Globalization: Prepared By: Fernando Quijano and Yvonn Quijano

CHAPTER 22
Globalization
Prepared by: Fernando Quijano

and Yvonn Quijano
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Globalization
• Globalization is the process of

increasing interdependence among
countries and their citizens.
C H A P T E R 22: Globalization
• Economic globalization is the

process of increasing economic
interdependence among countries
and their citizens.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 42
Economic Globalization:
International Flows
The Global Circular Flow
• Opening the economy adds ten

new flows:
1. U.S. citizens buy foreign produced
goods and services (imports).

2. U.S. producers sell their goods and
services abroad (exports).
3. U.S. producers hire foreign workers.
4. U.S. producers finance investment with

foreign savings.

new flows:
5. U.S. citizens send saving abroad—buy
foreign stocks and bonds, put money in

foreign banks
6. U.S. citizens supply labor to foreign
companies or in foreign countries
7. Foreign countries supply labor in the
U.S. labor market

new flows:
8. Foreign citizens place savings in the
U.S.—buy U.S. stocks and bonds, put

money in U.S. banks
9. Foreign producers hire workers in the
U.S.
10. Foreign producers finance investment
with U.S. saving
• Efficiency in any economy, even the

world economy, is achieved if
capital and labor can move freely to
where their productivity is the
highest—where factors of
production are put to wok in their
“highest and best uses.”
A Brief History of
Economic Globalization
• Economic historian Jeffrey

Williamson classifies the period of
1820-1914 as the first great period
of globalization and the period since
World War II as the second.
A Brief History of
Economic Globalization
• Many dimensions of globalization

are new today:
• Sharp reductions in trade barriers
• Increases in the flows of information

and commerce over the Internet
• Increased speed and lower cost of
travel
• Different nature of international
relations.
The Free-Trade Debate Revisited
• The argument for free trade rests on

two pieces of intuition:
• Voluntary exchange is efficient, and
• Comparative advantage. A country

enjoys a comparative advantage in the
production of a good if the production of
that good has a lower opportunity cost
than it would have if produced in
another country.
• Those who oppose trade make a

number of arguments:
• Buying imports simply ships jobs abroad
• How can we compete with countries

who pay low wages?
• Free trade will hurt the environment.
• The power of organizations like the

WTO can undermine national
sovereignty.
• Proponents of free trade have a

number of counter arguments:
• We can’t buy from countries unless they
simultaneously buy from us. Exports to

Mexico grew from $46 billion in 1995,
just after NAFTA went into effect to
$111 billion by 2000.

• Protecting an industry from foreign
competition to save jobs will cost jobs in

those sectors which would expand with
free trade.
• Protecting an industry can lead to
inefficiency and a lack of ability to
compete in world markets later on.

• Keeping the unemployment rate low is a
macroeconomic issue. The correct tools

for fighting unemployment are fiscal and
monetary policies, not anti-trade
policies.
• If the objective is to reduce poverty, how
can preventing trade help?

• The real hope for an improved
environment is growth and responsible

government. Feeding the citizenry
comes first, and improving the
environment comes later.
• One final issue is the debate over

genetically modified (GM) foods which
are strains of food that have been
genetically modified. Examples include
insect and herbicide-resistant soybeans,

corn, and cotton and rice with increased
iron and vitamins.
Trade, Growth, and Poverty
• Controlling for other determinants of

poverty and growth, is trade a plus or a
minus?
• Studies show that countries that were more

integrated into the world economy grew
faster than those that were less integrated.
• When countries grow, the income of the
lowest fifth of the income distribution rises at
about the same rate as aggregate income.
The Globalization of Labor Markets:
The Economics of Immigration
• The first “Great Migration” in the

United States occurred between
1880 and 1924, when 25.8 million
immigrants entered the country, a
figure that represented 40% of the

period’s total population increase.
• The Immigration Reform and

Control Act (1986) granted amnesty
to about 3 million illegal aliens and
imposed a strong set of employer
sanctions designed to slow the flow

of immigrants into the United States.
• The Immigration Act of 1990

increased the number of legal
immigrants allowed into the United
States each year by 150,000.
IMMIGRANTS INTO THE UNITED STATES BY COUNTRY OF ORIGIN,

1991-2000
THOUSANDS OF THOUSANDS OF
RANK COUNTRY IMMIGRANTS RANK COUNTRY IMMIGRANTS
1 Mexico 2,251 8 Haiti 182
2 Philippines 506 9 Cuba 181

3 China 425 10 Jamaica 174
4 Vietnam 421 11 South Korea 172
5 India 383 12 Poland 170
6 Dominican Republic 341 13 Ukraine 142
7 El Salvador 218 14 Canada 138
Economic Arguments
for Free Immigration
• Free immigration increases world

output.
• If the productivity of low-wage workers is
higher in the United States than in

Mexico, the same labor force produces
more total output after immigration, and
world output rises.
Economic Arguments
for Free Immigration
• Free immigration increases world

output.
• Immigrants do not necessarily displace
U.S. workers but rather take jobs that

Americans simply do not want.
• Almost all U.S. citizens except Native
Americans have recent ancestors who
came to this country as immigrants.
The Argument
Against Free Immigration
• The distribution of income is likely to

change in response to immigration,
affecting the returns to both labor
and capital.
• Immigrants take jobs away from low-

income Americans and drive up
unemployment rates.
• Immigrants end up on welfare rolls

and become a burden to taxpayers.
The Evidence:
The Net Costs of Immigration
• David Card of Berkeley looked at the

impact of the large inflow of Cuban
immigrants in 1980 on wages and
unemployment in the Miami area.
• He found virtually no effect.
• Other studies suggest that low-

skilled immigrants caused one third
of the drop in the wages of high-
school dropouts.
The Evidence:
The Net Costs of Immigration
• First-generation immigrants as a
whole might be paying more in taxes
than they collect in means-tested
benefits such as welfare.
• But there has been a dramatic drop

in the level of education, experience,
and skills among immigrants. They
contribute less in tax revenues than
the amount they collect in benefits.
Capital Mobility
• The argument for free and open

financial market mobility is that
capital should flow to its highest and
best use.
Capital Mobility
• To reduce the volatility of capital

flows to emerging-market countries,
countries can shut themselves from
international capital flows.
• But the revealed preference of these

countries is to stay involved with the
international financial system.
Public Policy and Globalization
• Other policy debates beyond the

issues of free trade and free mobility
of resources include:
• Global public goods, or externalities
• The impact of non-governmental

organizations (NGO’s) on world growth,
and their powerful roles in enforcing
international monetary agreements and
trade rules.
Global Externalities and Public Goods
• Public goods, sometimes called social

goods, are goods or services that bestow
collective benefits on members of society.
• Taking action to slow global warming

presumably would produce a worldwide
public good. Since no nation can be
excluded, and the impact on a single
nation is small, there is no incentive to
contribute.
• An externality is a cost or a benefit

resulting from some activity or
transaction that is imposed or
bestowed on some party outside the
activity or transaction.
• One of the functions of government

is to “internalize” externalities with
something like a pollution tax.
• If the number of countries is small,

bargaining and negotiation may
resolve the issue. But where large
numbers of jurisdictions are involved,
the public goods’ problems arise.
Nongovernmental Organizations and International
Economics: The Washington Consensus
• While there is considerable

disagreement about who formed it or
how strongly it was designed to be
enforced, a set of objectives or goals
were laid down for countries that the

IMF was financing.
• What came to be referred to as the

“Washington Consensus” had ten
elements.
1. Fiscal discipline—modest budget

deficits or balanced budget,
2. public expenditure priorities in health
and education,
3. tax reform—the tax base should be

broad and marginal tax rates should be
low,
4. positive but moderate market-
determined interest rates,
5. a competitive—ideally floating—
exchange rate as the “first essential
element of an outward-oriented
economic policy,
6. import liberalization—essentially a free

trade policy for reduced tariffs,
7. openness to foreign investment,
8. privatization—“based on the idea that

private industry is managed more
efficiently than public enterprises.”
9. deregulation, and
10. protection of property rights.
• Clearly, considerable disagreement

existed about the degree to which
these elements should or could be
enforced. A new consensus has
emerged for gradualism.
Globalization,
Capitalism, and Democracy
• Advocates of globalization often are

staunch supporters of laissez faire
capitalism.
• But the issue of openness and the

desirability of interdependence
between national economies
probably does not depend on the
kind of economic or political system
that a country chooses to establish.
Globalization,
• The terms democracy and

dictatorship refer to the institutions of
government and to the process of
public choice.
• The terms socialism and capitalism

refer, on the other hand, to the
economic institutions that determine
the allocation of resources.
Globalization,
• A pure socialist economy is one in

which the government owns the land
and capital and in which resources
are allocated essentially by a central
government plan.
• A laissez faire capitalist economy is

one in which the government plays
virtually no role in directing the
economy.
Globalization,
• The debate is really not about

government vs. no government. It is
instead about the role of government
in the economy in addition to:
• Providing public goods
• Regulating monopoly power
• Internalizing external costs and benefits
• Ensuring that all economic agents are

well informed
Globalization,
• More debatable issues about the role

of government in the economy include:
• Government involvement in income
redistribution, and
• The potential role of government in
stabilizing the economy.
• Economists as a whole tend to favor
globalization, but there is a wide range
of opinion on the proper role of
government in the economy.
A Final Word
• A powerful logic exists in support of

economic openness:
• The free flow of resources and goods
and services across national borders,

driven by efficient economic incentives,
including the desire to maximize profit,
is likely to make citizens better off than if
borders were closed and economies
turned inward.
Review Terms and Concepts
comparative advantage
economic globalization
externality
genetically modified (GM) foods

globalization
The Immigration Act of 1990
The Immigration Reform and Control Act (1986)
public goods, or social goods
Washington Consensus

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CHAPTER 22

Prepared by: Fernando Quijano

• Globalization is the process of

• Economic globalization is the

• Opening the economy adds ten

goods and services (imports).

4. U.S. producers finance investment with

• Opening the economy adds ten

foreign stocks and bonds, put money in

• Opening the economy adds ten

U.S.—buy U.S. stocks and bonds, put

• Efficiency in any economy, even the

• Economic historian Jeffrey

World War II as the second.

• Many dimensions of globalization

• Increases in the flows of information

• The argument for free trade rests on

• Comparative advantage. A country

• Those who oppose trade make a

• How can we compete with countries

• The power of organizations like the

• Proponents of free trade have a

simultaneously buy from us. Exports to

• Proponents of free trade have a

competition to save jobs will cost jobs in

• Proponents of free trade have a

macroeconomic issue. The correct tools

• Proponents of free trade have a

environment is growth and responsible

• One final issue is the debate over

insect and herbicide-resistant soybeans,

• Controlling for other determinants of

• Studies show that countries that were more

• The first “Great Migration” in the

figure that represented 40% of the

• The Immigration Reform and

sanctions designed to slow the flow

• The Immigration Act of 1990

IMMIGRANTS INTO THE UNITED STATES BY COUNTRY OF ORIGIN,

2 Philippines 506 9 Cuba 181

• Free immigration increases world

higher in the United States than in

• Free immigration increases world

U.S. workers but rather take jobs that

• The distribution of income is likely to

• Immigrants take jobs away from low-

• Immigrants end up on welfare rolls

• David Card of Berkeley looked at the

• He found virtually no effect.

• Other studies suggest that low-

• But there has been a dramatic drop

• The argument for free and open

• To reduce the volatility of capital

• But the revealed preference of these

• Other policy debates beyond the

• Global public goods, or externalities

• The impact of non-governmental

• Public goods, sometimes called social

• Taking action to slow global warming