Globalisation

Globalisation is an issue that rouses strong emotions among people. The first step in understanding the topic is to define what it means. The problem is that there is no single agreed definition. What is common to all usages is an attempt to explain, analyse and evaluate the rapid increase in crossborder (trans-national) business that has take place over the last two decades. The OECD defines globalization as The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets The International Monetary Fund defines globalization as The process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies
GDP IN 2008 ($M PPP) United States China Japan India Germany Russian Federation United Kingdom France Brazil World 14,204,322 7,903,235 4,354,550 3,388,473 2,925,220 2,288,446 2,176,263 2,112,426 1,976,632 69,697,646 GROSS NATIONAL INCOME PER CAPITA $ PPP 46,970 6,020 35,220 2960 35,940 15,630 36,130 34,400 10,070 10,357 GDP GROWTH IN 2009 % CHANGE -3.0 6.5 -6.8 5.1 -5.8 -7.5 -4.0 -4.3 -1.1 -2.9

Globalisation is a process of deeper economic integration that involves: o o An expansion of trade in goods and services between countries. An increase in transfers of financial capital across national boundaries including the expansion of foreign direct investment (FDI) by multi-national companies and the rising influence of sovereign wealth funds (SWFs). The internationalization of products and services and the development of global brands. Shifts in production and consumption for example the expansion of out-sourcing and off shoring of production and support services - production supply-chains have become more international. The iPod from Apple is part of an increasingly complicated global supply chain. The product was conceived and designed in Silicon Valley; the software was enhanced by software engineers working in India. And most iPods are assembled / manufactured in China and Taiwan. Increased levels of labour migration The entry of countries into the global trading system including China and the former countries of the Soviet bloc.

o o

o o

Another way of describing globalisation is to describe it as a process of making the world economy more inter-dependent. Most of the worlds countries are dependent on each other for their macroeconomic health. Linked with this process is a change in the balance of power in the world economy, many of the newly industrialising countries are winning a growing share of world trade and their economies are growing faster than in richer developed nations. All countries have been affected

by the credit crunch and decline in world trade, but many emerging market countries have slowed down rather than fall into a full-blown recession. Different Waves of Globalisation

Decline in tariff and non-tariff restrictions

Rising Real Living Standards

Fall in Sea Transport Costs

Liberalisation of Domestic Markets Fall in communications costs

Declining Air Freight Costs

Globalisation is not new! Indeed there have seen several previous waves of globalisation. Nick Stern, the former Chief Economist of the World Bank has identified three major stages of globalization: o Wave One: Began around 1870 and ended with the descent into global protectionism during the interwar period of the 1920s and 1930s. This period involved rapid growth in international trade driven by economic policies that sought to liberalize flows of goods and people, and by emerging technology, which reduced transport costs. This first wave started the pattern which persisted for over a century of developing countries specializing in primary commodities which they export to the developed countries in return for manufactures. During this wave of globalisation, the level of world trade (defined by the ratio of world exports to GDP) increased from 2 per cent of GDP in 1800 to 10 per cent in 1870, 17 per cent in 1900 and 21 per cent in 1913. Wave Two: After 1945, there was a second wave of globalization built on a surge in world trade and reconstruction of the world economy. The rapid expansion of trade was supported by the establishment of new international economic institutions. The International Monetary Fund (IMF) was created in 1944 to promote a stable monetary system and so provide a sound basis for multilateral trade, and the World Bank (founded as the International Bank for Reconstruction and Development) to help restore economic activity in the devastated countries of Europe and Asia. Their aim was to promote lasting multilateral economic cooperation between nations. The General Agreement on Tariffs and Trade (GATT) signed in 1947 provided a framework for progressive mutual reduction in import tariffs. Wave Three: The current wave of globalisation which is demonstrated for example by a sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between counties and trade in goods and services

Main Motivations and Drivers for Globalisation As the commentator Hamish McRae has argued, Business is the main driver of globalization! The process of globalisation is motivated largely by the desire of multinational corporations to increase profits and also by the motivation of individual national governments to tap into the wider macroeconomic and social benefits that come from greater trade in goods, services and the free flow of financial capital. Among the main drivers of globalisation are the following: o Improvements in transportation including containerisation the costs of ocean shipping have come down, due to containerization, bulk shipping, and other efficiencies. The reduced cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and makes markets genuinely contestable in an international sense. Technological change reducing the cost of transmitting and communicating information sometimes known as the death of distance this is an enormous factor behind the growth of trade in knowledge products using internet technology. For example, the OECD reported that over the past 50 years, passenger air travel costs, measured by the ratio of airline revenues to miles flown, have been reduced fourfold in real terms. In the telecommunications industry, expressed in 2005 US dollars, the charge for a three-minute New York-London call has dwindled from $80 in 1950 to $0.23 in 2007. De-regulation of global financial markets: The process of deregulation has included the removal of capital controls in many countries. The opening up of capital markets in developed and developing countries facilitates foreign direct investment and encourages the freer flow of money across national boundaries. Differences in tax systems: The desire of multi-national corporations to benefit from lower labour costs and other favourable factor endowments abroad and therefore develop and exploit fresh comparative advantages in production has encouraged many countries to adjust their tax systems to attract foreign direct investment. Lower import tariffs - tariffs and other import controls have declined, with progress especially marked in developing Asia and in Eastern Europe after the break-up of the Soviet Union. The breakdown of the Doha trade talks has dashed hopes of a globally based multilateral reduction in import tariffs and other forms of protectionism. In its place there has been a flurry of bi-lateral trade deals between countries and the emergence of regional trading blocs. Economies of scale: Many economists believe that there has been an increase in the estimated minimum efficient scale associated with particular industries. This is linked to technological changes, innovation and invention in many different markets. If the MES is rising this means that the domestic market may be regarded as too small to satisfy the selling needs of these industries. Overseas sales become essential.

Globalization no longer necessarily requires a business to own a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. For instance, economic activity can be shifted abroad by the processes of licensing and franchising which only needs information and finance to cross borders. And increasingly we are seeing many examples of joint-ventures between businesses in different countries e.g. businesses working together in research and development projects.

Evaluating the effects of Globalisation Opportunities and Threats There are hugely diverging viewpoints on the costs and benefits of the current process of globalisation. Employment effects Concern has been expressed in some quarters that investment and jobs in the advanced economies will drain away to the developing countries. Inevitably some jobs are lost as firms switch their production to countries with lower unit labour costs. But past experiences suggest that all nations in the globalization process will gain providing they can find areas of expertise and competitive advantage as trade is a determinant of growth and rising living standards. That has not allayed concerns that certain sections of the population in richer countries - notably relatively unskilled workers - will lose as an abundance of low-skilled labour in developing countries makes itself available to the world's companies at cheaper costs leading to a fall in the demand for lower skilled workers in industrialised countries. Critics of globalisation in some developed countries point to the risks of increasing income equalities and greater job insecurity together with the threat of structural unemployment in industries where demand for labour falls. Most workers in industry and, especially, manufacturing in rich advanced countries produce goods that could be imported from abroad. Static and Dynamic Efficiency Gains For consumers and capitalists, the rapid expansion of global trade and foreign investment is a normally considered good thing. Textbook theory suggests that increased competition from overseas leads to improvements in static and dynamic efficiency and gains in welfare. Trade enhances the division of labour as countries specialise in areas of comparative advantage. Deeper relationships between markets across borders enable producers and consumers to reap the full benefits of economies of scale. Competitive markets reduce monopoly profit margins and provide incentives for businesses to seek cost-reducing innovations and improvements in their products. The combined effects of these gains in efficiency should be over time an improvement in growth and higher per capita incomes. The OECD Growth Project found that a 10 percentage-point increase in trade exposure was associated with a 4% rise in income per capita. But these gains represent an average we must also consider the distributional consequences of rising incomes.

Expansion of Multinational Activity Capital does not always flow in one direction!

China's Mountain of Foreign Currency Reserves

Billions of US dollars

2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00

US $s (thousand billions)

Source: Reuters EcoWin

Many developing countries are now exporters of capital and are increasingly willing to use their foreign exchange reserves to buy up the rights to mineral deposits in other countries and to engage in merger and takeover activity with long established businesses in the developed world. Chinas foreign exchange reserves tipped over the $2 trillion level in 2009 and many other emerging market countries and oil and gas exporting nations have accumulated large trade surpluses that have allowed them to establish sovereign wealth funds for investment in overseas assets. The main motivations for the rapid expansion of multinational activity are as follows: o o o o o o o Higher profits and a stronger position and market access in global markets Reduced technological barriers to movement of goods, services and factors of production Cost considerations a desire to shift production to countries with lower unit labour costs Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost) Avoidance of transportation costs and avoidance of tariff and non-tariff barriers Extending product life-cycles by producing and marketing products in new countries The urge to merge the financial incentives created by the global deregulation of capital markets is making it easier to achieve acquisitions and mergers and thereby encouraging the external growth of a business

thousand billions

China's Net Foreign Assets

Yuan, trillion (trillion = thousand billion)
20.0
20.0

17.5
National Currency (thousand billions)

17.5

15.0

15.0

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5

0.0 00 01 02 03 04 05 06 07 08 09

0.0

Source: Reuters EcoWin

The UK economy has seen a huge rise in foreign investment over the last fifteen to twenty years. Some of this has been in portfolio investment (stocks and shares, bonds and property). Direct investment including capital investment by foreign businesses has also been strong.

Foreign Investment in the UK Economy

Value of external liabilities - direct and portfolio investment 2.50 2.25 2.00 1.75 2.50 2.25 2.00 1.75 1.50 Portfolio investment 1.25 1.00 0.75 Direct investment 0.50 0.25 0.00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

GBP (thousand billions)

1.50 1.25 1.00 0.75 0.50 0.25 0.00

Source: Reuters EcoWin

thousand billions

thousand billions

12.5

12.5

Case Study: Can China maintain her rapid economic growth?

Chinese growth has been revised upwards to 9.5% in 2010 by the World Bank. If it achieves that rate of growth, it will overtake Japan to become the second largest economy in the world. If it can sustain that rate of growth, then it will be catching the US by the mid-2030s. But how sustainable is it? This article considers some of the factors which may cause future Chinese growth to be more sedate.
China - Real GDP growth and Consumer Price Inflation
Growth rate of GDP, annual % change at constant prices. % change in consumer prices
16.0 14.0 12.0 10.0 8.0 6.0 Real GDP Growth 16.0 14.0 12.0 10.0 8.0 6.0 Consumer price inflation 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0

Percent

4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0

The Chinese growth has -10.0 -10.0 been based heavily on 00 01 02 03 04 05 06 07 08 09 10 exports, which in turn rely Source: Reuters EcoWin on sustained demand from the West. Factors which could cause a reduction in this demand would have serious implications for the Chinese. Guangzhou contributes about a third of Chinese exports and the economic crisis saw three million workers lose their jobs as manufacturing firms closed. A slow recovery of the developed economies would damage Chinese exports. There is also a lot of international pressure on China to allow the Yuan to appreciate and should China yield to such pressure, their exports are likely to see a reduction in international competitiveness. More fundamental economic arguments exist though. Firstly, one could consider the lack of innovation and technological progress generated by the Chinese. Despite some improvement, the amount of patent applications from China in 2008 was only 1874. In the US, there were more than 90000 applications. The argument here is that China is merely using technology already invented to close the gap on the West. This form of growth is inherently limited, eventually the Chinese will catch up with the technology level of the West and there will be no gap to exploit. A similar argument applies to the labour market. China has been able to take advantage of low average wage levels to attract investment for many years. Manufacturing wages in China are now higher than in Vietnam, India and Indonesia. As the wage level rises in the Chinese cities, international firms are increasingly looking to other countries for their low wage manufacturing. It must also be suggested that the political situation will limit future development. The managed economy can be very effective at providing rapid economic growth when there are numerous significant infrastructure projects to employ lots of people but it is unlikely to provide such positive effect once entrepreneurship becomes a driving factor. In addition, one could point to other weaknesses in the Chinese systems which may limit the future potential for growth. China is a cash-driven society; individual debt is significantly lower than in more developed countries. There are both demand and supply side explanations for this. Firstly, the cultural history of China dissuades people from having debt as it is viewed as a blot on a persons reputation. In addition, following many years of state-directed lending, the main banks in China have suffered from very high levels of non-performing loans. Government efforts to liberalise and reform the banking sector have been successful to an extent but there is still a lack of effective creditworthiness tests which makes banks reluctant to lend. So what could all of this point to? Conceivably, China could start to approach its potential output and without further technological innovation, further growth could be restricted to the growth rates seen in the west. In addition, a lack of credit within China combined with reduced levels of government spending on infrastructure projects, FDI and export income could limit the growth of aggregate demand. Source: EconoMax, Mark Johnston, 2010

Globalisation and the UK Economy The UK is a highly open economy. Openness to the global economy can increase the size of commercial markets available to domestic producers, encourage the transfer of technology and knowledge and also permit countries to specialise in those goods and services they produce efficiently by exploiting their comparative advantage. Thirty years ago, the UK abolished its foreign exchange controls and the major financial markets have been subject (until recently) to light-touch regulation. This means that each day there is a huge amount of trade within our stock markets, the short-term money markets and the bond markets. Little wonder that the City of London has become a hugely important global centre for financial trading. UK trade continues to take a high and rising percentage of our total national output. Clearly, the globalisation process impacts significantly on the British economy with benefits and costs along the way: BENEFITS OF GLOBALISATION FOR THE UK Opportunities for UK businesses to trade and invest overseas an injection into the UK circular flow, investment income helps finance current account deficits Access to cheaper goods and services from emerging market countries leading to higher real incomes Opportunities to live, study and travel overseas COSTS AND CHALLENGES OF GLOBALISATION FOR THE UK Risks of increase in structural unemployment in industries / regions that lose demand to lower-cost competition from overseas Globalisation may lead to rising income and wealth inequality (a higher Gini co-efficient) average incomes have risen but so too has the level of relative poverty Increase in global trade / output has an environment effect increased use of non-renewable resources and CO2 emissions growing threats to the global commons Globalisation of brands perhaps a loss of cultural diversity UK government has less control over the economy businesses are footloose, economy may become more vulnerable to external shocks The surge in inward migration of labour has brought economic and social tensions and increased fiscal costs for the government Globalisation contributed to the sharp fall in interest rates and widening trade imbalances that were part of the root cause of the sub-prime lending boom and bust and the credit crunch High food and fuel price inflation has hurt lower income families most

Bigger export markets chance to exploit economies of scale More intense competition drives innovation and gains in allocative, productive and dynamic efficiency Britains creative industries have successfully exploited the opportunities of expanding global markets Globalisation has lifted hundreds of millions of people out of absolute poverty around the world and the emergence of an extra one billion middle class consumers is a huge export opportunity for the UK Falling cost and rising speed of global communications and transport has helped to bring people closer together

Threats and Challenges to Globalisation

The political openness generated by, first, the adoption of outward looking policies by the Chinese under Deng Xiaoping in the early 1980s and, second, by the fall of the Berlin Wall in 1989 are massive shocks that have rocked the competitive equilibrium of the world economy through both labour and capital flows. Source: Stephen King, chief global economist of HSBC, February 2008

Globalisation is not an inevitable process. 2009 marked a year when global trade contracted for the first time in many years and the term de-globalisation started to appear frequently in international economics news coverage. o The paradox of inequality: Globalisation has been linked to a widening of inequalities in income and wealth. The paradox is that globalisation has reduced inequalities between countries but widened income and wealth gaps within nations. Evidence for this is a rise in the Gini-coefficient for many developed nations and a growing rural urban divide growing in countries such as China, India and Brazil. The return of inflation: In many ways globalisation has reduced costs and prices for many goods and services. But the driving down of interest rates caused by a glut of global savings allied to fast economic growth rates in emerging market countries led in 2007-08 to a surge in the prices of virtually all traded commodities. Food price inflation is the obvious symptom of this and it placed millions of the worlds poorest people at great risk. Bursting of the financial euphoria / bubbles: A decade or more of strong growth, low interest rates, easy credit created the conditions for a boom in share prices and property valuations in many countries. The bursting of these speculative bubbles prompted the credit crunch and the spreading of contagion from that across the world in 2008-09. Threats to the global commons: Perhaps the biggest long-term threat to globalisation is the impact that rapid growth and development is having on the global environment. The threat of irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflicting millions of the most vulnerable people are just some of the vital issues facing policy-makers. Huge trade imbalances: World trade has grown over recent years but so too have trade imbalances. Some countries are running enormous trade and current account surpluses. Whatever the causes, trade imbalances are creating tensions for globalisation. There is growing political pressure towards (1) Economic nationalism where governments block takeovers and mergers of domestic industries and businesses by foreign owned multinationals (2) Resource nationalism: Where countries protect their own factor resources such as natural raw materials. And countries with trade surpluses but high levels of import dependency use foreign exchange reserves to buy up the right to import minerals from other countries. (3) Trade protectionism to cut balance of payments deficits and protect output and jobs (4) Smaller agreements: There has been a shift away from multi-lateral trade towards bilateral trade agreements a process that will be strengthened after the collapse of the Doha trade negotiations.

Reverse Globalisation: Global Trade Shrinks in 2009

Quarterly Value of World Trade

4.50 4.25 4.00 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 Q1 Q3 Q1 Q3 04 05 Export, EXPORTS,F.O.B. Q1 Q3 Q1 Q3 Q1 06 07 Imports, IMPORTS,C.I.F. Q3 08 Q1 Q3 09 10

US Dollars (thousand billions)

3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00

Source: Reuters EcoWin

The World Trade Organisation has published a pessimistic short forecast for global trade in 2009 predicting that global trade flows will shrink by 9% this year with developed countries such as Germany and Japan feeling the worst effects of the downturn in trade and exchange. Poorer countries will see exports fall 2-3%. The report emphasizes the growing importance of global supply chains which increases the size of the trade multiplier effect. In a recession the multiplier effect works in reverse and hits those countries where exports are a large percentage of national output. Production for many products is sourced around the world so there is a multiplier effect as demand falls sharply overall, trade will fall even further. Germany is facing a severe recession because of the shrinkage in global trade. Germanys merchandise exports in 2008, at $1.47 trillion, were slightly larger than Chinas $1.43 trillion. This meant that Germany retained its position as the worlds leading merchandise exporter. But economists at Commerzbank forecast that German GDP may shrink by more than 7% this year. 40% of German GDP is exported and it is heavily reliant on machine tools and engineering that is leveraged to global industrial cycle. Germanys traditional heavy focus on exporting manufactured goods is coming to be seen as an Achilles heel especially given the lack of an alternative source of domestic demand. Japan too is suffering from a collapse in exports and industrial production Source: Tutor2u economics blog

thousand billions

The Rise of Sovereign Wealth Funds Investment funds run by foreign governments, also called sovereign wealth funds have been in existence since the 1950s. As a result of high commodity prices and the success of export-oriented manufacturing economies, countries such as China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have built up a sizeable surplus of domestic savings over investment. This surplus has been transferred into sovereign wealth funds worth by some estimates over $2.5 trillion today, and controlling more money than hedge fund. According to Standard Chartered, sovereign wealth funds will be valued at more than $13.4 trillion in just a decade. To some people sovereign wealth funds are a threat to global trade partly because of fears of a protectionist backlash from western governments whose countries are running huge current account deficits on their balance of payments. There are many questions up in the air at the moment. 1. How will the SWFs use their gigantic surpluses? 2. Do they have an incentive to invest strategically perhaps for quasi political reasons and not simply with the aim of maximising returns? For example, an investment into another nations telecoms industry might result in a high rate of return and perhaps more importantly, an influx of research and development information. Sovereign wealth funds are already having an important effect on the UK economy. Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye. Many sovereign wealth funds have provided an injection of fresh financial capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to recapitalise to repair their balance sheets and improve their chances of survival. Globalisation and the African Continent For many years Africa appeared to have largely missed out from the beneficial effects of globalisation. The gap in real per capita incomes between Sub-Saharan Africa and emerging market countries grew wider. More recently the region has seen an improvement in her relative economic position and performance helped in some cases by the strength of global commodity prices (many African countries rely on exports of primary products as a key source of income and foreign exchange reserves) and a pick-up in foreign direct investment into the continent.
Macroeconomic indicators for Sub-Saharan GDP at market prices Private consumption spending Fixed investment Exports Imports Investment (as a % of GDP) Exports (as a % of GDP) GDP per capita, current US$ Real per capita GDP growth 2007 6.2 7.1 20.5 4.1 11.9 20.9 35.9 1079.4 3.8 2008 4.8 3.3 12.4 4.7 6.6 21.4 39.3 1240.8 2.8 2009 1.0 0.8 -2.6 -3.2 -3.0 22.3 32.4 1072.5 -0.9

Source: World Bank Global Economic Prospects, June 2009

Africa has yet has not been directly hit by the credit crisis. The major African banks have invested little in the problem assets that have brought western financial institutions to their knees. It has also

been helped by the fact that a growing share of output is agriculture for domestic markets, and is less exposed to declining global markets. Africa is likely to experience some indirect effects of the global crisis. The global demand for many commodities, which are at the heart of the export industry in some countries, has fallen. This includes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia. Other export markets have also been hard hit, for instance the Zambian flower exporting industry has suffered. Falling demand means falling prices. Crude oil is down by about 70% from its peak in July and copper about 66%. Money sent home by African nationals working abroad (remittances) also looks set to fall. This money sent home is often used to support family income and provide funds for small businesses. In 2007, 13bn was sent home in the form of remittances. The problem in 2009 is that 75% of all remittances come from employment in Western Europe and the US, areas already in recession. With a lower level of funds injected into the economy the national income multiplier effect will likewise be smaller. Foreign direct investment into Africa is also set to fall. More than $30bn was injected into Africa in 2007 in the form of FDI, nearly the same level as the $39bn received in aid. Falling commodity prices are going to make firms less attracted to an FDI projects in Africa (along with the inability of firms to access funds for investment, due to poorly functioning credit markets). Foreign owned banks with problems in their domestic markets may want to pull funds out of African banks. This will mean a lower level of loanable funds for the creation of loans for local businesses. As with many countries across the globe, the indirect effects of the slowdown may well be a decline in government revenues for many African administrations. With a lower level of tax revenues African government may have less flexibility with regard to fiscal policy. Indirect tax revenues account for over a third of all money flowing in African treasuries - there is no doubt that once again the African economy is facing uncertain waters.
(Source, adapted from EconoMax April 2009, author Jon Mace)

China versus America From Currency to Energy Chinas phenomenal growth over the last 30 years can be put into perspective as its economy has leapfrogged Germany as the worlds third largest economy after the US and Japan. The initiator of growth in the Chinese economy has been the expansion of its manufacturing base and the export demand from the US consumer. Recent data indicates that China has amassed $2 trillion worth of US$ reserves through the sale of goods and purchase of US government bonds. A lot has been written about the power that China has over the US with its holdings of US dollars. Ultimately the Central Bank of China Peoples Bank of China could collapse the dollar by selling its supply of dollars/US Bonds in the foreign exchange market. Indeed, many economists believe that Chinas continuing demand for US dollars is the only thing stopping it from collapsing. However, the fact is China has a stake in the stability of the dollar and if they push too hard to destabilize it theyll erode the value of their own dollar reserves. Essentially the more dollars China acquires the more wealth it has to lose if the dollar crashes in value. Furthermore, a fall in the dollar will reduce the competitiveness of Chinas currency in the US, which would damage Chinas economy. It seems that the two competing powers are too closely tied and too concerned with stability of the dollar to risk taking each other on, but with energy, (especially oil) the winner can take the gains without exposure to a corresponding loss If we move away from the currency market and focus on oil, the US is being outmanoeuvred by China with respect to energy policy. At present China holds 2% of the worlds oil reserve whilst the US holds 3%. The US consumes up to 20 million barrels a day and China is quickly approaching this level and directly competing against the US and Europe for prime Middle East oil presently the Middle East holds over 70% of the worlds known oil reserves. Therefore, to secure their oil reserves China has avoided the larger oil producers in the area Saudi Arabia and Iraq as they have strong ties with the US. Instead Chinese authorities have forged links with Iran and Sudan which on the periphery of the main oil reserves of the Middle East. Also the way they have approached these

countries is in the role of a developer and peacemaker in contrast to the US method which has been seen as an aggressor. But it is not just the Middle East where the Chinese have been active in securing oil supply see table below. The Chinese authorities put great importance in clinching these deals, to the extent that Chinese President Jintao met in person with the leaders of Russia, Brazil, and Venezuela. Source: EconoMax, Mark Johnston, June 2009

A Third Wave of Outsourcing in the Global Economy

The Economist Commodity Price Index

Index of Prices 2000=100 325 300 275 250 225 200 175 150 125 100 05 06 07 08 09 10 Food Industrial Metals 325 300 275 250 225 200 175 150 125 100

Index

Source: Economist Commodity Price Index

Comparative advantage shows that it is efficient to cut production in those activities where the producer faces a relatively high opportunity cost. That is the idea behind outsourcing. A generation ago, firms in the rich world increasingly shifted industrial production out into the developing world. A decade ago, services followed, with numerous back office functions shifting from high cost locations to those with lower costs. Now a third wave is gathering pace: rich food importers are acquiring vast tracts of poor countries' farmland to grow their own supplies. Is this a good thing? Why not encourage countries that export capital, but import food, to outsource farm production to countries that need capital, but have land to spare? Recently, food grown in Ethiopia has been shipped to Saudi Arabia. But Ethiopia is a hungry country that needs a significant amount of food aid. This is the heart of the dilemma. The scale of current land deals is staggering. Sudan will set aside roughly a fifth of the cultivated land in Africas largest country. China secured the right to 2m hectares in Zambia and will grow palm oil for bio fuel on 2.8m hectares in Congo. Since 2006 the amount of land handed over globally is equivalent to the whole of Frances agricultural land, or a fifth of all the farmland in the European Union.

Thanks to rising land values and rising commodity prices, farming has been one of the few sectors to remain attractive during the credit crunch. When private investors put money into cash crops, they tend to boost world trade and international economic activity. But now, governments are investing in staple crops in an attempt to avoid world agricultural markets altogether. Why? Over the last couple of years, food prices soared and food stocks slumped. This did not particularly scare importers; most of which (especially oil states) could afford higher prices. Their problem was the spate of trade bans that grain exporters imposed to keep food prices from rising at home. The obvious answer for food importers has been to access food directly by finding land (and water) abroad. The investors promise a lot: new seeds, new marketing, better jobs, schools, clinics and roads. Sudans agriculture ministry say investment in farming by Arab states would rise almost tenfold to represent half of all investment in the country. China has set up 11 research stations in Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less than India on agricultural R&D. Even without new seed varieties or improved irrigation, investment should help farmers. One of the biggest constraints on African farming is simply the inability to borrow money for fertilisers. But the deals produce losers as well as winners. Host governments usually claim that the land they are offering for sale or lease is vacant or owned by the state. But empty land often supports herders who graze animals, or farmers who have worked it for generations without legal title. Most economists and pressure groups would rather see freer, and fairer, trade in agriculture.
Source: EconoMax, Author Tom White

De-globalisation or Reverse Globalisation In 2009 the progress of globalisation appeared to come to a halt and go into reverse gear. The world economy suffered its deepest recession for over sixty years and global trade was set to shrink by more than 10 per cent. De-globalisation became a buzz word. There are several aspects of deglobalisation that have become apparent: 1. 2. 3. 4. 5. 6. 7. A steep slowdown in world economic growth followed by a recession Unemployment worldwide is forecast to rise by around 30m above 2007s level Sharp fall in global trade in goods and services A large fall in net private debt and equity flows to developing countries Worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion A partial reversal of migrant flows and also remittances from migrant workers Evidence of a return towards economic nationalism and other forms of protectionism

Geographical Seepage in the World Economy Geographical seepage occurs because of deepened inter-relationships between economies, supplychains and financial markets across countries. One example is how developing countries that were really not part of the financial bubble and subsequent crisis of 2007-08 are now suffering economically because of the spread of the global downturn. Seepage is partly due to the changing structure of the world economy arising from outsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth. And developing nations reliant on exporting commodities to advanced economies will suffer from a fall in demand for and price of their output. The global credit crisis has led to a drying up of capital flows into developing countries - one consequence is that some emerging markets find it really hard to get hold of the bank loans needed to finance their continued expansion.

Decoupling

Chinese and Indian Growth compared to the USA and UK

Annual percentage change in real national output

15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 00 01 02 03 04 05 06 07 08 09 10 UK USA

15.0 12.5 10.0 7.5

China

India
5.0 2.5 0.0 -2.5 -5.0 -7.5

Percent

Source: Reuters EcoWin

Decoupling is the idea that the emerging market economies can survive and continue to grow even when many of the richest advanced nations are in a recession or slump. Globalisation ought to make the business cycles of countries more closely aligned as trade and capital flows between nations become ever more important. But there are grounds for thinking that China, India, Brazil and Russia and other emerging economies can maintain growth momentum independent of what is happening in the United States, Japan and the European Union. The main reason is that emerging markets now account for a bigger proportion of global economic activity. Their share of global GDP is heading towards 25 per cent and their share of global investment spending including house building and infrastructure investment is nearly 30%. Their share of world trade continues to rise year by year. China was not immune to the global slowdown of 2007-08 but her growth rate stabilised in 2009 largely as a result of an enormous fiscal stimulus launched by the Chinese government. A 4 trillion Yuan ($585bn, 390bn) stimulus programme was introduced in November 2008 and China has made huge efforts to kick-start domestic demand (consumption and investment) to offset the decline in her exports.