9.4: Economics in the Global Age

• Globalization often refers to the integration of the global economy since the 1970s

• At the end of the Cold War, global trade exploded

• We see rise in knowledge based economies thanks to revolutions in information and communications technology

• We also see industrial production and manufacturing being increasingly shifted to Asia and Latin America

Acceleration of Free-Market Economies

• Free markets = are economic systems based on supply and demand, with as little government control as possible

• After the collapse of the USSR, the Eastern bloc countries and non aligned countries like India started to relax restrictions on trade and adopt free market principles
• This opening up of a country’s economy is called economic liberalization

• Corporations took advantage of globalization by moving jobs to countries with lower wages, lower taxes, and fewer regulations
• Due to this, some people say globalization led to labor exploitation and environmental damage

Economic Liberalization in Chile

• In 1976, US-backed dictator Augusto Pinochet takes control of Chile, overthrowing the socialist leader at the time

• Even though he was a brutal authoritarian dictator, under his rule, Chile’s economy took a turn away from state control toward a free-market approach
• Goals included privatizing formerly state-run businesses and resolving the serious inflation

• Economists known as Chicago Boys (because they studied at UChicago) helped design Chile’s economic reforms

• These economic reforms were very unpopular because they didn’t address problems like poverty and Pinochet used repression to enact these policies

• Later leaders would use these economic reforms as a foundation later on

Chinese Economic Reforms

• In 1981, China under Deng Xiaoping enacted some policies to open the Chinese economy

• Reforms under Deng Xiaoping included:
• Replaced the communes of collectivization plots of land leased to peasants, who could grow the crops and sell some of them on the market
• Led to agricultural surpluses instead of the famines under Mao
• Allowed private ownership of some businesses

• Although economic reforms were successful, they had the “downside” in making people clamor for reforms in areas besides the economy

Tienanmen Square

• Some Chinese people, after getting taste of economic freedom, started clamoring for other freedoms like freedom of speech and press

• These feelings culminated in 1989 at Tienanmen Square, where students leading a peaceful protest were met with brutal force by the government

• Shows that although Deng Xiaoping instituted economic reforms, he was not going to tolerate cries for political reform

Economic Change: New Knowledge Economies

• In the late 1900s, some countries started to adopt knowledge economies
• These are economies based on creating, distributing, and using knowledge and information
• Ex: Designers, engineers, teachers; Ex 2: Silicon Valley

• Made possible thanks to the big innovations in information and communications technology

Knowledge Economy in Finland

• Until the 1950s Finland mostly had an agricultural-based economy

• It industrialized after WWII

• When USSR collapsed, it lost one of its main customers in manufactured goods and went through an economic crisis

• However, Finland turned its situation around by adopting a knowledge economy
• Entered global marketplace and encouraged economic growth through technology and innovation
• Nokia, for example, was the biggest manufacturer of phones at one point in time

Japanese Economic Growth

• After WWII, Japan adopted 1700 mercantilist-like economic policies that were designed to increase exports and decrease imports
• Government used high tariffs to discourage imports
• Government gave subsidies to corporations to keep the costs of their goods low

• These policies, aided by US investments, turned Japan to a manufacturing powerhouse
• Manufactured radios, televisions, cars, CPU chips, CD-ROM tech until 1990s

• Eventually Japan shifted to a knowledge economy

Asian Tigers

• Include Hong Kong, Singapore, South Korea, and Taiwan

• These countries closely followed following Japan’s economic model and became very economically prosperous
• Prospered through government-business partnerships, high exports, intense education, and a low-wage workforce

• The success of the Asian Tigers and China raised hundreds of millions of people from poverty

Economic Continuities: Shifting Manufacturing

• Countries which adopted knowledge economies, like US, saw decline in manufacturing

• Manufacturing instead moved to Asia and Latin America due to lower wages and less restrictions

Vietnam and Bangladesh

• Labor costs in Vietnam and Bangladesh are significantly low (even lower than they are in China!)

• These two countries are known for their exports of clothing

• Vietnam also known for manufacturing of electronic devices

Manufacturing in Mexico and Honduras

• NAFTA = Trade agreement signed by US, Canada, Mexico
• Encourages U.S. and Canadian industries to build maquiladoras (factories) in Mexico that used low-wage Mexican labor to produce tariff-free goods

• Critics say NAFTA has taken thousands of US jobs, and that safety and environmental standards were weaker

• Honduras is also a major manufacturer of textiles

Transnational Free-Trade Organizations

• We see a rise of trading blocs to encourage trade on a regional and global scale by reducing barriers

• These trading blocs have helped to facilitate the globalization of the world’s economy

European Union

• Promotes a single market with the free movement of goods, services, capital, and people

• The euro, a common currency shared by its member, makes cross-border transactions easier and more efficient and facilitates trade and investment

OPEC

• Established in 1960s; dominated by Arab and Muslim countries

• Used economic might to place embargo on U.S. oil, 1973-1975

• Still use restriction of oil production as economic threat/tool

World Trade Organization

• Founded in 1995

• Makes rules that govern 90% of international trade

• Yet again, goal is to reduce barriers to trade and increase economic cooperation

Multinational Corporations

• A multinational corporation is a corporation incorporated in one country but makes and sells goods in other countries
• They employ knowledge workers in their own countries, manufacture goods in other countries and sell their goods on the global market

• Ex: Nestlé
• Incorporated in Switzerland, manufacture chocolate with low-wage (and sometimes child labor) in West Africa, and sell that to countries like the US

• Ex 2: Mahindra Mahindra, an Indian company that makes automobiles and farm equipment