Features of the Global Economy - Research Paper Example

of Contents Introduction 3 Features of the global economy 3 History 3 Characteristics of the global economy 4 Prerequisites for the functioning of World Economy 6 Conclusion 9 References 11 Introduction Describing the features of the global economy is a rather difficult job as it has undergone multiple changes over the period of time. The synthesis of the existing literature suggests that industrialization in the European and the American countries had a profound impact on the production levels and has greatly changed the outlook of agents to the economy. Changes of the global economy can be traced to the way it has been organized and governed. A gradual decline has occurred in the power and position of the nation states and this has been replaced by the growth of supranational organizations (Baylis, Smith & Owens, 2013). The industrial revolution had produced marked differences between developing and developed countries based on the extent of their overall production and growth. Broadly speaking, the entire global economic literature has been studied under two broad headings namely macro or meso level. The former emphasizes on the role of transnational organizations. The later treats countries and firms as the building blocks of the global economy and engages in their analysis (Baylis, Smith & Owens, 2013). The main aim of this paper is to uncover two things. The first one is to discuss the general characteristics of the world economy and the second one is to find the main factors which are responsible for the smooth function of the global economy. Features of the global economy History Most of the researchers who had considered world economy as their subject of research had pointed out this topic is rather interdisciplinary and cannot be treated in isolation (Gereffi, 2005). Increasing trade between nations can be considered to be the first step of integration between nations. The origins of trading can be dated back to as early as the period of 15th century. It is this historical period of beginning of trade which had automatically rendered some nations stronger than the others. The capitalist system of production had become quite dominant in the 18th century and this has become the basic state of the world economy (Gereffi, 2005). Economists like Adam Smith had focused on the idea of division of labour and the way it fits into the capitalist regime of production. Different countries had begun to specialize in different forms of economic activity and some of them were considered as industrial countries while others came to be known as agricultural countries. The period of 1940’s was particularly very important in the history of the world economic development because this era had witnessed some of the most important changes that had occurred in the financial trade scenario. The international conference at Bretton Woods in 1944 was a memorable year in the world economic history as it laid the foundation of some of the most powerful transnational organizations like the World Trade Organization (WTO) and International Monetary Fund (IMF) (Gereffi, 2005). The IMF, since its inception has acted as a vigilant organization which is keen on shaping the fiscal and monetary policies of countries. Similarly the WTO has supervised the trading relations between countries and dictates the norms of the global trading system. Characteristics of the global economy Certain characteristics of the world economy have occurred in a recurrent manner in the works of certain researchers. This research paper focuses on few of the most important representative characteristics. The contemporary global economy has three most important characteristics namely international trade, activities relating to investment and integration of financial systems of countries. The period of the 1980’s had witnessed an ever tightening integration between the developed and developing countries through the channel of international trade. The most important feature of international trade during this period was that it was not only constrained to physical goods but also included trading of financial services and technology. The crossing of technology, information and people across the borders of countries have ushered a new phase in international trade (Gereffi, 2005). The era of the 80’s and 90’s has also witnessed a massive growth in foreign direct investments among nations which has strengthened their ties. This is the time when most of the transnational companies had begun to expand their businesses beyond borders of domestic countries. Researchers argue that there can be two types of globalization namely participative and forceful (Gereffi, 2005). Globalization of transnational companies is a rather participative one. According to the research conducted by McCann and Acs (2011) multinational companies in the contemporary world economy has been found to dominate two thirds of the global trade. McCann and Acs (2011) identifies that the three most important driving factors for companies to expand their business are decline in production costs, expansion of markets and the ability to earn higher profits in the future. The dawn of financial innovation had propelled the development of a number of innovative financial instruments which had brought together the financial institutions. Innovative financial instruments, like international equity, international bonds and trading of derivatives like futures, swaps and options, have frequented the transactions in the capital market. Therefore, one of the most fundamental changes that have occurred in the structure of the global economy is a gradual shift from integration through trading of goods and services to the shift of the entire production process to other countries. Researchers like Baylis, Smith & Owens (2013) argue that one of the strongest features of the global economy in contemporary times is the strong interdependence between nations. International trade of goods and services have become the vehicle of growth which is proving to be the ultimate source of growth for most of the countries in the world. There is a growing consensus among researchers that international division of labour, one of the most important features of the global economy are also undergoing through a number of changes in the 21st century (Arrighi, Silver, and Brewer, 2003). Statistics over the last 20 years reveal that most of the manufactured goods in trade are being exported from the labour intensive countries. These countries have been found to have lower average wage compared to the developed countries which had experienced industrialization in the early part of the 20th century. According to the research of Arrighi, Silver, and Brewer (2003) ever since the period of the late 1970’s the gap between the core and the periphery countries of globalization are shrinking in the capitalist global economy. Free trade agreements between nations have enhanced the shift of production process to countries which have lower wages. This has been found to be one of the most important factors which have initiated a phenomenon called race to the bottom of real wages in the developed countries. Outsourcing of jobs has become a commonplace practice in today’s global economy and most of the companies are deriving huge benefits from paying lower wages to the workers (Gereffi, 2005). Another important feature of the global economy is the formation of production networks and the integration of supply chains. The research of Gereffi (2005) has shown that global buyers have become extremely important in the new production set ups. This research has shown that global retailers have created a dispersed network of production and distribution. Researchers have also distinguished between the concepts of buyer-driven supply chains from producer driven supply chains. Producer driven supply chains are the ones which are mainly propelled by manufacturers and they are generally vertically integrated (Dunning & Lundan, 2008). The buyer driven supply chains on the other hand focuses on the designing and marketing initiatives. So the supply chains of companies have actually transformed into global commodity chains which are shaped by the multinational organizations. There is also a relatively new concept in the global economy known as the global value chain which aims at adding value to the economic activities by utilizing a number of processes of physical transformation (Dunning & Lundan, 2008). The IMF for instance promotes monetary promotion between countries and works hard so that various countries can maintain a manageable balance of payment position. This is extremely important in maintaining the stability of the exchange rate and ensuring that capital flows freely among nations. Similarly, the role of the WTO is also inevitable in the global economy as it regulates the trading norms between nations. The WTO promotes the essence of free trade between nations and urges countries to drop trade barriers (Bleaney & Greenaway, 2001). The WTO holds a unique position in the world economy because it not only performs the duty of settling of international disputes between nations but also provides support to the countries of the developing nations. The multilateral trade negotiations promoted by the WTO are aimed at benefitting both the developing and the developed countries. Prerequisites for the functioning of World Economy From the above discussions it appears that interdependence between nations through the process of globalization is the glue of the global economy. Therefore, it is only rational that promoting this interdependence is one of the primary criteria for per functioning of the global economy. The global financial crisis of 2008 has greatly disrupted the functioning of the world economy. The period after the crisis has been particularly difficult because it has badly affected the economies of the developed countries like the U.S.A, Eurozone and Japan (International Monetary Fund, 2014). It has become extremely important for the developed countries to formulate their monetary and fiscal policy in a manner which strengthens their future credibility. It is extremely important for the developed countries to recover because their weakness is also affecting the developing countries. Researchers are of the notion that it will be better for Eurozone to continue with the program of monetary tightening to pull the economy out of recession (International Monetary Fund, 2014). It is also important for the developed countries to keep their inflation rates within acceptable levels and take care so that the economy does not slip back into deflation anymore. The developing countries may also find themselves in the forthcoming years on account of unfavourable external environment in the global economic conditions. Maintaining the flexibility of exchange rate will be crucial for countries that are developing rapidly. Researchers have argued that if the developing countries like China do not let their currency to appreciate then their trading partners will accumulate significant foreign debt which can be precarious for the current account balance of the country (International Monetary Fund, 2014). One of the primary prerequisite for the smooth functioning of the global economy is that the high public debt of the governments of the countries should be brought down. Current economic situation in most of the developed countries in Eurozone indicates that they have very high proportion of public debt. The research of Reinhart and Rogoff (2010) sheds light on this topic as they have studied the impact of very high public debt of 44 countries. Results from their study indicate that high public debt of the governments can dampen the extent of growth in the long-run. This is because high public debt will make the economy highly vulnerable to external shocks. This happens mainly because the government is not in a position to devise countercyclical fiscal policies to deal with difficult economic situations if the debt is very high. Additionally, the government loses its entire surplus budget for stabilizing the debt ratio. It has also been found that if the level of sovereign debt is very high then the capital accumulation of the economy stagnates and its level of productivity is affected adversely. Uncontrolled public debt can also cause a galloping inflation which is essentially bad. It is extremely important for nations across the world to minimize the extent of volatility in exchange rate. It has been observed that undervaluation of exchange rate is strongly correlated with accelerated economic development but overvaluation of exchange rate hurts the economic growth. However, researchers like Bleaney & Greenaway (2001) are of the opinion that prolonged misalignment of exchange rate is actually bad for sustainable growth of the economy. They have shown that if the exchange rate is highly volatile then it makes the country less productive and less competitive. Overvaluation of exchange rate has been correlated with less capital inflows in the country and bad loans. It suppresses the exports of the country and curbs the export led growth. If exchange rate is highly volatile then improper signals are sent to the economic agents and resources are allocated in less effective manner. Data from developing countries shows that African countries have fared poorly because they have been plagued by overvalued exchange rates for prolonged time making them less productive. Similarly undervaluation of exchange rate has helped countries like China to grow rapidly recently. However, long-standing undervaluation of exchange rate in China has adversely affected the U.S.A adversely and it has accumulated massive trade deficits as it is a major trading partner of China (Bleaney & Greenaway, 2001). The strong association between countries makes it important for countries to manage their exchange rates effectively. From the ongoing discussion a clear picture about the strength of globalization materializes. This is because in the era of globalization, welfare of one country is highly dependent on the welfare of another country. Under such a circumstance if one country is facing difficult situation, then the impact of this difficulty passes on to other countries as they are interconnected through trading investments. In this regard it can be said that multilateral and bilateral trade agreements governing the trade relations between nations will be very important in promoting free trade among nations. Government negotiations in creating and improving the free trade agreements are an important precursor for the smooth functioning of the global economy. Increasing trading activities in terms of regional and global level requires business enterprise to enter foreign countries. Business houses require a certain degree of certainty when they are entering into countries. It is only but rational that these business enterprises will require certain measures which protect them from uncertainties (McCann & Acs, 2011). Trade agreements have been found to important in creating a smooth integration between the economies. Trade agreements provide assurance that it will be easier to conduct business in a foreign country because they help in the removal of tariff and non-tariff barriers. This directly translates into higher profits for the multinational companies. The Uruguay agreement of the WTO had witnessed a weakening of trade negotiations. This has particularly increased the importance of trade agreements for smooth functioning of the world economy (McCann & Acs, 2011). Many researchers have argued that preferential trade agreements between nations actually help in promoting trade liberalization which is the key to sustained growth. Statistics indicate that over the past two decades there has been a considerable increase in the number of free trade agreements between nations and they are being signed proactively by countries irrespective of their physical distance (McCann & Acs, 2011). Globalization has enhanced the flow of people across boundaries and labour market development is key factor for global economic development. The contemporary business environment is highly dynamic and organizations need to be highly flexible in order to adjust to the changing market conditions. Researchers like Sassen (1990) had suggested that successful organizations are the ones which are using highly flexible teams. According to their research organizational structures are very important in shaping the job culture which in turn directly affects the productivity of the organization. Flexibility of the workforce is the main precursor affecting the smooth functioning of global business. Statistics of the labour market reveals that the workforce of the European countries is ageing fast and the European countries should rapidly undertake reforms for combating the situation. Therefore, structural reforms can be considered as the key factor for the smooth functioning of labour market. It is extremely for governments of different countries to adopt reforms which turn the labour market mobile and flexible. Easing conditions of labour migration will actually help countries to build up a flexible labour force and help in unhindered development of the labour market. Flexicurity is a recent trend that has emerged in the present labour market which is likely to help the government in adjusting to changes. The concept of flexicurity attempts to bring equilibrium between flexibility and security in job markets (Wilthagen & Tros, 2004). Therefore, both organizations and governments have a responsibility to help the labour market adapt to changing market forces. Conclusion The world economy comprises a number of features and it is almost impossible to capture all of these factors comprehensively in a singular study. Few secondary research works has been used in this research paper to decipher a handful of popular characteristics of the world economy. It appears that the global economy is highly depended on growth of trade and investment between nations. Increasing trade has given significant power to the multinational enterprises which in turn controls two thirds of the entire global trade. Emergence of institutions like the IMF, World Bank and WTO have established a new era in the history of social sciences. These organizations have a heavy influence on determining the trade and commerce between countries and promoting integration between them. It has also been observed that international business enterprises are increasingly trying to integrate their supply chains and this has led to the emergence of a new concept called the global supply chain. The present economic structure requires certain prerequisites for its proper functioning. It has been found that factors like proper fiscal and monetary policy is essential especially in the aftermath of the global crisis to take the economies out of the recession. Reducing the volatility of exchange rate will also be crucial for smooth functioning of the global economy. Liberalization of trade between nations through open trade agreements can help in liberalization of trade and enhance the welfare of nations. Trade agreements can achieve a great deal in reducing the uncertainties and risk of business enterprises and help them to enter in foreign countries. Finally, governments and other key regulatory authorities in countries should consider taking reforms to bring necessary changes in the labour market. This is to ensure that the ageing population in the countries can be replenished with new labour from foreign countries. References Arrighi, G., Silver, B.J. & Brewer, B.D. (2003). Industrial Convergence, Globalization, and the Persistence of the North-South Divide. Studies in Comparative International Development, 38(1), 3–31. Baylis, J., Smith, S. & Owens, P. (2013). The globalization of world politics: an introduction to international relations. Oxford: Oxford University Press. Bleaney, M. & Greenaway, D. (2001). The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. Journal of development Economics, 65(2), 491-500. Dunning, J.H. & Lundan, S.M. (2008). Multinational enterprises and the global economy. London: Edward Elgar Publishing. Gereffi, G. (2005). The global economy: organization, governance, and development. The Handbook of Economic Sociology, 2, 160-182. International Monetary Fund, 2014. Prospects for the world economy. Retrieved from http://www.opec.org/opec_web/static_files_project/media/downloads/press_room/Rodrigo_de_Rato_y_Figaredo.pdf. McCann, P. & Acs, Z.J. (2011). Globalization: countries, cities and multinationals. Regional Studies, 45(1), 17-32. Reinhart, C. M. & Rogoff, K. S. (2010). Growth in a Time of Debt (Digest Summary). American Economic Review, 100(2), 573-578. Sassen, S. (1990). The mobility of labor and capital: A study in international investment and labor flow. Cambridge: Cambridge University Press. Wilthagen, T. & Tros, F. (2004). The concept of ‘flexicurity’: a new approach to regulating employment and labour markets. Transfer. European Review of Labour and Research, 10(2), 166-186. Read More