Assignment 1999-2000 in

ADVANCED ECONOMIC THEORY: MACROECONOMICS

For

Professor George Hadjimatheou

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Written by Konstantinos Kostoulas 9910284

Msc in International Banking and Finance (F/T)

(2100 words)
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CONTENTS:

a)Globalisation: Definition ..………………………………………….. Page 3

b)Implications of globalization for investment………………………..Page 4

Table1:World Foreign Direct Investment and GDP growth…………..Page 4

Graph………………………………………………………………… Page 5

c)Implications of globalisation for economic policy…………………..Page 6

References to the Literature…………………………………………..Pages 9,10

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a)Globalisation: Definition

Globalisation is the growth, or more precisely the accelerated growth, of economic

activity across national and regional political boundaries. It finds expression in the
increased movement of goods and services, including ownership rights, via trade and
investment, and often of people, via migration. It can be and often is facilitated by a
lowering of government impediments to that movement, or by technological progress,
notably in transportation and communications. The actions of individual economic
actors, firms, banks, people, drive it, usually in the pursuit of profit, often spurred by
the pressures of competition.
Driven by the actions of individual economic actors, globalisation reduces the
economic distance not only between countries and regions, but also between the
economic actors themselves. It also tends to disrupt oligopolies in the struggle for
competitive advantage among firms, within countries as well as between countries.
Globalisation is a phenomenon that has the potential to reduce the significance and
autonomy of the nation state. It is a continuing process which reduces the significance
of national boundaries as an impediment to the free movement of capital, labour,
goods and services. Barriers nowadays have particularly diminished in the
international capital market.
The last 100 years alone have witnessed three distinct periods or waves of
globalisation: we have been in the midst of one since the 1980s; another occurred
during the 1950s and 1960s; while the previous wave took place during the 50 years
or so prior to World War I1. The current wave of globalisation is the third in this
century and is now transforming OECD and non-OECD countries alike. It has several
specific features that help distinguish it from the past: deregulation in the large
economies; new technologies and the innovation that accompanies their spread;
financial globalisation and sweeping policy changes in non-OECD countries
(privatisation, liberalisation, deregulation).

In the late 1970s the Keynesian idea that government intervention could stabilize a
nation’s economy and protect it from decline was seriously attacked by supply side
economics. The latter’s major proponent, Milton Friedman, argued that economic
growth could only be restored by the abolition of institutional rigidities that blocked
market forces. The attack proved to be successful: everywhere in the western world,
be it to varying degrees, public budgets were cut down, notably on social security
provisions. In the late 1980s, the so-called globalisation thesis2 gained popularity
among economists and politicians. This thesis can be regarded as a specification of
supply side economics: it also strongly recommends the removal of institutional
rigidities in order to enhance the competitiveness of the economy which is considered
to be a prerequisite for survival in a global economy.

1
Charles Oman (1996),”The policy challenges of globalisation and regionalisation”, OECD
Development Centre, Policy Brief No.11
2
Wyn Grant (June 1998),”Globalisation ,Comparative Political Economy and the Economic Policies
of the Blair Government”, CSGR Working Paper No.08/98
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b)Implications of globalization for investment

In general, the globalisation process has positive implications for investment. Foreign
Direct Investment (FDI) driven by the forces of globalisation enables countries to gain
from international specialisation and expand supply capacities. Outward flows are
recognized to have positive trade-creating effects on both exports and imports of the
home country, stemming from the increase in exports of goods. Available evidence
points to stronger, positive impacts on exports than imports, implying a positive net
effect on the home country trade balance3:

Table 1:World FDI, trade and GDP growth

(1981-1993)

$billion------ ------- Average annual growth rate(%):

Indicator 1993 1981-85 1986-90 1991-1993

FDI outflows 222 0.8 28.3 5.6

FDI outward stock 2135 5.4 19.8 7.2

Current gross domestic product 23276 2.1 10.6 3.3

Exports of goods and non-factor services 4654 -0.1 14.3 3.5

Source: UNCTAD

3
Pete Richardson (1997),”Globalisation and linkages: Macrostructural challenges and opportunities”,
Economics Department Working Papers no. 181
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The following graph is based on the data obtained from the previous table:

30

25

20 FDI outflows

15 FDI outward stock

10 Current gross domestic

product
Exports of goods and non-
5 factor services

-5
1981-85 1986-90 1991-1993

There have been very high annual growth rates of the economic fundamentals associated with
globalisation from 1986-90,which brought about positive implications for the world economy.

In both developed and developing countries, FDI policies in recent years were
liberalised, as part of an overall movement toward more open and market-friendly
policies. In the past 15 years there has been a convergence of views among most
countries in favour of FDI as a result of changes in economic policies to reduce the
role of governments and to rely more on the free play of market forces and of
institutional factors, such as regional trade and investment agreements. Restrictions on
FDI have almost disappeared and the previously widespread restriction of foreign
activity in the financial sector has been largely dismantled. Investment flows between
developing countries, as well as from developing to developed countries, have also
been growing. The potential of international investment to contribute significantly to
economic growth in both home and host countries is being increasingly recognised.

Furthermore, the liberalisation of investment policies and elimination of capital

controls through the process of globalisation, gives stimulus to capital flows, permits
wider competition and enhances capital productivity through the increase in the flow
of technology. There is a wide consensus that FDI is an important, perhaps the most
important, channel through which advanced technology is transferred to developing
countries.

Direct investment by multinational enterprises has the potential rapidly to restructure

industries at a regional or global level and to transform host countries into prodigious
exporters of manufactured goods or services to the world market. In doing so, FDI can
serve to integrate national markets into the world economy far more effectively than
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could have been achieved by traditional trade flows alone. As with private sector
investment, the benefits from FDI are enhanced in an environment characterised by an
open trade and investment regime, an active competition policy, macroeconomic
stability, privatisation and deregulation. In this environment, FDI can play a key role
in improving the capacity of the host country to respond to the opportunities offered
by global economic integration, a goal increasingly recognised as one of the key aims
of any development strategy.

However, not only the countries that are net recipients of investment, but also
provider nations achieve economic benefits from globalisation. These benefits include
facilitation of international trade, specialisation of production on a broader basis and
the stimulation of innovation.

Free flows of investment greatly increase the prospects for new entry in specific
markets. This is true not only for markets of national or international scope, but also
for also those markets that are by necessity local in their geographic definition.

Liberal investment rules can mitigate or eliminate local distribution barriers that may
frustrate trade in goods. Under such rules, an exporter who cannot place his goods
through established wholesalers or retailers owned or controlled by one or more local
producers can create new distribution channels to the benefit of consumers. In sum,
open investment usually enhances competition. An enlightened competition policy
enhances investment flows and ensures that consumer welfare is served.

Globalisation encourages free flows of investment, which in turn usually facilitate

competition and thus complements sound competition policy. Competition policy
helps maximize the benefits of liberal investment. Both investment liberalisation and
competition policy work should proceed together. In the same way, governments
should continue to create and enhance a culture of competition that allows the full
consumer benefits of investment liberalisation to be realised

c)Implications of globalisation for economic policy

Let us now consider the impact of globalization on economic policies. Government

policies normally facilitate and often stimulate — or on the contrary inhibit or impede
— the economic forces that drive globalisation. These policies include both
international policies, such as the raising or lowering of impediments to trade or
capital flows, and traditional domestic policies such as labour and environmental
standards and policies on competition and innovation. Developments in technology,
notably in transportation and communications but also in product or production
technologies, direct and organize the forces of globalisation. In any given country or
region, underlying economic conditions, notably the strength of growth and the level
of development, influence these forces as well.
During the period of rapid growth in the now developed countries, standard
macroeconomic Keynesian policies, with their monetary and fiscal instruments,
played a central role in the monitoring of economies. The new context, providing
economic agents more or less directly with some global reach, limited the power and
scope of these policies, while favouring public sector deregulation and privatisation.
The old tools, which allowed nation states to more or less successfully monitor their
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economies, have been drastically constrained. This does not imply that there is no
room for maneuvering, however.
Endogenous growth theory emphasizes that economic growth partly results from the
behaviour of economic agents, and can thus be influenced by policies, so denying the
purely exogenous nature of the technical progress postulated in the standard neo-
classical theory4. Direct indicators of trade policies, such as the absence of tariff
barriers, help to explain growth performance in the 1980s, both through raising capital
accumulation and total factor productivity.

Open trade has tended to be correlated with other features of what is regarded as a
healthy economy, in other words macroeconomic stability and reliance on the private
sector as the main engine of growth. In addition, there has been a shift from inward-
to outward-oriented growth strategies.
This fast-paced global process involves some regions or areas more than others. It
also raises some fundamental policy challenges. At the national level, it has made
policy makers more aware of the increased international implications of their policy
actions. Policies that might appear sustainable within a national context may
increasingly appear less so in an international context5.
Moreover, events in one country can very quickly affect other countries. Events in
global financial markets, for example, tend to affect all countries, whether or not they
reflect underlying economic conditions in any particular country. Because highly
mobile financial capital is responsive to regulatory differentials as well as to interest-
rate differentials among countries, there has also been a tendency toward
competitive deregulation among countries, which further weakens the economic
influence of governments and the potential of their policies. Competitive deregulation
tends to put downward pressure on labour standards, as well as to amplify the shifting
of the fiscal burden away from capital and the weakening of the tax base, thus it
undermines governments’ ability to engage in redistributive policies. Today most
developing countries have moved to reduce import barriers, attract foreign
investment, privatise state-owned companies and carry out domestic regulatory
reform, while being increasingly economically vulnerable to events in the global
economy.

The globalisation of financial markets and financial deregulation together are a major
cause of the weakening of national economic policy autonomy. The volume of liquid,
mobile funds circulating in the global market significantly reduces central banks’
ability to manage exchange rates. The volatility in exchange-rate fluctuations has in
turn become far greater in the 1980s and 1990s than anyone anticipated after the
introduction of market-determined exchange rates.

Developing countries must also face the implications of globalisation in the developed
countries. As developing countries open up, they must also deal with the pressures of
competitive deregulation and the dangers of exclusion from the major regional
groupings. Developing countries, more than developed countries, need policies that

4
Malcolm Sawyer (January 1998),”The Kaleckian Analysis and the new Millenium”, Working Paper
No.223,University of Leeds and the Jerome Levy Economics Institute
5
Pascal Petit and Luc Soete (September 1998),”Globalisation in Search for the Future: The
contemporary challenge to national policies”, International Review of Social Sciences
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will capture the benefits from globalisation. On the other hand, because of
institutional market rigidities and the resulting high level of labour costs it is very
difficult for the developed economies to compete at the ever more competitive world
market. Such economies can improve their competitiveness by de-institutionalizing
their markets, notably by increasing the flexibility of labour.

Many of the policy implications, however, apply to all countries. Namely, mutually
reinforcing macroeconomic and structural policies, facilitating the diffusion and
absorption of expertise and promoting the formation of industrial clusters are essential
for both developed and developing countries.
Effective management of macroeconomic policies is also essential for investment
liberalization to produce the expected outcome. In order to maximise the positive
effects of FDI, liberalisation policies should be tailored to meet the needs and
priorities of each country’s economic development policy.

In general, globalisation presents the main challenge today for policy makers in
OECD and developing countries alike and for firms worldwide. In many developing
countries, the main threat is exclusion from globalisation and growing poverty. Even
in the more dynamic developing countries, growing income disparities, stagnant or
declining real incomes and increased economic insecurity affect many people. Large
segments of the world’s population face not only a threat of exclusion from the
welfare gains to be derived from globalisation, but also a threat of significant loss of
income and of economic security. The extent to which that threat to economic
security in turn creates a threat to political security should not be underestimated. The
challenge, above all, is therefore to pursue globalisation in ways that do not weaken,
but strengthen, social cohesion. All segments of society, within countries and between
countries, must share in the benefits from the enhancement of productivity that
accompanies globalisation.
The globalisation process to date has made a significant contribution by creating a
new international context and, in many instances, forcing nation states to co-
operate. However, the future of globalisation lies in the co-operative actions that
nation states initiate in response to its challenges.
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REFERENCES TO THE LITERATURE:

Audretsch B.David (1998),”Agglomeration and the Location of Innovative

Activity”, Oxford Review of Economic Policy,Vol.14,no.2, Summer 1998

Barret Martin and McCallum Carol (1997), “Globalisation and the Employment
Relationship: towards an Explanatory Framework”, Centre for International
Business Studies, Research Papers in International Business, Paper Number 4-97,
ISSN Number 1366-6290

Bax E.H (1995), “Globalisation and the Flexibility of Labour: A new challenge to
human resource management”, SOM theme A: Structure Control and
Organisation of Primary Processes

Cantwell John (1992), “Multinational Investment in Modern Europe”, University

of Reading, Edward Elgar Publishing Limited

Grant Wyn (1998), “Globalisation, Comparative Political Economy and the

Economic Policies of the Blair Government”, CSGR Working Paper No.08/1998,
the University of Warwick

Kozul-Wright Richard (1998),”Spoilt for Choice? Multinational Corporations

and the Geography of International Production”, Oxford Review of Economic
Policy,Vol.14,no.2, Summer 1998

Loredo Enrique and Suarez Eugenia (2000), ”Privatisation and Deregulation:

Corporate Governance Consequences in a Global Economy”, Empirical
Research-Based and Theory Building Papers, Volume 8, Number 1, January 2000

Narula Rajneesh (1996),”Multinational Investment and Economic Structure:

Globalisation and competitiveness ”, Routledge, London

Oman Charles (1996), “The Policy Challenges of Globalisation and

Regionalisation”, OECD Development Centre, Policy Brief No.11

Petit Pascal and Soete Luc (1998), ”Globalisation in Search for a Future: The
contemporary challenge to national policies”, International Review of Social
Sciences No.160, 1999

Richardson Pete (1997), “Globalisation and Linkages: Macrostructural

Challenges and Opportunities”, Economics Department Working Papers
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No.181,OCDE GD(97)147, Organisation for Economic Cooperation and

Development

Sawyer Malcolm(1998), “The Kaleckian Analysis and the New Millenium”,

Working Paper No.233, the University of Leeds and the Jerome Levy Economics
Institute

Temin Peter (1999), “Globalisation”, Oxford Review of Economic Policy Winter

1999

Venables Anthony (1998),”The Assessment: Trade and Location”, Oxford

Review of Economic Policy,Vol.14,no.2, Summer 1998

Wood Adrian (1998),”Globalisation and the Rise in Labour Market Inequalities”,

Economic Journal September 1998

World Trade Organisation (1998), “Report (1998) of the Working Group on the
Relationship between Trade and Investment to the General Council”, World
Trade Organisation WT/WGTI/2, 8 December 1998-4920