Chapter I: Globalization

1. Introduction
Meaning And Introduction Of International Finance
The international business activity has been in existence for hundreds
of years. Adam Smith in his book “Wealth of Nations” wrote that if a
foreign country can supply us with a commodity cheaper than
ourselves can make it, it is better to buy it, of them with some part of
the produce of our own, in which, we have some advantage.
 Cont …
• Though it is very difficult to define the term international finance,
because the domain of it, are very large and infinite. Since
international finance involves MNCs, national government’s rules
and regulations, regarding flow of capital, across the borders of
the country, the international finance discipline is vivid and
complex.
• The term international finance is defined on the basis of various
parameters:
(a) It is a discipline of financing the international economic and
commercial relations between countries.
(b) It includes international markets (such as international banking,
euro currency market, Eurobond, international stock exchanges
 Cont…
(c) It is related to management, economic, commercial and
accounting activities of MNCs, governments and private
individuals.
(d) It involves conversion of one currency into another.
(e) It coordinates all financial and non-financial operations with the
objectives of maximization of the shareholders’ wealth.
 Emerging Challenges In International Finance
• Tariff and non-tariff trade barriers:
• Political Risks:
• Environmental safeguards:
• Dumping: It refers to selling a product at a high price in the
home currency and relatively at a LOW PRICE in the host
country by an international company. This practice ruins
industries and employment opportunities in the host country
especially micro and small scale industries. For example, the
Chinese goods like goods sold in Dipawali, Holi and other
festivals are sold, at very low prices in India.
• Cultural differences
 Cont …
• Cyber crimes: Cyber crime is a crime committed with the use
of computer and internet. Today, all around the world e-
commerce and e-business, e-governance, are flourishing
 1.1.What is Globalization?

• Globalization is the process of interaction and integration

among people, companies, and governments worldwide.
Globalization has accelerated since the 18th century due to
advances in transportation and communication technology.
 Cont …
• in most basic terms, the globalization of the world economy is
the integration of economies throughout the world through
trade, financial flows, the exchange of technology and
information, and the movement of people. The extent of the
trend toward integration is clearly reflected in the rising
importance of world trade and capital flows in the world
economy. An increasingly large share of world GDP is
generated in activities linked directly or indirectly to
international trade.
 First wave of globalization (19th century-1914)
• This started to change with the first wave of globalization,
which roughly occurred over the century ending in 1914. By
the end of the 18th century, Great Britain had started to
dominate the world both geographically, through the
establishment of the British Empire, and technologically, with
innovations like the steam engine, the industrial weaving
machine and more. It was the era of the First Industrial
Revolution.
 Second and third wave of globalization
• The end of the World War II marked a new beginning for the global
economy. Under the leadership of a new hegemony, the United
States of America, and aided by the technologies of the Second
Industrial Revolution, like the car and the plane, global trade
started to rise once again.
 Cont …
• In the early decades after World War II, institutions like the
European Union, and other free trade vehicles championed by
the US were responsible for much of the increase in
international trade. In the Soviet Union, there was a similar
increase in trade, albeit through centralized planning rather
than the free market. The effect was profound. Worldwide,
trade once again rose to 1914 levels: in 1989, export once
again counted for 14% of global GDP. It was paired with a
steep rise in middle-class incomes in the West.
 Cont …

• In the 2000s, global exports reached a milestone, as they rose

to about a quarter of global GDP. Trade, the sum of imports
and exports, consequentially grew to about half of world GDP.
In some countries, like Singapore, Belgium, or others, trade is
worth much more than 100% of GDP. A majority of global
population has benefited from this: more people than ever
before belong to the global middle class, and hundred of
millions achieved that status by participating in the global
economy.
 Globalization 4.0

• In a world increasingly dominated by two global powers, the US

and China, the new frontier of globalization is the cyber world.
The digital economy, in its infancy during the third wave of
globalization, is now becoming a force to reckon with through e-
commerce, digital services, 3D printing. It is further enabled by
artificial intelligence, but threatened by cross-border hacking and
cyber attacks.
• At the same time, a negative globalization is expanding too,
through the global effect of climate change. Pollution in one part
of the world leads to extreme weather events in another. And the
cutting of forests in the few “green lungs” the world has left, like
the Amazon rainforest, has a further devastating effect on not just
the world’s biodiversity, but its capacity to cope with hazardous
greenhouse gas emissions.
 1.2 Drivers of globalization

 government policies that are designed to facilitate trade and

commerce in view of globalization.
 Technology plays an important role in expediting the process of
globalization.
 Social factors bring cultural convergence, that is, increasing
similarity throughout the world, through significant reduction in
transport and communication cost
 Policies directed to financial sector liberalization increase not
only capital mobility but also financial integration among
different countries
 What policy response to globalization?
• More importantly, no one set of policies is a sufficient condition for
success--indeed, experience shows that poor policies in one area can
obstruct progress, even if policies in other areas are good. The three
objectives of policies complement and reinforce each other:
• macroeconomic stability, embodied in low inflation, appropriate real
exchange rates and a prudent fiscal stance, is essential for expanding
domestic activity, and is a precondition for benefiting from and
sustaining private capital flows;
• openness, in the resolute pursuit of policies to rationalize and
liberalize the exchange and trade regimes, is vital in international
competition. This forces the economy to fully exploit its comparative
advantage through trade; and finally, the primary role of the
government should be the creation of an enabling environment that
encourages foreign and domestic investment, and of a solid
infrastructure to support an expanding economy.
 The Challenges of globalization for Africa
• five main areas where African countries need to achieve greater
progress in order to speed up their participation in globalization:
• maintaining macroeconomic stability and accelerating
structural reform
As the continent enters the "second phase of adjustment", the
emphasis must be to maintain economic stability and to
reinforce the implementation of structural policies that will
make the economies more flexible, encourage diversification,
and reduce their vulnerability to exogenous shocks.
 Cont …
• Ensuring economic security

Establishing the right framework for economic activity

addresses the second requirement of policy--removing the
sense of uncertainty that still plagues economic decision-
making in most of Africa. The direction and orientation of
future policy must be beyond question. This requires the
creation of a strong national capacity for policy formulation,
implementation and monitoring. Moreover, the transparency,
predictability and impartiality of the regulatory and legal
systems must be guaranteed.
 Cont …
Reforming financial sectors

an open and liberal system of capital movements is beneficial

to the world economy. However, rising capital flows place
additional burdens on banking regulation and supervision, and
require more flexible financial structures. This aspect of
globalization thus confronts developing countries with a new
challenge--to accelerate the development and liberalization of
their financial markets, and to enhance the ability of their
financial institutions to respond to the changing international
environment.
 Cont …
• Achieving good governance

National authorities should spare no efforts to tackle

corruption and inefficiency, and to enhance accountability in
government. This means reducing the scope of distortionary
rent-seeking activities; eliminating wasteful or unproductive
uses of public funds; and providing the necessary domestic
security. In short, governments must create confidence in their
role as a valued and trusted partner of private economic
agents.
1.3 The Changing demographics of the global economy
 1.4.The globalization debate: prosperity or impoverishment?

• There are good theoretical reasons for believing that declining

barriers to international trade and investment do stimulate
economic growth, create jobs, and raise income levels. Moreover,
considerable empirical evidence lends support to the predictions
of this theory. However, despite the existence of a compelling
body of theory and evidence, the process of globalization has its
critics.
 Cont …
• Globalization is a complex and multi-dimensional process and
the phenomenon of globalization is vast, vague and contested.
Globalization has multiple features and scholars interpret the
concept in different ways. However, two contradictory
approaches to globalization can be identified: One that
describes globalization as a positive phenomenon and as a
driving force of progress and another that argues that
globalization is a negative phenomenon and the main cause of
poverty.
 Globalization and Opportunities for Ethiopia

• Strategic location between Europe and Asia

• In addition to its strategic positioning as a long-haul transfer hub,
Ethiopia is increasingly becoming an important destination for
manufacturing
• Promising start-up ecosystem
• Local challenges around mobility, agriculture, infrastructure and
healthcare for a country of Ethiopia’s size could be turned into a
series of opportunities by the start-up movement. Sustaining a
strong Ethiopian economy will require the existence of a local
start-up ecosystem. Such an environment where entities such as
universities, large companies, service providers, research and
funding organizations come together to allow local entrepreneurs
to get off the ground and to scale up – will be vital.