Reasons for growth of Global Economy:

1. Role of the USA; Marshall Plan, Japan, US leadership in Bretton Woods
2. Role of Bretton Woods system; free trade, financial stability, supporting development.
3. Rise of mixed economies; because of decolonization, NIEs
4. Role of Multinational Corporations; especially FDI in developing states, technology transfer.


What is Globalisation?

In his book The Lexus and the Olive Tree, Thomas Friedman wrote:
"Globalization is not a phenomenon. It is not just some passing trend. Today it is an overarching international system shaping the domestic politics and foreign relations of virtually every country, and we need to understand it as such."

“Globalization is much like fire. Fire itself is neither good nor bad. Used properly, it can cook food, sterilize equipment, form iron, and heat our homes. Used carelessly, fire can destroy lives, towns and forests in an instant.”

Globalization essentially means opening up of the economy and its integration with the other economies of the world.
It involves deregulation and adoption of the policies of economic liberalization and economic reforms which are calculated to encourage the growth of private enterprise.
Globalization implies change in external economic policy as well and involves abandonment by a country of protectionist stance in commercial policies and dismantling of tariff walls and encouragement of free and fair trade between nations. Globalization also essentially involves pursuit of economic policies which encourage free and fair competition among public enterprises and among private and public enterprises as well.
{The Global Envision Fall 2006 Essay Contest Winner, Shrinivas Thakur}

These three fundamental factors have influenced the pattern and pace of economic integration in all of its important dimensions:-
(1) Through human migration
(2) Through trade in goods and services
(3) Through movements of capital and integration of financial market
Trade in Goods and Services
Traditionally, economists tend to focus on trade in goods and, to a lesser extent, services as the key mechanism for integrating economic activities across countries and as a critical channel (but not the only important one) for transmitting disturbances between national economies. However, optimum trade is usually not possible due to barriers:

- natural barriers to trade in the form of transportation costs and also costs of information about product prices and availabilities at different locations;
- artificial barriers to trade arising from tariffs, quotas, and other public policy interventions.

If there were literally no natural or artificial barriers to trade in goods or services, then the relative prices of all goods and services would be equalized everywhere, and integration through the channel of trade would be perfect and complete. In practice, of course, there are important natural and artificial barriers to trade which preclude such perfection.

History of the trade
- The interwar period witnessed a collapse in the volume of world trade. This collapse reflected both the worldwide depression of economic activity in the 1930s and the widespread and massive increase in tariffs and other trade restrictions during this period. (protectionism)
- Since World War II, the world economy has enjoyed a remarkable era of prosperity that has spread quite broadly, but not universally, across the globe. Over the past five decades, real world GDP has risen at somewhat more than a 4 percent annual rate, with real GDP in developing countries (as a group) growing in per capita terms at about the same pace as the industrial countries. The result has been that real living standards, as measured by real per capita GDP, have improved on average about three-fold in just half a century;
- 2 fundamental reasons
o Technology in transport and communication
 Air cargo
 Ocean Shipping
 Communication cost reduced
o Reduction in barriers
 Possibly reduced by as much as 90% since pre war days
 Reductions in regions like EU and NAFTA
 In developing states, there was mixed economies
 International trade surely benefits from improvements in communications. As previously discussed, the areas likely to benefit the most are those that rely particularly heavily on communications, with financial services being an important example.

International Capital Movements and Trade in Financial Services
Not truly global and free yet, but (Some important components of wealth (like human capital) are scarcely traded at all, and currency risk, the threat of government intermediation (especially during periods of turbulence), and the strong preference for consuming home goods and investing in more familiar home and regional markets, still serve to restrict the range and size of asset substitutability.)
But the forces making for stronger chances of expected returns are already powerful enough to have made a large dent in the autonomy that authorities have in the conduct of macroeconomic and regulatory policies.
Main points

1. Financial markets, especially wholesale markets for high grade instruments, have tended to become more tightly linked internationally, especially among the industrial countries and also including many important emerging market economies.
a. A unified market for bank liquidity emerged very rapidly once the Economic Monetary Union (EMU) started.
b. The Asian Financial Crisis, which effectively began with the attack on the Hong Kong dollar and stock market in mid-October 1997, was preceded by a massive surge in gross private capital flows to emerging market countries and a deep compression of spreads for emerging market borrowers
2. A country highly open to private international capital flows, the policy requirements for successful operation of a pegged exchange rate regime are quite demanding
a. Mexico 1994
b. AFC, 1997
c. Emerging market countries that maintained more flexible exchange rate regimes—such as Singapore, Taiwan Province of China, South Africa, and Mexico (after 1995)—were generally better sheltered from the effect of recent financial crises.
3. Need for Foreign Direct Investment) FDI.
4. Efforts to improve market discipline through better provision of information, heightened transparency, harmonization of accounting standards, etc., and through avoiding generous bailouts of errant borrowers (and their creditors) appears to have successfully forecast much of the agenda for the recent debate on improving the international financial architecture.

Problems of Globalisation

Globalisation as an ideology
- It is also unthinkable in the mainstream that the contest between free trade and globalization, on the one hand, and "protectionism," on the other, might be reworded as a struggle between "protection"--of transnational corporation (TNC) rights--versus the "freedom" of democratic governments to regulate in the interests of domestic non-corporate constituencies.
- Economic Failure
o The average rate of productivity of the G-7 countries (U.S., Britain, France, Italy, Germany, Canada and Japan) has gone from 0.4 percent, 1971- 82, to 4.6 percent by the late 1990s.
o But the elites have done well despite the slackened productivity growth. Because globalization has helped keep wages down, while increasing real interest rates, the upper 5 percent of households have been able to skim off a large fraction of the reduced productivity gains, thereby permitting elite incomes and stock market values to rise rapidly
o Income inequality rose markedly both within and between countries. In the United States, despite a 35 percent increase in productivity between 1973 and 1995, the median real wage rate was lower in the latter year. Inequality rose to levels of 70 years earlier, and underemployment, job insecurity, benefit loss, and worker speedup under "lean" production systems all increased.
o Income gap
- Attack on Democracy
o The globalization of recent decades was never a democratic choice by the peoples of the world--the process has been business driven
o In the United States, public opinion polls showed the general public against NAFTA even after incessant propaganda, but the mass media supported it
o The Euro
o The assault on labour. One of the main objectives of TNC movement abroad has been to tap cheaper labour sources.
o Capturing or immobilizing governments. The business community has also mounted a powerful effort to dominate governments--either by capture or by limiting their ability to serve ordinary citizens.
 Effect of Multinational Corporations (MNC)
 Some claim that the MNCs impose conditions
 US and other MNCs have their own agenda
 In fact, even MNCs may even rather invest in domestic industries
• E.g. 79% of US firms invest in USA, 60% of Brit firms in Britain
• 1993, 90% of Japanese firms invested at home
o The power of global financial markets to limit political options.
 Democracy is no longer able to serve ordinary citizens, making elections meaningless and democracy empty of substance. This helps explain why half or more of eligible U.S. voters no longer participate in national elections.
 In the early 1980s, the IMF and World Bank took advantage of the Third World debt crisis and used their leverage with numerous distressed Third World borrowers to force their acceptance of Structural Adjustment Programs.
 Forced a stress on exports, which help generate foreign exchange to allow debt repayment and that more closely integrate the borrower's economy into the global system; and it stressed privatization, allegedly in the interest of efficiency, but serving both to help balance the budget without tax increases and to provide openings for TNC investment in the troubled economy.
o The claim of its proponents that free trade is the route to economic growth is also confuted by longer historic experience: no country, past or present, has taken off into sustained economic growth and moved from economic backwardness to modernity without large-scale government protection and subsidization of infant industries and other modes of insulation from domination by powerful outsiders. This includes Great Britain, the United States, Japan, Germany, South Korea and Taiwan, all highly protectionist in the earlier takeoff phases of their growth process.

2 Competing Theories in the development of the third world economies
1. Modernisation Theory
Modernization theory is a socio-economic theory, sometimes known as (or as being encompassed within) development theory, which highlights the positive role played by the developed world in modernizing and facilitating sustainable development in underdeveloped nations, often contrasted with dependency theory.
During the 1950s, its initial focus was placed on the mass media as a modernizing force in undeveloped countries. Economically, the mass media was viewed as integral to the diffusion of modern forms of social organizations and technology over traditional economies, with literacy playing an especial cultural role in this. Modernization theorists also maintained that this would serve to promote a diffusion of liberal-democratic political ideals within less developed countries.
Theories of modernization have been developed and popularised in 1950s and 1960s. It combines the previous theories of sociocultural evolution with practical experiences and empirical research, especially those from the era of decolonization. The theory states that:
• Western world countries are the most developed, and rest of the world (mostly former colonies) are on the earlier stages of development, and will eventually reach the same level as the Western world
• Development stages go from the traditional societies to developed ones
• Third World countries have fallen behind with their social progress and need to be directed on their way to becoming more advanced
Developing from classical social evolutionism theories, theory of modernization stresses the modernization factor: many societies are simply trying (or need to) emulate the most successful societies and cultures. It also states that it is possible to do so, thus supporting the concepts of social engineering and that the developed countries can and should help those less developed, directly or indirectly.
Theory of modernization has been subject to some criticism similar to that levied on classical social evolutionism, especially for being too ethnocentric, one-sided and focused on the Western world and culture.
Its contrasts witht the dependency theory
2. Dependency Theory
Dependency theory is a body of social science theories, both from developed and developing nations, that create a worldview which suggests that poor underdeveloped states of the periphery are exploited by wealthy developed nations of the centre, in order to sustain economic growth and remain wealthy.
Dependency theory states that the poverty of the countries in the periphery is the result of how they are integrated into the world system, whereas free market economists argue that they are not 'fully' integrated.



The premise:
• Poor nations provide a destination for obsolete technology, and markets to the wealthy nations, without which the latter could not have the standard of living they enjoy.
• First World nations actively, but not necessarily consciously, perpetuate a state of dependence through various policies and initiatives. This is multifaceted, involving economics, media control, politics, banking and finance, education, sport, and all aspects of human resource development.
• Attempts by the dependent nations to resist the influences of dependency often result in economic sanctions and/or military invasion and control. Many dependency theorists advocate social revolution to effect change in economic disparity.
• Former Brazilian President Fernando Henrique Cardoso wrote extensively on dependency theory while in political exile, arguing that it was an approach to studying the economic disparities between the centre and periphery. The American sociologist Immanuel Wallerstein refined the Marxist aspect of the theory, and called it the "World-system."
o Latin American viewpoint (dependency theory)
 Globalisation as a new form of imperialism
 Core dependency
 Stratification of international power where US has unquestioned hegemony
 Bretton Woods, while many of its ideals were outdated by 1990s but got things that were created like MNCs, multilateral financial organisations
 Expansion of capital flows involve 3 things
 Introduction of new technologies
 Increased liquidity of capital
• Capital moved in 1990s at US$1.3b per day
• Increased liquidity due to oil shocks in 1970s, US military power and expenditures in Vietnam, development of financial speculation

o Requires decisive state investment and intervention
 1997 showed the US Treasury and IMF designing policies that favoured US companies in AFC
 Also has great inequalities
• 1980s GNP per capita, of rich and poorer nations was 11x the rest, and the rich were 30x the poorer
• by 1990s, 20x the rest, 62x the poorest
Dependency theory became popular in the 1960s and 1970s as a criticism of modernization theory (also known as development theory) that seemed to be failing due to the continued widespread poverty of large parts of the world.
Some believe it come from as early as colonial times.

Implications (what countries due to prevent it from happening). Usually in mixed economies
While there are many different and conflicting ideas on how developing countries can alleviate the effects of the world system, several of the following protectionist/nationalist practices were adopted at one time or another by such countries:
• Promotion of domestic industry and manufactured goods. By subsidizing and protecting industries within the periphery nation, these third-world countries can produce their own products rather than simply export raw materials.
• Import limitations. By limiting the importation of both luxury goods and manufactured goods that can be produced within the country, supposedly, the country can reduce the amount of its capital and resources that are siphoned off.
• Forbidding foreign investment. Some governments took steps to keep foreign companies and individuals from owning or operating property that draws on the resources of the country.
• Nationalization. Some governments have forcibly taken over foreign-owned companies on behalf of the state, in order to keep profits within the country.
Dependency theory has been criticized by free-market economists such as Peter Bauer and Martin Wolf, who believe it will lead to:
• Corruption. State-owned industries may have a higher rate of corruption than privately owned companies.
• Lack of competition. By subsidizing in-country industries and preventing outside imports, these companies may have less incentive to improve their products, to try to become more efficient in their processes, to please customers, or to research new innovations.
But
Market economists point to many examples they claim disprove dependency theory: the improvement of India's economy after it moved from state-controlled business to open trade is one of the most often cited. India's example seemingly contradicts dependency theorists' claims concerning comparative advantage and mobility, as much as its economic growth originated from movements such as outsourcing - one of the most mobile forms of capital transfer. However, South Korea was able to rise out of poverty using many tenets which Dependency theory advises.

Multinational Corporations
A multinational corporation (MNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Very large multinationals have budgets that exceed those of many countries. Multinational corporations can have a powerful influence in international relations and local economies. Multinational corporations play an important role in globalization; some argue that a new form of MNC is evolving in response to globalization—e.g. the 'globally integrated enterprise'.
There are numerous advantages
- to increase benefits from economies of scale. (workforces, raw materials, and technology.) For example, “many North American publishers actually write and produce much of their software in countries such as India.”
- the opportunity for smaller companies to quickly expand globally, having more choices when recruiting a workforce and the opportunity to target a larger customer base (which translates to greater earning potential).
- promoting international cooperation and peace. If countries are dependent upon one another's economic success then armed conflict would be less likely. For instance, India and Pakistan are often in dispute over land territory such as Kashmir. It is likely that these two countries will not enter into combat for the severe negative effects on their economies. Essentially it would be mutually assured destruction (MAD) on a financial level.
Disadvantages of a global economy
- Pollution
- Another disadvantage of a shift towards a global economy is the argued loss of domestic jobs. Certain labor-intensive industries (like textile and even parts of the software development industry) tend to shift their production from developed countries to developing countries where wages are lower..
- increased instability as was seen during the Asian crisis; the inability to create globally uniform regulations and legislation, which leads to phenomena like tax havens.

New Industrialised Countries / Economies (NIC / E)
NICs are countries whose economies have not yet reached first world status but have, in a macroeconomic sense, outpaced their developing counterparts. Another characterization of NICs is that of nations undergoing rapid economic growth (usually export-oriented).
NICs usually share some other common features, including:
• Increased social freedoms and civil rights.
• A switch from agricultural to industrial economies, especially in the manufacturing sector.
• An increasingly open-market economy, allowing free trade with other nations in the world.
• Large national corporations operating in several continents.
• Strong capital investment from foreign countries.
• Political leadership in their area of influence.
The term began to be used in the 1970s when the so-called "East Asian Tigers"of Hong Kong (then colony of the United Kingdom), South Korea, Singapore and the Republic of China (Taiwan) rose to global prominence with rapid industrial growth since the 1960s, most now having evolved beyond this status. There is a distinction between these countries and the nations now considered to be NICs. In particular, the combination of an open political process, high per capita GDP income and a thriving, export-oriented economic policy has shown that these countries have now reached the ranks of developed countries.