Global Political Economy for the 21st Century

Session 2: The Global Economy Now

Partha Ray
Jan 22 2021 1
Contours of
Globalization

2
 Some Aspects of Globalization
• Economic Aspects: Increasingly over the past two centuries, economic
activity has become more globally oriented and integrated.
• Political Aspects: Two views
– Some political scientists argue that globalization is weakening
nation-states and that global institutions gradually will take over
the functions and power of nation-states.
– There is another view that while increased global inter-connectivity
will result in dramatic changes in world politics, particularly in
international relations, the nation-state will remain at the center of
international political activity.
• Social and cultural manifestations: Differing Dimensions
– Informational services: The past two decades have seen an
internationalization of information services involving the
exponential expansion of computer-based communication through
the Internet and electronic mail.
– News services: "CNN-ization of news".
– Popular culture: For example, "world music" has developed a
major international audience. 3
 What is Globalization?: Different Perspectives
• Definition 1:
– Globalization “is interdependence of countries resulting from the increasing
integration of trade, finance, people, and ideas in one global marketplace” (World
Bank, 1996)
– Globalization is “the integration of economies, industries, markets, cultures and
policy-making around the world” (Financial Times Lexicon)
• Definition 2:
– In 1995, Martin Khor, President of the Third World Network in Malaysia, referred
to globalization as “colonization”.
• Definition 3:
Globalization "is the closer integration of the countries and peoples of the world
...brought about by the enormous reduction of costs of transportation and
communication, and the breaking down of artificial barriers to the flows of goods,
services, capital, knowledge, and people across borders" (Stiglitz, from
Globalization and its Discontents)

4
 Major of Elements of Globalization
1. International trade of goods
2. Trade in Services
3. Financial Flows
4. Technology Transfer
5. Labor Movements
6. Convergence of Regulation

5
 Drivers of Globalization
• Lower trade barriers
• Lower transportation costs
• Lower communication costs
• Information and communication technology
(ICT) development
• Spread of technology
• International Institutions
 Transport Cost and Global Exports
Real Costs of Ocean Shipping World Merchandise Exports
(1910= 100) ( % of World GDP (%)

400 20
376
18 17.2
350
16
298
300 287
14

250 12
10.5
196 10
200 9
7.9
8
150

100 107 6 5.5

100 4.6
4
47 51
50
2 1
0 0
1750 1790 1830 1870 1910 1930 1960 1990 1820 1870 1913 1929 1950 1973 1998

Source: Nicholas Crafts and Anthony Venables (2003): Source: Angus Maddison (2001): The world
“Globalization in History: A Geographical Perspective”, in 7
economy: A Millennial Perspective. Paris: OECD.
Michael D. Bordo, Alan M. Taylor and Jeffrey G. Williamson
(eds.): Globalization in Historical Perspective, Chicago:
University of Chicago Press.
 Falling Transportation Costs
• Between 1920 and 1990, the average ocean and port charges
per tones of U.S import and export cargo fell from $ 95 to $ 29
(1990 dollars).
• Between 1930 and 1990, the average air transport revenue
per passenger mile fell from $ 0.68 to $ 0.11.
• Jet air shipping and refrigeration have changed the status of
goods from non-tradable to tradable.
• Cost of a 3 minute telephone call from New York to London
fell from $ 244.65 to $ 3.32

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 IT and Globalization
• Information is accessed and transmitted in real time and at low marginal
cost
• The increased flow of information greatly enhances and multiplies the
benefits of tangible as well as intangible capital, such as human capital,
R&D capital, and knowledge capital
• Significant reductions in transactions costs
• Many services have become highly tradable or potentially highly tradable
e.g., software, back-office paper work, design, quality assurance,
entertainment.
– The average product cycle has shortened from 5 years to between 12 and 18
months
– Many services have become highly tradable or potentially highly tradable e.g.,
software, back-office paper work, design, quality assurance, entertainment
– A popular joke among computer professionals is, "If the automobile had
followed the same development cycle as the computer, a Rolls-Royce would
today cost $100, get a million miles per gallon, and explode once a year, killing
everyone inside".

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 International institutions
• WTO - 134 nation-states have ceded to its vast authority and powers. WTO
represents the rules-based regime of the policy of economic globalization. The
central operating principal of the WTO is that commercial interests should
predominate.
• IMF / World Bank
• Critique: “Obstacles" that are superseded are often policies or democratic
processes that involve
• Labour rights / Human rights / Social justice,
• Environmental protection,
• Local culture, and
• National Sovereignty.
• Regional Trade / Currency Blocks – NAFTA / EU Pro- or Anti-Globalization?
• There are governance issues of these international organization – G-20?
10
 Globalization & Business
“Whenever Civilization has gone through one of the
disruptive, dislocating technical revolutions,- like
Guttenberg’s introduction of the printing press – the
whole world has changed in profound ways …. But there
is something different about the flattening of the world
that is going to be qualitatively different from other such
profound changes: the speed and breadth with which it
is taking hold.”
- Thomas Friedman / The World is Flat (2005)
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 In this story of Globalization
Global Supply Chain played a huge role
& Global Supply Chains got a boost from Globalization

Globalization Supply Chain

12
 Where does the Bicycle come from ?

Source: World Bank (2020): World Development Report, 2020, p. 16.

Outsourcing versus Offshoring

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Growth of Global Value Chain (GVC)
 Rise of 21st century trade:
The trade-investment-services-IP nexus
• 20th century trade meant goods crossing borders. 21st century
trade is radically more complex for a very simple reason.
• Internationalizing supply chains also internationalized the complex
two-way flows that used to take place only within factories.
• The rise of global supply chains is much more than extra trade in
parts and components.
• The heart of 21st century trade is an intertwining of:
– Trade in goods, especially parts and components
– International investment in production facilities, training, technology
and long-term business relationships
– The use of infrastructure services to coordinate the dispersed
production, especially services such as telecoms, internet, express
parcel delivery, air cargo, trade-related finance and customs clearance
services
– Cross-border flows of know-how such as formal intellectual property
and more tacit forms such as managerial and marketing know-how.
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Globalization
and
Inequality
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 Three notions of Inequality

Inequality is multi-
dimensional
• Income
• Wealth
• Racial
• Regional
• Gender
• Human Capital
• Physical Capital
• Health
• …..

Note: This figure is adapted from Milanovic (2013) and illustrates that within-country
inequality is based on income differences among the citizens of one country, between-
country inequality refers to income differences between the mean incomes of different 18
countries, and global inequality estimates the income differences among the global
population (the size of each person is related to her income).
Trends in Inequality

19
 Thomas Piketty: three points
• The return of a wealth-based society in the Old World (Europe,
Japan).
Wealth-income ratios seem to be returning to very high
levels in low growth countries.
Intuition: in a slow-growth society, wealth accumulated in
the past can naturally become very important. In the very
long run, this can be relevant for the entire world.
• The future of wealth concentration
with high r - g during 21st century (r = net-of-tax rate of
return, g = growth rate), then wealth inequality might
reach or surpass 19th century oligarchic levels; conversely,
suitable institutions can allow to democratize wealth.
• Inequality in America
Is the New World developing a new inequality model that
is based upon extreme labor income inequality more than
upon wealth inequality?
Is it more merit-based, or can it become the worst of all
worlds?
“Over a long period of time, the main force in favor of greater equality has been the
diffusion of knowledge and skills.” ― Thomas Piketty, Capital in the Twenty-First Century 21
Life Expectancy & Income

22
Child Mortality & GDP Growth

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 The Glass is half-empty or half-full?
The Great Escape: Angus Deaton

“LIFE IS BETTER NOW than at almost any time in history. More

people are richer and fewer people live in dire poverty. Lives are
longer and parents no longer routinely watch a quarter of their
children die.
“Yet millions still experience the horrors of destitution and of
premature death.
“The world is hugely unequal. Inequality is often a consequence
of progress. Not everyone gets rich at the same time, and not
everyone gets immediate access to the latest life-saving
measures, whether access to clean water, to vaccines, or to new
drugs for preventing heart disease. Inequalities in turn affect
progress.”

• May like to see his lecture at

https://www.youtube.com/watch?v=XwLNqDbPNBw 24
 Inequality has increased due to Covid-19

Source: https://inequality.org/
Some Contemporary Developments
 THE PANDEMIC HAS ADDED FUEL TO THE TREND AWAY
FROM GLOBALIZATION
• The COVID-19 pandemic simply adds further momentum

De-globalization to the deglobalization trend.

• President Emmanuel Macron of France has said that the
coronavirus “will change the nature of globalization, with
which we have lived for the past 40 years,” adding that it
was “clear that this kind of globalization was reaching
the end of its cycle.”
• The pandemic has reinforced concerns around the world
that supply chains have gone too far.
• Export bans have been imposed over concerns about
inadequate domestic production of medical equipment,
personal protective equipment, and pharmaceuticals.
• Such policies will exacerbate shortages, the opposite of
their intended effect.
• Experience also suggests that fear leads countries to turn
inward. Many countries are now rethinking trade
dependence.
• Phil Hogan, the European Union’s commissioner
for trade, has stated, “we need to think about
how to ensure the EU’s strategic autonomy.”
• Scott Morrison, Australia’s prime minister, told
parliament: “Open trading has been a core part
of our prosperity over centuries. But equally, we
need to look carefully at our domestic economic
sovereignty as well.”
• Japan has also begun investigating how to break
its supply-chain dependence on China and
produce more at home.
• The risk of overreaction and a slide to protectionism is
compounded by the failure of leadership in the United
States, leaving a vacuum in the world trading system.
• The world economy is at a critical inflection point in
history in which fears about dependence on others are
growing.
Major Actors in the Global Economy

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 History of Global GDP
1000 1500 1820 1870 1913 1950 1973 2001

1. Western Europe 8.7 17.8 23.0 33.0 33.0 26.2 25.6 20.3

2. Western offshoots 0.7 0.4 1.9 10.0 21.3 30.7 25.3 24.6

3. Japan 2.7 3.1 3.0 2.3 2.6 3.0 7.8 7.1

4. Asia (excl Japan) 67.6 61.9 56.4 36.1 22.3 15.4 16.4 30.9

5. Latin America 3.9 2.9 2.2 2.5 4.4 7.8 8.7 8.3

6. Eastern Europe & 4.6 6.1 9.0 12.0 13.4 13.0 12.9 5.6
former USSR

7. Africa 11.7 7.8 4.5 4.1 2.9 3.8 3.4 3.3

8. World 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

31

Source: Angus Maddison, 2004, Contours of the World Economy and the Art of Macro-measurement, 1500-2001
 How to Measure the Size of an
Economy: India’s GDP in 2019
• GDP at INR
• GDP at USD (GDR at Market Exchange Rate, MER)
• GDP at PPP (Purchasing Power Parity)

Economic Variable Scale Number / Amount

1 GDP in INR INR, Billions 203,399
2 USD-INR Market Exchange Rate (MER) Ratio 70.90
3 GDP at MER [1/2] USD, Billions 2,869
4 PPP Factor Ratio 3.33
5 GDP at PPP [3*4] USD, Billions 9,542.3
6 Per Capita GDP at MER [3/9] USD 2,098
7 Pre Capita GDP at PPP [5/9] USD 6,977
8 GDP share of world total (at PPP) Per Cent 7.09
9 Population Millions 1,368
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 Top 20 Countries in the World: 2019
(in terms of GDP at MER)
GDP GDP
(at MER) (USD (at PPP) (USD Global Share Per Capita GDP Population
Billion) Billion) (%) (at MER) (USD) (Million)
1 United States 21,433 21,433 15.9 65,254 328
2 China 14,402 23,393 17.4 10,287 1,400
3 Japan 5,080 5,451 4.1 40,256 126
4 Germany 3,862 4,672 3.5 46,473 83
5 India 2,869 9,542 7.1 2,098 1,368
6 United Kingdom 2,831 3,255 2.4 42,379 67
7 France 2,716 3,228 2.4 41,897 65
8 Italy 2,001 2,666 2.0 33,159 60
9 Brazil 1,839 3,223 2.4 8,751 210
10 Canada 1,736 1,921 1.4 46,272 38
11 Russia 1,702 4,136 3.1 11,601 147
12 Korea 1,647 2,305 1.7 31,846 52
13 Spain 1,394 2,006 1.5 29,993 46
14 Australia 1,387 1,346 1.0 54,348 26
15 Mexico 1,258 2,626 2.0 9,862 128
16 Indonesia 1,120 3,332 2.5 4,197 267
17 Netherlands 907 1,029 0.8 52,646 17
18 Saudi Arabia 793 1,677 1.2 23,266 34
19 Turkey 761 2,472 1.8 9,151 33 83
20 Switzerland 705 615 0.5 82,484 9
 Advanced Countries (39)
• G 7 is a forum of • Euro Area Non-G7 • Other Advanced Economies
developed countries 1. Sweden
the world's seven 2. Denmark
1. Spain
most 2. Austria 3. Norway
industrialized 3. Greece 4. Switzerland
economies.: 4. Netherlands 5. Iceland
5. Belgium 6. Czech Republic
1. France 6. Ireland 7. San Marino
2. Germany 7. Portugal 8. Puerto Rico
8. Cyprus 9. Israel
3. Italy 9. Slovak Republic 10. Australia
4. U.K. 10. Estonia 11. New Zealand
11. Latvia 12. Korea
5. Japan 12. Slovenia 13. Singapore
6. Canada 13. Finland 14. Macao SAR
14. Lithuania 15. Hong Kong SAR
7. U.S. 15. Luxembourg 16. Taiwan
16. Malta

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All other (189 – 39 =) 150 countries are known as Emerging Market & Developing Economies –
or EMs in short
 39 Advanced Countries: Global Share (PPP)
Country 1980 1990 2000 2010 2020 Country 1980 1990 2000 2010 2020
1 Canada 2.17 2.06 1.83 1.52 1.39 24 Slovak Republic n/a n/a 0.13 0.15 0.14
2 France 4.34 4.05 3.35 2.62 2.27 25 Lithuania n/a n/a 0.07 0.07 0.08
3 Germany 6.42 5.89 4.78 3.60 3.42 26 Slovenia n/a n/a 0.07 0.06 0.06
G7 4 Italy 4.61 4.20 3.32 2.36 1.86 27 Luxembourg 0.04 0.05 0.06 0.05 0.05
5 Japan 7.83 8.92 6.81 5.01 4.02 28 Latvia n/a n/a 0.04 0.04 0.05
Smaller
United
Economi
6 Kingdom 3.72 3.63 3.11 2.53 2.29 29 Estonia n/a n/a 0.04 0.03 0.04
es
7 United States 21.41 21.70 20.42 16.74 15.98 30 Cyprus 0.02 0.03 0.03 0.03 0.03
31 Malta 0.01 0.01 0.02 0.01 0.02
8 Australia 1.17 1.18 1.11 1.03 1.01 32 Iceland 0.02 0.02 0.02 0.01 0.02
9 New Zealand 0.21 0.19 0.17 0.15 0.16 33 San Marino n/a n/a 0.00 0.00 0.00
34 Puerto Rico 0.17 0.17 0.17 0.13 0.08
10 Spain 2.21 2.16 1.93 1.64 1.36
11 Netherlands 1.24 1.15 1.06 0.84 0.76 35 Hong Kong SAR 0.27 0.38 0.38 0.39 0.34
12 Switzerland 0.84 0.76 0.58 0.48 0.45 36 Korea 0.62 1.18 1.57 1.72 1.76
13 Belgium 0.80 0.71 0.59 0.49 0.44 Asia 37 Macao SAR n/a n/a n/a 0.06 0.03
14 Sweden 0.66 0.63 0.52 0.45 0.42 38 Singapore 0.17 0.26 0.35 0.43 0.42
Taiwan Province of
15 Austria 0.64 0.57 0.49 0.40 0.38 39 China 0.46 0.74 0.95 0.99 0.98
Europe 16 Ireland 0.19 0.19 0.24 0.22 0.34
17 Czech Republic n/a n/a 0.35 0.33 0.33
18 Israel 0.21 0.22 0.26 0.25 0.28
19 Norway 0.45 0.43 0.41 0.33 0.27
20 Portugal 0.44 0.47 0.42 0.32 0.26
21 Denmark 0.46 0.41 0.36 0.27 0.26
22 Greece 0.64 0.50 0.43 0.35 0.24
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23 Finland 0.34 0.34 0.29 0.24 0.21
 Major Classification of World Economic Power (% of Global GDP at PPP)

1990 2000 2010 2019

Advanced economies (39 AEs) 64.0 57.2 46.3 40.3

Major advanced economies (G7) 51.2 44.1 34.5 29.7

Other advanced economies (AEs excluding G7 and euro area) 6.4 7.0 6.7 6.4

European Union 27.7 23.9 19.0 16.0

Emerging market and developing economies (150 EMs) 36.0 42.8 53.7 59.7

Emerging and developing Asia 12.6 17.0 26.0 34.2

Emerging and developing Europe 3.7 3.3 3.3 7.1

Latin America and the Caribbean 10.1 9.2 8.8 7.3

36

Middle East and North Africa 6.2 5.9 7.1 8.0

Sub-Saharan Africa 2.7 2.4 2.9 3.0

 G10 currencies
Table: Turnover of OTC foreign exchange instruments, by currency

• United States dollar (USD) (“Net-net” basis, Daily averages over the Year, Percentage to total)

• Euro (EUR) 1992 2001 2019

1. U.S. Dollar
41.0 45.0 44.0

• Pound sterling (GBP) 2. Euro ..

19.0 16.0
3. Japanese Yen

•
11.5 12.0 8.5
Japanese yen (JPY) 4. British Pound
7.0 6.5 6.5

•
5. Australian Dollar
Australian dollar (AUD) 6. Canadian Dollar
1.0

1.5
2.0

2.0
3.5

2.5

•
7. Swiss Franc
New Zealand dollar (NZD) 8. Chinese RMB
4.0
..
3.0

0.0
2.5

2.0

• Canadian dollar (CAD) 9. H.K. Dollar

10. Others
0.5 1.0 2.0

32.8 9.1 13.0

• Swiss franc (CHF) Total

100.0 100.0 100.0
Note: As each transaction is counted twice for each of the legs (for buy and sale separately), the

•
total should have been 200; for ease of presentation, all entries of the Table have been divided by

Norwegian krone (NOK) 2.

Source: Triennial OTC derivatives statistics, BIS;

http://stats.bis.org:8089/statx/srs/table/d11.3?f=xlsx

• Swedish krona (SEK) 37

Thank you