Global Economic Environment

L-1 &2

Dr. Rashmi Ahuja

What is Global Economic Environment ?

• Study of state of the world economy and the policies that govern it.

• Full view of the economic affairs of the world.

Course organization
• Overview of current Global economy

• Development vs Growth Debate [Sen vs Bhagwati]

• Evolution of Trade theories

• Theories of Development

• Dig deeper into Globalization

• Global Value Chains & FDI

 References
• Krugman, Obstfeld, International Economics-Theory and Policy
• Dominick Salvatore International Economics-Trade and Finance(latest
edition)

• Jagdish Bhagwati, In Defence of Globalisation, Oxford University Press,

Oxford, 2004
• Jagdish Bhagwati, Termites in the World Trading System, Oxford
University Press, Oxford, 2008.
• Joseph Stiglitz, Making Globalization Work, Penguin Books London, 2006
• Paul Krugman, Rethinking International Trade, MIT Press, 2000
Globalization – You are Living IT ??
• Globalization_ You're living IT - YouTube (360p).mp4

• The world is moving away from self contained national economies toward
an interdependent ,integrated global economic system.

• Globalization—the process through which an increasingly free flow of

ideas, people, goods, services, and capital leads to the integration of
economies .
Globalization has several facets including
• the globalization of markets and
• the globalization of production.
 What is Globalization of Markets ?
• Historically distinct and separate national markets are merging.

• We talk about Global Markets instead of German or American Market.

• Falling Trade Barriers
• Converging consumer tastes
• Some basic products offer worldwide

It is important not to push too far the view that national markets are giving way to the global market.
 Degree of openness
70

60

50

40

30

20

10

World India

Source : construction based on WDI(2017)

Globalization of Production
• Firms source goods and services from locations around the globe to
capitalize on national differences in the cost and quality of factors of
production like land, labor, energy, and capital.
• Companies can
• lower their overall cost structure
• improve the quality or functionality of their product offering

Example - Boeing's 777, a commercial jet airliner

• Eight Japanese suppliers make parts for the doors & wings; Outsourcing
• A supplier in Singapore makes the doors for the nose landing gear;
• Three suppliers in Italy manufacture wing flaps; and so on…..
Globalization of Production ctd..
• One mode of international production is the Foreign Direct Investment
(FDI).
• In the last 30 years FDI increased a lot.
Portfolio Direct Investment
Investment

0% 10% 50% 100%

Active
Passive
Emergence of Global Institutions
• Global institutions
• help manage, regulate, and police the global marketplace

• promote the establishment of multinational treaties to govern the global

business system
Examples of Global Institutions
• World trade organization (WTO)- previously General Agreement on
Tariffs & Trade (GATT)

• International Monetary fund(IMF)

• World bank(WB)

• United Nations(UN)

• G20
What do Global Institutions do ?
• The World Trade Organization (like its predecessor GATT)
• polices the world trading system.

• makes sure that nation-states adhere to the rules laid down in trade treaties

• promotes lower barriers to trade and investment

• 164 members
• The International Monetary Fund (1944)
• maintains order in the international monetary system
• lender of last resort for countries in crisis
• Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece

• The World Bank (1944)

• promotes economic development via low interest loans for infrastructure
projects
• The United Nations (1945)
• maintains international peace and security
• develops friendly relations among nations
• cooperates in solving international problems and in promoting respect for
human rights
• is a center for harmonizing the actions of nations

• The G20
• forum through which major nations tried to launch a coordinated policy
response to the 2008-2009 global financial crisis
Drivers of Globalization
• Decline in barriers to the free flow of goods, services, and capital that has
occurred since the end of World War II.

GATT

WTO

Regional Trade
Agreements
Source: WTO and UNCTAD for trade, consensus estimates for GDP
Regional Integration
Regional Integration Definition

Free Trade Agreements (FTA’s) Tariff and Non-tariff Barriers to trade between member
countries are removed.
Eg. NAFTA
Custom Union Trade barriers b/w member countries are eliminated
and identical trade barriers to non-member countries
are established[Common External Tariff].
Eg. European Union
Common Market Custom Union in which free movement of labor, capital
,goods and services is also permitted among member
nations. Eg. Mercosur (Southern Cone Market)
Economic Union Common Macroeconomic polices are also adopted.
Eg. European Union
Technological Change
• Email & video conferencing
• Internet
• Transportation costs
• The period of globalization, between 1980 and 2010, is unique because
global trade grew very fast.
For whole world :
• Trade sector grew from about 25 % in 1960 to about 58% in 2016.

• The global stock of FDI grew from 0.7 to 25 trillion US dollars.

• What also makes the three decades between 1980 and 2010 unique is that
international trade gradually became global.
What does Globalization mean for firms ??
• Created business opportunities [Imp. Role of Foreign Consumers ].
• view the world, rather than a single country, as their market

• base production in the optimal location for that activity

• Scale benefit of globalization

• Faster specialization of production and firms.

• Innovation

• But, firms may also find their home markets under attack by foreign firms
Importance of Global economic environment for Businesses
• Organizations conducting their businesses in the global environment.

• Companies that have learnt to thrive in this increasingly connected world

have built large global businesses at astonishing speeds.
Examples :-
• Uber, for example, penetrated more than 80 countries in just six years.
• Netflix launched its streaming service in 2010, and has expanded to more than
190 countries in less than seven years.
• Important to understand the implications of operating in the international
environment.

• Best way of doing business abroad may not be the same way as the best way at
home.

• When co. engages in business internationally, modes of business i.e. exporting &
importing may be different from those in which it engages domestically.

• Physical, social and competitive conditions vary among the countries & affect the
best ways to conduct the business.
Changing Demographics of the Global Economy
• In 1960, the U.S. accounted for over 40% of world economic activity, but by
2014, the U.S. accounted for just 22% .
• a similar trend occurred in other developed countries .

• In contrast, the share of world output accounted for by developing nations

is rising .
• expected to account for more than 60% of world economic activity by 2020
Is an Interdependent Global Economy a Good Thing?
Or
The shift towards to a more integrated and interdependent global economy is a good thing.
Discuss?

• Supporters believe that increased trade and cross-border investment mean

• lower prices for goods and services
• greater economic growth
• higher consumer income, and more jobs

• Critics worry that globalization will cause

• job losses
• environmental degradation
• the cultural imperialism of global media and MNEs.
Are we headed towards Protectionism or De-globalization ???
• Free Trade – important issue[Rise of Donald Trump].

• De-globalization or Protectionism rising  Impede free movement of

goods, services & people
Why do we need to worry about de-globalization???
• Highly Globalized world.

• Upend the global premise on which

global growth is estimated.

• Affect the fortunes of trade partner

countries.
• Trump position of ‘America First’
• US-China Trade War
• Renegotiations of North American Free Trade Agreement (NAFTA)
• U.S.-Korea Free Trade Agreement (KORUS)
Long term
effects on
• Scrapping of Trans-Pacific Partnership (TPP) [US withdrawal] Global trade

• Slow Dismantling the working parts of WTO

Britain –Own
Weakened EU multilateral system
or Trade agreements
• The dominant role of the multilateral financial institutions appears to be
receding due to new financial institutions, such as China-backed Asian
Infrastructure Investment Bank and the New Development Bank, emerge.

• The world economy needs a transparent, workable and multilateral approach

for its progress and advancement.
• Should WTO be reformed or dismantled ????

• Impact of institutions like AIIB and NDB on global Trade ???