Economic Globalization: Myth or Reality - Article Example

 Economic Globalization: Myth or Reality? Discuss and Analyze to What Extent Economic Globalization is Likely to be Hindered by the Consequences of the Financial Crisis by the World Leading Economies of 2008? Most concisely, economic globalization can be described as a state in which any action in one part of the globe has a direct reaction on the other parts. It is a state when the transformation of world community takes place and becomes a global village, as Marshal McLuhan said in 1960. Financial crisis, on the other hand, started in 2007 and worsened in 2008. This had a negative effect on the global economy, and hence resulted in, as some people call it, Great Depression (Wynne et al., 2009). This paper will focus on the extent to which international economy is truly global. It will analyse how the financial crisis of 2008 hinder or assist the global economy. That is, whether the reaction world leading economies of 2008, such as United States of America (USA), United Kingdom (UK) and China, will encourage or discourage globalization. Furthermore, affect on few individual countries will also be discussed. These countries have been specifically chosen as they are the leading economies of the world. The severity of the crisis felt in these nations is to have a direct effect on global economy. Their actions and decisions decide the fate of many other countries functioning around the globe. However, individual analysis of each country will not be carried out as it would be irrelevant in proving my opinion of whether world economic globalization is hindered or encouraged. Sources used in this paper include articles, IMF surveys and World Bank reports, and books regarding economic globalization. A few surveys have also been made part of this essay as they are helpful in understanding the crisis of 2008. The surveys were taken from reliable sources such as BBC and US Bureau of Economics. The entire essay has been written, explaining country by country the severity of crisis. Finally, the USA is stressed upon as it was the leading country of the globe, and its actions were a major cause of global economic recession. The theory of globalization is most closely associated to Roland Robertson, who believes that contemporary world’s compression and the increasing awareness of the world as the singular entity is globalization. Compression, or a global village in McLuhan’s words, makes this world a singular global market for entrepreneurs of various cultures, traditions and ethnicity. Hence, these theories suggest that present international economy is global, but not truly. I say that because even though the economic crisis had an affect on all individual countries, however, neither was it at the same scale nor always direct. Many countries had an indirect effect of globalization, much of which was too late. Such as Canada of one those countries which were affected the last. According to the IMF survey, the economic growth of 2008 remains flat due to worsening financial conditions. While developing China and India’s growth did compress, they did, however, remain positive. Furthermore, it is true that any event which takes place on this globe can be seen on television screens or through internet in other parts too. However, the fact remains that even today countries do not have the internet connection, such as North Korea. Additionally, very small amount of people on this globe can afford luxuries of television and computer. Education too is a factor as people are not aware of the world beyond. A truly global economy is the one in which every individual is involved in globalization. Economy today does not seem like that. People who are uneducated, or those at very low levels of poverty, do not know and are not even involved in international economy or global events. Despite the financial crisis in USA, UK and other parts of the world, the present global economy remains strong during 2008. For 6 continuous years, according to IMF, all economies around the globe have had remarkable growth, mostly because of the consistent growth of emerging economies at 8-12%. In 2007, IMF had expected world economic growth to reach 4.8%. China, Russia and India represent half of this global growth. The financial crisis of 2008 has a significant affect on the economic activity. Many blame the wealthy countries for the crisis. It is, after all, these leading nations on whom smaller countries are dependent upon. Basic reason of this was the abrupt exit of important financial institutions such as Lehman Brothers’, who decided to file a case for bankruptcy. US dollar and money markets came under severe strain due to liquidation. US dollar, recognized as the international currency, affected investments of many world wide. The crisis became so extreme that Bush Government had to offer $700 billion as a bailout program. Even though USA is a free market ideology, it was decided by the Bush Administration to buy troubled shared and nationalize the failing industries (Shah, 2009). Professor Ha- Joon Chang of Cambridge University points how in recent past, America has been pragmatic about free markets. This graph below has been taken by BBC news, which shows how even unfolded. The way economy started collapsing in 2008 is visible through this chart. This was a major reason why globalization was slowed down. The financial crisis of 2008 has a significant affect on the economic activity. Many blame the wealthy countries for the crisis. Basic reason of this was the abrupt exit of important financial institutions such as Lehman Brothers’, who decided to file a case for bankruptcy. US dollar and money markets came under severe strain due to liquidation. The crisis became so extreme that Bush Government had to offer $700 billion as a bailout program. Even though USA is a free market ideology, it was decided by the Bush Administration to buy troubled shared and nationalize the failing industries (Shah, 2009). Professor Ha- Joon Chang of Cambridge University points how in recent past, America has been pragmatic about free markets. Starting with Britain, Europe had also started to nationalize its industries in 2008 to assure people. These countries also 100% guaranteed people’s savings. Wealthy countries demand free market from developing countries at all times, while they are often protectionist themselves. Free market and democracy are very important for the world to become truly global market. However, with such protectionist measures and a move from market economy to nationalization suggest that instead of moving towards a truly global economy, the world is moving towards de-globalization. That is, markets which previously had been free and global are now nationalizing. Canada has been one of the last countries to be affected by global financial crisis. Many households in Canada lost 8%of the net worth. Towards the end of 2008, household debt had grown by 2%. Even the important automakers in Canada, which were US based, have threatened to pack and leave if they bail out funds worth $10 billion are not provided (Annis, 2009). These automakers were General Motors and Chrysler. 20,000 Canadian workers alone are employed by these two companies in their vehicle assembly. Further more, manufacture, service and sales employ thousands more. The severe crisis has led Chrysler to demand further reduced wages than that voted in March by workers of GM Canada. In 2008 alone, a loss of $40 billion was announced in the Quebec province of Canada by public pension manager. One quarter of this loss was due to stock market investment in riskiest of assets. The only motivating and encouraging aspect of economy during the end of 2008 were the Canadian banks functioning as monopolies, all of which showed positive cash flow (Annis, 2009). Due to the devastated stock market, many banks suffered losses of hundreds of millions of dollars. Profit rates declined, and the downturn was caused to such an extent that it led to bankruptcies and foreclosures. The Canadian opposition parties were so busy attacking each other that it resulted in an extremely distressing economy. They failed to address core economic issue until 2009. These parties continuously repeated the positive viewpoint of Harper, hence failing to understand and find a solution for the deep crisis. However, the truth remains that just after 2 months of Harper’s statement that Canadian economy was doing well and would make a surplus by next year, there was a harsh deficit of $38 billion. All these discourage the globalization. Canada, being one of the leading economies, collapsed dramatically due to inability of parties to address the core issue. The threat of multi national companies to pull out investments obviously reverses the globalization. Furthermore, $38 billion deficit may result in reduced imports in order to bring down the deficit. This can also decrease globalization. Asia, specifically countries like India and China have had consistent growth in wealth and economies. This has led to massive investments in Western world. Asia did not have mortgage crisis, however, due to the inter-connectedness of the world at a global level, effects of this crisis were deeply felt in Asia. For example, stock markets of many Asian countries have suffered and the currencies have depreciated (Shah, 2009). As Asian products, such a China’s, were global products and sold to international markets, crisis in Western countries have slowed the Asian market and resulted in job losses and social unrest. In order to create local jobs, create demand for local produce and due to reduced disposable income of the western citizens, West reduced the import of foreign goods. This would result in de-globalization as international economies are now encouraging their own individual markets. Chinese economy has been indirectly, yet greatly affected by the downfall of US market. Chinese products had once been the most imported products in most of the countries specifically the west. Due to the 2008 crisis, Chinese products’ demand has decreased all over the globe. Thus, domestic industrial production has had a rippling effect. There have been high levels of unemployment as production subsides and factories close down. Considering such economic crisis, Chinese leaders introduced packages in November of 2008 to increase local consumption and expansion in various parts of china. This bail out package was worth $586 billion, aiming to rebuild the disaster, protect the environment and improvise the infrastructure (Chiu, n.d.). By investing in infrastructure, cement, iron and steel industries would be aided. To encourage expansion of small businesses and assist rural areas, credit limit and amount was to be increased while lenders will be spared from paying loan quotas. According to Lisa Chiu (N.D) China was not as devastated as other countries. This resulted in many other countries to force china assist other nations. This financial assistance was asked to be provided by increasing her imports. This was indeed a way to encourage and lead to a true globalization. However, high levels of unemployment and rippling economy led the Chinese leaders to instead focus on domestic market by plans such as reduction in interest rates, encouraging growth and investment in infrastructure. Further more, china has even announced higher taxes from exporters. Thus, producing and focusing on individual economies and markets goes against the theory of globalization. The crisis of 2008 had complicated effects on Japanese economy. Due to this financial turmoil, Japanese banks and consumers had very low levels of debt compared to those in Europe and US. As no important bank collapsed, many investors took advantage of reduced prices. Toyota, a major company in the automobile industry of Japan, faced losses for the first time in 2008. As international governments reduced interest rates, Yen’s value increased during the end of 2008. However, increase in Yen’s value has a direct affect on its exports as their products became expensive. Thus, by 2009, country’s exports had halved. This reduction in exports will lead to a reduced rate of globalization. Japan suffered from a mixed effect of global crisis. Internal issues did not harm as much as the global problems did. The individual industries of machine building and medicine have remained immune t the crisis. Even if USA and UK fail to purchase German products, they can always be sold to China, India and Russia. However, the present situation has led Germany in a state from which recovery is difficult. Demand exists, but customers do not have the capital required to purchase. Due to reduced production, unemployment rose to very high levels. Machine building and plant production have been the most earning assets of Germany. Two thirds of its domestic production was exported. However, lending has been reduced at levels unimaginable by UK and US banks. As finance is now very difficult to get, customers of machine building have reduced purchase. Hence, orders are not being placed, and many cancel at end moment. Export industries have declined as a whole. So much that in august of 2008 alone, 2.5% decline was reported. World economic crisis affected all individual economies, including Russia’s. The Kremlin leaders have also lost confidence, who have now understood that is Russia growing out of the crisis, in fact, it is further deepening. Initially, Kremlin leaders took an optimistic view. They believed that no threat was faced by Russia in this crisis which greatly affected other economies. These statements were made in September which addressed to Russia strengthening its role in global economy. It was said that Russia would be the center of world investors. Furthermore, it was believed that Russia would be the major and leading worldwide financial center. Even after Russian stock market started collapsing and a fifth of its value was lost, Kremlin leaders did not show any serious concern. Authorities publicly announced measures and aids on large scale in order to support the banks and thus believed the problem would be solved. As in Canada, Russia was soon aware of its miscalculations. Even after, the leaders gave optimistic statements, however, local citizens were smart enough to understand the situation and pull out their savings from banks. By September, US $7 billion was pulled out from private banks (Bush, 2008). By October, 30 percent had been removed, according to the Citibank data in Moscow. Further more, citizens had transferred and converted their rubbles into dollars worth $3.5 billion. Situation is much shakier than many Russians had initially believed. Credit is difficult to get, economy is growing at a very slow rate while Russian markets are collapsing. Many western investors have pulled out investments, which had been worth 70% of Russia’s assets. The growing risk of Russian markets has worried all foreigners, while the collapse of Lehman Brothers in September has halted trading. Since May 2008, Russian market had fallen 60%. This has happened mostly because of reduced oil prices, leading Russian exports to also collapse. Russian system’s entire existence depends on foreign investments. It is the global economy and the west which keeps the economy of Russia stable. As so much investment has been pulled put, Russia has been left devastated. Reduction in economic ties among Russia and other countries is bound to discourage economic globalization. USA has had superpower status for a long time. It has led all the leading countries. Hence, the crisis faced by USA has had the worst effects on global economy. In late 2007 and early 2008, crisis spread in to many sectors of US economy and entered recession. Dramatic decline in goods and service spending declined. Unemployment also rose, and production fell. As seen in cases of China and other countries, USA reduced spending on imported purchases. Like domino effect, this not only weakened the US economy and finance sector but also the entire world. US imports slowed dramatically from rest of the world, as seen in the graph above. Specifically in 2008, many firms suffered as production and employment fell. Hence, other countries can also be seen to have slow production, and have started developing their individual markets and economies instead of focusing on exports, as seen in China. USA had played a great role in reducing world wide GDP by stopping purchases. As the US actions led to reduce GDP world wide, other countries also became unable to buy US goods and services. US sales to other countries declined. Americans themselves reduced domestic purchases due to reduced disposable income. Hence, US GDP further dropped (Lombra, n.d.). In conclusion, it can be said that international trade or globalization between and among other countries means any action in country’s economy had direct reactions in other nations. USA was the first to feel the crisis, which spread and was felt in all other nations. This was due to interdependence of all countries on each other. The economic problems faced in USA shocked all the economies of the world. This suggests that economic globalization does exist. The crisis of 2008 had a crippling effect on economies all over the world. It was the concept of international economy which pulled all individual states in to this crisis. The reduced GDP and purchasing power had led all countries to reduce international trade and focus on their individual economies. Strong and emerging markets of china have also produced programs to encourage domestic growth. Foreign investments are also being pulled out from global markets. 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