The GLOBAL ECONOMY: Contemporary Debates

The GLOBAL ECONOMY: Contemporary Debates 2005 Thomas Oatley 0-321-24377-3 ISBN Visit www.ablongman.com/replocator to contact your local Allyn & Bacon/Longman representative. sample chapter The pages of this Sample Chapter may have slight variations in final published form. Longman 1185 Avenue of the Americas 25th floor NewYork, NY 10036 www.ablongman.com

INTRODUCTION The last decades of the twentieth century brought tremendous growth in global economic activity and a consequent deepening of economic interdependence, often referred to as globalization. Economic globalization can be defined as the integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short term capital flows, international flows of workers and humanity generally, and flows of technology. 1 This definition highlights two distinct aspects of globalization. On the one hand, globalization is a process. As a process, globalization refers to the growth of the cross-border economic activities listed in the definition offered above. On the other hand, globalization is an outcome. As an outcome, globalization refers to the emergence of highly interdependent national economies. Countries that may have once enjoyed considerable economic independence or autonomy find that they are now enmeshed in interdependent relationships in which economic conditions at home depend heavily upon economic developments in the rest of the world. Globalization as a process is clearly evident in many of the standard statistics of international economic activity. Between 1980 and 2000, for example, world trade grew at an average rate of 5.1 percent per year, more than twice as fast as the average annual rate of growth of the world economy as a whole. 2 Consequently, total world merchandise trade rose from about $84 billion in 1953 to $3.7 trillion in 1993 and then to about $6.3 trillion in 2002. 3 Foreign direct investment (FDI), the process by which a firm based in one country gains an ownership stake in a company based in a second country, has also grown at historically unprecedented rates during this period. According to the United Nations Conference on Trade and Development (UNCTAD), which assembles the most authoritative statistics on the activities of multinational corporations (MNCs), annual FDI inflows amounted to about $62.2 billion in 1985. In 2000, FDI inflows equaled just less than $1.4 trillion. 4 Not surprisingly, the number of MNCs operating in the global economy has also grown sharply. UNCTAD estimates that in 1969 there were about 7,258 MNCs operating in the global economy. By 1988 the number of MNCs had doubled to about 18,500. Between 1988 and 2000 the number of MNCs operating in the global economy tripled, reaching 63,000 by 2000. 5 International financial transactions experienced similar growth. To provide just one indicator, total foreign claims held by banks based in the advanced 3

4 PART I INTRODUCTION industrialized countries rose from $755 billion at the end of 1983 to more than $14.7 trillion at the end of 2003. 6 This is a clear indication that over the last 20 years foreign lending has become an increasingly important counterpart to banks loans to domestic businesses. While the rate of growth of all of these international economic transactions slowed in the first decade of the twenty-first century, this reflects the worldwide slowdown in economic growth rather than a more profound retreat from globalization. The pace of globalization is likely to pick up again as soon as the global economy recovers fully. Globalization as an outcome is also evident in statistics and in the events of the day. Trade openness provides one standard statistical measure of globalization. Trade openness measures each country s total trade (its imports plus its exports) as a percentage of its total domestic economic production (its gross domestic product, or GDP). Because world trade has grown more rapidly, on average, than world production, we can conclude that each year the world as a whole is becoming more open to trade a larger share of the world s economic output crosses at least one national border between the time it is produced and the time it is consumed. Consequently, whether a company based in your hometown continues to produce, and therefore continues to hire local residents, depends in no small part on whether people living in other countries remain willing to purchase the company s products. Economic conditions in your hometown thus increasingly come to depend on developments in other parts of the world. When you consider where many of the products that you own were produced, it becomes evident that such dependence is a two-way street. The fortunes of workers and businesses in foreign countries depend in part on your willingness to continue to buy the goods that they produce. This situation your dependence on foreigners and their dependence on you is what the economic interdependence generated by the dynamic process of globalization is all about. Because globalization strengthens connections between national economies, and because the economic dynamics that are at the core of globalization can be disruptive for individuals, communities, and nations, globalization has given rise to a number of debates among academics, nongovernmental organizations, and policymakers. One can place these debates into three broad categories. The first category features debates that revolve around the basic dynamics of the global economy. How far has globalization progressed? Has the world entered an unprecedented era of global markets, or is the current world economy still less deeply integrated than it was in the late nineteenth century (at the end of the so-called first wave of globalization )? What are the consequences of globalization for individuals, groups, governments, and nations? Is the life of the typical person (if indeed there is a typical person) improved or worsened by globalization? Are governments losing the capacity to govern in the face of global markets, or do they retain the capability to use national policies to achieve most of their desired domestic objectives? Are global markets undermining the nation-state, and is political authority therefore gradually being transferred to international economic organizations like the World Trade Organization (WTO), the Internatinal Monetary Fund (IMF), and the European Union (EU)? Each of these debates involves contending perspectives about how to characterize the depth and the consequences of globalization.

INTRODUCTION 5 The second category includes debates that focus on the foreign economic policies that governments use to manage the relationship between their national economies and the global economy. Should a government pursue additional trade liberalization or should it take steps to protect certain domestic industries from trade? If more liberalization is desired, is it best to achieve it through the World Trade Organization s multilateral process or is it better to proceed through regional free trade agreements? Should governments, particularly in developing countries, liberalize capital flows as well as trade, or should they continue to control and regulate capital flows? Should governments attempt to maintain fixed exchange rates, or should they allow their currency to float? Should they strive to maintain a strong national currency, or is it better to keep the currency a bit undervalued? Debates of this type involve contending perspectives about the extent to which a particular country should participate in the global economy, and about the terms under which it should do so. The final category includes debates that revolve around broader issues of governance. These debates focus on the political institutions and rules that have been established to govern the global economy, as well as on the possible need for new global rules in areas where they do not currently exist. For example, should the WTO decision-making process be reformed, perhaps by opening participation to nongovernmental organizations? Should the WTO and regional trade arrangements like the North American Free Trade Agreement (NAFTA) incorporate explicit rules concerning labor and the environment? Should governments establish a set of international rules that would govern the activities of MNCs? Debate on these issues involves distinct perspectives on how and in some cases whether various aspects of the global economy should be governed. This book presents a sample of the debates that have arisen out of the dynamics of globalization. While the articles focus on contemporary issues and events, the deeper issue at the center of each debate tends to be more enduring. In one exchange, for example, the authors debate whether the United States should pursue regional free trade agreements in the wake of the failure to reach agreement at the WTO Ministerial Conference in Cancun, Mexico in the fall of 2003. Yet, this contemporary debate reflects a more enduring disagreement about the respective roles of multilateralism and regionalism in American trade policy that has been taking place for at least 15 years. In another debate, the participants disagree about the contribution that international trade can make to economic development in the South. While each article reflects current thinking on this question, the debate itself has been raging for more than 50 years, and will likely continue into the future. Thus, while the articles focus on contemporary issues, these contemporary debates typically have quite a long history. One important reason why these debates endure is that most lack clear answers. Some debates, such as those that involve contending perspectives about how far globalization has progressed and what its consequences are, could be resolved through careful empirical research. We could engage in research that measures the extent of trade and financial integration over time, and then come to some conclusion about how far globalization has progressed. We could develop indicators to measure the quality of life for the typical individual and then examine

6 PART I INTRODUCTION whether globalization is improving or worsening living standards. In other words, such debates are largely about what the world looks like, and presumably can be settled with evidence. Debates arise about these issues because empirical research is not always easily conducted and does not always yield clear conclusions. To take just one example, is globalization widening or narrowing world income inequality? One might think that this question could be answered relatively easily. Most governments collect data on the incomes of their citizens on a regular basis. We need only assemble this data over a reasonable period of time and then examine what it tells us. Yet, this debate has proven remarkably difficult to resolve. In part this is because people do not agree about what data one should collect (should we examine income or consumption expenditures?), and the conclusion one reaches appears to depend on the kind of data one uses. The lack of resolution also reflects the difficulties associated with getting accurate data about individual incomes in developing societies. Consequently, there remains a debate between scholars, some of whom believe that globalization has widened global income inequality, and others who believe that globalization has narrowed this gap. 7 The fact that empirical debates are not always easily resolved should not blind us to the fact that correct answers do exist. World income inequality has either widened or it has not; it cannot have done both. One should, therefore, be cautious about arguing too strongly when the issue at hand is an empirical question. Other debates are long-lasting because they have no right or wrong answer. This type of debate revolves around different values and priorities. Most of the policyrelated debates fall into this category. For example, should the U.S. government maintain a strong (overvalued) dollar or should it instead maintain a weak (undervalued) dollar? We could begin to answer this question with empirical research. We could investigate the impact that a strong and a weak currency have on the American economy. We would discover that a strong dollar has costs (it makes it more difficult for American firms to export and reduces the income of people employed in the traded-goods sector) and benefits (it reduces the cost of imports and raises the income of people employed in the non-traded-goods sector). A weak dollar has the opposite effect. The research could not tell us how individuals, not to mention governments, should weigh the costs and benefits of each strategy. In order to do so, we must place a value on the costs and benefits associated with each option, and there is no single correct weighting to attach. Consequently, perfectly reasonable people are quite likely to disagree about such issues. Most of the debates about broad issues of global governance also fall into this category. For example, should governments establish international rules to regulate the activities of multinational corporations? Again, we could engage in empirical research to begin to answer this question. We could explore the wages that MNCs pay and the impact of these jobs and wages on the countries that host MNCs. We could investigate the impact of MNC activity on the environment. With enough time and money we could catalog everything that MNCs do. Yet, would such a project help us determine whether MNC activities should be regulated? Suppose we found that MNCs producing in developing countries damage the environment. Would this finding necessarily imply that MNC activities should be regulated? Some people will argue that a bit of environmental damage is a reasonable price to

INTRODUCTION 7 pay for the benefits that MNCs bring to developing countries. Others likely would argue that MNCs should be prevented from engaging in any activities that harm the environment. The answer that one proposes, therefore, has less to do with the facts concerning the impact of MNCs on the environment, and more to do with the relative weight that different people attach to the protection of the environment and to economic development. Again, perfectly reasonable people can easily reach quite different, and yet equally legitimate conclusions about the same issue. I encourage you to keep these categories in mind as you read the articles presented in this volume, and as you discuss and debate them with your colleagues inside and outside of class. Ask yourself whether the debate at hand is one that empirical research can resolve. If it is, then ask yourself whether you are willing to accept conclusions that emerge from careful research, even when the conclusion contradicts some of your prior beliefs. If the issue at hand cannot be resolved through empirical research, then I ask something different. Try to become conscious of how your values shape your position on such issues, and be willing to listen to and respect those whose views differ from your own. In short, debate these issues, but recognize that on such issues reasonable people can disagree. Please disagree reasonably. ENDNOTES 1. Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2004), page 3. 2. World Trade Organization, Long Term Trends World Exports, Production, GDP, From 1950, Available at http://www.wto.org/english/res_e/statis_e/its2003_e/section2_e/ii01.xls (accessed March 13, 2004). 3. World Trade Organization. International Trade Statistics 2003 (Geneva: World Trade Organization, 2003), page 32. Available at http://www.wto.org/english/res_e/statis_e/ its2003_e/its03_toc_e.htm (accessed March 18, 2004). 4. UNCTAD, FDI Database. Available at http://www.unctad.org/templates/ Page.asp? intitemid 1923&lang 1 (accessed March 13, 2004). 5. Medard Gabel and Henry Bruner. Global Inc.: An Atlas of the Multinational Corporation (New York: The New Press, 2003), page 3. 6. Bank for International Settlements, Consolidated Claims by Maturity and Sector, Historical Time Series. Available at http://www.bis.org/publ/hcsv/hanx9a_for.csv (accessed March 13, 2004). 7. See More of Less Equal? The Economist, March 13, 2004: 69 71. For a more detailed discussion see Angus Deaton, Measuring Poverty in a Growing World (or measuring growth in a poor world), Research Paper in Development Studies, Woodrow Wilson School, Princeton University. Available at http://www.wws.princeton.edu/%7erpds/ downloads/deaton_measuringpoverty_204.pdf (accessed June 14, 2004).