International Production and Governance - Essay Example

International Production and Governance Student’s Name Subject Professor University/Institution Location Date As Nayyar (2006) observes, globalization is a complex term depending on many of its approaches but significantly it is processes associated with increased economic openness, growth of economic interdependence and deepened economic integration in world economy. It manifests itself in international trade, investment and finance expanding transactions and organization of economic activities across national and political boundaries. Globalization has been a process that is traced back in the historical development and different phases are manifest which shares similarities and difference. Importantly, there is much in historical globalization that informs the present developments in the world today. Since 1950, the world economy experienced progressive economic integration. The last quarter of twentieth century was however marked with acceleration in globalization process. The presumption that current situation of globalization is a new phenomenon compared to the past is incorrect. There are similarities that can be drawn from globalization phase of 1870-1914. The historical perspective of globalization and development reveals important considerations. The framework of globalization has and is building on international trade, investment, finance and dynamic political regulations and manipulations among nations. Globalization was built on trade, investment and finance. However, there had been patterns of unbalanced conduct between countries in global economy (Mathews 2006). The West have for long practiced protection but due to political power and imperialism imposed free trade in other countries particularly Third World. Import duties have in the historical globalization defined the lines between the gainers and losers. The west has gained in an increased stock of foreign investment and for long they have dominated in gaining much of income from external investment. They are less challenged as many countries were not in a position to invest due to struggling national income which was at the mercy of imperialist (Pauly 2009). As the export income rose for developing nations in the second half of the 20 th century, the state of globalization changed with finance taking over as the main trading element of globalization overtaking investment and trade. The last quarter of the 20 th Century has had an explosive growth of international finance. This has dwarfed trade and investment which majorly incorporated the developing nations to gain in globalization. The dimensions of international finance markets involve foreign exchange, financial assets, and bank lending and government bonds. Interdependence of developing nations however weakened in the face of internationalization of financial markets since the only way of interaction was through trade amongst themselves (Nayyar 2006). Trade, investment and finances has created a pervasive international production and governance which is critical for global economic stability today. Globalization development however, has not had a balanced state regarding to the cost and benefits. At times economic growth, development and expansion are desirable to a part of society and not to all. Globalizing process therefore, has detrimental effects to global or local scale social well-being. This is particularly through imperialism, colonial, hegemony, structural inequality and cultural assimilation that underlie globalization processes (Beeson & Bell 2009). Though the general understanding is international economic integration, it privileges lenders and investors with more rights and there are fewer rights geared to human beings. The dominance of globalization is then sustained by propaganda by highly privileged elites from all over the world who reap much from it. Dunning (2001) argues that, the fall of barriers to international transactions invigorated global markets. This is by extending transactions and promoting the rise of elaborate corporate systems that organize the production processes such as various services functions. Such production takes advantage of the fine differences in resources, costs, logistic and markets. The intensity of regional and global integration and emphasis on efficiency of the whole system are distinct with the rise of the international production system. Global markets thus, involves an increasingly competition between the entire production systems. The financial crisis of 2008 undermined international production and governances. The crisis led to rising unemployment and falling production, consumption, and investment. As Summers (2000) discusses, a competitive process of transnational corporations leads to over-investment increasing indebtedness. International finance which provide capital to corporations with lower interest rates than the domestic one increases borrowing. Much of corporation’s debt exists in foreign currencies. Good proportion of the short-term debt is invested in stock markets and property which are the most hit in economic downturn. Collapse of asset and property prices affect the international finance and particularly manifesting itself in corporate bankruptcies. Production slows down as consumption affects the demand. This ultimately undermines production (Taylor, et al 2009). To offset high debts, most corporations raise products prices and increase the sale of assets, particularly those in the new geographical regions. They also structure the markets in a way to avoid excessive costs which reduces the extent of geographical markets. A good illustration is as O’Brien (2012) argues, on the euro economic crisis. European banks had subprime debt, and made bad loans on real estate, it thus led to piles of sovereign debt. This is because European banks had high exposure to subprime mortgage loans and collateral debt obligations from U.S. In comparison, Australian banks had no such debts and therefore their performance was not affected. This set Australia as a real winner, and its banks were worth more compared to European counterparts. Economy determines to a larger extent the tendency for falling and sound financial sector. After 2008 crisis, Australia economy and incomes grew as it was expected. This therefore, solved their bank’s debt problem and thus, the debts did not go bad as in other countries. Commodity exports from China also powered Australia and its income steadily went up just as financial contracts assumed. Australia inflation on goods and services was also low thus the economy had improvements. From this particular example, it is logical to conclude that current international investments and finance was a major contributor to 2008 economic crises. This is on the basis of how European banks and ultimately European economy was adversely affected compared to that of Australia who had little external debts. European banks failed to handle and manage risks from the corporate and households increasing mortgage defaults. High share in domestic household loans worsened the debt recovery. It was impossible to apply risk mitigating factors. Thus the fall of interest rates from 2008 and households made it hard to service them. Problem is compounded by a large share of households which belongs to a higher risk group. Corporate sectors failed according to market-based indicators and balance sheet. For Australian banks, there was sufficient liquidity provision that maintained financial sector confidence. The government had also established wholesale and deposit funding, and therefore Australian banks maintained access to both domestic and offshore capital market funding which contributed to growth in deposits (Tumbarello 2010). There are several forces that drive the rise of integrated international production. Among them include the rapid decline of barriers to international investment flows and trade. The freedom of moving goods, services and trade patterns is an essential factor in enhancing export competitiveness. Three core elements critical to international production system apply to the context. They are the geographical configuration, global value chains and governance. According to Mayer-Foulkes (2009), transnational corporations respond by dramatic changes in global economic environment. They particularly search for an enhanced competitive advantage. Investors in such instances get excited as they expect high profits from property and stock investment. They then get credit even high risk borrowers by financial innovation. Profit taking leads them to compromise risk. The sale of assets and panic selling increase asset selling and thus there is a sharp decline of asset value. According to Borzel & Risse (2005), governance is the structure of control which determines functional and geographical distribution of the business activities and ensures coordination. Governance in international production system occurs in forms that range from equity linkages which provide direct managerial supervision, to diverse non-equity linkages and thus formally independent intermediaries such as producers, suppliers, and marketers link. In consideration of the way the 2008 financial crisis undermined international governance, moral hazard and deregulation were manifest. For one, the lenders saw their activities as implicitly guaranteed by international corporate governance taking excessive risk by their lending activities. On the other hand, the capacity and expertise for financial institutions to monitor such risks was limited. Governments and banks sought to soften the economic downtown by lowering interest rates, tax cuts and higher spending. Government credibility was at stake with rising social unrest as public confidence in functioning of economy was undermined and dissatisfaction with worsened living conditions. Another outcome was that, there lacked regular stress testing and banking regulatory authorities were unable to impose rules on adequacy conservative capital. International finance governance failed to impose regulations and liquidations. Strong governance with financial expertise is thus required in the financial institutions. This is mainly to monitor risks in case of there are potential indicators or actual manifestation of economic crisis. International governance requires decision guided by data and consensus in order to guarantee lenders or investors to take excessive risk in lending activities. Another crucial role of governance regulations is to efficiently allocate global savings to the production of goods and services which is reduces the adverse effects of economic crisis in the case of investing global savings in stocks and property. The critical role of international financial stability in ensuring international production stability, adequate international regulation and governments’ cooperation is vital. Overarching international organizations should constantly intervene for good governance. This is because they have efficient mechanisms of evaluation, assessment and advising on explicit intervention mechanisms. References Beeson, M., & Bell, S 2009, “The G-20 and international economic governance: hegemony, collectivism, or both? Global Governance: A Review of Multilateralism and International Organizations”, 15(1), 67-86. Borzel, T. A., & Risse, T 2005, “Public-private partnerships: Effective and legitimate tools of international governance. Reconstituting Political Authority Complex Sovereignty and the Foundations of Global Governance”, Toronto, 195-216. Dunning, J. H 2001, “The eclectic (OLI) paradigm of international production: past, present and future”. International Journal of the economics of business, 8(2), 173-190. Mathews, J. A 2006, “Dragon multinationals: New players in 21 st century globalization”, Asia Pacific Journal of Management, 23(1), 5-27. Mayer-Foulkes, D. A 2009, “Long-term fundamentals of the 2008 economic crisis”, Global Economy Journal, 9(4). Nayyar, D 2006, “Globalisation, History and Development: A Tale of Two Centuries”. Cambridge Journal of Economics 30, 137–159. O'Brien, M, Australia’s Banks Are Now Worth More Than Europe's—How Is That Possible? , August 15 2012, http://www.theatlantic.com/business/archive/2012/08/ Palier, B., & Sykes, R 2001, “Challenges and Change: Issues and Perspectives in the Analysis of Globalization and the European Welfare States”, Globalization and European Welfare States: Challenges and Change, 1-16. Pauly, L. W 2009, “The old and the new politics of international financial stability”, JCMS: Journal of Common Market Studies, 47(5), 955-975. Summers, L. H 2000,” International financial crises: causes, prevention, and cures”, The American Economic Review, 90(2), 1-16. Taylor, P. J. et al 2009, “The way we were: Command-and-control Centres in the Global Space-economy on the Eve of the 2008 Geo-economic Transition”. Tumbarello, P (2010, January 22). Australian, New Zealand Banks Remain Sound During Global Crisis. 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