The Contemporary
World
Lesson 2
Structures of Globalization
• [Link] structures – trade, financial system,
MNC’s
•2. Political structures – organizations, regulatory
frameworks, governance network
•3. Cultural structures – media and
communication, migration and diaspora, cultural
institutions
•4. Technological structures – internet and digital
infrastructure, transportation, research and
development networks
The Global Economy
•In today’s world, no nation exists
in economic isolation. All aspects
of a nation’s economy—its
industries, service sectors, levels
of income and employment, and
living standard—are linked to the
economies of its trading partners.
The Global Economy
•What is included in the “global
economy”? Those who organize
and sustain it such as states
and governments, international
organizations, and associations;
those who play a role in it like
capitalists and investors,
The Global Economy
•international financial institutions
(IFIs), production managers,
consumers and labor; those marginal
but connected to it. For instance, the
global poor, small farmers, grey and
black marketers; and trans-border
flows of goods, information, money,
people and other things.
International Trade
•Globalization has led to a
phenomenal increase in world trade.
One measure is to consider exports
as a proportion of world GDP.
The pattern of
world trade has
also been
greatly affected
by the entry of
China as a major
manufacturer.
The basis of free trade law: the law of comparative advantage
•The law states that, even if one
country has an absolute advantage in
the production of all goods, it can still
benefit from specialization and trade if
it specializes in the production of
goods in which it has a comparative
advantage.
•However, widespread acceptance of the
law of comparative advantage amount
economists and the benefits of free trade,
various criticisms can be made:
Free trade is not fair trade
The law of comparative advantage is based on
unrealistic assumptions such as constant costs of
production, zero transport costs, and no barriers to
trade.
•
Limits of free trade: the case for
protectionism
•The term protectionism
refers to measures
designed to limit free
trade
Arguments supporting the need for
protectionism might include the following:
•To protect infant industries
•To protect geriatric industries
•To ensure employment protection
•To prevent dumping
•Tocorrect a balance of payments
deficit on current account
Arguments supporting the need for
protectionism might include the following:
•To restrict imports from countries
whose health and safety regulations
and environmental regulations are less
stringent
•For strategic reasons
•To raise tax revenues
•In retaliation
Types of protection/import
barriers
•tariffs
•quotas
•subsidies to domestic
producers and
•administrative regulations.
Quotas
• Import quotas place a physical
restriction on the amount of goods that
can be imported. They have a similar
effect as tariffs, in that the price of
imported goods will rise and domestic
producers should gain more business
Subsidies to domestic producers
• Grants given to domestic producers
artificially lower their production costs,
so enabling their goods to become more
competitive. Subsidies therefore act as a
barrier to trade.
Administrative regulations
• These take a variety of forms, including
labelling, health and safety regulations,
environmental standards, and documentation
on country of origin. In effect, such regulations
increase the costs of foreign producers and so
act as a barrier to trade.
The case against protectionism
There are several problems with protectionism including:
*Inefficient resource allocation: trade barriers distort
comparative advantage and reduce specialization, which
will result in lower world output and therefore reduce
living standards
*Higher prices and less choice for consumers
The case against protectionism
There are several problems with protectionism including:
Less incentive for domestic producers to become more
efficient in order to compete on a global scale.
Difficulty of removing trade barriers. Once such barriers
are introduced, it might prove to be difficult to remove
them because of the adverse effect on domestic
producers (Brewer 2012)
MARKET
INTEGRATION
•Markets are said to be integrated if they are
connected by a process of arbitrage. A well
integrated market system is central to a well
functioning market economy. The economic
proposition of integration is that an element of
efficiency is attainable in the unified operation
than in independent actions. According to
McDonald (1953), “the integrated economy is
one in which various economic processes are
so functionally related to every other process
that the totality of separate operation forms a
single unit of production with characteristics
of its own.
Types of Market Integration
•1. Backward vertical integration. This
involves acquiring a business operating
earlier in the supply chain – e.g., a retailer
buys a wholesaler, a brewer buys a hop
farm.
•2. Conglomerate integration. This involves
the combination of firms that are involved
in unrelated business activities.
Types of Market Integration
•3. Forward vertical integration. This involves
acquiring a business further up in the supply
chain – e.g., a vehicle manufacturer buys a
car parts distributor.
• 4. Horizontal integration. Here, businesses in
the same industry and which operate at the
same stage of the production process are
combined. (Riley 2018)
Pros and Cons of Each Type of
Market Integration
• See page 8 of your module 2
Global Corporations
•Aglobal company is generally referred
to as a multinational corporation
(MNC). An MNC is a company that
operates in two or more countries,
leveraging the global environment to
approach varying markets in attaining
revenue generation.
Transnational company
•is an enterprise that is
involved with the international
production of goods or
services, foreign investment, or
income and asset management
in more than one country.
INTERSTATE
SYSTEM
What is interstate system?
•The theory that holds that all states are
defined through their relationship to
other states or through participation in
the world economy, and that divisions
between states help to divide the world
into core, periphery, and semi periphery
•The modern world-system is structured politically
as an interstate system – a system of competing
and allying states. Political Scientists commonly
call this the international system, and it is the
main focus of the field of International Relations.
Some of these states are much more powerful
than others, but the main organizational feature
of the world political system is that it is
multicentric. There is, as yet no world state.
Rather there is a system of states. This is a
fundamentally important feature of the modern
system and of earlier regional world systems as
well.
GLOBAL
GOVERNANCE
•The World Health Organization defines
global governance as “…the way in which
global affairs are managed. As there is no
global government, global governance
typically involves a range of actors including
states, as well as regional and international
organizations. However, a single
organization may nominally be given the
lead role on an issue, for example the World
Trade Organization in world trade affairs.