Transcript Class 6: Economic Globalization

Economic Globalization
Sociology 2, Class 6
Copyright © 2010 by Evan Schofer
Do not copy or distribute without
permission
Announcements
• Announcements
– Section quizzes / graded in-class activities
• None this week
– because Monday sections were cancelled
• They will resume next week (Week 4)
• Be familiar with all readings since last quiz:
– Weeks 3 & 4
• Agenda
• Today: Economic Globalization (cont’d)
Readings: Some comments
• Friedman, Thomas: The Untouchables
• Chapter in “The World is Flat”
– Flattening: refers to economic globalization
• People from around the world increasingly compete on
a level playing field
– Question: What is an “untouchable”?
– Answer: Someone whose job can’t be outsourced
• Specialized: “Knowledge work” that is hard to duplicate
– Ex: surgeon, highly skilled software engineer
• Anchored: Location specific, face to face (chefs, nurses)
• Adaptable: “Learn how to learn”… constantly acquire
new skills.
Readings
• Stiglitz: Making Globalization Work, Ch 1:
“Another World Is Possible”
• Discusses the “promise” of globalization, and areas
where results have fallen short
– The promise of globalization: Greater economic
prosperity for both rich and poor countries
– Criticisms of globalization, often raised by those
from poor countries
• 1. The rules of the game benefit rich countries
– Ex: trade agreements
• 2. Globalization tends to focus on material issues
(money) and less on the environment & social issues
Readings
• Stiglitz: Making Globalization Work, Ch 1:
“Another World Is Possible”
– Criticisms of globalization
• 3. Globalization sometimes undermines democracy
– Similar to the argument in “Supercapitalism”
• 4. Claims that “everybody wins” are wrong
– There are losers in both rich and poor countries
• 5. Pro-market / pro-globalization policies have
sometimes been forced on poor countries… which is
unfair.
Review: What is most globalized?
• Some things are more globalized than others…
How Global?
Extremely
Capital flows
Very
Trade
Moderately
Corporations, FDI, Production
Not so much
Labor (workers)
Economic Globalization: Origins
• Question: What are some basic things that
are absolutely required in order to have a
global economy?
– 1. Inexpensive transportation & communication
– 2. International financial (money) system
– 3. Countries that are willing to participate
• Absence of legal or regulatory “barriers”.
Transportation
• Historically, people only traded lightweight,
valuable items… spices, silk, ivory, etc…
• Things that could be easily carried long distances
• Global economic activity requires costeffective transportation systems
• Otherwise most business activity remains localized
• Most changes are pretty obvious: increase in cars,
trucks, planes, trains, ships…
• But, one change matters more than others:
containerized shipping
Transportation
• Containerized shipping = a huge revolution
in global transportation
• Started in the 1970’s
• Shipping containers: a standard 40ft long
box
• Easy to load and unload onto ships, trains, trucks
• Drastically reduced cost of shipping
• Huge ships can hold thousands of
containers!
Containerized Shipping: Pics
• Ships can hold hundreds of containers!
Containerized Shipping: Pics
• Containers allow mechanical loading
Pics: from Maersk Sealand Website
Containerized Shipping: Pics
• Containers can be transferred to trains, trucks
Containerized Shipping
• Question: Guess how much it costs to send a
40 foot shipping container with 10,000
pounds of cargo from Shanghai, China to the
port at Long Beach?
• Answer: Less than $2,500
• Taxes, tariffs, etc. make it cost a bit more…
• Question: How many pairs of Nike shoes fit in
a container?
• Answer: over 10,000!
Containerized Shipping
• Consequence: Containerized shipping
resulted in a dramatic increase in global trade
• Example: Container holds 10,000 pairs of shoes
• Container costs $2,500 to ship (including taxes)
• Total cost of shipping per pair: 25 cents!
• If cost of making a shoe in China is 26 cents
less than in US, then there is an incentive to
ship…
• Higher costs might come from: more expensive labor,
costs of adhering to environmental laws, etc.
Containerized Shipping
• Containerized shipping has indirect
consequences for the environment…
– Some examples:
– Companies can dump garbage in other countries
• Anything that is costly to dispose of in the US
• Hazardous waste; Old computers
– Mass shipping leads to spread of “invasive” nonnative species
• Examples: Asian Tiger mosquito, Zebra mussel arrived
in cargo ships.
International Financial System
• Another barrier to the global economy: Money
• Suppose I build and sell computers…
– What if someone from Europe wants to buy one?
• They only have European money: Euros
– Problems:
• 1. I don’t want Euros – they are useless to me
• 2. How much is my computer worth in Euros money?
– Even if I would accept the money, I don’t know the value…
International Financial System
• In order to conduct trade, there must be an
international system to handle currencies
• Example: The Gold Standard
– For every dollar the government prints, they hold a
corresponding amount of gold in the bank
• Value of all currencies = tied to a common “standard”
• Example: US$1 = 1/35 ounce of gold
• Other currencies might have a different value:
Example: Euro = 1/20 ounce.
The Gold Standard
• The gold standard is one solution to trade in a
world of multiple currencies
• To sell a computer to someone in Europe, I
can directly convert price
• US$ 1,000 computer = 35 ounces of gold = 700 Euros
• European gives 700 Euros to his bank… converts to
gold
• Gold is given to US central bank; US$ 1,000 given to
me
• Result: International trade is possible!
The Gold Standard
• Issue: If trade is one sided, gold drains from
one country to another
• A “trade imbalance”, or a “current accounts deficit”
• Consequence
– European banks have less gold, issue fewer
Euros
• Money supply shrinks
– European economy slows down, imports reduce…
• Result: System prevents asymmetric trade; system
stays in equilibrium.
The Gold Standard
• The gold standard fell apart in the depression
• Governments wanted to boost their economies…
• Question: What are some ways the government can
boost their economy?
– Governments increased spending (e.g., hired
people to build roads) to increase consumption
• This required printing more money… even though gold
supply didn’t expand
• Currencies were no longer tied to gold…
• Trade became difficult.
Bretton Woods
• Plan B: The Bretton Woods agreement
helped to re-establish an international
financial system
• New plan: U.S. Dollars would serve as the
currency for international transactions
• US dollars would have a fixed value vs. gold
• Other currencies would have a fixed exchange rate
versus the dollar
• Everybody was happy again… for a while…
Bretton Woods
• The Bretton Woods system also fell apart
• Basic Problem: The fixed exchange rates
works only if trade and capital flows are small
• … compared to the size of the US economy
• Eventually, when global trade flows harmed the US
economy, the US changed the system…
– The process is described by Herman Schwartz:
“International Money, Capital Flows, and Domestic Politics.”
Floating Exchange Rates
• Plan C: The system of floating exchange
rates
• Value of currencies is determined by market
• Like the price of commodities: oil, wheat, etc.
• Selling a computer to someone in Europe:
– European goes to the currency market (bank)
to buy US dollars – to pay me for the computer
• Current exchange rate: .70
– European pays .70 Euros to get each US$
• Therefore, a US$ 1,000 computer costs 700 Euros…
Currency Value Examples
Country
Currency
Number per US$
Europe
Canada
China
India
Japan
Mexico
South Korea
Thailand
Euro
Dollar
Yuan/RMB
Rupee
Yen
Peso
Won
Baht
0.70
1.02
6.83
45.70
90.97
12.72
1123.06
32.87
United Kingdom
Pound
.613
As of Jan 15, 2010
Trade & Exchange Rates
• Currency values affect trade:
• Example: Suppose the Euro becomes more
valuable relative to the dollar:
• Value of dollar drops from .70 Euros to .10 Euros
– Euro worth 1.44 US$, goes up to 10 US$
• How much would a US$ 1,000 computer cost to a
European?
• Answer: Only 100 Euros!
• When a currency goes up relative to
others, it is cheap to import
• If currency value drops, imports become expensive.
Trade & Exchange Rates
• Who benefits if Euro goes up relative to the
US$?
• 1. European consumers – they can buy American
products cheaply
• 2. American exporters – they can sell lots more to
Europe
• Who Loses?
• 1. American consumers – European imports costs
more
• 2. European companies – can’t compete with cheap
US imports
Floating Exchange Rates
• Why do currency values “float” (change)?
• What forces affect supply and demand?
• 1. Asymmetric trade
• If a country imports more than it exports, its currency
drops
• Ex: US has a current accounts deficit with Japan
(imports more than it exports)
• To purchase Japanese goods, Americans must sell
dollars, buy Japanese Yen
– Demand drives up value of Yen relative to the dollar.
Floating Exchange Rates
• Example: The effects of asymmetric trade on
currency values
• Suppose I sell 10,000,000 computers
• Europeans will sell 7.0 billion Euros to banks in order
to purchase 1 billion US$…
– If banks (currency markets) are flooded with
Euros, supply increases, value drops…
• Currency markets don’t want more Euros
• Banks will give fewer US$ in exchange
Floating Exchange Rates
• What forces affect currency values?
• 2. Asymmetric capital flows
• If capital moves into a country, its currency goes up
– Ex: In early 1990s, global investors moved money into
Thailand, Mexico… raising the value of currency
• If capital moves out of a country, its currency goes down
– Investors feared problems in Mexico, Thailand… pulled money
out
– Thai Baht and Mexican Peso dropped in value
Floating Exchange Rates
• What causes asymmetric capital flows?
• 2. a. Interest rates
• If a country raises interest rates, its currency goes up
– Reason: Foreign investors prefer high rates
– The “electronic herd” is attracted to high rates…
• If a country cuts interest rates, its currency drops
– Investors would prefer moving money into countries where
banks pay higher interest…
– Important issue: Globalization limits the ability of
governments to control their own monetary policy
• Sometimes countries want to lower interest rates to
boost the economy…
– But can’t because it would hurt their currency
In the News: Article from 2007
• LONDON (AFP) - The dollar plunged to a record low Tuesday
against the euro, which broke through the 1.60-dollar barrier,
as the unit was hit by dismal US housing news and fresh
fears over the health of the US economy.
• Also weighing on the dollar was … the interest rate differential
between the United States and the eurozone.
• The European Central Bank's benchmark rate, 4.00 percent,
is already substantially higher than that of the US Federal
Reserve, which stands at 2.25 percent. Higher interest
rates in the eurozone makes the euro a more attractive
investment than the dollar.
• While the Fed is scrambling to galvanize economic
momentum and head of recession by lowering rates, the ECB
is focused on curbing inflation -- currently at 3.6 percent in the
eurozone -- and has shown no inclination to make credit
cheaper.
• Issue: Fed can’t lower interest rates without hurting the
dollar!
Floating Exchange Rates
• What causes asymmetric capital flows?
• 2. b. Anything else that “scares” investors
• Government instability
• Concern that an economy isn’t going to do well
– Ex: Fears that Thailand was going “bust”
• Policy changes that investors don’t like
– Ex: big increase in taxes
– Shift away from free-market policies (“golden straightjacket”)
• All of these things can cause investors to pull their
money out of a country quickly, harming currency
values.
Floating Exchange Rates
• What forces affect currency values?
• 3. Countries can intervene strategically to
alter their currency values
• Governments can sell their currency to lower its value
– They buy other currencies on global markets
• Governments can buy their own currency to raise its
value
– They spend “reserves” of gold or other currencies on global
markets
• This requires lots of money, so rich countries can do it
more.
Trade & Exchange Rates
• Recent news article:
• WASHINGTON (AP) -- America's
beleaguered manufacturing companies,
chafing over the loss of 2.7 million jobs over
the last three years, vowed Wednesday to
press ahead harder to get China to stop
manipulating its currency to gain trade
advantages. (Associated Press)
• Issue: China keeps value of currency low
• Aids exporters, at expense of US companies
Trade & Exchange Rates
• Issue: Countries can strategically alter their
currency values to gain an advantage in trade
– Asymmetric trade with China should cause
Chinese Yuan to rise relative to the US$
• The US imports much more than it exports
– But: China floods market with Yuan, buys US$
• Yuan value stays low compared to US$
• Result: Chinese exports remain cheap for Americans
• Result: American manufacturing companies = Angry!
– Note: Only big/wealthy countries can do this
• US did a similar thing in the 1970s
• Thailand tried, but ran out of money… it’s currency
suddenly plummeted.
Financial Flows & Exchange Rates
• Issue: Trade & financial flows have same
impact on currencies
• Asymmetrical flows cause currency values to change
– But remember: Investment flows are larger than
trade flows, and they can happen much faster
• Elwood: “pinball capital”
• Result: global investors can cause currency values to
change rapidly
• Called: market volatility (rapid change in value)
• If a currency value falls too low, serious
economic problems arise.
Exchange Rates & Volatility
• Capital flows and resulting currency
volatility can produce severe crises
• Example: Mexico in 1994
• Global investors bought lots of stock, investments in
Mexico over several years…
– This caused a slow rise in the peso. Not a problem.
• A minor political crisis led to panic selling in 1994
– The stock market began to plummet
• Global investors rushed to sell stocks, converted
pesos to dollars
• Result: Selling of pesos made the value of pesos
plummet!
Video
• Commanding Heights, Ep 3, chapter 7
• 5 minutes
Exchange Rates & Volatility
• Why was it bad for the value of pesos to drop
severely, rapidly?
– 1. Suddenly, imports were very expensive
• Price of gas shot up
• Businesses dependent on imports couldn’t afford
costs; potential for bankruptcies
– 2. Many Mexican companies had borrowed
money from US banks
• US banks must paid in $, not pesos
• If pesos are worth little, suddenly can’t afford to pay
loans
• Result: More bankruptcies, economic recession.
Exchange Rates & Volatility
• In the case of the 1994 peso crisis, the US
government stepped in
• Provided emergency loans, etc., to prevent massive
bankruptcy
• But, that was just a small crisis… It is clear that crises
could occur that are too large to stop so easily.
Asian Financial Crisis
• Commanding Heights Video:
• In the 1990s, foreign investors moved capital into Asia
• And, foreign banks lent money to Asian companies at
very low interest rates
– Consequence: Rapid economic growth
• Economies “heated up”
• But, capitalism is prone to boom-bust cycles…
• Companies built more factories and housing than
needed
– The “boom” ended
• But – global dynamics made the “bust” much worse!
Asian Financial Crisis
• How did globalization prompt a crisis for Asian
economies in the 1990s?
– 1. Investors pulled out quickly – affecting
currencies
• Asian currency valued dropped…
• Imports became expensive
• Companies could no longer pay off loans to foreign
banks
– Bankruptcies, unemployment…
Asian Financial Crisis
• How did globalization prompt a crisis for Asian
economies in the 1990s?
– 2. Contagion
• Worries about Thailand spread to other Asian countries
– Self-fulfilling prophecy: fear of problems caused investors to
pull out, creating real problems
• Also, many US companies were invested in Asia (or had
made loans)… Now they were losing money
– Lesson: Integrated economies mean that crises
tend to spread…
• Example: US financial crisis caused economic
disruption around the globe.
Capital Flows & the United States
• Krugman article: “Don’t Cry for Me America”
• Explains how investors are starting to pull out of the US
• Results won’t be as dire for us…
– Isn’t happening too quickly
– American companies have loans payable in US$ (if it were
Euros, we’d be in bigger trouble)
• But, still… a serious issue for the US econoomy.
More Video: Commanding Heights
• Topic: Asian financial crisis, spillover to other
regions…