How Global Economic Crisis Undermines the Case for Globalization - Essay Example

The present world financial and economic crisis undermines the case for globalization Introduction Globalization refers to the integration of economies in order to develop a global economy in the world. This process leads to a single interdependent system through the integration of capital markets, information, information and trade across the national borders thus creating a single global market place (Stiglitz, 2002). Globalization aims at creating uniform international standard trade policies and regulations thus increasing the volume of international trade. Globalization facilitates the mobility of human capital beyond the national borders and business process outsourcing. International institutions such as the World Trade Organization (WTO), World Bank (WB) and International Monetary Fund (IMF) aid the process of global economies integration and international trade. However, the present world financial and economic crisis has undermined the case for globalization and international trade. The current global financial and economic crisis has its origins in the bursting of the housing bubble in US economy in 2007. Some macro-economic causes of the economic crisis include the global imbalances in excessive consumption in the US and over-saving in Chinese economy and monetary policy failure in the US which encouraged excessive credit and debt in the economy. Excessive risk taking and imprudent lending practices such as the sub-prime mortgages which were secured by collateralized debt obligations led to high leverage in most of the financial institutions that supported global trade. Financial innovations made it difficult for most rating agencies to accurately evaluate the risks of the underlying assets which encouraged excessive risk taking by financial institutions. Major global banking institutions such as Lehman Brothers suffered huge losses while other filled for bankruptcy thus limiting the international trading activities and flow of capital in the economy. The current economic crisis also led to massive layoffs and unemployment due to contraction in global aggregate demand thus limiting the flow of human capital and technology transfer. The crisis has a significant impact since most economies have currently implemented economic protectionist measures that control risk-taking, and limit the cross-border flow of capital (Steger, 2008). The present economic crisis negatively impacted on the major world economies and translated the effects to a global recession. The crisis have dimmed the prospects of further trade liberalisation, capital account liberalisation, the unlimited flows of direct foreign investments and financial sector deregulation (Steger, 2008). The crisis have contracted the trade opportunities for low income countries through limited market access in advanced economies, decreased foreign direct investments and limited technology transfers. According to International Monetary Fund, the world economic output declined by 3 percent between 2007 and 2008 while global inflows of foreign direct investments declined by about 40 percent during the economic downturn. It is clear that the present financial and economic crisis has far reaching adverse consequences on globalization since the developed economies which are primary facilitators of international trade have been most affected. The effect to a particular economy depends on the nature of integration and global investment flows (Stiglitz, 2002). The crisis has caused solvency and liquidity problems in global capital markets which are the primary sources of investment capital for international investors and multinational corporations. The crisis has caused a negative sentiment in the markets with many investors transferring their wealth to stable currencies such as the Yen and Euro. Commodity-dependent countries such as low income countries are more vulnerable to economic crisis and price movements in the international markets which have destabilized their foreign exchange earnings. Market liberalization and privatization has not transformed to lower and stable commodity prices which have caused many policy makers assert that unregulated capital market and international trade is to blame for the trend (Langhorne, 2001). The reduction of aggregate demand due to decline in disposable consumer incomes emanating from the financial and economic crisis has also led to reduction in employment of the factors of production such as capital and labor which is critical in facilitating global integration of economies and technology transfer (Langhorne, 2006). Available import data indicates that USA imports dropped by 4 percent due to economic crisis with textile imports falling more than 20 percent in value. The economic crisis has forced many countries to implement discriminatory economic protectionism measures that will definitely reduce the volume of global trade (Steger, 2009). For instance, USA implemented Recovery and Reinvestment Act 2009 which contains “buy American” clause that aims protecting the economy from cheap imports. Russia and Ukraine have increased import tariffs on several import products such as automobiles, steel and electronic goods while Argentina and Indonesia implemented new strict import licensing systems. For instance, India increased the tariffs of Iron and Steel from zero to 5 percent in 2008 while Turkey increased the import tariffs of rolled steel from 5 percent to 13 percent thus limiting global trade. The European Union countries revived the tariffs on cereals which had been eliminated prior to the economic crisis (Steger, 2008). Some countries have introduced compulsory import standards for various imports. For instance, Ecuador has implemented standards for automobile products while prohibited imports of Chinese-made toys. Malaysia also introduced strict product certification requirements in order to curb imports of Korean Lithium secondary batteries from July 2009. Chinese government has intensified the verification of software products of foreign-owned companies in order to safeguard the domestic companies (Steger, 2009). The economic crisis has led to huge capital account imbalances in the global economy. Credit crisis make the US exports to decline thus increasing the current account deficit (Langhorne, 2001). The US economy policies are geared at reversing the current account deficit by import substitution and stimulating the domestic demand through subsidies thus limiting the net imports from close trading partners like China which has a current account surplus of about 17 percent of the Gross Domestic product (GDP). The current financial markets have forced many governments to implement restrictive capital controls that aim at protecting the domestic financial markets from foreign intervention. Some countries have implement measures to reduce excessive risk taking and debt-financing from some economies which are considered more prone to financial shocks. This will limit the trade diversification strategies of multinational corporations thus creating instability in the flow of exports when the domestic market is saturated. This will decline employment levels and productivity thus hindering regional integration (Langhorne, 2006). The recent economic crisis has forced many Multinational corporations which have considerable influence in country’s economy to switch their investments to other countries due to harsh operating environment and unfavorable regulatory regime (Langhorne, 2006). This trend has reduced the national consumer incomes by reducing the wage levels and increasing the direct foreign investment outflows to the parent country thus hurting the economic growth of the less developed nations (Stiglitz, 2002). According to geopolitics, global companies are the greatest contributors of global warming and environmental pollution due to globalization of operations (Langhorne, 2001). The current financial and economic crisis has also affected other areas of globalization like social globalization, military globalization and political globalization. The crisis will reduce the ability of adversely affected nations to participate in humanitarian and peacekeeping missions and financial aids to less developed countries. The current crisis will limit the establishment of more offshore global financial hubs, standardized commodity supply agreements and global movement of labor. Globalization facilitates the spread of economic shocks of one country to the rest of the world since the financial crisis of the US are largely to blame for the debt crisis in Greece and other European countries that invested heavily in US debt securities (Steger, 2009). Conclusion The present financial and economic crisis will adversely affect globalization efforts since many economies have sought to protect their national capital markets from financial shocks emanating from other countries. Financial globalization has been accused of stock markets turbulence, bank runs, instable commodity prices and currency depreciations. Bibliography: Langhorne, R, 2001. The Coming of Globalization, London: Palgrave Macmillan. Langhorne, R, 2006. The Essentials of Global Politics, London: Hodder Arnold. Steger, M. 2008. Globalization: A Very Short Introduction, Oxford: Oxford University Press. Steger, M. 2009. Globalization: The Great Ideological Struggle of the twenty-first Century, Rowman and Littlefield, Lanham MD. Stiglitz, J. 2002. Globalization and its Discontents. New York. Norton & Company Inc. Read More