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The Changing Global Economy Essay

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The argument for globalisation is an argument for International trade. Classical liberal economists have always argued for the free movement of all factors of production. Adam Smith had declared that nations have absolute advantaged that they leverage to provide cheaper and more efficient production processes. David Ricardo argues in his theory of Comparative advantages that countries must utilize their relatively more abundant factors of production more intensively to produce higher levels of output. All this results in higher output and therefore the world stands to gain through increased trade.

Factor mobility leads to stabilization of prices that result from goods and services moving from one place to another where the factor is scarce and fetches higher returns. Those who are against globalisation and trade base their debates on the infant industry argument which believes that small domestic players get adversely affected when large foreign firms compete. The other argument they make is that that imports cause shifts of production where firms locate to foreign lands and cause unemployment.

It is also believed that globalisation leads to the dumping of poor quality or toxic goods across the border.

Reliance on imports leads to dependence, and exports cause injury to locally available resources that get diverted to foreign markets. Globalisation is also seen as a phenomenon where the free flow of money and currency makes domestic economies extremely vulnerable to volatile foreign investments. This could lead countries to balance of payment difficulties and cause events such as the East Asian crisis in the mid nineties. What results is a situation where any minor turbulence in large economies like the US causes severe stress to developing and under developed economies.

2. Huntington and the clash of civilizations Huntington’s famous hypothesis states that in the modern world, the clash of ideologies will convert into a clash of cultures. He argues that the new world order will see greater examples of conflict between various cultures of the world. His thesis is seen as a justification of the US war against Islamic nations and its aggression against countries like China. These clashes would come from a conflict that emanates whenever differing cultural paradigms come into contact with each other and compete for global resources.

The end of the cold war, according to Huntington, is the end of conflict based on ideology, where the capitalist and the communist bloc were engaged in war. This conflict ended with the collapse of the USSR and the coming down of the Berlin Wall. Today, the emerging economies of the world are growing fast and eroding the huge share in Gross Domestic Product (GDP) of the world that is now held by the western countries. These new and emerging economies are home to most of the cultures of the world that are all opposed to the dominant western thought. This opposition would give rise to global conflict.

This is the conflict that Huntingdon terms as the Clash of civilizations that emerges in a world that is globalising at a fast pace. This globalisation is bringing together people from various cultures and this would manifest in a battle for domination. This then would cause conflicts among cultures. Huntington’s hypothesis has been debated endlessly and there are as many voices supporting the argument as there are that characterise Huntington’s theory as mischievous. 3. Institutional arrangements For a free economy, there are certain pre conditions that must be met.

These are the protection of property rights, honoring of contracts, law and order and a competitive environment. These pre conditions are met when these are institutionalized. These institutions then enable markets in any state and cause efficiency in market transactions and therefore result in growth. Some of these institutions are put in place by the government by way of regulatory bodies and police forces. Some of these institutions are created simultaneously by a society as it evolves. Markets function best when free and perfect information is available to all players.

Competition in an economy comes out of the lack of barriers to entry and exit from the market. Laws and policies that enable such an environment are all referred to as institutional arrangements. In most markets there is asymmetry of information and a differentiated access to factors of production. Such a situation prevents an economy from operating at full potential. Those states that ensure the existence of such institutions are the ones where economic growth takes place to its full extent. Weak institutional arrangements favor some players in a market and adversely affect the rest.

Market based solutions to such problems are usually the most sustainable and efficient mechanisms. This gives rise to poor governance structures and cause imperfection. It is not always the state that brings about these institutions. Sometimes institutional arrangements evolve and take firm roots in markets. Such informal institutional arrangements provide players with an eco system that enables innovation and growth. 4. Shifts in the world economy The two factors that clearly set apart the last 25 years of economic growth in the world are the collapse of the Soviet Union and the fast paced changes in technology.

Both these events have lead to a globalised world where trade has more than quadrupled. Technological changes, especially the strides made in communication technology and transportation have enabled the world to shrink and become a global village. Transactions are now possible at lightning speeds, at the click of a mouse, between two entities situated in different corners of the globe. What has also been seen is the spurt in trade in services, and such was not the case with the world earlier where all trade was for goods.

Free trade has improved the chances of poor countries to enter new business internationally, and allow their firms to buy and sell various commodities and services. Domestic rules and standards become significant and issues such as restrictions on imports, exports, tariffs and duties become significant. (Ohmae, 1999). In all this the new entity that has emerged is that of the Multi National Corporation. MNCs today typically operate in several countries, where the source of raw material is one nation; production takes place in a second country, assembly and packaging in a third and sales in a fourth.

This has enabled firms to grow in size and shape and allow economies of scale to reduce costs of production and therefore prices. Most nations in the last 25 years have made currencies convertible and have ensured that internationally agreeable norms and polices are put in place. A large credit for this goes to the World Trade Organisation that has put in place a multi lateral agreement that allows for free trade between members. The MNC has leveraged these changes to emerge as a significant player in world economics.

References: 1. Clarke, G.and S. Wallsten, (2004), “Has the Internet Increased Trade? : Evidence from Industrial and Developing Countries”, World Bank Policy Research Working Paper 3215. 2. Edwards, S. (1989a), Openness, Trade Liberalization and Economic Performance in Developing Countries, Working Paper No. 2908, NBER, Cambridge Mass. 3. North, D. (1990), “Institutions Institutional Change and Economic Performance” Cambridge University Press, Cambridge. 4. Ohmae, K. (1999) ‘The Borderless World: Power and Strategy in the Interlinked Economy’. New York: Harper Business.

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