Liberalization and Globalization

According to Wikipedia encyclopedia liberalization refers to a relaxation of government restrictions and controls that imposed on social or economic policy. In some contexts this r concept is referred as deregulation. The two concepts namely economic liberalization and trade liberalizations are regarded as most important aspects in economic globalization. The former is referred as deregulating government interventions by empowering private sector as the engine of growth while the trade liberalization is known as   providing opportunity for entering international trade through various incentives for exporters and importers more competitive manner. Thus export oriented development programs are promoted under trade liberalization.

Liberal economic thoughts were based on the economic theories preached by classical economist such as Adam Smith (1776) and David Ricardo (1817) and neo-classical thoughts developed by Alfred Marshal, Jacob Winer, Godfriy Haberler, Leontief and Samuwelson in 19^th century. Basically classical theory of liberal trade is based on the principles of absolute advantage and comparative advantage of trade presented by Adam Smith and David Ricardo and neo classical thought of liberal trade were based on increasing opportunity cost, Social indifference curve and offer curves. The views of Heckscher and Ohlin on factor Endowment theory and Paul A. Samuelson’s modification of Heckscher- Ohlin theory is vital in determining international trade and it considered as the modern theory of International Trade.

 Under the liberal thoughts private sector was recognized as the engine of growth and national production was determined on the demand and supply system rather than on  the government decision. Thus it was believed that the liberal economic system is more effective and efficient than the state controlled policies. Market mechanism was determined on the equilibrium position of the demand and supply system. But the liberal system was not taken into consideration of externalities or the public bads to the society.    

Activity 3.1

Explain the basic classical thoughts of liberalization

3.1 Liberal Policies and Strategies

Liberal trade policies introduced by many countries were followed comprehensive policy package as included follows:

1.      Price policy reforms: that  encouraged to avoid subsidies, quotas and other nontariff barriers

2.      Financial policy  that aimed to  liberalize local financial market

3.      Fiscal policies that aimed to revise taxes and tariff and to change welfare expenditure

4.      Trade policy that encourage liberal trade with international market

5.      The institutional policies that aimed to change institutions and legal framework.

These policies were aimed to liberalize foreign trade instead of implementing protection policies such as infant industry quota, subsidies and some non tariff barriers.

After the Second World War, many international institutions such as World Bank, International Monetary Fund and the world Trade Organizations were established in order to institutionalize the liberal trade among trading partners. According to Wikipedia encyclopedia, the establishment of GATT and the successive World Trade Organization (WTO) were helped gratefully in promoting world trade. Following actions were important in this regard.

a.       Elimination or minimizing  of tariff and creating free trade zones

b.       Reduction or elimination of capital controls

3. Reduction, elimination, or harmonization of subsidies for local businesses
4. Provide incentives for global corporations
5. Harmonization of intellectual property laws across the majority of states, with more restrictions
6. Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)

Reduced transportation costs, especially resulting from development of containerization for ocean shipping were also greatly effective in spreading world trade. The development strategies followed by respective world economies for trade liberalization were based                                                                                                                                                                                                            on four models;

1.      Export oriented models

2.      Resource oriented Models

3.      Technology oriented models

4.      Situation optimization model

Activity 3.2

List liberal trade policy reforms implemented by countries to encourage globalization;

Globalization & Development

The influence of globalization is measured in terms of effects and impacts that affected as outcome at the short run and the long run. Thus the immediate results or benefits received due to globalization process are regarded as the effects and the overall influence of globalization on whole society is regarded as the impact. Though the effects and impacts of globalization were discussed from different point of views as economic, political, social and cultural issues, the vital factor in this regard is how effects or impact were influenced on society either positively or negatively. Obviously, some of the effects of globalization are positive and attractive for increasing economic development and consequently many developing countries are encouraging globalization as the tactical way of development. Considering the past performances of some countries that encouraged the globalization, followings were identified as effects (http://en.wikipedia.org/wiki/Globalization).

                                      

1.      Emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies

2.      Realization of a global common market, based on the freedom of exchange of goods and capital

3.      competition in a global job market

4.      creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization

5.      increase in information flows between geographically remote locations

6.      Spreading of multi culturism, and better individual access to cultural diversity

7.      Increase international travel and tourism

8.       Worldwide sporting events such as Olympic and world cup series

9.      Development of world telecommunication system

10.  The creation of the international low and judiciary system

11.  The spread and increased interrelations of various religious groups, ideas, and practices

12.  Develop the social system and nongovernmental organizations

Activity 2.2

List and describe the effects of globalization on the global society

2.3 The Impact

When Consider the main effects of globalization, the impact of globalization is somewhat endanger particularly in terms of sustainable development that intended in achieving viable economic, social and environmentally balance growth. Therefore policy makers are vigilant in minimizing negative impacts and optimizing positive gains. Thus following factors could identify as positive and negative impacts;

Positive Impacts:

1.      Increase world food production and assure the food security

2.      Increase the transport facilities and reduce transport cost  of passenger and goods transport

3.      Encourage international labour migration  and reduce uncertainty of employments

4.      Improve  the information and communication technology

5.      Technological advancement and rapid development

6.      Improve medical technology and reduce the harmfulness of many dieses

7.      Increase the world trade and commerce

Negative Impacts:

1.      Increase income inequalities and disparities among developed and developing nations as well as rural and urban population

2.      Brain drain from developing countries to developed countries

3.      Environmental pollution and increasing negative externalities

4.      Spreading aid and other epidemic diseases

5.      Unexpected economic and financial crisis

6.      Labour displacements due to heavy mechanization 

7.      Drugs, illicit goods trade  and increasing Crimes

Activity 2.2

Justify the positive and negative impacts of globalization

Globalization

Introduction
What is globalization? Is it interdependence of world economies? or inter related economic, social and political activities followed as the unique world?

At present, globalization has recognized as the driving force of changing world economies. Is it bad or good? Is it able achieving expected outcomes?

Is Globalization a development ideology or tactical method followed by super powers to control economic and political power? What do you think?

1.1 Definitions
Globalization is not a recent phenomenon. The information shows that the world economy was globalized 100 years ago as it is today. As expansion of international trade, technology and investment over the world, literature of globalization were also enriched with sound conceptual base. Thus the globalization has defined from the different point views of social scientists

According to Webster’s dictionary, globalize means “to make worldwide in scope of application.”

As a multi-faceted concept, globalization has described in terms of economic dimension and their social, political and distributional dimensions. The term globalization defines 'boundryless trade and information' or 'Integration of the World Economy’ through trade, investment and the global movement of capital. Thereby, the globalization has defined according to various disciplines;

From the economists’ point of views, globalization is a growing economic interdependence of all countries and integration of national market into one global market through the increasing amount and variety of cross border transactions in goods and services, capital and money movements and technology transfers.

According to political scientists; globalization is the spread of democracy, human rights, basic freedom, gender equity, good governess and civil society for the sake of achieving sustainable economic development to overcome the poverty and environmental issues.

Socially, it is an organization of social life on a global scale, and growth of a global consciousness, hence to the consolidation of world society


Activity 1.1:
Explain the definitions and different views of globalization

1.2 Conceptual Base

The conceptual foundation of globalization was based on five characteristics such as trade, capital movements, labor movements and spread of knowledge and technology. Though this categorization is somewhat subjective, it indicates the main features of globalization i.e. international trade, international investment international immigration and technology.

As the multi lateral trading system the globalization was evolved from center-periphery theory that the development was occurred as input –output channel between the center of European countries and the periphery of developing countries, Thus the periphery was used as the market for output produced by the center and the source of raw materials supplied for the center.

Thus the theories related to globalization were derived from international trade theories, international investment theories, models of international labour movements, technological and knowledge.

International trade theories were developed by classical and neo-classical economists by emphasizing the type of trade and gains from international trade. Thus the comparative advantage theory was presented and developed by David Ricardo, Hecksher and Ohlin and Samuelsson. It explained how determine international trade, resource utilization and consequence effect of receiving trade gains as static and dynamic gains among trade partners. New trade theories such as Human Skills Theory, Product Life Cycle Theory Overlapping Demand Theory and strategic trade theories are explained how international trade is occurred under competitive advantage.

International investment theories such as Two Gap Model, Debt Cycle Theory and the Theory of Assets Selection and the labour migration theories provide the theoretical sound for the globalization process.


Activity 1.2:


Describe the conceptual and the theoretical base of globalization



1.3: Driving Forces of Globalization

According to past experience of globalization process over the world, four elements were recognized as the driving forces of globalization. It includes technological advancement, liberalization policies, factor mobility and internationalization of business activities

Technological Advancement

As will be discussed in the next sessions technology play a vital role in increasing efficiency of production and trade by expanding production possibility frontier Technological change occurs when the same amount of output can be produced by fewer factor inputs, or equivalently, when the same amount of inputs can produce greater amount of output. As a result of innovations, research, & development (R&D) activities done in the the world, technological innovations have led to increase the productivity of industrial and agricultural products and to slash the transportation and other cost remarkably.

Thus, the relationship between globalization and technology was closely linked together for the benefit towards the world development. As defined by Paul Romer (1996), “The technology invokes images of manufacturing, but most economic activity takes place outside of factories. Ideas include the innumerable insights about packaging, marketing, distribution, inventory control, payments, information systems, transactions, processing, quality control and worker motivation that are all used in the creation of the economic value in a modern economy.” Thus as a broad concept, it is considered as a “black box” which represents the economy’s production function, in which technology defines the efficiency with which inputs are transformed into output.

Consequently conversions of Technological advancement were positively contributed to increase and double the Gross Domestic Products (GNP) and the per capita income of many developing countries within a short period. Compared to western industrial countries that spend nearly 100 years for doubling economic growth, newly industrial countries like Korea, Singapore, Taiwan and the Honking were able to double their GNP witin ten fifteen years due to conversion effect of technological advancement from industrilized countries.. Innovations and R&D activities done in developed countries were caused to increase the food production and food security of the world economy.

The liberalization of trade and investment has expanded the boundaries of factor and product mobility. Thus liberalization allows any country to access resources, finance, technology and market. Due to the strong relationship between trade and growth, all developing countries peruse outward looking or primary export led development strategies that encouraging the production of exports. It seems that newly developed East Asian countries have followed liberal economic policies strictly before they developed. GATT/WTO is also play a vital role in the reduction or elimination of broader barriers to trade through multi lateral trade negations.

International mobility of human capital or labor immigration becomes one of the main factors in globalization both in terms of transferring technology and remitting capital to mother country. Measuring of human capital is based on education. Though, education and human capital treated as synonymous, education does not always result in the creation of human capital. Expenditure on education, the percentage of children attending in school and average years of schooling are regarded as the main measures used for measuring human capital.

As a result of development of world economy since World War II, value of human capital and international immigration was increased in the world. At the end of 1970s, more than 20 million labors were flowed across the world, of who 12 million were from developing countries and 8 million from developed countries. Unite States admitted about 500.000 technical and professional workers, of nearly three fourth from developing countries. Canada, Australia, New Zealand and some EU countries also received many immigrants from developing countries.

Internationalization of business and trade activities through bi lateral and multi lateral trade arrangements were significantly affected to world trade. Reginald and area economic integration are also important in this processs.

Activity 1.3:


List key driving forces of globalization and explain the role of conversion of technological advancement for accelerating global economic development

International Trade and Growth

Irrespective of any government policies and theories, there is always a tendency for economic growth to occur . For instance, increases in population imply a growing labor force. Investment in new plant and equipment by firms implies a larger and larger capital stock. Likewise, technological advances in the world indicate that allow for higher efficiency in production. Thus, despite these general tendencies in economic growth over the world, international mobility of production factors and technological innovations were greatly influenced for development of the modern world. 

International trade and SOLOW model

 Though all the theories and models of international trade so far discussed were highlighted the direct effect of international trade, new growth models which were mainly based on Solow growth model reflect effect and impact of trade on economic growth of any particular country. According to SOLOW model, international trade can change an economy’s stationary state in the short run and economic growth in the medium- run as the economy moves from one steady to another. The model of increasing returns to scale indicate that trade increases the real value of goods available to consumers by producing more goods which has comparative advantage and importing goods which lack comparative advantage. Richard Baldwin interpreted this as an increase of production function, as increase in the value of real goods produced . Joy Mazumdar qualified Baldwin’s idea by pointing out that a country may not be able to increase its rate of growth in the medium term if it exports capital goods and imports consumer goods . Thus, according to Mazumdar’s idea, Baldwin’s application of the SOLOW model to international trade suggests that capital importing developing countries might gain more from international trade than developed economies.

References

            Solow, Robert.  “A contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, 1995 16Vol. 70(1): pp 65-94.

            Baldwin E. Richard. “Measurable Dynamic gains in Trade,” Journal of political Economy, 1992(100)11:  162-174.

            Mazmdar Joy “Do static gains from trade lead to medium run growth,” Journal of political Economy, 1996: 104(6).

            Hendrik Van Den Beng. Economic Growth and Development, Chapters 4, 5 and 6,   McGraHill: 2001 pp114-211

Alternative International Trade Theories

After World War 2, new trade theories were developed as an alternative to HO model. These theories were fall into two main categories; (1) Theories developed to overcome some rigidities of HO model (2) theories developed to abundant HO framework. New theories are much general than HO model . It includes; 

        

Specific Factors Model

  

The specific factor model was presented by Paul Samuelson and Ronald Johns in 1971. It assumes an economy that produces two goods and that can allocate its labor supply between two sectors. The model allows for the existence of factors of production beside labor. Where as labor is a mobile factor and it can move between sectors, other factors are assumed to be specific, and they can be used only in the production of particular goods. The specific factor model assumes that each of the specific factors capital and land can be used in only sector, manufactures and food, respectively. Only labor can move in either sectors. Thus to analyze the economy’s production possibilities, it is necessary to ask how the economy’s mix of output changes as labor is shifted from one sector to the other. In the specific factor model, factors specific to export sectors in each country gain from trade, while factors specific to import competing sectors lose. Mobile factors that can work in either sector may either gain or lose. Nonetheless, trade provides overall gains in the limited sense. Thus the model provides detailed description of income distribution effects of international trade