Introduction To Global Economic Architecture
Economic Globalization: Increasing Interconnectedness of National Economies
Globalization has dramatically increased the economic interdependence between countries over the past few decades. As national economies become more integrated through trade and financial flows, events in one country can have significant impacts around the world. Understanding the drivers, nature, and consequences of economic globalization is crucial given its immense influence on economic growth, development, and stability worldwide.
This material provides an in-depth look at key aspects of global economic integration. It examines the major forces spurring greater interconnectedness of national economies, the expansion of international trade and finance, and the shifting distribution of economic power. The analysis also explores the significant implications of globalization, including both benefits such as efficiency and growth, as well as costs like rising inequality and volatility. By illuminating the complex dynamics of the global economy, this guide aims to leave readers with a nuanced understanding of why increased economic interdependence matters and how it impacts countries, companies, and individuals.
End of the Cold War
The Cold War period from 1945 to 1991 provided a framework for economic cooperation and integration amongst capitalist countries aligned with the United States. During the Cold War, countries formed economic and military alliances, with the major divide being between capitalist economies led by the US and communist countries led by the Soviet Union.
The world split into two major geopolitical blocs with different ideologies and systems. The Western alliance included the United States, Canada, Western European countries, Japan, South Korea, Australia and New Zealand. The Eastern bloc was dominated by the Soviet Union and its satellite states in Eastern Europe. China also leaned towards the Soviet sphere up until the Sino-Soviet split.
These alliance structures strongly influenced the global economy. Countries within each bloc traded closely with each other, often creating preferential trading blocs that discriminated against the opposing bloc. There were also technology and information restrictions in place, limiting economic interactions between the blocs.
The US provided economic aid and investment to its allied states, encouraging a form of “embedded liberalism” with free trade within the Western bloc but protections against communism. With the collapse of the Soviet Union in 1991, this alliance structure dissolved. It removed the global divisions that had restricted economic integration between the blocs.
Rise of Multinationals
Multinational corporations (MNCs) have played a major role in the increasing economic interdependence amongst national economies. MNCs operate production facilities and provide services in multiple countries, taking advantage of differences in resource endowments, labor costs, skills, infrastructure and technological capabilities across borders.
The rise of MNCs has been a driving force behind global economic integration. By locating different parts of their operations in different countries, MNCs optimize their efficiency and productivity on a global scale. This promotes specialization amongst countries and greater interdependence in the global economy.
MNCs now account for a large share of global GDP, exports and employment. Their cross-border investments and operations facilitate the international flow of capital, knowledge, resources and talent. The productivity gains and innovation from MNC operations contribute significantly to economic growth worldwide.
However, the rise of MNCs has also raised concerns about their influence over global economic affairs. Critics argue that MNCs have grown larger than many national economies, weakening the bargaining power of governments. There are also worries about MNCs evading taxes, indulging in anticompetitive practices and exploiting weaker regulatory frameworks in developing countries. Notwithstanding the criticisms, MNCs will likely continue playing a major role in globalization given their cross-border scale and resources.
Competition from Asia Powers Global Economic Growth
The rise of economic powers in Asia, especially East Asia, has intensified global economic competition and been a key driver of economic globalization.
China’s rapid growth since market reforms in the late 1970 s fundamentally altered the global economic landscape. With the world’s largest population, China became the world’s second largest economy in 2010 and is on track to overtake the United States as the largest economy this decade. China’s share of global GDP grew from 2% in 1980 to 18% in 2019. The country is now the world’s largest exporter and a major hub in global manufacturing supply chains.
The “Asian Tigers” of Hong Kong, Singapore, South Korea and Taiwan industrialized rapidly in the second half of the 20 th century and became high-income economies. Their development demonstrated the success export-oriented policies could achieve. South Korea in particular rose from poverty in the 1950 s to become a high-tech industrial powerhouse and leading exporter in areas like electronics, automobiles and ships.
The Association of Southeast Asian Nations (ASEAN) has also seen robust growth since the 1980 s, with Indonesia, Malaysia, Philippines, Thailand and Vietnam emerging as significant economic powers. With over 650 million people, ASEAN forms an important bloc in the Asia-Pacific economy.
Rapid income growth for billions of people in Asia opened immense new opportunities for international trade and investment. Asia’s economic ascent contributed to the expansion of global supply chains and the rise of transnational companies catering to an exploding Asian consumer market. Asia’s development profoundly changed the international economic system.
Expansion of Global Trade
Since the 1970 s, international trade in goods and services has increased exponentially. Global exports as a percentage of GDP rose from 13% in 1970 to over 30% by the late 1990 s. This expansion in trade has been facilitated by a significant decrease in barriers to trade between nations.
Average tariffs on manufactured goods fell from over 40% in the late 1940 s to less than 5% by the end of the 20 th century. Quotas and other non-tariff barriers have also been reduced through free trade agreements and organizations like the World Trade Organization (WTO). The General Agreement on Tariffs and Trade (GATT) and its successor the WTO have been instrumental in spurring trade liberalization efforts.
Today, global trade is significantly more open and integrated compared to just a few decades ago. This has enabled and encouraged greater specialization amongst nations in line with their comparative advantage. Consumers around the world also benefit from access to a wider variety of goods at lower costs. However, some argue the pace of trade liberalization has occurred too quickly and needs to be better managed.
Financial Integration
The global financial system has become much more integrated since the 1970 s, partly due to financial deregulation and the creation of new financial instruments.
Financial deregulation refers to the removal or relaxation of regulations in the financial sector. This allowed for more financial innovation and made cross-border capital flows easier. Major examples include the deregulation of deposit rates in the 1970 s, the removal of barriers between commercial and investment banking in the 1990 s, and the repeal of Glass-Steagall in the United States.
New financial instruments also contributed to greater integration. Securitization allowed banks to convert illiquid assets like mortgages into tradeable securities. Derivatives like options and swaps helped firms manage financial risk. These new instruments increased interconnections between financial institutions globally.
The increased mobility of capital enabled greater cross-border financial flows. Daily foreign exchange market turnover rose from $10-20 billion in 1973 to over $5 trillion by 2016. Capital flows to developing countries surged, with net private capital flows rising from $44 billion in 1975 to $472 billion in 1997. Portfolio equity flows also saw rapid growth.
However, some argue the large scale and volatility of international capital flows have increased the vulnerability of national economies to sudden reversals or speculative attacks. The Asian Financial Crisis and Global Financial Crisis demonstrated how integrated capital markets could enable rapid transmission of financial shocks. This led to debates around whether better global coordination or regulation is needed.
Drivers of Economic Globalization
Economic, technological, and political developments have driven the shift from a state-dominated to a market-dominated global economy.
Economic Drivers
Improved productivity and technological advances have enabled companies to take advantage of economies of scale and scope in ways not possible before. This has fueled greater specialization and trade as firms focus on their comparative advantage. Financial deregulation has also played a key role, enabling capital to flow more freely across borders.
Technological Drivers
Advances in transportation, communications, and information technology have dramatically reduced the costs of transporting goods, services, and information around the world. Containerization, the internet, mobile phones, and other technologies have enabled complex global supply chains and connectivity. This has expanded the possibilities for international trade and collaboration.
Political Drivers
Policy shifts away from protectionism and state intervention toward trade liberalization and free markets have opened up economies. Reductions in tariffs and non-tariff barriers through trade agreements and organizations like the World Trade Organization have promoted cross-border economic integration. Privatization of state-owned enterprises has also played a role.
Consequences of Economic Globalization
Economic globalization has led to several major consequences, including increased income inequality, high unemployment in some regions, and environmental degradation.
Income Inequality
Globalization has been associated with rising income inequality both between and within countries. While free trade policies have lifted millions out of poverty, they have also concentrated wealth in the hands of a few and left some groups worse off. The gap between the richest and poorest countries has grown wider. Developing countries’ share of global income has declined. And inequality has risen in two-thirds of OECD countries. These trends have fueled discontent and backlash against globalization.
Unemployment
Another consequence is concentrated unemployment in certain industries and regions. As production shifts to countries with lower costs, workers in developed countries can face job losses, especially in manufacturing. This exacerbates inequality as displaced workers struggle to find new jobs, sometimes settling for lower-paying service roles. Entire communities built around declining industries like steel or coal mining have been hollowed out. Developing countries also face the challenge of generating enough quality jobs for their large young populations.
Environmental Degradation
Rapid industrialization and unregulated growth have led to environmental damage around the world. Lax environmental standards in developing countries allow more pollution. Increased transportation associated with global trade also increases carbon emissions. Intensified agriculture strains water resources. Extractive industries have increased deforestation and habitat destruction. As the world becomes more interconnected through trade, the negative impacts of unsustainable growth are felt globally. Environmental issues like climate change require coordinated international action.
Industry Shift
One of the most significant changes brought about by economic globalization has been the shift in the distribution of global industry. Whereas the major industrialized nations used to be concentrated in North America, Western Europe, and Japan, there has been a dramatic movement of manufacturing and industry from these regions to Asia, Latin America, and other emerging economies.
This shift can be attributed to several factors. Developing countries have large pools of lower wage workers, making labor costs for manufacturing much cheaper. Countries like China and India also invested heavily in infrastructure, education, and adopted export-oriented economic policies to attract foreign investment and manufacturing facilities. The rise of regional trading blocs like ASEAN and trade agreements like NAFTA also enabled companies to set up cross-border supply chains and take advantage of lower costs abroad.
The resulting shift has seen Asia, especially China, become the “factory of the world,” with major expansions in industries like electronics, textiles, and chemicals. Latin American countries like Mexico and Brazil have also become manufacturing powerhouses in automobiles, aerospace, and other sectors. At the same time, there has been deindustrialization across much of the developed world, with the loss of millions of manufacturing jobs in regions like the American Rust Belt and Northern England.
While this shift allowed companies to lower costs and countries like China to rapidly industrialize, it also led to economic disruptions in advanced economies. Managing this industry shift and its impacts continues to be a major challenge for policymakers around the world.
Conclusion
The end of the Cold War marked a major shift in the world economy, with American leadership declining and economic cooperation among capitalist countries decreasing. This paved the way for the rise of multinational corporations and intense competition from Asia, especially East Asia.
Global trade expanded rapidly, with trade barriers falling significantly. The financial system became much more integrated after the 1970 s due to deregulation and new financial instruments, making more capital available to developing countries. However, the scale, velocity and speculative nature of financial movements also left states vulnerable.
Economic globalization was driven by economic, technological and political developments, shifting power from states to markets. Critics point to the high costs, like income inequality, unemployment and environmental degradation. There has also been a major shift in world industry from Western countries to Asia Pacific, Latin America and other newly industrialized countries.
In summary, the period since the end of the Cold War has seen dramatic economic globalization and integration, with both benefits and costs. States have less control while markets and multinationals have gained power. Managing the rapid pace of change and tackling negative impacts will be key challenges going forward.