The Economics Book

(Barry) #1

230


Improvements in transport have
been a major driver in globalization. In
Shanghai, China, the US has invested
in a gigantic “mega-port” that will
make shipping safer.


GLOBALIZATION


Smoot–Hawley tariff, which
raised tariffs on imported goods to
record levels. These tariffs reduced
demand for foreign goods. Foreign
countries retaliated by imposing
their own tariffs. The result was a
collapse in world trade that
worsened the effects of the
Depression. It took decades to
rebuild the world economy.


Integration
By the end of the 20th century
globalization across most markets
had returned to the levels seen just


before World War I. Today, markets
are more integrated than ever as
transportation costs have
continued to fall and most tariffs
have been scrapped altogether.
One vision of the future
of globalization involves the
elimination of other kinds of
barriers to trade caused by
institutional differences between
countries. Markets are embedded
in institutions—in property rights,
legal systems, and regulatory
regimes. Differences in institutions
between countries create trading
costs in the same way that tariffs
or distance do. For example, there
may be different laws in Kenya and
China about what happens when a
buyer fails to pay. This might make
it hard for a Chinese exporter to
recover what it is owed in the event
of a dispute, which could make the
firm reluctant to enter the Kenyan
market. Despite the removal of
tariffs the world is far from being
a single market. Borders still
matter because of these kinds
of institutional incompatibilities.
Complete integration requires the
ironing out of legal and regulatory
differences to create a single
institutional space.

Some economists argue that this
process is underway and inevitable,
and that global markets drive the
harmonization of institutions across
countries. Consider a multinational
firm choosing a country in which to
locate its factory. In order to attract
the firm’s investment, a government
might cut business tax rates and
loosen regulatory requirements.
Other competing countries follow
suit. The resulting lower tax
revenues make countries less
able to finance welfare states and
educational programs. All policy
decisions become oriented toward
maximizing integration with
global markets. No goods or
services would be provided
that are incompatible with this.

Globalization v. democracy
The Turkish economist Dani Rodrik
(1957– ) has criticized this vision of
“deep integration,” arguing that it
is undesirable and far from
inevitable, and that in reality
considerable institutional diversity
persists between countries.
Rodrik’s starting point is that
choices about the direction of
globalization are subject to a
political “trilemma.” People want

The East Asian crisis began when
the Thai government attempted to
float the bhat on the international
markets, ending its link to the dollar.

Liberalizing the money markets


The liberalization of capital
(money) markets, where funds
for investment can be borrowed,
has been an important contributor
to the pace of globalization. Since
the 1970s there has been a trend
towards a freer flow of capital
across borders. Current economic
theory suggests that this should
aid development. Developing
countries have limited domestic
savings with which to invest in
growth, and liberalization allows
them to tap into a global pool of
funds. A global capital market

also allows investors greater
scope to manage and spread
their risks.
However, some say that a
freer flow of capital has raised
the risk of financial instability.
The East Asian crisis of the
late 1990s came in the wake
of this kind of liberalization.
Without a strong financial
system and a robust regulatory
environment capital market
globalization can sow the
seeds of instability in
economies rather than growth.
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