federal Republic of Germany,
known as West Germany, and the German Democratic Republic, known as
East Germany. West Germany is a democratic nation, and East Germany is
member of the Communist Soviet Bloc. The first Five-Year Plan (1949–
1954) of the People’s Republic of China is launched with the assistance and
support of the Soviet Union.
 Chronology xliii

1950
Six European nations join their economics and politics to create the Euro-
pean Coal and Steel Community (European Union). The six nations are
France, the Federal Republic of Germany (West Germany), Belgium, Italy,
Luxembourg, and Netherlands.
1953
An armistice is being signed to end the Korean War. As a condition of the
armistice, two Koreas are being created, North Korea and South Korea.
1954
The Anglo-Iranian Oil Co. is renamed British Petroleum.
1955
China’s Great Leap Forward loses the gains achieved during the Five-
Year Plan.
1957
The six nations of the European Union create the European Economic
Community (European Common Market). Ghana becomes an indepen-
dent nation from Britain.
1958
Guinea gains its independence from France.
1959
Fidel Castro has successfully overthrown the Cuban government and cre-
ates a communist Cuba, which escalates the Cold War. The United States
imposes an embargo on Cuba. Castro establishes stronger ties with the
Soviet Union.
1960
The French African colonies gain their independence from France, includ-
ing Benin, Burkina Faso, Cameroon, Central African Republic, Chad,
Congo, Cote d’Ivoire, Madagascar, Mali, Mauritania, Senegal, and Togo.
Britain begins dismantling its colonial empire in Africa, allowing British
Somaliland to merge with Italian Somaliland to create the new nation of
Somalia.
1961
Britain continues to leave Africa, turning over South Africa and Tanzania
to independent national governments.
1962
China’s Great Leap Forward ends.
1963
Britain continues its march out of Africa. Kenya is the newest British col-
ony to become independent.
xliv Chronology

1964
Zambia and Malawi join Kenya as new independent nations.
1965
Britain’s Rhodesia is divided, creating independent Zimbabwe and
Gambia.
1966
The last two British colonies, Botswana and Lesotho, gain their indepen-
dence. Britain is now totally out of Africa.
1968
Spain grants independence to its African colony, Equatorial Guinea.
1973
The United Kingdom, Ireland, and Denmark join the European Union,
raising membership to nine nations. The Organization of Petroleum
Exporting Countries imposes an embargo on exporting oil to the United
States. The oil-producing countries’ influence on the global economy
expands significantly.
1978
China’s premier Deng Xiaoping introduces economic reforms, including
market incentives for farmers and other market reforms.
1981
Greece joins the European Union, becoming the tenth member.
1985
Mikhail Gorbachev becomes leader of Soviet Union, as general secretary
of the Communist Party and president. He introduces economic reforms
known as glasnost (openness to new ideas) and perestroika (permits mar-
ket incentives into the economy).
1986
Spain and Portugal are the eleventh and twelfth nations to join the Euro-
pean Union, and the members sign the Single European Act. The Euro-
pean Union embarks on a six-year program to establish free trade
throughout all EU nations as a single market.
1989
Poland elects a noncommunist majority government. Soviet president
Gorbachev and the Communist Party allow the election to stand. The
Soviet Union’s nonaction is the beginning of the end of the Soviet Union.
The Berlin Wall separating East and West Berlin since the end of World
War II is torn down. The reunification of Germany begins, symbolizing
the end of the Cold War.
 Chronology xlv

1990
The reunification of East Germany and West Germany is complete, creat-
ing the Federal Republic of Germany. For the first time since 1945, Ger-
many is again one nation. The Shanghai Stock Exchange reopens in China
after being closed for forty years.
1991
The dissolution of the Soviet Union continues as Russia, Ukraine, and Bye-
lorussia claim their independence.
1993
The signed North American Free Trade Agreement is ratified by the three
countries’ governments: Canada, Mexico, and the United States.
1994
NAFTA becomes effective January 1.
1995
Three nations become thirteenth, fourteenth, and fifteenth new members
of the European Union: Finland, Sweden, and Austria. The Schengen
Agreement allows people to travel between EU nations without passports.
1997
Great Britain turns Hong Kong over to Chinese rule, completing the dis-
solution of the British Empire.
1999
The euro becomes the currency for most of the EU nations. England and
Denmark opt out and are not part of the European Monetary Zone.
2000
British Petroleum takes the new name of BP.
2001
China joins the World Trade Organization (WTO).
2004
Ten nations, mostly from the former Soviet Union or Soviet Union bloc,
join the EU (listed in order of joining): Cyprus, Czechia, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. This brings EU
membership to twenty-five countries.
2007
Bulgaria, number twenty-six, and Romania, number twenty-seven, join the
European Union.
2008
The worldwide financial crisis happens.
xlvi Chronology

2011
South Sudan gains its independence from the Republic of Sudan.
2013
Croatia joins the European Union, bringing the number of nations to
twenty-eight.
2014
Scotland votes not to be independent and leave Great Britain.
2016
Great Britain votes to leave the European Union, in a process known as
Brexit. Twelve nations sign the Trans-Pacific Partnership: Australia, Bru-
nei, Chile, Canada, New Zealand, Peru, Singapore, Vietnam, Malaysia,
Mexico, Japan, and the United States.
2017
President Trump withdraws the United States from the Trans-Pacific
Partnership.
2018
Canada, Mexico, and United States agree to a new trilateral trade agree-
ment to replace NAFTA (as of this writing, the agreement has not been
passed by the U.S. Congress). The eleven remaining members of the Trans-
Pacific Partnership sign the Comprehensive and Progressive Agreement
for Trans-Pacific Partnership (CPTPP) pact.

NOTES
  1. William Shakespeare, As You Like It, Act 2, Scene 7, Lines 139–66.
 2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of
Nations (London: W. Strahan and C. Cadell, 1776).
 3. David Ricardo, On the Principles of Political Economy and Taxation
(London: John Murray, 1817).
  4. Sandra Kollen Ghizoni, “Creation of the Bretton Woods System,” History of
the Federal Reserve History.org, accessed January 13, 2019, 2013, https://www
.federalreservehistory.org/essays/bretton_woods_created.
  5. “History of the United Nations,” United Nations, accessed January 13, 2019,
http://www.un.org/en/sections/history/history-united-nations/.
1
Economic Rules of the Global Economy

The global economy involves pretty much the entire scope of what is
known in the world of economics. To understand the global economy, it is
important to first understand the characteristics that every economy has
in common. While there are differences between economies, some quite
extreme, there are also similarities. All economies play by the same six
basic economic rules. As you will soon see, they interpret them differently,
but the rules are the same. Before we hone in on the key economic con-
cepts that create the global economy, let us first take a look at what each
economy and every citizen has in common.

FIVE CORE ECONOMIC RULES OF EVERY ECONOMY

Rule #1: Everyone Chooses. All Economies Choose How to
Allocate Resources
Try a little experiment tomorrow morning when you wake up. As you
lie there, tell yourself that today is the day you are not going to make any
decisions. Being a wise individual, you are already thinking, “Hold on! If I
am telling myself not to make any decisions, didn’t I just make a decision
to tell myself not to make any decisions?” Of course you did! That is exactly
the point of this somewhat silly experiment. From the moment we wake up
until the time we go to sleep, we are making decisions. Some decisions are

1
2 The Global Economy

quite minor, while others can be very major. They all have one thing in
common: economics.
Each individual on the planet, including you, has a level of natural, labor,
or capital resources available for their use. We will elaborate on these
shortly, but for now, it is important to know that the amount of these
resources available to you is limited. It may not seem like it now, but what
you want to do with your resources far exceeds the availability of your
resources to do them. You and your seven billion fellow earthlings all have
the same economic problem: scarcity.
Scarcity forces us to make decisions. We always want more than our
resources will let us. It is true for individuals, and it is also true for nations.
All nations large and small have a limited amount of resources for their
use to produce goods and services for their citizens. As a society, they have
to make economic decisions about how to allocate the natural, labor, and
capital resources of their nation. This idea will have greater significance for
us later in the chapter when we begin our discussion of trade. The impor-
tance of making wise decisions with our resources is Rule #2.
Scarcity and decision-making are the result of limited resources. Before
we journey farther, we need to further expand our understanding of the
resources. Resources come in three types: human resources, natural
resources, and capital resources. Let us take a moment and look into each
of these three.
Human resources is a fancy term for labor. Each of us has access to labor,
our labor. Early in the history of mankind, all labor was unskilled. All
humans were hunters and gatherers. As history progressed, individuals
learned special skills, and specialization evolved. Specialization led to divi-
sion of labor, interdependence, and different skill levels for different jobs.
As skill levels became more differentiated, so did the need for different
levels of education. A key component of today’s global economy is the spe-
cialization and education necessary to participate in it. How different
economies use their labor is a later story.
Natural resources are the resources from nature. Natural resources are
considered anything that comes from underneath the ground, is grown
and comes from the ground, or is a product of the ground. Commodities
such as oil, copper and other minerals, and gold are examples of natural
resources underneath the ground. The farmers’ crops used to feed cows,
wheat or corn milled to create flour for bread and other products, and cat-
tle for meat products are examples of natural resources.
The air we breathe and water we use in the production of goods and
services are also natural resources. This brings us to the issue of the qual-
ity of our natural resources. As our global economy grows and options for
goods and services increase, quality has become more of an issue. Natural
resource quality will be an issue we will explore later in our journey.
 Economic Rules of the Global Economy 3

Capital resources are the man-made tools used to manufacture the

products and services we use in our homes and businesses. In the world of
economics, there is sometimes a bit of confusion over the term “capital.” In
finance, the term is used to mean money. That is not so in economics. Since
this is a journey into the global economy, when you see the term “capital,”
it will refer to the tools used in the production of goods and services.
As new capital resources are invented, implemented, and become an
integral component of the global economy, they become more important.
Change in capital resources has been significant the last one hundred
years. At the turn of the twentieth century, new technologies included the
telephone and telegraph. Changes in travel made the world smaller.
Since we entered the twenty-first century, we have not just a telephone
but a phone so small without wires that we are able to carry it in our
pocket. What we carry is really a small computer with a phone component.
Computers have been reduced in size that they can fit on our wrist to mea-
sure our health. Satellites revolve around the earth, giving us better com-
munications visually and auditorily from virtually anywhere on the globe.
The steady increases and changes in technology and capital are con-
stantly changing the global economy landscape. New capital inventions
and improvements have made the global economy more accessible today
than at any time in history. As we travel through our journey, note how
capital and labor are trade-offs in the expanding global economy.

Rule #2: All Choices Have Costs (Trade-Offs) Today and

Consequences Tomorrow
Because of the scarcity of our resources, we are forced to make deci-
sions in every circumstance. We make them as individuals, families, school
groups, and nations. In each circumstance, we make decisions because our
desire for the many uses of our resources exceeds the level of resources
available to us. Decisions themselves have several parts.
When we make a decision as an individual or a group such as a nation,
we do more than just decide to do something. Maybe you have heard the
phrase “nothing is free.” It is true, because every time we make a decision,
we give something up. At the time of the decision, we also choose not to do
another thing. In economics, what we give up is called “opportunity cost.”
All choices have an opportunity cost. The opportunity cost of a decision is
the trade-off between two options.
The next time you go to your favorite restaurant, think in terms not of
what you choose but what you do not choose. When you make your menu
selection, what did you not choose? Every decision, small or large, has a
trade-off, or opportunity cost. As our individual decisions have a trade-off,
4 The Global Economy

so also do the decisions of nations. Are the farmers in the nation growing
corn or wheat? Are they using horse-drawn plows or tractors? Every choice
a nation makes to allocate its resources, it is giving up the opportunity to
allocate it elsewhere.
Decisions have an immediate trade-off as well as future consequences.
Consequences can be positive and negative. Years ago, there was a televi-
sion show called Truth and Consequences. Since the premise of the show
gave the term “consequences” a negative connotation, the word has since
usually been associated with bad or negative actions or results. There are,
however, also many positive consequences to decisions.
Some consequences are intended. Other consequences are surprises. It
is the unintended consequences of decisions that make the news. The deci-
sions of nations are no different with regard to consequences, both intended
and unintended. The opportunity cost of a nation’s decisions is a cost in the
present. Consequences are the future costs and/or benefits of decisions.
When nations make decisions as to how to allocate their resources,
there are both trade-offs immediately and consequences in the future.
Whether it is how a society utilizes its labor, natural resources, or available
tools, for every political, economic, or civic decision, there will be a trade-
off with future consequences. The consequences of a nation’s decisions
could be positive, negative, or a combination. Often, those decisions are
determined by the incentives in their use. This brings us to Rule #3.

Rule #3: Incentives Influence Choices

Incentives are rules, laws, regulations, or lack of them that encourages
individuals or nations to make decisions. We know from our Rule #1 silly
experiment earlier that decisions are made individually from the time we
wake up to when we go to sleep. The decisions, opportunity costs, and con-
sequences are different, because the incentives behind the decisions vary.
Every economy has the same three components: economic, political,
and civic. Within each of the three components are institutions and incen-
tives that ultimately create the behavior of the economy’s producers and
consumers. The incentives vary depending on the structure of each sys-
tem. Economies can be structured very differently. With our next rule, let
us now explore how economic systems are structured in depth.

Rule #4: Economic Systems Influence Incentives

To accurately view how economic systems influence an economy’s
incentives, we first have to understand what an economic system is and
how they differ. Economic systems have two main differences. The first are
 Economic Rules of the Global Economy 5

the economic institutions of a nation’s economy. In economics, institu-

tions are not buildings or organizations as we often use the term. Instead,
“institutions” refer to both organizations as well as the rules and charac-
teristics that define how an economic system functions. There are many
types of different institutions used to define societies. Three of them (prop-
erty rights, rule of law, and a credible court system) differentiate economic
systems and influence the incentives of an economic system.

Property Rights
A fundamental institution of a democratic nation and market economic
system is the right of private individuals to own property. Property can be
owned either privately or publicly. Private property like homes, farms, fac-
tories, and business buildings is owned by individuals, companies, and
essentially any nongovernmental person or organization. Government
entities like schools, public libraries, parks, and government offices at all
levels are examples of publicly owned property. The rights of citizens to
own property differentiate economic systems. That right of the individual,
however, is only valid if society has a political component with a credible
court system.

Credible Court System

Private property rights are only as good as the validity and credibility of
the nation’s court system. The issue arises when the court system is put in
the position to protect the property rights of an individual. A court system
is valid when their decisions on private property cases are accepted and
properly administered. Many nations claim they have private property
rights. Their issue is that the courts are so corrupt or have been so discred-
ited that any decisions they do make are not followed through on by the
government. Often in these situations, courts are political puppets that
only serve the powerful and most influential. The courts must adhere to
the next institution.

Rule of Law
An additional institution that involves the courts is rule of law. Rule of
law is the idea that the courts treat everyone the same. Every citizen within
a nation has the same rights under the law. Rule of law is missing from
nations with court systems under government control and those that sup-
port only a few powerful and influential individuals. Notice the close con-
nection between rule of law and credible court system.
6 The Global Economy

These three main institutions define the Rule #3 incentives of an eco-

nomic system. The incentives, or disincentives, provided by property rights,
a creditable court system, and rule of law, can differ within economic sys-
tems. These three institutions lay the groundwork for defining and differ-
entiating the various economic systems that we will be exploring shortly.

Rule #5: Voluntary Trade (Exchange) Creates Wealth

The final rule will lead us into our next discussion on the different eco-
nomic systems. Trade can occur either voluntarily or involuntarily. The
key word to this rule is that trade is “voluntary.” When you choose to trade
something with a friend, the exchange makes you both better off. Both you
and your friend have increased your personal wealth. The trade is a plus for
both of you with a positive outcome for the whole. This same idea holds
true for nations.
The other type of exchange is involuntary. An involuntary trade occurs
under duress, pressure, or law. An involuntary exchange benefits one party
at the cost of the other. When a robbery occurs, the robber gains while the
victim loses. Contrary to the earlier voluntary exchange, this exchange is
not positive for both parties. The involuntary exchange is a zero-sum
exchange. On the whole, no wealth is created.
These five rules provide the backdrop for how all seven million of us on
this planet behave. The ways in which these rules apply in a society create
the environment for the incentives that influence our behavior. Collec-
tively the actions of individuals and decisions of politicians, elected and
self-proclaimed, create economic systems, our next topics of exploration.

ECONOMIC SYSTEMS
Economic systems, along with the political and civic systems of a soci-
ety, provide the landscape in which we live. Economic systems define the
organizations and institutions of a society. As Rule #4 above states, eco-
nomic systems define the incentives by which individuals act. The eco-
nomic system in which we live determines the freedom and level of
economic activities we will experience. Most importantly, the economic
system of a society defines the level of international and global economic
participation in the global economy.
Economic systems are defined by how society answers three basic eco-
nomic questions. The first is, “What will be introduced?” When society
answers this question, it is allocating its resources. What goods and ser-
vices will be produced within the nation’s economy?
The second question, “How will it be produced?” This question addresses
how the nation’s resources will be economically used. Will the resources of
 Economic Rules of the Global Economy 7

the nation be used efficiently or inefficiently? Will the economy be labor

intensive, capital intensive, or in combination? How will be the nation’s
land be used?
The final question is, “For whom will it be produced?” This question
determines the distribution of the nation’s goods and services. Who
answers this question decides whether the goods or services will be avail-
able for everyone or for a select population of the nation.
As you can see from the many questions above, an economic system is
very important to the ways a nation and its citizens function. How a nation
addresses these questions determines many things. Are these questions
answered by custom, by the interaction of buyers and sellers, or by a gov-
ernment’s central authority? This final question is the key question that
societies answer regarding their economy. Who is the driving force behind
answering the three basic economic questions (who, what, for whom) will
determine the nation’s role in the global economy.

TRADITIONAL ECONOMY
The traditional economy has answered the three questions the same
way for generations. Customs, traditions, and family ties determine the
type of labor a young person will pursue. They determine the mix of goods
and services that an individual and family will have access to, and these
are generally are only those needed for daily survival. Traditional
economies do not exist in many places in the world today. There are a few
that have been cut off from other economies by geography, weather, or
other natural barriers. Others choose to remain tradition by custom.
Portions of the Aboriginal tribes in Australia, the Kayango tribes of
Namibia, or the Mbuti Pygmies of the Congo are examples of traditional
economies.
The more a traditional economy remains the same, the less it grows.
Traditional economies, by definition, do not have much economic growth.
They do not innovate, nor do we see entrepreneurial efforts within a tradi-
tional economy. Their tools of production are the same tools used by their
great-great-great grandparents and even longer in the past. Given their
constraints, traditional economies are not participants in the global econ-
omy. Little, if any, of our further discussions on the global economy will
apply to these economies.

COMMAND ECONOMY
Our global economies today are covered in the next three ways the basic
economic questions are answered. The command economic system is a
system in which the basic economic questions are answered by a central
8 The Global Economy

authority, usually an agency of the government. The popular term for this
type of economy is “socialism.”
In a command economy, all the resources (land, labor, capital) are
owned by the state. The state determines the what, how, and for whom to
benefit the leaders. The questions are answered to create a state that fits
their definitions and philosophies. The government is in total control of
the economy. We will discuss this political-economic interdependence
shortly.
If you lived in a pure command economic system, you could not choose
your career. You would go to school for some years and take a national
exam or two, and the government would then assign you to a career and
determine how you would make a living. The government would own the
factories, farms, homes, and businesses. The government would set the
wages you would earn and would determine the goods and services you
could purchase as well as the prices you would pay.
Pure command (pure socialist) economies are rare in today’s global
economy. Some domestic economies that participate in the global econ-
omy have leanings toward pure socialism, but they would not be defined as
pure command economies. We will expand on these shortly, but what
many call socialism today is not pure socialism.
“Socialism” is a popular term that has been adopted today by many poli-
ticians, journalists, and commentators to signify a shift toward more gov-
ernment spending. Pure socialism, command economy, is government
ownership of the nation’s resources. Most who use the term today, how-
ever, are using “socialism” to define increased income redistribution, not
necessarily government taking over ownership of the nation’s resources.
That can certainly be a step towards pure socialism, one we will explore
further. How these discussions unfold both politically, and amongst the
nation’s citizens goes a long way in determining a nation’s role and partici-
pation in the global economy.

MARKET ECONOMY
If we consider the command economy as one far side of the economic
systems spectrum, the market economy is the other far side. All the com-
mand economy’s characteristics are reversed. Private individuals, busi-
nesses, or organizations own the nation’s economic resources (land, labor,
capital). The government has no role in the economy (or almost no role).
The interactions between the buyer and seller answer the who, what, and
for whom of an economy. The market economy is based on Rule #5 that
voluntary exchange (trade) creates wealth.
A hallmark of a market economy are private property and private prop-
erty rights. Individual private ownership of a nation’s resources provides
 Economic Rules of the Global Economy 9

many incentives to use the resources wisely and efficiently. Unlike the
command economy example, in a market economy, you can decide what
you would like to do as a career. Of course there are levels of education,
training, and experiences necessary for some professions (doctors, for
example), but you decide on your profession, not the government. Remem-
ber we mentioned earlier that the institution of private property rights is
only as credible as the court system upholding the laws. There is a role for
government in a market economy.
Market economies are major players in the global economy. The incen-
tives of a market economy and private ownership of the resources also
includes innovation, invention, and entrepreneurship. The freedoms of a
market economy incentivize individuals to be creative, to invent new prod-
ucts and processes, and to share their new tools or ways of doing some-
thing, business or otherwise, with the rest of the world. Market economies,
like market forces, are the force of the global economy.
Again as with the command economy, there are not many pure market
economies in the world today. Many economies today have some compo-
nent of a market economy. We will elaborate on these distinctions shortly.
It is also important to notice the political-economic interdependence once
more, even in market economies. That both ends of our economic spec-
trum need politics, although in different ways, leads us into a discussion of
our next and most realistic economic system.

MIXED ECONOMY
Most nations of the global economy ultimately function somewhere
between the command economy and the market economy. They answer
the who, what, and for whom questions in concert with their political and
civic systems. We will explore these connections shortly. Let us use nations
to best illustrate the various types of mixed economies. At the time of this
writing, those nearest the command economy profile would include North
Korea and Venezuela. Both North Korea and Venezuela could conceivably
be considered pure command economies, but for discussion purposes, we
are giving them the benefit of the doubt that some market economy char-
acteristics exist.
Moving away from command economies are those still mostly influ-
enced by command economy with political characteristics. Cuba is com-
mand except for approximately two hundred jobs in which they allow
some market incentives and characteristics. China is unique in that while
it has adopted many of the market economy characteristics, it has also
retained many command economy characteristics. We will discuss this
paradox in detail shortly, because it gives us a lot of information about how
and why China has become such a major player in the global economy.
10 The Global Economy

The government still mostly owns many of China’s resources. Some of

the resources, however, are also privately owned. This is especially true in
the rural, agricultural sector. Chinese people own some of the companies
and businesses, and some are Chinese-foreign company partnerships. All,
however, are still under the control of the Communist Party if the need
arises. Ian Bremmer has called China’s economic system the “state-owned
economy.”1
As we move closer to the market economy, we have Western Europe,
Japan, Canada, Australia, and the United States, to identify a few. These
economies are the dominant participants (along with China, India, and a
few others) in the global economy. They have a dominant role for a reason.
As we discussed earlier, the freedoms and characteristics associated with
the market economy allow for the free flow of goods and services around
the world, both in terms of what is produced in other nations and comes
into the country (imports) and what is produced domestically and goes to
other nations (exports).
These economies are dominated by the characteristics of the market
economy, but they do possess a minor element of the command economy.
The government owns some of the resources in each of these nations. In
the United States, the federal government owns lands and claims the min-
eral rights to those lands. It decides through the courts or laws how some
resources will be used. All these decisions influence the level of participa-
tion in the global economy.
Finally are those nations that are almost pure market economies. Hong
Kong and Singapore rank numbers one and two for Economic Freedom on
the 2019 Human Freedom Index.2 Hong Kong still ranks high on economic
freedom even though Great Britain turned it over to China in 1997 (China
ranks hundredth, the United States twelfth). Pick a nation, and see how
they rank among 162 nations, most of them either participating in the
global economy or trying to do so.
As you can see, no two countries are alike, and they participate in the
global economy in just as many different ways. It is time to explore the key
economic concepts that will help you understand both why nations make
the decisions they do and how those decisions are made.

NOTES
  1. Ian Bremmer, The End of the Free Market: Who Wins the War Between
States and Corporations (New York: Penguin, 2010), 54.
  2. “2019 Index of Economic Freedom,” Heritage Foundation, accessed Sep-
tember 12, 2019, https://www.heritage.org/index/ranking.
2
Global Economy, Politics, and Culture

The global economy today is very complex with many moving parts, both
economic and noneconomic. Before we leave this discussion on economic
systems, it is important to understand how they exist relative to the soci-
ety as a whole and their role in a nation’s global economy participation. We
need to understand how all the global economy’s moving parts work
together. Only then can we understand our complete role as an economi-
cally educated citizen.
The economic systems of the global economy do not operate in a vac-
uum. An economy’s participation is influenced by their society’s political
and civic systems and those in other nations. Political systems, civic sys-
tems, and economic systems are all interdependent on each other’s phi-
losophies and actions. Institutions discussed earlier, such as property
rights and the incentives of a society, are ordered by the interdependent
coordination of all three systems.
Political systems are either determined by the people or rule the people.
Free elections, a credible court system, the rule of law, and a democratic
form of government define political freedom. Or, the political system is
controlled by a dictator who determines elections, controls the courts, and
rules over the people with an iron hand of the law. Each of these political
systems has an economic system that pairs with it nicely, the other not
so much.
The other system of society is its civic society, which determines the
level of freedom for an individual. Freedom of press, freedom of religion

11
12 The Global Economy

and to worship, and freedom to congregate and assemble are examples of

the kinds of freedom determined by the civic system. Those types of free-
dom do not have to exist. They either are present because of the actions of
society or do not exist because of the actions of the ruling political system.
Either way, the rules of the civic system are determined by the actions of
the other two systems.
To illustrate the distinctions about how these domestic systems inter-
relate and ultimately determine their participation in the global economy,
let us look at the different combinations of political-economic-civic soci-
eties and explore why they fare as they do in the global economy. To make
these comparisons, we need to define our subcategories:
• Political-Dictator (one-party rule) or Democracy (representative
government)
• Economic-Socialism (command) or Capitalism (market)
• Civic-Personal Freedom (Bill of Rights) or No Personal Freedom

Before we briefly identify these combinations, a few caveats. One, these

are generalities. In some cases, there are exceptions, but they are few. Two,
history has shown us that the exceptions are generally only short term. In
the long term, these scenarios usually are the outcomes. Three, a country’s
combination today (or yesterday) may be different in the future. History is
quite clear that a country can change its stripes, for good and for bad. How
these determine a nation’s role in the global economy we will explore after
we view the different scenarios.

DICTATOR-SOCIALISM-PERSONAL FREEDOM
This combination would not be a viable model. A political dictator
demands total control over all aspects of the society and its nation. Abso-
lute political control would include ridding themselves of all the opposi-
tion. It would be natural for a dictator to demand a command economy to
control all the resources. Civic freedoms do not fit a dictator’s control, so
all civic freedoms would be eliminated and punished. In 1989, Chinese
students protested the lack of personal freedom and were quickly and
firmly dispersed by the communist government.

DICTATOR-CAPITALISM-PERSONAL FREEDOM
We have already discussed why personal freedom will not work for the
dictator. For the same reason, capitalism too will not work. The charac-
teristics of a market economy (freedom and interaction of buyers and
 Global Economy, Politics, and Culture 13

sellers) are directly opposite the control demanded by a dictator. Control

is paramount for the dictator. Without it, they are not, by definition, a
dictator.
Interestingly enough, however, this is precisely the current combination
that China would like us to believe they use. They have unquestionably had
significant short-term success. Even with their recent gains in global trade,
some in the global economy are suspicious of their ability to maintain this
global position. Much has been documented of their restrictions on per-
sonal freedom relative to religion and a free press. Even though it was
twenty years ago, the protest of Tiananmen Square remains fresh in the
minds of many human rights activists.
Politically China is still governed by a one-party system. Their emphasis
on exports has led their economy to be called the “modern mercantilist.”
China claims this combination, and, for now, the world seems to accept
their claim, exceptions aside. Changes to the global perception of China as
a Dictator-Capitalism-Personal Freedom nation would have significant
repercussions to the global economy. We will explore this idea when we
end our journey and try to look into the future.

DICTATOR-CAPITALISM-NO PERSONAL FREEDOM

This combination is the recipe for a fascist society or one dominated by
culture or religion (theocracies). Fascism is when the nation’s economic
organizations (farms, businesses, unions) might be privately owned but a
dictator-style government controls their operations. Obviously, we are
using the term “capitalism” here only because the resources are privately
owned, differentiating it from socialism. In this form, their actions and
control are definitely those of a command economy. Economies of fascist
governments participate in the global economy in various levels. Some
only trade with other fascist or dictator nations. Some South American
nations would be considered fascist nations.
Not considered fascist by definition, culturally and religiously dom-
inant societies could fit this combination as well. Having few, restricted,
or no personal freedoms, the economy takes its direction from the gov-
ernment. Culturally and religiously dominant societies can be global
traders because of their possession of a major resource, such as oil in
the Middle East.

DICTATOR-SOCIALISM-NO PERSONAL FREEDOM

This is the perfect combination for a dictator. Communism is complete
control over all systems of society. The government answers the three basic
14 The Global Economy

economic questions. Different from the fascists, the communists own the
nation’s resources, including businesses, farms, and homes.
Any attempt to change the status quo is generally met with force and
eliminated. North Korea is a prime example of this combination, as is Ven-
ezuela. The current situation in Venezuela is a prime example of how com-
binations change. It has not been that long ago that Venezuela was
Democratic-Capitalism-Personal Freedom. Now it is none of those, and its
participation in the global economy has changed as well. No country is
immune to change.

DEMOCRACY-SOCIALISM-PERSONAL FREEDOM
Using the command economy definition of socialism, this combination
does not work. As democracy and personal freedom bring freedoms to the
society, economic freedom would be expected as well. There are several
countries, however, that fit this combination, if we use today’s definition of
socialism as income redistribution. These countries, even with significant
income redistribution, could be meaningful trading partners in the global
economy. Political debates and rhetoric often suggest that this is the direc-
tion of the United States.

DEMOCRACY-SOCIALISM-NO PERSONAL FREEDOM

This form is internally inconsistent, which is why nations do not nor-
mally use this combination in the long term. The lack of economic and
personal freedoms is inconsistent with free democratic elections and rep-
resentative government. This combination may be a short-term transition
condition on its way either to democracy or to a dictatorship.

DEMOCRACY-CAPITALISM-PERSONAL FREEDOM
This final combination is the perfect scenario for a totally free society.
Hong Kong and Singapore lead the nations in providing all three freedoms.
Representative government, market economy, and civic freedoms are a
way of life and are also supported by a credible court system that protects
property rights and the rules of the game for both the buyer and the seller.
For all the discussions and rhetoric in today’s world, the United States,
Japan, the European Union, and the United Kingdom exemplify this com-
bination. Many other nations, such as Sub-Saharan African nations, are
pursuing this combination with varying degrees of success. As nations
move toward this combination, they move closer to being participants in
 Global Economy, Politics, and Culture 15

the global economy. Interestingly, as some have moved from this combina-
tion (Brazil, Ecuador, Egypt), they have become more insular, and their
global participation has reduced.
It is important keep these political, economic, and civic combinations
before us and for us to remember that for a nation, participating in the
global economy is more than an economic gesture. Remember that all
choices have costs in the short term and consequences in the long term.
This most definitely applies to political, economic, and civic systems of a
society and their role in the global economy.
3
Gains from Trade

A favorite hobby for many of us is collecting. If you are into sports, you
may collect trading cards of your favorite baseball, basketball, soccer, or
football players. You may collect Harry Potter figurines or Lego movie
characters. Have you ever traded an item from your collection to obtain a
new item for your collection? When you did trade, which of you was better
off after the trade? As with most trades, both of you were better off, or why
would you have traded at all?
The same holds for nations. It is time to shift our direction and explore
why trade is such a good thing for nations. Have nations always traded?
Why is it so important for nations to trade? To answer these questions, we
need to pause and go back to our earlier history lesson. If you remember,
prior to the eighteenth century, nations used the mercantilist system.
Nations would not trade their goods but would sell them to other nations
for gold, silver, or other precious commodities. Economic growth was a
zero-sum game. Each time the nation sold, it won, and each time it bought,
the nation lost. Then in 1776, the world of global trade changed forever.

ABSOLUTE ADVANTAGE
In 1776, Adam Smith’s An Inquiry into the Nature and Causes of the
Wealth of Nations1 was published. In Wealth of Nations, Smith advocated
two extremely novel ideas for his era. One was specialization, and the
other was division of labor. Remember that this was just at the beginning
17
18 The Global Economy

of the Industrial Revolution. Specialization was occurring in cities and vil-

lages. To address of the needs of the town or village, there was the town
blacksmith, shoe cobbler, furniture builder, and so on. The idea, however,
had not been applied to production and trade.
Division of labor as an economic concept to increase national wealth
was an idea promoted by Smith in the Wealth of Nations. He illustrates
division of labor with what is now the famous pin factory example.2
Between specialization and division of labor, Smith proposed that if
nations did not sell but instead traded their goods, both nations would be
better off and each nation’s economy would grow.
Smith expanded on these two novel ideas, suggesting that nations pro-
duce what they are best at producing and trade for those items they do not
produce well or produce at the cost of using many of their precious scarce
resources. This idea is known as “absolute advantage.” Smith proposed that
if each nation focused on what it produced best and traded for the other
goods, it would actually have more goods, and the economy would grow.
This scenario of global trade would be a win-win for both nations, a posi-
tive sum to the global economy.
There was one drawback to Adam Smith’s idea of absolute advantage.
For a nation to participate in the global economy, it needed to have the
resources to produce a product better than any other nation; it needed to
have an absolute advantage in the production of a good. Even for these
nations, however, their resources for producing their goods were limited.
Between limited resources and mercantilism, the age of discovery and
colonialism was dominant until the Wealth of Nations.
Not having an absolute advantage in producing any product was a prob-
lem for many nations. For these nations, the answer was in the writings of
David Ricardo forty years later.

COMPARATIVE ADVANTAGE
David Ricardo had read the writings of Adam Smith and began writing
on his own ideas about the economy. In 1817, he published the On the Prin-
ciples of Political Economy and Taxation.3 In his work, Ricardo goes one
step beyond Smith, suggesting that even nations without an absolute
advantage in the production of a good can participate in the global econ-
omy. By two nations comparing the opportunity costs (trade-offs) of pro-
ducing two goods, they could then determine that each country could be
more efficient in producing one good then the other, produce that good,
and trade for the other.
By comparing the opportunity costs of producing a good, nations deter-
mine their comparative advantage. Introducing the idea of comparative
 Gains from Trade 19

advantage allowed nations for whom there was no absolute advantage to

participate and benefit from the global economy. It is important to empha-
size here that in comparative advantage, the opportunity costs of produc-
tion between only two nations producing two goods are compared.
The following examples (and only an example) of global trade illustrate
how comparative advantage benefits both nations. The first comparison
illustrates Smith’s absolute advantage.
Let’s say that the United States has an absolute advantage in the produc-
tion of skateboards. France has an absolute advantage in the production of
bicycles, as the Table 3.1 below shows.
Using the same input of resources, the United States can produce ten
skateboards or one bicycle. France can produce six skateboards or three
bicycles. For the United States to produce one skateboard, it costs 0.1 bicy-
cles. It costs France 0.5 bicycles to produce one skateboard. Therefore, the
United States has absolute advantage in producing skateboards. It costs
the United States ten skateboards to produce only one bicycle. It costs
France two skateboards to produce one bicycle. France has absolute advan-
tage in producing bicycles. Each has an absolute advantage in one
product.
Let’s see how Adam Smith was correct. If the United States were to use
all its resources to produce only skateboards, they could produce twenty
skateboards (more than the combined sixteen). France could produce six
bicycles (more than the combined four). By specializing, they could have
twenty skateboards and six bicycles instead of sixteen and four. Both coun-
tries are better off and gain from trade. If the two nations trade for the
product they do not produce, both countries will be better off. Both econ-
omies will be more efficient, and both economies will grow.
Let’s change our story and the relationship between our two countries.
In this scenario, the United States has absolute advantage in both produc-
ing skateboards and bicycles (Table 3.2).

Table 3.1  Absolute advantage

United States France
Skateboards 10 6
Bicycles 1 3

Table 3.2  Comparative advantage

United States France
Skateboards 10 5
Bicycles 5 1
20 The Global Economy

In Smith’s terms, the United States has absolute advantage in both, and
trade most likely will not occur for these two products. They may trade for
other products but not for skateboards and bicycles. David Ricardo’s com-
parative advantage, however, creates another outcome. Even though France
does not have absolute advantage producing either product, it does pro-
duce skateboards more efficiently than it produces bicycles (five to one).
Remember our earlier discussion on opportunity costs. Opportunity
cost is the key measure in determining comparative advantage. While
France does not have absolute advantage, it does have lower opportunity
costs in producing skateboards. Since it gives up less of its resources, this
creates an opportunity for France to participate in trade with the United
States for bicycles. Let’s see how this works.
France can produce ten skateboards if it does not produce bicycles (it
transfers its resources from producing one bicycle to five more skate-
boards). The United States already produces ten skateboards, so together,
the two nations can produce twenty total. To make up for France’s loss of
one bicycle to produce skateboards, the United States needs to produce at
least one more bicycle for both nations to gain from trade. Since the United
States has absolute advantage in both products, it has several options for
both nations to be better off.
One option is for the United States to produce only eight skateboards.
This allows it to switch its resources for one more bicycle. Both nations
now have eighteen skateboards and six bicycles, more skateboards with the
same number of bicycles.
The second option is for the United States to produce only six skate-
boards for a total of sixteen skateboards and seven bicycles; both countries
still gain from trade.
France produces skateboards and then trades skateboards with the
United States for bicycles. The United States can produce fewer skate-
boards and transfer its resources into the production of other domestic
goods, including more bicycles if the market demands more bicycles.
France is now a player in the global economy. The United States can now
refocus the use of its resources into more bicycles to trade or increase pro-
duction of other goods for domestic consumption.
Comparative advantage gives all nations an opportunity to participate
in the global economy. By comparing their advantages to each other, both
countries can participate and gain from trade. The global economy has
more skateboards and bicycles. Trade is a win-win for everyone.

Comparative Advantage in Your Own Lives

Comparative advantage is a concept we practice in our everyday lives.
Have you had a part-time job mowing lawns, shoveling snow, babysitting,
 Gains from Trade 21

or cleaning someone’s house? Have your parents hired you to do work

around the house? You were hired because the individuals, whether your
parents or neighbors, were practicing comparative advantage. They could
have done the job they hired you to do at least as well (i.e., absolute advan-
tage). They hired you, however, so that they could spend their time doing a
second task for which they may or may not have had an absolute advan-
tage. By hiring you, they practiced comparative advantage so that they
could do a second task which had a greater opportunity cost for them.
When practicing comparative advantage, both nations and individuals
specialize in the production of goods and services with lower opportunity
costs. The nation’s economy is more efficient and results in more goods
and services for the entire economy. As the global economy expands, it
will become more important for nations to discover their comparative
advantage with trading partners.

YOU MUST REMEMBER THIS IMPORTANT FACT

Throughout this chapter, we have made reference to the notion that a
country trades with another country. That is a shortcut that we almost
always use in economics when discussing the exchange of goods between
countries. It is easy, it is simple, but it is not accurate. Countries do not
trade with each other. The trade really occurs between companies of dif-
ferent nations.
Remember our discussion on economic systems. In a market economy,
such as the United States, where private property and property rights are
so important, it is not the government (country) that actually produces the
products. They may provide certain products and services in specific situ-
ations. Companies produce the products. If countries do not trade, why
state it that way? Good question.
It is easier to discuss global trade in terms of a country’s trade for sev-
eral reasons. First, it is a simpler method for discussing global trade. Think
of the many thousands of trades that occur between companies of differ-
ent nations. It is easier to discuss them as an aggregate trade. Second, that
is how global trade is measured. We will discuss how we measure trade in
detail shortly. For now, it is enough to know that the many thousand export
and import trades of the nation’s companies are measured in their aggre-
gate entirety.
Some domestic companies of nations send their products to companies
in other nations virtually every day. Foreign companies are sending their
products to us virtually every day. Besides products crossing borders,
money also crosses borders. These different actions define a dynamic and
growing global economy. Yet there are times when a government wants to
limit the flow of products or money either entering or leaving the nation.
22 The Global Economy

These deliberate actions to halt the global economy are the next topic of
our journey.

NOTES
 1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of
Nations (London: W. Strahan and T. Cadell, 1776).
  2. Instead of just reading about Smith’s pin factory in the Wealth of Nations,
we suggest you explore it personally at Adam Smith Works, “The Pin Factory,”
https://www.adamsmithworks.org/pin_factory.html. This website is a project of
the Liberty Fund.
 3. David Ricardo, On the Principles of Political Economy and Taxation
(London, John Murray, 1817).
4
Protectionism and Standards

Most economists would tell you that the best trade is free trade. They would
also agree about fair trade. Free trade is self-explanatory. Fair trade is much
more subjective. Each country views fair trade differently. Politicians and
special interest groups often believe another country is imposing unfair
trade practices. When trade interferes with the jobs, utilization of the
nation’s scarce resources, or both, politicians and special interest groups
band together to limit free trade. The global economy becomes political.
When a politician’s electorate or a special interest group views trade as
unfair, politicians get involved. Protectionist measures are used when one coun-
try has a different view of trade. Politicians have many tools to restrict trade.
We will explore four major tools here: tariffs, quotas, subsidies, and embargoes.
Before we get into the specific tools of protectionism, there is one term
often used we need to introduce. “Economic sanction” is a popular term
referring to a government-imposed protectionist measure against another
country. Economic sanctions are trade or financial restrictions against
another country. Tariffs and quotas are generally instituted against spe-
cific goods and services and the trade between countries.

ECONOMIC SANCTIONS
Tariffs
In its simplest term, a tariff is a tax on a nation’s imports, those goods
and services that come into a country from another country. Until the
23
24 The Global Economy

Sixteenth Amendment of the U.S. Constitution (income tax), tariffs were

the major source of federal government revenue. This is still true for many
developing nations.
In today’s global economy, the developed countries mostly use tariffs as
economic/political tools and not for purposes of generating revenue.
Countries like the United States, those of the European Union, or Japan
use tariffs to protect their domestic industries and to level what they con-
sider an unfair trading field. At the time of this writing, government offi-
cials are using tariffs as an economic/political tool in an attempt to
generate what they consider fairer trade policies with several U.S. trading
partners.
What might occur in the global economy is that there are two prices for
a good: a domestic price and a world price. When the domestic price is
lower than the world price, a tariff might be imposed to raise the domestic
price closer to the world price. When a government imposes the tariff,
there are generally two results. The first is that the cost of the tariff is usu-
ally passed on to the consumer in a higher price of the good. The second is
government receives the amount of the tariff as tax revenue.
Implementation of a tariff by a developed nation’s government fre-
quently results in a higher world price. The higher world price increases
profits for the domestic companies in the industry and generates new rev-
enue for the government, paid by consumers paying higher prices.

Quotas
A quota is both different and the same as the tariff. A quota is a limit on
the amount of imports. It is not a tax like a tariff. Like tariffs, however, a
quota raises the domestic price.
Depending on the goal of the government, a quota may be a more effec-
tive protectionist tool. Quotas emphasize the quantity, or supply, of the
product. A tariff does not limit the supply. If the foreign country pays the
tariff, there is no limit to the quantity it can import. A quota places limits
on what can come into the country.
There is one significant difference between the quota and the tariff. The
tariff, being a tax, generates revenue for the government. A quota does not
generate that revenue for the government. The two main winners of a
quota are the domestic and foreign producers. They both receive the addi-
tional revenue from the higher price, not the government.
An important likeness to the tariff, however, is that both tariffs and
quotas raise the price for consumers. Regardless of whether it is a tariff or
quota, the consumer pays.
 Protectionism and Standards 25

Subsidies
A subsidy is the protective sanction policy that addresses an industry of
the domestic economy. Subsidies generally result from the political efforts
of a special interest group. The U.S. government applies subsidies to vari-
ous domestic products from farm subsidies for sugar and corn for ethanol
production, dairy exports, and housing.1
Tariffs and quotas are sanctions instituted on the imports of a foreign
good or service. Subsidies are government policies to support domestic
industries. Subsidies on a product lower the production costs so that the
domestic industry can charge a price lower than the world price. The lower
price serves as a barrier to keep foreign competitors from being able to
participate in the domestic market.

Embargoes
Like the other protectionist tools, embargoes are most generally used by
developed nations for economic/political reasons. An embargo differs
from tariffs, quotas, and subsidies in one major way. The previous three are
limits but not total restrictions. An embargo is a total restriction. It is
comparable to a country having a No Entry sign on its borders. Embargoes
are 100 percent prohibitions on a product or service from entering a coun-
try. Embargoes are the severest and most punitive of the protectionist
tools.

REASONS GOVERNMENTS TURN TO PROTECTIONISM

Remember when we discussed earlier the interdependence between
politics and economics. When governments impose one of the sanctions,
it eliminates the economists’ goal of free trade. Subjectively, the sanctions
may or may not even achieve fair trade. When politics overtakes econom-
ics, protectionism is aimed to achieve a political outcome more than an
economic one. Governments impose sanctions for several reasons.

Protect Domestic Jobs

A common goal for politicians is to protect domestic jobs. Special inter-
est groups represent many politicians’ constituents, and they usually have
a significant influence on the policy actions of politicians, regardless of the
politicians’ party affiliation. Protecting domestic jobs is a news maker for
politicians and special interest groups.
26 The Global Economy

This reason often arises during trade agreement discussions. During

recent discussions leading to the revised North American Free Trade
Agreement (United States-Mexico-Canada Agreement), protecting
domestic jobs was a key topic. During the original NAFTA discussions,
labor (both organized and unorganized) vehemently opposed the agree-
ment, suggesting that jobs would leave the United States. At the time of
this writing, President Trump is using tariffs with the intent of protecting
steel industry jobs.2

Infant Industry
A second reason governments impose economic sanctions is to protect
new domestic industries, known as “infant industries.” This reason is most
often used by developing countries to protect and allow their new indus-
tries to compete in the global economy. In our global economy, interna-
tional mergers and acquisitions are fairly common. Developing country
governments fear that larger companies from developed countries may
interfere with their industry’s ability to participate or even survive.

National Security
One purpose of every government is the national defense and security
of the nation. If a particular industry is necessary for defending the nation
and its citizens, governments may move to protect their national defense
interests. Such industries include military jets and weapons, technology
specific to national security, or transportation or communication that
benefits protecting their borders and citizens.

Intellectual Property
An issue often in today’s news is a nation protecting its media and arts,
including music, movies, books, and software technology. Protecting one’s
culture is very important to most nations. The United States is a giant in
the arts and media and is very protective of its outlets. The United States
spends a great deal of resources to protect those arts and media industries
created here in the United States. Other nations often protect their arts
against being overwhelmed by the size of the U.S. markets in these areas.

Retaliation
When Country A imposes a tariff on specific goods of Country B, Coun-
try B most likely will retaliate with their own tariffs on certain Country A
 Protectionism and Standards 27

goods. The retaliation usually leads the two countries to discussing a “fair”
trade settlement for both countries.
There are times when the two countries do not agree to a settlement.
Stalemate discussions can lead to trade wars. In 1930, the consequences of
the Smoot-Hawley Tariff Act led to global retaliations. The result was a
basic shutdown of global trade and heightened the severity of the Great
Depression. As of this writing, certain agreements have been achieved
to deter the implementation of economic sanctions. President Trump
threatened tariffs on Canadian goods if an agreement to revise NAFTA
were not achieved. An agreement was arrived at, and the tariffs were not
implemented.

Dumping
A form of retaliation is when a country (Country A) tries to sell its prod-
uct in another country (Country B) at a price lower than it cost to produce
the product. This is known as “dumping.” You may have seen this term
used in the media. According to global trading rules established by the
World Trade Organization (see chapter 7), dumping is illegal. The abused
country (Country B) has the right, according to the WTO, to impose its
own protective measures to protect its domestic industries of the same
product.

Developing Nations Use Tariffs to Generate Revenue

When we first introduced tariffs, we mentioned that there is one sce-
nario where tariffs make sense. For many developing nations, tariffs are
the government’s main form of revenue. Compare that to how the taxes
the U.S. government (and most developed nations’ governments) institutes
to generate revenue for public goods and services. This was not always
true. As previously mentioned, tariffs were a main source of the U.S. gov-
ernment until passage of the Sixteenth Amendment to the U.S. Constitu-
tion in the 1920s, which made the income tax legal.
Much of the economy in a developing nation is known as an “informal
economy.” The economy consists of significant barter and self-sufficiency.
Government corruption also lends itself to an informal economy out of
sight of corrupt government officials. Income taxes in a developing nation
with very little income would not provide much in tax revenue. Measuring
the economy’s income would also be difficult. Sales or property taxes
would also not provide much revenue, for much the same reason. Since
they import many of their products, the tariff is the one tax these govern-
ments can reasonably count on to provide sufficient income.
28 The Global Economy

The Costs and Consequences of Protectionist Policies

Remember that very early you were introduced to five rules of every
economy. One of those rules was that every decision has costs today and
consequences tomorrow. This rule most definitely applies to trade between
nations and decisions that involve protectionist policies. The costs and
consequences of economic sanctions to protect domestic industries are far
greater than the costs and consequences of free trade. This is why most
economists prefer free trade to protectionist trade. Earlier we discussed
the market costs to consumers. There are also macroeconomic conse-
quences to everyone in the economy.

Trade War or Retaliation Tactics

When nations retaliate and trade wars follow, no one wins in either
nation. If a country believes it won, that usually means they were only the
least loser, because there is no winner. Trade wars isolate countries from
the rest of the world, reducing their trade with other countries. They also
isolate countries in more ways than just trade, as we will discuss shortly.
As mentioned earlier the Smoot-Hawley Tariff Act essentially closed the
world to trade and deepened the Great Depression. Current trade disputes
taken to their extreme could have similar results.
There is an interesting and somewhat ironic twist to most protectionist
policies to protect domestic jobs. History has shown that while some jobs
may be saved in one industry, the retaliation creates job losses in other sec-
tors of the economy. The net effect on the overall economy of most eco-
nomic sanctions is often a macroeconomic net loss of domestic jobs.

Economic Rent
Another consequence to the economy is what economists call “eco-
nomic rent.” Economic rent is the idea that a person, company, or industry
can increase profits or economic gain without doing anything productive
to earn the gain. Instead of being more productive or efficient in producing
their good or service, they employ lobbyists to encourage politicians of the
need for economic sanctions against their foreign competitors. A sanction
is imposed, the price goes up, and the industry earns more profits. They
earn profits without changing the way they do business. They receive eco-
nomic rents paid by the consumer.

Lack of Innovation
When trade wars close off economies, they close it off to more than for-
eign goods and services. Since industries are earning economic rents, they
 Protectionism and Standards 29

do not have an incentive to be more creative in their business model or

production. Without open trade, they close society off to new inventions,
new production processes, new technologies, or new ideas in education,
training, or the arts. Countries continue to use horse-drawn plows while
other countries are using tractors. Without inventions and innovation,
countries do not grow, and their standard of living remains low or is even
reduced.

Benefits to the Few at the Cost of Many

When citizens hear the news of a new tariff and price increases, why
don’t they protest? They may grumble a while, but then they pay the higher
price and life goes on as before. Companies and industries receive the
higher prices (economic rents) from the sanction. Economist Mancur
Olson called this “the logic of collective action.” What did he mean?
Olson was referring to the idea of numbers. The economic sanction,
regardless of type, benefits only a relatively few parties, whether it is indi-
viduals, companies, or industries. The per-unit benefits of the sanction can
be quite high. The costs of the sanctions, however, are spread out over
many more people. The per-unit costs of the sanction is quite small. So
consumers may complain, but the costs of the sanction are so small per
consumer that the consumers decide that their complaints and the higher
price are inconsequential. Life goes on.

STANDARDS AND THE GLOBAL ECONOMY

In our modern world, many individuals, interest groups, and nonprofit
organizations are concerned with how nations treat their laborers, the
environment, and technology. These concerns are often carried over by
politicians into negotiations on trade and global economy participation. At
times, the standards are bargaining points to be agreed upon. Other times,
they are actually used as a form of protectionism for a domestic industry.
Before we leave our discussion of protectionism, we need to briefly intro-
duce you to the major categories of standards that, at times, have been a
trade or global economic agenda issue.

Labor
To a politician, a laborer is also a voter. As we mentioned earlier, pro-
tecting a domestic job is high on a politician’s agenda. Labor standards are
arguably the most popular of protectionist standards. There are several
ways labor standards are imposed as protectionist or trade policy issues.
One labor standard that may be included is a restriction on child labor.
30 The Global Economy

Child labor is often an issue in very poorest of countries. Many children in

these countries need to work for the family to survive. How children are
used in factories, mines, or in the fields can be quite controversial.
A second labor standard issue often implemented in trade discussions is
a minimum wage for workers in a poorer nation. To avoid a “race to the
bottom” regarding wages, one nation may insist on a minimum wage com-
parable to their prevailing wage. This standard protects domestic workers
from losing jobs to another nation purely on wage levels. The recent United
States-Mexico-Canada Agreement included such a protection for U.S.
workers.
Finally, a labor issue often addressed during trade negotiations is the
ability of laborers to organize and be represented by labor unions. Unions
contend that this is important as a protectionist measure in order to assure
that all labor of the same industry regardless of nation has the same work-
ing conditions. The right to assemble is one of the standards endorsed by
the International Labor Organization (ILO).

Environment
Another popular standard often promoted by special interest groups of
the richer nation is protection of the environment. They fear that the
poorer nations will have less restrictive environmental standards for facto-
ries and production facilities and that therefore businesses will find those
locations more attractive for their facilities and relocate, taking both jobs
and resources. Economists who have researched this issue have found that,
generally, less environmental standards are not enough of an incentive for
businesses to relocate to the poorer nation. They continue to remain, how-
ever, an issue that trade negotiators need to address.

Technical and Intellectual Property

As the world of work becomes more automated and technological, it is
becoming important for nations to include standards for intellectual and
technical property, and such standards often feature in trade discussions
between nations. There are times when standards are implemented in trade
policies for the sharing of technology. At other times, however, the stan-
dards may be needed to protect or restrict their sharing between nations. In
many ways, as both technology and intellectual property grow and change,
so too will the standards by which they are treated in trade negotiations.
We have covered a lot of ground on the global economy. You have
learned that there are rules that apply to all nations regardless of their
location, politics, or culture. You now know why nations trade and how
 Protectionism and Standards 31

they gain from trade. Nations gain from trade, but they also at times have
reasons for desiring to protect their domestic industries. Nations need to
know to what extent they are benefitting from their economic partner-
ships with other nations. In our next section, we will explore how nations
measure their participation in the global economy with a closer look at the
United States.

NOTES
  1. Kimberly Amadeo, “Government Subsidies,” The Balance, January 17, 2019,
https://www.thebalance.com/government-subsidies-definition-farm-oil-export
-etc-3305788.
  2. Ana Swanson, “Trump to Impose Sweeping Steel and Aluminum Tariffs,
New York Times, March 1, 2018, https://www.nytimes.com/2018/03/01/business
/trump-tariffs.html.
5
Measuring the Global Economy

It is important for nations to know how global trade has benefited their
citizens, businesses, and communities. To do so, every nation measures
their global transactions with what is known as a “balance of payments,”
which provides an accounting of a nation’s trade of goods and services as
well as capital transactions that have occurred between nations. In this
chapter, we are going break down each of the components and explain the
way each measure impacts the global economy.
Before we get into the specifics, let’s discuss a few details about the U.S.
balance of payments. One, the Bureau of Economic Analysis (BEA), an
agency in the Department of Commerce, creates the U.S. balance of pay-
ments. The BEA provides much more information than just on the United
States in the global economy. For our purposes, however, we are exploring
the BEA only in terms the global economy.1 Two, the balance of payments is
calculated and presented quarterly. Three, unlike other government data
that is static, the balance of payments is based on net calculations. A net cal-
culation is the balance of inflows and outflows. Because of these net calcula-
tions, the balance of payments never really balances. We will explain shortly.
There is another, very important detail regarding the balance of pay-
ments and international accounting. It is very important to remember that
the interactions, while measured as a nation, are actually between indi-
viduals and companies of other nations. Nations themselves do not trade.
The balance of payments measures the global actions of individuals and
companies.

33
34 The Global Economy

BALANCE OF PAYMENTS
The balance of payments has three components: current account, finan-
cial account, and the capital account. The current and financial accounts
are the most important of three accounts. The capital account is the most
minor of the three and is often so small that it is not discussed. We will do
likewise. We will focus on the current account, the financial account, their
components, and their relationship to each other relative to a country’s
participation in the global economy.

Current Account
The current account primarily measures the flow of goods and services
going out of the country (exports) and those coming into the country
(imports). The difference between the two is known as the balance of trade.
Earlier, we discussed how politicians try to protect domestic jobs. The bal-
ance of trade is often used as a predictive measure of domestic jobs
(exports) versus foreign competition (imports). We will discuss this fallacy
later. For now, know that the balance of trade is a net metric, measuring
the difference between the two. The balance of trade is arguably the most
popular international measure. Along with exchange rates, which we will
discuss in the next chapter, the balance of trade is a favorite international
measure of the media.
The current account also measures net investment income flows. There
are U.S. citizens who have investments in other countries. They earn
income on those investments and bring their earnings back into the United
States. The income earned outside the United States and then brought
back and spent or saved here adds to the U.S. domestic economy. There are
foreigners, conversely, who own investments in the United States. These
foreigners earn income on their U.S. investments and take it to their own
country. This income leaves the United States and is not spent or saved
here. It is important to know what income earned within the United States
will not be spent or saved here as well.
The third component of the current account is a very small component
compared to the balance of trade and investment income accounting. It is
for unilateral transfers, one-way transfers of money to other countries.
U.S. aid to other countries would be an example of a unilateral transfer,
where the United States provides funds to another country without any
stipulation for the other country to pay it back. As we mentioned and will
see shortly, this is a relatively small global component.
You can see why the current account is so popular with the media, as it
measures those recent (“current”) global transactions that are important
to the domestic economy. This is also why it is one of those economic
 Measuring the Global Economy 35

measures watched by politicians. It is interesting to note how the media

and politicians pick up and use the current account measures for their own
gain. It is up to you as the economically literate citizen to understand the
true nature of the current account in what it does and does not provide
relative to the U.S. participation in the global economy.

FINANCIAL ACCOUNT
When companies participate in the global economy, they intend to be
paid for their goods or services if exporting and to pay if they are import-
ing and receiving goods or services. The accounting of net money flows
between nations occurs in the financial account.2 The financial account
also has three components. As we discuss these components, remember
that we are using net and not gross data. The financial account measures
the flow of asset values and not the stock of asset values.3
When we use the term “assets,” we are referring to a tangible item with
value. Assets measured in the financial account include both property and
investments such as factories, office buildings, land, stocks, bonds, and any
type of bank account in a foreign bank. Shortly we will make a finer dis-
tinction between assets.
The first component of the financial account is the change of the foreign
asset values of assets owned by U.S. citizens or U.S. companies in other
lands. Earlier in the current account, we referred to investment income
being earned by U.S. citizens returning to the U.S. and foreigners earning
income in the United States and returning to their country. The same is
true of owning assets in a global economy. There are U.S. individuals who
own assets in foreign countries and foreigners who own assets here in the
United States. The first component of the financial account measures the
net change in value of the assets that U.S. citizens own in other nations.
The second component measures the net change in asset values of U.S.
property owned by foreigners.
Within both components, there are three main types of investments in
which financial exchanges between nations occur. One financial exchange
is the flow of stocks, bonds, and money within financial institutions. These
investments are known as “foreign portfolio investments” (FPI). The other
investments are when companies build factories, buy foreign company, or
own real estate in a foreign nation. These investments are known as “for-
eign direct investment” (FDI). Whether a nation receives FPI or FDI is
often a very important criterion to a nation’s overall economic stability.
Why is the difference between FPI and FDI important? Whether indi-
viduals and companies in other nations are investing in FPI or FDI is very
important to a nation. This is especially true of nations trying to be global
36 The Global Economy

economy partners. Foreign portfolio investments are important because

they bring financial resources to a nation. Foreign direct investments are
more important, because they can bring jobs and can be more directly
related to the nation’s economic growth. When FDI occurs, the individual
or company is making an investment in the long-term viability of the
nation’s economy. They are investing in the nation’s future.
For such a long-term investment to occur, other variables are also
important. First and foremost, if a company is going to invest into a nation
with FDI, the nation must reflect political stability now and in the future.
This generally refers countries that have democratic political structures,
although this is obviously not always the case, as is evidenced by the many
U.S. companies with FDIs in China and other communist countries.
Foreign direct investment in developing nations is usually very difficult,
since political stability is often absent. Currently Venezuela is an exception
here, as it was once one of the richest nations in the world.4 Most countries
will not invest in Venezuela now because of its political instability
(Cuba and China being the exceptions). Companies do not want to
gamble that their foreign investments will be lost to nationalization by
a dictator.
Of course other variables beyond political stability determine the
amount of FDI in a country. These are especially important variables for a
company in relation to their employees and their plans to export the fac-
tory’s product back to the company’s nation of origin. For their employees,
these would include housing, education opportunities for the employee
and their family, telecommunications, health, sanitation, and safety con-
cerns. To export their product back to the country of origin, good roads,
airports, or ocean ports and transportation infrastructure are very impor-
tant, along with the other variables for the employees.
You can see that FDIs are very large investments, and companies do not
make decisions to make these investments lightly. Foreign portfolio invest-
ment, conversely, can be taken more lightly. These decisions can be much
more short term and are much more flexible if political or other changes
within a country occur. The one caveat for the nation with FPIs is if many
of the investors holding the stocks and bonds or having bank accounts
decided to withdraw their funds at the same time. We will dig deeper into
this in the next chapter when we explore financial crises in the global
economy. We will also look further into the third type of financial exchange
known as “official reserve assets” in the next chapter when we discuss
exchange rates.
The third component of the financial account is a fairly new component.
Derivatives are an investment instrument whose value is “derived” from
other investments, such as interest rates, mortgages, or exchange rates,
hence the name. Since their value is dependent on the value of other
 Measuring the Global Economy 37

investments, they are quite complicated for the average person to under-
stand, and trading them is quite complex. Derivatives became very popu-
lar in the 1990s and into the twenty-first century. Since the trading of
derivatives has been a global phenomenon since 2006, the BEA has
attempted to capture their value with this line item.

CAPITAL ACCOUNT
As mentioned earlier, we are not going to discuss the capital account in
detail. Since it is one of the three components of the balance of payments,
however, we should at least define it. Like the financial account, it mea-
sures the net or flow of accounts between nations. Briefly, the capital
account is the net change when certain types of assets are transferred from
one country to the other. Examples of capital account transfers include
military or state department assets as well as when migrants take money
to their homeland or a nation forgives another’s trade or financial debt. As
it is such a small amount, for simplicity, we will consider the capital
account zero and focus on the relationship between the current and finan-
cial accounts.

Relationship between the Current and Financial Accounts

Since we have reduced the significance of the capital account to zero,
this discussion will focus on the interdependence between the current and
financial accounts. The current account measures goods and services;
financial and capital accounts measure money flows. When goods and ser-
vices are bought and sold, it is expected that they are paid with money.
When the transaction involves companies in two separate countries, a sec-
ond transaction of currencies is also involved. This second transaction will
be more deeply explored in the next chapter on exchange rates.
One side of the transaction involves goods and services—that is, the
current account. The other side of the transaction involves money—that is,
the financial account. This is true whether the foreign transaction is an
export or import for the domestic economy. This interdependence implies
that the value of the money transactions equals the value of the goods and
services transactions. When measured, the current account balances equal
the financial account balances (when the capital account equals zero), only
with the reverse sign.
The producers of the domestic economy may export goods and services
(current account credit). The foreign companies pay for the goods and ser-
vices with money (financial account credit). In the reverse, the foreign pro-
ducers may import goods and services to the domestic economy (current
38 The Global Economy

account debit). The domestic companies pay for the imported goods with
money (financial account debit).
To summarize:
• Exports (credits) – Imports (debits) = Net trade
• Money flows to pay for exports (credits) – Money flows to pay for
imports (debits) = Net financial flows
• If net trade is positive, net financial flows is negative.
• If net trade is negative, net financial flows is positive.
This interdependence equality of values exists only in theory. The BEA
balance of payments needs to deal with reality.

STATISTICAL DISCREPANCY
Before we view a real-life example of a U.S. balance of payments
accounting, we need to address one more aspect of the balance of pay-
ments. Since the balance of payments measures the net changes of the
domestic economy’s participation in the global economy, the value of the
current account and the value of the financial account should be equal but
an opposite sign. When one of the accounts is positive (+) the other is neg-
ative (−). The reality of measuring net changes is that the two will not be
equal at any given point in time.
The BEA, therefore, adds one more line item to the balance of payments,
known as the “statistical discrepancy.” The statistical discrepancy mea-
sures the difference between the current and financial accounts so that in
the balance of payments, as its title suggest, the credits minus the debits
equal zero.

THE OFFICIAL BALANCE OF STATEMENTS

For the United States, the official title is the U.S. International Transac-
tions and can be found on the Bureau of Economic Analysis website
(https://www.bea.gov/data/intl-trade-investment/international-transactions).
The balance of payments measure is announced, and a press release to the
media provided every quarter (three months). At the time of this writing,
the last official U.S. International Transactions was released December 19,
2018.
Table 5.1 below shows the major categories of the U.S. balance of pay-
ments. These categories are taken directly from the December 19, 2018,
release of the U.S. International Transaction.
We can make many observations, but let us emphasize a couple here.
First, as discussed earlier, notice the minimal capital account to the
 Measuring the Global Economy 39

Table 5.1  U.S. International Transactions, 2018

(Seasonally
adjusted, Q3, 2018)
Line (Millions of dollars)
Current account
  1 Exports of goods and services and income 9,30,276
receipts (credits)
  2   Exports of goods and services 6,29,398
  3   Goods 4,21,762
 13   Services 2,07,635
 23   Primary income receipts 2,64,523
 30  Secondary income (current 36,355
transfer) receipts
 31 Imports of goods and services and income 10,55,093
payments (debits)
 32   Imports of goods and services 7,88,054
 33   Goods 6,48,775
 42   Services 1,39,279
 52   Primary income payments 2,05,098
 58  Secondary income (current transfer) 61,942
payments
Capital account
 59 Capital transfer receipts and other credits 562
 60 Capital transfer payments and other debits n.a.
Financial account
 61 Net U.S. acquisition of financial assets 1,32,689
excluding financial derivatives (net increase in
assets / financial outflow (+))
 62 Direct investment assets 76,846
 65 Portfolio investment assets 72,598
 70 Other investment assets −16,577
 75 Reserve assets −177
 84 Net U.S. incurrence of liabilities excluding 1,51,723
financial derivatives (net increase in liabilities /
financial inflow (+))
 85 Direct investment liabilities 1,22,336
 88 Portfolio investment liabilities 12,469
 93 Other investment liabilities 16,918
 99 Financial derivatives other than reserves, net −12,255
transactions

(continued)
40 The Global Economy

Table 5.1  (continued)
(Seasonally
adjusted, Q3, 2018)
Line (Millions of dollars)
Statistical discrepancy
100 Statistical discrepancy 92,966
Source: Department of Commerce, Bureau of Economic Analysis, https://www
.bea.gov/system/files/2018-12/trans318.pdf.

balance of payments. Zeroing the capital account, as we did earlier, did not
significantly alter our earlier observations. The negative trade balance often
mentioned in the media is reflected here in the difference between exports
and imports. Take note of the various categories. In the next chapter, we
will focus on “Line 75, Reserve Assets” and its subcategories “Monetary
Gold,” “Special Drawing Rights,” and “Reserve Position in the International
Monetary Fund.”5 Finally, notice the statistical discrepancy to balance the
balance of payments.

Relationship between the Domestic Economy and Global

Economy
When an economy participates in the global economy, it is known as an
“open economy.” A country that does not participate in the global econ-
omy is known as a “closed economy.” Obviously we have been focusing on
the open economies of the global economy.
The balance of payments reflects a nation’s participation in the global
economy. Government and political leaders’ number one priority, however,
is to their domestic economy. Participation in the global economy has a
direct relationship to the activity of a country’s domestic relationship. To
explore this relationship further, we need to first go back and view how the
domestic economy is measured.
The most popular and recognized measure of a domestic economy is
the gross domestic product (GDP). GDP is measured by both income and
spending, which is the one we will focus on here. This measure is based on
the final value of goods and services produced within an economy during a
specified period of time. The GDP measure on spending has four main
components: consumer spending, government spending, business spend-
ing, and the difference between exports and imports (net trade). It is this
last component that is important to us in this discussion. Net trade in
GDP is the same net trade in the balance of payments. It is important to
note that closed economies do not have a net trade measure in their GDP.
 Measuring the Global Economy 41

TRADE SURPLUSES AND TRADE DEFICITS

As we discussed, balanced trade is virtually impossible. Net trade,
therefore, is either a trade surplus (exports > imports) or a trade deficit
(exports < imports). In each instance, there are various reasons both sur-
pluses and deficits can occur.
Trade surpluses occur when a government limits the nation’s imports by
protectionist or mercantilist policies. In both instances, the quantity of
imports is restricted. The imposed policies lead to the nation’s exports
exceeding their imports. China’s trade policies increase the incentives for
Chinese businesses to export at the expense of imports.
Nations often try to manipulate their exchange rates to devalue their
exports and increase the cost of imports. Again, China is a prime example
of a nation that manages its exchange rate to maintain a trade surplus. In
both Europe and the United States we often hear political leaders advo-
cate for a weaker currency to promote exports and a trade surplus. We
will explore the role of exchange rates in greater detail in our next
chapter.
Trade surpluses also occur when a domestic economy is not doing well
yet the global economy is growing. When the economy is in a recession,
many people are not working and earning money and so are not spending
and buying products. The vicious cycle of not producing means that fewer
jobs lead to less spending, and so it goes. As the domestic cycle continues
its downward trend, fewer and fewer products are bought, including
imports. As long as the global economy has not been impacted, the nation’s
exports will continue to eventually exceed imports.
Trade deficits can occur for very different reasons. First, trade deficits
can occur when a domestic economy is doing well. This is especially true in
large developed economies like those in the United States and the European
Union. Many people have jobs and earn money and then spend their money
on goods and services, many of which are going to be imported from other
countries. The more imports we buy, the larger the trade deficit.
The second reason is not so good. Many developing or smaller countries
either do not have the resources to produce enough goods and services for
their citizens or have a corrupt government that restricts their productive
abilities. As a result, they are forced to import many of their products. The
more they import to address their citizens’ needs, the larger the trade
deficit.
All of the scenarios above create trade imbalances. One is the result of a
good economy, and in the second, the citizens’ needs exceed the economy’s
ability to produce to necessary level of products and services. Conversely,
net trade becomes a surplus when government manipulates the economy
or an open economy is in recession when the global economy is not.
42 The Global Economy

It is time to turn our attention to one of the instruments often used by

governments in an attempt to create trade surpluses: exchange rates and
exchange rate systems.

OTHER MEASURES OF THE GLOBAL ECONOMY

In chapter 7, we will introduce you to other international organizations
that are also measuring the global economy. We will discuss how the IMF,
World Bank, WTO, and United Nations collect data and report on the
global economy. Additionally, the central banks do research on the global
economy as it relates to their domestic economy. There are other U.S. orga-
nizations that report on the research, most notably in the United States,
the Central Intelligence Agency (CIA). Yes, the same CIA who does the
spying. Their CIA World Factbook website has a wealth of information on
every nation. You should take some time and check it out at https://www
.cia.gov/library/publications/the-world-factbook/.

NOTES
  1. We encourage you to spend some time and explore the Bureau of Economic
Analysis website at www.bea.gov.
  2. The difference between gross and net can be substantial. Gross is the total
amount without subtracting any amount from the total. Net is what remains after
subtracting something from the gross amount. Using the terms here, the financial
account adds monies received (gross) but then subtracts monies sent to other
countries, resulting in net amount.
  3. Gross and net also align with stock and flow—stock with gross and flow
with net. To help distinguish between a stock measure and a flow, think of the dif-
ference between a picture and a video. A picture captures one moment in time
(apologies to the network that likes that phrase), as does a stock measure. A video,
however, captures events through time, as does a flow measure.
  4. CIA Factbook, “Venezuela,” CIA, accessed February 14, 2019, https://www
.cia.gov/library/publications/the-world-factbook/geos/ve.html
  5. Reserve assets are comprised of Lines 75 to 83. These three categories are
Lines 76, 77, and 78. They are not shown here.
6
Global Financial Systems: Exchange
Rates and Exchange Rate Systems

When you use money to buy an item at the local store, you use our domes-
tic currency, the U.S. dollar. The money was earned at your job, as an
allowance, or maybe a birthday or holiday gift. Using dollars is probably
something you do not think much about it. It is a fairly straightforward
transaction.
Transactions between individuals or companies from different coun-
tries in a global economy get a bit trickier. If the two countries have differ-
ent currencies, a second transaction is now involved. Since the selling
company would like to receive payment in its home currency, the buying
company needs to convert its home currency to the selling company’s cur-
rency. This second transaction occurs through exchange rates and
exchange rate systems. Exchange rates are determined based on the
exchange rate system of an economy.

EXCHANGE RATES
As you get ready for school, check out one of the morning television
business shows. It is a fairly certain that at some segment of the program,
they will announce the current exchange rates of the more popular cur-
rencies. These are the currencies used most often throughout the global
economy (we will discuss why these currencies shortly).
43
44 The Global Economy

An exchange rate is the price of one currency expressed in a second cur-

rency. The exchange rate of the U.S. dollar is price of the dollar in another
currency. If, for example, it takes two euros to buy one dollar, the dollar
exchange rate in euros is two. In reverse, to buy one euro using dollars, you
would only need fifty cents. Exchange rates can act as indicators of an
economy’s health. Exchange rates can determine the potential for the
number of jobs gained or lost in an economy. Exchange rates are very
important in a global economy, able to make a big difference.
Exchange rates are important to different participants in the global
economy. First, as we mentioned, are international businesses and those
companies that do business with foreign companies or have foreign sales.
International investors and speculators are also interested in the value of
currencies. Investors want to invest in countries with stable currencies.
Speculators are trying to make money on changing exchange rates. For
speculators, their business is the currency. They buy and sell currencies on
expectations of rising or lowering currency values. Of course, exchange
rates are important for tourists and global travelers. All these players have
a stake in the value of an exchange rate. That is why they are reported on
frequently in the news.
Depending on your local bank, you may or may not be able to access a
foreign currency. If you live in an area with only smaller community banks,
they generally do not hold foreign currencies. If you live in an area with a
bank whose business clients would need access to foreign currencies, they
quite possibly do hold foreign currencies for their international customers.
A nation’s central bank would also hold foreign currency. If the country is
a small country that imports many of its goods, their central bank most
certainly will hold foreign currencies.
There are two main methods in which exchange rates are determined.
We will return to these methods, but for now, it is important to know that
exchange rates are determined by supply and demand or by government
decree. When they are determined by the supply of a currency available to
the global economy versus the demand for the same currency, it is called a
flexible or floating exchange rate. When the government decrees the value
of the home currency, it is called a fixed exchange rate. Both are factors in
today’s global economy. They can impose different costs and consequences
to both the home economy and impact their participation in the global
economy.

Exchanging Currencies
Whether the exchange rate is flexible and fixed determines how much
one receives when currencies are exchanged. If the exchange rate is fixed,
 Global Financial Systems 45

the value of exchanging one currency for another is, as the term implies
already, established. In our earlier example, if the dollar exchange rate of
two euros is fixed, you will receive two euros for your dollar regardless of
what is going on in either home economies or the global economy.
Exchanging currencies in a flexible exchange rate system is more com-
plex. Since flexible exchange rates are dynamic, they are constantly in flux,
increasing or decreasing in value based on relative home economy strength
or weakness and the global economy. This dynamic characteristic of flexi-
ble exchange rates can be a problem for a business or even an individual.
Depending on the length of time it takes to complete a transaction, a
business could be exposed to exchange rate risk. During the time of the
transaction, changes in an economy could alter an exchange rate, poten-
tially costing a business its profit from the transaction. Granted, the busi-
ness could also gain if the change was in their favor, but the other company
would lose. Many companies on both sides of the transaction are willing to
lock in an exchange rate and not take that chance.
They can lock in the exchange rate with a forward exchange rate, a con-
tract value predetermined in the forward market. This market predeter-
mines a future value so that both parties of the transaction know the
exchange rate at the time of the product’s future delivery. With a forward
exchange rate, the exchange rate risk of the transaction is minimized at
the worst, eliminated at best.
When you are traveling to another country, you will also need to
exchange dollars for the currency of your destination. As a tourist or busi-
ness traveler, you usually have several options. First, if there is a larger
bank nearby, you can visit it and convert your dollars to the currency of
your destination, based on the exchange rate of the day known as the “spot
market exchange rate.” The bank may charge a small transaction fee. You
will have your new currency and are good to travel. The other option is to
wait and convert your dollars in the other country. Since you are exchang-
ing currencies on the spot, exchange rate risk is not an issue.
Since flexible exchange rates are dependent on the supply and demand
of the currency, their value can be quite volatile (Figure 6.1). When the
demand for the currency increases, it results in an appreciation of the
value. A currency appreciates when its value (price) goes up. When
the central bank of a country increases the supply of the currency, it
results in a depreciation of the currency’s value. The currency depreciates
when its value (price) goes down. When currencies appreciate and depre-
ciate, they can have consequences on both the home economy and global
economy.
Notice a currency depreciates when either its supply increases or its
demand decreases (Figure 6.2; R to R1). The supply may increase when
holders of the currency decide to sell their currency in the currency
46 The Global Economy

Figure 6.1  Supply and Demand of Flexible Exchange Rate

$/€
S

R S1

R1

D1

Q1 Q Q€

Figure 6.2  Change in Flexible Exchange Rate (Depreciating Currency)

 Global Financial Systems 47

markets or convert to another currency. A central bank can also increase

the money supply. The demand decreases when investors or speculators
decide not to hold the currency. Demand will also decrease if tourists do
not choose the nation as a destination.
In reverse, a currency appreciates when either its supply decreases or its
demand increases (Figure 6.3; R to R2). The supply usually decreases when
holders of the currency decide to hold their currency or the central bank
decreases the money supply. The demand increases when investors or
speculators decide to hold more of the currency because of a nation’s
higher interest rates. Demand will also increase if a nation becomes a pop-
ular vacation destination.
Before we move on and discuss exchange rate systems, a couple of basic
exchange rate rules to remember. One, an exchange rate is the relationship
between only two currencies. The dollar-euro exchange rate does not have
any significance with the euro–British pound or yen-euro exchange rate.
Global economic events may move them in a direction (appreciating
or depreciating), but the relationships between the currencies are
independent.
The second rule is that if the price of one currency goes in one direction,
the price of the second currency must go in the opposite direction. If the

Figure 6.3  Change in Flexible Exchange Rate (Appreciating Currency)

48 The Global Economy

dollar’s value versus the euro goes up (appreciates), the value of the euro
must go down (depreciate). Instead of two euros to buy one dollar, it now
takes three euros. The dollar is more valuable against the euro, which
means that, by definition, the euro is worth less (depreciated). Likewise, it
now only takes thirty-three cents to buy a euro. Always remember that
when one currency appreciates, the other depreciates.

EXCHANGE RATE SYSTEMS

A major determination of whether an exchange rate is fixed or flexible is
based on the economy’s exchange rate system. Exchange rate systems
range from a fixed exchange rate that does not change without major polit-
ical action to the supply-and-demand-dependent flexible-exchange-rate
systems discussed earlier, with several variations in between. It is now
time to explore each of these exchange rate systems in more detail.

FIXED (PEGGED) EXCHANGE RATE SYSTEMS

Fixed exchange rate systems are when the currency is pegged to a com-
modity or another currency. There are two types of fixed exchange rates:
hard peg or a soft peg. Hard pegs have no variation in their exchange rate,
while soft pegs do allow for modifications of the exchange rate from time
to time. These are sometimes also known as modified exchange rates or
crawling peg. Which term is used often depends on the author or speaker,
but the idea is the same.

Commodity-Based
The most popular commodity-based fixed exchange rate system is the
gold standard. A gold standard infers that a nation has enough gold on
reserve to match the value of the dollars in circulation. A simple example
of a gold standard would be if the nation’s money is valued at ten dollars
per ounce, for every ten dollars in the economy’s circulation, they need one
ounce of gold in reserve at their central bank or some other bank deposi-
tory. If they want to increase the amount of money in circulation, they
need to buy more gold and increase their reserves.
The United States was officially on a gold standard for most of its hist-
ory until the Great Depression and World War II. President Franklin Roo-
sevelt took the United States off the gold standard during the Great
Depression. During World War II, the United States needed to spend more
money to build war materiel then it owned in gold. Following World War
II, the U.S. exchange rate system took another modification.
 Global Financial Systems 49

U.S. Exchange Rate System following World War II

As we discussed during the introduction, World War II was a turning
point in the U.S. exchange rate system. It was not due to World War II
itself but to the preparation for a new post–World War II global economy
that a new exchange rate system was adopted with gold and the U.S. dollar
at its center.
The 1944 conference held in Bretton Woods, New Hampshire, to create
a postwar global exchange rate system was the genesis of our revised sys-
tem. The result of Bretton Woods for the United States was a modified (or
pegged) exchange rate system. First, the U.S. dollar was pegged to gold at
thirty-five dollars per ounce. Second, the currencies of other nations were
then pegged to the dollar. Nations could use gold or the dollar as the
anchor for their currency. The U.S. dollar became the global reserve cur-
rency, the same as gold. Nations could base their domestic money supply
on their reserves of either dollars or gold. The United States had a world
market for dollars.
The system survived to the early 1970s. Given the U.S. economic times,
in 1971 President Nixon devalued the dollar to thirty-eight dollars an
ounce of gold. In 1973, Nixon disconnected the dollar from gold, and the
United States adopted a flexible exchange rate system. The dollar’s value
was now a function of the supply and demand for buying or selling the cur-
rency. The Bretton Woods system was officially over.

Anchor Currency
In today’s modern global economy, the more popular fixed exchange
rate system is where the home currency’s value is fixed to a second cur-
rency, or anchor currency. Most developing and some transitional econo-
mies use this type of exchange rate system. Most of these fixed exchange
rate systems use the dollar or the euro as their anchor currency, since the
United States and Europe, respectively, are often their major trading
partners.
The nation’s government or central bank sets the value of an anchor-
based currency exchange rate system. To maintain a stable currency, gov-
ernments or central banks need to retain a sufficient ratio of anchor
currency reserves to the home currency in circulation. The government or
central bank’s set fixed value is often based on the needs of their domestic
economy. If the ratio of anchor currency reserves and supply of domestic
currency gets too far out of balance, problems arise.
In today’s global economy, this can often lead to a contradiction between
what is best for the domestic economy and how they participate in the
global economy. One fixed value is best for the nation, yet another value is
best for their global participation. We will return to these issues later.
50 The Global Economy

Managed Float (Dirty)

There is one additional type of fixed exchange system, the managed or
dirty float. Officially, the currency has a stated fixed exchange rate. The
central bank or government, however, allows the currency’s value to float
between a certain range of values with a upper and lower boundary. When
the monetary authority believes the currency is at or near a range bound-
ary, it will reset (i.e., manage) the exchange rate in an effort to accomplish
its economic goals.
China is considered to manage the exchange rate of the Chinese yuan.
Until 2005, the Chinese yuan was pegged to the U.S. dollar at approxi-
mately eight to one (eight yuan to one dollar). In 2005, the People’s Bank of
China allowed the yuan to trade within a value of approximately 0.15 per-
cent up and 0.15 percent down (0.3 percent). China instituted a managed
floating exchange rate system. In 2014, they widened the band further to
approximately 1 percent in each direction (+ or – 2 percent).1 The People’s
Bank of China monitors the yuan’s value every day, making adjustments as
necessary.

FLEXIBLE EXCHANGE RATE SYSTEMS

The final major exchange rate system is the flexible exchange rate sys-
tem. Throughout our discussion of exchange rates and exchange rate sys-
tems, we have made reference to flexible exchange rates. Flexible exchange
rate systems have flexible exchange rates and their system currencies are
based on supply and demand.
The exchange rates of the major currencies of the global economy are
from flexible exchange rate systems. Currencies are considered major
when they are used as an anchor currency or are involved in many of the
global transactions. There are currently four major, or reserve, currencies:
dollar, euro, British pound, and Japanese yen. If you remember from our
discussion on balance of payments, a key line item for developing nations
was official reserve assets. Since countries need the major currencies to
transact business globally, their central banks need to have these curren-
cies on reserve.
The values of these currencies relative to each other are determined by
the supply of the currencies relative to the demand for each currency.
There are two values for flexible exchange rates. One is the real exchange
rate, determined entirely on the supply and demand for the currency rela-
tive to the second currency. The second is the nominal exchange rate,
determined by the real exchange rate and an additional factor for
inflation.
 Global Financial Systems 51

The Impact of Inflation on Exchange Rates

When an economy is experiencing inflation, it can have disastrous
results on a nation’s currency. For the importance of participating in the
global economy inflation is caused by an increase in the money supply. As
the supply increases, the currency’s exchange rate depreciates. If the sup-
ply continues to increase steadily, the depreciation will continue until the
currency virtually has no value. If the central bank or government con-
tinue to print money, hyperinflation results, and the economy and the
exchange rate collapse.
Zimbabwe had the world’s highest hyperinflation rate in 2008 at an
annual 231,000,000 percent!2 The Zimbabwean currency was worthless.
To rid themselves of the hyperinflation, Zimbabwe did away with their
currency and adopted the U.S. dollar in a process known as dollarization.
Zimbabwe used the dollar as their unit of account and medium of
exchange. At the time, you could vacation in Zimbabwe and not have to
exchange currency.

Black Market Values

There is one more currency market we need to acknowledge. When a
nation’s currency depreciates significantly and the government has lost
investor confidence, a black market usually evolves for the currency. This is
precisely the case with the Venezuelan bolivar.
As of July 1, 2019, the official exchange rate for the Venezuelan bolivar is
6,733.29.3 We have discussed previously the hyperinflation of the bolivar.
As the hyperinflation rate continues to climb and the bolivar depreciates
further, the black market value for the bolivar has been predicted to almost
double the official rate. The higher the black market rate for the bolivar, the
more valuable the dollar is to the Venezuelan economy. Given current bad
U.S.-Venezuelan relations, this presents the Venezuelan leadership with an
economic dilemma.

OTHER EXCHANGE RATE SYSTEMS

Dollarization
Dollarization is when a nation uses the currency of another nation. As
mentioned, Zimbabwe converted to the U.S. dollar in order to reduce their
hyperinflation. Many of the Caribbean and Central American nations use
the dollar, including the Bahamas, Belize, and Costa Rica. Panama has a
domestic currency (cordoba), but it is fixed one to one with the dollar,
52 The Global Economy

essentially dollarizing the currency. South American countries Ecuador

and El Salvador use the U.S. dollar. The disadvantage of dollarization is
that the country does not have its own monetary policy.

Monetary Unions
Some countries may group together and create a monetary union. These
single currency areas band together and establish a common exchange rate
system. Single currency areas are not exactly exchange rate systems, but
they do change the currency landscape for the global economy. In joining
together with a common system, they reduce the number of currencies in
the global economy.
The largest single currency area is the European Monetary Zone. The
EMZ includes over three hundred billion European citizens in nineteen
countries (there are twenty-eight countries in the European Union). The
European Union has a central bank, the European Central Bank (ECB),
which makes the monetary policy decisions for all the nations of the Euro-
pean Monetary Union. As a nation, the forfeiture of monetary policy
power is one of the major drawbacks of a single currency area.
Take note that the EMZ and the EU are not the same. The twenty-eight
nations of the European Union focus around trade, open borders, and freer
movement of capital and labor between the nations. The nineteen EMZ
countries are those nations who use the euro as their currency. Not all EU
members use the euro. Britain, for one, was a EU member but maintained
the British pound as its domestic currency. With Brexit ahead, this of
course will change. Bulgaria, Denmark, Poland, and Sweden are examples
of EU nations who use their own domestic currency and do not belong to
the EMZ.4
A second single monetary zone is the West African Single Monetary
Zone (SMZ). This single currency has been in the making for over twenty
years. Even now it is not a reality. The fifteen nations involved have agreed
for its implementation to begin in 2020 (about the time for publication of
this book).5 We will be discussing this SMZ in a bit more detail during our
conclusion on future issues.

FINANCIAL CRISES
When an economy reaches a breaking point, the domestic financial sys-
tem usually experiences a crisis, and the value of the economy’s currency is
usually a casualty. When a currency loses value, it is often a difficult road
to restore it to the original precrisis value. This is a key reason why it is so
important for central banks and governments to protect their currency
 Global Financial Systems 53

values. Governments are often unwilling to accept that their currency

need to be revalued, and crisis results. A crisis can seriously impact the
nation’s ability to participate in the global economy.
Financial crises can begin on several fronts. One, the nation’s own
banking system may be the culprit. Banks are institutions that receive
money from savers and lend money to borrowers. When this process of
intermediation operates as it should, savers win by earning interest on
their savings and borrowers win by increasing their ability to purchase
goods for personal or business use. When there are not enough savers or
the banks have made bad investments and loans and do have enough funds
for borrowers, the economy falters. Global participants avoid investing in
the banks or the economy. When the currency is not needed, its value falls.
When the economy has a fixed exchange rate system, a financial crisis
occurs if the central bank does not have enough reserves of the anchor
currency to support the supply of domestic currency in the economy. This
crisis forces the central bank or government to buy enough of the anchor
currency to support its domestic currency or to devalue its currency. The
currency’s devaluation reduces the value of assets and the economy as a
whole. This can also occur with a flexible exchange rate system, as holders
of the domestic currency suddenly decide to sell, greatly increasing the
supply of the currency and reducing demand causing the currency value to
collapse.
There is one additional type of financial crisis. When a nation has sub-
stantial debt and cannot make its payments, the global economy suffers. If
you cannot make your car payments, you most likely will lose your car. It
becomes a bit trickier when a country cannot pay. A country cannot be
taken away. It can, however, stop paying and default on its loans.
For the global economy, there is no upside for any country to default on
its loans. When a debt crisis occurs, investors stop investing, traders will
not trade, and the ability of the nation’s economy to grow is questioned.
The global financial system of banks and institutions holding the loans
most likely will work with the nation to restructure its debt payments
rather lose the entire amount of the loan.

DEVALUATION LEADS TO DEPRECIATION; REVALUATION

LEADS TO APPRECIATION
Contrary to how the terms “devaluation” and “depreciation” may be
used in the media, they are not the same. Devaluation is an act of reducing
the value of a currency, while depreciation is the resulting value. Devalua-
tions occur in two different ways. One, when a fixed exchange rate needs
to accurately reflect the value of the currency in the global economy, the
central bank or government will, by edict or law, take steps necessary to
54 The Global Economy

devalue the currency. The result is that the currency depreciates relative to
other currencies.
A second type of devaluation is when a flexible exchange rate is deval-
ued by the central bank. Earlier, we defined depreciation as an increase in
the supply of the domestic currency, which lowers the value of the cur-
rency. When a central bank deliberately increases the domestic money
supply, it is devaluing the currency. Depreciation is the result, as the cen-
tral bank changes the dynamics between the supply and demand of the
currency.
In the opposite way, central banks or governments can revalue or
increase the value of their domestic currency. A revaluation for a fixed
exchange rate occurs in exactly the same fashion as devaluation. The cen-
tral bank or government decides to raise the value of their currency and
does so by edict or law. A central bank can revalue a currency by contract-
ing the money supply, thereby creating an appreciation of the exchange
rate.

IMPACT OF A DEPRECIATED OR APPRECIATED CURRENCY

Politicians and Labor versus Consumers
Forever in debate about exchange rates is which is more advantageous
for an economy. Should the domestic currency be depreciated against
other currencies or appreciated? The answer to the question really depends
on which side of the economy one favors.
Politicians and labor prefer a currency that is lower in value (depreci-
ated) relative to other currencies. Their reason for a depreciated currency
is pretty straightforward. The lower the value of the domestic currency,
the less expensive the nation’s exports are to foreign markets. As the theory
goes, since the goods cost less, foreigners will demand more of them. If
there is greater demand, more domestic products need to be produced,
and that translates into more domestic jobs. Labor, therefore, prefers the
depreciated currency. Politicians win; they know that if there are more
jobs, that usually equates to more votes for them as incumbents.
One cost of the depreciated currency is that the consumer pays higher
prices for imports. While not always the case, another potential cost is in
the nation’s balance of trade. If the value of exports is significantly lower
than the value of imports, a negative trade balance may be the result.
When the currency is appreciated against other currencies, the per-
ceived winners and losers are opposite. Consumers prefer an appreciated
currency. Now imports are less expensive in the domestic marketplace. In
a competitive market, domestic competitors have to lower their price to
 Global Financial Systems 55

compete against the imports. As markets work, greater competition will

also improve the quality as well as quantity of domestic and foreign prod-
ucts available to the domestic consumer.
For labor and politicians, an appreciated currency may or may not be a
negative. Jobs in certain products or industries may be lost. Politicians
would then have to explain why the jobs were lost or to pass legislation
protecting jobs. Enter protectionism. As we saw in the previous chapter,
now everyone loses. We are going to explore this relationship much more
in future chapters.

PURCHASING POWER PARITY (PPP)

There is one more topic we should address before moving on from
exchange rates and exchange rate systems. In the last chapter, we explored
how to measure the global economy. How do investors, traders, and eco-
nomic and political leaders know when their currency is properly valued?
One way is the currency’s acceptance in the global marketplace. While
that measure might work within the nation, it is not a very good compara-
tive measure, since the global economy is such a dynamic market.
A comparative measure used by many world agencies and organizations
is an idea known as purchasing power parity (PPP). The idea behind PPP is
to measure the domestic value of a similar market basket of goods in all
currencies. If we use the United States and the dollar as our base, let’s say
that this particular basket of goods is valued at $100. If we go to Germany
and the same market basket of goods is valued at 300 euros, then the
exchange rate between the dollar and euro should be three to one (3 euros
to 1 dollar). If the dollar/euro exchange rate is anything other than three to
one, one of the currencies is either overvalued or undervalued.
Economists generally do not view the precise nature of PPP to be cred-
ible. PPP does, however, allow for organizations like the World Bank and
IMF to draw comparisons between economies and currencies. It also
makes possible observing trends of domestic economies and the dynamic
value of their currencies.
A stable exchange rate of a domestic currency to the other currencies is
vital for a nation to participate in the global economy. If the value is too
high, exports become too expensive, and the economy may experience a
net loss in domestic jobs. If the value is too low, they will experience infla-
tion or hyperinflation, such as in Venezuela. Confidence in the economy is
lost, while prices, including imports, continuously rise and the domestic
economy experiences net job losses. Historically, this balancing act has
only been achieved when the central bank is independent of political and
special interest pressures.
56 The Global Economy

International organizations also play an important role in creating an

environment for a healthy global economy. These organizations are the
topic of our next road on our journey of the global economy.

NOTES
  1. “How Does China Control Exchange Rates?” FXCM, accessed June 25, 2019,
https://www.fxcm.com/uk/insights/how-does-china-control-exchange-rates/.
  2. “Zimbabwe inflation hits new high,” BBC News, October 9, 2008, http://
news.bbc.co.uk/2/hi/africa/7660569.stm.
  3. See the Banco Central de Venezuela at http://www.bcv.org.ve/.
  4. For a closer look at each of the countries that use the euro and those that do
not, visit European Commission, “EU Countries and the euro,” https://ec.europa
.eu/info/business-economy-euro/euro-area/euro/eu-countries-and-euro_en.
 5. Tahiru Azaaviele Liedong, “Could West Africa Introduce a Single Cur-
rency?” CNN: The Conversation, August 8, 2017, https://www.cnn.com/2017/08/08
/africa/single-currency-west-africa/index.html.
7
The Organizations That Influence
the Global Economy

The foundation of any domestic economy is a set of institutions and organ-

izations on which the economy is structured. Every domestic economy has
a monetary system and central bank. As we discussed in the beginning
chapters, the institutions include private property, a government struc-
ture, and economic, political, and cultural influences. The spectrum of
these institutions ranges from command and authoritarian economic and
political institutions, respectively, to market capitalism and republics and
democratic systems.
The global economy is not so neat and structured. It is a comprehensive
collective of diverse economic and political systems. The extent to which a
nation participates in the global economy is directly related to its domestic
economy. All nations are independent sovereign nations. Whether com-
mand or market, authoritarian or democratic, a nation will make decisions
for the global economy only if those decisions will have a positive impact
on their domestic economy. A nation’s sovereignty is their first priority, not
the global economy.
Global organizations are in a difficult position. Regardless of the organi-
zation, their mission is to create a global environment conducive to active
trading partnerships. This includes partnerships involving all nations
regardless of economic, political, and cultural differences. The sovereignty
of individual nations trumps the global economy. If two nations are in a

57
58 The Global Economy

trade dispute, each of the nations will first assess the global economy
against their domestic economy. Nations will impose their sovereignty as
an independent nation first and concern themselves with the global econ-
omy second.

INTERNATIONAL ORGANIZATIONS
United Nations Conference on Trade and Development
(UNCTAD)
Most of us are familiar with the United Nations. In 1945, the United
Nations was created in the aftermath of World War II. The primary role of
the United Nations when it was formed was to maintain world peace. In
the years since, it has expanded into other areas of the global landscape.
For our discussion, the most relevant expansion is the UN Conference
on Trade and Development created in 1964. While it also has an office in
New York along with the United Nations, UNCTAD’s main office is in
Geneva, Switzerland. It also has an office in Addis Abba, Ethiopia. UNC-
TAD is part of the UN Development Group organized under the UN Sec-
retariat. UNCTAD is independent in that it has its own membership and
budget. UNCTAD focuses on trade and development, finance and invest-
ment, technology, and the Sustainable Development Goals (SDG).
UNCTAD provides much of the statistical data and analysis of the
trade and economic development occurring within the global economy.
UNCTAD provides us with over 150 different economic indicators and
data sets going all the way back to 1948, shortly after the United Nations
was created. Collected from both countries and international sources, the
statistical data is very diverse. According to the UNCTAD website statis-
tics (https://unctad.org/en/Pages/Statistics/About-UNCTAD-Statistics.aspx),
the organization’s areas of focus include the following:
• International trade
• Economic trends
• Foreign direct investment
• External financial resources
• Population and labor force
• Commodities
• Information economy
• Maritime transport1
Their work heavily focuses on trade and development in the developing
countries around the world. Their membership includes 195 nations
around the world, including the United States.
 The Organizations That Influence the Global Economy 59

Sustainable Development Goals

UNCTAD is responsible for tracking the progress in reaching the
United Nations Sustainable Development Goals. The Sustainable Develop-
ment Goals were created in 2015 as part of the 2030 Agenda for Sustain-
able Development by the United Nations. There are fifty-two specific
targets bundled into seventeen SDGs. The SDGs range in topics from pov-
erty and hunger to economic growth.
Goals eight, nine, and ten fall under the category of “prosperity for all”
SDGs. These three goals focus on work, economic growth, industry, inno-
vation and infrastructure, and global wealth. While all seventeen of the
goals can be relevant to the global economy, these three are the most dir-
ectly relevant for our discussion. You can read about all seventeen at
the UNCTAD website, https://unctad.org/en/Pages/About%20UNCTAD
/UNCTAD-and-the-Global-Goals.aspx. For our purposes, we will keep
our discussion to goals eight, nine, and ten, but you should take some time
and read through all seventeen.
Goal eight: Decent work and economic growth. Goal eight focuses on
developing an educated, efficient, and effective workforce in the Least
Developed Countries (LDCs). It also works to promote trade, investment,
and technology in these countries so that there are opportunities for the
nation’s labor force. UNCTAD’s efforts to achieving goal eight encourage
entrepreneurship and innovation by the private sector, which is encour-
aged in both a nation’s goods sector and services sector. A focus of goal
eight is also to increase both access and accountability of the financial ser-
vices sector of an LDC.
Goal nine: Industry, innovation, and infrastructure. This goal focuses
on changing the dynamics of a Least Developed Country’s domestic econ-
omy. That means infusing the economy with technology, industrialization,
and markets. For an economy to grow, it must have an infrastructure of
roads, bridges, sanitation, water, and communication technology that is
dependable and will last for many years. Achieving this goal takes research
and development, entrepreneurship and innovation, and diversification of
the economic base with more industrialization. UNCTAD and its partners
strive to makes these changes reality.
Goal ten: Reduced inequalities. A key goal for UNCTAD’s creation was
to increase trade and investment among the world’s nations. A large share
of their data collecting monitors the global economy, especially how well
nations are cooperating with each other. Goal ten goes directly to the heart
of the UNCTAD’s role in the global economy, and a main emphasis is giv-
ing all nations (especially the LDCs) a platform for representation in an
effort to achieve a more inclusive global economy. The closer goals eight
and nine are to being achieved, the closer UNCTAD and its partners come
to achieving goal ten as well.
60 The Global Economy

The UN Conference on Trade and Development is not working on the

seventeen Sustainable Development Goals in a vacuum. They have many
partners around the globe working with them. Some of these include the
World Trade Organization, International Labor Organization, World Bank
Group, the Organization for Economic Cooperation and Development
(OECD), and the International Monetary Fund. Cooperation and partner-
ships are critical to a functioning global economy. It is almost certain,
however, that without this type of cooperation between international
organizations and between nations, the global economy will never be at
peace. We will explore this idea further as we conclude our journey and
discuss the global economy’s future.

Bank of International Settlements (BIS)

Any economic system that uses money has a central bank with the goal
of maintaining the economy’s money supply. We will discuss a central
bank’s role in the global economy later. Central banks themselves have a
central bank, the Bank of International Settlements. The mission of the
BIS is to provide support to the world’s central banks so that they can best
serve and accomplish their economic goals. The BIS is the central banks’
bank.
The Bank of International Settlements was established at the beginning
of the Great Depression in 1930. Its headquarters are in Basel, Switzerland.
When you read or see news about a Basil Accord relating to bank regula-
tions, they are named for this Swiss town. BIS also has offices in Hong
Kong and Mexico City.
In its earlier beginnings, BIS served as the clearinghouse for Germany’s
World War I reparation payments. In the last chapter, we discussed the
gold standard exchange rate. During World War II, the BIS was responsi-
ble for shipping gold between nations to maintain exchange rate levels.
From post–World War II to the end of the twentieth century, the BIS
evolved into the central banks’ bank. In 2009, the Basel Accords estab-
lished international standards for the world’s central banks.
The BIS is a bank owned by the central banks. Sixty central banks are
members of the BIS, and they hold all the capital of the BIS. These sixty
central banks have the responsibility of maintaining the monetary policy
for approximately 95 percent of the world’s gross domestic product. One
of the key missions of the BIS is facilitating relationships between the cen-
tral bank members. Between central banks functioning in different eco-
nomic systems (i.e., authoritarian versus market) with potentially different
ex­change rates, this task can at times be very difficult.
In a domestic economy, savers deposit money in a financial institution
(bank, credit union, etc.), and the financial institution loans the money to
 The Organizations That Influence the Global Economy 61

borrowers. Whether it is bank or credit union, the BIS serve as an inter-

mediary between the two. The BIS serves the same function between cen-
tral banks as the central banks’ intermediary. When central banks need to
exchange currencies, they do so through the Bank of International
Settlements.
These transactions can occur for several reasons. A central bank may
need liquidity to maintain a stable domestic currency, assist a nation to
buy or sell gold reserves, or exchange one currency for another to stabilize
exchange rates when necessary. If the People’s Bank of China needs euros
for an asset reserves balance sheet, they can exchange yuan for euros
through the BIS. A central bank can also access gold reserves from the BIS,
one of the locations at which BIS stores gold is at the Federal Reserve Bank
of New York. The BIS pays interest on a central bank’s deposits just like our
bank pays us for deposits. It is not the same interest rate amount,
however.
While the BIS holds reserves and currencies for all its central bank
members, as of March 2018, 80 percent of its balance sheet’s currency
deposits were in U.S. dollars.2 Remember our discussion of exchange rates
and the way that many foreign exchange transactions involve the dollar.
This lopsided amount of dollar deposits is a direct result.
One fact important to remember regarding the size of deposits is that
the BIS reports its currency holdings in Special Drawing Rights. Dis-
cussed in more detail shortly, SDRs are the unit of account of the Inter-
national Monetary Fund. Using a market basket of currencies, currently
1 SDR = 0.583 dollars + 0.387 euros + 11.9 yen + 0.08 British pound +
1.02 Chinese yuan.3 This relative value is reviewed by the BIS every five
years. The BIS holds total deposits of 221.5 billion SDRs, equal to
80 percent of United States BIS participation value. The numbers aside, the
important point to understand is the size and influence of the U.S. markets
on the global economy and the ability of the BIS to serve its member cen-
tral banks.
The BIS is also the key regulatory agency for the world’s central banks.
We will address this function of the Bank of International Settlements and
the Basil Accords in the next chapter on laws and regulations. BIS is one of
the global organizations closest to having some enforcement authority. As
we will see, this is rare for international organizations.

International Monetary Fund

In 1944, the end of World War II was within sight. Germany was on the
retreat, and the Allies were on the verge of ending the global terror. World
War II had followed one of the longest periods of global isolation. The
Great Depression, the Tariff Act of 1930 (Smoot-Hawley Tariff Act), and
62 The Global Economy

subsequent retaliation tariffs by other nations had all but brought global
trade to a standstill. World War II was just one more reason for the global
economy not to exist.
Now these reasons for global isolation were about to end. Leaders around
the world did not want another period of global isolation and were ready to
do something about it. In preparation for the formal end of World War II,
representatives from forty-four nations gathered for a UN conference in
Bretton Woods, New Hampshire, to design a global environment that
would avoid the pitfalls of those prior to World War II that had caused or
deepened the Great Depression. If you like history, there a some very good
books on this period surrounding the end of World War II and the Bretton
Woods Conference. We will identify a couple for you in the bibliography.
Out of the Bretton Woods Conference came the infrastructure for a
new global economy. We discussed the new Bretton Woods exchange rate
system in the last chapter. There were also two new organizations created
in Bretton Woods and a consensus for need of a third. We will begin our
discussion with the one organization that can trace its direct creation to
1944 and Bretton Woods.
The International Monetary Fund was officially created in 1945. “The
Fund” was established as a way to create financial and currency stability in
a postwar era. During the war, currency instability was common, as
nations spent money and then spent more money on warplanes, tanks,
armaments, and military clothing and supplies to defeat the Germans and
other Axis nations. The new Bretton Woods exchange rate system was cre-
ated along with the IMF to prevent further devaluations.

Very Brief History of the IMF

As Victory in Europe Day came and World War II ended, the challenge
to rebuild many nations began. The IMF was responsible for implementing
the new Bretton Woods monetary system. The healing of World War II
was largely the responsibility of the IMF.
When the Bretton Woods exchange rate system became history in 1971,
the role of the IMF began to evolve. It was consulted to help several nations
whose economies collapsed during the 1973–74 and 1979 oil shocks. Dur-
ing these periods of global oil shocks, the international economy experi-
enced a serious debt crisis. Again, the IMF was called in to alleviate the oil
shock debt crisis.
One other period when the IMF was especially busy was the breakup of
the Soviet Union during the 1990s. Many of the new countries needed the
consulting services of the IMF as they transitioned from a socialist,
planned economy to a capitalist, market-driven economy.
 The Organizations That Influence the Global Economy 63

IMF Today
It has now been some seventy years after the IMF’s creation; its mission
and global responsibility have evolved, and the IMF is now one of the key
international organizations. Today’s primary mission is to safeguard the
stability of exchange rates and international payments in order to create a
positive global environment for trade and investment. Membership in the
IMF has grown from those 44 nations in New Hampshire to 189 nations
today. The mission now focuses on assisting nations to be financially sta-
ble, promoting ever-expanding global trade, and working to bridge trade
between nations.
Teams of IMF economists track the global economy to ensure that the
member countries have stable currencies, their balance sheets are in good
order, and their reserves of anchor currency are sufficient to maintain a
fixed exchange rate. When nations have financial troubles, it is often for
one of the last two reasons. This usually happens to smaller economies
with fixed exchange rates that have tried to grow too fast.
We discussed financial crises in the last chapter. If the holders of the
domestic currency do not have faith the anchor currency reserves, a rush
to turn in the domestic currency for the anchor currency may result. This
is when economies crash. A classic example of this was the overly rapid
growth of Thailand at the end of the twentieth century, when there were
more Thai bahts (Thailand currency) in circulation than there were U.S.
dollars (the anchor currency) to cover the given exchange rate at the time.
The IMF stepped in to support the Thai baht in an attempt to squelch the
currency run. In this case, it spread to other countries, and a world conta-
gion erupted. The IMF was kept very busy.
When the IMF is called into a situation as they were in Thailand or
more recently Greece, they have an obligation to monitor both the interna-
tional monetary system and the monetary system of its member nations.
Prior to entering a crisis, the IMF is known for identifying a list or series of
steps the country in crisis must implement before receiving IMF funding
or service assistance. This conditionality is often a point of debate by both
economists and politicians.
Once a member nation accepts the conditions of the IMF, they are in a
position to receive a loan to alleviate their balance of payments issues. The
loan may be used to stabilize their domestic currency, rebuild their
reserves, pay for imports, or implement additional economic growth poli-
cies. Loans from the IMF are often widely publicized in a negative light by
the media.
These are often the challenges of developing countries. Developing
nations often owe more for their imports than they receive for their exports.
Over time, these deficits grow into a major problem. The developing
64 The Global Economy

nation often needs assistance from either its trade partners or the IMF to
pay for its imports. One of the IMF’s roles that is less well known but just
as critical is working with a government to help update their economic
policies or institutions.
The nations agree to pay a quota subscription as part of their IMF
membership. Most of the organization’s resources come from the quota
subscriptions. The United States is the largest quota subscription payer
of the members. The size of each country’s subscription is roughly
based on their influence and impact on the global economy, which
means that the United States is the largest payer. Gold is also an import-
ant component of some country’s reserves. The IMF, therefore, has gold
holdings. They are one of the world’s largest holders of gold reserves.
When necessary, the IMF also has the ability to borrow for short-term
shortfalls.
An interesting aspect of IMF governance is the voting procedure. Most
of us are accustomed to the idea that one member per organization gets
one vote. It is not so with the IMF. In the same way that the quota sub-
scription amount is determined by a nation’s position in the global econ-
omy, so is the voting. The number of votes for each member essentially
corresponds to the size of their quota subscription. The United States is
the largest and most influential economy, so they pay the most in quota
subscription. In return, they also receive the most votes to cast for IMF
reforms or policy changes to the IMF structure.

Special Drawing Rights

The IMF has one thing has that no other international organization can
claim: its own unit of account. Special Drawing Rights, or SDRs, is an
international unit of account that IMF members can use to solve an inter-
national trade imbalance. The SDRs were created in 1969 as another offi-
cial reserve asset for IMF members. Members agree to accept SDRs as
payment for their exports. Like voting, the quantity of SDRs a nation
receives is in direct proportion to its IMF quota. As mentioned earlier,
other organizations such as the Bank of International Settlements use
SDRs as their currency of account.
Today the IMF is one of the better known of the international organiza-
tions. Headquartered in Washington, DC, the managing director of the
IMF is, by design, always, or least to date, from outside the United States.
The IMF continues today to consult and, when necessary, to loan money to
nations to modernize, to avoid or alleviate the pain of a financial crisis, and
to strengthen domestic economies and improve a nation’s standard of
living.
 The Organizations That Influence the Global Economy 65

World Bank
The second organization that is a direct descendant of the Bretton
Woods Conference is the World Bank. In 1944, it was originally called
the International Bank for Reconstruction and Development, or IBRD. The
IBRD became the World Bank, which is now part of what is officially the
World Bank Group. Use of the word “bank” is a bit of a misnomer.
The World Bank is not a bank in the normal sense of the word. It is not a
bank for individuals. This bank is a membership of nations designed to
support economic development and poverty reduction within the globe’s
poorest nations.
The Bretton Woods conferees knew that without a formal international
mechanism to rebuild Europe and Japan, their economies and cultures
may never recover. As part of the Bretton Woods Agreement, the World
Bank was established with the original charge to provide loans and assis-
tance to help rebuild Europe and Japan after World War II.
Once the reconstruction phase of IBRD was completed, the develop-
ment part of its mission began. During the 1950s, the world was returning
to a new, fresh normal, thanks in large part to the efforts of what is now
known as the World Bank. In the mid-1950s, the World Bank turned its
attention to the countries of the developing world with the creation of the
International Finance Corporation (IFC).
With the IFC, the World Bank’s focus turned to major infrastructure
projects in developing nations, such as dams and water treatment, electri-
cal grids, water and irrigation systems, and roads and bridges. The World
Bank changed its policy to now make loans to private companies and other
financial institutions located in developing countries. This was a major
turn in its mission. The modern World Bank was beginning to evolve.
The International Bank for Reconstruction and Development was still
intact as a component of an increasingly expanding World Bank. It would
not be a stretch to claim that the genesis of today’s World Bank Group
began with the creation of the International Development Association
(IDA) in 1960. The IDA was created to provide interest-free loans to the
poorest countries in order to improve their infrastructure. These two
organizations formed the World Bank.
The focus of the World Bank took another major shift toward the
development and growth of the globe’s poorest countries. Another major
goal of the World Bank became the fight against poverty, especially in the
nation’s poorest countries.
In future years, the International Centre for Settlement of Investment
Disputes was created as a pseudointernational court. This provided nations
and companies with disputes with each other an avenue to pursue an
equitable dispute conclusion over loans, projects, and other World Bank
66 The Global Economy

projects and investments. The other component of the World Bank Group
to be created was the Multilateral Investment Guarantee Agency in 1988.
This agency, as the name suggests, was a way for nations and borrowers of
World Bank funds to have political risk insurance for funding and proj-
ects. Political risk insurance protects investors from having their projects
taken over because of a change in a nation’s government by an authoritar-
ian dictator. The modern World Bank Group was now reality.

World Bank Group Today

Today’s World Bank Group operates through the cooperation of 189
member countries, also known as shareholders. Similar to the IMF, the
member countries receive a bloc of votes relative in size to the subscrip-
tions to provide World Bank capital. Each individual institution has a sep-
arate voting process. While each are based on a different formula, there is
a general similarity; votes allocated are based on the size of a nation’s cap-
ital subscription contribution to the institution. To view the formulas in
more detail, you can go to the World Bank’s website at www.worldbank
.org/en/about/leadership/votingpowers.
The mission of the World Bank Group is to end poverty, and this orga-
nization defines poverty on a global scale. At the time of this writing, the
World Bank defines poverty as living under $1.90 per day. Of the nearly
seven billion people on the planet, approximately one billion live below
this standard of living.
We have already mentioned the World Bank Group’s five institutions:
International Bank for Reconstruction and Development, International
Development Association, International Finance Corporation, Interna-
tional Centre for Settlement of Investment Disputes, and Multilateral
Investment Guarantee Agency. The World Bank’s staff is located in over
170 countries. It is important to remember that the World Bank wants to
reduce poverty through viable, long-lasting solutions that will raise the
poor country’s standard of living.
All five of the World Bank Group’s institutions aim for the same target:
reducing poverty. Through both financial and technical assistance among
the five institutions, the World Bank Group aims to reduce poverty
through several different strategies. The World Bank’s financial products
include low- or zero-interest loans and grants to the poorest countries,
which can be used for education, health and safety, agriculture, and nat-
ural resources development. They are made to governments, private com-
panies, or financial institutions. Some of the loans and grants are public-
private partnerships.
A second important strategy provided by the World Bank is sharing
innovative and creative financial and technical knowledge through
 The Organizations That Influence the Global Economy 67

consultant services, research, and research analysis. The five institutions

use research and analytics to identify the goals and priorities for their
investments. These priorities drive the strategies for the World Bank
Group to help the poorest nations build capacity, infrastructure, and raise
their standard of living.
A third strategy of the World Bank Group is partnerships with other
organizations, both national and international. One of the most important
partnerships, arguably, is with its Bretton Woods twin, the International
Monetary Fund. The two organizations formally meet twice a year to coor-
dinate their roles. The IMF is the organization whose primary focus is on
financial stability, while the World Bank strives to improve infrastructure,
capacity building, and standard of living. The two organizations are dis-
tinctly different in their roles to improve and provide stability to the global
economy.
The International Bank for Reconstruction and Development began in
1944 with 38 members. The World Bank Group has evolved from those
1944 beginnings and today has 189 nations as members and five agencies
or organizations within the group, and it focuses on rebuilding the world
to reduce poverty, build capacity, and raise the standard of living in the
world’s poorest countries. The president of the World Bank is always from
United States. With over 120 offices around the world, the World Bank is
located in Washington, DC, across the street from the International Mon-
etary Fund. They are often referred to as the “twin buildings,” as their
exteriors are identical.

World Trade Organization

The World Trade Organization grew out of a Bretton Woods consensus
but was not acted upon during the conference. As we have discussed on
previous occasions, the Bretton Woods conferees wanted to create a post–
World War II global economy based on free and open trade. Having not
addressed the specific issue of open borders and free trade during the con-
ference, in a post–Bretton Woods move, they established the General
Agreement of Trade and Tariffs.
The General Agreement on Tariffs and Trade was not a formal organiz-
ation, but as the title suggests, it was a general understanding between
nations to work for a global economy with free and open borders. We will
explore GATT in greater detail in our next chapter when we discuss global
regulations. For now, however, it is important to know that GATT came
before the WTO. Nations would meet in conferences known as “Rounds”
to discuss trade policies, issues, and address disputes between nations.
Over time, it became clear that a more formal organization was neces-
sary to achieve free and open world trade in a growing global economy. In
68 The Global Economy

1995, the World Trade Organization was created to implement GATT and
other global trade policies. The World Trade Organization was instrumen-
tal in creating a global system of trade. Since the end of World War II, with
first the creation of GATT and later the WTO, global economic growth
has never been higher.

Functions of the WTO

The WTO serves the global economy in several ways. It provides a
forum for governments to negotiate trade policies and a set of rules for
trade that all member nations are required to follow. When those rules are
not followed, the WTO provides the court to settle those disagreements
between trading partners. All these responsibilities focus around the
WTO making sure the member nations continue to follow the trade poli-
cies and guidelines set up during the different rounds of GATT meetings.
Specifically the functions of the WTO include the following.
Assist in trade negotiations. As noted, one of the most important func-
tions of the WTO is to create an open and free trade environment. The
goal of WTO agreements is to lower the protectionist barriers of trade
worldwide. They include reducing or ideally eliminating tariffs, quotas,
and other sanctions on goods, services, and trade-related intellectual
property rights (TRIPS). Many old agreements are now being renegotiated
under a new 2001 WTO program, the Doha Development Agenda.
Provide court for settling disputes. While the WTO’s main goal is to cre-
ate a global environment of free trade, it also provides a place for countries
to settle their trade disagreements. Trade experts from around the world
hear the nation’s disputes and present a ruling. If a nation has been
wronged, the guilty nation must, as a member, correct its policy. The
nation that brought the dispute to the WTO may also be given the privil-
ege to institute a WTO-endorsed sanction (tariff, quota, etc.) to rectify the
injustice.
Monitor trade agreements. All members must treat each other equally,
known as the “most favored nation” (MFN) status. The WTO monitors
both their members and the trade policies to be sure that this membership
criterion is being met. Nation members are required to provide the WTO
policies of all its trade laws, regulations, and treaties. From time to time,
the WTO Secretariat, the legislative body of the WTO, will review a
nation’s trade policies to be sure they follow the rules.
Improve a nation’s standard of living. For the two-thirds of the member-
ship that are developing nations, the WTO assists them with providing
extended opportunities for trade. The WTO may increase the time period
for them implement or correct a trade inequality. It may also provide
 The Organizations That Influence the Global Economy 69

technical assistance as needed to these members. The WTO tries to pro-

vide these members with greater opportunities to become trade partners
in the global community. The WTO works with many of these member
nations through a program, Aid for Trade.
Partner with other organizations. The WTO does not operate in a vac-
uum. Many of its programs and efforts are jointly conducted with other
nonprofits, nongovernment organizations, or other international organi-
zations. The goal of the WTO is a global economy of free trade, and they
will do whatever is necessary to achieve that goal. The WTO also collects
data and conducts research on the global economy.4

The Doha Round

As we mentioned earlier, when all the member nations gather to discuss
trade negotiations, GATT, and later WTO, the gatherings were known as
Rounds, which are not only the meeting itself but also the period of time
between meetings when the business of the WTO follows the meeting of
the whole. Throughout the existence of GATT and the WTO, two rounds
stand out as most significant. The first was the Uruguay Round, from
which the World Trade Organization was formed. The second is the last
meeting of the WTO, the Doha Round, called this since the meeting was
held in Doha, Qatar, in 2001.
The work of the Doha Round was the creation of a major reform to the
set of global trade rules. The Doha Development Agenda introduced
reform trade policies reducing approximately twenty different trade sanc-
tions.5 The reforms are aimed at helping developing nations become more
involved participants in the global economy. The areas of reform include
agriculture, services, and intellectual property rights.
The World Trade Organization headquarters are in Geneva, Switzer-
land. There are 164 members of the WTO, almost two-thirds of which are
developing countries. The executive leadership of the WTO is the director-
general with a secretariat to provide legislative and administrative sup-
port. The business of the WTO is conducted through different legislative
bodies led by the member nations or decisions of the whole with voting by
all member nations.

International Labor Organization

Established in 1919 as a component of the Treaty of Versailles ending
World War I, the International Labor Organization was the first special
agency of the United Nations in 1946. The organization has 187 nation
members committed to promote the rights of labor, improve social
70 The Global Economy

protection of labor, and constantly work for improved relations regarding

labor-related problems and issues.
The ILO global headquarters are in Geneva, Switzerland. It conducts its
business through a series of what are called “conventions” toward more
social justice. These conventions focus on seven fundamentals of labor:
1. Freedom to associate
2. Right to organize and collective bargaining
3. Prohibition and abolition of forced labor (i.e., slavery)
4. Nondiscrimination in employment
5. End to the exploitation of child labor
6. Minimum wage
7. Equal pay for equal labor

NATIONAL ORGANIZATIONS THAT IMPACT THE GLOBAL

ECONOMY
Important Central Banks
Along with the international organizations we have discussed, a few
national organizations can have a significant influence on the global econ-
omy, primarily the central banks of the countries whose currencies are
most likely to be used in an international trade transaction. We are going
to focus in on five central banks and their currencies: the United States
and the dollar, the European Central Bank and the euro, Great Britain and
the British pound, Japan and the yen, and China and the renminbi.

Federal Reserve System (Fed)

The Federal Reserve System (popularly known as the Fed) is the central
bank of the United States. It was created as part of the Federal Reserve Act
of 1913. The result of a 1913 compromise, the Fed has a different structure
than most central banks. Technically the Fed is not one bank but twelve
regional banks all associated together and coordinated through a central
board of governors located in Washington, DC. The chair of the Board of
Governors has often been labeled the most important monetary policy
leader in the world and includes people such as Alan Greenspan, Ben Ber-
nanke, and the first female chair Janet Yellen. Members of the Board of
Governors, including the position of chair, are nominated by the President
and confirmed by the Senate.
Even though regional banks have a high degree of independence, they
all have the same functions and follow the same guidelines and rules as
 The Organizations That Influence the Global Economy 71

determined by the board of governors. The twelve regional banks are

located in Boston, Massachusetts; New York City, New York; Philadelphia,
Pennsylvania; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia;
Chicago, Illinois; St. Louis, Missouri; Minneapolis, Minnesota; Kansas
City, Kansas; Dallas, Texas; and San Francisco, California.
The Fed has many different roles and responsibilities for the nation’s
financial system. The most important, and probably most popular, is the
Fed’s responsibility to establish U.S. monetary policy to achieve price sta-
bility, low unemployment, and economic growth within the United States.
How the Fed conducts monetary policy impacts the value of dollar nation-
ally, but it can have international impact as well. This is one area in which
the Fed can directly impact our story on the global economy.
Fed monetary policy can have a direct impact on the exchange rate of
the dollar. This is important because almost 90 percent of all global trans-
actions involve the U.S. dollar. The exchange rate value of the dollar can
have a significant impact on the both the quantity and value of global
trade. Remember that in our exchange rate chapter, we discussed the
reserve currencies. The dollar is the number one reserve currency, proved
by how many global transactions involve the dollar. More than the other
central banks and currencies we are going to mention here, the dollar is
without question, at least now, the most important currency on the planet.
We will return to this notion as we look at future issues in the conclusion.

European Central Bank

A second most important central bank is the European Central Bank.
The ECB determines the monetary policy of the euro, the key currency of
the European Monetary Zone, or Eurosystem. Remember that the Euro-
system is not the same as the European Union. Since most fixed exchange
rates have as their anchor currency either the dollar or euro, many con-
sider the euro the second most important global currency.

History of the ECB

The origins of the European Central Bank date back to 1988, when
many countries of Europe decided to collectively create an economic union
complete with its own currency. Through various agreements and treaties,
the European countries created a free trade zone. The new trade zone
(European Union) eliminated trade sanctions, allowed for freer move-
ments of labor and money between nations, and stabilized exchange rates
between different European currencies. The final step was the creation of a
common currency for all EU members who wanted to participate.
72 The Global Economy

In 1999, the euro was introduced to the world. At this time, all mone-
tary policy from the participating central banks was shifted to the Euro-
pean Central Bank. For most of the domestic economies of Europe, their
trading partners now transacted business in euros only. From a financial
point of view, trading in Europe became much easier.

The ECB Today

The European Central Bank is headquartered in Frankfurt, Germany.
Similar to the Fed, the ECB is responsible for monetary policy, bank regu-
lation, and coordinating national supervisors. The executive leader of the
ECB is the president. He works with a governing council comprised of rep-
resentatives from the executive board and each of the nineteen central
bank governors of the ECB countries. The ECB along with the member
nations’ central banks officially make up the Eurosystem.6
Each of the nations of the Eurosystem still maintain a central bank;
however, they do not have their own currency and instead all share the
euro. Monetary decisions are made at the ECB level and not the domestic,
central bank level. This is a major drawback of a single currency area. The
participating nations have fiscal control for their domestic economy but
not monetary control. This can significantly hamper a nation’s ability to
address domestic economic issues.
The ECB has only one goal: price stability. It has other responsibilities,
but all actions of the ECB should ultimately be driven to achieve low infla-
tion and stabilize the value of the euro on world markets. This is where the
euro has relevance for our story. The ECB maintains the euro’s value by
conducting foreign exchange transactions when necessary. The central
bank also maintains significant holdings of foreign currency reserves for
the central banks of its members.

Bank of England
One of the oldest central banks is the Bank of England. It has only been
a central bank since 1946 when it was nationalized. Prior to 1946, the Bank
of England was a private bank like any other; shareholders owned the bank,
and the goal was profits. Even though the Bank of England has been gov-
ernment owned since 1946, it was not until 1997 that it was truly a central
bank with the responsibility of setting monetary policy.
As the European Union was developing during the 1970s to stabilize
exchange rates, it established the European Exchange Rate Mechanism
(ERM). The United Kingdom joined the ERM in 1990 with every expecta-
tion of being a full member of the European Union. Then a British
 The Organizations That Influence the Global Economy 73

financial crash with high interest rates forced the United Kingdom to
withdraw from the ERM. In 1999 when the euro was introduced, the
United Kingdom maintained the British pound as their domestic
currency.
Comparable to the Federal Reserve’s Board of Governors, the Court of
Directors is responsible for setting monetary policy and financial stability
for the United Kingdom. The use of the British pound as an anchor cur-
rency for some nations’ fixed exchange rate and its use in international
trade makes the pound sterling one of the world’s reserve currencies.
The Bank of England is headquartered in London. The queen or king
nominates the members of the Court of Directors from recommendations
from the prime minister, and one member is selected as chair. The Bank of
England acts independently of the government, but they do report to Par-
liament several times a year.

Bank of Japan
Until the economic rise of China, South Korea, and the Asian Tigers in
the Pacific Rim, the Japanese economy was the Pacific economy’s main
economic factor. Even though the Japanese economy may no longer be on
the front pages, the most important currency in the Pacific is still the Japa-
nese yen. If financial stability in the region is dependent on the yen, then
the Bank of Japan, Japan’s central bank, is still the most important central
bank in Asia.
As with all central banks, the goals of financial stability and setting
monetary policy apply to the Bank of Japan. The Bank of Japan is also
directly responsible for maintaining an appropriate exchange rate and
value of the yen in the global economy. Given its importance in the global
economy, the yen is also one of the reserve currencies many nations need
in reserves for trade. The Bank of Japan is responsible for making sure that
the money supply of yen reflects a confidence in the currency in world
markets.
For over a decade or longer, the Japanese economy has been deflation-
ary. In a deflationary economy, prices, wages, and all asset values actually
lose value over time. Like a slow leak of air out of a tire, the economy
deflates or shrinks. As a result, relative to interest rates in other countries,
Japanese interest rates have been relatively low. This has led Japan to be the
focus of a financial tool called the “carry trade.” A carry trade is when an
investor borrows Japanese yen at the lower interest rates to then invest in
the higher-yielding interest rates in another country such as the United
States.
The Bank of Japan is one of the oldest central banks, created in 1882. It
is located in Tokyo.
74 The Global Economy

People’s Bank of China (PBC)

The central bank that is attempting to grow in global influence is the
People’s Bank of China, and it is the only central bank we are discussing
that represents a communist government. Located in Beijing, the People’s
Bank of China was created in 1948, only one year before the communists,
led by Mao Zedong, assumed control of the Chinese government.
Some of the People’s Bank’s responsibilities are similar to the others.
This central bank, however, also has responsibilities the others do not. It is
difficult to determine if these additional responsibilities are the result of a
communist government, but this factor certainly needs to be considered.
The similarities are setting monetary policy that influences interest
rates, regulating the domestic financial industry, and maintaining price
stability. The major difference between the People’s Bank of China and
other central banks is that PBC is the manager of China’s national trea-
sury. In the United States, for example, the Fed and Treasury work together
but are very different agencies. The Fed is independent of government, and
the Treasury is part of the Executive Branch.
As both central bank and treasury, the PBC is also responsible for issu-
ing Chinese currency, the renminbi, and controls the money supply of
Chinese renminbi in circulation. When the new mentions China’s man-
aged exchange rate, it is the PBC who is doing the managing. Different
politicians from different countries have accused China and the PBC on
many occasions of undervaluing their currency. Whether such actions are
independent decisions by the PCB or directive from the government is
hard to tell.
You may notice the Chinese currency referred to as either the renminbi
or the yuan. The difference is that the Chinese currency is known as the
renminbi. The yuan is the currency’s denomination unit of accounting.
Renminbi can come in one yuan, two yuan, ten yuan, and so on. The U.S.
monetary system, by contrast, is the dollar. Our unit of account, however,
might be the dollar or cents, since we also have coins.
The People’s Bank of China uses many of the same financial tools as the
Fed to promote financial stability. Like the Fed, the PBC uses open-market
operations to buy and sell government securities and controls the reserve
requirement of the central bank’s client banks and short-term interest
rates to maintain economic growth. Even though the communist govern-
ment and the PBC are not far apart in control, the PBC has a responsibility
to maintain the financial health of the Chinese domestic economy similar
to all our central banks.
In recent years, the PBC has made suggestions that the renminbi should
be treated the same as the other reserve currencies. In 2016, the IMF
announced that they would add the renminbi to the market basket of
 The Organizations That Influence the Global Economy 75

currencies that determines the value of their Special Drawing Rights. It

may not be too far in the future that the renminbi will also be a reserve
currency for the global economy.

NOTES
  1. “About UNCTAD Statistics,” UNCTAD, accessed July 2, 2019, https://unctad
.org/en/Pages/Statistics/About-UNCTAD-Statistics.aspx.
 2. “Financial Statements,” BIS, accessed July 2, 2019, https://www.bis.org
/banking/balsheet.htm?m=4%7C21.
 3. “Reporting Currency,” BIS, accessed July 2, 2019, https://www.bis.org
/banking/bank_reporting_currency.htm.
  4. To read more about the functions of the WTO, go to “What We Do,” World
Trade Organization, accessed July 2, 2019, https://www.wto.org/english/thewto_e
/whatis_e/what_we_do_e.htm.
  5. To read more about the Doha Development Agenda, you can go to “Doha
Round,” World Trade Organization, accessed July 2, 2019, https://www.wto.org
/english/tratop_e/dda_e/dda_e.htm.
  6. Like the Fed the ECB has other tasks and responsibilities that are not rel-
evant to our discussion on the global economy. To read more about the European
Central Bank visit “About,” European Central Bank, accessed July 2, 2019, https://
www.ecb.europa.eu/ecb/html/index.en.html.
8
International Rules, Trade Agreements,
and Trade Unions

If you want to drive a car, you need a license. If the police catch you driving
too fast, you get a ticket for speeding. If the police catch you taking some-
thing that is not yours, you are arrested for stealing. It is against the law to
not pay for an item. It is against the law to sell certain items. It is against
the law to sell items in certain regions. Whether there are too many laws
or which laws are good and which ones are bad is another story for another
day. Laws govern our world at all levels of government and society. Laws
and regulations provide us a civil society. The same is true of our global
economy.
You have a local police, a county sheriff, a state police, and the national
FBI to keep you safe and ensure that you obey the laws. If you do not obey
the laws and one of these law enforcement agencies catches you, there are
consequences. In the global economy, there are rules, regulations, and
treaties nations agree to obey. Each organization has their own set of rules
they enforce. In reality, between the organizations discussed in the previ-
ous chapter and a few we will include here, there are many more rules of
the global economy than we can possibly cover in our relatively short
space.
Just as we have several different levels of laws and rules and respective
levels of enforcement, so does the global economy. The key difference
between the two is that domestic enforcement is generally by geography,

77
78 The Global Economy

where in the global economy, enforcement or dispute settlement is by

organization or agreement. What does not exist in the global economy are
global police forces to ensure that nations obey international rules and
treaties. Each organization acts to enforce the rules of their organization.
Nations are pretty much left to self-police.
In each instance, we are using the term “police” very loosely. Officially,
organizations are not a police agency. They cannot, and do not, go around
the world handing out tickets for not obeying the rules. They only get
involved when a nation files a claim against them or two nations come to
them when they need an arbitrator to settle a dispute. Nations are sover-
eign nations. They are independent and decide whether and how they will
participate in the global economy. No other nation or organization can
interfere with a nation’s sovereignty. When one nation intrudes on another
nation’s sovereignty, it usually leads to something much worse than a dis-
pute. It usually leads to war.
Most of the organizations from our previous chapter have evolved ways
to enforce their international rules. The IMF has evolved from the lender
to rebuild financial systems into a lender of last resort to protects financial
systems. The World Bank was established to rebuild a post–World War II
world and has since evolved into an organization that polices the global
fight against poverty. GATT has evolved into the World Trade Organiza-
tion (WTO). In this chapter we will expand our conversation regarding
these organizations. We will also add a few organizations of the United
Nations whose sole purpose is the enforcement of international law. With
so many rules, regulations, and laws being instituted by so many different
organizations, it is no wonder that there are so many global economic
disputes.1
When nations decide to participate in the global economy, they usually
do so through membership in these organizations and trade treaties with
other nations. Once nations belong to these groups or sign certain treaties,
they have obligated themselves to obey those set of rules. Unfortunately,
they do not always obey what they have agreed to do.

INTERNATIONAL ORGANIZATIONS
International Monetary Fund
In the last chapter, you were introduced to the IMF, created in 1945 dur-
ing the Bretton Woods Conference to finance rebuilding after World War
II. Beginning with 44 members, today it has evolved into a lender of last
resort to assist its 189 members when they find themselves in a financial
crisis because of unstable exchange rates or lack of reserve currencies (dol-
lar, euro, yen, or pound). Once the IMF is asked to intervene in a crisis, it
 International Rules, Trade Agreements, and Trade Unions 79

“polices” to determine if the situation needs its involvement, how involved

it should be, and what the nation in crisis needs to do for the IMF to
become involved.

IMF Conditionality
We briefly introduced IMF conditionality in the previous chapter. This
is the term that refers to the stipulations the IMF puts on a government in
order for them to receive a loan. These stipulations can be almost any-
thing, but there is one list of criteria they often refer to when determining
the conditions of a loan. Let us not get too far ahead of the story; we will
return to these criteria shortly. For now, we know that the list is going to
include economic reforms that will impact the financial system, the
exchange rate of the domestic currency, or the level of reserves being held
by the nation’s central bank. Another consideration is that the borrowing
nation will be financially able to repay the loan.
IMF loan programs also include the police component of the loan. Every
loan includes a monitoring process to be sure that the borrowing nation is
abiding by the terms of the loan and implementing the conditions set forth
in the loan package. Remember that the borrowing country has two aspects
of the loan they need to consider: advancing the IMF conditions for the
loan and repaying the loan. In both, the IMF is watchful and prominent
until their conditions are met and the load repaid.

The Incentive for Nations to Accept the Conditions

If the IMF can assert stringent conditions to a loan, why would a nation
go to the IMF for financial assistance? First, a nation usually does not
invite the IMF to be involved in their domestic financial situation unless it
is absolutely necessary and usually after the nation has run out of all other
options. Before calling the IMF, the government and finance leaders of a
nation probably had conversations with international commercial banks,
request an aid package or loan from a developed nation, or considered tak-
ing domestic action with tax or spend policies. Almost always, only after
all other financing avenues have been exhausted does a nation pick up the
phone and call 1-800-IMF.2 This is why the IMF is aptly named the lender
of last resort.
Nations contact the IMF to help solve a problem they themselves cre-
ated. The conditions set forth by the IMF are usually directly contrary to
the way the nation had been conducting the nation’s financial business.
They are in trouble for a reason. So the conditions can be very hard on the
nation. Yet at the same time, they help nations restructure and establish
80 The Global Economy

sound fiscal and/or monetary policies. They permit nations to rectify bal-
ance of payments problems that have been created with trading partners,
exchange rates, or reserve currency deficiencies. The IMF can bring finan-
cial relief to a nation’s balance of payments and do so in a way that the bor-
rowing nation can afford to repay the loan.

Qualifying for an IMF Loan

The most important criterion is that the nation needs the loan to achieve
macroeconomic stability, as outlined for IMF members. Macroeconomic
stability includes a stable balance of payments, ability to achieve economic
growth with sound money (stable prices), and for the developing nations
reduction of poverty. While the IMF may spell out the conditions for a
loan, the program is actually designed by the member country applying for
the loan.

The IMF “Police”—Monitoring Success of the Loan Program

When the IMF and a member nation agree on a loan package including
conditions and agree on the repayment procedure, the next steps are pay-
ments and police. The IMF makes payments to nations in partial payments
known as tranches. This is one way that the IMF can be sure the nation is
living up to its part of the agreement and making the financial changes it
agreed to make. If the agreement is being met, the IMF will continue the
installment payments. If not, they may delay or even cancel any remaining
payments.
Another method for the IMF loan police is to determine a country’s
participation in program reviews. Using program reviews, the IMF again
can determine that the country is implementing and practicing the agreed-
upon components for the loan. At these midpoints, the IMF can also sug-
gest modifications in the agreement if they believe it is in the best interest
of the borrowing nation.

Setting the Conditions

In the 1980s, a British economist coined the term “Washington Con-
sensus” for these ten main economic and financial conditions for the IMF
borrowers. The conditions are also used by the World Bank, and we will
discuss their rules next. As you will see, these conditions focus on the cre-
ation of capitalist, open-market policies. They were considered by some
economists to be the key to development of developing nations. Notice we
mentioned some economists, not all. We will look at the others shortly.
 International Rules, Trade Agreements, and Trade Unions 81

The ten key conditions known as the Washington Consensus3 are the
following:
1. Fiscal deficits relative to GDP should be minimal. Governments bor-
row only what is absolutely necessary.
2. Public spending should promote economic growth and should be used
on infrastructure such as education, health care, roads, and bridges.
3. Tax reform policies need to be implemented that expand the tax base
with marginal tax rates implemented.
4. Nominal interest rates should be market driven and positive.
5. A flexible exchange rate should be implemented so that the currency is
competitive in the global economy.
6. Also regarding the global economy, the nation’s trade policies should
promote open trade and not conduct protectionist policies such as tar-
iffs and quotas.
7. More foreign direct investment for their domestic economy should be
promoted.
8. If necessary, the nation’s commanding heights, such as railroad trans-
portation, oil and gas production, and steel production, should be
privatized.
9. More competitive domestic markets should be created.
10. The system of property rights and rule of law should be established.
As you notice, most of these focus on macroeconomic policies. The
IMF’s focus is on assisting developing nations to become active partici-
pants in the global economy.
In the 1990s, after significant criticism that the ten rules were not suc-
cessful for some nations, the IMF made some modifications to the IMF
conditions. In 2002, the guidelines were revised, and the Washington
Consensus ten were made less important. The IMF became more adapt-
able in identifying the structural issues of a nation, and the conditions
became more individual and less boilerplate. In 2009, the IMF changed
again in its efforts, focusing more on prevention in their conditions. Today
the IMF is more willing to work with the nation in crisis to develop a plan
of conditions that best fits their needs to cure the crisis as well as to pre-
vent future crises through the program review process.

Critics of the IMF Conditions

The IMF actions, especially the use of the Washington Consensus as a
boilerplate for IMF conditions, drew both praise and criticism. The IMF,
82 The Global Economy

remember, was created to finance the rebuilding of the global economy

after World War II. Through mission creep, the organization has evolved
into a lender of last resort to help countries that find themselves in a finan-
cial crisis. The supporters of the IMF and its new mission point to the long-
term opener and more positive growth of an economy is a sign that IMF
conditions were appropriate.
Criticism of the IMF takes two forms. There are those who are against
the IMF as an organization. Their main criticism is that the IMF was cre-
ated as a financial organization in 1944 for a specific mission and that the
organization has evolved to encompass things that it was not designed to
do. The reality is that the IMF is not going away any time soon.
A second form of criticism focused on the way the IMF conducted its
lender-of-last-resort support to nations in financial trouble. This criticism
was an external form of police that the IMF heeded. Early on, there were
critics of the IMF’s use of the Washington Consensus rules as a standard
template for all nations. The critics were especially tough on the IMF about
how it created these conditions for developing nations. As we noted earlier,
from the 1990s on, the IMF became much more flexible in how they
addressed many of these concerns.

World Trade Organization

Quite possibly the most influential set of international rules for the
global economy are those by the WTO, more specifically those of the Gen-
eral Agreement on Tariffs and Trade. We will cover GATT shortly, but
when it comes to rules and regulations for the global economy, the WTO
extends beyond GATT. The WTO provides the framework and serves as
the overseer of trade agreements. Along with GATT and trade agreements,
the WTO has become the organization that has set the rules for what is,
arguably, the newest global issue of the twenty-first century: intellectual
property.
The WTO deals with the global issues of the global economy. We
described the various roles of the WTO in the previous chapter. One of
those applicable here is setting the framework for nations to partner
together to create a more open trade environment. The WTO serves as the
arbiter of disputes between nations who have a trade agreement. We will
keep our focus on two areas of the WTO: GATT and intellectual property
rights. Let us explore intellectual property rights first.

The Rules of the Game for Intellectual Property Rights

The WTO does not police the world of intellectual property alone. They
work with their member nations, but their main international partner is
 International Rules, Trade Agreements, and Trade Unions 83

the World Intellectual Property Organization (WIPO). This partnership

serves as the intellectual property police. Between these two organiza-
tions, the laws and regulations regarding intellectual property are con-
trolled and managed. When member nations establish intellectual
property rules, they forward them on to these two organizations. These
two organizations review the documents to be sure that they are consis-
tent with the TRIPS Agreement.
The two organizations determine whether a nation’s patent, copyright,
and trademark rules meet the standards set forth in TRIPS. When they
agree that the standards are met, the nation’s rules for intellectual prop-
erty are published in the Collection of Laws for Electronic Access (CLEA).

Trade-Related Aspects of Intellectual Property Rights—

Defining Intellectual Property
During the Uruguay Round of WTO trade negotiations (1986–94), the
member nations created the Agreement on Trade-Related Aspects of Intel-
lectual Property Rights. The TRIPS agreement is the global economy’s
main document for defining and creating a common ground for how mem-
ber nations deal with intellectual property. First, it established a global
definition of intellectual property for member nations to follow. Simply
stated, TRIPS defines intellectual property as anything that is generated,
invented, or created by the mind. This includes the fine arts, such as art,
music, books and movies, as well as inventions. If something can be copy-
righted, trademarked, or patented, it falls under the category of intellec-
tual property and is covered by TRIPS.
This broad definition of intellectual property gives the WTO and WIPO
wide discretion in enforcing the TRIPS agreement when disputes arise
between nations. The TRIPS Council administers the agreement. All
WTO members are members of the TRIPS Council. When there are dis-
putes, the nations take their grievances to the TRIPS Grievance and Ethics
Council, a subcouncil of the TRIPS Council.4

General Agreement on Tariffs and Trade (GATT)

There are not many organizations that ultimately enforce the agreement
that established the rules from which it was born. As we mentioned previ-
ously, the WTO is precisely one of those organizations. The agreement
that ultimately led to the WTO was the General Agreement on Tariffs and
Trade, a thought coming from, but not a product of, the Bretton Woods
Conference in 1944. An end to World War II was in sight, and the Great
Depression was fresh in the minds of government leaders around the
world. Avoiding a repeat of the 1930s was one thing everyone agreed on.
84 The Global Economy

The year was 1947. World War II was now history. The Bretton Woods
Agreement was being implemented in order to create a more a stable and
secure global economy. One goal that remained was to create a set of global
trade rules and institutions for the nations to promote more open trade
and create a structure for settling trade disputes as they arose. Negotia-
tions to create such a document were heated and often contentious. This
was especially true between the United States and United Kingdom. Both
were positioning as leader of the global economy. The United States wanted
a principle of “most favored nation” included in the agreement.
In retrospect, MFN seems a fairly obvious principle for a document try-
ing to create a peaceful, open global economy. World War II was still too
fresh in everyone’s minds. MFN would mean that a member nation would
have to treat all members equally. If it wanted to have a special agreement
with one nation, it must have the same agreement for all nations. In the
minds of many government leaders in Europe, nations like Germany, Italy,
and Japan were still the enemy. The United States prevailed, and GATT
became the trade law of the new global economy.
This was not, however, the way it was supposed to happen. There was
supposed to be an international organization to administer GATT. In 1947
in Havana, Cuba, shortly after signing GATT, a UN conference on trade
and employment created a charter to establish the International Trade
Organization. The United States Congress would not ratify the ITO charter.
The United States having the influence it did essentially put an end to the
ITO, and as a result, GATT was an agreement without an organization.
The General Agreement on Tariffs and Trade was the multilateral trade
law of the global economy until 1994, when the WTO was created. The
bases of GATT’s rules were twofold. The first is that all nations are treated
the same. A nation could not discriminate against another nation regard-
ing trade practices. The United States, as a signatory of GATT, has to apply
the same trade rules to China and Europe exactly the same. The second is
that all products within a nation are treated equally. All cars whether they
are imports or exports must be treated equally.
Between 1948 and 1994, the global economy grew and expanded signifi-
cantly. The quantity of goods exported and imported by countries grew
exponentially. The number of countries joining the global economy (and
becoming members of GATT) grew significantly. GATT was responsible
for a significant reduction in tariffs and trade protectionism around the
world. Over forty-five thousand tariff concessions were agreed to in the
first year alone. GATT was on its way to be the road map to global free
trade.
There have been nine GATT Rounds since 1948. We will not go into the
details of most of them. The first of two was held in Geneva (it is known as
Geneva I) with twenty-three participants. As we have noted, the Uruguay
 International Rules, Trade Agreements, and Trade Unions 85

Round from 1986 to 1993 established the WTO. The current GATT Round,
is Doha, which began in 2001. This most recent round has 153 members,
reflecting the growth of the global economy and increased number of
participants.
During the GATT years, there were very few changes to the agreement.
In the 1960s, GATT expanded to include developing nations. In the 1970s,
GATT extended its efforts beyond tariffs and into other forms of trade pro-
tectionism as well. As the GATT Rounds were held during these years, the
nations constantly negotiated among themselves to liberalize trade. In later
rounds, GATT addressed the issue of dumping with an Anti-Dumping
Agreement.
If you remember from chapter 4, dumping is when a country exports a
product to another country and sells it below the cost of producing that
product. By selling at such a low price (and below production costs), it gives
the foreign product an unfair competitive advantage. The lower price
forces the domestic producers of the same product to lower their price to
compete. The lower price forces the domestic companies to take a loss or,
worse, go out of business, because they can no longer compete in the
domestic market. By signing the Anti-Dumping Agreement, nations agree
not to condone this behavior. Unfortunately, it still happens. We will take
yet another look at dumping in the next chapter.
As the name suggests, the General Agreement on Tariffs and Trade was
a trade agreement. The WTO created an expanded set of rules, regulations,
and procedures for its member nations to abide. With the WTO, the global
economy now has a set of rules for trade in services, rules for intellectual
property, and expanded ways for nations to settle disputes. The global
economy is much more complex and intricate than it was post–World War
II, and GATT and the WTO have grown with a growing global economy.

United Nations
We are going to shift our focus to an international organization that has
many facets to its existence. When it comes to the rules and regulations of
the global economy, we must devote some space and time to the United
Nations. In chapter 7, we explored one component of the United Nations
that is directly involved with the global economy: the UN Conference on
Trade and Development. In this chapter, we need to address the United
Nations from another perspective: international law. Distinguishing
between international law for the global economy and international law
regarding peace and war can sometimes get blurred.
Bretton Woods was a conference on the global economy (remember, it
was officially a UN conference), yet its genesis was a war. Bretton Woods
ended with an agreement, not a treaty. Treaties create rules. There are
86 The Global Economy

trade agreements or economic treaties, some of which we will explore

shortly. There are political treaties, such as the North Atlantic Treaty
Organization. Then there are treaties that end wars, such as the Treaty of
Versailles ending World War I. For now, it is enough to describe the differ-
ent types of treaties. In the next chapter, we will look at the issues that sur-
round their interdependence.
There needs to be one organization that differentiates them from each
other. That organization is usually the United Nations. There is the WTO,
GATT, and the IMF to guide and grow the global economy. They each have
their own set of rules and regulations that all nations are obligated to use
to conduct business and participate in the global economy. The UN Char-
ter establishes itself as the organization that maintains world peace, pro-
vides justice when necessary, and essentially keeps the world order. This is
a very tall order for one organization, and whether it has been successful is
the topic of many debates. That, too, is a later discussion.
The UN mission is multifaceted. Politically, it has a peacekeeping mis-
sion. It implements courts or tribunals, and treaties, and the UN charter
itself is considered a treaty by which all members need to abide. The UN
Security Council has wide-ranging authority for peacekeeping as well as
authorizing force when necessary. Of course, all of this is wrapped in poli-
tics. International law, whether economic or political, can be quite
distorted.

Defining and Enforcing International Law

Simply stated, international law covers every aspect of nations interact-
ing with each other. For our conversation, that means global trade and the
global economy. In today’s world, it is also refers to topics important to
world trade, such as the environment and sustainable sources of energy,
global communications, commons areas (areas with no owners, such as
oceans or the air), international crime, human rights, migration, war, and
other global issues. International law is much easier to define than to
enforce.
The United Nations has an array of courts and tribunals that hear and
adjudicate accusations of breaking international law. The UN Security
Council and the UN General Assembly also have their input relative to
sanctions (these are usually political sanctions), creating ad hoc tribunals
or approving and dispensing a peacekeeping mission to a troubled part of
the world.
Two subgroups of the General Assembly are pertinent to our conversa-
tion. The first is the UN Commission on International Trade Law. This
group studies and makes recommendations to the General Assembly
 International Rules, Trade Agreements, and Trade Unions 87

regarding the laws of international trade. A second UN group whose work

is important for the global economy is the UN Convention on the Law of
the Sea. This subgroup determines the rules that govern the seas, oceans,
and their resources.

International Court of Justice

The International Court of Justice, more commonly known as the World
Court, is a main judicial branch of the United Nations. The court is located
in The Hague, Netherlands. When the United Nations was chartered in
1945, the World Court was one of the original components and began
hearing cases a year later. It is the only original chartered component of
the UN that is not located in New York. There are fifteen judges elected by
the UN General Assembly and Security Council. They each serve nine-
year terms. It conducts its business in two languages, English and French.
Nations come to the World Court for many reasons besides the eco-
nomic. The World Court hears two sets of cases. The first are the legal
disputes between nations. These are brought to the court by the nations
themselves. These hearings end with a decision in favor of one of the
nations involved. By bringing the case before the World Court, the nations
are bound to support the final decision. The subject of these cases could
range from trade and economic jurisdiction to crimes against humanity.
The second type of case is advisory, in which an opinion of the court is
asked for by the General Assembly, Security Council, one of the five UN
suborganizations, or other UN affiliates. The advisory opinion can be
regarding anything legal. The World Court holds hearings on the matter
and provides a written opinion to the group of their findings. These find-
ings are public, but the group asking for the opinion is not bound to it.

World Intellectual Property Organization

In chapter 7, you were introduced to one very important UN agency
regarding the global economy, UNCTAD. Since we are discussing intel-
lectual property, it is now appropriate to provide you a bit more informa-
tion on this secondary UN organization: the World Intellectual Property
Organization. Created in 1967, the World Intellectual Property Organiza-
tion is officially part of the United Nations, with 191 member nations.
WIPO world headquarters are in Geneva, Switzerland.
WIPO serves as an international forum for nations to discuss the differ-
ent ideas and aspects of intellectual property. The organization serves as a
form of clearinghouse for intellectual property rules and regulations for
the nation members. It promotes cooperation between nations so that all
88 The Global Economy

nations can be more effective in encouraging invention and creativity of

the mind, as defined by the TRIPS Agreement.
If you remember, very early in our journey we discussed the crossover
between economics and politics. That crossover is exhibited no better than
in many of the actions conducted by the United Nations.

TRADE AGREEMENTS
Trade between nations, arguably, has been the number one peacetime
activity of the global economy. Often it is difficult to distinguish nations’
actions as either economic or politic. At times, one helps the other, and at
other times, the reverse is true. An often-overused cliché in economics is
that good trading partners do not go to war against each other because
economic compatibility is more important than political differences. Later
we will discuss the accuracy of that cliché, but it works for us now.
Before we explore a few specific, more relevant trade agreements, we need
to discuss the many different types of trade agreements that are being nego-
tiated and signed virtually every day. Worldwide, there are over 420 different
regional trade agreements determining global economic trade.5 Trade agree-
ments come in basically three forms. Bilateral agreements are those between
two nations. Multilateral agreements involve more than two nations. Some
multilateral agreements are regional trade agreements expressly for the pur-
pose of benefitting trade in a specific designated region of the world.
Two regional trade agreements directly impact the western hemisphere:
the North American Free Trade Agreement and the Central American
Free Trade Agreement (CAFTA). A revised NAFTA (United States-Mexico-
Canada Agreement) has been agreed upon, but it still has potentially sig-
nificant political hurdles before it will replace NAFTA. We will explore its
revisions and differences with NAFTA in more detail later in the book. For
now, however, let us take a look at the two key trade agreements that
impact North America and South America.

North American Free Trade Agreement

Trade agreements between North American nations began long before
NAFTA. In the late 1980s, the United States and Canada implemented the
Canada-U.S. Free Trade Agreement (CUSFTA). The primary focus of this
agreement was the automobile industry and the intraindustry trade occur-
ring between the two nations. As the United States turned south to negoti-
ate a bilateral trade agreement, the neighbor to the north, Canada, joined
in the trade conversation. The outcome of those discussions was a multi-
lateral agreement, the North American Free Trade Agreement, popularly
known as NAFTA.
 International Rules, Trade Agreements, and Trade Unions 89

NAFTA did not have an easy road to ratification. Negotiations for

NAFTA occurred during the George H. W. Bush administration. He
signed the agreement along with Mexico’s president Carlos Salina de Gor-
tari and Canada’s prime minister Brian Mulroney in 1992. Trade agree-
ments in the United States have to be ratified by Congress before they can
become law. In the United States, environmental and labor special inter-
ests were against NAFTA. They were very outspoken and critical of the
agreement. As a result of these special interest groups along with the inde-
pendent presidential candidacy of anti-NAFTA Ross Perot, Bush lost the
following election that same year to Bill Clinton.
Under the new Clinton administration and with all the campaign rheto-
ric that preceded the election, it appeared that the United States would not
ratify NAFTA and the agreement would not go into effect. Clinton, how-
ever, did an about-face. Working with a Republican Congress and the new
Canadian prime minister Jean Chretien (Mulroney also lost his reelec-
tion), NAFTA was ratified with a few new addenda items regarding the
environment and labor. Even though these addenda had been included to
appease the special interest groups, they felt betrayed by Clinton. The link
between economics and politics was never more evident than in the nego-
tiations, elections, and ratification process that led to NAFTA becoming
North American trade law in 1994.
Between 1994 and 2008, NAFTA eliminated all U.S. and Mexico tariffs,
and all but a few Canadian agricultural tariffs, that had been in place prior
to the agreement. Other important aspects of NAFTA included intellec-
tual property rights; rules regarding origin of goods, trade in services, and
investment; and environmental and labor standards, as mentioned earlier.
NAFTA changed the economic landscape of all three nations. Trade
among the three nations rose significantly, even though the net effect of
NAFTA is often disputed. Labor unions naturally held an anti-NAFTA
position. Others argued that NAFTA generated net employment in the
United States. Most certainly, some U.S. jobs were lost, and certain regions
of the country experienced hardship. Other U.S. regions gained jobs, and
overall, NAFTA appears to have been a positive influence.
Clearly the future of NAFTA is in question, with the agreement of the
United States-Mexico-Canada Agreement. Until USMCA is ratified,
NAFTA remains the dominant influence on trade and investment among
the United States and its neighbors to the north and south.

Dominican Republic-Central America Free Trade

Agreement (CAFTA-DR)
The United States has free trade agreements with many countries, large
and small. One western hemisphere agreement is the free trade agreement
between the United States and many of the hemisphere’s smaller,
90 The Global Economy

developing nations. The Dominican Republic-Central America Free Trade

Agreement includes the Central American countries of Costa Rica, Guate-
mala, Honduras, El Salvador, Nicaragua, and the Dominican Republic.
Together they form the United States’ sixteenth-largest trading partner in
combined (exports and imports) products. This is one region of the world
where the United States actually has a trade surplus.

Other U.S. Free Trade Agreements

The United States has many bilateral free trade agreements with many
nations around the globe. Besides NAFTA and CAFTA, the United States
has free agreements with Australia, Bahrain, Chile, Colombia, Israel, Jor-
dan, South Korea, Morocco, Nicaragua, Oman, Panama, Peru, and Singa-
pore. Along with the countries of NAFTA and CAFTA, the United States
has trade agreements with twenty nations. Notice that two of our larger
trading partners, China and Europe, are missing. Not having a trade agree-
ment does not mean that nations will not trade with each other. At the
time of this writing, the United States and China are trying to negotiate a
bilateral trade agreement.

Trans-Pacific Partnership (TPP)

Since President Trump withdrew the United States from the TPP, there
is not much to state, except that it still exists. The TPP was created to
reduce barriers of trade, including tariffs, among eleven countries, includ-
ing Japan, Malaysia, New Zealand, Australia, Peru, and Singapore, along
with NAFTA partners Mexico and Canada. Both President Bush and
Obama’s administrations had worked to make TPP a reality. President
Trump’s withdrawal was not without controversy. We will explore this
decision a bit more in our next chapter on controversial issues.

Bilateral Investment Treaties

Before we move on from the United States and take a brief trip around
the world to look at other global economic trade and investment partner-
ships, there is one more treaty we need to introduce. Up to this point, we
have explored only the trade of goods and services. There is one additional
trade that occurs every day just as often: the trade of money. Remember
that in chapter 6, we discussed currencies and exchange rates. Often these
trades are the result of investment opportunities that individuals and
investors from one country make in another country.
 International Rules, Trade Agreements, and Trade Unions 91

The United States has a series of treaties with nations specifically for
investments. These are bilateral investment treaties (BIT). As the name
suggests, these are treaties between two nations for the express purpose of
private investments in each nation. Essentially a BIT has two main func-
tions. First, the BIT is to protect investors’ rights if they are not protected
in another bilateral or multilateral agreement between the nations. This
does not mean that BITs protect the success of the investment. Second,
BIT focuses on nations adopting market-oriented business practices.
The United States has BITs with many countries around the world. If
you are interested, you can view the list at tcc.export.gov/Trade_Agree​
ments/Bilateral_Investment_Treaties/index.asp.

REGIONAL UNIONS AND TREATIES OUTSIDE NORTH

AMERICA
European Union
In the span of less than fifty years in the early to mid-twentieth century,
Europe was the battleground of two world wars. The predecessor of the
European Union was the European Economic Community (EEC), follow-
ing World War II. The hope was that if the European nations became inte-
gral trading partners with each other, they would not want to declare war.
The EEC was created in 1958 between Belgium, France, Germany, the
Netherlands, Luxembourg, and Italy.
The regional market grew in both its economics and its politics. We will
keep our discussion focused on the economics of the European Union and
the global economy. The EEC was successful in bringing the nations
together economically. As it did so, the nations also began to come closer
politically. They began to work together on climate, the environment, jus-
tice, and security, and they were becoming a single market in more ways.
In 1993, the EEC became the European Union. They were also beginning
to discuss the use of one currency for the nations. We will discuss this
evolution later in the chapter.
Today the European Union has twenty-eight member nations. Estab-
lished on the foundation of an open market and free trade, it is the largest
single market in the world and is the world’s biggest exporter of manufac-
tured goods. It has created a regional economic market with free move-
ment of people, goods, services, and money.
Governance is a shared responsibility among the member states. There
is not one institution responsible. Within the European Union are several
cooperating councils (European Council and Council of the EU) that pro-
vide guidance and coordination of economic policies important to all the
members. There is also the European Commission, which monitors the
92 The Global Economy

member states to ensure compliance with EU policies. Finally, regarding

economic policy, the European Central Bank is responsible for setting
monetary policy for the euro zone.
Institutions are very important to the EU’s success. It has been inten-
tional in its ability to protect property rights with rule of law and to pro-
mote security and justice both within the domestic borders but externally
as well. The European Union is democratic and transparent in all its poli-
cies and decisions. The freedoms we appreciate, such as freedom of speech,
religion, and press, are also vital to the EU way of life. With peace through-
out the region for more than seventy-five years, the European Union has
accomplished the goal of its predecessor. For these efforts, the EU was
awarded the Nobel Peace Prize in 2012.

African Union (AU)

A second regional union of special interest is the African Union. Simi-
lar to the European Union, the African Union also had a predecessor orga-
nization that brought African nations together in the spirit of peace and
harmony. During the 1960s, many African nations became independent
from their European colonizers, France, the United Kingdom, Portugal, or
the Netherlands, after years, or centuries, of European rule. They wanted
to be sure that they controlled their own futures. In 1963, thirty-two rela-
tively new African nations created the Organization of African Unity
(OAU), their vision of freedom and continental cooperation.
A key difference between the European Union and the African Union
was their approach to the economy. While the European Union advocated
free trade and open markets, the African Union organized just the oppo-
site. Among their member nations, they promoted socialism and unity
within the African community. They were now independent and sovereign
nations. They did not want to lose their sovereignty, and for them, the best
way to do that was solidarity among themselves and shunning the outside
world. They would cooperate internationally but only in matters regarding
the United Nations and human rights.
For the next thirty years, the continent of Africa was fairly quiet interna-
tionally. Within Africa, there was much turmoil. Civil wars were common-
place. Dictators and authoritarian leaders ruled by force, not by law. There
were tragedies such as those perpetrated by dictators like Idi Amin in
Uganda, Siad Barre of Somalia, or Sékou Touré of Guinea, to name just a
few. There have been more dictators as well, but these three were known for
their atrocities during this time of African awareness and global isolation.
In 1999, the leaders of the Organization of African Unity gathered
to discuss the organization. The African leaders were still intent on
 International Rules, Trade Agreements, and Trade Unions 93

preserving and progressing the African culture and social life, but they
knew that they needed to expand their horizons and become global part-
ners in the global economy. A new agreement was needed to reflect this
expanded vision. The African Union was officially implemented in 2002.
The African Union currently has fifty-five member states of the African
continent. Its headquarters are in Addis Ababa, Ethiopia.
The key difference in wording between the Organization of African Unity
and the new African Union agreement is the inclusion of being a “dynamic
force in the global arena.”6 Much like the European Union, the African Union
has both economic and political reasons for its existence. On the economics
side, the African Union reflects the new focus of being active participants in
the global economy while at the same time protecting their domestic econo-
mies. We will explore Africa’s future when we look at future issues of the
global economy. Africa most definitely deserves our attention to the future.

Agenda 2063
It was important for all the African nations to create a new environment
of economic growth and economic development. Signed in 2013, Agenda
2063 is a long-range strategic plan to transform the African continent into a
major participant in the global economy. The major goals of the agenda
include self-rule, freedom and democratic governance, unity of nations, eco-
nomic progress through global integration, and prosperity for all of Africa.
For these nations, changing their internal focus to a global one was not
going to be easy. The fifty-year time frame was a deliberately developed by
the African leaders, as they knew that what was needed was not going to
happen in the short term.
The agenda stressed the need for improved infrastructure, better peace
and harmony among the nations, gender equity, and youth empowerment.
The leaders emphasized growth and investment in agriculture, health, and
education, along with transportation and communication infrastructure.
All of these take years to achieve. The leaders knew that globalization of
the continent was needed and the time to begin was now.

Africa Free Trade Agreement

In 2015, the African Union gathered in a series of meetings to further
realize their goal of a united, peaceful, and prosperous Africa. The result of
meetings was the African Free Trade Agreement and the establishment of
the African Continental Free Trade Area (ACFTA). As with other trade
agreements, the African Continental Free Trade Area was to improve
trade among the AU members.
94 The Global Economy

The ultimate goal of the ACFTA is to more fully integrate the African
nations in both trade and economic development. It is also, however, to
retain the sovereignty rights of each member. An interesting idea for the
African nations is that ACFTA promotes the freedom of individuals to
move among the nations. Remember that it was not that long ago that the
nations were each isolated from the rest of the global economy. This objec-
tive is a vast departure from Africa’s past.
The major economic sectors ACFTA focuses on are agriculture, food
security, manufacturing, and industrialization of the region, with the
aforementioned focus on infrastructure building. The ACFTA also takes
aim at the reduction of tariffs, quotas, and other trade and investment bar-
riers that might stifle progress toward Agenda 2063.
The ACFTA addresses several political issues. It stresses the importance
of international security as the member countries progress toward more
international trade as well as democracy and rule of law, long a seldom-
achieved political goal for most of the African nations. The agreement also
addresses the political-social issues of human rights and gender equality.
Between the African Union and the ACFTA, Africa as a group of nations
is poised to ascend as a significant and influential partner of the global
economy in the twenty-first century.7

TRADE ASSOCIATIONS
The final global piece of the trade story is countries joining each other
to create trade associations, generally with geographical commonality. A
few of the trade associations use the term “cooperation” to define their
trade relationship. With a trade association, the nations involved maintain
their political sovereignty but forfeit their economic sovereignty for the
good of the whole. Trade associations are usually one step beyond a trade
agreement. Examples of trade associations include ones who include the
nations from Southeast Asia (Association of Southeast Asian Nations) and
one West Africa (Economic Community of West African States).
One group, referred to as the BRICS nations,8 created a trade and devel-
opment group based on their common interests in building their econo-
mies. These nations build on each other’s strengths, have created their own
development bank, and continue to transition their economies to join the
developed nations of the global economy.

NOTES
  1. The number of international rules, regulations, and laws is voluminous. In
order to maintain some civility and keep our conversation focused, we are going
 International Rules, Trade Agreements, and Trade Unions 95

to devote our journey to a few major areas of rules and the way that organizations
enforce the rules and settle disputes between nations.
  2. This is not a real number! It is made up to make the point that the IMF is
the last to be called when financial events are all but hopeless.
  3. Economist John Williamson first used the term in 1989 when he worked at
the World Bank. The IMF, World Bank, and others now use this set of recommen-
dations in working primarily with the developing countries.
  4. There are many intricacies to the TRIPS Agreement. If you would like to
read more about TRIPS, go to https://www.wto.org/english/tratop_e/trips_e/trips
_e.htm.
 5. Joe Myers, “The World’s Free Trade Areas–and All You Need to Know
about Them,” World Economic Forum, May 6, 2016, https://www.weforum.org
/agenda/2016/05/world-free-trade-areas-everything-you-need-to-know/.
  6. Chris Giles, “44 African Countries Agree Free Trade Agreement, Nigeria
Yet to Sign,” CNN Online, March 23, 2018, https://www.cnn.com/2018/03/22
/africa/african-trade-agreement-world/index.html.
  7. Ibid.
  8. The BRICS countries are Brazil, Russia, India, China, and South Africa. Jim
O’Neil of Goldman Sachs first used the term “BRIC” to represent Brazil, Russia,
India, and China. The acronym stuck. The S was added when South Africa joined
the group.
9
Major Controversies of the Global
Economy

If you have a brother or sister, it is fairly certain there have been times
when you did not agree. The same is true in relationships with parents,
neighbors, friends, or just about anyone else in your life. Disagreements
abound within every country. The global economy is no different than any
relationship between two entities.
There are events that pull nations together and events that separate
nations. There are over 150 nations in the world today. There are times
when two countries or regions do not agree. As we explore a few of the
major controversies in this chapter, remember there are also many things
that bind nations together.

GLOBAL ECONOMY VERSUS GLOBAL POLITICS

Before we break down a few of the major controversies, it is important
to take a holistic view of the relationships between nations. The relation-
ships and partnerships between nations and regions can be essentially bro-
ken down into two major categories: economic and political. From the
beginning of our journey, we have discussed the often-difficult task of
separating the two. The distinction between these two types of relation-
ships can become even blurrier during times of disagreements.

97
98 The Global Economy

The Bretton Woods conference is a prime example of how the two rela-
tionship types comingle. Officially a United Nations conference, Bretton
Woods was a conference on the global economy, yet its genesis was a war.
Bretton Woods ended with an agreement, not a treaty. World War II ended
with surrender but not a treaty. Earlier, World War I ended with a treaty.
There are economic treaties, some of which we will explore shortly. There
are also political treaties, such as the North Atlantic Treaty Organization,
or NATO. For now, it is enough to describe the different types of treaties.
As we conclude our journey, we will look at their interdependence.
There are partnerships where economic controversies and political con-
troversies are not comingled. Our economic agreement with Canada and
Mexico (NAFTA) does not include aspects of the three nations’ politics.
The U.S. economic and trade agreements with Europe, Japan, and a host of
other nations are devoid of political structural changes.
There are a few instances where one is dependent on the other. The most
notable example is the U.S. relationship with Cuba, which, since the Cuban
Revolution in 1959, has run from cold (no relationship at all) to at times
lukewarm (almost normal but not quite). Every U.S. president since 1959
has stipulated that economic relationships can normalize with Cuba only
after they change their political structure. It emphasizes again how com-
plicated relationships between nations can be.
Economic controversies are more prevalent in today’s global economy.
The most discussed controversies in today’s global economy are those that
arise over trade. These disagreements range from specific aspects of a
trade agreement, such as working or environmental standards, to entire
trade agreements and to the idea of trade itself.
Earlier, we mentioned trade treaties. As trade treaties and trade
agreements grow throughout the world in both number and complexity,
disagreements and controversies are all but guaranteed. We cannot
possibly explore all of them. Let us take a look at the controversies
whose outcome will most likely impact us personally and the United
States as a nation.

GLOBAL TRADE
Trade Agreements
The world of global trade is made up of many trade agreements. Most of
them are regional, and all involve advocating free trade. According to the
World Bank at the time of this writing, there are approximately 420
regional free-trade agreements worldwide.1 A few of them make worldwide
attention, while others go virtually unnoticed except to the nations
 Major Controversies of the Global Economy 99

involved. We are going to focus on three that have been at the forefront of
media attention in the United States for the last few years.

United States-Mexico-Canada Agreement

The USMCA is a revised updated version of the North American Free
Trade Agreement. Before we get into the major controversies surrounding
NAFTA and its supposed successor, it is important to remember that at
the time of this writing, this agreement has not been approved by any of
the three nations’ governments. We will explore the major distinctions
between NAFTA and the USMCA further, in our conclusion on the future.
For now, however, NAFTA is still the trade agreement by which the three
nations conduct trade.
As the USMCA was being negotiated by representatives of the three
nations the controversy primarily focused on making sure they did not
lose the trade benefits they had gained from NAFTA. The USMCA contro-
versy gained momentum as the three nations’ governments and special
interest groups began to circle the wagons in order to maintain their gains
and/or minimize their losses of a new agreement.
Representatives of the three nations have agreed to a new trade agree-
ment. As of this writing none of the three nations, however, have officially
approved the agreement. Approval seems far from certain. The more vocal
opponents of USMCA are mostly the same opponents against NAFTA,
with labor unions and environmental groups leading the opposition. In the
United States, a Republican president agreed to the USMCA, and the
Democrats are leading the political opposition.
Many of the labor union’s anti-USMCA arguments are the same ones
they had with the original NAFTA when it was signed in 1988. They
claimed, and still do, that the low wages and poorer working conditions
hurt U.S. manufacturing and U.S. competitiveness. According to them,
the original NAFTA hurt U.S. workers, and the USMCA does not make the
manufacturing environment any better. Like their labor-union brethren,
environmental groups protested that USMCA continued NAFTA’s pro-
business and antienvironment orientation. According to these groups, the
new USMCA will allow corporations to avoid the United States’ more
stringent environmental standards.
There were other groups against the new USMCA, but there were also
several groups in favor of the revised agreement. Given the opponents of
USMCA, it is not hard to conclude who the USMCA supporters are. Most
business groups support USMCA. The supporters are so organized that
they have their own website (https://passusmca.org). The group is
100 The Global Economy

comprised of mostly businesses with agricultural and trade associations

from the United States, Canada, and Mexico. Politically, Republicans
largely support the revised agreement. Congressional passage of USMCA
is going to require support from both political parties.

United States–China Trade Agreement

At the time of this writing, the trade controversy between the United
States and China is still raging. At times, it appears to be settled, while at
other times, it is an all-out trade war. Historically, the economic relation-
ship between the two nations has been as tumultuous as the current
negotiations.
Early in this trading relationship, the opponents have been loud and
constant. One of the first controversies was when China opened up to U.S.
manufacturing businesses. From the late 1970s, Chinese leader Deng
Xiaoping began reforming the Chinese economy. With the creation of eco-
nomic trade zones, U.S. manufacturing began moving operations to China.
As U.S. manufacturing jobs began leaving the United States for China,
labor unions, city and state government officials, and some consumer
groups began protesting the loss of jobs, tax revenue, and product quality
and production oversight.
As the quantity of goods arriving in the U.S. marketplace with Made in
China tags continued to increase, the issues became front-page news.
Investigative journalists began searching out problems with Chinese
goods, and the U.S. media focused on two issues especially prominently:
the use of child labor in the production of goods exported to the United
States2 and lead paint in children’s toys coming to the United States.3
With the U.S. losing jobs to China in assorted manufacturing indus-
tries and the quantity of goods increasing but their apparent quality
decreasing, the economic partnership between the two nations seemed
very one-sided to many U.S. citizens. The value of the partnership was
under scrutiny in many ways. The controversy was about to take on
another turn.
U.S. government officials began referring to China as a “currency
manipulator.” A currency manipulator is a nation that artificially main-
tains an undervalued currency to promote exports and limit imports, the
implication being that the nation is not open to free trade but instead
engages in one-sided trade. They are willing to export but not willing to
import, or at least enthusiastic about importing, products for their domes-
tic economy. This has become an important issue in the controversy
between these two trading partners, as we will explore further shortly and
in our concluding chapter on the future.
 Major Controversies of the Global Economy 101

Trans-Pacific Partnership
When President Trump withdrew the United States from Trans-Pacific
Partnership, it started an ongoing controversy between those who sup-
ported TPP and therefore opposed the president’s withdrawal and those
who were opposed TPP and thus supported the president. The controversy
continues today because of the geographical area involved (Pacific Ocean)
and the fact that we, the United States, were part of the pact and not our
Asia-Pacific competitor, China.
The Trans-Pacific Partnership is a regional free-trade agreement between
nations who have an interest in free trade across the Pacific Ocean. It includes
several nations on this side of the Pacific, including the United States, Can-
ada, Mexico, and Peru; nations from the other Pacific shore include Japan,
Malaysia, Australia, Singapore, New Zealand, Brunei, and Vietnam. Of spe-
cial note is the absence of China. Presidents Bush and Obama negotiated the
agreement, and President Obama signed it in 2016. Many considered it a
strong foothold into creating free trade in the Pacific. Others felt differently.
Even during the negotiations, the idea of such a multination regional
agreement had both supporters and opponents. When President Trump
withdrew in March 2018, the debate began in earnest, with President
Trump leading the opponents’ side of the argument, which focused on
three primary aspects.
First, the agreement stated the United States, Canada, and Japan would
give up tariffs for the dairy, beef, and poultry industry. This was a major
problem, since the United States significantly subsidizes the agricultural
industries. Second, the three countries also agreed to open up the automo-
tive industry, potentially costing the United States automotive jobs. Cars
and trucks, however, would have lower price tags in the United States.
Third, the agreement would have restricted the trade of tobacco, an indus-
try important to the U.S. south.
The majority of TPP supporters were businesses whose business model
included exporting products including the automobile, machinery, and
plastics industries. Interestingly, a benefactor of the TPP would also have
been the agricultural industry. The Trans-Pacific Partnership would have
increased exports, since it would have eliminated an estimated eighteen
thousand tariffs on U.S. exports to the other TPP nations. U.S. tariffs on
imports would have continued to be removed, so products in the United
States would also be less expensive.
A noneconomic selling point for the TPP was that China was not
included. Many considered this a major win for the United States in estab-
lishing an economic base in the Asia-Pacific region. In withdrawing from
TPP, the United States would lose that political advantage as well as the
economic advantages gained. The TPP trade area would have been larger
102 The Global Economy

than the NAFTA area. Many of the TPP supporters pointed that this was a
major victory for the United States in the global economy.
Even though the United States has withdrawn for now from the TPP,
the other nations moved ahead and created a second agreement without
the United States. In 2018, eleven of the original members signed a revised
TPP, the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP). Seven countries have already approved the CPTPP
as of January 1, 2019.
China has expressed interest in joining the revised TPP agreement. If
China decides to join and essentially replace the United States, it would
take significant step in altering the economic balance of the global econ-
omy. President Trump has stated the United States would be willing to
rejoin with a “better deal.” The other nations seem content to move on, and
the U.S. debate continues.

Currencies around the World

Earlier we discussed the U.S. concerns that China was altering the value
of their currency to benefit their exporting industries at the expense of
other nations’ ability to export to China. While China is the largest econ-
omy to engage in currency manipulation, other economies also do it. Some
do so to protect their economy, in a similar manner to China. Others have
to manipulate their currency in order to prevent their economy from col-
lapsing due to a financial crisis.
When dealing with currencies of the world that impact the global economy,
controversies are usually of several types. The first is when a nation manipu-
lates their currency, as China is accused of doing. The second currency crisis is
when a nation’s leader tries to pay off political favors with poor monetary poli-
cies, such as just printing more money. Nations also make poor monetary
decisions, and their central banks cannot support the currency. A nation may
also use its currency as an economic-political weapon and create a currency
war. Each of these can have global economic implications as well as domestic.
We are going to take a brief look at each of these controversies. We
explored exchange rates and exchange rate systems back in chapter 6, so
return there if you need to review. These are far more complex issues and
controversies than can be mentioned here. Consider this an introduction
to these issues that seemingly never go away. The countries may change
and the government leaders may change, but somewhere in the world, one
of these controversies is creating an issue for the global economy.

China as a Major Economy with a Fixed Exchange Rate

Throughout our journey, we have referenced the Chinese economy and
the way that the Chinese government controls much of what happens
 Major Controversies of the Global Economy 103

within. One more example is controlling its currency. While the specific
ways China does this are not for this space, the controversy surrounding
that control is most certainly part of our discussion. China has a fixed
exchange rate system. The Chinese yuan is fixed to the U.S. dollar. Their
fixed rate, however, is often changed by China’s central bank. Given the
size and impact of the Chinese economy on the global economy, much of
the currency controversy revolves around the fact the exchange rate sys-
tem is fixed and not flexible.
As you remember, fixed exchange rate systems have an anchor cur-
rency, and the domestic currency’s value is fixed to the anchor currency.
Flexible exchange rates are, conversely, determined by the supply and
demand for the domestic currency, both domestically and globally. All the
major global economies have flexible exchange rate systems except one,
China, which manipulates their currency to keep it undervalued, resulting
in less expensive exports and more expensive imports. This imbalance is at
the heart of the China currency controversy.
This controversy with China could potentially go away completely. If
China would convert to a flexible exchange rate system with the other major
economies and currencies, this issue would solve itself. The marketplace for
Chinese yuan would determine its value. China does not implement a flex-
ible exchange rate because of the consequences. Under a flexible exchange
rate system, the demand on the renminbi would be significant. The size and
impact of the Chinese economy would cause the renminbi to appreciate,
resulting in increased prices of exports and decreased prices of imports.
The stress on China’s domestic economy would be severe. Interest rates
would rise, and consumer prices would be under substantial inflationary
pressure to increase. China does not see controlling its currency to be con-
troversial. They have chosen and continue to choose what is best of their
domestic economy over what might be best for the global economy. As the
global economy continues to evolve along with China’s increasing role,
there is certainly room for their attitude to change in the future.

Poor Monetary Decisions Create Global Currency Crises

When a nation has a fixed exchange rate, it is important for the central
bank to maintain sufficient reserves of the anchor currency so that the
value ratio of the domestic currency will remain fixed. When an imbal-
ance occurs, it is the responsibility of the central bank to either reduce the
amount of domestic currency in the global economy, purchase additional
anchor currency to maintain the fixed ratio, or devalue their currency to
the level met by their level of reserves. If the central bank does none of the
above, a domestic financial crisis can quickly turn into a global financial
contagion, such as how the currency financial crisis in Thailand exploded
into a global financial contagion.
104 The Global Economy

It is imperative for central banks to maintain adequate reserves or to be

willing to take steps to resolve the issue. In Thailand, they refused to
devalue the Thai baht, which was fixed to the U.S. dollar. Bankers, inves-
tors, and speculators around the world saw the problem and took steps to
protect their investments by trying to exchange the Thai bahts they held
for dollars. However, there was one problem: the Thai central bank did not
have enough dollars to cover all the Thai bahts at the fixed exchange rate.
The bankers, investors, and speculators began to fear as other countries
were in the same monetary and financial condition as Thailand. To protect
their investments they began selling other Asian currencies for dollars.
What became one nation’s national problem was now a global problem,
and controversy always follows problems.
In today’s global economy, central banks around the world are much
more aware of the global consequences of their decisions. Even central
banks of relatively small nations and economies like Thailand need to
understand the consequences of their decisions on the global economy.
Debates, discussions, and controversy regarding monetary policy deci-
sions on both their domestic and the global economy are now common-
place. As we noted with China, domestic sovereignty virtually always wins
out. Yet the consequences and problems that extend to the global economy
are still present.

Using an Economy as a Political Tool

When government leaders use their economies to make political pay-
offs, there is always controversy, debate, and ultimately problems. Presi-
dent Robert Mugabe mortgaged Zimbabwe’s economy and future to payoff
political cronies (see chapter 7). If Zimbabwe’s economy had been capital-
ist, economists would have labeled his actions “crony capitalism.” Being a
dictator, however, he controlled both government policy and monetary
policy. Using monetary policy for his political gain led to the highest
hyperinflation rate in history (one more reason for an independent central
bank).4
A more recent example of the economy being used for political pur-
poses has been the actions of Venezuela’s Caesar Chavez and his successor,
Nicholas Maduro (see chapter 7). Chavez nationalized all industries and
conducted monetary policy to his political benefit. The consequence of
these actions and the ultimate controversies involved the use of monetary
policy to dismantle an economy that once was the most productive in
South America and rivaled the United States.
Upon Chavez’s death, his handpicked successor, Maduro, continued to
dismantle the Venezuelan economy for personal political and economic
 Major Controversies of the Global Economy 105

gain, and hyperinflation reached Zimbabwe proportions. Venezuela is now

one of the least free and poorest nations in the global economy, even with
the world’s largest oil reserves. The nations of the global economy have
now taken sides either for or against the current Maduro regime. Through-
out history, using the economy as a political tool has never benefitted the
domestic economy and has only caused debate and controversy for the
global economy.

Specific Issues of Trade and Global Economy

Controversies also arise around certain topics or single issues. As we
close out our discussion of global economy controversies, we need to
briefly identify a few of the single issues you are most likely to hear or read
about in the media.

Dumping
We will begin our discussion about a popular topic we discussed in
chapter 8. Governments often claim that they are dumping for political
purposes, but they are also protecting their domestic economy against
such actions. Dumping occurs when a company from one nation sells its
products in another nation below the price it would charge in its own
country. The other price is usually below the production costs. Companies
will do this in an effort to increase market share in the foreign market or
even to drive out competition when the competitors cannot compete at the
lower dumping price.
Dumping accusations are always confrontational. One nation accuses
the other of dumping a product, and the other nation denies it. Dumping is
usually only determined and resolved by a third party, the World Trade
Organization. The General Agreement on Trade and Tariffs includes an
antidumping agreement. When a company of a nation is accused of dump-
ing, it has to plead its case before the WTO. The WTO will determine if
dumping occurred. If not, the nation is exonerated. If so, the aggrieved
nation has the right to levy tariffs on the products on which the dumping
occurred. It is interesting that this is the only time when the WTO consid-
ers tariffs justified.

Trade Protectionism
Another set of issues that creates controversies are the different forms
of trade protection, which we addressed in detail in chapter 4. However,
106 The Global Economy

because they are always controversial, we felt compelled to acknowledge

them here. Regardless of which trade protection tool is implemented, they
are going to create controversy and debate.
For those who believe in total free trade, no form of protectionism is
legitimate. If one believes in some form of “fair” trade, then there are times
when a protectionist measure might be warranted. There are a few in
today’s world who believe in absolutely no trade at all. In this instance, a
nation does not export or import, as they believe they have the resources
domestically produce all they need within their own borders. As a result,
they believe in total protectionism.
Regardless of which one of these three protectionist policies a nation or
government leader adheres to, it is sure to be debated and controversial. In
today’s current political environment, this controversy has been quite pre-
dominant in many countries of the global economy. Trade wars, discussed
earlier, are often the result of two or more nations not agreeing on free or
freer trade, and, as a result, the level of trade protectionism increases.
Trade wars only have least cost losers. There are no winners.

Cartels and Controlling Global Trade

In a domestic economy, several companies might talk among them-
selves in an effort to limit supply, resulting in increased prices and higher
profits. This is known as collusion, and the companies banding together is
called a cartel. Companies create cartels in an attempt to control the mar-
ket, thereby controlling supply and prices. We do not see cartels in
the United States because they are illegal. When companies try this in the
United States, the result is often significant fines by the U.S. government,
and often the companies’ leaders may go to prison.
Cartels are not, however, illegal in other parts of the world. Countries
may also use cartels to control a market in the global economy. If a resource
is a nation’s major commodity on the world market, they may combine
their efforts with other countries whose major resource is the same and
attempt to control the market. The most famous attempt at controlling a
market (and succeeding at times) is the Organization for Petroleum
Exporting Countries, most commonly known as OPEC.
For cartels to be successful, they need a few market characteristics.
One, the nations involved in the cartel must possess the majority of the
resource. Two, their commodity must not have a close substitute. As the
world moves toward cleaner energies and less use of oil, this makes
the OPEC cartel position somewhat vulnerable. It will be interesting to
watch how OPEC moves in the future as the world continues its quest for
cleaner, cheaper, and renewable energy sources.
 Major Controversies of the Global Economy 107

Outsourcing and Offshoring

In the last decade or so, one of the major controversies has been the
efforts of companies to reduce costs by sending part or all their production
to other countries. Companies claim they need to do so to remain com-
petitive, while the opposition (mostly labor unions) claims that companies
want to not pay union wages and to eliminate domestic jobs in the process.
While the point-counterpoint arguments have both merits and drawbacks,
it is important as economically educated citizens to be sure we have our
understanding of the terms correct.
Outsourcing occurs when a company subcontracts with an outside firm
to perform a job that could be done in-house. Notice what is missing in
this definition. Outsourcing can occur with both domestic companies and
foreign companies. Companies that are not a car-producing company pro-
duce many parts on a car. For example, two of the major U.S. car compa-
nies, Ford and General Motors, outsource many segments of the
car-producing operation to other domestic firms. Outsourcing itself is not
the issue. Thousands of U.S. jobs exist because of domestic outsourcing.
Generally at issue is the act of offshoring. Offshoring is when a company
sends part of its production process to another country. The debate inten-
sifies when a company offshores a part of its production process at the
expense of domestic jobs. Offshoring can be beneficial for companies to
both reduce costs and be competitive. It can also be detrimental to the
overall economy if it costs domestic jobs.
Offshoring is a form of outsourcing. This is where much of the confu-
sion comes in for the general public. The media and those opposed to off-
shoring usually do not refer to “offshoring” but rather use the more general
term “outsourcing.” Offshoring is outsourcing, but outsourcing is not nec-
essarily offshoring. Until the media changes its terminology and correctly
refers to offshoring as offshoring and not outsourcing, the confusion will,
unfortunately, remain.

Environmental and Labor Standards

These two issues do not need to go together, but in the debates and con-
troversies over trade agreements, they usually end up being linked. One
reason is that they both have similar politically strong and vocal special-
interest groups backing them. Everyone wants a clean environment, and
everyone wants labor to be safe and absent of child labor. On the surface,
they appear no-brainers until the discussions involve the global economy’s
developing nations.
Developing nations can have quite a different perspective on these two
issues. For many citizens of a developing nation, daily survival is most
108 The Global Economy

important priority. While clean water and air can improve their way of life,
they think more in microeconomic and personal terms than macroeco-
nomic terms or holistically as a nation. The same is true with child labor.
In many of these nations, education is not an option for some children,
who need to work for both them and their family to survive. Insisting on
imposing external environmental and child-labor standards on a develop-
ing nation causes an instant controversy and debate. Developing nations
are not against these standards. It is a matter of priority and ability.

A Negative Trade Balance—Good or Bad

The last two controversies we are going to discuss—negative trade bal-
ance and intellectual property—could also be in our final chapter on
future issues. We chose to include them here because the controversies
surrounding them are both current in today’s global economy. Remember
that in chapter 5, we explored measuring a nation’s participation in the
global economy. One of those measures was the difference between what a
nation exports out of the country minus the imports that come into the
country. The trade balance can be equal, positive (trade surplus), or nega-
tive (trade deficit).
In the United States, we regularly have negative trade balance (i.e.,
import more than we export). There has been a growing trend by political
leaders in the U.S. and several other nations who think a negative trade
balance indicates that there is something wrong with the nation’s trade
policy and that it must be corrected with new trade deals or protectionist
measures. The controversy arises because other politicians and econo-
mists see the trade imbalance as a long-term problem. They view the nega-
tive trade balance as not necessarily bad and protectionist measures
unnecessary. This controversy has a long way to go before it will be settled,
if ever.

Intellectual Property
The final controversy we are going explore is the controversy over intel-
lectual property. As with negative trade balance, it has been going on for
some time and appears to not have an end in sight. Much of the early con-
troversy centered on intellectual property piracy—the stealing of intellec-
tual works without compensation, permission, or credit. China is the
nation that has been most accused of intellectual piracy. They deny the
piracy, and consequently the controversy continues.
The WTO created the Agreement on Trade Related Aspects of Intellec-
tual Property Rights, as discussed in chapter 8. Remember that many
 Major Controversies of the Global Economy 109

different types of products are included in discussions and controversies

around intellectual property rights. Intellectual property includes every-
thing from films, books, music, art, and software, and it also includes
clothes, different types of food, and even plants. As the world becomes
more computerized and automated, discussions and differences of opinion
will continue to arise.

NOTES
  1. Joe Myers, “The world’s free trade areas—and all you need to know about
them,” World Economic Forum, May 6, 2016, https://www.weforum.org/agenda
/2016/05/world-free-trade-areas-everything-you-need-to-know/.
  2. David Barboza, “China Says Abusive Child Labor Ring Is Exposed,” New
York Times, May 2008, https://www.nytimes.com/2008/05/01/world/asia/01china
.html.
  3. Maria Bellos Fisher, “Toxic Toys: Tips for Choosing Safe Toys for Kids,”
Parent Map, February 2012, https://www.parentmap.com/article/toxic-toys.
 4. It was estimated that Zimbabwe’s inflation rate reached 250,000,000
percent in 2008! Only after abandoning the Zimbabwean Kwatcha and adopting
the U.S. dollar did their inflation rate subside. In 2019, after returning to a new
Zimbabwean currency, it had already reignited to 98 percent. Without responsible
monetary policy, the form of currency is inconsequential.
10
The Influencers of the Global Economy

The idea of a global economy is relatively new. If you remember, back in the
introduction we discussed in detail the evolution of the global economy
from the earliest of civilizations. We consider that the global economy
began in earnest around the time of Marco Polo and his journeys to China
and call this the first era of the global economy. Marco Polo made his jour-
ney in the thirteenth century (1200s). Considering how many thousands of
years the world has been around and humans have existed on the earth,
eight hundred years is not that long. When you delete the periods during
that time when the global economy did not exist, the time of a global econ-
omy is even shorter.
During those some eight hundred years, many people were instrumen-
tal in the evolution of the global economy. Some of them we discussed in
detail in the introduction. We do not want to repeat ourselves. It is impor-
tant, however, that as we explore the individuals whose contributions to
history made the global economy grow and expand in breadth and depth,
we mention them here.
We will are going to make a quick review of some of the people impor-
tant to the global economy. Most of this chapter will focus on the modern
(since the 1700s) economists and political leaders whose insights and con-
tributions to economics and politics provided the background for today’s
global economy.

111
112 The Global Economy

EARLY EXPLORERS
Marco Polo
The first true era of the global economy began with Marco Polo and his
brother Niccilo. Marco and his brother made their travels to China during
the late 1200s. They were from Venice during a time when the city-state
was the main political unit. They became friends and confidants of China’s
Great Khan.
Marco was a writer and documented much of their travels. His Travels
of Marco Polo was a best seller in Europe. Many, however, considered it
fictional. History has been much kinder to the stories, and the brothers are
considered by many to be the first known global travelers.

Mercantilist Explorers
The introduction mentions a few of these explorers of the thirteenth,
fourteenth, and fifteenth centuries. While these explorers were sent off on
behalf of the European kings and queens for riches and wealth, they also
found many new routes to known lands and many unknown lands. Many
of these are going to be familiar to you. Some may not.
Prince Henry the Navigator was the first to consider a new sea route to
China around Africa for Portugal. We highlight him in the introduction.
Bartholomew Dias followed Prince Henry’s idea and was the first to sail
around southern Africa (the Cape of Good Hope). He also sailed for
Portugal.
Vasco da Gama completed Prince Henry’s dream and reached India by
sailing around Africa at the end of the fifteenth century. He also sailed for
Portugal. During the fifteenth and parts of the sixteenth century, Portugal
was the most powerful nation on earth.
Christopher Columbus, for the Spanish king and queen, was sure that he
could sail due west to reach India, under the theory that the world is not
flat. We know where his journey ended—in the islands of the Caribbean
and an entirely new land for the Europeans.
Hernando De Soto conquered and claimed much of South America for
the Europeans.
Amerigo Vespucci discovered the land of what is now Florida in search
of the Fountain of Youth. America is named after him.
Ferdinand Magellan died during the journey, but he is thought to be the
first European to sail around the world.
Vikings, as well as other groups like them, explored what is now north-
ern Canada and may have come as far south as the current New England of
the United States.
 The Influencers of the Global Economy 113

These are only a representative few of the many European explorers

who came to their new world. Of course, this world was not new to the
natives. In search of gold and wealth, the Europeans were not to be denied.
That is another story for another venture. Needless to say, all the conse-
quences were not good ones.

ECONOMISTS1
Two economists who laid the economic foundations for the global econ-
omy are featured here.

Adam Smith
No conversation that includes economists of history would be complete
without at least some mention of Adam Smith. He is, after all, considered the
father of modern economics. The global economy changed forever in both
thought and deed with his publication of An Inquiry into Nature and Causes
of the Wealth of Nations in 1776. His writings on the benefits of trade along
with his antimercantilist stance and critique of mercantilism in the Wealth
of Nations changed the way that nations and individuals thought about trade.
Regarding the global economy, arguably his greatest contributions were the
ideas of absolute advantage, specialization, and division of labor.
Popular writing of Adam Smith relative to the global economy is An
Inquiry into the Nature and Causes of the Wealth of Nations. London:
W. Strahan and T. Cadell, 1776. Duflo and Banerjee, wife and husband,
were awarded the 2019 Nobel Prize in Economics.

David Ricardo
Following up on Adam Smith’s idea of absolute advantage, Ricardo
introduced the idea the all countries, big and small, rich and poor, could
participate in a global economy. His concept of comparative advantage was
based on the idea that if nations focus on comparing their opportunity
costs of production, they will find that they can both benefit by doing (pro-
ducing) what they do best and trading for those items where their oppor-
tunity costs are higher. While Smith was accurately promoting do what
one does best, Ricardo was went further by comparing costs of production.
In this way, all nations could gain from trade. Now the global economy had
an economic foundation on which all nations could participate.
Popular writing of David Ricardo relative to the global economy is On the
Principles of Political Economy and Taxation. London: John Murray, 1817.
114 The Global Economy

Here are some modern economists whose new ideas expanded our
understanding of the global economy.

Paul Krugman
In 2008, Paul Krugman was awarded the Nobel Prize in Economics for
his work on international trade. His work enhanced the earlier efforts of
Ricardo on comparative advantage. His ideas further explained how
nations could benefit from trade even when comparative advantage is not
so obvious. His work furthered the case for free trade and a global econ-
omy. Krugman also served in positions with the World Bank, International
Monetary Fund, and the United Nations.
Popular writings of Paul Krugman on the global economy include the
following:
• Krugman, Paul. “Does the New Trade Theory Require a New Trade
Policy?” The World Economy 15 (1992): 423–42.
• Krugman, Paul. “Increasing Returns, Monopolistic Competition, and
International Trade.” Journal of International Economics 9 (1979):
469–79.
• Krugman, Paul. Rethinking International Trade. Cambridge, MA:
MIT Press, 1990.

Joseph Stiglitz
Stiglitz has become known as the antiorganizations economist. Label-
ing him “antiorganizations” might be a bit strong. His more recent works
have been attempts to reshape key international organizations, the World
Bank and the International Monetary Fund. Stiglitz served as a vice presi-
dent of the World Bank. He left when he considered their work to be out of
step with more modern economic and trade theories. Stiglitz has the rare
honor of being recognized with two Nobel prizes. He was awarded the
Nobel Prize in Economics in 2001. Later in 2007, he was awarded the
Nobel Peace Prize for his work on climate change.
Popular writings of Joseph Stiglitz on the global economy include the
following:
• Stiglitz, Joseph. Freefall: America, Free Markets, and the Sinking of the
World Economy. New York: Norton, 2010.
• Stiglitz, Joseph. Globalization and Its Discontents. New York: Norton,
2002.
• Stiglitz, Joseph. Making Globalization Work. New York: Norton, 2006.
• Stiglitz, Joseph. The Roaring Nineties. New York: Norton, 2003.
 The Influencers of the Global Economy 115

Lester Thurow
Economist Lester Thurow is best known as a noncapitalist global econo-
mist. Thurow’s writings were quite popular with those who believed capi-
talism was not the positive-sum theory that would help all nations. Thurow
believed that a zero-sum theory was necessary if the world was to avoid a
stagnant global economy. For Thurow, a zero-sum theory was using taxes
and taxation policy to redistribute income from an economy’s winners to
the losers; that is, a zero sum result. For developed nations like the United
States, the government needed to be more involved to create a national eco-
nomic policy that would help businesses compete in the global economy.
Popular writings of Lester Thurow on the global economy include the
following:
• Thurow, Lester. Head to Head: The Coming Economic Battle among
Japan, Europe, and America. New York: Morrow, 1992.
• Thurow, Lester. The Zero-Sum Society: Distribution and the Possibili-
ties for Economic Change. New York: Basic, 1980.

Paul Collier
Collier is considered one of the world’s key experts in economic and
global development of developing countries. He worked at the World Bank
with the Development Research Group before heading the Center for the
Study of African Economies at St. Antony’s College of Oxford University.
Collier has been especially interested in the impact of civil wars and for-
eign aid on the economic growth of Africa’s developing nations. Many of
these impoverished nations want to be participants in the global economy.
He focuses on the influence of their public policies on the poverty of the
nations and ability to be global partners.
He has consulted and been advisors to many nations, Prime Minister
Tony Blair, and the United Nations. Collier’s writings have been very pop-
ular and influential in creating the global view of what he calls “the bottom
billion.” He was awarded the Commander of the Order of the British
Empire in 2008 for his contributions to global economic growth.
Popular writings of Paul Collier on the global economy include the
following:
• Collier, Paul. The Bottom Billion: Why the Poorest Countries Are Fail-
ing and What Can Be Done about It. Oxford: Oxford University Press,
2008.
• Collier, Paul. Labour and Poverty in Rural Tanzania: Ujamaa and
Rural Development in the United Republic of Tanzania. Oxford:
Oxford University Press, 1991.
116 The Global Economy

• Collier, Paul. The Plundered Planet: Why We Must, and How We Can,
Manage Nature for Global Prosperity. Oxford: Oxford University
Press, 2010.
• Collier, Paul. Wars, Guns, and Votes: Democracy in Dangerous Places.
New York: HarperCollins, 2009.

William Easterly
Easterly is also one of the most influential development economists
today. As with many economists, he worked as a research economist at the
World Bank. He also spent time at the Center for Global Development and
the Institute for International Economics. Like Collier, most of his career
has focused on the developing world in Africa. He also has been involved
in nation development in Latin America.
Easterly is often quite critical of how governments of developed nations,
the World Bank, and the IMF have treated developing nations. He argues
that the organizations enter a nation to help but are naive about the cul-
ture, the people, or the local economies, politics, or policies. According to
Easterly, these organizations often create the wrong incentives that lead to
contradictory outcomes.
Easterly believes that properly incentivized markets can do more for a
developing nation than the policies imposed by foreign aid or international
organizations. In areas such as health and education, he believes the local
markets will ultimately lead to more desired outcomes. His books have
been very influential in popularizing this idea.
Popular writings of William Easterly on the global economy include the
following:
• Easterly, William. The Elusive Quest for Growth: Economists’ Adven-
tures and Misadventures in the Tropics. Boston: MIT Press, 2001.
• Easterly, William. The White Man’s Burden: Why the West’s Efforts to
Aid the Rest Have Done So Much Ill and So Little Good. London: Pen-
guin, 2006.

Jagdish Bhagwati
Bhagwati is one of the most influential Indian economists. Much of his
work has focused on the economy of India. He has been especially involved
with the positive impact of offshoring on the nation’s economy. Many
credit his work for the economic transformation of India.
Bhagwati promotes offshoring as a key factor in free global trade. Focus-
ing primarily on offshoring to India by companies from the United States,
 The Influencers of the Global Economy 117

he promotes free trade and compares it to utilizing comparative advantage

for a better world. By implementing offshoring, in the long run, all nations
are better off, and the global economy grows as a result. Throughout his
career, he has been a staunch supporter of free trade for a better global
economy. He is founder of the Journal of International Economics.
Popular writings of Jagdish Bhagwati on the global economy include the
following:
• Bhagwati, Jagdish. Free Trade Today. Princeton, NJ: Princeton Univer-
sity Press, 2002.
• Bhagwati, Jagdish. In Defense of Globalization. Oxford: Oxford Uni-
versity Press, 2004.
• Bhagwati, Jagdish. India in Transition: Freeing the Economy. New York:
Oxford University Press, 1993.
• Bhagwati, Jagdish. India: Planning for Industrialization: Industrializa-
tion and Trade Policies since 1951. Oxford: Oxford University Press,
1970.
• Bhagwati, Jagdish. Protectionism. Cambridge, MA: MIT Press, 1988.
• Bhagwati, Jagdish. A Stream of Windows: Unsettling Reflections on
Trade, Immigration, and Democracy. Cambridge, MA: MIT Press,
1998.
• Bhagwati, Jagdish. Termites in the Trading System: How Preferential
Agreements Undermine Free Trade. Oxford: Oxford University Press,
2008.
• Bhagwati, Jagdish. The World Trading System at Risk. Princeton, NJ:
Princeton University Press, 1991.
• Bhagwati, Jagdish, and Alan Blinder. Offshoring of American Jobs:
What Response from U.S. Economic Policy? Edited by Benjamin M.
Friedman. Cambridge, MA: MIT Press, 2009.

Esther Duflo
French by birth and U.S. trained as a development economist, Esther
Duflo focuses on the microeconomic issues of developing countries. Most
of her work was through the MIT Jameel Poverty Action Lab, or J-PAL, a
research laboratory she founded and directed. Her research emphasized
finding the causes of poverty and their solutions.
She is most noted for her unique academic approach to economic
development research. Duflo pioneered the use of randomized control
trials, as they do in medicine, to research the causes and cures of poverty.
Using randomized control trials, she studied education, finance, and
118 The Global Economy

health issues in developing nations. Two topics she was most noted for was
her work on malnutrition and microfinance.
Microfinance is the financing of relatively small loans to begin mostly
home-based-type cottage businesses, such as sewing or cooking. The bor-
rowers pay off the loan in small payments to the lender. During the pro-
cess, they learn money management and business skills. Duflo and her
colleague Abhijit Banerjee coined the term “reluctant entrepreneur”
because most would rather work in a factory.
Popular writing of Ester Duflo on the global economy include Poor Eco-
nomics: A Radical Rethinking of the Way to Fight Global Poverty. New York:
Public Affairs, 2011.

Emily Oster
Oster is a premier development economist who focuses on diseases in
the developing nations. Early in her career, she studied hepatitis and other
social diseases. This led her to further research on HIV in Africa. Her
questioning of current knowledge and further research led to using public
policy as a tool against HIV-AIDS. At the time of her research, most
nations only advocated a single approach, such as abstinence. Oster
observed single approaches to HIV in countries that also had low mortal-
ity due to malaria or experienced high maternal mortality and concluded
that such approaches were not successful. She proposed a multitargeted
public policy approach to address HIV-AIDS.
Popular writing of Emily Oster on the global economy include “Sexually
Transmitted Infections, Sexual Behavior, and the HIV/AIDS Epidemic.”
Quarterly Journal of Economics 120, no. 2 (May 2005): 467–515.

Jeffrey Sachs
Sachs is best known as a political economist. While a professor at Har-
vard, he consulted with and worked for several nations during financial
crises. He is also known for his prolific writings on reducing poverty and
promoting a global perspective to the environment. Sachs is one of the few
economists whose books are popular with the general audience.
While at Harvard, he was invited to Bolivia to study and make recom-
mendations on their hyperinflation. Sachs promoted to the Bolivians a
concept known as “shock therapy.” Shock therapy had three key compon-
ents. The first was fiscal restraint. The government needed to tighten their
budgets and only spend the money they received. The second key was
monetary restraint. They needed to immediately stop printing money. The
third key was to receive debt forgiveness from those nations with whom
 The Influencers of the Global Economy 119

Bolivia owed money. While Sachs was not the inventor of shock therapy,
he was one of the most successful economists to implement it and be
successful.
Popular writings of Jeffrey Sachs on the global economy include the
following:
• Sachs, Jeffrey. Common Wealth. New York: Penguin, 2008.
• Sachs, Jeffrey. The End of Poverty. New York: Penguin, 2005.
• Sachs, Jeffrey. The Price of Civilization. New York: Random House,
2011.

Hernando De Soto
De Soto is a Peruvian economist who is one of the most known econo-
mists in the developing nations. According to De Soto, for any individual
in order to rise out of poverty, the most important elements are individ-
ual property rights and a capitalist economic institution. For De Soto,
these two ideas go together and are lacking in virtually all developing
countries. In 1981, he formed the Institute for Liberty and Democracy
(ILD) in Lima, Peru, to research, write, speak, and promote these two key
ideas.
For De Soto and ILD, the key for a developing nation to embrace capital-
ism was to make business ownership and entrepreneurship accessible for
every citizen. Their research revealed there was more to it than accessibil-
ity. Between authoritarian governments where property rights did not
exist and corruption of government officials, new business startups or
obtaining property were all but impossible for the average developing
nation citizen. De Soto and ILD have worked to promote property rights
and entrepreneurship with many developing nations to change their cur-
rent situation.
De Soto has won many awards for his work with developing nations. He
was identified as one of the most influential Latin Americans of the twen-
tieth century. In 2004, he was named by Time magazine as one of the top
one hundred most influential people in the world. He has been honored
with awards in the United States, Canada, Switzerland, and the United
Kingdom.
Popular writings of Hernando De Soto on the global economy include
the following:
• De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs
in the West and Fails Everywhere Else. New York: Basic Books, 2000.
• De Soto, Hernando. The Other Path: The Economic Answer to Terror-
ism. New York: Basic Books, 1987.
120 The Global Economy

Douglass North
Douglass North was the 1993 recipient of the Nobel Prize in Economics
for his work in economic history and institutional economics. It is this lat-
ter topic that has been applied to describe how the global economy func-
tions best.
As an institutional economist, North studied the importance of institu-
tions such as property rights and decision-making to economic growth.
He submitted that how individuals and economies made decisions based
on their beliefs, ideas, and even prejudices had an important role in an
economy’s ability to grow. Without the proper incentives and beliefs in
institutions such as property rights, some economies were bound to stag-
nate, and growth would be limited, if able to grow at all.
North’s work became the foundation for assessing cultural and social
norms’ impact on the economy of a society. According to North, proper
efficient economic institutions were a must for an economy to grow. If a
society did not change its culture, it could not change its economy.
Popular writings of Douglass North on institutions and the global econ-
omy include the following:
• North, Douglass. Institutions, Institutional Change and Economic Per-
formance. Cambridge: Cambridge University Press, 1990.
• North, Douglass. Understanding the Process of Economic Change.
Princeton, NJ: Princeton University Press, 2005.

TRANSFORMATIONAL LEADERS OF THE GLOBAL

ECONOMY
Two countries whose transformation toward markets and increased
influence in the global economy, that generated most of the news are India
and China. One reason is the size of their populations. As two of the most
populated nations in the world, their participation in the global economy
as potential consumers and markets is extraordinarily large. The flip side is
the potential for producers and companies from around the world to enter
their markets. The second reason is the current poor economic health of
the populations as a whole. The potential increases in the standard of liv-
ing for both countries would reduce global poverty significantly.
While many were, and still are, involved in these transformations, there
are two who stand out as their pioneers. Manmohan Singh for India and
Deng Xiaoping for China are credited as the philosophical influences who
turned these two economically restrictive nations into major global econ-
omy participants.
 The Influencers of the Global Economy 121

India
Manmohan Singh
An economist who became a politician best describes Manmohan
Singh. Singh was credited as one of the Indian economist who initiated the
transition of India’s economy from socialist to market driven capitalism.
As an economist virtually his entire career, Singh was devoted to public
service as a governmental civil servant. He held many positions within the
Indian government, ranging from being an economic adviser in the Com-
merce Ministry, to minister of finance, to the ultimate position, prime
minister of India in 2004.
As finance minister and prime minister, Singh was devoted to the ideals
of privatization of the public sector. He was successful in attracting foreign
direct investment to India. He is credited with eliminating the Licence Raj,
a very restrictive system of regulations and many licenses needed to con-
duct business or own property in India. As an economist, Singh was a
strong supporter of open markets and the global economy. This was
reflected in many of his economic policies as prime minister that pro-
moted India’s participation as a global partner.
Popular writing of Manmohan Singh on the global economy include
India’s Export Trends and Prospects for Self-Sustained Growth. Oxford:
Clarendon Press, 1964.

China
Deng Xiaoping
For Deng Xiaoping, the transformation from socialist to capitalist was a
long one. As a young Chinese of the Chinese Communist Revolution, he
was trained and educated in all things communist. He was an advisor to
Chairman Mao Zedong during the civil war that led to the communists
coming to power in 1949. He was an integral and trusted leader of Mao’s
new government. In the 1960s, Mao took away all his power, and Xiaoping
became a common laborer of the government. He eventually returned to
Mao’s good graces and returned to party leadership. When Mao Zedong
died, Xiaoping was named his successor.
As the new Chinese leader, he immediately began to transform China’s
economy. He modernized industry, science, agriculture, and technology
sectors of the economy. Gradually he restored some private incentives and
pushed for China to be a global economy participant. His transitions were
slow and methodical. He encouraged some entrepreneurship and priva-
tized parts of the agricultural community, allowing farmers to sell a
122 The Global Economy

portion of their crops at market prices. He created state-owned companies

to compete in the global-market-oriented economy. As a communist
leader, he maintained a state-owned, state-planned portion of the econ-
omy. He did, however, begin to open Chinese markets at the margin. He
once described his efforts as a socialist market economy with Chinese
characteristics.
To read more about Deng Xiaoping, check out the following:
• Deng Xiaoping. Selected Works of Deng Xiaoping: 1975–1982. Balti-
more, MD: University Press of the Pacific, 2001.
• Marti, Michael E. China and the Legacy of Deng Xiaoping: From Com-
munist Revolution to Capitalist Evolution. Dulles, VA: Brasseys, 2002.
• Stewart, Whitney. Deng Xiaoping: Leader in a Changing China. Min-
neapolis, MN: Lerner Publications, 2001.

ORGANIZATIONAL LEADERS WHO SHAPE THE GLOBAL

ECONOMY
International Monetary Fund
Managing Director, Christine Lagarde
Christine Lagarde became the first woman to lead the International
Monetary Fund as its managing director. Prior to joining the IMF, she was
France’s minister of finance. In her role as chair of the G20 Group, she
gained international acclaim with her handling of the financial crisis. Dur-
ing the financial crisis, Lagarde’s past background of international law and
finance gave her the expertise to address international monetary policies
and to institute more stringent financial regulation and governance. These
qualities were instrumental in her selection as IMF’s managing director in
2011. In 2016, Lagarde was reelected by the IMF Executive Board to a sec-
ond five-year term.
Traditionally the managing director of the IMF is from Europe. Ascend-
ing to the leadership role of the IMF, however, was not easy for Lagarde.
First, her background was in law, whereas previous leaders’ backgrounds
were in economics. Second, at the time, many of the developing nations
wanted the new head of the IMF to be from a developing nation. She cam-
paigned in several of those nations to earn their support.
Lagarde has upheld her promise to the developing nations. They are
more involved in the efforts of the IMF than in the past. They are also a
group of nations to which she devotes much of her energies as managing
director. The European debt crisis and global financial encounters have
also been challenges for her. Lagarde is also chair of the European Bank for
 The Influencers of the Global Economy 123

Reconstruction and Development’s board of governors. She also holds a

board position with the European Investment Bank and the Inter-
American Development Bank.
In 2016, Forbes listed Lagarde as the sixth most powerful woman in the
world.

World Bank Group

President, David R. Malpass
The newest member of the global economy leadership is David Malpass,
president of the World Bank. Malpass was approved as the World Bank’s
thirteenth president in April 2019. As tradition prevails, the president of
the World Bank comes from the United States. Prior to his appointment,
Malpass was U.S. undersecretary of the treasury for international affairs.
In this role, he represented the United States at international meetings
including the G-7, the G-20, the annual joint meeting between the World
Bank and IMF, and the Organization for Economic Cooperation and
Development.
Even before coming to the World Bank, Malpass promoted increased
capital for both the International Bank for Reconstruction and Develop-
ment and the International Finance Corporation, two agencies of the
World Bank Group now under his direction. He advocated for efficient
capital (money) use as a tool to increase living standards in developing
countries. Malpass is an ardent promoter of transparency in financial
reporting. Both the World Bank Group and the IMF adopted the Debt
Transparency Initiative to achieve the transparency Malpass believes can
help reduce both the frequency and the severity of debt crises that might
arise in the future.

United Nations
President of the General Assembly, Maria Fernando Espinosa
Garcés
In 2018, the United Nations elected the fourth woman to hold the posi-
tion of General Assembly president. Officially Garcés is president of the
seventy-third session of the United Nations General Assembly. Previously
the foreign minister from Ecuador, she represented Ecuador at many inter-
national conferences, ranging in topics from climate change to gender
equality to multilateral cooperation.
Of special note, Garcés is the first woman appointed as the permanent
representative of Ecuador to the United Nations. She was instrumental in
124 The Global Economy

the United Nations’ efforts to create and promote the Millennium Develop-
ment Goals to improve the lives and standard of living for the world’s
underserved population in the developing nations.

Bank of International Settlements

General Manager, Agustín Carstens
Carstens was a member of the BIS’s board of governors from 2011 to
2017. Prior to his time at the BIS, Carstens was the Bank of Mexico gover-
nor and served with the IMF. During his tenure at the IMF, he chaired
their International Monetary and Financial Committee and later served
the IMF as its executive director in 1999 and 2000. At the time when
Christine Lagarde was appointed managing director of the IMF, it was
Carstens who was actually considered the front-runner for the position. A
Mexican native, he holds two graduate degrees from the University of
Chicago.

TWO CENTRAL BANKERS WHOSE LEADERSHIP INFLUENCES

THE GLOBAL ECONOMY
Central banks play a vital role in a nation’s ability to participate in the
global economy. Two are especially important, due to the currency stabil-
ity necessary for the global economy to grow: the European Central Bank
and United States Federal Reserve System. In chapter 7, we discussed the
importance of central banks to the global economy. We also highlighted
several beyond these two. Arguably, however, the two most influential cen-
tral bankers are those of the ECB and the Fed.

European Central Bank2

President, Mario Draghi
Mario Draghi became president of the European Central Bank in 2011,
succeeding Jean-Claude Trichet. Draghi is an economist by training, earn-
ing his degree at Massachusetts Institute of Technology (MIT). While at
MIT, he worked with Nobel Laureates Robert Solow and Franco
Modigliani.
Prior to joining the ECB, Draghi was governor of the Bank of Italy.
Draghi served the World Bank as its Italian director. He also served the
Organization of Economic Cooperation and Development, chairing their
European Economic and Financial Committee. Add to this experience his
 The Influencers of the Global Economy 125

time with the Bank of International Settlements and ECB itself, and
Draghi was ready for the ECB presidency when the opportunity came in
2011.
As ECB president, Draghi is now the most important monetarist in
Europe and one of the most important in the world. He was immediately
confronted with a financial crisis not experienced since the Great Depres-
sion of the 1930s. His immediate actions were applauded by some and crit-
icized by others. Every action by Draghi and the ECB was watched not only
in Europe but also around the world. The health of the euro was as neces-
sary as the health of the U.S. dollar.
Draghi was also confronted with the default of loans by Greece, a mem-
ber of the European Monetary Zone. As with every decision by a global
leader, his actions were both applauded as correct or criticized that they
would lead to further trouble. As of this writing, the jury is still out on
Greece. Between the Draghi and the ECB’s actions as well as those of the
U.S. Federal Reserve, the financial crisis came to an end. Judgment on
the ECB’s decisions is still being debated. One thing is certain: whether the
ECB made the right decisions in the past and whether they will make the
right decisions in the future, one person will get the credit or the blame.
That is the person leading the European Central Bank, and for now, that is
Draghi.
To read more about Draghi, you will find the following resource helpful:
“Mario Draghi.” European Central Bank, accessed September 2012, http://
www.ecb.int/ecb/orga/decisions/html/cvdraghi.en.html.

Federal Reserve System

Chair of the Board of Governors, Jerome H. Powell
When Jerome Powell was nominated by President Trump and
approved by the U.S. Senate in 2018, he joined an illustrious list of previ-
ous chairs. He replaced Janet Yellen, who was chair when Mr. Trump was
elected president. President Trump chose Mr. Powell over renominating
Yellen for a second term. Yellen replaced Ben Bernanke during the presi-
dential term of Barack Obama. President George H. Bush had nominated
Ben Bernanke, who served two terms as chair after succeeding Alan
Greenspan, the longest-serving chair, with five terms extending from
1987 to 2006.
In our previous biography on Mario Draghi, we discussed his role dur-
ing the financial crisis. While Draghi was dealing with the crisis from Eur-
ope, it was Ben Bernanke who was sitting in the Fed chair’s seat during the
crisis. As one can see from the recent past, the Fed chair has been more
precarious than the similar position at the ECB.
126 The Global Economy

Powell began his own fourteen-year term as a Fed governor in 2014,

after being nominated to complete an unexpired term in 2012. Powell’s
background is law, and he joined the Fed’s board from the private sector,
where he focused his efforts on federal and state fiscal policies.
Many now consider Powell to be the most powerful monetarist in the
world. The monetary policy decisions he champions for the Fed have global
impact. As chair, he is also chair of the Federal Open Market Committee
(FOMC). Between the board of governors and the FOMC, their decisions
have direct influence on the health of the U.S. dollar, which has a direct
influence on the health of the global economy. The importance of their
decisions extends far beyond U.S. borders. Anyone in the world holding
dollars or U.S. Treasuries has a stake in the decisions of Powell and the
Fed’s board. It is important that they have the ability to make those deci-
sions in an environment free from political influence. The writers of the
Federal Reserve Act of 1913 understood that very well. For our modern
global economy, that may be more important than ever.
To read more about Powell, you will find the following resource helpful:
“Jerome H. Powell, Chair.” Board of Governors of the Federal Reserve
System, accessed July 7, 2019, https://www.federalreserve.gov/aboutthefed
/bios/board/powell.htm.

NOTES
  1. We could go on for many pages about the all these great individuals and
their many contributions to the world of economics. For our purposes, we are
going to keep our focus on their contribution to the global economy. If you would
like to read more about their lives and other contributions, we suggest you go to
David A. Dieterle, ed., Economic Thinkers: A Biographical Encyclopedia (Santa
Barbara, CA: Greenwood Press, 2014).
  2. At the time of this writing, Christine Lagarde had just been nominated as
the next president of the European Central Bank. You can read about Lagarde as
the current head of the IMF.
Conclusion: The Future of the Global
Economy

We began our journey looking behind us at the history of the global econ-
omy, and then we explored many aspects of today’s global economy. The
global economy of the past was stagnant for most of its history. At a few
points in history, it woke up and expanded. Today it is in constant change,
as nations change their roles and relationships with other nations. In the
future, that change will most likely only be faster and broader, with conse-
quences that we may not even be able to recognize today. It is time to pull
out our crystal ball and take a look into the future.

POLITICS AND CULTURE’S ROLE IN THE GLOBAL

ECONOMY
For all the bravado of economists, economic systems do not operate in a
vacuum. Along with political and cultural influences, economic systems
make-up only one-third of how consumers, producers, and other players in
a global economy act and interact with each other.

Economic Systems and the Design of the Global Economy

To gain a full understanding and appreciation of the global economy’s
complexities now and in the future, it is important for us to take a step
back and review a one of our earlier discussions. In chapter 2, we explored
the interdependence among our economic, political, and civic spheres.
Remember that dictators demand complete control in all areas of life.
Without it they cannot “dictate”—that is, control every aspect of every-
one’s life.

127
128 Conclusion

An economy based on market interactions does not permit the degree

of control necessary for a dictator. The late Nobel Laureate Milton Fried-
man was noted for stating that capitalism will eventually lead to democ-
racy. In South America, this scenario has played out on several occasions
throughout history.

State Capitalism—the New Political/Economic System

In chapter 2, we discussed the combination of a Dictator-Capitalism-
No Personal Freedom nation, using China as our example. China has suc-
ceeded to now with this combination through the development of what is
being called “state capitalism.” Many believe state capitalism could be the
economic system of the future.
The unique feature of state capitalism is that the state has ownership of
the resources and companies. Under the old socialist state, the companies
would be subsidized and controlled by the state. With state capitalism,
however, these companies must successfully compete alongside privately
owned companies in the marketplace in order to remain operational. So
far, China seems to have created the right balance of state-owned compa-
nies with private capitalism in order to successfully both the benefits of a
capitalist marketplace and the benefit of maintaining one-party rule.
Today’s global economy is forcing other countries to reassess their cur-
rent communist, socialist political/economic structure. Vietnam and Cuba
appear to be opening their economies at the margins while still maintain-
ing one-party rule. Globally, Cuba has to deal with the 1962 U.S. embargo,
but within Cuba, there have been increased market-oriented initiatives
even though the government is still one-party (communist) rule. Cuba will
be an interesting case study to follow in the future.
Other nations are still clinging to their old ways. This is especially true
of North Korea, Zimbabwe, and Venezuela. As the economy continues to
become more global, it will be interesting to see whether this will force
changes on them politically or economically. The primary essence of dem-
ocratic capitalism is that in the long run, capitalism can only succeed
through a democratic government and civic rights. All three countries
have shown cracks in their systems. We will keep watching to see if they
will be able to retain their current status.

REGIONS OF THE WORLD

Sub-Saharan Africa
Into the future, the region of the world that potentially will receive the
most attention is Africa, specifically sub-Saharan Africa. Based on UN
 Conclusion 129

figures, that is 46 nations of the world potentially banding together to form

one economic body. We discussed earlier their organizing as the African
Union. Based on the resources available to them, if sub-Saharan Africa can
organize effectively going forward, they have the potential to economically
rival any region of the world, including China and India. Several of these
nations are also discussing the use of a single currency.

Asia
Today all eyes are on the various economic activities of Asia. It is not
just China, Japan, or South Korea anymore. There is significant economic
activity in Thailand, Singapore, Malaysia, and Vietnam. These nations
have become known as the Asian Tigers, as their economic competitive-
ness has grown. In the same way that some jobs from the United States
moved to Mexico, many Chinese jobs moved to Vietnam or Thailand.
We cannot discuss the future global economy and Asia without also
discussing India. India continues its trend toward becoming a major eco-
nomic participant in the global economy. India will continue to be plagued
by its population size and extreme poverty.

South America
The one region of the world where “turmoil” seems to be its middle
name is the continent of South America. The twelve nations and three ter-
ritories that make up South America are as diverse in their cultures and
standard of living as the Africa nations. At this point in time, the African
nations seem to be better coordinated and better planned for the future
than their South American counterparts.
South American’s ability to participate in the global economy seems to
be dependent on their different nations’ political landscape. Except for a
few nations (Brazil, Argentina, Chile), most of the South America nations
seem to be vulnerable to extreme shifts in political philosophies. As South
American political philosophies shift, so do economic philosophies. Cur-
rently Venezuela is a prime example of this shift. Roughly fifty years ago,
Venezuela was the fourth-wealthiest nation in the world. Today it is one of
the poorest.
The difference is the change in political philosophy, which changed eco-
nomic philosophy. South American nations seem to have more than their
share of military junta and dictator takeovers of the government. As we
discussed earlier, the two philosophies seemed to be more interdependent
in South America than other regions of the world.
130 Conclusion

Addressing Extreme Poverty in China and Asia

China, India, and the sub-Saharan African nations will need to address
the extreme poverty that exists in their countries. Such wide income dis-
parities create a problem, and they will continue to do so into the future.

Europe
Historically, the continent of Europe has been a friend of the United
States economically, politically, and in many ways culturally. Much of U.S.
culture has its origins in Europe. Primarily through the Marshall Plan, the
United States assisted Europe’s rebuilding efforts following World War II.
Strategically, the United States and Europe comprise the North Atlantic
Treaty Organization (NATO), an alliance of nations that binds them
together that an attack against one nation is an attack against all nations.
During his presidency, Donald Trump has questioned the validity and
worthiness of this relationship. He has claimed that the United States sup-
ports NATO more than other nations and that this should change. On the
surface, these types of discussions between the United States and other
NATO members are more political than economic. Looking forward, how-
ever, one needs to ask whether changes in these political and strategic rela-
tionships will ultimately spill over into changes in the economic
relationships regarding trade among the NATO nations.

GLOBAL ECONOMY AND THE WORLD’S RESOURCES

To have goods and services, an economy needs resources (land, labor,
and capital). As the global economy expands and standards of living
improve globally, more goods and services are going to be desired. This
also means that more resources are going to be needed to produce those
goods and services. To look in the future of the world’s resources, we need
to explore three areas: changing labor market, new natural resources, and
potential future alternative sources.

Labor Market in a Global Economy

The global economy may have its greatest impact on labor and labor
markets. As trade barriers disappear through trade agreements and more
nations participate in the global economy, the labor market may experi-
ence the most drastic change. Through improved resource allocation, edu-
cation, and specialization, nations will depend on each other for labor
specialties.
 Conclusion 131

As this expansion of labor occurs, several significant changes will be

very important and impact you directly. One, the world is your labor mar-
ket. Some of you will find yourselves with careers in other countries. You
will live and work in a world very different from the one you now know.
The other distinct possibility is that the company or career you choose will
be directly linked to another global company or nation. You may still live
in the United States, but your career and work will take you to many places
of the world. The world will definitely be your oyster.
This is also true for every young person from every other nation on the
planet. They, too, will have opportunities worldwide. For you, that means
additional competition for the jobs of the world. You will have to compete
with young people from Asia, Europe, and every other continent on the
planet (except for maybe Antarctica) along with those from North America.
The labor market of the future will place an even greater significance on
education. Much of manufacturing is becoming a white-collar industry.
The manufacturing job your grandparent had with a high school education
will now need someone with knowledge of computers, robotics, and tech-
nology. Higher-level knowledge, thinking, and communication skills will
be necessary just to be considered for an assembly line position. Trades will
require education in trade schools and specialized training. A college four-
year or graduate degree may not be necessary, but postsecondary training
is, and will continue to be, an absolute for the future global economy.

Natural Resource Discovery

Natural resources are any resource that comes from or under the ground
or water. Throughout history, the United States has been blessed with an
abundance of almost every kind of natural resource necessary for the pro-
duction of goods and services and an improved standard of living. These
included fertile soil for different types of growing plants and animals, fresh
water, forests, and oil, gas, and fossil fuels. As we needed more or other
resources, we were able to obtain them rather easily through trade.
Some of these natural resources are finite. Once we use them up, they
will be gone forever. The combination of gained knowledge and technol-
ogy, however, has changed the perception of some resources. Fracking has
prolonged the life and use of oil reserves. Individual transferable quotas
(ITQs) have altered some types of commercial fishing to protect certain
species. Soil use and crop rotation have protected and enriched certain
crops. Human ingenuity and innovation continue to make better use of
even our finite resources and to keep others from becoming extinct.
The future of our natural resources is often a topic of current debates.
One debate relates to the quantity of natural resources still available for
132 Conclusion

ultimate use. The other argues about the quality of the natural resources,
such as debates over air or water quality, for future consumption and use.
Far from being settled, these are the debates you and your generation will
continue to discuss in order to determine future economic and political
policies.

Alternative Sources
An alternative (no pun intended) to discovery of new resources is the
development and ultimate implementation of alternative sources replacing
the fossil fuels. Development of water- and solar power continues to
improve and become more cost-effective for commercial and home use.
The use of natural gas and electric to fuel our cars grows in efficiency and
cost-effectiveness. These are just a couple examples in which the global
economy is changing to meet its growing needs. It is highly likely that
some of you will have careers in further developing and refining alterna-
tive sources of energy for the future global economy.

THE FUTURE OF GLOBAL TRADE

Countries That Do Not Trade
When countries do not trade, they cannot specialize and benefit from
their comparative advantage with other countries. They have to produce
all their goods and services using only the resources within their borders.
This scenario leaves them isolated from the rest of the world and strictly
limits their ability and potential for economic growth. Economists use the
term autarky to describe a country that does not trade.
For many sub-Saharan African countries, growth was a long time com-
ing because they did not trade. As the new countries gained their indepen-
dence from Britain, France, or the Dutch, the new African leaders feared
that trade would lead them back to colonial times and they would lose their
new independence. The new countries bordered themselves up, isolating
themselves from the world. With time, they opened their borders, and now
sub-Saharan Africa is one of the fastest growing regions of the world.
As the global economy expands to include more and more nations,
fewer and fewer nations will be able to practice autarky and survive.

A Protectionist Global Economy

The sub-Saharan African countries closed themselves off voluntarily.
There are times when other countries decide to not trade with a country.
 Conclusion 133

Voluntary decisions to not trade with a country are called a “sanction.”

Sanctions are generally instituted against another country for political
reasons. The intent is to isolate the country being sanctioned and therefore
limit their economic abilities so that they will ultimately capitulate on a
political issue. Sanctions have been imposed many times throughout his-
tory. Research has shown they are usually not very successful.

Potential Future Protectionist Policies

Economic Populism
Increased dissatisfaction with the current status quo throughout the
global economy has increased the popularity of economic populism and
protectionism in many nations, both developed and developing. Economic
populist politicians promise jobs, lower prices, and restricting imports.
Once elected they fulfill their campaign promises by increased govern-
ment spending, creating large deficits. They cover the deficits by printing
more money.
While economic populist policies are often promising in the short-run,
in the long-run economic populism has led to capital flight, real wage
decreases, currency devaluations, and inflation. It will be fascinating to
watch if history repeats itself in these nations where economic populism
has emerged as a dominant economic/political philosophy.

Global Dependence on Oil

Your future world is moving away from its dependence on oil. Providing
subsidies to specific companies in specific industries is the same as pro-
tecting them from foreign competition. In an attempt to speed up the
transition, some governments are trying to pick winners and losers in the
race for alternative, sustainable, and cleaner sources of energy. At the same
time, the oil-rich nations will be trying to keep the world oil dependent as
long as possible. It will be an interesting tug-of-war between the two sides
for energy dominance.

Terrorism, Piracy, and the Global Economy

Another issue that appears not to be going away is terrorism and piracy.
With oil dependence, piracy on the high seas is an issue. Most of us are
familiar with the fictionalized Pirates of the Caribbean Disney movie fran-
chise. There are, unfortunately, the real pirates of the Strait of Hormuz.
The Strait of Hormuz is the oil tankers passageway from the Middle
East oil-producing nations to the oil-consuming nations. The pirating of
134 Conclusion

oil tankers could have a direct impact on the oil industry. If the supply of
oil is drastically reduced, the price of oil and the products from oil, such as
gasoline, could rise significantly. A second scenario is that the oil compa-
nies will be forced to increase security, which will also raise the costs of
producing oil based products and prices for the consumer.

United States-Mexico-Canada Agreement

The governments of the United States, Mexico, and Canada agreed to
the USMCA in 2018. It is supposed to replace the current North American
Free Trade Agreement, which is now over twenty years old. What the
future holds for USMCA is still very much in question. Around the time
that the USMCA was being agreed to by the governments, the U.S. Con-
gress was changing from a Republican-controlled House of Representa-
tives to a Democratic-controlled House. Politics will now play an even
more significant role in the USMCA’s future.
As with most trade agreements, there are winners and losers. Suppos-
edly some of the winners included U.S. farmers, businesses, and workers.
Its improved origin-of-content standards should benefit that U.S. automo-
bile labor. There are new intellectual property protections along with digi-
tal trade, anticorruption, and regulation policies. The agriculture and
agribusiness sections of the USMCA are to benefit farmers and ranchers.
As mentioned, the future of USMCA is still quite uncertain. The best
case scenario is for USMCA to have total support of Congress and be
approved in total. The worst case scenario is for the USMCA to be rejected
in total by the U.S. House. As with most trade agreements, the final ver-
sion of USMCA will likely be a compromise version.

Trans-Pacific Partnership
Another area that is very important to the future of the global economy
is the developments occurring in Asia and the Pacific. When the United
States pulled out of the TPP conversation, it opened a wide range of specu-
lations, one of which was whether China would step in as the foundational
nation for the trade pact. This would give China a stronger foothold in
their relationships with the other Asian economies and most likely dimin-
ish the U.S. role.

Future Tariffs or Tariff Wars

The current U.S. administration is showing the many uses for tariffs
and reasons why a nation may impose tariffs on their imports. The
 Conclusion 135

problem has been, and always will be, that tariffs have two sides. It is
important to acknowledge that tariffs have always been a tool of govern-
ments and will continue be in the future. What will be interesting to fol-
low in the future is the extent that some nations, the United States
included, will use tariffs in the belief that they are helping their domestic
economy at the expense of the global economy.

GLOBAL ECONOMY AND THE WORLD’S CURRENCIES

Money and the Global Economy
In chapter 6, we discussed money and currencies, exchange rates, and
the global economy. We are not going to repeat ourselves here. It is impor-
tant, however, to think about the currencies of the future global economy
and a few of the issues that might surround them.

Currency Wars
At the top of the list of potential global currency problems are currency
wars. A currency war most certainly a war. The weapons in a currency war
are not guns and battleships but the manipulation of a nation’s currency by
another nation. Nations especially vulnerable to a currency war are those
nations whose economy is based on a fixed exchange rate (chapter 6) or
who are highly indebted to other nations.
China is a nation that is both vulnerable to a currency war and has the
ability to start a currency war. It is vulnerable because it has a fixed
exchange rate. Having a currency whose value is fixed to the U.S. dollar
makes China a potential currency war target of the United States. The
United States could alter the value of the dollar to such an extent that the
value of the Chinese renminbi would change so much that it could poten-
tially destroy China’s domestic economy. There would be U.S. domestic
issues as well as the dollar value changed, but they would be considered a
small sacrifice to destroy the enemy, as is the goal in war.
There is another side to the currency war strategy in which the roles are
reversed. In this scenario, China has the United States at a distinct advan-
tage. China holds approximately a little over $1 trillion of U.S. Treasury
bonds, notes, and bills. While this is not a significant portion of the U.S.
federal government’s $21 trillion debt, it is significant enough that if China
chose, they could destroy the value of the U.S. dollar.
If a currency war broke out between the United States and China, one of
China’s first moves would be to cash out of all its U.S. obligations. This
means that the United States would have to pay China more than $1 tril-
lion. These are dollars not currently in circulation. The United States
136 Conclusion

would be forced to print money and add $1 trillion to the amount of dol-
lars in the global economy. As the supply of dollars increases, the value
decreases, and hyperinflation would potentially result. In this scenario,
China potentially wins the war.
Now that we have painted these two dismal pictures of currency wars, a
final note of reality. The reality that either case will happen is quite remote.
In both scenarios, the damage to each domestic economy would be sub-
stantial. At this time, because of the interdependence of the two nations,
neither China nor the United States are willing to risk the uncertain out-
comes of a currency war.

Potential Future Single Currency Areas

West Africa
One area of the world most people would not think about having a sin-
gle currency would be Africa. The countries of West Africa, however, have
had those very conversations and actually began having them in 1999. As
we are gazing into the future, it is worth noting that these discussions are
back on track. A single currency is in the works for the fifteen countries of
the Economic Community of West African States (ECOWAS)1 for 2020.
The early discussions of this single currency coincided with the launch
and implementation of the euro and the European Monetary Zone. This was
not unusual, as other regions of the world were also contemplating the single
currency idea. Since then, however, given issues that have arisen with the
euro and the Eurozone, many of the discussions have also silenced. Whether
this single currency will ever be a reality will be interesting to watch. If it is
launched and does meet with some success, the next interesting step will be
to observe if other regions, especially in Africa, will adopt single currencies.

North American Monetary Union

When single currency regions are discussed, the idea of a North Ameri-
can single currency is usually included. Since the beginning of the North
American Free Trade Agreement in 1994, there has been the debate of a
possible single currency. These discussions have usually occurred in the
ivory towers of academia or in books. There has not been any official dis-
cussions, nor are any planned or anticipated.
For starters, the United States is not going to give up its place in the
global economy in which the dollar is the world’s reserve currency. If a sin-
gle North American currency were to happen, it would most likely, under
current conditions, be the U.S. dollar. Mexico would most likely benefit
from a single currency. Canada, however, would probably have difficulty
 Conclusion 137

accepting the U.S. dollar as their currency. The three countries can agree
on trade. Whether or not they could agree to have a single currency is a
discussion that will be left for the ivory towers and academic think tanks.

Global Reserve Currencies

The odds of a global currency are very, very slim. As the global economy
continues to expand and more nations become active participants, the role
of reserve currencies will also become greater. Nations with fixed exchange
rates are going to demand anchor and reserve currencies whose stable
value they can rely on.
Currently there are four main reserve currencies: U.S. dollar, EU euro,
British pound, and Japanese yen. Of these, the U.S. dollar is the number
one reserve currency. The United States is still the largest consumer mar-
ket in the global economy. Nations whose companies want to do business
in U.S. markets need to have dollars available. The world market for oil is
priced in dollars. The U.S. dollar is almost as important outside the United
States as it is in the United States. The dollar’s status as the number one
reserve currency is vital to both our domestic currency as well as the global
economy. We will discuss this more a bit later.
One currency that does not get the respect its nation believes it deserves
is the Chinese renminbi. As China continues to become a more dominant
participant in the global economy, they are promoting the renminbi as the
next reserve currency. Some movement on this front has occurred, when the
International Monetary Fund made the decision in 2016 to include the Chi-
nese yuan in its basket of currencies that set the value of their Special Draw-
ing Rights.2 The role of the renminbi in the global economy will most likely
be a future issue as the global economy expands and China’s role does too.

GLOBAL BANKING AND FINANCE

Several innovations and expanded use of existing instruments are
changing the way nations and individuals in developing nations are financ-
ing their futures. How these finance innovations will impact the future
global economy will be of great interest to many individuals, economic
and political leaders, and national governments.

Sovereign Wealth Funds (SWF)

While not necessarily a new concept, more nations are creating sover-
eign wealth funds to invest national monies in other parts of the world.
Sovereign wealth funds are actually the savings accounts of nations in
138 Conclusion

which they set national monies aside for investing and financial emergen-
cies. Sources of these funds include budget surpluses, funds received from
privatization activity, or certain capital flows into the country.
SWFs are currently being used by nations for various purposes. One is
to deflect the possibly of a financial crisis. Several nations, such as Singa-
pore, avoided a financial crisis by using funds from their sovereign wealth
fund. A second purpose of the funds is to invest in other parts of the world.
Several SWFs hold U.S. Treasuries as a way to stabilize their funds. These
funds can also be used by nations for development of their own
infrastructure.

Development Banks
Other nations are banding together to create regional development
banks. These are not banks in the normal banking definition. The banks
are owned and operated by the member nations. The mission of a develop-
ment bank is to support the development within each of the member
nations.
The activities of the development banks are varied yet similar. Most
development bank initiatives focus on improving the agricultural develop-
ment in rural areas of the nations. A major initiative of agricultural devel-
opment is the creation of irrigation systems so that farmers are less
dependent on the weather. A second major initiative of development banks
includes roads, bridges, water, and sanitation throughout the nation.
Finally, development banks devote resources to the improvement of
human capital of the nation. This may arguably be the most important for
a nation’s future. Development banks focus on improvements in education
and health care and on creating an environment conducive to entrepre-
neurship and business creation. Development banks could be a very
important variable in the future development of developing nations.

Microfinance in Developing Nations

In many of the world’s nations, access to financial assistance for the
poor to start businesses or other ventures has been unattainable. The third
innovation of global finance is truly a new innovation. Microfinance insti-
tutions serve the poor people in a nation, providing a wide array of finan-
cial assistance. These institutions serve as banks (financial intermediaries)
for a nation’s poorest population. They make loans, take deposits for repay-
ing loans, and help with other financial products, such as insurance.
Microfinance institutions make microloans so that the nation’s poor
can start businesses. A major difference of the microfinance institution is
 Conclusion 139

that collateral is not required for the loan. In lieu of collateral, the borrow-
ers are assigned peer groups. Most of the borrowers are women wishing to
begin a home business.
They also provide support with classes and counseling in business, per-
sonal finance, and basic skills. As the use of microfinance institutions
grows throughout the developing world, this just may be the catalyst for
over a billion people to lift themselves out of poverty. Of course, there are
also downsides, the main one being those who use these institutions to
take advantage of the poor. Regardless, it will be interesting to watch the
impact of these institutions on the future of developing nations.

Source Funding
Given the vast use of the internet now and into the future, this method
of funding projects needed to be at least mentioned. Source funding is an
open source funding strategy currently being used by individuals and
companies to generate revenue. It will be interesting to watch if nations
gravitate to this type of finance and funding as individuals have done. On
one side of the argument is, why not? On the other is, why? Most govern-
ments have various other sources to pursue that are much more likely to
achieve their financial aims in the long run. Yet it is one more source to
keep on our watch in the future.

Export-Import Bank of the United States

There is one finance institution that overlaps this section and our final
section on the United States. The Export-Import Bank of the United States
was created in 1934 as part of President Roosevelt’s New Deal efforts in
order to create jobs in exporting industries.
The bank continues today in two capacities. One is to help U.S. compa-
nies fund exports more than might be possible through regular banking
channels. The other is to serve as a lender of last resort for foreign compa-
nies who desire to buy U.S. goods but need banking assistance. The first
helps create more U.S. jobs, and the latter provides U.S. consumers with
more products than would be possible otherwise.
It appears to be a good deal for everyone. Yet, the Ex-Im Bank continues
to fight for its political life. The federal government funds the Ex-Im Bank.
Many politicians and policy leaders do not like taxpayer money being used
to fund foreign companies who might not pay, leaving the taxpayer to
cover the unpaid loan. Others contend that it funds projects outside its
mission, like bridges and roads in foreign countries. The bank will most
likely continue to be a political topic and one to watch in the future.
140 Conclusion

THE UNITED STATES AND THE GLOBAL ECONOMY

As we conclude our journey, it seems only appropriate that we spend
some time discussing the future role of the United States. Regardless of
any metric one might use today, the U.S. economy is still the dominant
domestic economy in the global economy. With two-thirds of our GDP
being consumer spending, we are the market that the companies of the
world want to be part of. The U.S. economy, however, has its challenges if
that role is going to be maintained in the future.

Nationalism—Modern Mercantilism
Potentially the most comprehensive challenge to the U.S. position in the
global economy is the current general attitude toward a nationalist focused
economy or modern form of mercantilism. This nationalist view retreats
back to the days prior to Adam Smith when individual market transactions
were insignificant to the perceived nation’s economic needs. Then it was
kings and queens making economic decisions for the populace where
today it is presidents and prime ministers. Remember that modern mer-
cantilism is the central focus on exports and a limited focus of imports,
even to the point of discouraging imports. Limiting imports through pro-
tectionist measures shrinks the global economy’s impact on the domestic
economy.
The net impact of protectionist measures is almost always negative. The
domestic economy loses consumer goods, so there is less competition and
higher prices. The inputs of production cost more, and the higher costs are
passed on to consumers in higher prices. The protectionist measure that
may help one part of the economy certainly will hurt another part, as for-
eign nations retaliate with their own protectionist measures. As stated
previously, the current tariff wars have no winners, just least losers.
If the United States, and other nations as well, limit access to the global
economy, they miss out on new innovations, opportunities for entrepre-
neurs, and expanding their consumer markets. As the dominant market,
the United States wants the global economy to be as fair and open as pos-
sible. It needs to protect itself from nations who try to take advantage of
the U.S. dominance and willingness to be open to all. A nation must guard
against being too nationalist in one’s approach.

Future of the Dollar as a Reserve and Anchor Currency

Earlier we discussed the significance of the U.S. dollar as a reserve and
anchor currency in the global economy. What few people understand is
 Conclusion 141

the significance that it also plays in the U.S. domestic economy. The Fed-
eral Reserve responds to the level of economic activity in the United States
through the buying and selling of U.S. Treasuries. When the U.S. economy
is weak, the Fed buys more U.S. Treasuries, which increases the level of
U.S. dollars and lowers U.S. interest rates.
If the U.S. dollar were not as necessary outside United States as it is
today, all the new dollars would be trapped within the U.S. domestic econ-
omy. That would ultimately lead to inflation and then to higher interest
rates and higher prices for resources and consumer products. The new dol-
lars do, however, have an escape from the domestic economy: use by for-
eign companies or foreign central banks as anchor and reserve currencies.
This helps keep U.S. interest rates lower than they would be otherwise and,
with it, enables sustainable economic activity.
Some nations, China being the most vocal, have spoken out for the U.S.
dollar to no longer be the dominant world’s reserve currency. It is impor-
tant for the United States to maintain the dollar’s role in the global econ-
omy. Losing this global role could significantly alter and limit how the Fed
conducts monetary policy in response to the U.S. domestic economy.
This leads to one more potential future issue for the United States. This
is beyond the scope of our global economy journey, but it will be critical for
the Federal Reserve to maintain its independence as the nation’s central
bank. If the Fed were ever to become responsive to a branch of govern-
ment, most likely Congress, monetary decisions would become more polit-
ical than economic. Throughout history, political monetary decisions have
proven disastrous for the domestic economy. It is your future economy.
Protect it.

FINAL WORD
Throughout the chapter, we discussed several future issues of the global
economy. We explored both current and potential future issues of world
regions, trade, and currencies. Now, we need to address one more ques-
tion, which refers to the age-old global relationship between trade and war.
The idea that trading partners promote peace and not war is credited to
French political economist Frédéric Bastiat. It is claimed that he stated, “If
goods don’t cross borders, soldiers will.”3
Will a fully integrated global economy prevent war? The global econ-
omy has benefits and costs. We have identified, discussed, and explored
many of them throughout our journey. This debate is arguably the most
important of them all. If Bastiat’s statement is true, the ramifications for a
world of peace are immense. This reason alone is enough for many to claim
the need for a global economy.
142 Conclusion

The global economy will not be the end all of wars. Most likely there will
always be some leader in the world who desires more power and control.
There will be those whose want for power will necessitate the need for
nations to be ready to defend themselves against such aggressors. Nations
must be prepared to defend their borders, property, and citizens. A global
economy free of protectionism and economic hostilities can be one weapon
against global terror and dictators.4
Through technology and better and faster means of travel, you are
closer to your seven billion, and growing, global neighbors with each pass-
ing year than at any time in the history of mankind. The need to work, play,
and communicate with each other peacefully is more important now than
ever. If a vibrant global economy gives us that chance for global peace, it is
important to make every effort for the global economy to be all-inclusive.
Every nation on the planet needs the opportunity to be a free, open, and
active participant in your global economy of tomorrow. Make it one of
your goals to work for that future.

NOTES
  1. The fifteen nations of ECOWAS are Benin, Burkina Faso, Cabo Verde, Cote
D’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria,
Senegal, Sierra Leone, and Togo.
  2. Reuters, “China’s Yuan Just Joined an Elite Club of International Monetary
Fund Reserve Currencies,” Fortune, October 2, 2016, https://fortune.com/2016
/10/02/china-yuan-imf-currencies/.
  3. Julian Adorney, “Want Peace? Promote Free Trade,” Foundation for Eco-
nomic Education, October 15, 2013, https://fee.org/articles/want-peace-promote
-free-trade/.
  4. An interesting book on this is Hernando De Soto’s The Other Path: The
Invisible Revolution in the Third World (New York: Harper & Row, 1990). In it, De
Soto explains how free markets and capitalism, as opposed to military aggression,
can be a way out for Peru’s poor.
Questions for Further Exploration

INTRODUCTION: HISTORY OF THE GLOBAL ECONOMY

1. The global economy is continually changing and evolving. How do you

think the global economy will evolve in the future?
2. The early global economy took shape with the early Egyptians, Greeks,
and Romans. Do you notice any similarities between the global econ-
omy then and now?
3. The explorers were sent out to discover and conquer new lands for their
riches. Why was this so important for the mercantilist economic
system?
4. How did Adam Smith forever change the global economy and the way
we view trade?
5. With each industrial revolution, significant changes occur to the global
economy. What changes do you think are going to happen with the
next major industrial revolution?
6. John Maynard Keynes was considered one of the most influential peo-
ple of the twentieth century. Like Adam Smith before him, he changed
the way people looked at the global economy. What were the major
ways in which he changed our economic way of thinking?
7. Which part of the world do you believe will have the next major influ-
ence on changing the global economy? Defend your answer.

CHRONOLOGY

1. Why were Marco Polo’s accomplishments so important to the evolution

of the global economy?

143
144 Questions for Further Exploration

2. During the 1400s and 1500s, many explorers set out from Europe to
explore new lands. Why was it so important for kings and queens to pay
for these very dangerous voyages?
3. What made the writings of Adam Smith and David Ricardo so signifi-
cant to the expanding global trade?
4. What made the Smoot-Hawley Tariff (Tariff Act of 1930) so dangerous
to the global economy? Could the same dangers be relevant again?
5. Name two significant twentieth-century events that greatly expanded
the number of nations and potential for an expanding global
economy.

CHAPTER 1: ECONOMIC RULES OF THE GLOBAL ECONOMY

1. Of the five core economic principles of every economy, which one do

you believe to be the most important and why?
2. Think back to a decision you made only to realize it had unintended
consequences. How did your decision work out for you?
3. Name the last decision you made in which you were responding to an
incentive.
4. Besides our examples, can you identify other nations whose economic
system is more clearly defined as a command economic system? A mar-
ket economic system?
5. Why are private property and property rights so important for a market
economy to function efficiently and create economic growth?

CHAPTER 2: GLOBAL ECONOMY, POLITICS, AND CULTURE

1. Which component of society do you believe is more important: eco-

nomic, political, or cultural? Why?
2. Given what you learned in chapter 2, when a political leader become a
dictator, what can you predict will occur economically and culturally?
3. Politicians often want to control a nation’s economic institutions.
Given the societal paradigms, why or why not this is a good idea for
society?
4. Design your own society. Choose one option from each of the societal
components, and defend why your selection is the best option for a
nation.
 Questions for Further Exploration 145

CHAPTER 3: GAINS FROM TRADE

1. What did you collect? Did you trade one of your items for another you
valued more highly? If so, how did you feel after the trade? Did you
believe your collection was wealthier? How did your trading partner feel?
2. Name a skill in which you believe you have an absolute advantage over
another individual.
3. Have you practiced comparative advantage? If so, recall the situation
and identify the reason you allowed someone else to do something you
could have done.
4. Identify a product we import with another nation even though we may
have absolute advantage in producing it ourselves. (You may have to use
an outside source to identify the product.)

CHAPTER 4: PROTECTIONISM AND STANDARDS

1. What is the difference between free trade and fair trade?

2. Economists are more likely to favor free trade, while politicians are
more inclined to favor fair trade. Take and defend a position supporting
the economists or the politicians.
3. When an economic sanction is necessary, which do you believe to be the
most effective? Why is your choice more effective than other options?
4. Should countries have the right and ability to protect their economy
from other countries dumping their imported products into the domes-
tic economy? Support your response.
5. Who wins a trade war and why?
6. How do developed and developing nations use tariffs differently?

CHAPTER 5: MEASURING THE GLOBAL ECONOMY

Spend some time exploring the Bureau of Economic Analysis website at
www.bea.gov.
1. What is your first impression of the work done at the BEA?
2. Go to the “Working at the BEA” section of the website. What might
interest you in working at the BEA?
3. The balance of payments shows how connected a nation is in the global
economy. Can a nation be too global in nature? Defend your position.
146 Questions for Further Exploration

4. Are trade deficits always bad for a domestic economy? Why or why not?
5. Go to the CIA World Factbook at https://www.cia.gov/library/publica
tions/the-world-factbook/. Select two countries. Compare their balance
of trade and then compare their percentage of global trade to their GDP
(exports + imports/GDP). Which country has the higher standard of
living?

CHAPTER 6: GLOBAL FINANCIAL SYSTEMS: EXCHANGE

RATES AND EXCHANGE RATE SYSTEMS

1. A stable currency is imperative for a nation to participate in the global

economy. Why is this statement true?
2. If a nation experiences hyperinflation, what happens to the exchange
rate relative to the world’s reserve currencies?
3. Why it is important for China to have flexible exchange rate?
4. Why does China not want to move to a more flexible exchange rate
system?
5. Give examples of the difference between the forward market and the
spot market for currency exchange.
6. Why did the gold standard go out of favor with the global leaders fol-
lowing World War II?
7. Explain the events leading up to when President Nixon closed the gold
window and essentially ended the era of the gold standard.

CHAPTER 7: THE ORGANIZATIONS THAT INFLUENCE THE

GLOBAL ECONOMY

1. Which of the several international organizations discussed do you

believe has the greater impact on the global economy? Defend your
choice.
2. If you had to prioritize the Sustainable Development Goals, in what
order would you place their importance and why?
3. There are many critics of the IMF and World Bank. Take the position of a
critic and state your case about why they have outlived their usefulness.
4. Should Special Drawing Rights replace the U.S. dollar as the world’s
number one reserve currency? Defend your position.
5. How are the roles of the Federal Reserve System and European Central
Bank different?
 Questions for Further Exploration 147

CHAPTER 8: INTERNATIONAL RULES, TRADE AGREEMENTS,

AND TRADE UNIONS

1. If you were asked to create a global economic police, what would be

your top priority? Why?
2. Defend the IMF’s right to place conditions on nations before granting
them assistance.
3. Ten key items were listed as the Washington Consensus. Choose one
and defend its being on the list to assist nations in financial crisis.
4. Protecting intellectual property is going to be much more important in
the future. Suggest some ways in which this might be more
enforceable.
5. Africa is poised to be a major global partner in the future. What is
needed by African nations to make this a reality? What are the obsta-
cles that could prevent their future global ascendency?

CHAPTER 9: MAJOR CONTROVERSIES OF THE GLOBAL

ECONOMY

1. Of the controversies discussed in the chapter, which one do you believe

is the most important for the future of the global economy?
2. Throughout our journey, we have made reference to the hyperinflation
issues of Zimbabwe and Venezuela. Identify several recommendations
that these countries could implement to avoid a repeat financial crisis.
3. Controversies are a part of life. As you have read, this also includes
nations and the global economy. Consider the many facets of the global
economy we have explored throughout our journey. Is there a contro-
versy beyond the horizon that you believe will need the world’s atten-
tion that we may not have?

CHAPTER 10: THE INFLUENCERS OF THE GLOBAL

ECONOMY

1. Which contemporary economist do you believe had the greatest impact

on today’s global economy? Why?
2. China and India are growing and becoming dominant economic play-
ers in the global economy. How does the work of Douglass North
explain how either of them might ultimately stop growing and not
become the dominant economy most believe they will become?
148 Questions for Further Exploration

3. Which of the early explorers do you find most interesting and why?
4. Joseph Stiglitz has been quite critical of the World Bank and IMF. Using
his arguments, or those of others, either defend their modern existence
or explain why they should be dismantled and replaced.
5. Of all the individuals highlighted in this chapter, choose one and read
an additional biography of their life. Notice how many of them were
also influential in areas besides the global economy.

CONCLUSION: THE FUTURE OF THE GLOBAL ECONOMY

1. Are sanctions imposed for a political result or an economic result?

Defend your position.
2. What are the necessary components for politics, culture, and econom-
ics for a nation to fully participate in the global economy?
3. How do the characteristics of state capitalism and socialism differ?
4. Which region of the world do you believe will be the most significant
growth region in the future and why?
5. Why would one global currency be a good act? Why would it be a
bad act?
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CHAPTER 2: GLOBAL ECONOMY, POLITICS, AND CULTURE

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CHAPTER 3: GAINS FROM TRADE

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CHAPTER 6: GLOBAL FINANCIAL SYSTEMS: EXCHANGE

RATES AND EXCHANGE RATE SYSTEMS
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CHAPTER 7: THE ORGANIZATIONS THAT INFLUENCE THE

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CHAPTER 8: INTERNATIONAL RULES, TRADE AGREEMENTS,

AND TRADE UNIONS
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CHAPTER 9: MAJOR CONTROVERSIES OF THE GLOBAL

ECONOMY
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CHAPTER 10: THE INFLUENCERS OF THE GLOBAL

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ADDITIONAL GLOBAL ECONOMY RESOURCES OF

INTEREST
Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of
Power, Prosperity, and Poverty. New York: Crown Publisher, 2012.
Norberg, Johan. Progress: Ten Reasons to Look Forward to the Future. Lon-
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Novak, Michael. The Spirit of Democratic Capitalism. New York: Simon &
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Rickards, James. Currency Wars: The Making of the Next Global Crisis.
New York: Portfolio/Penguin, 2012.
Rivoli, Pietra. Travels of a T-Shirt in a Global Economy: An Economist
Examines the Markets, Power, and Politics of World Trade. Hobo-
ken, NJ: John Wiley & Sons, 2009.
Rosling, Hans, Ola Rosling, and Anna Rosling Ronnlund. Factfulness: Ten
Reasons We’re Wrong About the World—and Why Things Are Better
Than You Think. New York: Flatiron Books, 2018.
Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle
for the World Economy. New York: Free Press, 2002.
Index
Aboriginal tribes, 7
Absolute advantage, 17–21, 113, 145
Addis Ababa, 93
African Continental Free Trade Area
(ACFTA), 93
African Free Trade Agreement,
93–94
African Union (AU), xliv, 92–94
Age of Discovery. See Age of
Exploration
Age of Exploration, xxi–xxii,
xxxviii, 18
Agenda 2063, 93
Alexander the Great, xxxviii
Amin, Id, 92
An Inquiry into the Nature and Causes
of the Wealth of Nations (Adam
Smith), xxiv, 17, 113
Anchor currency, xxvii, xxx, 49–50,
53, 63, 71, 73, 103, 137, 140–141
Anglo-Iranian Oil Co., xlii–xliii
Anglo-Persian Oil Co., xli–xlii
Anti-Dumping Agreement, 85
Appreciation, currency, 45, 53–54
Association of Southeast Asian
Nations, 94
Australia, xlvi, 7, 10, 90, 101
Austria, xlv
Autarky, 132
Axis, xxvi, xlii, 62
169
Babylon, xvi, xxxvii. See also
Mesopotamia
Bahrain, 90
Baht, 63, 104
Balance of payments, 33–40, 64. See
also Capital account; Current
account; Financial account
Balance of trade, 34, 38, 40–41, 54, 108
Banerjee, Abhijit, 118
Bank of England, 72–73
Bank of International Settlements
(BIS), 60–61, 124–125
Bank of Japan, 70, 73
Barre, Siad, 92
Bastiat, Frédéric, 141
Belgium, xliii, 91
Benin, xliii, 142
Bernanke, Ben, 125
Bhagwati, Jagdish, 116–117
Bilateral investment treaties (BIT),
90–91
Bilateral trade agreements, 88, 90
Black market, 51
Board of Governors: Federal Reserve
System, 70–71, 73, 125; IMF
European Bank for Reconstruction
and Development, 123
Bolivar, Venezuelan, 51
Bolivia, 118–119
Botswana, xliv
170 Index
Brazil, 15, 129
Bretton Woods Agreement, xxx,
65, 84
Bretton Woods Conference, xxvi,
xxviii, xxx, xlii, 49, 62, 65, 78,
83–85, 98. See also General
Agreement on Tariffs and Trade
(GATT); International Bank for
Reconstruction and Development;
United Nations; World Bank
Brexit, xxxiv, xlvi, 52. See also
European Union; Great Britain
BRICS, 94. See also Brazil; China;
India; Russia; South Africa
British pound, 47, 50, 52, 61, 73, 137.
See also Bank of England
Brunei, 101
Buddhism, xxxviii
Bulgaria, xlv, 52
Bureau of Economic Analysis, 33, 38,
40. See also Department of
Commerce
Burkina Faso, xliii, 142
Burmah Oil Company, xl
Bush, George H. W., 89
Byelorussia, xxxii
Cabot, John, xxii, xxxix
Cameroon, xliii
Canada, xxxiv, xlv, xlvi, 10, 90, 112,
119, 136. See also North American
Free Trade Agreement (NAFTA);
Trans-Pacific Partnership (TPP);
United States-Mexico-Canada
Agreement (USMCA)
Canada-U.S. Free Trade Agreement
(CUSFTA), 88
Capital account, 34, 37–40. See also
Balance of payments; Current
account; Financial account
Capital resources, 3, 8
Capitalism, xxxv, 12–14, 104, 119, 128.
See also Market economic system,
State capitalism
Carry trade, 73
Carstens, Agustín, 124
Cartels, 106
Castro, Fidel, xliii
Cathay. See China, ancient history of
Central African Republic, xliii
Central American Free Trade
Agreement (CAFTA), 88–90
Central Intelligence Agency (CIA), 42
Chad, xliii
Chavez, Caesar, 104
Child labor, 29–30, 70, 107–109
Chile, xviii, xlvi, 90, 129
China: age of exploration, xxi, xxxviii–
xxxix; ancient history of, xvi–xx,
xxxv, xxxviii, 112; modern economy,
xxxiii–xxxv, 9, 10, 13, 36, 50, 102–
103, 121, 128, 129, 134–137, 141;
poverty in, 130; and trade, 41, 90,
100–101, 108, 134; twentieth
century, xxix, xlii–xlv. See also
People’s Bank of China (PBC); Polo,
Marco; Xiaoping, Deng; Yuan,
Chinese
Clinton, Bill, 89
Cold War, xxvi, xxix, xxxi–xxxii,
xliii–xliv
Collection of Laws for Electronic
Access (CLEA), 83
Collier, Paul, x, 115–116
Colombia, 90
Columbus, Christopher, xxii, xxxix,
112
Command economy, 7–10, 12–14, 57,
81, 115. See also Marx, Karl;
Socialism
Commanding heights, 81
Commodities, 2, 58
Communism, 13
Communist Manifesto, The (Karl
Marx), xl. See also Marx, Karl
Comparative advantage, xxxvi, xl,
18–21, 113–114, 117, 132. See also
Ricardo, David
Comprehensive and Progressive
Agreement for Trans-Pacific
Partnership (CPTPP), 102. See also
Trans-Pacific Partnership (TPP)
Congo, xxxvi, xliii, 7
Corn Laws, xl

Costa Rica, 51, 90
Cote d’Ivoire, xliii, 142
Crawling peg exchange rate system, 48
Croatia, xlvi
Crony capitalism, 104
Cuba, xliii, 9, 36, 84, 98, 128
Currency. See Anchor currency;
Appreciation, currency; British
pound; Currency manipulator;
Currency wars; Depreciation,
currency; Euro; Global reserve
currencies; Renminbi; Reserve
currencies; Single currency areas;
Yen, Japanese; Yuan, Chinese
Currency manipulator, 100
Currency wars, 135–136
Current account, 34–35, 37–39. See
also Balance of payments; Capital
account; Financial account
Cyprus, xlv
Czechia, xlv
Czechoslovakia, xxxii
da Gama, Vasco, xxi, xxxix, 112
de Soto, Hernando (economist), 142
de Soto, Hernando (explorer), xxii,
112, 119
Denmark, xliv–xlv, 52
Department of Commerce, 33, 40. See
also Bureau of Economic Analysis
Depreciation, currency, 45, 51, 53–54
Devaluation, 53–54, 62, 133
Development banks, 138
Dias, Bartholomew, 112
Dirty float, 50. See also Managed float
Division of labor, xxiv, 2, 17–18, 113
Doha Round. See General Agreement
on Tariffs and Trade (GATT); World
Trade Organization (WTO)
Dollarization, 51–52
Dominican Republic, xxxiv, 89–90. See
also Dominican Republic-Central
America Free Trade Agreement
(CAFTA-DR)
Dominican Republic-Central America
Free Trade Agreement (CAFTA-DR),
89–90
Index 171
Draghi, Mario, 124–125
du Champlain, Samuel, xxxiv
Duflo, Esther, 117
Dumping, 27, 85, 105
East Germany, xxxiii, xlii, xlv
Easterly, William, 116
Economic Community of West
African States, 94, 136
Economic populism, 133
Economic rent, 28–29
Economic systems. See Capitalism;
Command economy; Market
economic system; Mixed economy;
Socialism; State capitalism;
Traditional economy
Egypt, 15
Egyptians, ancient, xvi, xxxvii
El Salvador, 52, 90
Embargo, xxxi, xliii, xliv,
23, 25, 128. See also
Protectionism
Emergency Tariff of 1921, xli
Engels, Friedrich, xl
Equatorial Guinea, xxxvi, xliv
Estonia, xlv
Euro, xxxiii, xxxiv, xlv, 48, 52, 71–72,
125. See also Anchor currency;
European Central Bank; Flexible
exchange rate system; Global
reserve currencies
European Central Bank, 52, 71–72, 92,
124–125
European Coal and Steel Community,
xliii
European Commission, 56, 91
European Common Market, xxxii,
xxxiii, xliii, 92
European Economic Community, xliii,
91. See also European Common
Market
European Monetary Union, 52. See
also European Monetary Zone
European Monetary Zone (EMZ),
xxxiii, xlv, 52, 71, 125, 136
European Union, xxxii–xxxiv,
xliii–xlvi, 14, 24, 41, 52, 91–92
172 Index
Exchange rate systems. See Dirty float;
Fixed exchange rate system; Flexible
exchange rate system; Managed float
Exchange rates, 43–48. See also
Appreciation, currency;
Depreciation, currency; Forward
exchange rate; Spot exchange rate
Export-Import Bank of the United
States, 139
Exports. See Balance of trade; Current
account; Export-Import Bank of the
United States; Mercantilism;
Nationalism; Trade deficit; Trade
surplus; Trans-Pacific Partnership;
United States-China Trade
Agreement
Federal Open Market Committee
(FOMC), 126
Federal Republic of Germany, xlii–xlv.
See also West Germany
Federal Reserve Bank of New York, 61
Federal Reserve System (Fed), 70,
125–126
Financial account, 35–39. See also
Balance of payments; Capital
account; Current account
Financial crises, 52–53, 103
Finland, xlv
Fiscal deficits, 81
Fiscal policy, 72, 118
Five-Year Plan, xliii
Fixed exchange rate system, xxx,
48–49, 53, 102–103
Flexible exchange rate system, xxvii,
45, 50, 53, 81
Fordney-McCumber Act, xli
Foreign direct investment, 35–36, 58,
81
Foreign portfolio investment, 35–36
Forward exchange rate, 45
Forward market, 45
Four freedoms, xxxii
Four Modernizations, xxxv
Fourteen Points, xli
Fracking, 131
France, xxiv, xxix, xxxix, xliii, 91–92,
122, 132
Free trade zone, 71
French Revolution, xl
Friedman, Milton, 128
G-7, 123
G-20, 123
Gambia, xliv, 142
Garcés, Maria Fernando Espinosa, 123
General Agreement on Tariffs and
Trade (GATT), xlii, 67, 83–85, 105
Geneva, 58, 69–70, 87
Geneva I (GATT Round), 84
Genghis Khan, xxxviii
Germany, xxvi, xxxii, xliii–xlv, 55, 61,
84, 91
Ghana, xliii, 142
Glasnost, xxxi, xxxvi, xliv
Global reserve currencies, 137
Gold reserves, xxx, 48–49, 64
Gold Standard, xxvii, xxx, 48
Gorbachev, Mikael, xxxi–xxxii, xliv
Great Britain: modern economy,
xxxiii–xxxiv, xxxvi, xlvi, 10;
twentieth century, xxvi–xxvii,
xxxix, xlii–xliii, xlv. See also Bank of
England; Brexit; Pound sterling
Great Leap Forward, xliii
Greece, xvii, xliv, 63, 125
Greeks, Ancient, xvii, xxxvii
Gross Domestic Product (GDP), 40, 60,
81, 140
Guatemala, 90
Guinea, xxxvi, xliii, 92, 142
Hague, The, 87
Harding, Warren, xli
Hitler, Adolf, xxvi, xlii
HIV-AIDS, 118
Honduras, 90
Hong Kong, xlv, 10, 14, 60
Household Responsibility System,
xxxv
Human resources, 2, 131–132
Hungary, xxxii, xlv

Hyperinflation, xlii, 51, 55, 104–105,
118, 136
IMF conditionality, 63, 79
Imports. See Balance of trade; Current
account; Export-Import Bank of the
United States; Tariffs; Trade deficit;
Trade surplus; Trans-Pacific
Partnership (TPP); United States-
China Trade Agreement
Incentives, xliv, 4–6, 9, 11, 116, 120, 121
India: Age of Discovery, xxi–xxii,
xxxix, 112; early history of, xvi–
xviii, xx, xxxviii; modern economy,
10, 95, 129–130; twentieth century,
xlii. See also Bhagwati, Jagdish;
Singh, Manmohan
Individual transferable quotas (ITQs),
131
Indus River Valley, xvi
Industrial Revolution, xxiv–xxv,
xl, 18
Infant industry, 26
Inflation, xxx–xxxi, 50–51, 55, 103,
104, 141. See also Hyperinflation
Information economy, 58
Institute for Liberty and Democracy
(ILD), 119. See also de Soto,
Hernando
Intellectual property rights, 26, 30, 69,
82, 108–109, 134. See also Trade-
Related Aspects of Intellectual
Property Rights; World Intellectual
Property Organization (WIPO)
Interest rates, 36, 73, 141. See also
Interest rates, nominal
Interest rates, nominal, 81
Intermediation, financial, 53
International Bank for Reconstruction
and Development (IRBD), xxvii, xlii,
65–67, 123. See also World Bank
International Centre for Settlement of
Investment Disputes, 65. See also
World Bank Group
International Court of Justice, 87. See
also United Nations
Index 173
International Development
Association (IDA), 65. See also
World Bank Group
International Finance Corporation
(IFC), 65. See also World Bank
Group
International Labor Organization, 30,
60, 69–70
International Monetary Fund (IMF):
creation of, xxviii, 61–62; critics of,
81–82; role of, 64, 78–82. See also
IMF conditionality; Lagarde,
Christine; Special Drawing Rights
(SDRs)
International Trade Organization
(ITO), xxxviii
Ireland, xliv
Israel, xxxi, 90
Italy, xxvi, xliii, 84, 91, 124
Jamestown, xxxix
Japan: modern economy, xxxiv, xlvi,
10, 14, 24, 129; trade of, 90, 98, 101;
twentieth century, xxvi–xxvii, xlii,
65, 84. See also Bank of Japan; Yen,
Japanese
Jordan, 90
Kayango tribes, 7
Kenya, xliii, xliv
Keynes, John Maynard, xxvi–xxviii
Korean War, xliii
Krugman, Paul, 114
Labor, xxii, xxiv, xxv, 2, 130–131. See
also Child labor; Human resources
Lagarde, Christine, 122, 124, 126
Latin America, 116, 119, 136
Latvia, xlv
League of Nations, xli
Least developed countries (LDCs), 59
Lender of last resort, 78–79, 82, 139
Lesotho, xliv
Lithuania, xlv
Logic of collective action, 29
Luxembourg, xliii, 91
174 Index
Madagascar, xliii
Maduro, Nicholas, 104
Magellan, Ferdinand, xxii, xxxix, 112
Malaria, 118
Malawi, xliv
Malaysia, xxxiv, xlvi, 90, 101, 129
Mali, xliii
Malpass, David R., 123
Malta, xlv
Managed float, 50. See also
Dirty float
Market economic system (market
economy), 5, 8–10, 12, 14, 21, 57. See
also Capitalism
Marx, Karl, xl
Mauritania, xliii
Mbuti Pygmies, 7
Mercantilism, xviii, xxii–xxiv, 18, 113,
140
Mesopotamia, xxxvii
Mexico: history of, xvii; modern
economy, xxxiv, xlvi, 30, 136;
twentieth century, xlv. See also
Carstens, Agustin; Comprehensive
and Progressive Agreement for
Trans-Pacific Partnership (CPTPP);
North American Free Trade
Agreement (NAFTA); Trans-Pacific
Partnership (TPP); United States-
Mexico-Canada Agreement
Mexico City, 60
Microfinance, 118, 138–139
Mixed economy, 9–10
Modern mercantilism. See
Nationalism
Monetary policy, 70–74, 104, 118,
125–126. See also Bank of England;
Bank of Japan; European Central
Bank; Federal Reserve System (Fed);
People’s Bank of China (PBC)
Monetary unions, 52
Morocco, 90
Most-favored nation (MFN), 68, 84
Mugabe, Robert, 104
Mulroney, Brian, 89
Multilateral agreements, 88, 91
Multilateral Investment Guarantee
Agency. See World Bank Group
Nationalism, 140
Natural resources, xxxiii, 2, 130–132
Netherlands, xxxi, xliii, 87, 91–92
New Zealand, xlvi, 90, 101
Nicaragua, 90
Nixon, Richard, xxx, 49
Nobel Peace Prize, 92, 114
Nobel Prize in Economics, 114, 120
North, Douglass, 120
North American Free Trade
Agreement (NAFTA), xxxiv, xlv, 27,
88–90, 98–99, 102. See also Canada;
Mexico; United States-Mexico-
Canada Agreement (USMCA)
North Atlantic Treaty Organization
(NATO), 130
North Korea, xliii, 9, 14, 128
Obama, Barak, 90, 101, 125
Offshoring, 107, 116–117
Oil, xxx–xxxi, xxxiii, xl–xliv, 2, 13,
105–106, 131, 133–134, 137
Olson, Mancur, 29. See also Logic of
collective action
Oman, 90
On the Principles of Political Economy
and Taxation (David Ricardo), 113
Opportunity costs, xl, 3–4, 18–21, 113
Organization for Economic
Cooperation and Development
(OECD), 60
Organization of African Unity (OAU),
92–93
Organization of Petroleum Exporting
Countries (OPEC), xliv, 106. See also
Cartels
Oster, Emily, x, 118
Ottoman Empire, xxxviii
Outsourcing, 107
Pakistan, xvi, xxix, xlii
Panama, xxii, 51, 90
Par value, xxvii
 Index 175
Pearl Harbor, xlii
Pegged exchange rate system, 48–50.
See also Anchor currency; Fixed
exchange rate system
People’s Bank of China, 74–75. See also
China
Perestroika, xxxi, xxxvi, xliv
Perot, Ross, 89
Peru, xviii, xlvi, 90, 101, 119. See also
de Soto, Hernando
Pizarro, Juan, xxii
Poland, xvii, xxxi, xlii, xliv, xlv, 52
Polo, Marco, xviii–xxi, xxxvii, 111–112
Populism. See Economic populism;
Modern mercantilism; Nationalism
Portugal, xxi, xxxi, xxxix, xliv, 92, 112
Pound sterling, xxxiii, 70, 73
Powell, Jerome H., 125–126
Prince Henry the Navigator, xxi, xxxix,
112
Private ownership, 8–9, 128
Private property, 8
Privatization, 121, 138
Property rights, 5–6, 9, 11, 14, 21, 81,
120. See also Intellectual property
rights; Trade-Related Aspects of
Intellectual Property Rights (TRIPS)
Protectionism, 23, 84, 106. See also
Embargo; Quotas; Subsidies; Tariffs
Purchasing power parity (PPP), 55–56
Quebec City, xxxix
Quota subscriptions, xxvii, 64
Quotas, 24–25, 68, 81, 94. See also
Individual transferable quotas
(ITQs); Protectionism
Raleigh, Sir Walter, xxii
Reagan, Ronald, xxxii, xxxvi
Regional trade agreements, 88, 98
Regional unions, 91. See also African
Union; European Union
Renminbi, 61, 74–75, 103, 135, 137. See
also People’s Bank of China; Yuan,
Chinese
Republic of Ireland. See Ireland
Republic of Sudan, xlvi
Reserve assets, 36, 39–40
Reserve currencies, 137
Revaluation, 54
Ricardo, David, xxv, xxxvi, xl, 18, 113.
See also Comparative advantage
Roman Empire, xvii, xxxviii
Romania, xxxii, xlv
Rule of law, 5–6, 81
Russia, xxxii, xlv
Sachs, Jeffrey, 118–119
Salina de Gortari, Carlos, 89
Sanctions, economic, 23, 26–29, 68,
86, 133. See also Embargo;
Protectionism; Quotas; Tariffs
Scarcity, 2–3
Schengen Agreement, xxxiii, xlv
Scotland, xlvi
Senegal, xliii, 142
Seven Years War, xxxix
Shanghai Stock Exchange, xlv
Shock therapy, 118–119
Silk Road, xix–xx, xxxviii
Singapore, xxxiv, xlvi, 10, 14, 90, 101,
129
Singh, Manmohan, 120–121
Single currency areas, 52, 136
Single European Act, xliv
Single Market Treaty, xxxiii
Single monetary zone (region), 52, 136
Sixteenth Amendment, 24, 27
Slovakia, xlv
Slovenia, xlv
Smith, Adam, xxiii–xxv, xl, 17–18, 19,
113. See also Absolute advantage; An
Inquiry into the Nature and Causes
of the Wealth of Nations
Smoot-Hawley Tariff Act, xli, 27, 28,
61. See also Tariff Act of 1930
Socialism, 8, 12–14, 92. See also
Command economy; Economic
systems
Solar power, 132
Source funding, 139
South Africa, xxxi, xxxix, xliii
176 Index
South America, xvii, 52, 104, 112, 128,
129
South Korea, xxxiv, xliii, 73, 90, 129
South Sudan, xlvi
Sovereign, 78, 94
Sovereign wealth funds, 137–138
Soviet Union, xxvi, xxix, xxxi–xxxii,
xlii–xlv, 62
Special Drawing Rights (SDR), xxvii,
40, 61, 64, 75
Specialization, 2, 17–18, 113, 130
Spot exchange rate, 45
State capitalism, 128
Stiglitz, Joseph, 114
Sub-Saharan Africa, 14, 128–130, 132
Subsidies, 25. See also Protectionism
Sustainable Development Goals,
58–59
Sweden, xlv, 52
Switzerland, xxxiii, 58, 60, 70, 87, 119
Tanzania, xliii, 115
Tariff Act of 1930. See Smoot-Hawley
Tariff Act
Tariff wars, 134–135
Tariffs: definition of, 23–24; history of,
xli; purposes of, 25–26, 62, 68; as
revenue, 24. See also General
Agreement on Tariffs and Trade
(GATT); Protectionism; Sanctions,
economic; Tariff wars; Trans-Pacific
Partnership (TPP)
Thailand, xxxiv, 63, 103–104, 129
Theocracy, 13
Thurow, Lester, 115
Togo, xliii, 142
Touré, Sékou, 92
Trade, measurement of. See Balance of
trade; Trade, net; Trade deficit;
Trade surplus
Trade, net, 38, 40, 41
Trade, voluntary, 6, 8
Trade agreements. See African Free
Trade Agreement; Dominican
Republic-Central America Free
Trade Agreement (CAFTA); North
American Free Trade Agreement
(NAFTA); Trans-Pacific
Partnership; United States-China
Trade Agreement; United States-
Mexico-Canada Agreement
(USMCA)
Trade associations. See Association of
Southeast Asian Nations;
Economic Community of West
African States
Trade deficit, 41, 63
Trade-Related Aspects of Intellectual
Property Rights (TRIPS), 83. See
also Intellectual Property Rights
Trade surplus, 41
Trade war, 28, 106, 134
Traditional economy, 7
Trans-Pacific Partnership (TPP), xlvi,
90, 101, 134. See also Comprehensive
and Progressive Agreement for
Trans-Pacific Partnership (CPTPP)
Treaty of Paris (1763), xxxix
Trump, Donald, xlvi, 26, 90, 101, 102,
125, 130
Ukraine, xxxii, xlv
UN Commission on International
Trade Law, 86
UN Convention on the Law of the Sea,
87
United Kingdom. See Great Britain
United Nations, xxvi, xlii, 85–88. See
also International Court of Justice;
United Nations Conference on
Trade and Development
(UNCTAD); World Intellectual
Property Organization (WIPO)
United Nations Conference on Trade
and Development (UNCTAD),
58–59
United States-China Trade
Agreement, 100
United States-Mexico-Canada
Agreement (USMCA), 99, 134
Uruguay Round, 69, 83–84. See also
General Agreement on Tariffs and
Trade (GATT); World Trade
Organization (WTO)
 Index 177

Venezuela, 9, 14, 36, 55, 104–105, 128, World Intellectual Property

129 Organization (WIPO),
Vespucci, Amerigo, xxii, 112 83, 87–88
Vietnam, xxxiv, xlvi, 101, 128, 129 World Trade Organization (WTO), xlv,
Vikings, xxii, 112 27, 67–69, 78, 82–85, 86, 105. See
also General Agreement on Tariffs
Washington Consensus, 81–82 and Trade (GATT)
Water power, 132 World War I, xxv, xli, xlii, 61, 69, 84,
West African Single Monetary 86, 98
Zone, 52 World War II, xxvi, xxix, 48–49, 58,
West Germany, xxxii, xlii–xlv. See also 60, 62, 91, 98
Federal Republic of Germany
White, Harry Dexter, xxvi Xiaoping, Deng, xxxv, xliv, 100,
Wilson, Woodrow, xli 121–122
World Bank, xxvii, 42, 65–66, 98,
114–116 Yellen, Janet, 70, 125
World Bank Group, 60, 66–67, 123– Yen, Japanese, 50, 73, 137. See also
124. See also International Centre Bank of Japan; Japan
for Settlement of Investment Yuan, Chinese, 50, 61, 74, 103. See also
Disputes; International China; Renminbi
Development Association (IDA); Yugoslavia, xxxii
International Finance Corporation
(IFC) Zambia, xliv
World Court. See International Court Zedong, Mao, xxix, 74, 121
of Justice Zimbabwe, 51
About the Author

Dr. David A. Dieterle is professor of economics in the Finance and Eco-

nomics Department at Walsh College and director of the Center for Eco-
nomic Education. Dr. Dieterle served as president and chief academic
officer of the Michigan Council on Economic Education (MCEE) from
1999 to September 2015. A National Teaching Fellow of the Foundation for
Teaching Economics, Dr. Dieterle specializes in economic education,
global economics, and economic analysis. He has received several teaching
and writing honors.
Dr. Dieterle is the editor of Economic Thinkers: A Biographical Encyclo-
pedia (Greenwood Press, 2013), coeditor with Kathleen Simmons of Gov-
ernment and the Economy: An Encyclopedia (Greenwood Press, 2014), and
editor of Economics: The Definitive Encyclopedia from Theory to Practice
(Greenwood Press, 2017). Booklist.com, the review arm of the American
Library Association, listed Economics: The Definitive Encyclopedia from
Theory to Practice as one of the Top Ten Reference Books for 2018. Recently
he authored Business and Economics Series: Taxation (Greenwood Press,
2019).
Dr. Dieterle was a coauthor of Social Studies in Our Nation’s High
Schools: A National Random Survey of Social Studies Teachers’ Profes-
sional Opinions, Values, and Classroom Practices (The Center for Survey
Research and Analysis, University of Connecticut, 2009). Dr. Dieterle has
authored publications that appeared in Social Education and Newspaper
in Education educational sources for the Chicago Tribune and Detroit Free
Press.
180 About the Author

Dr. Dieterle has consulted with the Michigan, Illinois, and Nebraska
departments of education and many organizations throughout his career,
including Junior Achievement, Goodwill Industries of Northern Michi-
gan, and Economics for the Clergy. He has presented over sixty workshops
and conference presentations nationally and internationally. Dr. Dieterle
presented a series of lectures and workshops to educators in Zambia,
Malawi, and Puerto Rico. He presented papers to both the Zambia Minis-
try of Education and Malawi Ministry of Education proposing the inclu-
sion of economic and entrepreneurship education in their national teacher
preparation programs.
Dr. Dieterle taught elementary and middle school in Michigan Public
Schools for eleven years. He received degrees from Central Michigan Uni­
versity, Purdue University, and a doctorate from Michigan State University.
He resides in Michigan and loves to boast about his seven grandchildren
and two great grandchildren.