1 ECONOMÍA MUNDIAL 2. GLOBALIZATION

2 OUTLINE What is globalization? Forces behind globalization Is globalization new, irreversible and complete? The costs and benefits of globalization. Challenges and opportunities

3 WHAT IS GLOBALIZATION? Semantic problem: globalization is a term with multiple meanings… … because we are referring to a multifaceted phenomenon GLOBALIZATION: is a historical process of increasing integration of countries around the world, particularly through economic flows across borders. It also includes the movement of people, knowledge and culture across international borders.

4 FORCES BEHIND GLOBALIZATION Two main forces Innovation and technological progress Financial and trade liberalization Both forces work together to cut transaction costs associated with international flows

5 TECHNOLOGICAL REVOLUTION We are in the midst of an all-purpose technological revolution based on ICT technology (computers, software, internet, telecommunications) Similar to previous technological revolutions (railroad, automobile, electricity,…) A main difference: rapid rate of diffusion at a global level

6 TECHNOLOGICAL REVOLUTION: ICT DIFFUSION Source: UNCTAD 2008

7 TECHNOLOGICAL REVOLUTION: LEAPFROG EFFECT Source: UNCTAD 2008

8 LIBERALIZATION After World War II Bretton Woods institutions (IMF, WB, GATT) Achieving peace through global prosperity Trade and financial liberalization Political and civil liberties have simultaneously expanded with economic liberalization

9 TRADE LIBERALIZATION In 1947 the average tariff on manufactures in the industrial countries was over 40 percent. By 2000, they had been lowered to less than 5 percent

10 TRADE LIBERALIZATION Average Tariff Reduction ( ) TARIFF 1980TARIFF 2000

11 FINANCIAL LIBERALIZATION Source: Chinn and Ito (2007)

12 EXPANSION OF POLITICAL FREEDOM AND CIVIL LIBERTIES Source: Freedom House Percentage of free (libres), partially free and non free countries (1973 and 2009) Worldwide expansion of liberal democracy

13 TRANSACTION COSTS REDUCTION Liberalization, economic and political freedom, and technological innovation lead to international integration through a reduction of transaction costs Distances shrink. “The world is flat”

14 TRANSACTION COSTS REDUCTION Transportation costs reduction: sea-freights and air-freights Communication costs reduction: phone calls and satellite use

15 MISUNDERSTANDINGS ABOUT GLOBALIZATION Globalization is new Globalization is irreversible Globalization is complete

16 FIRST WAVE OF GLOBALIZATION ( ) Factors fuelling integration Pax Britannica Monetary stability (gold standard) Developments in transport and communications Labor shortages and surpluses (migration) Productivity and economic growth

17 FIRST WAVE OF GLOBALIZATION AND TRANSPORTATION COSTS Intercontinental trade integration Change in price differentials Due to Lower transportation costs Lower tariffs and trade barriers Disintegration of the world economy

18 FIRST GLOBALIZATION: MODEST REDUCTION OF TARIFFS Fuente: FMI (1997)

19 FIRST GLOBALIZATION: DEEP FINANCIAL INTEGRATION Financial and trade integration Exports/GDP Foreign assets/GDP Exports/GDPForeign assets/GDP

20 FIRST GLOBALIZATION: MIGRATIONS : 60 million people migrate from Europe to America (50% to USA) : around 50 million people move from China and India. Labor flows (workers migrations) explain 60% of the reduction in wage differentials between Europe and America

21 DISINTEGRATING FORCES Several forces work against globalization Political conflicts (World Wars) and ideology (North Korea) Economic crises (Great Depression) Xenophobia Discontent over the process and results of globalization

22 AN INCOMPLETE PROCESS: TRADE Fuente: FMI

23 AN INCOMPLETE PROCESS: FINANCIAL INTEGRATION Fuente: FMI

24 AN INCOMPLETE PROCESS Home bias in trade Feldstein-Horioka puzzle The purchasing power and exchange rate disconnect Effects of exchange rates Equity home bias puzzle Limitations on international migrations Prevalence of non tradable goods and services

25 IS GLOBALIZATION GOOD? Is globalization impoverishing poor countries? Does globalization widen income disparities? Is it shrinking states ? Is there any relationship between globalization and environmental problems? Globalization of health risks Globalization of crime