ECONOMIC POLICY
I. Globalization and Liberalization
A. Historical stages in development of modern trade system
1. Colonialism – 19th century to 1945. This period was characterized by a mercantilist system of trade preferences b/n parent nations and their colonies, primarily in raw materials. People thought a trade surplus, wherein a nation was exporting more than it was importing, was the measure of wealth.
Adam Smith (1776): the productivity of workers, not a trade surplus, is the true measure of wealth. Trade barriers deny nations the benefit of specialization.
2. Institutionalism – post WWII to present. Allies create various int’l economic institutions, including the IMF, IBRD, and GATT. European nations form the EC and later the EU. Newly independent and developing nations attempt to spur economic growth though rapid industrialization and import substitution (states impose high trade barriers to protect domestic industries). Overall, this period led to a gradual reduction in tariff barriers but an increase in non-tariff barriers.
3. Globalization – ‘80s to present, coincides w/ collapse of Soviet Union and transition of non-market states to market economies. Beginning w/ Nixon, states shift from a fixed to a floating exchange rate system. Money is made more liquid in a manner that facilitates large trade surpluses and deficits.
B. Definitions
1. Globalization – worldwide prices and social consequences of eliminating barriers to free movement of goods, services, and capital across national borders.
2. Liberalization – deregulation, privatization, and reduction in trade barriers on national level. Liberalization facilitates globalization, but it is the result of…
a. Competition for capital – in order to obtain investment or foreign financial investment, states are forced to liberalize their economies in a manner that makes them more attractive to invest in (e.g. conditionality).
b. Export of telecommunications – has a tendency to standardize cultures, encourage liberalization, and is perceived as facilitating global stability. NAFTA, to a large extent, was about tying Mexico to the US and Canada.
C. Costs and benefits of globalization
1. Market effects – free competition is generally regarded as creating an efficient allocation of resources based on demand and supply. Production increases, prices decrease, innovation is spurred. The free flow of capital and transfer of technology facilitates development in third world nations and makes those nations wealthier. The theory of factor price equalization states that ov
ay stimulate internal reform.
3. Effects on geopolitical stability – economic interdependence from tree trade can facilitate political stability b/n states. War is bad for business. Although not true today, in 1996, an academic observed that no two nations w/ a McDonald’s have ever gone to war.
a. Terrorism – globalization makes states more vulnerable to international terrorism bcs there is an increased movement of goods and people across borders. A sense of powerlessness in societies feeling the negative effects of globalization can also lead to increased violence and terrorism.
4. Race to the bottom – globalization can create a regulatory race to the bottom wherein states lower their environmental and labor standards to attract foreign capital. The threat of capital flight deters nations from raising regulation.
5. Other harm to environment – free trade allows the rich to consume more resources in a manner that may not be self-sustaining while developing nations suffer the immediate effects of increased consumption.
