Case 1.

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Global Economics
Economic problems on a grand scale

‘Globalisation’ has become a fashionable term in recent years. But what does it mean in the
context of economics? It refers to the integration and interdependence of the world economy.
This interdependence has increased dramatically in the past 40 years and has had a profound
effect on national economies and the ability – or inability – of their governments to tackle
economic problems.
Globalisation has a number of dimensions:
 Global transport and communications have improved, especially with growth in air
transport and the information technology revolution. Between 1930 and 2017, the
average cost of a three-minute telephone call from London to New York fell from
nearly $250 to around $0.10. This has been accompanied by a new technologies, such
as Skype and FaceTime, which have effectively reduced the financial cost of global
communication to zero.
 International trade and movements of finance have increased, as government
restrictions on imports and on the flow of money and capital abroad have diminished
(or in many cases have been abolished). Between 1970 and 2017, well over 100
countries eliminated foreign exchange controls. These countries are now free to
exchange their currency into others when they wish to buy imports.
 Giant ‘multinational’ companies, such as Ford, Sony, GlaxoSmithKline, Nestlé and
McDonald’s, have expanded their operations to more and more countries. In 2017, the
stock of global foreign capital invested in industries in other countries was valued at
over $27 trillion ($27 000 000 million). It grew at a staggering average of 11 per cent a
year between 1990 and 2015.
 Consumer tastes for a whole range of products from trainers, hamburgers, soft drinks
and computer games to spectator sports and television soaps have become more similar.
Just as we can look at macroeconomic and microeconomic issues for a particular
economy, so too we can look at these issues in the context of the global economy.

Global macroeconomics
What causes the global economy to grow? Why does this growth tend to fluctuate? Why was
it that most countries experienced rapid economic growth in the late 1980s, often with
accelerating inflation, and yet a recession in the early 1990s and late 2000s? Clearly there are
international forces at work here.
The point is that countries are interdependent, especially those countries within a
particular region, such as the European Union, North America or East Asia. Thus when
Thailand and Indonesia experienced a financial and banking crisis in 1997 and a resulting
recession, the effects spread rapidly around the region. By early 1998, Japan, South Korea
and other East Asian economies were also experiencing a large economic downturn. But then
the effects spread beyond the region. By mid-1998, the Russian economy was in virtual ‘free-
fall’ as international investors pulled out, and by the autumn countries in Latin America had
come under attack. Leaders of the seven most powerful industrial nations (the G7 – the USA,
Japan, Germany, France, Italy, the UK and Canada) were anxiously seeking policies to deal
with a possible global recession as the ‘Asian contagion’ spread.
An even greater global interdependence was demonstrated during the ‘credit crunch’
and subsequent recession of 2007–9. Banks around the world had granted too may risky
loans. These loans had been bundled up into complex financial securities and sold on to other
financial institutions worldwide. A major example of risky loans were so-called ‘sub-prime
mortgages’ in the USA and other countries. These were mortgages granted to householders
who had little chance of paying if house prices were to fall. When house prices did start to
fall and many people defaulted on their mortgage payments, this put banks in serious
difficulties: not just those granting the mortgages, but anyone holding securities which
included this sub-prime debt.
This led to a collapse of confidence in banking and many banks around the world had
to be bailed out by governments. This in turn led to a severe reduction in bank lending (the
‘credit crunch’), a consequent reduction in spending by both consumers and firms, and a
worldwide recession. In other words, with the globalisation of world finance, a financial
problem that began in the USA and a few other countries, rapidly became a global problem.
Another example occurred in the mid-2010s as world growth was held back by slowing
growth in China, the world’s second largest economy after the USA. China is a major
purchaser of imports of raw materials and, in recent years, of manufactured products. Slower
growth in China was a major contributing factor in falling commodity prices, which, in turn,
had ramifications around the world. Commodity exporters suffered a fall in exports earnings,
which curtailed their growth, while lower commodity prices did at least help to increase real
incomes of commodity importing countries. But the net effect of slowing growth in China
was slowing export growth for the rest of the world and a growing worry about the fragility
of the global economy.
If solutions to global problems are to be found, then do they require global action? Will
the uncoordinated actions of individual governments be sufficient? In 2010, it became clear
that several European countries had persistently overspent during the period leading up to the
‘credit crunch’ and had subsequently failed to address this. Portugal, Italy, Ireland, Greece
and Spain were amongst those deemed to be highly vulnerable to bank and government
financial meltdown. In previous decades this might have been a matter of moderate concern
to other European countries. However, the existence of the single currency, precipitated what
became known as the ‘Euro crisis’. Collective action was required, with a bailout scheme put
in place to ensure that the system did not collapse. But, as we shall see in Chapter 15, the
terms of bailouts for countries such as Greece, were very harsh and led to extreme hardship.

Global microeconomics
Just as we can study the what, how and for whom questions within a country, so we can study
them within the global economy. How will output (what), techniques (how) and incomes (for
whom) differ between countries? Why will a poor African country produce a large proportion
of primary products (food and raw materials) using relatively labour-intensive techniques,
whereas countries in western Europe produce a large proportion of manufactured products
and services, using technology that is often sophisticated and highly automated? And why
does the degree of inequality within countries differ from one country to another? Why, for
example, did the poorest 20 per cent of the population receive over 9 per cent of national

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income in both Norway and Finland in the mid-2010s, but only 3.3 per cent in Brazil and 2.5
per cent in South Africa?
Then there is the question of distribution between countries. According to IMF data, in
the richest five countries of the world, the average person’s income in 2016 could buy the
equivalent of just over $97 000 worth of goods and services. In the poorest five countries, it
could buy only $840 worth. This concentration of buying power in the rich countries then
affects what goods the world produces. Clearly, world production will be geared towards
satisfying consumer demands in the rich countries.
Can international policies, such as those to reduce barriers to international trade, lead to
greater equality in income distribution? How important are multinational organisations, such
as manufacturing companies and banks, in determining the pattern of output? Just how much
are a country’s microeconomic decisions determined by its citizens? These too are big issues
and we will be examining them at various points throughout the book.

Question
What dangers do you see from increasing globalisation in the world economy?

Activity
Choose five economic indicators and look up the latest figures for a selection of rich and poor
countries. Is the ranking the same across the different indicators? Explain why or why not?
In what ways are poorer countries’ performance according to these indicators dependent on
the global economy?
Sources: International data can be found at Economic Data freely available online on the
Economics Network’s site.
Another good source of international data for whole range of indicators is
Gapminder.