Global Political Economy Globalization

Economics

There is a concerted effort to bring developing nations into the global trade system. There are certainly success stories of nations that have been able to enjoy advantages from joining this system -- China in particular comes to mind -- but there is room for debate as to whether or not the neoliberal trade system is actually desirable for developing nations. There are a lot of issues at play, starting with the basic economics.

In general, the theory of comparative advantage argues that nations should open up trade, so that they can produce the goods in which they have a comparative advantage and sell them to buy the goods in which they do not. There are some fairly significant real world limitations to this theory, however. One is that trade is usually governed by absolute competitive advantage, not comparative advantage. If a company wants a good at a low cost, it will buy from the low cost supplier. If that supplier country has enough capacity, it will dominate the world market in that good. This can shut down other countries that otherwise would trade in that good. A lot of developing nations share fairly similar characteristics -- agrarian economies, limited industrialization, and myriad issues with things like transportation and corruption. There is the very real possibility that countries fitting that description and having limited natural resources will have very little to trade. A country with little to trade is at a disadvantage in a system where there is much to buy, but little to sell. Nations in sub-Saharan Africa and small tropical island nations in particular lack the advantages that would allow them to fully profit from the global trade system in the way that larger, more diversified nations can.

In some ways, many nations are still suffering the influence of colonialism. As part of broader economic systems, they were geared towards selling a handful of commodity goods, and their current economies often reflect this. Therein lies the problem -- if a country is no longer competitive in such a good, it is in a poor structural position to develop any further industries. It may, possibly, benefit from infant industry protections at the very least.

What occurs in countries with few disadvantages is basically neocolonialism. They sign agreements where they have little bargaining power, in the hopes of earning foreign direct investment. Smaller countries or those without resources do not receive this investment, and their domestic firms are uncompetitive. They grow economies that are capable of buying things, but not of selling them. There is no way to get ahead, and they end up dependent on foreign goods, ring up substantial trade deficits, and end up requiring IMF bailouts. Ultimately, the evidence shows that many nations do not benefit from trade liberalization. Some do, without question, and larger nations with relatively diversified economies will benefit from liberalized trade. But textbook economics rests on sets of assumptions that do not always hold true in the real world.

This is not to say that a gradual move towards the international economic system is not a good idea. Most countries that are run poorly also have state-owned entities that are run poorly. One of the stated goals of trade liberalization is that it forces nations to reduce political risk in order to attract investment (Investopedia, 2016). This is certainly a benefit, and the potential for foreign investment is as well. But developing nations should heed the lessons of their powerful, successful brothers, like China, and maintain strong control over the process. Set limits on what foreign entities can do, on capital flight, and ensure that some of your own people have opportunity given to them as well. It is not enough to allow foreign companies to access your markets; you have to gain from accessing foreign ones, and that is not something that happens just because trade barriers are lowered. It is important to foster industries that have the potential to compete on the international marketplace. With those types of policies in place, a nation will stand to benefit much more from trade liberalization than it will without strong policies to defend its interests during the transition period.

4. Globalization is a contentious issue in contemporary GPE for a few different reasons. The first issue is simply a lack of transparency and democracy. In general, the forces that are driving globalization lack transparency -- deals are negotiated in secret, and in some cases like with the TPP the details of these deals are not even announced to the public until after the deal is signed. Worse, big business interests are part of the negotiations while everybody else finds out later what they have been signed up for. This runs directly counter to the principles of democracy on which modern, Western societies have been founded, which should be a fairly significant point of controversy (Masnick, 2016)

The other major issue with globalization stems from this. The forces that are driving globalization are limited to a relatively small segment of global society. Most people have no influence at all on the forces that are driving globalization. As a consequence, its benefits skew towards the people that are shaping it, as they are naturally shaping it in their own interest. This is the reason for the Occupy Wall Street protests, which were an expression of people who considered themselves to be outside of the scope of influence with respect to the forces that are shaping our world. IF those people -- generally privileged people -- felt that way, then there is little doubt how people in the developing world feel with respect to this issue. They have less than no power over their lives, and that is ultimately why globalization is so contentious for people. It is not that the forces of globalization are inherently bad; it is that the people and institutions influencing the process of globalization are doing so for their own benefit, to the contrary of the principles of democratic society.

Neoliberal globalization is rooted in the view that opening markets, and breaking down borders, will be beneficial. The principle, however, was never that it will be beneficial for everybody individually, but that on aggregate it will be. This is true -- GDPs rise when countries liberalize. But the increased wealth is not distributed evenly. In many cases, even in the West, it seems to accrue to a particular class of people, while others are left out.

The global financial crisis highlighted this. Bankers, working with perverse incentives, created financial instruments that were unstable. The interconnectedness of the global financial system meant that not only did the U.S. economy take a hit from this but economies all over the world did. The bankers who created the problem received bailouts from the U.S. taxpayer, but nobody else did, even though millions were affected negatively by the global financial crisis. Even the wording indicates the problem -- financial crisis, not human crisis or some other reflection that the issue was anything other than a money thing.