Over the decades, economies have become increasingly interdependent. This process of globalisation has involved a growth in international trade, the spread of technology, integrated financial markets and international migration.
When the global economy is growing, globalisation spreads the benefits around the world. However, when there are economic problems in one part of the world, this can spread like a contagion to other parts. This was clearly illustrated by the credit crunch of 2007–8. A crisis that started in the sub-prime market in the USA soon snowballed into a worldwide recession. More recently, the impact of Covid-19 on international supply chains has highlighted the dangers of relying on a highly globalised system of production and distribution. And more recently still, the war in Ukraine has shown the dangers of food and fuel dependency, with rapid rises in prices of basic essentials having a disproportionate effect on low-income countries and people on low incomes in richer countries.
Moves towards autarky
So is the answer for countries to become more self-sufficient – to adopt a policy of greater autarky? Several countries have moved in this direction. The USA under President Trump pursued a much more protectionist agenda than his predecessors. The UK, although seeking new post-Brexit trade relationships, has seen a reduction in trade as new barriers with the EU have reduced UK exports and imports as a percentage of GDP. 
According to the Office for Budget Responsibility’s November 2022 Economic and Fiscal Outlook, Brexit will result in the UK’s trade intensity being 15 per cent lower in the long run than if it had remained in the EU.
Many European countries are seeking to achieve greater energy self-sufficiency, both as a means of reducing reliance on Russian oil and gas, but also in pursuit of a green agenda, where a greater proportion of energy is generated from renewables. More generally, countries and companies are considering how to reduce the risks of relying on complex international supply chains.
Limits to the gains from trade
The gains from international trade stem partly from the law of comparative advantage, which states that greater levels of production can be achieved by countries specialising in and exporting those goods that can be produced at a lower opportunity cost and importing those in which they have a comparative disadvantage. Trade can also lead to the transfer of technology and a downward pressure on costs and prices through greater competition.
But trade can increase dependence on unreliable supply sources. For example, at present, some companies are seeking to reduce their reliance on Taiwanese parts, given worries about possible Chinese actions against Taiwan.
Also, governments have been increasingly willing to support domestic industries with various non-tariff barriers to imports, especially since the 2007–8 financial crisis. Such measures include subsidies, favouring domestic firms in awarding government contracts and using regulations to restrict imports. These protectionist measures are often justified in terms of achieving security of supply. The arguments apply particularly starkly in the case of food. In the light of large price increases in the wake of the Ukraine war, many countries are considering how to increase food self-sufficiency, despite it being more costly.
Also, trade in goods involves negative environmental externalities, as freight transport, whether by sea, air or land, involves emissions and can add to global warming. In 2021, shipping emitted over 830m tonnes of CO2, which represents some 3% of world total CO2 emissions. In 2019 (pre-pandemic), the figure was 800m tonnes. The closer geographically the trading partner, the lower these environmental costs are likely to be.
The problems with a globally interdependent world have led to world trade growing more slowly than world GDP in recent years after decades of trade growth considerably outstripping GDP growth. Trade (imports plus exports) as a percentage of GDP peaked at just over 60% in 2008. In 2019 and 2021 it was just over 56%. This is illustrated in the chart (click here for a PowerPoint). Although trade as a percentage of GDP rose slightly from 2020 to 2021 as economies recovered from the pandemic, it is expected to have fallen back again in 2022 and possibly further in 2023.
But despite this reduction in trade as a percentage of GDP, with de-globalisation likely to continue for some time, the world remains much more interdependent than in the more distant past (as the chart shows). Greater autarky may be seen as desirable by many countries as a response to the greater economic and political risks of the current world, but greater autarky is a long way from complete self-sufficiency. The world is likely to remain highly interdependent for the foreseeable future. Reports of the ‘death of globalisation’ are premature!
Podcasts
Articles
Report
Questions
- Explain the law of comparative advantage and demonstrate how trade between two countries can lead to both countries gaining.
- What are the main economic problems arising from globalisation?
- Is the answer to the problems of globalisation to move towards greater autarky?
- Would the expansion/further integration of trading blocs be a means of exploiting the benefits of globalisation while reducing the risks?
- Is the role of the US dollar likely to decline over time and, if so, why?
- Summarise Karl Polanyi’s arguments in The Great Transformation (see the Daniel W. Drezner article linked below). How well do they apply to the current world situation?
The global economic impact of the coronavirus outbreak is uncertain but potentially very large. There has already been a massive effect on China, with large parts of the Chinese economy shut down. As the disease spreads to other countries, they too will experience supply shocks as schools and workplaces close down and travel restrictions are imposed. This has already happened in South Korea, Japan and Italy. The size of these effects is still unknown and will depend on the effectiveness of the containment measures that countries are putting in place and on the behaviour of people in self isolating if they have any symptoms or even possible exposure.
The OECD in its March 2020 interim Economic Assessment: Coronavirus: The world economy at risk estimates that global economic growth will be around half a percentage point lower than previously forecast – down from 2.9% to 2.4%. But this is based on the assumption that ‘the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained.’ If the disease develops into a pandemic, as many health officials are predicting, the global economic effect could be much larger. In such cases, the OECD predicts a halving of global economic growth to 1.5%. But even this may be overoptimistic, with growing talk of a global recession.
Governments and central banks around the world are already planning measures to boost aggregate demand. The Federal Reserve, as an emergency measure on 3 March, reduced the Federal Funds rate by half a percentage point from the range of 1.5–1.75% to 1.0–1.25%. This was the first emergency rate cut since 2008.
Economic uncertainty
With considerable uncertainty about the spread of the disease and how effective containment measures will be, stock markets have fallen dramatically. The FTSE 100 fell by nearly 14% in the second half of February, before recovering slightly at the beginning of March. 
It then fell by a further 7.7% on 9 March – the biggest one-day fall since the 2008 financial crisis. This was specifically in response to a plunge in oil prices as Russia and Saudi Arabia engaged in a price war. But it also reflected growing pessimism about the economic impact of the coronavirus as the global spread of the epidemic accelerated and countries were contemplating more draconian lock-down measures.
Firms have been drawing up contingency plans to respond to panic buying of essential items and falling demand for other goods. Supply-chain managers are working out how to respond to these changes and to disruptions to supplies from China and other affected countries.
Firms are also having to plan for disruptions to labour supply. Large numbers of employees may fall sick or be advised/required to stay at home. Or they may have to stay at home to look after children whose schools are closed. 
For some firms, having their staff working from home will be easy; for others it will be impossible.
Some industries will be particularly badly hit, such as airlines, cruise lines and travel companies. Budget airlines have cancelled several flights and travel companies are beginning to offer substantial discounts. Manufacturing firms which are dependent on supplies from affected countries have also been badly hit. This is reflected in their share prices, which have seen large falls.
Longer-term effects
Uncertainty could have longer-term impacts on aggregate supply if firms decide to put investment on hold. This would also impact on the capital goods industries which supply machinery and equipment to investing firms. For the UK, already having suffered from Brexit uncertainty, this further uncertainty could prove very damaging for economic growth.
While aggregate supply is likely to fall, or at least to grow less quickly, what will happen to the balance of aggregate demand and supply is less clear. A temporary rise in demand, as people stock up, could see a surge in prices, unless supermarkets and other firms are keen to demonstrate that they are not profiting from the disease. In the longer term, if aggregate demand continues to grow at past rates, it will probably outstrip the growth in aggregate supply and result in rising inflation. If, however, demand is subdued, as uncertainty about their own economic situation leads people to cut back on spending, inflation and even the price level may fall.
How quickly the global economy will ‘bounce back’ depends on how long the outbreak lasts and whether it becomes a serious pandemic and on how much investment has been affected. At the current time, it is impossible to predict with any accuracy the timing and scale of any such bounce back.
Articles
- Coronavirus: Global growth ‘could halve’ if outbreak intensifies
BBC News (2/3/20)
- Coronavirus: Eight charts on how it has shaken economies
BBC News, Lora Jones, David Brown & Daniele Palumbo (4/3/20)
- The economic ravages of coronavirus
BBC News, Douglas Fraser (7/3/20)
- What Coronavirus Could Mean for the Global Economy
Harvard Business Review, Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz (3/3/20)
- Coronavirus escalation could cut global economic growth in half – OECD
The Guardian, Richard Partington and Phillip Inman (2/3/20)
- U.S. Fed Cuts Rates, There Are Still Strategies The ECB Can Follow
Forbes, Stephen Pope (3/3/20)
- A coronavirus recession could be supply-side with a 1970s flavour
The Guardian, Kenneth Rogoff (3/3/20)
- Coronavirus will wreak havoc on the US economy
CNN, Mark Zandi (3/3/20)
- UK factories feel the effects of coronavirus spread – PMI
Reuters, William Schomberg (2/3/20)
- The first economic modelling of coronavirus scenarios is grim for Australia, the world
The Conversation, Australia, Warwick McKibbin and Roshen Fernando (3/3/20)
- Extraordinary complacency: the coronavirus and emerging markets
Financial Times, Geoff Dennis (2/3/20)
- Coronavirus Economic Impact On Global Economy
Seeking Alpha, Mark Bern (1/3/20)
- OECD warns coronavirus could halve global growth
Financial Times, Chris Giles, Martin Arnold and Brendan Greeley (2/3/20)
- BoE’s Carney sees ‘powerful and timely’ global response to coronavirus
Reuters, David Milliken, Elizabeth Howcroft (3/3/20)
eBook
Questions
- Using a supply and demand diagram, illustrate the fall in stock market prices caused by concerns over the effects of the coronavirus.
- Using either (i) an aggregate demand and supply diagram or (ii) a DAD/DAS diagram, illustrate how a fall in aggregate supply as a result of the economic effects of the coronavirus would lead to (a) a fall in real income and (i) a fall in the price level or (ii) a fall in inflation; (b) a fall in real income and (i) a rise in the price level or (ii) a rise in inflation.
- What would be the likely effects of central banks (a) cutting interest rates; (b) engaging in further quantitative easing?
- What would be the likely effects of governments running a larger budget deficit as a means of boosting the economy?
- Distinguish between stabilising and destabilising speculation. How would you characterise the speculation that has taken place on stock markets in response to the coronavirus?
- What are the implications of people being paid on zero-hour contracts of the government requiring workplaces to close?
- What long-term changes to working practices and government policy could result from short-term adjustments to the epidemic?
- Is the long-term macroeconomic impact of the coronavirus likely to be zero, as economies bounce back? Explain.
Each January, world political and business leaders gather at the ski resort of Davos in Switzerland for the World Economic Forum. They discuss a range of economic and political issues with the hope of guiding policy.
This year, leaders meet at a time when the global political context has and is changing rapidly. This year the focus is on ‘Creating a Shared Future in a Fractured World’. As the Forum’s website states:
The global context has changed dramatically: geostrategic fissures have re-emerged on multiple fronts with wide-ranging political, economic and social consequences. Realpolitik is no longer just a relic of the Cold War. Economic prosperity and social cohesion are not one and the same. The global commons cannot protect or heal itself.
One of the main ‘fissures’ which threatens social cohesion is the widening gap between the very rich and the rest of the world. Indeed, inequality and poverty is one of the main agenda items at the Davos meeting and the Forum website includes an article titled, ‘We have built an unequal world. Here’s how we can change it’ (see second link in the Articles below). The article shows how the top 1% captured 27% of GDP growth between 1980 and 2016.
The first Guardian article below identifies seven different policy options to tackle the problem of inequality of income and wealth and asks you to say, using a drop-down menu, which one you think is most important. Perhaps it’s something you would like to do.
Articles
Project Davos: what’s the single best way to close the world’s wealth gap? The Guardian, Aidan Mac Guill (19/1/18)
We have built an unequal world. Here’s how we can change it World Economic Forum, Winnie Byanyima (22/1/18)
Oxfam highlights sharp inequality as Davos elite gathers ABC news, Pan Pylas (21/1/18)
Inequality gap widens as 42 people hold same wealth as 3.7bn poorest The Guardian, Larry Elliott (22/1/18)
There’s a huge gender component to income inequality that we’re ignoring Business Insider, Pedro Nicolaci da Costa (22/1/18)
Ahead of Davos, even the 1 percent worry about inequality Washington Post, Heather Long (22/1/18)
“Fractures, Fears and Failures:” World’s Ruling Elites Stare into the Abyss GlobalResearch, Bill Van Auken (18/1/18)
Why the world isn’t getting a pay raise CNN Money, Patrick Gillespie and Ivana Kottasová (1/11/17)
WEF archive
Articles on Inequality World Economic Forum
Questions
- Distinguish between income and wealth. In global terms, which is distributed more unequally?
- Why has global inequality of both income and wealth grown?
- Explain which of the seven policy options identified by the Guardian you would choose/did choose?
- Go through each one of the seven policy options and identify what costs would be associated with pursuing it.
- Identify any other policy options for tackling the problem.
World markets were taken by surprise by a large rise in Turkish interest rates on 28/1/14. In an attempt to combat a falling lira and rising inflation, the Turkish central bank raised its overnight lending rate from 7.75% to 12%. Following the decision, the lira appreciated by over 3%.
Since the start of this year, the Turkish lira had depreciated by 7.1% and since the start of 2013 by 22.8%. Along with the currencies of several other emerging economies, such as India and Brazil, speculators had been selling the Turkish currency. This has been triggered by worries that the Fed’s tapering off its quantitative easing programme would lead to a fall, and perhaps reversal, of the inflow of finance into these countries; in the worst-case scenario it could lead to substantial capital flight.
Consumer price inflation in Turkey is currently 7.4%, up from 6.2% a year ago. The central bank, in a statement issued alongside the interest rate rise, said that it would continue with a tight monetary
policy until the inflation outlook showed a clear improvement.
The Turkish Prime Minister, Tayyip Erdogan, has been opposed to rises in interest rates, fearing that the dampening effect on aggregate demand would reduce economic growth, which, as the chart shows, has been recovering recently (click here for a PowerPoint of the chart). A slowing of growth could damage his prospects in forthcoming elections.
World stock markets, however, rallied on the news, seeing the rise in interest rates as a symbolic step in emerging countries stemming outflows of capital.
Articles
Turkey raises interest from 7.75pc to 12pc The Telegraph (28/1/14)
Emerging markets forced to tighten by US and Chinese monetary superpowers The Telegraph, Ambrose Evans-Pritchard (28/1/14)
Turkey Gets Aggressive on Rates The Wall Street Journal, Joe Parkinson (28/1/14)
Turkish central bank raises lending rate to 12% BBC News (28/1/14)
Asian stock markets stage relief rally after Turkey rate rise BBC news (29/1/14)
Turkey raises rates to halt lira’s slide Financial Times, Daniel Dombey (29/1/14)
Turkey Rate Increase Stems Lira Drop as Basci Defies Erdogan Bloomberg Businessweek, Onur Ant and Taylan Bilgic (29/1/14)
Fragile economies under pressure as recovery prompts capital flight The Observer, Angela Monaghan (2/2/14)
Data
Main Economic Indicators (including Turkish data) OECD
Data on Turkey, World Economic Outlook database IMF
Turkey price indices Central Bank of the Republic of Turkey
Questions
- Why did the Turkish central bank decide to raise interest rates by such a large amount?
- Why has the Turkish lira been depreciating so much over the past few months? How has this been linked to changes in Turkey’s balance of payments and what parts of the balance of payments account have been affected?
- Why did global stock markets rally on the news from Turkey?
- What will be the impact of the central bank’s actions on (a) inflation; (b) economic growth?
- How has the USA’s quantitative easing programme affected developing countries?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?