Paul Torelli - International Economics: Understanding the Forces of Globalization for Managers

International Economics

International Economics

Understanding the Forces of
Globalization for Managers

Paul Torelli

To my teachers

International Economics: Understanding the Forces of Globalization for Managers

Copyright Business Expert Press, LLC, 2013.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any meanselectronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.

First published in 2013 by

Business Expert Press, LLC

222 East 46th Street, New York, NY 10017

www.businessexpertpress.com

ISBN-13: 978-1-60649-352-6 (paperback)

ISBN-13: 978-1-60649-353-3 (e-book)

Business Expert Press Economics and Finance collection

Collection ISSN: 2163-761X (print)

Collection ISSN: 2163-7628 (electronic)

Cover and interior design by Exeter Premedia Services Private Ltd. Chennai, India

First edition: 2013

10 9 8 7 6 5 4 3 2 1

Printed in the United States of America.

Abstract

Todays news media displays an intense fascination with the global economyand for good reason. The degree of worldwide economic integration is unprecedented, and rising globalization has lifted living standards and reduced poverty. Foreign markets and new technologies continue to present opportunities for entrepreneurs and corporations. Still, economic shocks can spread across the world in minutes, impacting billions of lives. Citizens are understandably anxious in this age of macroeconomic turbulence and overextended governments.

Modern economics offers a powerful framework for understanding globalization, international trade, and economic growth. Many managers possess years of hands-on experience dealing with business cycles and foreign competitive pressures, yet these leaders may not have a solid grounding in economic concepts that shed light on the forces of globalization. This book explains economics in everyday language, using little or no math, giving businesspersons better tools to interpret current events as well as long-term economic and political developments.

Keywords

economics, human capital, financial crisis, macroeconomics, comparative advantage, absolute advantage, emerging economy, international trade, business strategy, economic growth, economic history, international economics, political economy, economic development, industrialization, labor market, convergence, New World, mercantilism, Industrial Revolution, productivity, technology, capital control, intellectual property, research and development, productivity slowdown,AdamSmith,factorproportions model, gravity model, infant industry, import substitution, Asian Tiger, trade policy, tariff, public choice, rent seeking, trade agreement, free trade, liberalization, information and communications technology, vertical integration, supply chain, poverty trap, big push, coordination failure, industrial policy, diversification, value added, managerial capital, skill biased technological change, population growth, wage inequality, middle income trap, tradable sector, offshoring, outsourcing, foreign direct investment, skill upgrading, immigration, wage structure, regulation, competitiveness, corruption, democracy, autocracy, socialism, communism, controlled capitalism, gold standard, natural resource curse, business cycle, collective bargaining, social insurance, safety net, labor union, Washington Consensus, multinational enterprise, exchange rate, sweatshop, spillover, human rights, labor standard, property rights, Dutch disease, extractive industry, negative externality, pollution haven, greenhouse gas, global warming, climate change.

Now that world wide communications have been established thanks to the authority of the Roman Empire living standards have improved by the interchange of goods and by partnership in the joy of peace and by the general availability of things previously concealed.

Gaius Plinius Secundus (Pliny the Elder),
Natural History,77 AD

Globalization is the increasing economic interdependence of all regions of the world. Made possible through improvements in transportation and communications, globalizations driving force is the international movement of goods, people, capital, technology, culture, and ideas. Although silks and spices were traded between Asia and Europe at least as far back as Greco-Roman times, the process of intercontinental assimilation wasnt truly global until the 16th century, when the Americas became part of world trade and migration routes, uniting both hemispheres. Several centuries later, the Industrial Revolution opened up new production possibilities and wrought tremendous efficiencies, overturning the old snails pace rate of economic growth that had previously ruled the civilized world. Globalization has played a central role in facilitating growth, consumption, and higher standards of living, above all when a major hegemonsuch as the Roman or British Empire has been in place to combat piracy and provide law and order. Historians commonly think of the modern Western world beginning around 1500, and this book begins with the follow-up to that date. World trade has grown mightily since then despite wars and depressions periodically slowing its expansion. The most recent deglobalization occurred during the period from World War I to World War II, when, after a prolonged period of peace and integration, cracks in the international economic order fissured, and tribalism and warfare reemerged. Today the degree of global economic connectivity is unprecedented, even greater than the previous watershed era prior to World War I.

To some extent, globalization reflects the progress of civilization and mankind. Whereas isolation breeds stagnation, cross-cultural contact brings new influences and technologies, which then vie against the old. And tradewhether short- or long-distanceyields mutual gains, a fact that has been understood and exploited since prehistoric times. It is revealing that the ancient city-state of Athens traded abroad vigorously and boasted a rich culture, whereas Sparta, its more introverted rival on the Greek peninsula, did not. Market economies in ancient Greece and Rome exchanged goods throughout vast regions of Asia and Africa. Far larger than the territories of any Greek city-state (or even the Macedonian Empire under Alexander the Great), the Roman Empire was partially funded by trade and tribute over an immense land network of roads. Its seagoing commercial ships carried Egyptian grain, Spanish copper, Greek wine, and Asian silks. Roman traders may have reached China by sea in the 2nd century AD, and at its peak around this time, the Roman Empire stretched across all sides of the Mediterranean Sea and most of Western Europe, ruling approximately 75 million people, with at least a million living in its capital city of Rome. Roman culture assimilated Greek ideas about philosophy, politics, art, science, and architecture, and then modified or sometimes improved upon them. The exceptional Roman capacity for administrationunmatched in the West until the British Empire more than a millennium laterprovided order in an extremely violent ancient world, stimulating economic and cultural development.

Nevertheless, even the greatest and wealthiest civilizations may collapse. Toward its end, the Roman Empire had been weakening for more than a century, with ineffective governance and a disintegrating society. Rival generals vied for power and often required bribes to stave off coups. The Roman government had trouble raising funds and ultimately resorted to devaluing the currency, which caused a destructive hyperinflation. Wishing to evade the states grasping hands, urban citizens and businesses fled to the countryside, helping to pave the way for feudalism. By the 3rd century AD, the Roman military began to suffer embarrassing defeats by Germanic forcespart of a rural society the Romans considered hopelessly barbaricto the north and Persian armies to the east. The external threats worsened in the late-4th century, and in 410, Rome was famously sacked by an army of Germanic barbarians known as the Visigoths. The Empire continued to crumble in the 5th century as a number of Germanic tribes conquered Roman territories. The final act that has traditionally marked the end of the Western Roman Empire occurred in 476 when a Germanic chieftain, Flavius Odoacer, removed the last emperor, a teenager named Romulus Augustus, from power. (The Eastern Roman Empire, later known as the Byzantine Empire, survived until the 1453 conquest of Constantinople by Ottoman Turks.) For centuries afterward, during the period of conflict, disorder, and migration in Europe commonly known as the Dark Ages, Middle Eastern merchants came to dominate trade routes along the crossroads region linking the Asian and European economies. Knowledge of many key technologies disappeared, and there were relatively few cultural achievements coming out of the West.