Entanglements in the global

economy
The Rants of Trump
• China has an excessive trade surplus wrt the US
• It is a currency manipulator
• It has destroyed US manufacturing
• Its investments in the US are harmful to US interests
New Concerns of Committee on Foreign
Investment in the United States (CoFIUS)
• Acquisitions of U.S. companies holding “critical technology” by non-
U.S. acquirers
• Minority investments by non-U.S. investors in U.S. companies holding
“critical technology”
• Investment into U.S. venture capital funds by foreign investors
• Investment into U.S. private equity funds by foreign investors
• Sales, licenses, or export of technology to non-U.S. companies
• Acquisition or lease of certain types of U.S. real estate by foreign
entities
India National Movement’s Economic
Arguments Against Colonialism
• Great Britain has an excessive trade surplus wrt India
• Low tariffs on imports from Lancashire, high excise duties on Indian textiles
• It is a currency manipulator
• It has destroyed Indian manufacturing
• Its investments in India are harmful to Indian interests
Core-periphery configuration Since 1600s
• Periphery relegated to producing primary products
• Core reserved manufacturing for itself
• Disadvantages to periphery
• Terms of trade turn against primary products
• Prices of primary products volatile
Simple Geographical Division of Labour
Gross Domestic Product (or GDP)
The total market value
of all final goods and
services produced
during a given period
of time (usually a year,
in the geographic

€
borders of a country
(or a region, or a city)
Expenditure=Value Added = Income
Stage of Sales receipt Cost Value added Factor incomes
production intermediate
product
Wheat 24 0 24 r+w+i+p

Flour 33 24 9 r+w+i+p

Dough 60 33 27 r+w+i+p

Bread 90 60 30 r + w + i+ p
Sectoral division of GDP
• Agriculture
• Industry
• Services
Phases of Post WW2 Global Economy
• 1950 -1970 : Golden Age, Keynesianism
• 1970 – 1980 : Stagflation
• 1980 – 2000 : Liberalization, New Macroeconomics + Washington
Consensus
• 2000 – 2008 : growth of emerging markets
• 2008 onwards : Entanglement
1950-80 : First Unbundling of Production and
Consumption Driven by Reduced Transport Costs
First Unbundling Did Not Lead to Economic
Convergence

i) cheap transport favours large-scale production, ii) such production is complex, and
iii) extreme proximity lowers the cost of coordinating the complexity
Main Developments of First Unbundling
• Rise of Japan
• Rise of Asian tigers
• Rise of oil as a strategic variable
• Rise of trans-national corporations, but mainly targeted to developed
economies
• Rise of global financial flows, mainly FDI
• Keynesian consensus gives way to rational expectations, Thatcherism,
and Washington consensus
Rise of Japan
• IN early 1960s Japan 5th in world economy
• By 1980 , it was second
• During 1960s Japan’s manufacturing growth averaged 13.6% per year
• 2.5 times US rate, 4 times UK rate
Asian Tigers Manufacturing Growth
1960s 1970s 1980s 1990s
Korea 18 16 13 7
Taiwan 16 14 8 6

First wave: Singapore, Korea, Taiwan, Hongkong

Second wave: Thailand, Indonesia, Malaysia

Rise of Oil
Theories of Trade
• Absolute Advantage – Adam Smith(?)
• Comparative Advantage – Ricardo
• Economies of Scale – Krugman et al
• Vertical Specialization – Krugman et al
Rise of trans-national corporations and FDI
Rise of trans-national corporations and FDI
Global Capital Flows
Types of global capital flows
• FDI
• FII
• Bank lending
• Portfolio investment
Washington consensus
• Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
• Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based
provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure
investment;
• Tax reform, broadening the tax base and adopting moderate marginal tax rates;
• Interest rates that are market determined and positive (but moderate) in real terms;
• Competitive exchange rates;
• Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative
restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
• Liberalization of inward foreign direct investment;
• Privatization of state enterprises;
• Deregulation: abolition of regulations that impede market entry or restrict competition, except for those
justified on safety, environmental and consumer protection grounds, and prudential oversight of financial
institutions;
• Legal security for property rights.
Current account liberalization
• liberalization of trade, the maintenance of fixed exchange rates, and a
commitment to current account convertibility
Capital account liberalization
ability to freely undertake transactions such as foreign direct
investment and the purchase of foreign securities
Vertical specialization of international trade

Countries
Importing
intermediate
goods
And exporting
finished products
The ICT revolution made it possible to coordinate complexity at distance.
The vast wage differences between developed and developing nations made separation profitable.