The Greatest Failure of the Current Wave of Financial Globalisation - Essay Example

The Greatest Failure of the Current Wave of Financial Globalisation Introduction Many people are considering globalisation as a way to the world economic development while the rest views it in a negative way. Some people believe that globalisation would increase the unequal distribution of wealth among the rich and the poor as well as the gap between the developed countries and the third world countries. It is true that globalisation brings a lot of opportunity for international development. However, the progress between nations is not developing evenly. Some countries are becoming more competent and well integrated into the global economy than the others. Those countries that are able to integrate with the environmental changes will be experiencing more economic growth while others will be experiencing economic recession. Globalisation has resulted from many years of human inventions and technological improvement. It pertains to the integration of economic activities all over the world through endless trading of products and services as well as the exchanging of cash flows. Sometimes, globalisation relates to the constant movement of technology and business people including the skilled and unskilled workers. Even intangible thing such as knowledge and skills are also being transferred from one country to another. During globalisation, the local and international markets are promoting efficiency because of the tight competition worldwide. Even the work forces have to become more competitive and flexible so they could keep up with their job. The global markets open a wider opportunity for these people to tap into larger markets all over the world. The global business cycle that we are dealing today is actually creating huge imbalances between UK’s cash inflow and outflows. As globalisation continuous, the global financial trend also changes. These changes will eventually be considered as one of the greatest failure of the current financial trend due to globalisation. Effects of Globalisation on Trade Flows, Capital Flows, & the Balance of Payments Trade Flows The effect of international trade on a country’s economy can be examined and measured by looking at the changes in the ratio of international trade, the total export plus the total imports to the output of GDP of an economy. According to Dollar and Kraay (2001), globalisation reduces poverty.1 They said that “small group of developing countries such as Argentina, Bangladesh, Brazil, China, Colombia, Costa Rica, Côte d'Ivoire, Dominican Republic, Haiti, Hungary, India, Jamaica, Jordan, Malaysia, Mali, Mexico, Nepal, Nicaragua, Paraguay, Philippines, Rwada, Thailand, Uruguay, and Zimbabwe also known as the ‘post-1980 globalisers’ shows a large increase in trade over the past twenty (20) years.” IMF study shows that the per capita GDP growth of these developing countries have increased from 1.4% in 1960s, 2.9% in 1970s, 3.5% in 1980s, and 5.0% in 1990s while the rich countries shows a gradual decline from 4.7% in 1960s to 2.2% in 1990s. Also, based on the study, 18 out of the 24 globalisers have experienced a steady growth. (See Table 1 below) Dollar and Kraay (2001) also added that there is a minimal effect with regards to the inequality on the distribution of income regardless whether there is an increase or decrease in trading. (See Figure 2 below) Lastly, they have concluded that the gap between the rich and the poor has been narrowed and the poverty rate has declined. (See Figure3 below) On the other hand, Watkins (2002) responded that Dollar and Kraay are wrong.2 He said that international trading would eventually result to income inequalities in the long run because the exports are growing at a higher rate than the global GDP. Also, since the gap of income distribution among the rich and the less fortunate countries is becoming wider. For example, for every £5 worth of export goods, £3.75 goes back to UK or the rich countries. Therefore, only a very small income goes to poorer countries. Since there is a very small amount of income that goes to the poorer countries, problems such as access to markets and other assets occur. Poverty is indeed becoming a barrier to proper education. Globalisation has also resulted to a tight competition in the labour market. Because of the ‘flexibility’ in the labour markets, some of today’s workers are being exploited. While many have fully opened their country into the world markets, some countries like USA, Europe, Japan, and China is still protecting their farmers. It means that they are seriously limiting the amount of goods they import from other countries. Because of this issue, Joseph Stiglitz commented that “Today, few -- apart from those with vested interests who benefit from keeping out the goods produced by the poor countries -- defend the hypocrisy of pretending to help developing countries by forcing them to open up their markets to the goods of the advanced industrial countries while keeping their own markets protected, policies that make the rich richer and the poor more impoverished -- and increasingly angry.”3 Capital Flows As a result of globalisation, many countries in Asia and Central Europe have excessive capital / cash inflows. There is a huge problem attached with having excessive cash inflows. This is actually one factor that could really destabilize the macroeconomic management. Effects of Globalisation on the Economic Performance of Developed and Developing Countries in Asia Let us analyse how globalisation could affect the balances of cash flows in each country. The intensive international trading had caused many countries including developing Asian countries to undergo restructuring. A lot of local businesses in Asia declared bankruptcy since the late 1990s because of the tight competition in the market.4 Nevertheless, there are still a lot of other employment opportunities available for educated people because of subcontracting work that comes from developed countries. It only shows that globalisation is causing a shift in the way of doing business. After some time, these changes will come into equilibrium. For instance, prior to globalisation, Japan has been well known in exporting electronic goods and cars. When globalisation took place, the global market of Japan started to shrink because of the high costs of its product. The ‘free market’ that we have today has opened up a lot of rivalry and/or competition for Japan made products. Specifically the electronics industry, China has been able to slowly grab the global market that was once being dominated by Japan. This made the production and export level of Japan to slowly decreases with time. In 1998 onwards, the output gap of Japan as well as the unemployment rate has become negative. (See Graph I – Historical Data on the Output Gap and Unemployment Rate in Japan on page 8) Graph I – Historical Data on the Output Gap and Unemployment Rate in Japan Source: International Monetary Fund – World Economic Outlook 2006 Based on the scenario we have described above, there is definitely more cash flow coming to China than in Japan. In the long run, if Japan could not sustain competing with the price and quality of China products, the once known as the Asian ‘king of export’ would lose its crown to China. Effects of Globalisation on the Economic Performance of Developed Countries The problem with developed countries like United States or UK is that manpower alone is already expensive because of the high-cost of living in these areas. This factor adds up a lot to the costs of production. By the time these countries have come up with the finish goods, these people would no longer be able to compete with the global price that was initially set by China. As a result, developed countries and developing countries undergo through a major restructuring. Specifically the companies in America went through this process sometime between the years 1990 – 2001. This was very noticeable because of the sudden increase in the US unemployment rate. At the same time, working in a ‘Call Centre’ became an in thing in many countries in Asia such as: the Philippines, Singapore, Korea, Hong Kong, and Taiwan.5 Most of these call centre business are related to banks, telecoms, credit cards, insurance companies, airlines, and hotels. United States Let us take a closer look at how globalisation has caused a great impact on the overall economic standing of the United States. (See Graph II - Historical Data on the Output Gap and Unemployment Rate in the U.S. below ) Graph II - Historical Data on the Output Gap and Unemployment Rate in the U.S. Since most of these businessmen are downsizing their businesses in US back in the early twentieth century, many of the US local citizens were affected by mass lay-offs. Some companies even had to declare bankruptcy because of the tight competition coming from the global markets. The increase in the unemployment rate affects the consumer spending in the long-run. This is the main reason why the real gross domestic product (GDP) of the US has been constantly declining since 1999. (See Table I – The Real GDP and Total Domestic Demand in U.S. below) Table 1 - Advanced Economies: Real GDP and Total Domestic Demand United States     2007 2006 2005 2004 2003 2002 2001 2000 1999 1998   Real GDP 2.9 3.4 3.2 3.9 2.5 1.6 0.8 3.7 4.4 4.2   Real Total Domestic Demand 2.9 3.4 3.3 4.4 2.8 2.2 0.9 4.4 5.3 5.3 Source: International Monetary Fund – World Economic Outlook 2006 Notice that the graph above indicates that the US has experienced having the lowest real GDP output in year 2001.6 Even the total domestic demand at that time has reached its lowest point. This is because of the insufficient money that has been circulating in the US around those times. Most of the US$ were invested in foreign business during those years because of the globalisation. After the year 2001, the US has started to earn money from their foreign investments. Some of these business people started bringing the money back to their mainland, US. Even the consumer expenditure is also affected by the globalisation. Since 2001, the private consumer expenditure has slide down into half as compared to the 1998 expenditures. This data clearly shows that the local citizens are holding tight on their cash rather than investing it in businesses. Slowly, the private consumer expenditures is gradually increasing again because of the fact that most of them has already recovered or adjusted from the after effect of globalisation. (See Table 2 below) Table 2 - US Private Consumer Expenditures & Public Consumption United States     2007 2006 2005 2004 2003 2002 2001 2000 1999 1998   Private Consumer Expenditure 2.6 3.0 3.5 3.9 2.8 2.7 2.5 4.7 5.1 5.0   Public Consumption 2.2 1.6 0.9 2.1 2.5 4.3 3.1 1.7 3.1 1.6 Source: International Monetary Fund – World Economic Outlook 2006 Since the local businesses in US at that time were on its lowest point, the government-collected taxes also decreased a lot. These taxes normally come from the local businesses as well as personal income taxes. Despite the fact that the real GDP has slowly been increasing since 2001, tax collection remains lower than the normal rate of government expenditures. The US government has no choice but to borrow money from the Central Bank or sell some of its T-Bills in order to finance the daily government expenditures. The US General Government Fiscal Balance started to reach a negative level in 2001. The US Central Government Fiscal Balance was also affected starting in 2002. (See Table 3 below) Table 3 - US General & Central Government Fiscal Balance United States     2007 2006 2005 2004 2003 2002 2001 2000 1999 1998   Gen. Gov't Fiscal Balance -3.2 -3.1 -3.7 -4.6 -4.8 -3.8 -0.4 1.6 0.9 0.4   Central Gov't Fiscal Balance -2.8 -2.5 -2.9 -3.7 -3.8 -2.6 0.4 1.9 1.1 0.5 Source: International Monetary Fund – World Economic Outlook 2006 Euro Nations Source: International Monetary Fund – World Economic Outlook 2006 The case of Euro Nations is different. They have already experienced a negative output gap and unemployment rate because of their adjustment period upon joining the Euro nations. Slowly, the Euro leaders have come up with the proper fiscal policy in order to achieve the best economic strategy to be used in maintaining a sound economy of the euro countries as a whole. When globalisation became active, the Euro nations have slightly been affected by it because instead of trading with other countries outside the euro nations, they trade within the euro nations instead. The main reason for this is to build up the economy of the Euro nations. Also, since the Euro nations are holding the same currency, it is easier for them to do trading within the members of the Euro group. Factors and Correlation between Economic Performance and Cash Flows In the case of cash flows, when a country imports more than it export goods and services, the country will experience a more serious unemployment rate or deflation. In case of globalisation, it is important for the local citizens to patronize their own products because this will eventually create more job opportunity for his/her countrymen. Failure to do so, many of the local companies would suffer and eventually closed down. In this case, it is the less educated people who would suffer more because these are the ones who would have a hard time competing with high standard professions. The unequal cash flows in each country, particularly when the cost of import is much higher than the export, a country could experience a deficit in dollar reserve. When this happens, the country will have no choice but to loan from the Asian Development Banks (ADB), the World Bank, etc. (See Diagram I – Effects of More Import than Export below) Diagram I – Effects of More Import than Export Another factor that could have a big impact on the cash ‘inflows’ and ‘outflows’ is the Energy-Economic-Environment (EEE).7 Energy sources are very important in the success of an economy to compete in the global market. For example: China has a wide source of coal, Uranium, thermal and hydro-electric power. Since China has its own energy reserve, the country need not import these needed resources in order to produce finish goods for the global market. The fact that China has a lot of human resources and energy resources combined, the country can easily sell their goods at the lowest possible price. This fact alone gives China the edge to dominate over the world market. Balance of payment is simply referring to international transactions. The import and export of goods has to be balanced. Failure to do so will cause either a surplus or deficit in the merchandise trade, services, investment income, unilateral transfers, official reserve assets, etc. Basically, imbalanced cash flows will result to changes in the interest rates and exchange rates. Such that when the outflow is more than the inflow, the purchasing power of the money will generally decrease and the interest rates will increase.8 When the cash inflows are excessive, the real exchange rate of money will eventually increase. Automatically, the increase in the purchasing power of a country would affect the exporters because they won’t be able to sell their goods to their foreign customers at a competitive price. For example, the exchange rate for pounds (£) to US dollar ($) is 1:1.97. In case pounds (£) appreciate against the US dollar ($) by 1:2.50, automatically US will look for other importers that offer the same goods and services they get from UK. It means that UK will lose most of its international market because the value of their money appreciated. This will really cause a lot of serious problems with the UK’s economy. Usually, excessive capital inflows are related to a domestic boom except when the local people would decide to use their money in buying imported goods. (See Diagram II – Global Financial Inequalities on page 15) Diagram II – Global Financial Inequalities Conclusion Globalisation has caused a lot of changes in the business world particularly on the flow of capital and finances. At some point, there are some countries that would eventually benefit from this major economic change. The sad thing is that tight competition worldwide has caused many countries that could not compete globally to suffer. Whether developed countries like U.S. could compete with the developing country like China or not is yet for us to see. So far, it is very evident that U.S. has suffered a lot from globalisation. Globalisation has is not entirely a bad thing since some developing countries like the Philippines, Indonesia, Malaysia, and India are benefiting from subcontracting goods and services to developed countries. Globalisation has caused many people to become price and quality conscious with the goods they buy. Developed countries could still sell their more expensive products and services at a smaller margin. This factor could still enable the developed countries to sustain the their economic development. It is said that failure to create a stable net flows of capital between the rich and poor countries is arguably the greatest failure of current wave of financial globalisation. Imbalanced cash flows between the rich and poor would result to either creating job opportunities within a country or not. People who are narrow-minded and afraid of accept change would probably see it as a negative side of globalisation. These are the people who would choose to just sit-down to watch the economic changes that are taking place. But for people who are not afraid of accepting these changes are most likely the ones who would prosper. It is always good to see globalisation as an opportunity to make more money. It is just a matter of personal choices of whether to be competent enough for the global world or not. Besides, each country has a fiscal and monetary policy to use in protecting the economic stability of a country. For this reason, I would conclude that having failure to balance the net flows of capital between the developed, developing, and under developed countries is not a failure of the financial globalisation but the failure of the under developed countries to be competent enough to succeed in the world of globalisation. *** End *** Table of Contents I. Introduction ……………………………………………………………. 3 II. Effects of Globalisation on Trade Flows and Capital Flows, & the Balance of Payments …………….………………………………… 4 a. Trade Flows …………………………………………………… 4 b. Capital Flows …………………………………………………. 7 b.1 Effects of Globalisation on the Economic Performances of Developed and Developing Countries in Asia ……………………………………………….... 7 b.2 Effects of Globalisation on the Economic Performances of Developed Countries ..……………… 8 b.2.1 United States ………………………….. 9 b.2.2 Euro Nations ………………………….. 12 b.3 Factors and Correlation between Economic Performance and Cash Flows ………………………………………. 13 III. Conclusion ……………………………………………………………... 15 References ………………………………………………………………………. 17 References: 1 Dollar D. and Kraay A. (2001) ‘Trade, Growth, and Poverty’ International Monetary Fund. September 2001. Volume 38, No. 3 Retrieved: April 2, 2007 < http://www.imf.org/ > 2 Watkins K. (2002) ‘Making Globalisation Work for the Poor’ International Monetary Fund. March 2002. Volume 39, No. 1 3 Stiglitz J. (2006) ‘Making Globalisation Work’ Debates About Trade and Development: UC Atlas of Global Inequality. WW Norton. September 2006. 4 Sison, JM. (1998) ‘Bankruptcy of Imperialist Globalisation and Urgency of the Socialist Cause’ Retrieved: April 9, 2007 < http://www.wpb.be/ > 5 Kjellerup, N. (1999) ‘The Coming Call Centre Boom in Asia’ Retrieved: April 9, 2007 < http://www.callcentres.com > 6 IMF (2007) ‘Statistical Appendix’ Retrieved: April 9, 2007 < http://www.imf.org/ > 7 James, D. (2007) ‘Energy, Economics & Environment’ Retrieved: April 9, 2007 < http://www.idrc.ca/ > 8 Stein, H. (2007) ‘Balance of Payments’ Retrieved: April 2, 2007 < http://www.econlib.org/ > Read More