economic globalization sociology 2, class 5 copyright © 2011 by evan schofer do not copy or...
TRANSCRIPT
Economic Globalization
Sociology 2, Class 5
Copyright © 2011 by Evan Schofer
Do not copy or distribute without permission
Announcements
• Announcements:– Agenda
• Wrap up some loose ends from last week• Economic Globalization
Review: States and Markets
• Question: How can states affect markets?– 1. Fiscal policy – taxes and spending– 2. Monetary (money) policy – printing & lending
money– 3. Laws and Regulations– 4. Direct ownership of production
Laws and Regulations• Governments regulate banks to protect
consumers– Generally, limiting the risks banks can take with your money…
• Ex: FDIC – government guaranty that your money is safe in a savings account (up to 250K per bank)
– Banks are forced to pay money for such insurance; they’d rather not
• Ex: Reserve requirements – Banks must keep some money on hand, just in case of crisis
– They’d rather not do this… because they could make more $ otherwise
• Ex: Limits on “leverage” – risky investments– Banks can make more profits if they take more risks… but they
might go bankrupt!
The Credit Crisis of 2008-9• A story of banks evading state regulation…• Reading: Krugman: “Partying Like its 1929”
– Banks were heavily regulated since 1930s, but didn’t like it
• Banks began to circumvent regulation: a “shadow” banking system
• Banks took greater and greater risks… and made billions of dollars of profits for years
– Decline of real estate market in 2007-8 caused risky investments to lose HUGE amounts of money
– Banks began to go bankrupt; bank runs began– Without government intervention, many major banks would have
gone out of business…– Businesses need bank loans; the effect would have been horrific.
Credit Crisis Video
• The Credit Crisis Visualized• Jonathan Jarvis• Direct video link: http://crisisofcredit.com/• Local link:
Laws and Regulations
• States affect markets by imposing laws and regulations of many kinds
• Example: Subsidies to agriculture• US gives tens of billions a year to farmers
– Keeps industry stable – fewer bankruptcies• US farmers don’t have to be as efficient
– Issue for future discussion: This harms farmers in poor countries…
State Ownership
• Governments can own factories, railroads, electric power plants, hospitals, etc.
• Nationalized or “state-run” industry: a business or industry that is run by the state– “Nationalization” is when the government takes
over formerly private companies or industries• Example: airport security screeners after 9/11
– Privatization: when a government-run business is sold to private owners
• Examples: many prisons, even some schools• Heavy industries in Britain & Russia (historically).
State Ownership
• Advantages of state-run industries:– Highly stable – no bankruptcies
• Tax money can keep them afloat in hard times
– Works in collective interests (usually)• Not driven by greed; nicer to workers (usually)• Won’t try to co-opt the state: Bribes/lobbying…
– Greater accountability (sometimes)• Government organizations are often subject to greater
scrutiny and accountability, compared to private firms– Ex: monitoring by government accounting offices; FOI Act
• Private firms that do terrible things usually just go bankrupt and leave others to clean up the mess
– Ex: Mining companies that damaged the environment.
State Ownership• Disadvantages of state ownership
– Little or no competition: • Less pressure to be efficient or innovate• Though in some cases, they can be very efficient
– Ex: Social security vs. private savings funds– Ex: State-run health systems vs US system of private insurers
– State firms can become corrupt or under influence of government elites…
• Ex: Oil companies in Nigeria and Russia– Some have stolen the oil wealth of entire nations.
Keynesianism vs. Free Markets
• The Keynesian state:– Fiscal Policies: Higher taxes, higher spending
• To support health care, welfare, keep full employment
– Monetary policy: Expansionary (low interest rates)• Low interest rates keeps unemployment low
– But, inflation & debt tends to be higher
– Regulation: Expanded, elaborate• Industries and markets are stabilized, controlled
– Ownership: Some industries may be nationalized• “Private sector” is smaller.
Keynesianism vs. Free Markets
• The Free Market state:• States that put on the “Golden Straightjacket”
– Fiscal Policies: Low taxes, low spending• Corporations & international investors are attracted by
low taxes
– Monetary policy: Conservative (high interest rates)• High interest rates keep inflation low
– As a consequence, unemployment is higher
– Regulation: Minimal• Companies are free to do as they please
– Ownership: Privatized• The state doesn’t own industries; it is all “private”.
Democrats, Republicans, Markets• Democrats have been historically more
“Keynesian”, republicans more “free market”• But, everyone has shifted more toward free markets
– Also, there are plenty of exceptions• Democrats supported many free-market policies
– Ex: Carter (D) oversaw the start of deregulation– Clinton pursued many free-market policies
» Signed NAFTA; worked to reduce gov’t debt & spending
• Republicans don’t always follow “conservative” policy– Ex: Nixon (R) instituted wage and price controls.– Despite goal of “low spending/low debt”, Reagan & Bush 1 & 2
created huge budget deficits and a huge amount of debt– Bush 2 created TARP: rescuing banks in 2008-9 rather than
“letting the market work”….
States, Markets, Globalization• Since around 1980 governments have shifted
• Away from Keynesian / Welfare-state systems• Toward free market capitalism
• Why?– Commanding Heights:
• Success of Hayek’s ideas; Elections (Reagan/Thatcher)
– Reich (Supercapitalism)• New technologies & greater competition• New/smaller companies could compete with the
“giants”… caused firms to challenge old regulations
– Friedman (Golden Straightjacket)• New transportation/communication technologies• Adapting to global competition; golden straightjacket.
Economic Globalization• Economic globalization:
• Simple definition: When economic activity that was formally local or national scale becomes organized on a global scale
– Spanning countries, rather than contained within them
• Examples: Globalization of…• Trade / exchange• Production• Corporations• Labor• “Direct” Investment• Capital
– I’ll define & discuss each.
Globalization: Trade
• Trade: The exchange of goods & services• Historically, trade was local• But, the word has become synonymous with
“international trade”, which is global by definition
• History:– Global trade was common in the late 19th century
• International trade amounted to 8% of GDP by 1913• But, trade collapsed during WWI, Depression, WWII
– Since World War II, trade has grown rapidly• Trade surpassed 17% of world GDP in the 1990s• NOTE: trade is concentrated among wealthy nations.
Globalization of Production
• Production: Creating products and services
• Example: Building a car• Where do the raw materials come from? Where are
parts made? Where is assembly done?
– In the past, auto production was primarily local• Ex: raw materials were imported, but rest was local
– Now, it is common for auto production to span dozens of nations
• Parts made in various places, assembled in various places…
– Ex: Picture in Knox/Agnew/McCarthy text (on next slide).
Toyota’s Global Production System
Globalization of Production
• Global supply chains• A “supply chain” refers to the steps through which raw
materials are transformed into components and finally into a final product
• Cotton cloth shirt• Because of decreased transportation costs, “The old
[mass] production system could now be fragmented and parceled out around the world to wherever pieces could be done best or most cheaply.”
– Reich, ch 3 p 62.
Globalization of Production• Reich, in the book “Supercapitalism”, makes
some important observations:– With globalization, America began to import much
of what it consumes• BUT: Aggregate trade statistics hide the fact that much
of the trade occurs WITHIN American companies– Part of supply chains…
– Implication: It is an oversimplification to say that foreign companies are ‘outcompeting’ US firms
• “Rather than American companies ‘losing their competitiveness’ … America started losing solely American companies.”
• The success of American companies no longer implies better wages & conditions for US workers.
Foreign Direct Investment
• Foreign Direct Investment (FDI): • Definition: Investing assets (i.e., money) from one
country into organizations, structures, and equipment in another
• Example: building (or buying) a factory in another country
• FDI does not include “intangible” investments, such as buying stock or currency in another country
• Note: Most FDI occurs between wealthy, industrialized countries.
Econ Globalization: Capital• Capital Flows: Movement of assets (money)
across national borders to purchase intangible investments
• Also called: Financial flows, globalization of capital markets, capital market integration
• Example: Buying stocks & bonds in another country• Example: Buying other currencies for purposes of
speculation (i.e., profit)
– Unlike FDI, capital investments can move quickly… flowing in and out of countries
• Elwood reading: “Pinball capital”• Can precipitate or worsen economic crises• We’ll discuss this later…
Econ Globalization: Labor
• Labor: people who work in the economy• Like capital or goods, people can move across national
borders: Immigration
– Historical perspective:• Like trade, immigration was common in the late 19th
century, but dropped in the mid 20th century• Due to immigration laws, migration remains constrained
– Migrants represent a small fraction of the global population– Moreover, labor flows tend to be regional.
Econ Globalization: Corporations
• Corporations can span national nations…• Called: Multi-national corporations (MNCs); Multi-
national Enterprises (MNEs); Trans-national corporations (TNCs)
– Firms can vary in extent they are global• Sometimes only 1 or 2 factories overseas• Or, they can be spread literally across the globe
– The vast majority of companies are still local– And many multinationals are concentrated in a few countries
• But, multinationals have grow in number and size– Some dwarf the economic capacity of entire countries…
What is most globalized?• Some things are more globalized than others…
How Global?
Extremely Capital flows
Very Trade
Moderately Corporations, FDI, Production
Not so much Labor (workers)
Video: Commanding Heights
• Episode 3, chapters 3-6• Time: 6:15 to 28:00• Basic issues regarding trade, capital flows• Global link:
http://www.pbs.org/wgbh/commandingheights/lo/story/ch_menu_03.html
• Local link: Video\PBS.Commanding.Heights.Ep3.The.New.Rules.of.the.Game.DivX6.avi
Economic Globalization: Origins
• Question: What are some basic things that are absolutely required in order to have a global economy?– 1. Inexpensive transportation & communication– 2. International financial (money) system– 3. Countries that are willing to participate
• Absence of legal or regulatory “barriers”.
Transportation
• Historically, people only traded lightweight, valuable items… spices, silk, ivory, etc…
• Things that could be easily carried long distances
• Global economic activity requires cost-effective transportation systems
• Otherwise most business activity remains localized• Most changes are pretty obvious: increase in cars,
trucks, planes, trains, ships… • But, one change matters more than others:
containerized shipping
Transportation
• Containerized shipping = a huge revolution in global transportation
• Started in the 1970’s
• Shipping containers: a standard 40ft long box
• Easy to load and unload onto ships, trains, trucks• Drastically reduced cost of shipping
• Huge ships can hold thousands of containers!
Containerized Shipping: Pics
• Ships can hold hundreds of containers!
Containerized Shipping: Pics
• Containers allow mechanical loading
Pics: from Maersk Sealand Website
Containerized Shipping: Pics
• Containers can be transferred to trains, trucks
Containerized Shipping
• Question: Guess how much it costs to send a 40 foot shipping container with 10,000 pounds of cargo from Shanghai, China to the port at Long Beach?
• Answer: Less than $3,500• Taxes, tariffs, etc. make it cost a bit more…
• Question: How many pairs of Nike shoes fit in a container?
• Answer: over 10,000!
Containerized Shipping
• Consequence: Containerized shipping resulted in a dramatic increase in global trade
• Example: Container holds 10,000 pairs of shoes• Container costs $5,000 to ship (including taxes)• Total cost of shipping per pair: 50 cents!
• If cost of making a shoe in China is 51 cents less than in US, then there is an incentive to ship…
• Higher costs might come from: more expensive labor, costs of adhering to environmental laws, etc.
Containerized Shipping
• Containerized shipping has indirect consequences for the environment…
• Companies can dump garbage in other countries– Anything that is costly to dispose of in the US– Hazardous waste; Old computers
• Mass shipping leads to spread of “invasive” non-native species
– Examples: Asian Tiger mosquito, Zebra mussel arrived in cargo ships.
International Financial System
• Another barrier to the global economy: Money
• Suppose I build and sell computers…– What if someone from Europe wants to buy one?
• They only have European money: Euros
– Problems:• 1. I don’t want Euros – they are useless to me• 2. How much is my computer worth in Euros money?
– Even if I would accept the money, I don’t know the value…
International Financial System
• In order to conduct trade, there must be an international system to handle currencies
• Example: The Gold Standard– For every dollar the government prints, they hold a
corresponding amount of gold in the bank• Value of all currencies = tied to a common “standard”• Example: US$1 = 1/35 ounce of gold• Other currencies might have a different value:
Example: Euro = 1/20 ounce.
The Gold Standard
• The gold standard is one solution to trade in a world of multiple currencies
• To sell a computer to someone in Europe, I can directly convert price
• US$ 1,000 computer = 35 ounces of gold = 700 Euros• European gives 700 Euros to his bank… converts to
gold• Gold is given to US central bank; US$ 1,000 given to
me
• Result: International trade is possible!
The Gold Standard
• Issue: If trade is one sided, gold drains from one country to another
• A “trade imbalance”, or a “current accounts deficit”
• Consequence– European banks have less gold, issue fewer
Euros• Money supply shrinks
– European economy slows down, imports reduce…• Result: System prevents asymmetric trade; system
stays in equilibrium.
The Gold Standard
• The gold standard fell apart in the depression• Governments wanted to boost their economies…• Question: What are some ways the government can
boost their economy?
– Governments increased spending (e.g., hired people to build roads) to increase consumption
• This required printing more money… even though gold supply didn’t expand
• Currencies were no longer tied to gold…• Trade became difficult.
Bretton Woods
• Plan B: The Bretton Woods agreement helped to re-establish an international financial system
• New plan: U.S. Dollars would serve as the currency for international transactions
• US dollars would have a fixed value vs. gold• Other currencies would have a fixed exchange rate
versus the dollar
• Everybody was happy again… for a while…
Bretton Woods
• The Bretton Woods system also fell apart
• Basic Problem: The fixed exchange rates works only if trade and capital flows are small
• … compared to the size of the US economy• Eventually, when global trade flows harmed the US
economy, the US changed the system…– The process is described by Herman Schwartz:
“International Money, Capital Flows, and Domestic Politics.”
Floating Exchange Rates
• Plan C: The system of floating exchange rates
• Value of currencies is determined by market• Like the price of commodities: oil, wheat, etc.
• Selling a computer to someone in Europe:– European goes to the currency market (bank)
to buy US dollars – to pay me for the computer• Current exchange rate: .70
– European pays .70 Euros to get each US$
• Therefore, a US$ 1,000 computer costs 700 Euros…
Currency Value ExamplesCountry Currency Number per US$
Europe Euro 0.748
Canada Dollar .987
China Yuan/RMB 6.60
India Rupee 45.04
Japan Yen 82.71
Mexico Peso 12.09
South Korea Won 1112.06
Thailand Baht 30.38
United Kingdom Pound .63
As of Jan 12, 2011
Trade & Exchange Rates
• Currency values affect trade:
• Example: Suppose the Euro becomes more valuable relative to the dollar:
• Value of dollar drops from .70 Euros to .10 Euros– Euro worth 1.44 US$, goes up to 10 US$
• How much would a US$ 1,000 computer cost to a European?
• Answer: Only 100 Euros!
• When a currency goes up relative to others, it is cheap to import
• If currency value drops, imports become expensive.
Trade & Exchange Rates
• Who benefits if Euro goes up relative to the US$?
• 1. European consumers – they can buy American products cheaply
• 2. American exporters – they can sell lots more to Europe
• Who Loses?• 1. American consumers – European imports costs
more• 2. European companies – can’t compete with cheap
US imports
Floating Exchange Rates
• Why do currency values “float” (change)?• What forces affect supply and demand?
• 1. Asymmetric trade• If a country imports more than it exports, its currency
drops• Ex: US has a current accounts deficit with Japan
(imports more than it exports)• To purchase Japanese goods, Americans must sell
dollars, buy Japanese Yen– Demand drives up value of Yen relative to the dollar.
Floating Exchange Rates
• Example: The effects of asymmetric trade on currency values
• Suppose I sell 10,000,000 computers• Europeans will sell 7.0 billion Euros to banks in order
to purchase 1 billion US$…
– If banks (currency markets) are flooded with Euros, supply increases, value drops…
• Currency markets don’t want more Euros• Banks will give fewer US$ in exchange
Floating Exchange Rates
• What forces affect currency values?
• 2. Asymmetric capital flows• If capital moves into a country, its currency goes up
– Ex: In early 1990s, global investors moved money into Thailand, Mexico… raising the value of currency
• If capital moves out of a country, its currency goes down
– Investors feared problems in Mexico, Thailand… pulled money out
– Thai Baht and Mexican Peso dropped in value
Floating Exchange Rates
• What causes asymmetric capital flows?
• 2. a. Interest rates• If a country raises interest rates, its currency goes up
– Reason: Foreign investors prefer high rates– The “electronic herd” is attracted to high rates…
• If a country cuts interest rates, its currency drops– Investors would prefer moving money into countries where
banks pay higher interest…
– Important issue: Globalization limits the ability of governments to control their own monetary policy
• Sometimes countries want to lower interest rates to boost the economy…
– But can’t because it would hurt their currency
In the News: Article from 2007• LONDON (AFP) - The dollar plunged to a record low Tuesday
against the euro, which broke through the 1.60-dollar barrier, as the unit was hit by dismal US housing news and fresh fears over the health of the US economy.
• Also weighing on the dollar was … the interest rate differential between the United States and the eurozone.
• The European Central Bank's benchmark rate, 4.00 percent, is already substantially higher than that of the US Federal Reserve, which stands at 2.25 percent. Higher interest rates in the eurozone makes the euro a more attractive investment than the dollar.
• While the Fed is scrambling to galvanize economic momentum and head of recession by lowering rates, the ECB is focused on curbing inflation -- currently at 3.6 percent in the eurozone -- and has shown no inclination to make credit cheaper.
• Issue: Fed can’t lower interest rates without hurting the dollar!
Floating Exchange Rates
• What causes asymmetric capital flows?
• 2. b. Anything else that “scares” investors• Government instability• Concern that an economy isn’t going to do well
– Ex: Fears that Thailand was going “bust”
• Policy changes that investors don’t like– Ex: big increase in taxes– Shift away from free-market policies (“golden straightjacket”)
• All of these things can cause investors to pull their money out of a country quickly, harming currency values.
Floating Exchange Rates
• What forces affect currency values?
• 3. Countries can intervene strategically to alter their currency values
• Governments can sell their currency to lower its value– They buy other currencies on global markets
• Governments can buy their own currency to raise its value
– They spend “reserves” of gold or other currencies on global markets
• This requires lots of money, so rich countries can do it more.
Trade & Exchange Rates
• Recent news article:
• WASHINGTON (AP) -- America's beleaguered manufacturing companies, chafing over the loss of 2.7 million jobs over the last three years, vowed Wednesday to press ahead harder to get China to stop manipulating its currency to gain trade advantages. (Associated Press)
• Issue: China keeps value of currency low• Aids exporters, at expense of US companies
Trade & Exchange Rates• Issue: Countries can strategically alter their
currency values to gain an advantage in trade– Asymmetric trade with China should cause
Chinese Yuan to rise relative to the US$• The US imports much more than it exports
– But: China floods market with Yuan, buys US$• Yuan value stays low compared to US$• Result: Chinese exports remain cheap for Americans• Result: American manufacturing companies = Angry!
– Note: Only big/wealthy countries can do this• US did a similar thing in the 1970s• Thailand tried, but ran out of money… it’s currency
suddenly plummeted.
Financial Flows & Exchange Rates
• Issue: Trade & financial flows have same impact on currencies
• Asymmetrical flows cause currency values to change
– But remember: Investment flows are larger than trade flows, and they can happen much faster
• Elwood: “pinball capital”• Result: global investors can cause currency values to
change rapidly• Called: market volatility (rapid change in value)
• If a currency value falls too low, serious economic problems arise.
Exchange Rates & Volatility
• Capital flows and resulting currency volatility can produce severe crises
• Example: Mexico in 1994• Global investors bought lots of stock, investments in
Mexico over several years…– This caused a slow rise in the peso. Not a problem.
• A minor political crisis led to panic selling in 1994– The stock market began to plummet
• Global investors rushed to sell stocks, converted pesos to dollars
• Result: Selling of pesos made the value of pesos plummet!
Exchange Rates & Volatility
• Why was it bad for the value of pesos to drop severely, rapidly?– 1. Suddenly, imports were very expensive
• Price of gas shot up• Businesses dependent on imports couldn’t afford
costs; potential for bankruptcies
– 2. Many Mexican companies had borrowed money from US banks
• US banks must paid in $, not pesos• If pesos are worth little, suddenly can’t afford to pay
loans• Result: More bankruptcies, economic recession.
Exchange Rates & Volatility
• In the case of the 1994 peso crisis, the US government stepped in
• Provided emergency loans, etc., to prevent massive bankruptcy
• But, that was just a small crisis… It is clear that crises could occur that are too large to stop so easily.
Asian Financial Crisis
• Commanding Heights Video:• In the 1990s, foreign investors moved capital into Asia• And, foreign banks lent money to Asian companies at
very low interest rates
– Consequence: Rapid economic growth• Economies “heated up”• But, capitalism is prone to boom-bust cycles…• Companies built more factories and housing than
needed– The “boom” ended
• But – global dynamics made the “bust” much worse!
Asian Financial Crisis• How did globalization prompt a crisis for Asian
economies in the 1990s?– 1. Investors pulled out quickly – affecting
currencies• Asian currency valued dropped…• Imports became expensive• Companies could no longer pay off loans to foreign
banks– Bankruptcies, unemployment…
Asian Financial Crisis• How did globalization prompt a crisis for Asian
economies in the 1990s?– 2. Contagion
• Worries about Thailand spread to other Asian countries– Self-fulfilling prophecy: fear of problems caused investors to
pull out, creating real problems
• Also, many US companies were invested in Asia (or had made loans)… Now they were losing money
– Lesson: Integrated economies mean that crises tend to spread…
• Example: US financial crisis caused economic disruption around the globe.
Capital Flows & the United States
• Krugman article: “Don’t Cry for Me America”• Explains how investors are starting to pull out of the US• Results won’t be as dire for us…
– Isn’t happening too quickly– American companies have loans payable in US$ (if it were
Euros, we’d be in bigger trouble)
• But, still… a serious issue for the US econoomy.
More Video: Commanding Heights
• Topic: Asian financial crisis, spillover to other regions…