1. Discussion questions (DQ): Define G and its drivers and impacts. Is G reversible?

Discuss plausible scenarios.

Globalization is the process of increasing economic interdependence and
interconnectedness among nation states and sub-units that are willing and able to
participate in the global division of labor.
Globalization means a fragmentation of production processes across multiple
jurisdictions. Outsourcing to take advantage of national differences in the cost &
quality of factors of production means that more & more goods are global
products (example: Shoe industry and electronic industry put their factories in
developing countries such as China, India and Vietnam to leverage the low cost of
labor and incentives). G can also refer to non-economic aspects such as
multilingualism, cross-culture, music (traditional music and culture can be lost),
religion
Factors that have contributed to globalization include increasingly sophisticated
communications and transportation technologies, internet, services, mass
migration and the movement of people, a level of economic activity that has
outgrown national markets through industrial combinations and commercial
groupings that cross national frontiers, and international agreements that reduce
the cost of doing business in foreign countries. Globalization offers huge potential
profits to companies and nations but has been complicated by widely differing
expectations, standards of living, cultures and values, and legal systems as well as
unexpected global cause-and-effect linkages.
The advantages and disadvantages of globalization have been heavily scrutinized
and debated in recent years. Proponents of globalization say that it helps
developing nations "catch up" to industrialized nations much faster through
increased employment and technological advances. Critics of globalization say
that it weakens national sovereignty and allows rich nations to ship domestic jobs
overseas where labor is much cheaper.
Lower labor cost, increase sales, profits and revenues.
Dimensions of Globalization: Culture, Environment, Society, Economy and
Politics.
Globalizations drivers:
o Technology (Internet): The Internet has dramatically lowered the cost of
transmitting and communicating information
o Transport costs and speed of transport: Costs of ocean shipping have come
down, due to containers, bulk shipping, and other efficiencies.
o End of Cold War
o Global problems
o liberalization
Benefits:
o Consumers: cheaper prices. Globalization has brought in fierce
competition in the markets. Since there are varied products to select from,
the producer can sustain only when the product is competitively priced.
There is every possibility that a customer may switch over to another
producer if the product is priced exorbitantly. 'Customer is the King', and
hence can dictate the terms to a very large extent. Therefore, affordable
pricing has benefited the consumer in a great way.
o Businesses: get much wider opportunities for investment, increase sales,
profits and revenues.
o Labor: the generation of numerous employment opportunities. Companies
are moving towards the developing countries to acquire labor force. Also,
the migration of people, which has become easier has led to better jobs
opportunities. Education
o Government: greater interdependence of nation-states, reduce the
likelihood of war between nations. The creation of a world government
which regulates the relationships among governments and guarantees the
rights arising from social and economic globalization.
o International
Problems:
o Diminishing the role of nation state: Conventionally, people of a particular
country follow its culture and traditions from time immemorial. With large
number of people moving into and out of a country, the culture takes a
backseat. People may adapt to the culture of the resident country. They
tend to follow the foreign culture more, forgetting their own roots. This
can give rise to cultural conflicts.
o Social dumping: is a practice involving the export of goods & services
from a country with weak or poorly enforced labor and/or environmental
standards, where the exporters costs are artificially lower than its
competitors in countries with higher standards. Hence, it represents an
unfair advantage in international trade. Social dumping is the use of labor
with wages and benefits that do not meet the set standard in a country for
the purpose of cutting costs of production. Companies may rely on foreign
labor or specially negotiated deals to find employees amenable to
substandard conditions. Their use of cheap labor allows them to increase
profits, as they can sell goods at standard prices even though they cost
less. A few days later, the Swedish Pilots Association (SPF) learned that
all Skyways Express pilots had been fired and that the company "offered"
some of them to be hired back though through a crew leasing company.
With the new status of "contract pilot" the ex-Skyways pilots will lose
their collective work contract and they will have to pay their own social
security, medical insurance, tax, etc. Their contracts are short-term (6
months) and the working relationship can be terminated unilaterally by the
company with one month's notice...
o Gulf between rich and poor, Income and wealth distribution: Globalization
generates winners and losers; and for this reason it is likely to
increase inequality, as richer nations benefit more than poorer ones. The
potential loss of jobs in domestic markets caused by increased, and in
some cases, unfair, free trade. It is said that the rich are getting richer
while the poor are getting poorer. In the real sense, globalization has not
been able to reduce poverty. Instead it has led to the accumulation of
wealth and power in the hands of a few developed economies. Therefore
the gap between the elite and the underprivileged seems to be a never
ending road, eventually leading to inequality.
o Non-controllable multis
o Environmental destruction: polluting corporations take advantage of weak
regulatory in developing countries. Increased trade associated with
globalization has increased pollution and helped contribute to
CO2 emissions and global warming. Trade growth has also accelerated the
depletion of non-renewable resources, such as oil. The industrial
revolution has changed the outlook of the economy. Industries are using
natural resources by means of mining, drilling, etc. which puts a burden on
the environment. Natural resources are depleting and are on the verge of
becoming extinct. Deforestation is practiced owing to the non-availability
of land, thereby drastically reducing the forest cover. This in turn creates
an imbalance in the environment leading to climate change and occurrence
of natural calamities.
o Greater risk of diseases being transported unintentionally between nations.
o As countries are increasingly dependent on each other, a negative
economic shock in one country can quickly spread to other countries.
Most recently, the collapse of the US sub-prime housing market triggered
a global crisis in the banking system as banks around the world suffered a
fall in the value of their assets and reduced their lending to each other.
This created a liquidity crisis and helped fuel a severe downturn in the
global economy.
o Economic depression in one country can trigger adverse reaction across
the globe.
o Opening the doors of international trade has given birth to intense
competition. This has affected the local markets dramatically. In recent
times the standard of living has improved. People are therefore ready to
shell out extra money for a product that may be available at a lower price.
This is because of the modern marketing techniques like advertising and
branding. The local players thereby suffer huge losses as they lack the
potential to advertise or export their products on a large scale. Therefore
the domestic markets shrink.


Future of Globalization


o Factor-driven:
Institutions: The institutional environment is determined by the legal and administrative
framework within which individuals, firms, and governments interact to generate wealth. The
importance of a sound and fair institutional environment has become all the more apparent during
the recent economic and financial crisis and is especially crucial for further solidifying the fragile
recovery, given the increasing role played by the state at the international level and for the
economies of many countries. The quality of institutions has a strong bearing on competitiveness
and growth. It influences investment decisions and the organization of production and plays a key
role in the ways in which societies distribute the benefits and bear the costs of development
strategies and policies. For example, owners of land, corporate shares, or intellectual property are
unwilling to invest in the improvement and upkeep of their property if their rights as owners are not
protected. The role of institutions goes beyond the legal framework. Government attitudes toward
markets and freedoms and the efficiency of its operations are also very important: excessive
bureaucracy and red tape, overregulation, corruption, dishonesty in dealing with public contracts,
lack of transparency and trustworthiness, inability to provide appropriate services for the business
sector, and political dependence of the judicial system impose significant economic costs to
businesses and slow the process of economic development. In addition, the proper management of
public finances is critical for ensuring trust in the national business environment. Indicators
capturing the quality of government management of public finances are therefore included here to
complement the measures of macroeconomic stability captured in pillar 3. Although the economic
literature has focused mainly on public institutions, private institutions are also an important
element in the process of creating wealth. The global financial crisis, along with numerous
corporate scandals, has highlighted the relevance of accounting and reporting standards and
transparency for preventing fraud and mismanagement, ensuring good governance, and maintaining
investor and consumer confidence. An economy is well served by businesses that are run honestly,
where managers abide by strong ethical practices in their dealings with the government, other
firms, and the public at large.7 Private-sector transparency is indispensable to business; it can be
brought about through the use of standards as well as auditing and accounting practices that ensure
access to information in a timely manner.
Infrastructure
Macroeconomic environment
Health and primary education
o Efficiency-driven:
Higher education and training
Goods market efficiency
Labor market efficiency
Financial Market development
Technological readiness
Market size.
o Innovation-driven:
Business sophistication
Innovation
2. How is GDP calculated? How accurate are the estimates? How well do per capita GDP
comparisons indicate citizen welfare?
GDP is a measurement of all the goods and services a nation produces in a year. It is used
to compare the economic output of countries.
Expenditure approach: C + I + G (X-M)
C: Consumer spending on goods and services.
I: Investment by business to acquire goods and services
G: Government spending on goods and services
X: Total value of Export
M: Total value of Import.

GDP per capita only measures income; welfare measures income, leisure, life expectancy
and degree of inequality.

3. What are the "crises" the authors of the two short assignments describe? Discuss the
interdependence among the crises
4. Session 8 - Key points of the 2012 BBC video about aspects of the EZ crises from Greek
and German points of view
5. Session 10 - What factors explain Argentina's relative economic decline?
6. Session 11 - Prepare good comments and Qs on the TREs; brief comments of facts (not
just opinions) on the embargo and sanctions; comment on the Africa reading
7. Session 12 - Your views on whether the West is facing "secular stagnation"
a. Secular Stagnation
A condition of negligible or no economic growth in a market-based
economy. When per capita income stays at relatively high levels, the
percentage of savings is likely to start exceeding the percentage of longer-
term investments in, for example, infrastructure and education, that are
necessary to sustain future economic growth. The absence of such
investments (and consequently of the economic growth) leads to declining
levels of per capita income (and consequently of per capita savings). With
the reduced percentage savings rate converging with the reduced
investment rate, economic growth comes to a standstill ie, it stagnates.
In a free economy, consumers anticipating secular stagnation, might
transfer their savings to more attractive-looking foreign countries. This
would lead to a devaluation of their domestic currency, which would
potentially boost their exports, assuming that the country did have goods
or services that could be exported. Persistent low growth, especially in
Europe, has been attributed by some to secular stagnation initiated by
stronger European economies, such as Germany, in the past few years.
The reason for the secular stagnation is excess savings. For many years,
the world has saved more than it has invested, leading to ever lower
interest rates, which still fail to establish a new equilibrium between
savings and investment
Causes:
1. Demography
2. Exploding social welfare costs: free education, medical care,
longer vacation, less working hours
3. Growing income and wealth inequality
4. High level of debt
5. Lagging education
6. Resource and Environment constrains
7. Globalization
Responses:
1. Raise inflation
2. Expansionary fiscal policy
3. Introduce negative interest rates, to make investment attractive and
saving money less attractive
4. Give incentives to corporations to invest and use the money to
embark on credit-financed public spending on infrastructure and
other investments
b. Great Recession:
Causes:
o Housing bubble
o Household debt
o Subprime mortgage loans, low interest rate : made home
ownership more attractive and attainable for millions of Americans
o consumer debts reaching unsustainable levels
Consequences:
o The higher the rate of inflation
o GDP declined
o Companies cut their costs as well and they chuck out workers
which brings unemployment. Persistent high unemployment.
o Low consumer confidence.
8. Session 13 - Your country's debt situation and debt-sustainability
a. Public Debt (PD): the total debt of a countrys governments (including states and
local governments) owned to residents and foreigners.
b. Private Debt
c. Sovereign Debt (SD): Bonds issued by a government (include states and local
governments) in foreign currency.
d. The big difference between government debt and sovereign debt is that
government debt is issued in the domestic currency, while sovereign debt is
issued in a foreign currency.
e. External Debt: Sovereign debt + the foreign debt of the private sector
f. Internal Debt: the debt of countrys government owned to local people.
g. The Paris Club: is an informal group of financial officials from 20 of some of the
world's biggest economies, which provides financial services such as debt
restructuring, debt relief, and debt cancellation to indebted countries and their
creditors.
h. The London Club: The London Club is an informal group of private creditors on
the international stage, and is similar to the Paris Club of public lenders. The
London Club is not the only informal group of private creditors.
i. Country bailout: The financial rescue of a struggling borrower
j. Gross Domestic Product
k. Gross Debt: all debt concepts discussed so far are always gross.
l. Net Debt: difference between gross debt & the financial assets that the
Government & the Central Bank hold.
m. Debt sustainability: the ability to cap debt-to-GDP ratios at the current levels or, if
too high, to bring the ratios down to managerial levels.
n. MP is the CBs management of liquidity and the steering of rs
o. Credit Default Swap: is the annual cost of insurance against the issuer of a bond
defaulting in full or in part.
9. Session 14 - How do low interest rates impact you and your firm?
a. The Cost of Borrowing: When interest rates rise, banks charge more for business
loans. This means businesses must use more of their earnings to pay interest on
their loans. That decreases profits. Some business owners may decide not to start
new projects or expansions during periods of high interest rates. This hampers the
growth of the company. When interest remains low, businesses may borrow more
readily. Low-interest loans can fund business growth and increase profitability
because businesses can earn enough off of new ventures to pay for the loan
interest and have money left over for profits.
b. Customer Ability to Pay: Customers have to pay interest on their personal loans,
home loans and car loans. The higher the interest, the less money in customers'
pockets. This can reduce their ability to buy products and services, so businesses
may suffer from a decrease in sales. When interest rates remain low, customers
have more cash after they pay their loan payments, and they can spend this cash
with businesses. This principle applies whether your customers are the public or
other businesses. Both have to pay interest on their loans, so the lower the
interest, the more they can buy
c. Boosting the Business Investment: Businesses can invest their excess cash in
interest-bearing accounts to make more money. During periods of high interest
rates, businesses earn more from these investments. When rates are low,
businesses may be more likely to use their cash for new equipment and plant
improvements. While this can be good for equipment sellers and construction
firms, banks lose out. Banks make their money from providing loans. When they
don't get business investments to boost their assets, they can't make as much
money because they have less to loan out.
d. Too low, too long: The interest rates banks charge are their income after
expenses. When banks don't see an opportunity to make a reasonably-high interest
rate on their money, they become less likely to take risks on loans. Businesses
therefore can't borrow money for start-up and expansion expenses. Business can
slow down to a crawl because there's no way to fund innovation. In addition,
short-term loans to cover cash-flow problems can be hard to come by. This could
cause businesses to be unable to deliver goods and services to their customers
because they don't have the cash to continue operating.
The interest rate will stay low for years:
The economic remains weak: Great Recession "scarred households and
businesses," which is likely to dampen their spending and investment for a long
time.
Our future potential is declining: Lower economic potential implies interest
rates will have to remain low, even after the economy starts revving up again.
Bank regulation: Following the massive crash in 2008. Traditionally, banks
make their money by taking in your deposits and paying you a certain interest
rate, but then lending that money out to someone else at a higher rate. If banks are
forced to hold more cash on the sidelines, they may become less profitable and
may slow their lending

10. Session 15 - Making use of readings assigned for this session, fill in the blank bullet
points on the lecture slides:
a. The key points of Shifting World Economy

The European Union is heading toward the type of long-lasting stagnation
from which Japan is desperate to escape.
The euros design which was modeled on the Deutsche Mark has a fatal
flaw. Creating a common central bank without a common treasury means that
government debts are denominated in a currency that no single member
country controls, making them subject to the risk of default.
Future crises will be political in origin
In contrast to Europe, the United States is emerging as the developed worlds
strongest economy
The major uncertainty facing the world today is not the euro but the future
direction of China.
The absence of proper global governance. The lack of agreement among
the United Nations Security Councils five permanent members. In
contrast to the Chinese conundrum, which will come to a head in the next
few years, the absence of global governance may continue indefinitely
b. Global Economy in 2030
Distribution of global power: A much bigger group of countries now
dominates global economic debate.
Resources scarcity and competition: The competition for natural resources will
become more intense.
The future of financial markets: Global markets are expected to grow but in
markedly different ways, depending on regions, resources and partnerships
The corporate ecosystem: Specialization continues as businesses look for cost
and scale advantages by placing elements of their value chains in optimal
locations.
Governance and government: The future role of governments is defined by an
emphasis on either the facilitation of private enterprise or policing the system.
Five foundation for sustainable growth:
Stability as the foundation: First comes political and economic stability.
Stability is essential to allow both entrepreneurs and businesses to take advantage
of markets and resources, and to develop a strong educational infrastructure.
Tapping into a domestic market: Those with a large domestic market have an
obvious advantage. Access to a large domestic market fuels growth. This does not
have to be the countrys own; countries can take advantage of those close to their
borders.
Access to natural resources: There continue to be clear benefits of being able to
use and sell commodities, as long as countries have the infrastructure and political
will.
Education as growth enabler: There are parts of the world that really value
education. Where people work very, very hard to seize the kinds of opportunities
that education can deliver... and in these parts of the world we could see
something pretty impressive. The panel highlighted the benefits of a well-
educated population as a strong enabler of growth. And to cultivate their global
perspective, higher education institutions need to become universities of the
world. Currently, the highest-ranked universities are in the West. Some panelists
assert that unless the West adapts its institutions to become true universities of the
world, the globalists of the next generation will come from the emerging
economies.
Enterprise:
Gorbachev introduced a wide ranging program of reform. His major reforms were glasnost
(openness), perestroika (restructuring) and demokratizatsiya (democratization)