The period from the end of the Second World War until the financial crisis of 2007–8 was one of increasing globalisation. World trade rose considerably faster than world GDP. The average annual growth in world GDP from 1950 to 2007 was 4.2%; the average annual growth in world merchandise exports was 6.7%.
And there were other ways in which the world was becoming increasingly interconnected. Cross-border financial flows grew strongly, especially in the 1990s and up to 2007. In the early 1990s, global cross-border capital flows were around 4% of world annual GDP; by 2007, they had risen to over 20%. The increasing spread of multinational corporations, improvements in transport, greater international movement of labour and improved communications were all factors that contributed to a deepening of globalisation.
But have things begun to change? Have we entered into an era of ‘deglobalisation’? Certainly some indicators would suggest this. In the three years 2012–14, world exports grew more slowly than world GDP. Global cross-border financial flows remain at about one-third of their 2007 peak. Increased banking regulations are making it harder for financial institutions to engage in international speculative activities.
What is more, with political turmoil in many countries, multinational corporations are more cautious about investing in such markets. Many countries are seeking to contain immigration. Fears of global instability are encouraging many firms to look inwards. After more than 13 years, settlement of the Doha round of international trade negotiations still seems a long way off. Protectionist measures abound, often amount to giving favourable treatment to domestic firms.
The Observer article considers whether the process of increased globalisation is now dead. Or will better banking regulations ultimately encourage capital flows to grow again; and will the inexorable march of technological progress give international trade and investment a renewed boost? Will lower energy and commodity prices help to reboot the global economy? Will the ‘Great Recession’ have resulted in what turns out to be merely a blip in the continued integration of the global economy? Is it, as the Huffington Post article states, that ‘globalization has a gravitational pull that is hard to resist’? See what the articles and speech have to say and what they conclude.
Articles
Borders are closing and banks are in retreat. Is globalisation dead? The Observer, Heather Stewart (23/5/15)
Is Globalization Finally Dead? Huffington Post, Peter Hall (6/5/14)
Speech
Financial “deglobalization”?: capital flows, banks, and the Beatles Bank of England, Kristin Forbes (18/11/14)
Questions
- Define globalisation.
- How does globalisation affect the distribution of income (a) between countries; (b) within countries?
- Why has the Doha round of trade negotiations stalled?
- Examine the factors that might be leading to deglobalisation.
- What are the implications of banking deglobalisation for the UK?
- Are protectionist measures always undesirable in terms of increasing global GDP?
- What forces of globalisation are hard to resist?
Interest rates are the main tool of monetary policy and crucially affect investment. There has been much discussion since the end of the financial crisis concerning when UK interest rates would eventually rise. Uncertainty over just when, and by how much, interest rates will rise affects business confidence and hence investment. Businesses therefore listen carefully to what the Bank of England says about future movements in Bank Rate. But Mark Carney has now spoken about another cause of uncertainty and its impct on investment. This is the uncertainty over the outcome of the referendum on whether the UK should leave the EU.
By 2017, the Prime Minister has promised a referendum on staying in the EU, but Mark Carney has urged for this to be held ‘as soon as possible’. Whether or not the UK remains in the EU will have a big effect on businesses and with the uncertainty surrounding the UK’s future, this may soon turn to a lack of investment. 
As yet, businesses have not responded to this uncertainty, but the longer the delay for the referendum, the more inclined firms will be to postpone investment. As Mark Carney said:
“We talk to a lot of bosses and there has been an awareness of some of this political uncertainty – whether because of the election or because of the referendum … What they’ve been telling us, and we see it in the statistics, is they have not yet acted on that uncertainty – or to put it another way, they are continuing to invest, they are continuing to hire.”
Leaving the EU will have big effects on consumers and businesses, given that the EU is the UK’s largest market, trading partner and investor. With a referendum sooner rather than later, uncertainty will be more limited and any reaction by businesses will take place over a shorter time period. There are many other factors that affect business investment, some of which are related to the UK’s relationship with the EU and the following articles consider these issues.
EU referendum should be held ‘as soon as necessary’, says Mark Carney BBC News (14/5/15)
Business want an early EU referendum, Mark Carney indicates The Telegraph, Ben Riley-Smith (14/5/15)
EU poll should take place ‘as soon as necessary’, says Bank of England Chief The Guardian, Angela Monaghan (14/5/15)
Threat of business leaving the EU is fuelling business ‘uncertainty’, says Bank of England governor Mark Carney Mail Online, Matt Chorley (14/5/15)
Bank of England’s Mark Carney urges speedy EU referendum Financial Times, George Parker (14/5/15)
Questions
- Why is the EU important to the UK’s economic performance?
- If the UK were to leave the EU, what impact would this have on UK consumers?
- What would be the impact on UK firms if the UK were to leave the EU?
- Consider an AD/AS diagram and use this to explain the potential impact on the macroeconomic variables if the UK were to leave the EU.
- Why is uncertainty over the UK’s referendum likely to have an adverse effect on investment?
A new group of economies, known as MINT, are seen as strong current and future emerging markets. We’ve had the BRICS (Brazil, Russia, India, China and South Africa) and now we have the MINTs (Mexico, Indonesia, Nigeria and Turkey).
In 2014, Nigeria became Africa’s fastest growing nation. A large part of Nigeria’s success has to do with growth in some of its key industries.
Nigerian’s reliance on the oil and gas industry created an attractive economy for further development and it now has high growth in a diverse range of sectors, including mobile phones, champagne, private jets and ‘Nollywood’. Despite the uncertainty and political unrest caused by Boko Haram, Nigeria is attracting a significant amount of Foreign Direct Investment (FDI) in a range of sectors, indicating its growing diversity and attractiveness to some of the world’s largest multinational companies.
Boko Haram has certainly had a dampening effect on Nigeria’s growth, as has the lower oil price, but this may create opportunities for further diversification. Furthermore there are concerns about how the wealth of the nation is concentrated, given that poverty is still prevalent across the country. However, Nigeria is certainly emerging as a success story of Africa and surely the question that will be asked is will other African nations follow suit?
The following article from BBC News considers the Nigerian economy.
Nigeria’s ‘champagne’ economy bucks Boko Haram effect BBC News, Vishala Sri-Pathma (27/3/15)
Questions
- Is a falling oil price necessarily bad for the Nigerian economy?
- Explain why Boko Haram is likely to have a dampening effect on economic growth in Nigeria.
- Do you think other African nations will be able to replicate the success of Nigeria? Which factors may prevent this?
- If the number of millionaires is increasing significantly, but poverty is persisting, does this tell us anything about what is happening to inequality in Nigeria?
- Is is possible to reduce inequality in Nigeria while maintaining economic growth? Might it even be posible for greater equality to be a driver of economic growth?
- The Nigerian currency is weakening. What has caused this and why may this be a cause for concern?
In the developed countries of 2015, extreme poverty is (or should be) a thing of the past. With well-developed welfare states and hence safety nets, no-one should be living in deep poverty. However, that is not the case across the rest of the world, where extreme poverty is still a common thing – though much reduced compared to a decade ago.
In the article linked below, Linda Yueh of the BBC asks whether it is possible to end global poverty. Looking at some of the key data, we are certainly moving in the right direction, with the poverty rate in the developing world halving since 1981. Projections suggest that ending global poverty by 2030 is possible, though it will require significant investment and commitment. The World Bank data indicates that 50 million people would need to be brought out of poverty every year. Economists, on the other hand, suggest that the poverty rate may have fallen to around 8% – still progress, but perhaps a more realistic target?
How we measure poverty is clearly important here, as the higher the threshold income required to be ‘out of poverty’, the longer it will take and the more people will currently be in poverty. It is also important to consider things like changes in the population as although more people may be brought out of poverty, if an even greater number of people are being born in a country, then it is entirely possible that poverty actually increases in absolute terms.
A key thing to bear in mind when it comes to reducing poverty is that there is no ‘one size fits all’ policy. What works in one country is not necessarily going to work in another country. Policies will have to be targeted to the needs of the population and this means more time and resources. The numbers are definitely moving in the right direction, but whether they are going quickly enough to meet the 2030 target is another story. The BBC News article is linked below, as are some interesting documents and items from the World Bank and United Nations.
Is it possible to end global poverty? BBC News, Linda Yueh (27/3/15)
Poverty will only end by 2030 if growth is shared World Bank, Espen Beer Prydz (19/11/14)
Far greater effort needed to eradicate extreme poverty in world’s poorest nations United Nations News Centre (23/10/14)
Ending Poverty and Sharing Prosperity World Bank Group and International Monetary Fund, Global Monitoring Report 2014/2015 2015
Questions
- What is poverty and how to we measure it?
- If the growth rate of the world is high, does this mean that poverty is falling?
- What factors have explained the success of China in reducing poverty? Why might similar policies be ineffective in Africa? What types of policies would you recommend to reduce global poverty in Sub-Saharan Africa?
- Does Aid or Debt Forgiveness from developed countries help poorer nations or could it create a moral hazard?
- How important is economic growth in eliminating global poverty?
- How important are the Millennium Development Goals in driving efforts to eradicate global poverty?
- What are the 3 elements that the Global Monitoring Report focuses on to make growth inclusive and sustainable? In each case, explain how the elements would contribute towards global efforts to end poverty.
‘The world is sinking under a sea of debt, private as well as public, and it is increasingly hard to see how this might end, except in some form of mass default.’ So claims the article below by Jeremy Warner. But just how much has debt grown, both public and private? And is it of concern?
The doomsday scenario is that we are heading for another financial crisis as over leveraged banks and governments could not cope with a collapse in confidence. Bank and bond interest rates would soar and debts would be hard to finance. The world could head back into recession as credit became harder and more expensive to obtain. Perhaps, in such a scenario, there would be mass default, by banks and governments alike. This could result in a plunge back into recession.
The more optimistic scenario is that private-sector debt is under control and in many countries is falling (see, for example, chart 1 in the blog Looking once again through Minsky eyes at UK credit numbers for the case of the UK). Even though private-sector debt could rise again as the world economy grows, it would be affordable provided that interest rates remain low and banks continue to build the requisite capital buffers under the Basel III banking regulations.
As far as public-sector debt is concerned, as a percentage of GDP its growth has begun to decline in advanced countries as a whole and, although gently rising in developing and emerging economies as a whole, is relatively low compared with advanced countries (see chart). Of course, there are some countries that still face much larger debts, but in most cases they are manageable and governments have plans to curb them, or at least their growth.
But there have been several warnings from various economists and institutes, as we saw in the blog post, Has the problem of excess global debt been tackled? Not according to latest figures. The question is whether countries can grow their way out of the problem, with a rapidly rising denominator in the debt/GDP ratios.
Only mass default will end the world’s addiction to debt The Telegraph, Jeremy Warner (3/3/15)
Questions
- What would be the impact of several countries defaulting on debt?
- What factors determine the likelihood of sovereign defaults?
- What factors determine the likelihood of bank defaults?
- What is meant by ‘leverage’ in the context of (a) banks; (b) nations?
- What are the Basel III regulations? What impact will they have/are they having on bank leverage?
- Expand on the arguments supporting the doomsday scenario above.
- Expand on the arguments supporting the optimistic scenario above.
- What is the relationship between economic growth and debt?
- Explain how the explosion in global credit might merely be ‘the mirror image of rising output, asset prices and wealth’.
- Is domestic inflation a good answer for a country to the problems of rising debt denominated (a) in the domestic currency; (b) in foreign currencies?
The period from the end of the Second World War until the financial crisis of 2007–8 was one of increasing globalisation. World trade rose considerably faster than world GDP. The average annual growth in world GDP from 1950 to 2007 was 4.2%; the average annual growth in world merchandise exports was 6.7%.
The Observer article considers whether the process of increased globalisation is now dead. Or will better banking regulations ultimately encourage capital flows to grow again; and will the inexorable march of technological progress give international trade and investment a renewed boost? Will lower energy and commodity prices help to reboot the global economy? Will the ‘Great Recession’ have resulted in what turns out to be merely a blip in the continued integration of the global economy? Is it, as the Huffington Post article states, that ‘globalization has a gravitational pull that is hard to resist’? See what the articles and speech have to say and what they conclude.
