Global Economic Issues topic 4
- 1. GLOBAL ECONOMIC ISSUES Topic 4: Impact of Globalization on the Standard of Living By: MADDY.KALEEM
- 2. AGENDA Variations in the Standard of Living Income and Quality of Life Indicators Difference between Growth and Development Reasons for Difference between Nations Types of Economies in the Globalized World Impacts of Globalization By: MADDY.KALEEM
- 3. VARIATIONS IN THE STANDARD OF L IVING Despite the advances over the past century, there are har sh inequalities between wealthy and poor countries: 1.4 billion people live in extreme poverty on less than US1 .25/day. Richest 5% of people in the world earn 165x the in come of the poorest 5%. 30,000 children die each day from poverty‐related pre ventable diseases. However, living standards have been improving in both de veloping and developed nations. Between 1982 -2005 those living in extreme poverty fell from 52% to 25%. Life expectancy in developing nations from 56 to 67 ye ars between 1970 and 2007. Primary education completion rate increased in de veloping countries to 85% in 2007. By: MADDY.KALEEM
- 4. INCOME AND QUALITY OF LIFE INDICATORS The most popular method to compare living st andards between nations is to compare inc ome as it measures the ability of citizens to sa tisfy their needs. Gross National Income (GNI) is the sum of val ue added by all resident producers in an econ omy plus receipts of primary income from foreig n sources. Real GNI is calculated by accounting for the ef fects of inflation. By: MADDY.KALEEM
- 5. The size of the population and rate of population growth vary between countries and allowances ca n be made by dividing the real GNI of each coun try by its population – GNI per capita. Human Development Index (HDI):An alternative to the GNI is the HDI to measure economic de velopment. It takes into account: Life expectancy at birth: Indicative of the hea lth and nutrition standards of a country. Levels of education attainment: HDI measures adult literacy and ratio of people that have completed pri mary, secondary and tertiary education. GDP per capita: Used as a measure of a decent st andard of living and is essential in determining acce ss that people have to goods and services INCOME AND QUALITY OF LIFE INDICATORS By: MADDY.KALEEM
- 6. DIFFERENCE BETWEEN GROWTH AND DEVELOPMENT Economic growth is simply a percentage i ncrease in GDP/capita. Economic development is broad measure of welfare in a nation that includes: indicators of health, education, environmental quality, and material living standards. By: MADDY.KALEEM
- 7. REASONS FOR DIFFERENCES B ETWEEN NATIONS Global Factors: Global Trade System: Some features of the global trade sy stem reinforce rather than reduce global inequalities Western economies protect their domestic agriculture sector because it is not competitive with producers in developing nat ions. Developing countries experience high levels of global pr otectionism in the agricultural sector . Expanding regional trade blocs such as the EU and NAFTA exclude poorer nations from access to these lucrative ma rkets. This has an enormous impact on poor countries. High ‐ income nations have resisted making concessions on issues that would provide great benefit to developing countries such as at the Doha Round. They can then use regional and bilateral agreements to ga in access to markets where developing nations cannot barg ain as a group. By: MADDY.KALEEM
- 8. Benefits of free trade agreements are not always available to de veloping nations due to the high costs of administration and the c omplexity of the WTOs procedures. Global Financial Architecture: Long term international flows of investment heavily favour deve loped countries. High income economies received around 2/3 of all FDI in 2007 Short term financial flows often favour those “emerging markets” that offer better returns for speculators however these areas also experie nce the greatest economic volatility which can set back economic development decades while speculators move onto other markets. The IMF is criticised that its structural adjustment policies serv e the interests of high income economies. As a result of greater access to financial markets, many developing countries have massive foreign debt burdens irresponsible lending practises by rich ‐ country financial institutions. REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 9. Global Aid and Assistance: The total level of development aid provided by high in come economies was only 0.3% of GWP in 2008. This level is well below the goal of 0.7% of GDP that hi gh income economies have been committed to. There is also a risk that high income economies may cu t aid to help pay off the deficits caused by the GFC. Critics claim that the majority of the aid given is “phantom aid” – aid that does not improve the lives of the poor. Money is spent on paying for “technical cooperation” (c onsultants) as well as being wasted on administration cost s. The distribution of aid usually represents strategic and mil itary considerations rather than the need of the world’s poorest countries. REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 10. Global Technology Flows: High income economies choose the priority area s of scientific research and development. Much of this technology deals with the health pr oblems of an ageing population in rich cou ntries and little to do with poor nations whose health risks involve common infectious diseases. Developing nations find it difficult to gain acc ess to new technology. IP rights restrict the benefits of technological transfer to poor nations because they cannot pay developed country prices for the technology. REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 11. Domestic Factors: Economic Resources: Natural resources: are important inputs for the production of high er ‐ value added manufactured goods and services. Economies that have an abundant and reliable supply of cheap nat ural resources have better opportunities for economic devel opment than those who do not. Abundance of natural resources may also be a negative which can h amper a country’s economic development if it leads to an overvalued exchange rate, narrow export base and becoming over reliant on a small number of industries to drive economic growth. Labour supply and quality: Labour is an important factor in beco ming the most important input to the production process. High income economies tend to have highly educated and skilled la bour resources whereas low income nations are characterised by high population growth, poor education levels and low health standar ds which reduces the quality of labour. REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 12. Access to capital and indebtedness: Difficulty in gaini ng access to capital for investment and develo pment in low income nations also contributes to lowered living standards. Low levels of savings are largely a result of low income le vels and this creates a self ‐ perpetuating cycle of low investment levels and slow expansion. Enterprises in countries with high levels of foreign deb t often find it difficult to gain access to funds. Entrepreneurial culture: Evidence suggests that a cou ntry’s history and social institutions can impact on its economic success such as the values of individual responsibility, enterprise, wealth creation and a strong wor k ethic. These values can assists the industrialisation process towa rds sustainable economic development REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 13. Institutional factors: Institutional factors in indivi dual economies can have influences for busines ses. Political instability, corruption, and law of law enforcement tend to undermine investor co nfidence who will be reluctant to undertake risks if they business interests are threatened by inadequate structure for resolving legal dis putes. REASONS FOR DIFFERENCES B ETWEEN NATIONS By: MADDY.KALEEM
- 14. TYPES OF ECONOMIES IN THE GLOBALIZED WORLD Developing Economies: These countries suffer from low income levels, we ak human resources and have only experienced limit ed industrialisation. A large number of people live in absolute poverty (l ess than US1.25/day). High levels of income inequality. Dependence on agricultural production for income, e mployment and trade. Reliance on foreign aid and development assistance Low levels of labour productivity, industrialisation, technological innovation and infrastructure dev elopment. Weak political and economic institutions. By: MADDY.KALEEM
- 15. Newly Industrialised Countries (NICs): Economies experiencing rapid economic change and i n transition from being developing economies to high‐ income economies. NICs have been the fastest growing group of econo mies pursuing growth through export led development and encouraging large inward flows of F DI. Transition Economies: Were socialist economies prior to the collapse of s ocialism. These economies have attempted and extraordinary transformation from centrally planned economies to market economies. TYPES OF ECONOMIES IN THE GLOBALIZED WORLD By: MADDY.KALEEM
- 16. Reforms include privatisation of state own enterpri ses, financial market liberalisation and shift towards western‐style economic and political insti tutions. High‐Income Economies: Countries with high levels of economic develop ment and close economic ties with each other as well as liberal ‐ democratic political and economic institutions. High ‐ income countries have a GNI per capita about U S$11, 906. Includes 27/30 of the OECD countries. TYPES OF ECONOMIES IN THE GLOBALIZED WORLD By: MADDY.KALEEM
- 17. IMPACTS OF GLOBALISATION INTERNATIONAL CONVERGENCE Globalisation appears to be contributing to a co nvergence in living standards. Over the last few decades, developing e conomies have been “catching up” to developed high ‐income economies. Transition economies are now growing faster an d economic growth in the first wave of NIE’s has slowed now that living standards in those countries have risen to similar levels as fo r high income economies. By: MADDY.KALEEM
- 18. ECONOMIC GROWTH , DEVELOPMENT AND THE QUALITY OF LIFE Globalisation is said to offer the nations of the world the opportunity to experience economic growth and develo pment and to improve the quality of life for their citizens however, not all countries have benefitted equally from globalisation. The “winners” from globalisation are those countries that ha ve embraced international trade, foreign investment and th e participation of TNC’s however some features of globalisation have had negative impacts on the global ec onomy. For example, countries in Africa have suffered negative gro wth due to high levels of foreign indebtedness. If globalisation raises economic growth and therefore raise s income levels then this can have a positive effect. If however, the distribution of income is uneven then this will have a negative effect on the quality of life. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 19. TRADE, INVESTMENT AND TRANSNATIONAL CORPORATIONS The process of globalisation has resulted in substantial increases in the size of tradeflows and foreign investment. Because of the key role played by TNC’s in trade and investment flows, they are increasingly dominating business activity around the world. Due to the nature of the global economy, there can be multiple int ernational trade transactions in the process of manufacturing a good. The globalisation of financial markets has seen an increased reli ance on foreign sources of finance for investment. FDI is now playing a greater role in creating more economic act ivity around the world. However, the flow is FDI funds are usually targeted at those cou ntries with favourable economic prospects and only a trickle to those LDC’s (Least Developed Countries). A major criticism of TNC’s is that because they do not operate under t he laws of one country, they can move production facilities to co untries with weak government regulations. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 20. DISTRIBUTION OF INCOME AND WEALTH Globalisation has resulted in increased world income a nd wealth but the distribution of this increase has b een very unequal. A number of countries have gained very little or eve n nothing from globalisation. Even though increased FDI flows fuel economic gr owth, they tend to be focused on the higher skill ed and technology sectors favouring those who are already better off, increasing inequality. Globalisation has increased openness to trade which pr ovides more export opportunities raising the inco me of agricultural workers in developing countri es. A lower tariff on imports reduces the prices of go ods and improves living standards. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 21. ENVIRONMENTAL CONSEQUENCES Globalisation can have a negative impact on th e environment. Developing countries may engage in economic b ehaviour that is detrimental to the envi ronment to attract foreign investors. Globalisation also offers the chance to protect th e world’s environment from harm by forcing coun tries to own up to their environmental responsi bilities. It makes the costs of preservation able to be s hared and facilitates the transfer of env ironmentally friendly technology. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 22. FINANCIAL MARKETS Financial markets shift large amounts of mon ey very quickly and this can sometimes have d evastating effects when a sudden loss in confidence arises. The exchange rate can collage leading to a s hock in the economy, recession, rising un employment and increased poverty. The financial markets behave in unpredictable ways and this can pose a large threat to the gl obal economy like a “giant wrecking ball”. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 23. THE INTERNATIONAL BUSINESS CYCLE Close linkages between economies hold both benefits a nd risks: Benefits: achieve faster rates of growth by specialisation an d engaging in trade. Risks: exposed to downturns in the international bus iness cycles and developments in the region. IMPLICATIONS FOR GOVERNMENT ECONOMIC POLIC IES Globalisation has led to greater similarity of economic poli cies around the world. The Washington Consensus outlines market‐friendly poli cies: Fiscal discipline Redirection of public expenditure towards education, he alth and infrastructure investment. IMPACTS OF GLOBALISATION By: MADDY.KALEEM
- 24. Tax reform broadening the tax base and cutting mar ginal tax rates Interest rates determined by market forces and are positive but moderate Competitive exchange rates Trade liberalism Openness to foreign direct investment Privatisation of state enterprises Deregulation: such as those that impede entry or re strict competition except for those justified on safety, e nvironmental and consumer protection ground. Legal security for property rights IMPACTS OF GLOBALISATION By: MADDY.KALEEM