Globalization: Economic dimension

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Economic globalization refers to the intensification and stretching of economic interrelations across the globe. Gigantic flows of capital and technology have stimulated trade in goods and services. Markets have extended their reach around the world, in the process creating new linkages among national economies. Huge transnational corporations, powerful international economic institutions, and large regional trading systems have emerged as the major building blocks of the 21st century's global economic order.

The Emergence of the Global Economic Order

Contemporary economic globalization can be traced back to the gradual emergence of a new international economic order assembled at an economic conference held towards the end of World War II in the sleepy New England town of Bretton Woods. Under the leadership of the United States of America and Great Britain, the major economic powers of the global North reversed their protectionist policies of the interwar period (1918–39). In addition to arriving at a firm commitment to expand international trade, the participants of the conference also agreed to establish binding rules on international economic activities. Moreover, they resolved to create a more stable money exchange system in which the value of each country's currency was pegged to a fixed gold value of the US dollar. Within these prescribed limits, individual nations were free to control the permeability of their borders. This allowed states to set their own political and economic agendas.

Bretton Woods also set the institutional foundations for the establishment of three new international economic organizations. The International Monetary Fund was created to administer the international monetary system. The International Bank for Reconstruction and Development, later known as the World Bank, was initially designed to provide loans for Europe's postwar reconstruction. During the 1950s, however, its purpose was expanded to fund various industrial projects in developing countries around the world. Finally, the General Agreement on Tariffs and Trade was established in 1947 as a global trade organization charged with fashioning and enforcing multilateral trade agreements. In 1995, the World Trade Organization was founded as the successor organization to GATT.

In operation for almost three decades, the Bretton Woods regime contributed greatly to the establishment of what some observers have called the 'golden age of controlled capitalism'. Existing mechanisms of state control over international capital movements made possible full employment and the expansion of the welfare state. Rising wages and increased social services secured in the wealthy countries of the global North a temporary class compromise. By the early 1970s, however, the Bretton Woods system collapsed. Its demise strengthened those integrationist economic tendencies that later commentators would identify as the birth pangs of the new global economic order. What happened?

In response to profound political changes in the world that were undermining the economic competitiveness of US-based industries, President Richard Nixon abandoned the gold-based fixed rate system in 1971. The ensuing decade was characterized by global economic instability in the form of high inflation, low economic growth, high unemployment, public sector deficits, and two unprecedented energy crises due to OPEC's ability to control a large part of the world's oil supply. Political forces in the global North most closely identified with the model of controlled capitalism suffered a series of spectacular election defeats at the hands of conservative political parties who advocated a 'neoliberal' approach to economic and social policy.

Neoliberalism Neoliberalism is rooted in the classical liberal ideals of Adam Smith (1723–90) and David Ricardo (1772–1823), both of whom viewed the market as a self-regulating mechanism tending toward equilibrium of supply and demand, thus securing the most efficient allocation of resources. These British philosophers considered that any constraint on free competition would interfere with the natural efficiency of market mechanisms, inevitably leading to social stagnation, political corruption, and the creation of unresponsive state bureaucracies. They also advocated the elimination of tariffs on imports and other barriers to trade and capital flows between nations. British sociologist Herbert Spencer (1820– 1903) added to this doctrine a twist of social Darwinism by arguing that free market economies constitute the most civilized form of human competition in which the 'fittest' would naturally rise to the top.

Yet, in the decades following World War II, even the most conservative political parties in Europe and the United States rejected those laissez-faire ideas and instead embraced a rather extensive version of state interventionism propagated by British economist John Maynard Keynes, the architect of the Bretton Woods system. By the 1980s, however, British Prime Minister Margaret Thatcher and US President Ronald Reagan led the neoliberal revolution against Keynesianism, consciously linking the notion of globalization to the 'liberation' of economies around the world.

This new neoliberal economic order received further legitimation with the 1989–91 collapse of communism in the Soviet Union and Eastern Europe. Since then, the three most significant developments related to economic globalization have been:

1.    The internationalization of trade and finance

2.    The increasing power of transnational corporations

3.    The enhanced role of international economic institutions like the IMF, the World Bank, and the WTO.

Let us briefly examine these important features

The Internationalization of Trade and Finance

Many people associate economic globalization with the controversial issue of free trade. After all, the total value of world trade exploded from $57 billion in 1947 to an astonishing $6 trillion in the late 1990s. In the last few years, the public debate over the alleged benefits and drawbacks of free trade reached a feverish pitch as wealthy Northern countries have increased their efforts to establish a single global market through regional and international trade-liberalization agreements such NAFTA and GATT. Free trade proponents assure the public that the elimination or reduction of existing trade barriers among nations will enhance consumer choice, increase global wealth, secure peaceful international relations, and spread new technologies around the world.

To be sure, there is evidence that some national economies have increased their productivity as a result of free trade. Moreover, there are some benefits that accrue to societies through specialization, competition, and the spread of technology. But it is less clear whether the profits resulting from free trade have been distributed fairly within and among countries. Most studies show that the gap between rich and poor countries is widening at a fast pace. Hence, free trade proponents have encountered severe criticism from labour unions and environmental groups who claim that the elimination of social control mechanisms has resulted in a lowering of global labour standards, severe forms of ecological degradation, and the growing indebtedness of the global South to the North..

The internationalization of trade has gone hand in hand with the liberalization of financial transactions. Its key components include the deregulation of interest rates, the removal of credit controls, and the privatization of government-owned banks and financial institutions. Globalization of financial trading allows for increased mobility among different segments of the financial industry, with fewer restrictions and greater investment opportunities. This new financial infrastructure emerged in the 1980s with the gradual deregulation of capital and securities markets in Europe, the Americas, East Asia, Australia, and New Zealand. A decade later, Southeast Asian countries, India, and several African nations followed suit.

During the 1990s, new satellite systems and fibre-optic cables provided the nervous system of Internet-based technologies that further accelerated the liberalization of financial transactions. As captured by the snazzy title of Microsoft CEO Bill Gates' best-selling book, many people conducted business@the-speed-of-thought. Millions of individual investors utilized global electronic investment networks not only to place their orders, but also to receive valuable information about relevant economic and political developments. In 2000, 'e-businesses', 'dot.com firms', and other virtual participants in the information-based 'new economy' traded about 400 billion dollars over the Web in the United States alone. In 2003, global business-to-business transactions are projected to reach 6 trillion dollars. Ventures that will connect the stock exchanges in New York, London, Frankfurt, and Tokyo are at the advanced planning stage. Such a financial 'supermarket' in cyberspace would span the entire globe, stretching its electronic tentacles into countless decentralized investment networks that relay billions of trades at breathtaking velocities.

Yet, a large part of the money involved in these global financial exchanges has little to do with supplying capital for such productive investments as putting together machines or organizing raw materials and employees to produce saleable commodities. Most of the financial growth has occurred in the form of high-risk 'hedge funds' and other purely money-dealing currency and securities markets that trade claims to draw profits from future production. In other words, investors are betting on commodities or currency rates that do not yet exist. For example, in 2000, the equivalent of over 2 trillion US dollars was exchanged daily in global currency markets alone. Dominated by highly sensitive stock markets that drive high-risk innovation, the world's financial systems are characterized by high volatility, rampant competition, and general insecurity. Global speculators often take advantage of weak financial and banking regulations to make astronomical profits in emerging markets of developing countries. However, since these international capital flows can be reversed swiftly, they are capable of creating artificial boom-and-bust cycles that endanger the social welfare of entire regions. The 1997–8 Southeast Asia Crisis represents but one of these recent economic reversals brought on by the globalization of financial transactions.

The Southeast Asia Crisis In the 1990s, the governments of Thailand, Indonesia, Malaysia, South Korea, and the Philippines gradually abandoned control over the domestic movement of capital in order to attract foreign direct investment. Intent on creating a stable money environment, they raised domestic interest rates and linked their national currencies to the value of the US dollar. The ensuing irrational euphoria of international investors translated into soaring stock and real estate markets all over Southeast Asia. However, by 1997, those investors realized that prices had become inflated much beyond their actual value. They panicked and withdrew a total of $105 billion from these countries, forcing governments in the region to abandon the dollar peg. Unable to halt the ensuing free fall of their currencies, those governments used up their entire foreign exchange reserves. As a result, economic output fell, unemployment increased, and wages plummeted. Foreign banks and creditors reacted by declining new credit applications and refusing to extend existing loans. By late 1997, the entire region found itself in the throes of a financial crisis that threatened to push the global economy into recession. This disastrous result was only narrowly averted by a combination of international bail-out packages and the immediate sale of Southeast Asian commercial assets to foreign corporate investors at rock-bottom prices. Today, ordinary citizens in Southeast Asia are still suffering from the devastating social and political consequences of that economic meltdown.

 

The Power of Transnational Corporations

Transnational corporations are the contemporary versions of the early modern commercial enterprises. Powerful firms with subsidiaries in several countries, their numbers skyrocketed from 7,000 in 1970 to about 50,000 in 2000. Enterprises like General Motors, Walmart, Exxon-Mobil, Mitsubishi, and Siemens belong to the 200 largest TNCs, which account for over half of the world's industrial output. None of these corporations maintains headquarters outside of North America, Europe, Japan, and South Korea. This geographical concentration reflects existing asymmetrical power relations between the North and the South. Yet, clear power differentials can also be found within the global North. In 1999, 142 of the leading 200 TNCs were based in only three countries – the United States, Japan, and Germany.

Rivalling nation-states in their economic power, these corporations control much of the world's investment capital, technology, and access to international markets. In order to maintain their prominent positions in the global marketplace, TNCs frequently merge with other corporations. Some of these recent mergers include the $160-billion marriage of the world's largest Internet provider, AOL, with entertainment giant Time-Warner; the purchase of Chrysler Motors by Daimler-Benz for $43 billion; and the $115-billion merger between Sprint Corporation and MCI WorldCom. A close look at corporate sales and country GDPs reveals that 51 of the world's 100 largest economies are corporations; only 49 are countries. Hence, it is not surprising that some critics have characterized economic globalization as 'corporate globalization' or 'globalization-from-above'.

TNCs have consolidated their global operations in an increasingly deregulated global labour market. The availability of cheap labour, resources, and favourable production conditions in the global South has enhanced corporate mobility and profitability. Accounting for over 70% of world trade, TNCs have boosted their foreign direct investments by approximately 15% annually during the 1990s. Their ability to disperse manufacturing processes into many discrete phases carried out in many different locations around the world reflects the changing nature of global production. Such transnational production networks allow TNCs like Nike, General Motors, and Volkswagen to produce, distribute, and market their products on a global scale. Nike, for example, subcontracts 100% of its goods production to 75,000 workers in China, South Korea, Malaysia, Taiwan, and Thailand. Transnational production networks augment the power of global capitalism by making it easier for TNCs to bypass nationally based trade unions and other workers' organizations. Anti-sweatshop activists around the world have responded to these tactics by enlisting public participation in several successful consumer boycotts and other forms of nonviolent direct action.

Nokia's role in the Finnish economy Named after a small town in southwest Finland, Nokia Corporation rose from modest beginnings a little more than a decade ago to become a large TNC that manufactures 37 of every 100 cellphones sold worldwide. Today, its products connect one billion people in an invisible web around the globe. However, Nokia's gift to Finland – the distinction of being the most interconnected nation in the world – came at the price of economic dependency. Nokia is the engine of Finland's economy, representing two-thirds of the stock market's value and one-fifth of the nation's total export. It employs 22,000 Finns, not counting the estimated 20,000 domestic employees who work for companies that depend on Nokia contracts. The corporation produces a large part of Finland's tax revenue, and its $25 billion in annual sales almost equals the entire national budget. Yet, when Nokia's growth rate slowed in recent years, company executives let it be known that they were dissatisfied with the country's relatively steep income tax. Today, many Finnish citizens fear that decisions made by relatively few Nokia managers might pressure the government to lower corporate taxes and abandon the country's generous and egalitarian welfare system.

The Enhanced Role of International Economic Institutions

The three international economic institutions most frequently mentioned in the context of economic globalization are the IMF, the World Bank, and the WTO. These three institutions enjoy the privileged position of making and enforcing the rules of a global economy that is sustained by significant power differentials between the global North and South.

As pointed out above, the IMF and the World Bank emerged from the Bretton Woods system. During the Cold War, their important function of providing loans for developing countries became connected to the West's political objective of containing communism. Starting in the 1970s, and especially after the fall of the Soviet Union, the economic agenda of the IMF and the World Bank has synchronized neoliberal interests to integrate and deregulate markets around the world.

In return for supplying much-needed loans to developing countries, the IMF and the World Bank demand from their creditor nations the implementation of so-called 'structural adjustment programmes'. Unleashed on developing countries in the 1990s, this set of neoliberal policies is often referred to as the 'Washington Consensus'. It was devised and codified by John Williamson, who was an IMF adviser in the 1970s. The various sections of the programme were mainly directed at countries with large foreign debts remaining from the 1970s and 1980s. The official purpose of the document was to reform the internal economic mechanisms of debtor countries in the developing world so that they would be in a better position to repay the debts they had incurred. In practice, however, the terms of the programme spelled out a new form of colonialism. The ten points of the Washington Consensus, as defined by Williamson, required governments to implement the following structural adjustments in order to qualify for loans:

1.    A guarantee of fiscal discipline, and a curb to budget deficits;

2.    A reduction of public expenditure, particularly in the military and public administration;

3.    Tax reform, aiming at the creation of a system with a broad base and with effective enforcement;

4.    Financial liberalization, with interest rates determined by the market;

5.    Competitive exchange rates, to assist export-led growth;

6.    Trade liberalization, coupled with the abolition of import licensing and a reduction of tariffs;

7.    Promotion of foreign direct investment;

8.    Privatization of state enterprises, leading to efficient management and improved performance;

9.    Deregulation of the economy;

10. Protection of property rights.

It is no coincidence that this programme is called the 'Washington Consensus', for, from the outset, the United States has been the dominant power in the IMF and the World Bank. Unfortunately, however, large portions of the 'development loans' granted by these institutions have either been pocketed by authoritarian political leaders or have enriched local businesses and the Northern corporations they usually serve. Sometimes, exorbitant sums are spent on ill-considered construction projects. Most importantly, however, structural adjustment programmes rarely produce the desired result of 'developing' debtor societies, because mandated cuts in public spending translate into fewer social programmes, reduced educational opportunities, more environmental pollution, and greater poverty for the vast majority of people. Typically, the largest share of the national budget is spent on servicing outstanding debts. For example, in 1997, developing countries paid a combined $292 billion in debt service, while receiving only $269 billion in new loans. This means that the net transfer of wealth from the global South to the North was $23 billion. Pressured by antiglobalist forces, the IMF and the World Bank were only recently willing to consider a new policy of blanket debt forgiveness in special cases.

Neoliberal economics and Argentina Less than a decade ago, IMF and World Bank officials held up Argentina as a 'model developing country'. Having accepted substantial structural adjustment programmes that led to the privatization of state enterprises, the reduction of tariffs, and the elimination of many social programmes, the Argentine government celebrated low unemployment rates, a stable currency pegged to the dollar, and strong foreign investment. For a few short years, neoliberal economics seemed vindicated. However, as the IMF demanded even stronger austerity measures in return for new loans, the Argentine economy went sour. In June 2000, the country was paralysed by mass strikes against the government's new austerity package designed to meet IMF deficit guidelines and thus retain access to the Fund's $7.2 billion emergency line of credit. In January 2002, after months of violent street protests in major cities, Argentina formally defaulted on its massive public debt of $141 billion. In order to prevent the complete financial and social collapse of his nation, Eduardo Duhalde, the country's fifth president in only two weeks, further limited people's access to their savings deposits and decoupled the peso from the dollar. Within hours, the currency lost a third of its value, robbing ordinary people of the fruits of their labour. 'Argentina is broke, sunk,' the President admitted, 'and this [neoliberal] model has swept everything away with it.'

Economic perspectives on globalization can hardly be discussed apart from an analysis of political process and institutions. After all, the intensification of global economic interconnections does not simply fall from the sky; rather, it is set into motion by a series of political decisions. Hence, while acknowledging the importance of economics in our story of globalization, this article nonetheless ends with the suggestion that we ought to be sceptical of one-sided accounts that identify expanding economic activity as both the primary aspect of globalization and the engine behind its rapid development. The multidimensional nature of globalization demands that we flesh out in more detail the interaction between its political and economic aspects.