HSC Topic 1 – The Global Economy

International Economic Integration

The Global Economy

 The Global Economy is where the economies of individual countries are linked to each other
and changes in a single economy can have rippling effects on others
 The major integration of economies can be seen through:
o International trade in goods and services
o International financial flows
o International investment flows and transnational corporations
o Technology, transport and communication
o The movement of workers between countries
 Since 1980, the volume of world trade has quintupled
 The world has over 200 million migrant workers as compared to 78 million in 1965
 Indian Information technology companies usually generate up to 95% of their sales in
Europe and in the United States

Gross World Product

 The Gross World Product refers to the sum of total output of goods and services by all
economies in the world over a period of time
 Trade in goods and services has grown rapidly in recent decades increasing from $US8.7
trillion (38% of global output) in 1990 to $US49.9 trillion (71% of global output) in 2011
 Annual growth in the value of trade has been consistently twice the level of world economic
growth
 However, during economic downturns, the growth of global trade has contracted faster than
world economic output, highlighting the greater volatility of trade compared to the gross
world product

Globalisation
 Globalisation refers to the integration between different countries and economies and the
increased impact of international influences on all aspects of life and economic activity
 Globalisation has increased significantly over the recent decades because of new technology
and communications, which have reduced the cost of moving goods between economies
and providing services to customers in distant markets
 Also governments have encouraged trade by removing barriers and joining trade groups
such as the World Trade Organisation (WTO)
 It is an organisation of 155 member countries that implements and advances global trade
agreements and resolves trade disputes between nations

Financial Flows
 International Financial Flows is the most globalised feature of the world economy because
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money moves between countries more quickly than goods and people
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  These flows have expanded substantially following financial deregulation around the world.
This can be seen through the lifting of controls on currency markets and flows on foreign
capital
 An Important feature of international finance is Foreign Exchange Markets (FOREX)
 These are networks of buyers and sellers exchanging one currency for another in order to
facilitate financial flows between countries
 Foreign Exchange Markets have a daily turnover of up to $5 trillion
 The main driver of global financial flows are Speculators which are investors who buy or sell
financial assets with the aim of making profits from short term price movements
 They are often criticised for creating excessive volatility in financial markets
 Speculative behaviour can create significant volatility in foreign exchange markets as
speculators have a herd mentality, meaning that once and upward or downwards trend in
asset prices occurs, it tends to continue
 The main benefit of financial flows is that it enables countries to obtain funds that are used
to finance their domestic investment. In enables countries with low savings levels to finance
large scale business and investment projects

Investment and Transnational Corporations

 A measure of the globalisation of investment is the expansion of Foreign Direct Investment
 FDI refers to the movement of funds between economies for the purpose of establishing a
new company or buying more than 10% of shares in an existing company
 It is considered to be a long term investment and the investor normally intends to play a role
in the management of business
 FDIs are influenced by global activity, hence there has been a dramatic increase in FDI flows
over the past three decades
 The dominance of sources for FDI flows have shifted from developed nations to developing
nations due to increasing economic activity in developing nations with these economies
receiving up to half of the total FDIs
 Foreign Direct Investment typically accounts for less than 20% of total investment, meaning
that over 80% of investment still comes from national economies

 Transnational Corporations play a vital role in global investment role

 TNCs are global companies that dominate global product and factor markets
 They have production facilities in at least two countries and are owned by residents of at
least two countries
 Since the early 1990s the number of TNCs have grown from 37,00 to 104,000
 A significant cause of growth of international investment is the increased level of
international mergers and takeovers
 Recent mergers have seen the formation of companies worth hundreds of billions of dollars
and reduced the number of truly global companies in different product markets
 In 2007, international mergers and acquisitions were worth $1.6 trillion, however it dropped
to $526 billion because of lingering effects of the global recession
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Technology, Transport and Communication

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 Technological Developments facilitate the integration of economies

  Cheaper and more reliable international communications through high speed broadband
allows for the provision of commercial services to customers around the world
 In finance and investment, technology plays a key role in facilitating globalisation through
the powerful computer and communications networks that allow money to move around
the world in a fraction of a second
 Advances in transportation such as aircraft and high speed rail networks allow greater
mobility between economies as well as increased accessibility to tourism and travel for
consumers
 Technology influences globalisation as a driver for growth and investment
 An analysis of the income flow from technology transfers between countries shows that the
USA receives half of the royalties and licence fees from global technology transfers and that
most of the remaining gains are shared by a small number of developed economies
 Business corporations that play a leading role in developing new technologies will often
move directly into overseas markets in order to sell their products and services direct to
local buyers
 The internet is one of the most important communications technologies that links
businesses, individuals and nations in the global economy
 The World Information Technology and Services Alliance (WTSA) estimated that by 2011
the global marketplace for internet services and technology was worth almost $4 trillion

International Division of Labour and Migration

 In the last century more people than ever are migrating are moving to different countries to
take advantage of better work opportunities that other countries offer
 Migration is the movement of people between countries on a permanent or long term basis
usually for 12 months or longer
 Almost 3% of the world’s population are migrants, with over 60% of the world’s migrants
living in income countries
 Highly skilled workers are attracted to richer economies due to increased pay and work
opportunities with the share of immigrants in high income countries rising from 7% to 11%
 Smaller advanced companies such as Australia suffer from brain drain as some of the most
talented skilled workers are attracted to other countries due to greater rewards
 Low skilled labour is also in demand in the advanced economies where it may be difficult to
attract sufficient people born locally to do types of work
 These trends represent an international division in labour which is how the tasks in the
production process are allocated to different people in different countries around the world
 This is also evident when corporations shift production between economies in search of the
most efficient and cost effective labour (i.e. offshoring)
 The International division in labour also reflect the theory of comparative advantage
 Developing economies have a large population of workers with only basic labour skills and
education levels, giving them a comparative advantage in labour intensive manufacturing
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International and Regional Business Cycles
 The International Business Cycle refers to the fluctuations in the level of economic activity
in the global economy over time
 For most countries, economic growth is stronger when the rest of the world is growing
strongly weaker when other countries are experiencing a downturn
 As a small open economy, the Australian economy is particularly affected by growth rates
overseas. Hence, 63% of changes in the level of output in Australia can be explained by the
growth rates, inflation rates and interest rates of the G7 largest industrialised countries
 The transmission of economic conditions from one country to another is made more
immediate by the increased integration of economies during the globalisation era:
o Trade Flows- the level of growth in an economy will have flow on effects on the
economic activity of its trading partners
o Investment Flows- Stronger economic conditions in one country will make it more
likely that businesses in that country will invest in new operations in other nations,
which will add to their economic growth
o TNCs- these are increasingly important means by which global upturns and
downturns are spread throughout the global economy
o Financial Flows- 70% of financial market volatility in advanced economies is
transmitted to emerging economies within one or two months (IMF paper)
o Financial Market and Confidence- There is a strong correlation between
movements in share prices of the world stock exchanges and the level world
economic growth
o Global Interest Rate levels- Monetary policy conditions in individual economies are
increasingly influenced by interest rate changes in other countries
o Commodity Prices- Global prices of key commodities such as energy, agriculture,
minerals play a critical role in the general level of inflation in the world economy,
therefore has adverse effects on all features of the international business cycle
o International organisations- can act as unofficial forums to coordinate
macroeconomic policy especially during periods of economic uncertainty

 However, countries are still independent, thus there are many factors that will cause the
business cycle between economies to differ:
o Interest Rates- will differ between countries and thus will have significant impact on
the level of economic activity
o Fiscal Policy is likely to cause medium to short term difference in economic growth
o Exchange Rates- impacts the level of trade competitiveness and confidence within
economies
o Structural Factors- Countries have different attitudes, economic resilience,
demographics, consumption patterns skill etc, affecting the competitiveness and
level of economic growth
o Regional Factors- Some economies are very closely integrated with their neighbours
and are therefore very influenced by the economic performance of their trading
partners
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 Regional Business Cycles are the fluctuations in the level of economic activity in a
geographical region of the global economy over time
 Regional cycles are a part of globalisation because they are a result of increased border
integration
 For example, many of the 27 economies of the European Union are influence by the activity
levels in Europe’s largest economies- Germany, UK and France
 In recent years, the regional business cycle in Asia has become more pronounced due to
increased integration of domestic economies
 Regions around the world have a higher proportion of developing or low income countries
and tend to be less regionally integrated
 Hence, in South Asia and Latin American regions, regionally dominant economies like India
and Brazil respectively play a key roles
 However, smaller economies can affect the performance of regional economies, even if they
are not dominant economies or strongly integrated

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Trade, Financial Flows and Foreign Investment

The basis of Free trade-its advantages and disadvantages

 Free Trade can be defined as a situation where governments impose no artificial barriers to
trade that restrict the free exchange of goods and services between countries with the aim
of shielding domestic producers from foreign competitors
 It based around the concept of Comparative Advantage which is the economic principle that
nations should specialise in the areas of production which they have the lowest opportunity
cost and trade with other nations as to maximise each nation’s standard of living

 The Advantages of Free Trade include:

o It allows countries to obtain goods and services that cannot produce themselves or
in sufficient quantities to satisfy domestic demand
o It allows countries to specialise in the production of the goods and services they are
the most efficient in, and thus free trade encourages the most efficient allocation of
resources
o There is a greater tendency for specialisation to lead to economies of scale, which
will lower average costs of production
o International Competitiveness will improve as domestic businesses face greater
competitive pressures from foreign producers
o Free trade also leads to higher living standards as a result of higher levels of
international economic growth and increased real incomes

 The Disadvantages of Free Trade include:

o Increased short term unemployment as domestic businesses may find it difficult to
compete with imports. However in the long term, the domestic economy will direct
its resources to areas of production where there is a comparative advantage
o It may be more difficult to establish new businesses and new industries if they are
not protected from larger foreign competitors
o Production surpluses from some countries may be dumped on the domestic market
which may hurt efficient domestic industries
o It may encourage environmentally irresponsible production methods that because
producers in certain countries may be able to produce goods at a lower costs
because of weaker environmental protections

The Role of International Organisations: World Trade Organisation (WTO)

 The World Trade Organisation is a global organisation that enforces the existing WTO
agreement, resolves trade disputes and is the major forum for global trade negotiations
pursuing the goal of global free trade

 Through Dispute Resolution the WTO is able to settle disputes between countries
 If no agreement is reached, then the WTO will issue the decision
 Hence, Countries may impose trade sanctions that may include high tariffs on good that may
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be imported from the offending nation

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  The WTO’s major focus in recent years has been Doha Round of trade liberalisation talks
that were launched in 2001
 It aims to free up global trade through reducing agricultural protection, lowering tariffs on
manufactured goods and reducing restrictions on trade and services
 If implemented successfully the World Bank estimated that the resulting increase in global
trade would increase global economic activity by $520 billion by 2015
 It was also known as the Development Round as it aims to life 140 million people out of
poverty in the developing world

The Role of International Organisations: International Monetary Fund (IMF)

 The International Monetary Fund (IMF) is a global organisation that enforces the is to
maintain international financial stability
 The IMF plays a key role in monitoring the international financial system and assisting
economies who face major economic issues
 For example, a rescue package was delivered during the sovereign debt crisis in Europe and
it included loans and relief programs worth $159 billion in 2012 for eleven European
economies
 The IMF’s introduces Structural Adjustment policies which support the free trade of goods
and services and the free movement of finance and capital throughout world markets
 These policies ensure that most economies adopt similar strategies in recent years
 In the GFC, the IMF gave borrowing economies greater control over their macroeconomic
policies and lent to governments that were increasing their spending to avoid recession

The Role of International Organisations: World Bank

 The World Bank’s role in the global economy is primarily concerned with helping poorer
countries with economic development
 Its main focus is to fund infrastructure, reduce poverty and to help countries adjust their
demands to globalisation
 It is funded by contributions from member countries and from its own borrowings in global
financial markets in order to make loans to developing nations at rates that are below
standard commercial rates
 In 2012 its programs involved US$53 billion
 In recent years, the World Bank’s major aim as set out in Millennium Development Goals
has been to reduce the proportion of people living on less than $1 per day to half the 1990
level by 2015
 Since the GFC in 2008, the World Bank has provided over $US280 billion in assistance to
developing countries

The Role of International Organisations: World Bank

 The United Nations (UN) is a global organisation whose membership includes more nations
than any other political or economic organisation
 Its agenda covers the global economy, international security, the environment, poverty and
development, international law and global health issues
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  The International Labour Organisation, a UN Agency, has developed international labour
standards to improve working conditions around the world and prevent child labour and
discriminations against individuals or groups
 The UN first proposed the Millennium Development Goals in order togive assistance to
those in world’s poorest nations

The Role of International Organisations: OECD

 The Organisation for Economic Co-operation and Development (OECD) is an international
economic organisation of 34 countries committed to democracy and the market economy
 The primary goal of the OECD is to promote policies “to achieve the highest sustainable
economic growth and employment and a rising standard of living in member countries”
 The OECD played a role in proposing the macroeconomic stimulus when the GFC struck the
world economy in 2008
 The OECD undertakes research which is the most highly regarded in the world in order to
compile detailed economic and policy information in advanced economies
 They generally support government intervention in order to achieve economic policy goals

Influence of Government Economic Forums – G20, G7/8

 The Group of Eight Nations (G8) consists of the 8 largest industrialised nations in the world
including France, Germany, Canada, UK, US, Japan, Italy, Russia (added in 1997)
 In recent decades it has been the most important government economic forum
 It has been an unofficial forum coordinating global macroeconomic policy because of it s
influence over fiscal and monetary policies of the world’s largest economies
 Although the G8 comprises 60% of the world’s GDP, it only covers 14% of the world’s
population
 Hence, its global power is declining whilst the Outreach Five (O5)[China, India, Mexico,
Brazil, South Africa] are shifting the global power

 The Group of Twenty Nations (G20) emerged as the leading forum for coordinating the
global response to avert a depression GFC
 The G20 agreed to coordinate fiscal stimulus around the world as well as improving
supervision of the Global Financial System and international financial institutions
 The G20 included the 19 of the world’s largest national economies, plus the EU, covering
80% of world GDP and two thirds of the nation’s population
 Its main activity is during an annual summit

Trading Blocs, Monetary Unions and Free Trade Agreements

 A Trading Bloc occurs when a number of countries join together in a formal preferential
trading arrangement to the exclusions of other countries
 Free Trade Agreements are formal agreements between countries designed to break down
barriers to trade between those nations
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Advantages and Disadvantages of Multilateral and Bilateral Agreements
 Australia Pacific Economic Cooperation (APEC) was formed in response to trading blocs in
other areas of the world
 It has 21 member countries, yet it accounts for 41% of the world’s population, 54% of the
world’s GDP and 44% of the world’s trade
 This agreement was intended to boost Australia’s national output by 6.8% and create
500000 jobs by 2010
 It is intended to be non-discriminatory grouping meaning that it will trade with countries
outside of the grouping outside on the basis as members of the forum if they are prepared
to give equal access to their markets
 Some APEC members (incl. Australia) l (EU, APEC, NAFTA, ASEAN)have been negotiating a
Trans Pacific Partnership (TPP) which aims to further liberalise trade across the Asia Pacific
region

 The Association of South East Asian Nations (ASEAN) is the most effective force for trade
negotiations within the Asia Pacific Region
 It is divided into the AAFTA and the AANZFTA
 The ASEAN nations have been committed to lowering and eliminating tariffs on 96% of
Australian exports to the region

 The European Union (EU) is the most important trading bloc in the world, with 27 member
countries spread across Europe and a population of 500 million people
 A single market for European goods and services was established in 1992 and it has helped
trade growth within the EU
 However, it is a closed trading bloc as there are much higher tariff barriers against non
member countries
 The high rates of protection applied on agricultural products in the EU and the oversupply it
has generated has prompted the US to retaliate with similar protectionist policies
 The use of the Euro in 17 member countries has assisted in greater integration
 The Euro has been under sustained pressure in recent years due to the GFC as severe debt
crisis in individual European nations forced other Euro members to provide emergency loans
to prevent a collapse
 Given the wide variations in economic conditions in different European nations it is very
difficult to sustain common currency and common interest rate policy

 The North American Trade Agreement (NAFTA) is the elimination of agricultural protection
and the phasing out of other tariffs over 5-15 years in order to increase trade
 The NAFTA accounts for around 13% of global merchandise trade
 The establishment of the Free Trade Area of the Americas (FTAA) is intended to be a
counterbalance to the EU
 It has floundered due to major differences between the advanced and emerging economies
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 Two countries may also choose to enter a bilateral agreement
 The Closer Economic Regional Economic Trade Agreement (CERTA) has lead to the
elimination of trade restrictions between Australia and New Zealand
 It has been seen as highly successful and has contributed to annual increase in trade
between Australian and New Zealand of around 8%
 The United States has used Bilateral agreements to increase its economic power by
negotiating more favourable trade relationships on a country by country basis
 Bilateral Trade agreements can contribute to greater trade diversion, hence not adding to
world, but simply diverting it to nations that are party to an agreement
 Thus multilateral trade agreements can be seen as much more efficient and beneficial
means of trade
 The process of negotiating bilateral agreements is generally much faster than for multilateral
agreements

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Protection

Reasons for Protection

 Protection refers to government policies that give domestic producers an artificial
advantage over foreign competitors such as tariffs in imported goods
 Most countries tend to impose some form of protection in order to assist local producers

 Infant Industries generally start out on a smaller scale and face higher costs, so they may
need to be shielded from competitors in the short run in order to build capacity
 The test for economic credibility for protection of infant industry is whether the protection
is removed over time
 If the protection remains there is no incentive for the industry to reach maximum efficiency
and compete without protection
 Infant Industries usually rely on protection for several years as they would not survive
otherwise
 When governments provide help to new industries, it tends to involve direct assistance for a
very long time

 Dumping occurs when foreign firms attempt to sell their goods in another country’s market
at a price below the home country’s market price
 Although the low prices are temporary, local firms may be forced out of business as they
cannot compete. This may cause a loss in local productivity and increased unemployment
 However, in the short term consumers benefit from lower prices. But, these prices tend to
increase once local competition is eliminated
 Hence, it is in the economy’s best interest to impose import restrictions (This is supported by
most economists)
 In many cases, this protection is abused by falsely accusing efficient low cost foreign
producers of dumping and thus giving an artificial advantage to domestic producers
 India has lodged the most complaints of dumping with 656 non dumping actions

 If local producers are protected from competition with cheaper foreign imports, the demand
for local goods will be greater and this will create more domestic employment
 However, this protection will distort resource allocation away from efficiency, leading ot
higher levels of unemployment and decreased growth rates
 If protection is phased out, it will lead to lasting jobs creation in internationally competitive
sectors of the economy
 Protection may also result in other countries retaliating with similar protectionist policies

 Major powers may want to retain their own defence industries so that they can produce
defence equipment during war time
 There is a similar argument for self sufficiency of food supplies
 When a country adopts one of these approaches, it must accept that it may gain self
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sufficiency at the expense of the higher living standards that would achieved with
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specialisation and free trade

Methods of protection and the effects of protectionist policies on the domestic and
global economy (GRAPHS!)
 Tariffs are taxes on imported goods imposed for the purpose of protecting Australian
industries
 They raise the price of imports, making domestic producers more competitive
 Economic Effects
o It stimulates domestic production and employment
o Income is redistributed away from consumers and towards domestic producers because
consumer pay a higher price and receive fewer goods
o Although it increases revenue in the short term, revenue will be decreased as importers
will be discouraged to supply the country
o It will result in the retaliation effect

 Quotas refer to restrictions on the amounts or values of various kinds of goods that may be
imported
 Tariff Quotas is the protectionist method under which goods imported up to the quota pay
standard tariff rate, whereas goods imported above the quota pay a higher rate
 Economic Effects
o Resources allocation ins more to protected industries
o Consumers pay higher prices and receive fewer goods. This reduces overall
economic growth due to income moving away from consumer towards domestic
producers
o Governments can raise a small amount of revenue from quotas by administering the
quota through selling import licences allowing firms to import a limited number of
goods

 Subsidies are cash payments from the government to businesses to encourage production
of a good or service and influence the allocation of resources in an economy
 They are often granted to business to help them compete with overseas goods and services
 It is shown by an increase in supply
 It is preferred by economists as subsidies tend to be abolished quickly
 Economic Effects
o Stimulated domestic production and employment in the protected industry
o Consumers pay lower prices to receive more goods. However, they pay indirectly for
the subsidies through increased taxes
o Subsidies impose direct costs on government budgets because they involve
payments from the government to the producers of goods and services

 Local Content Rules specify that goods must contain a minimum percentage of locally made
parts
 In return for guaranteeing that a certain percentage of a good will be locally made, the
imported components may not attract a tariff
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 In Australia, television broadcasting is subject to this in order to promote Australian culture

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and foster Australian content

 Export Incentive programs give domestic producers assistance such as grants, loans or
technical advice and encourage businesses to penetrate global markets or expand their
market shares
 It creates greater focus on capturing on foreign markets rather than protecting import-
competing business and uses it as strategy for economic growth and increased employment
 However, export incentive are an artificial barrier to free trade

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Globalisation and Economic Development

Differences between Economic Growth and Economic Development

 Income is used to measure the living standards between economies, as it shows the ability
of citizens to satisfy their material wants
 The Gross Nations Income (GNI) is the sum of value added by all resident producers in the
economy plus receipts of primary income from foreign sources
 The United States have the largest GNI worth $US 15 332 billion
 One of the limitations in making comparisons using the GNI in order to compare economy
size, is that the exchange rate is used to make the comparisons
 Hence the GNI is adjusted through the Purchasing Power Parity (PPP) which is the theory
that exchange rates should adjust to equalise the price of identical goods and services in
difference economies throughout the world

 Economic Development is a broad measure of welfare in a nation that includes indicators of

health, education and environmental quality as well as a material standards
 It is measured by the Human Development Index (HDI) which was devised by the UN to take
into a count life expectancy at birth, levels of educational attainment and GNI
 It is a score between 0 and 1. Australia is second with a score of 0.929
 Note that Economic growth is essential for a high HDI

Distribution of Income and Wealth

 High Income economies receive around two thirds of the world’s income in raw GNI, or half
the world’s income in PPP adjusted figures:
o High Income(PPP adjusted)- $43853
o Low Income(PP adjusted)- $1123
 Note that High Income economies have one seventh of the world’s population
 Using GNI measured at PPP per capita:
o High Income countries-$38637
o Low and Middle Income - $6938
 The GNI per capita figure is used in order to take into account the size of populations and it
growth which varies between countries
 This gap is very slowly decrease as all nations have experienced economic growth in recent
decades enjoying higher incomes as a result of increased GDP

 Wealth is an important safety net for people when they do not have income and can be used
to start a business and generate income
 A report conducted by the UN in 2008, found that the global wealth is concentrated among
households in North America (with 34% of global wealth), Europe (30%) and rich Asia-Pacific
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Developing, Advanced and Emerging Economies
 Advanced Economies refers to high income, industrialised or developing economies. The
group of advanced economies includes 34 economies across North America, Europe and the
Asia Pacific
 Developing Economies experience low living standards, low education levels and generally
have agriculture based economies with poor infrastructure and economic and political
institutions
 Emerging Economies are in the process of industrialisation and experiencing sustained high
levels of economic growth
Type of Income Levels Economic Growth Structure of Economy Examples
Economy
Advanced High Income levels Slower growth in Large service United States
with GNI per capita recent decades industries and Germany
above $US 12,276 advanced Korea
manufacturing
Developing Low income levels Moderate growth Heavily reliant on Bangladesh
with around half the rates, but agriculture and Ethiopia
population in population foreign aid Zimbabwe
absolute poverty growth also high
Emerging Income levels vary, Strongest growth Industrialising usually China
but what these rates in the world with substantial Brazil
economies have in (5-10%) and manufacturing Indonesia
common is fast favourable sectors
growth in income prospects
levels

Reasons for Differences between nations

Global factors

 Global Trade System: This includes global protectionism in the agricultural sector and the
Expansion of regional trading blocs that exclude poorer nations from gaining access to
lucrative global consumer markets
 Global Financial Architecture: International flows of investment heavily favoured developed
countries and short term flows favour emerging economies. Also, developing countries have
massive foreign debt burdens
 Global Aid and Assistance: The total aid donated by high income countries was only 0.31% of
world GDP and a high proportion of this was phantom aid
 Global Technology Flows: Countries with established technology can better integrate new
technology
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Domestic Factors

 Economic Resources:
o Natural Resources- These are low value added goods which are important inputs
for the production of higher value added manufactured goods and services
o Labour Supply and Quality- High Income countries tend to have highly educated
and skilled labour resources. Low income nations tend to have high population
growth, poor education levels ad low health standards which reduce the quality of
labour supply
o Access to Capital and Technology- Difficulty in gaining access to capital for
investment and development is another major structural weakness of developing
nations which contributes to their low living standards
o Entrepreneurial Culture: The values of individual responsibility, enterprise, wealth
creation and a strong work ethic can assist in the industrialisation process and the
transition towards sustainable economic development
 Institutional Factors:
o Political and Economic Institutions- Political instability, corruption and a lack of law
enforcement government agencies tend to undermine the confidence of investors
o Economic Policies: Government economic policies can have a substantial impact on
development, in particular how governments balance the role of market forces and
government intervention in an economy
o Government Response to Globalisation- Policies relating to trade and financial
flows, investment flows and transnational corporations and the country’s
participation in regional and economic organisations will influence an economy’s
ability to take advantages of the benefits of integration

Effects of Globalisation
 International Convergence—Trend for economies to adopt similar economic systems of
market capitalism
 Economic Growth and Development – Globalisation does not appear to have accelerated
economic growth overall but in general terms countries that are more open to the global
economy have grown faster than other countries and experienced greater improvement in
living standards
 Trade, Investment and Transnational Corporations – The process of globalisation has
resulted in substantial increases on the size of trade flows and foreign investment. TNCs have
gained a more influential role in the global economy than before and are increasing
dominating business activity around the world
 Environmental Consequences- Globalisation can have negative environmental
consequences, especially in developing countries where there are not the same stringent
controls as in a high income economy. However, globalisation also offers the best
opportunity to protect the world’s environment by making nations face up to their global
responsibility
 The role of financial markets – Financial Markets shift massive volumes of money between
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countries each day and when investor confidence or sentiment falls it can have devastating
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effects upon the domestic economy as it is very volatile

Trade, Investment and Transnational Corporations
 TNCs are increasingly dominating businesses across the world
 Technology and government changes now foster trade growth and vertical specialisation
(goods are produced in different economies at different stages)
 Financial market globalisation has resulted in increased access to foreign funds for finance
and investment. Between 1990 and 2011 FDIs increased more than 7 fold
 The removal of restrictions on foreign ownership and the development of global capital
markets have spurred growth in TNCs
 A major criticism of TNCs is that they not operate under the laws of one government and so
they can move their production facilities to countries with the weakest government
regulations

Environmental Sustainability
 Low Income Countries that are desperate to attract foreign investment and earn higher
export revenue may engage in economic behaviour that may harm the environment
 Climate Change is an eminent environmental issue as it is created by individual countries yet
it will have a global effect
 The United Nations Framework Climate Change Convention conducted in 1977 produced
the Kyoto Protocol which set carbon emission reduction targets for industrialised countries
 Globalisation makes it possible to share the costs of preservation and increase the scrutiny of
the environmental practices of TNCs
 Globalisation has also facilitated the transfer of environmentally friendly technology

The International Business Cycle

 The benefit of integration is that is allows countries to achieve faster rates of economic
growth by specialising in certain types of trade
 However, closer integration of economies makes economies more exposed to downturns in
the international business cycles
 One of the reasons for the strength of global economic growth in the mid-2000s was the
simultaneous upswings of US and China
 Greater synchronisation of business cycles between different countries has also increased the
need for macroeconomic policies to be coordinated 17
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