LESSON 1

THE GLOBAL ECONOMY

EMPOWER
As you sit on a chair in a five-star hotel, you might realize that it was made in
Sweden. As you look out your window, you might see a car that carries a Japanese name.
As you look down at your keyboard, you see another Asian brand, and if you backed away
from your computer for a moment and checked out the label on your shirt, you just might
see the words ‘Made in China'. Without a doubt, you are surrounded by products that have
come from across the seas. In other words, your daily life (and others’, too!) is a living
example of this lesson on the globalization of the world's economy.
To explain, economic globalization is the economic mixing and interdependence of
economies across the world through an escalation of cross-cultural movement of goods,
services, technologies, and wealth (Joshi, 2009). Stated really simply, it is the world's
money being spread around as goods, products, and technology are sent from one country
to another country. Economic globalization is the reason that you can go to your local
superstore and buy products from all over the world, while people in Europe and Asia can
also buy American products. It is also the reason someone in China can order a Grande
mocha latte at the same coffee chain you bought yours from this morning. To play on a very
familiar song, it is one of the reasons that ‘It's a small world after all!' According to many
economists, it has reached new heights in the past few years (James, 2014).
With this unprecedented growth in economic globalization some argue its impact on
the world has been very positive. However, there are some who are not so sure that it has
been the best thing for all parts of the world. Indeed, going global is a big decisions that
many businesses think long about making. For the remainder of the lesson, we will look at
these two arguments so you can decide whether economic globalization is truly a good
thing for countries to embrace. We will also discuss the actors that facilitate it and the
modern global economic system it has built today. But before that, let us look at the good
and bad about doing business internationally first.
GOING GLOBAL IN BUSINESS
Many businesses go global because it makes sense to. They have developed
business relationships internationally and their presence abroad will benefit the company
economically and professionally. Take Matthew for example. Matthew is a small business
owner who has many international contacts. He has been contemplating the idea of
expanding his business internationally so he decided to travel abroad to scope out a
potential business location he had in mind in order to determine if it would meet his
company's needs.
While there, Matthew met many people and he was able to make a name for his
business quickly. Considering it a viable option, he spoke to his colleagues and partners
back home. After careful consideration of finances, laws, and regulations of the country,
along with all expenses needed to expand the business, Matthew and his team decided it
was the right move to expand their business overseas. Though they ultimately decided to
move the business overseas, it was not an easy choice for Matthew and his team. They
really had to weigh out the many pros and cons in order to make such an important
decision.
THE PROS OF GOING GLOBAL
What could be the pros that Matthew needs to consider when going global? The first
benefit is a global reputation. Since the business builds a name internationally, this could
help it stay in business longer and build an admirable reputation. The second benefit is
there can be cheaper labor costs, which can help reduce employee costs. Hiring local
employees is another advantage, since by hiring employees overseas, the business is
fostering a good relationship with the country and local economy. Companies going global
also benefit from fresh ideas. By hiring new employees, the business is increasing the
likelihood of new and creative business ideas.
Cheaper operating costs are also a pro, since the cost of running the business
abroad could be cheaper than at home. Cheaper supply costs may also come into play,
since the cost of suppliers and distributors could also be cheaper than at home. Another
advantage is the ability to have global partnerships. More partnerships could be built with
neighboring countries and these partnerships can assist in increased marketing potential for
the business. Finally, going global provides a back-up income source in case the
business at home has trouble meeting its yearly goals.
Now that you have learned the positive impacts of going global in business to the
owner itself, let us consider the pros on the global economy.
IMPACT ON JOBS & PRICING
The proponents for the expansion of economic globalization argue that it creates
jobs and lowers the prices of goods. For instance, when an American-born manufacturing
company sets up shop in an impoverished country, it creates jobs for the people there. On
the other hand, when China exports, or sends goods to another country like the U.S., it
forces American manufacturers to offer their goods at cheaper prices as well. Although it
would not be all that empirical, to see this phenomenon in action, just go to your local super
store (that probably has the word 'mart' in its name) and check out the prices and how
many times you read the words 'Made in China'!
Relating Matthew’s situation to the macro impact of economic globalization, a global
reputation is definitely established, along with the creation of global partnerships that is
beneficial for expansion in the future.
POLITICAL IMPACT
Speaking rather ethnocentrically, many in the West argue that economic
globalization will encourage the growth of democracy as impoverished nations, especially
those under dictatorships, begin to interact with the freer West. In other words, when people
get a taste of the products from the industrialized world, they may just want more.
THE CONS OF GOING GLOBAL
Although Matthew and his team have seen all the benefits of going global, they also
have to look at some of the downsides. One of these is dealing with local politics, since
the country may run into some political issues that could cause some harm to business
sales. It is important for the business to do its homework before expanding and make sure
the country it does business in does not have strong political issues. Other issues or risks to
watch out for are the crime rate and war.
Cultural differences also have to be considered, since it is important to really
understand the culture of the country where you are moving to. Knowing beliefs and
traditions will go a long way to ensuring success and not offending the locals. For example,
a country where the people believe in dressing modestly will not welcome a business that
manufactures revealing clothing.
Finally, it is essential to consider the possibility of financial instability. It is important
to consider how the country does when it comes to managing its wealth. It would be good to
know how the local businesses are managing, as well as how the currency compares to the
US dollar. For example, a business owner looking to move into the economy would want to
be aware if the country has poor trading conditions with other countries or is not producing
a lot of exports.
Of course, there are always two sides to every argument. While proponents of
economic globalization tout its power to create jobs in impoverished nations, many argue
that it has allowed for the following situations to take place:
CAPITAL FLIGHT
Opponents argue that economic globalization has caused capital flight, the large-
scale departure of companies, assets, and wealth from a country due to economic
instability or the opportunity for cheaper production (Hermes, et. Al, 2003). Linking capital
flight back to our conversation on jobs, economic globalization has made it possible for
large companies to move their businesses to countries where they can pay their employees
less. For example, a large computer company knows it can pay a worker overseas 50¢ an
hour, as opposed to the United States' minimum wage of over $7.
Consequently, opponents to globalization have a problem with the effects of offering
lower-priced goods to consumers. This is nice for us when we go shopping, but goods
coming into a country cheaper has also been the demise of some local economies — once
a large store comes to a specific area, the small businesses just could not compete with
the cheap prices that they offer, forcing them to shut their doors. Yes, these huge stores
have made a science out of importing, or bringing in goods from another country, but
many assert it has come at the loss of local businesses and the demise of what many have
called main-street local businesses. Although this sounds great in theory, others do not see
it with such rose-colored glasses. Opponents fear that large companies, without any sort of
accountability, just may end up being as dangerous as the dictators they replaced.
If truth be told, economic globalization has, indeed, allowed for social injustices,
such as poor working conditions, wages that are scandalously low, and even the
exploitation of children in the form of forced labor. In other words, when a company sets
up shop in a nation that does not enforce fair labor practices, abuses may abound.

ACTORS THAT FASCILITATE GLOBALIZATION

We have learned in the previous lesson that globalization is about interconnecting people
around the world beyond the physical barrier of geographical boundaries. Since it is
inevitable that pros and cons can result from it, it is necessary to recognize the many
factors that are responsible for the flourishing of economic globalization. Say for example,
Meat Queen. It is the supreme ruler of fast food restaurants around the globe. How did they
do it? They embraced globalization, or the integrating of economies across the globe
through the process of procuring goods, services, and capital across the world. As we go
along with our study of the major drivers of the globalization process of the economy, we
will begin examining Meat Queen’s adoption of globalization.
MAJOR DRIVERES OF GLOBALIZATION
Meat Queen’s globalization success can be linked to numerous key drivers of the
overall process. The first factor is the benefit of technological innovation, which has
allowed the Meat Queen to rapidly globalize their restaurants. The company has been able
to manage, reproduce, and standardize their food across the world with local sourcing of
ingredients coordinated by technology, such as video conferencing and emailing with
suppliers. It is also easy to communicate with employees worldwide to ensure coordinated
global efforts for topics such as training.
Another major driver of globalization for King Meat has been the development of
their transportation systems, which allow quick, affordable migration of their products
across the globe. The company utilizes freight trains, ships, and even planes to transfer
products to their restaurants. For example, new roads in India have allowed the company to
open restaurants in that country. In the past, Meat Queen was limited by small dirt roads
that did not support their trucks.
Social and political reforms have also affected the globalization of Meat Queen's
business. The enormous growth in population and consumerism of countries, such as
China, Japan, and India, has created opportunities for new customers globally. And the
collapse of communism in Central and Eastern Europe has created even more new
markets and business partnerships for Meat Queen to establish their restaurant business.
All of these drivers have allowed Meat Queen to quickly establish restaurants
globally with minimal effort.
MODERN WORLD SYSTEM
In this day and age, the world has changed as globalization takes place where we
are moving away from being self-contained countries to being a more integrated world.
Imagine for a moment that you run a business that produces digital cameras. How would
globalization impact your company? There are two broad categories that describe the
impact of globalization: market globalization and production globalization (Levitt, 2001).
Market globalization is the decline in barriers to selling in countries other than the
home country. This change will make it easier for your company to begin selling products
internationally, since lower tariffs keep consumer prices lower and fewer restrictions when
crossing borders makes it easier for a company to enter a foreign market. It also means
that companies must consider other cultures when developing their business strategies and
potentially adjust the product and marketing messages if they aren't appropriate in the
target country. This may not be an issue in the camera industry, but a hamburger company
entering India would definitely need to revisit their product and strategies to be successful.
Production globalization is the sourcing of materials and services from other
countries to gain advantage from price differences in different nations. For example, you
might purchase materials and components for your cameras from multiple countries and
then assemble the product in yet another international location to reduce your costs of
production. This change should lead to lower prices for consumers since products cost less
to produce. It also impacts jobs, since production may shift from one country to another,
usually from more developed countries to less developed countries with lower average
wage rates.
At present, there is an obvious change in businesses, a state known as
globalization of business, as changes in a business from a company associated with a
single country to one that operates in multiple countries occur.
What, then, are the effects of globalization?
The primary effects of globalization include the following:
1) Distributed Operations wherein companies may locate facilities in multiple
countries. There are many reasons to spread out operations, including: (a) reduced labor
or production costs in the country where a plant is located, and (b) reduced distribution
costs due to locating a plant nearer to the customers. For example, a company with sales
in Europe may build a production facility in Europe as well so that goods do not have to be
shipped over the ocean from the U.S. or Asia.
2) Changes in location wherein companies may locate their firms in new places,
both to reduce labor and production costs and to take advantage of free trade zones. In a
free trade zone, goods can travel freely between countries and no tariffs are charged when
crossing borders. This helps keep prices lower than if the goods were shipped in from
another area.
3) Increasing complexity — although multiple locations and distributed operations
may lead to reductions in cost, it also causes increasing complexity in management of the
interactions between the facilities.
In addition, although a free trade area has fewer hurdles for moving goods within the
region, companies may still have to adjust their marketing strategies for regional
economies. For example, advertising in France still needs to be translated into French,
even though a German company may send their goods there without dealing with border
restrictions.
The Modern World System is focused on the concept of economic integration. In this
lesson, we will learn about economic integration, its theoretical basis, and the different
levels of integration considering the trend that has been going on over the past decades.
WHAT IS ECONOMIC INTEGRATION?
Economic integration involves agreements between countries to permit, to varying
degrees, the flow of capital, labor, goods, and services across their respective international
borders (Tovias, 1994). It is an arrangement between different regions that often includes
the reduction or elimination of trade barriers, and the coordination of monetary (consists of
the decisions made by a government concerning the money supply and interest rates) and
fiscal policies (the use of taxation and government spending policies to affect the overall
business activity). The aim of economic integration is to reduce costs for both consumers
and producers and to increase trade between the countries involved in the agreement.
THEORY OF ECONOMIC INTEGRATION
The argument in support of economic integration can be very complex, but the
general theoretical basis of it will be outlined here. Every country is better suited to engage
in certain activities than other activities. Some countries are rich in natural resources, some
in labor, and some in capital, just to name a few. For simplicity, the discussion will be
restricted to capital (money available for investment) and labor (workers).
If labor and capital are free to move across international borders, each country can
capitalize on its advantages. Countries with a great amount of capital will focus on
economic activities requiring a great amount of capital investment, such as
pharmaceuticals, aerospace, and emerging technologies. They will export capital-intensive
goods and services, and import labor intensive goods and services. Since such a country
does not focus on labor-intensive businesses, its labor supply will increase, causing wages
to go down as more people compete for the same jobs.
On the other hand, countries with an abundance of labor will focus their economic
activities on industries that rely on a great amount of labor, such as manufacturing, because
labor is cheap. However, eventually the supply of labor will decrease, which will cause
wages to go up. The country will also increase its capital, from the profits it generates from
its exports, and that will permit more investment.
The theory hypothesizes that eventually the ratio between wages and profits should
equalize among the participating countries, resulting in fair and balanced trade. In other
words, according to the theory, there will eventually cease to be a disparity between labor
costs, capital investment, and wealth among nations.
TYPES OF INTEGRATION
As you might expect, there are varying degrees or levels of economic integration.
Each type of integration represents a particular level of economic integration. You can think
of economic integration as being on a continuum, in which no integration is at one end, and
complete economic integration is at the other end (Machlup, 1977).
FREE TRADE AGREEMENTS
Most efforts at economic integration occur today through the use of free trade
agreements, which are agreements entered into between countries regarding specific
trade issues, such as reduction of tariffs (a type of tax on imported or exported goods and
services) and quotas (nontariff barriers between countries) that limit imports. Trade
agreements can be bilateral (between two countries) or multilateral (between several
countries). Countries that are not a party to the agreement will be subject to higher tariffs
and other trade barriers.
FREE TRADE AREAS
 A free trade area eliminates barriers to trade among the members such as tariffs
and quotas. Members of a free trade area make their own policies concerning trade with
other countries outside of the free trade area. You should note that a free trade area may
be limited to specific types of goods and services. The best example of a free trade area is
NAFTA, the North American Free Trade Agreement.
CUSTOMS UNION
A customs union is formed by countries that not only eliminate trade barriers
between the members but also have a unified trade policy with countries outside of the
union. For example, a customs union will establish a common tariff that is applied to all
imports coming into each member country. The tariff revenues may be split among the
members, according to a formula agreed to by the members. An example of a customs
union is the Andean Community consisting of Bolivia, Colombia, Ecuador, and Peru.
COMMON MARKET
A common market has all of the characteristics of a customs union but also
eliminates barriers to the movement of capital, labor, and technology. Restrictions on
immigration, emigration, and foreign investment between members are lifted. Mercosur
(short for Mercado Común del Sur (or Common Market of the South) is a South American
group of nations that is an example of a common market.
ECONOMIC UNION
The highest level of economic integration occurs in economic unions. In addition to
all of the economic integration features found in common markets, members of an
economic union must be able to maintain consistency with monetary policy, fiscal policy,
and tax policy. An economic union also uses a common currency. It should be noted that an
economic union requires that member states give up a significant amount of their
independent sovereignty. The European Union is an example of an economic union.
In other words, the more integrated economies become, the fewer the trade barriers
are, and the more economic and political coordination there is between countries.
THE ADVANTAGES AND DISADVANTAGES OF ECONOMIC INTEGRATION
Of course, it is not always a walk in the park when it comes to being in agreement
with other countries. While there are potential benefits to economic integration, there are
also potential costs that need to be considered.
Let us discuss the advantages of economic integration, which fall into three
categories namely: 1) trade benefits, 2) employment and 3) political cooperation.
With economic integration, member countries (a) have a wider selection of goods
and services not previously available; (b) can acquire goods and services at a lower cost
after trade barriers due to lowered tariffs or removal of tariffs; and (c) have increased
efficiency gains which leads to an increased purchasing power since more trade is
encouraged between member countries, hence the balance of money spent for cheaper
goods and services can be used to buy more products and services.
 Employment opportunities, on the other hand, tend to improve because as economic
integration encourage trade liberation and lead to market expansion, more investment into
the country and greater diffusion of technology, it creates more employment opportunities
for people to move from one country to another to find jobs or to earn higher pay. For
example, industries requiring mostly unskilled labor tend to shift production to low wage
countries within a regional cooperation.
Lastly, political cooperation among countries can improve because of stronger
economic ties, which can help resolve conflicts peacefully and lead to greater stability. A
group of nations can have significantly greater political influence than each nation would
have individually. This integration is an essential strategy to address the effects of conflicts
and political instability that may affect the region. Economic integration is, in fact, a useful
tool to handle the social and economic challenges associated with globalization.
Despite these benefits, economic integration has disadvantages. For one, there is
creation of trading blocs since economic integration can also increase trade barriers
against non-member countries. The downsides also include trade diversion and the
erosion of national sovereignty. Because of trade barriers, trade is diverted from a non-
member country to a member country despite the inefficiency in cost. For example, a
country has to stop trading with a low cost manufacture in a non-member country and trade
with a manufacturer in a member country which has a higher cost. In short, trade unions
can turn away trade from non-members even if it is economically detrimental for them to do
so.
Additionally, national sovereignty requires member countries to give up some degree
of control over key policies like trade, monetary and fiscal policies. The higher the level of
integration, the greater the degree of controls that needs to be given up particularly in the
case of a political union economic integration which requires nations to give up a high
degree of sovereignty. Members of economic unions are typically required to adhere to
rules on trade, monetary policy and fiscal policy, which are established by an unelected
external policymaking body. Sovereignty, in fact, was one of the key debates in the United
Kingdom's decision to leave the European Union in 2016.
Now that you were presented with the main ideas about economic integration, its
pros and cons, do you think it gives more benefits than costs?
POINTS OF DEBATE
In truth, there really is plenty of debate on globalization. Whatever side you end up
taking, there are a few essential points to keep in mind to help make sure that your
argument is as intelligent as possible.
First point is: Remember that globalization measures cost per unit, not per hour - this
is crucial, and helps explain why factory workers in Germany and Japan are not victims of
globalization like those in the United States. This is because those countries have access to
better technology, which means that they can produce at a lower cost per unit. In those
countries, technology is so advanced that even while providing higher wages and better
benefits, technological efficiency allows those companies to still make more money by
leaving their operations in their home countries.
 Second point is: Knowledge is power - being able to adapt is an asset. A job is not a
safety net; however, a skill set is. People who work jobs that are replaceable overseas may
find themselves without a pay check, but those people who have a skill set that is needed
locally will almost always have a job.
Third, companies have to face consequences - many companies may be tempted to
use globalization to lower their costs far beyond what would be possible in the past, but
they should be careful in doing so. After all, creating an economy in which consumers do
not have the money to buy goods once the jobs have been moved overseas is not an
economy that will generate many sales. Consumers who lost their jobs because the
company moved the factory overseas won't have money to buy the now cheaper goods.