L7: Globalisation and International Trade

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BBB3633 | Malaysian Economics Prepared by Dr Khairul Anuar

Content of this lecture

1. Introduction 2. Primary School 3. Secondary Education 4. Smart School 5. Vision School 6. Teaching of Mathematics and Science in English 7. Higher Education 8. Public higher education 9. Private higher education 10. K-based Economy in Malaysia 11. Higher Education Institutions 12. The Malaysia Education Blueprint 2013-2025 13. 13. Allocation for educational expenditure

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1. Introduction

• Globalisation is characterised by an increase in flow of trade, capital, and information as well as mobility of individuals to cross borders.

• Definitions express different assessments of global changes, ranging from historical, geography, social-political. cultural to economic integration.

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1. Introduction • The following definitions represent current influential views.

A social process in which the constraints of geography on social and cultural arrangements recede and in which people become increasingly aware that they are receding (Waters, 1995).

The term ‘Globalisation' in its economic sense involves the integration of economies worldwide where the world economy is viewed as a single market and production area with regional or subsectors rather than a set of national economies linked by trade and investment flows (Gala, 2005)

In a nutshell, globalisation refers to the growing interdependence of countries resulting from the increasing integration of trade, finance, people and ideas in one global marketplace. International trade and cross-border investment flow are the main elements of integration.

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2. Malaysia & Globalisation

• Malaysia has been benefiting from trade liberalization and inflows of capital from FDI.

• The lack of knowledge workers is one of the major challenges for Malaysia.

• Malaysia need knowledge workers to create its own technology and produce knowledge goods in order to increase the sustainability of economic growth.

• Apart from that, in terms-of-trade (TOT) export, Malaysia is heavily dependent on US market. Almost 10% of the GDP of the trade exports is to US.

• Instead, Malaysia should be self-reliant and diversify her export targets.

• Alternatively, Malaysia should increase local productivity and supply products locally. As such, this helps increase local income and boosts the GDP of the country.

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3. Globalisation - The Pros and Cons

a. Advantages

i. Increase productivity when countries produce goods and services that have comparative advantage.

ii. Promote global competition.

iii. Cheaper import keeps prices low and inflation at bay.

iv. An open economy encourages technological development and innovation.

v. Jobs in export industries pay more than those in import-competing industries.

vi. Free movement of capital gives domestic scene access to foreign investment and keeps interest rates

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3. Globalisation - The Pros and Cons

b. Disadvantages

i. Millions of jobs lost to imports or production abroad; those displaced find lower-paying jobs

ii. Millions of domestic workers fear getting laid off.

iii. Workers face pressure for wage concessions under threat of having the jobs move abroad.

iv. Service and white-collar jobs are joining blue-collar ones and they are vulnerable to moving overseas.

v. Local workers may lose their competitiveness when firms build state-of-the-art factories in low-wage countries.

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4. Consequences of Globalisation

• Researchers are questioning the capability of globalisation in bringing global prosperity

• The following are 5 consequences of economic globalisation that are detrimental elements to development:

1. Economic governance and regulation

2. International trade

3. International finance

4. Labour market

5. Poverty and Inequality

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4.1 Economic governance and regulation

• The first major consequence of a globalised economy would be the difficulties in governing and regulating the global market.

• First, it is hard to formulate an effective and integrative public policy to cope with global market forces. The systematic economic interdependence among countries and markets further weaken the effectiveness of public governance at global level, especially due to the lack of capacity against shock Besides, there are problems of integration of regulatory policies within trade blocs.

• Second, at the end of the 1990s, there were more than 20 international institutions around the world and the number keeps rising. The international institutions give rise to new global politics, is. the rise of NGOs and the MNCs). The transformation of MNCs into TNCs in the world economy would be constrained by policies of a particular nation state. TNCs pursue a narrow commercial objective which raises doubts over the nation as a form of political organisation.

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4.1 Economic governance and regulation

• Third is the multipolarity growth in international political system. The power of nation states will decline. The arena of politics is opened as globalisation permits non-state players to participate in decision making at the international level.

• Fourth, the governance of international organizations has to be fundamentally reformed to sustain development, rather than assuming that liberalization and globalisation will miraculously achieve the objective.

Good governance at the national and international levels is essential for economic progress. Some of the worldwide institutions such as the International Bank for Reconstruction and Development, the World Bank and IMF have been regarded as an obstacle to development, as well as favouring powerful transnational corporate interest.

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4.2 International Trade & Trade Liberalisation • Economists have argued that developing countries should orient their

trade towards one another.

• The Trade Optimist Arguments generally agree that trade promotes competition, improves resource allocation and economics of scale. It increases efficiencies, savings, and investment, stabilises exports, and attracts foreign capital and expertise.

• There are also dynamic gains, which include:

• Economies of scale: With customs union, market enlargement, producers can enjoy economies of scale.

• Greater competition: Under more open markets customs union, the potential for successful collusion is lessened as the number of competitors expands.

• Investment stimulus: To survive in expanded and more competitive markets, producers must undertake investments in new equipment, technologies and product lines. This would hold down costs and permit expanded levels of output.

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4.3 International finance: FDI capital mobility and the foreign portfolio investments

• Globalisation advances IT and increases sophisticated investment tools for improving financial management. It also brings an influx of capital, boosts growth by narrowing the gap between domestic savings and investments and therefore deepens the domestic financial system. Moreover, technology transfer enables firms to move beyond economies of scale and contribute to enhance productivity.

• The new pattern of capital flows was influenced by a number of factors, particularly by the growth of emerging capital markets and widespread liberalization and globalisation of financial markets.

• Following the opening of the economy, securities markets and portfolio investment became two portfolio investment to emerging markets represented about 40% of total private capital flows.

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4.3 International finance: FDI capital mobility and the foreign portfolio investments

• Since investors can easily buy-sell assets on securities markets, portfolio investment has increased the volatility of capital flow.

• Moreover, private capital flow has become more volatile when countries tend to rely on short-term borrowing, either through bank lending or issuance of short-term bonds.

• Hence, any over-exposure or sudden withdrawal of foreign investment can cause major disruptions to the domestic financial systems with respect to liquidity and market prices, causing rapidly transmit shock waves of financial crisis from one emerging market to another.

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4.3 International finance: FDI capital mobility and the foreign portfolio investments

• The integration of emerging markets into the global financial system can bring substantial benefits.

• It can foster the development of domestic financial institutions, promote transfer of technological know-how in the area of financial management, and improve governance through better disclosure and accounting standards.

• Capital mobility has reduced the policy autonomy of countries and domestic economies are more exposed to markets' sentiment, and it too raised additional foreign savings to finance investment.

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4.3 International finance: FDI capital mobility and the foreign portfolio investments

• The accelerated expansion of global finance is crucial to the continued rapid growth in world trade.

• Certainly, the emergence of a high liquid foreign exchange (forex) market has facilitated foreign exchange transactions.

• The availability of hedging strategies enables investors to achieve their desired risk positions to unbundle complex risks as one of their better business strategies.

• This process facilitates cross-border portfolio investment and enhances the lower-cost of real capital formation financing on a worldwide basis, leading to an expansion of international trade.

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4.4 Labour Market

• Globalisation further decreases economic bargaining power in the labour market.

• Due to capital mobility trends, skilled and productive labour tends to favour advanced countries because of its lower social overheads.

• There is an increasing wage difference between skilled and unskilled workers as a result of trade openness.

• The process of globalisation affects workers and unions.

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4.4 Labour Market

• Over the last few decades, globalisation has been accompanied by 4 main labour market trends as listed below:

Decline in manufacturing and industrial employment

Decline in the demand for less skilful workers

Increase in unequal earnings

Slow real earnings growth especially at the low end of the earnings distribution

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4.4 Labour Market

• There are 3 main reasons for labour market changes, namely

shifts in relative labour demand

shifts in relative labour supply and

changes in labour-market institutions

• Within the set of demand-side and institutional explanations, those who received more attention are international trade, technological change, and the decline in the real minimum wage and de-unionisation.

• On the supply-side, changes in the supply of educated workers are important influences.

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4.4 Labour Market • Trade liberalisation changes relative prices and shifts the pattern of

production in line with comparative advantage

• Undoubtedly, in the last two decades, the greatest concern was the marked increasing unemployment of the low skilled workers in most developed countries.

• There was also evidence of a large number of low skilled workers employed at low wages in some developing countries.

• As the type of products traded was changing, with skill intensive exports expanding from developed economies and less skill intensive from developing economies, it was disheartening when workers did not have the means to learn new skills.

• Those who were unable to adapt to the new economic environment would lose their jobs.

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4.5 Poverty and inequality

• Globalisation and inequality have recently received great attention.

• There are supporters of globalisation, opponents of globalisation, and neutrals who see globalisation as almost inevitable.

• The supporters claimed that globalisation brings opportunities for prosperity to the impoverished of the world.

As stated by the World Bank (2001), “Globalisation has helped reduce poverty in a large number of developing countries but it must be harnessed better to help the world's poorest, most marginalized countries to improve the lives of their citizens.”

• Sally (2002) also argued that globalisation promoted growth, which in turn, reduced poverty and thus liberalization of international transactions was good for freedom and prosperity.

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4.5 Poverty and inequality

• During the 1990s, global average per capita income rose strongly.

• The gap of income inequality between the rich and poor countries has clearly increased

• But GDP per capita does not tell the whole story. Some proponents of globalisation claim that the process brings universal benefits

• Conversely, some opponents equate globalisation with social and environmental destruction.

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4.5 Poverty and inequality

• There are at least three distinct concepts of inequality, which are linked with globalisation.

• They are:

Inequality within nations, is. globalisation may be responsible for widening income disparities,

Inter-national inequality, i.e. refers to the differences between countries' average per capita income or GDPs

World inequality, i.e. combines the two previous concepts and refers to income inequality between individuals in the world, irrespective of where they live.

• The effects of globalisation on inequality are difficult to measure. Whether inequality goes up or down with the progress of globalisation, is no direct proof of causality.

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