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CRIC – Globalisation Course

Weekly Structure

1. An introduction to globalisation 2. Is globalisation a good thing? 3. Student Presentations – the globalisation of their domestic economies 4. Globalisation the case of Africa – this includes an analysis of two markets – copper and 5. Consolidation Week 1 6. The social and political implications of globalisation 7. Student Presentations on the social and political implications of globalisation for their own economies 8. The role of multi-national companies in global trade – 1 9. The role of multi-national companies in global trade – 2 10. International Organisation and International Trade – included trade and balance of payments, WTO, IMF and World Bank 11. Consolidation Week - 2 12. Examination Practice

The consolidation weeks are designed to allow you seek assistance on issues you may be experiencing some problems with, revise and prepare for the final examination Week 1

An introduction to globalisation

The global economy is in the midst of a radical transformation, with far-reaching and fundamental changes in technology, production, and trading patterns. Faster information flows and falling transport costs are breaking down geographical barriers to economic activity. The boundary between what can and cannot be traded is being steadily eroded, and the global market is encompassing ever-greater numbers of goods and services.

What is Globalisation?

Globalization is an issue that rouses strong emotions among people. The first step in understanding the topic is to define what it means. We are hampered by the reality that there is no one single agreed definition – indeed the term globalisation is used in slightly different ways in different contexts by various writers and commentators. What is common to all usages is an attempt to explain, analyse and evaluate the rapid increase in cross-border (trans-national) business that has take place over the last 10/15 years. Trends in global trade and output % change per annum unless stated 1980-89 1990-99 2000-04 Global GDP growth 3.3 3.2 3.8 World trade growth in goods and services 4.5 6.5 6.2 World trade (% of GDP) 19 21 25

The OECD defines globalization as

“The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets”

Globalisation is essentially a process of deeper international economic integration that involves:

A rapid expansion of international trade in goods and services between countries

A huge increase in the value of transfers of financial capital across national boundaries including the expansion of foreign direct investment (FDI) by trans- national companies

The internationalization of products and services by large firms Shifts in production and consumption from country to country – for example the rapid expansion of out-sourcing of production

All merchandise products Trade Production Average % change per annum 1950-63 7.7 5.2 1963-73 9.0 6.1 1973-90 3.8 2.7 1990-04 5.7 2.5 Manufactured goods Trade Production 1950-63 8.6 6.6 1963-73 11.3 7.4 1973-90 5.5 3.1 1990-04 6.3 2.6

The data table above drawn from statistics published by the World Trade Organisation shows how the annual growth in merchandise trade (trade in manufactures, agricultural products, fuels and mining products) has consistently out-paced the growth of output. This means that trade as a share of output in the global economy has continued to increase – marking an increase in trade integration within the world economic system.

Another way of describing globalisation is to describe it as a process of making the world economy more interdependent. The expansion of trade in goods and services, the huge increase in flows of financial capital across national boundaries and the significant increase in multinational economic activity means that most of the world’s economies are increasingly dependent on each other for their macroeconomic health.

Shares in world exports 1991 2006Change 1991-2006 Canada 3.4 3.4 -0.1 France 6.2 4.0 -2.1 Germany 10.8 8.6 -2.2 Italy 4.9 3.5 -1.4 Japan 8.0 5.0 -2.9 United Kingdom 5.5 4.4 -1.1 United States 13.7 10.1 -3.6 Non-OECD Asia inc China 11.5 19.3 7.8 Latin America 2.6 3.0 0.4 Source: OECD World Economic Outlook, June 2006

For example, a deflationary monetary or fiscal policy introduced in one country which leads to changes in AD inevitably affects the ability of other countries to export to that economy. Consider for example a decision by the Federal Reserve Bank in the United States to raise their interest rates in response to the threat of a rise in inflation. This could conceivably have important feedback effects throughout the international economy. The rate of growth of the US economy is likely to slow and this will then have an effect on the strength of demand from US consumers for overseas products. Secondly, changes in the structure of company taxation and personal taxation from country to country tends to influence flows of investment and have feedback effects in the long term on national income, employment and wealth.

Trends in global capital flows 1989 1999 2003 Stock of Foreign Direct Investment (% of GDP) 8.0 16.0 22.1 Foreign assets (% of GDP) 62.6 139.6 186.1 Source: International Monetary Fund Globalisation is not new! Indeed there have seen several previous waves of globalisation. Nick Stern, Chief Economist of the World Bank has identified three major stages of globalization:

Wave One: Began around 1870 and ended with the descent into global protectionism during the interwar period of the 1920s and 1930s. This period involved rapid growth in international trade driven by economic policies that sought to liberalize flows of goods and people, and by emerging technology, which reduced transport costs. This first wave started the pattern which persisted for over a century of developing countries specializing in primary commodities which they export to the developed countries in return for manufactures. During this wave of globalisation, the level of world trade (defined by the ratio of world exports to GDP) increased from 2 per cent of GDP in 1800 to 10 per cent in 1870, 17 per cent in 1900 and 21 per cent in 1913.

Wave Two: After 1945, there was a second wave of globalization built on a surge in world trade and reconstruction of the world economy. The rapid expansion of trade was supported by the establishment of new international economic institutions. The International Monetary Fund (IMF) was created in 1944 to promote a stable monetary system and so provide a sound basis for multilateral trade, and the World Bank (founded as the International Bank for Reconstruction and Development) to help restore economic activity in the devastated countries of Europe and Asia. Their aim was to promote lasting multilateral economic co-operation between nations. The General Agreement on Tariffs and Trade (GATT) signed in 1947 provided a framework for progressive mutual reduction in import tariffs.

Wave Three: The current wave of globalisation which is demonstrated for example by a sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between counties and trade in goods and services Main Motivations and Drivers for Globalisation

As the well respected commentator Hamish McRae has argued, “Business is the main driver of globalization!” The process of globalisation is motivated largely by the desire of multinational corporations to increase profits and also by the motivation of individual national governments to tap into the wider macroeconomic and social benefits that come from greater trade in goods, services and the free flow of financial capital.

Among the main drivers of globalisation are the following:

Improvements in transportation including containerisation – the reduced cost of shipping different goods and services around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and adds to the process where markets are increasingly similar and genuinely contestable in an international sense. Technological change – reducing massively the cost of transmitting and communicating information - sometimes known as “the death of distance” – this is an enormous factor behind the growth of trade in knowledge products using internet technology. Advances in transport technology have lowered the costs, increased the speed and reliability of transporting goods and people – extending the geographical reach of firms by making new and growing markets accessible on a cost-effective basis. De-regulation of global financial markets: The process of deregulation has included the abolition of capital controls in many countries. The opening up of capital markets in developed and developing countries facilitates foreign direct investment and encourages the freer flow of money across national boundaries Differences in tax systems: The desire of multi-national corporations to benefit from lower labour costs and other favourable factor endowments abroad and therefore develop and exploit fresh comparative advantages in production Avoidance of import protection: Many businesses are influenced by a desire to circumvent tariff and non-tariff barriers erected by regional trading blocs – to give themselves more competitive access to fast-growing economies such as those in the emerging markets and in eastern Europe Economies of scale: Many economists believe that there has been an increase in the estimated minimum efficient scale associated with particular industries. This is linked to technological changes, innovation and invention in many different markets. If the MES is rising this means that the domestic market may be regarded as too small to satisfy the selling needs of these industries. Overseas sales become essential.

Division of labour on a global scale

The ease with which goods, capital and technical knowledge can be moved around the world has increasingly enabled the division of labour on a global scale, as firms allocate their operations in line with countries’ comparative advantage. As a result, there has been a significant increase in the number of firms that locate, source and sell internationally, reflecting the new opportunities presented by the ICT revolution, alongside falling transport costs and easing trade and capital restrictions.

Globalization no longer necessarily requires a business to own a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. For instance, economic activity can be shifted abroad by the processes of licensing and franchising which only needs information and finance to cross borders. And increasingly we are seeing many examples of joint- ventures between businesses in different countries – e.g. businesses working together in research and development projects. Week 2

Is globalisation a good thing?

Pro globalisation

There is mounting evidence that inequalities in global income and poverty are decreasing and that globalisation has contributed to this turnaround. For example, the World Bank notes that China's opening to world trade has brought it growth in income from $1460 a head in 1980 to $4120 by 1999. In 1980, American's earned 12.5 times as much as the Chinese, per capita. By 1999, they were only earning 7.4 times as much. The gap between rich and poor is also shrinking with most nations in Asia and Latin America. The countries that are getting poorer are those that are not open to world trade, notably many nations in Africa.

Poor countries that have lowered their tariff barriers have gained increases in employment and national income because labour and capital shifts from import- competing industries to expanding, newly competitive export industries. In addition to providing jobs, companies moving to developing countries often export higher wages and working conditions compared with those in domestic companies operating in the country. While wages are often lower in developing countries than those in developed countries they reflect lower levels of education and productivity. The experience in countries like Korea is that as countries develop their wage levels rise and the focus

Anti globalisation

The gap between the rich and poor nations of the world is increasing. The figures used most frequently are those from the UNDP 1999 Development Report which find that over the past ten years, the number of people earning $1 a day or less has remained static at 1.2 billion while the number earning less than $2 a day has increased from 2.55 billion to 2.8 billion people. The gap in incomes between the 20% of the richest and the poorest countries has grown from 30 to 1 in 1960 to 82 to 1 in 1995.

By the late 1990s the fifth of the world’s people living in the highest-income countries had:

 86% of world GDP—the bottom fifth just 1%.  82% of world export markets—the bottom fifth just 1%.  68% of foreign direct investment—the bottom fifth just 1%.  74% of world telephone lines, today’s basic means of communication—the bottom fifth just 1.5%.

Critics of globalisation say that rising inequality is the inevitable result of market forces. Given free reign, market forces give the rich the power to add further to their wealth. Hence, large corporations invest in poor countries only because they can make greater profits from low wage levels or because they can get access to their natural resources.

The free market does nothing to address re-distribution of wealth. It assumes that wealth will ‘trickle down’ to the poor. The former British Prime Minister, Margaret Thatcher, once said, "It is our job to glory in inequality and see that talents and abilities are given vent and expression for the benefit of us all."

Statistics on poverty and growth

People will be struck by the difference in the way that pro-globalisation and anti- globalisation supporters assess the poverty gap. The reasons for this are differences in the way comparisons in wealth are measured. The UN development report measure of wealth is denominated in US dollars. The gap has widened with the steady increase in value of the US dollar against other currencies in recent years. The World Bank uses Purchasing Power Parity (PPP) which assesses what can be bought in local currency. A currency may devalue against the US dollar, but most products inside a country are paid for by local currency. They do not fall in price because the US dollar appreciates.

Since World War II, barriers to international trade have been considerably lowered through international agreements - General Agreement on Tariffs and Trade (GATT). Particular initiatives carried out as a result of GATT and the World Trade Organization (WTO), for which GATT is the foundation, have included:

Promotion of free trade:

Reduction or elimination of tariffs; creation of free trade zones with small or no tariffs

Reduced transportation costs, especially resulting from development of containerization for ocean shipping

Reduction or elimination of capital controls

Reduction, elimination, or harmonization of subsidies for local businesses

Restriction of free trade:

Harmonization of intellectual property laws across the majority of states, with more restrictions.

Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)

The Uruguay Round (1984 to 1995) led to a treaty to create the World Trade Organization (WTO) to mediate trade disputes and set up a uniform platform of trading. Other bilateral and multilateral trade agreements, including sections of Europe's Maastricht Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.

World exports rose from 8.5% of gross world product in 1970 to 16.1% of gross world product in 2001. [7]

The use of the term globalization (in the doctrinal sense), in the context of these developments has been analysed by many including NorAm Chomsky who states [7]

“ ... That enhances what's called "globalization," a term of propaganda used conventionally to refer to a certain particular form of international integration that is (not surprisingly) beneficial to its designers: Multinational corporations and the powerful states to which they are closely linked. ”

Critics have observed that the term's contemporary usage comprises several meanings, for example Noam Chomsky states that: [8]

“The term "globalization," like most terms of public discourse, has two meanings: its literal meaning, and a technical sense used for doctrinal purposes. In its literal sense, "globalization" means international integration. Its strongest proponents since its origins have been the workers movements and the left (which is why unions are called "internationals"), and the strongest proponents today are those who meet annually in the World Social Forum and its many regional offshoots. In the technical sense defined by the powerful, they are described as "anti-globalization," which means that they favour globalization directed to the needs and concerns of people, not investors, financial institutions and other sectors of power, with the interests of people incidental. That's "globalization" in the technical doctrinal sense. Measuring globalization

Globalization has had an impact on different cultures around the world.

Looking specifically at economic globalization, it can be measured in different ways. These center around the four main economic flows that characterize globalization:

Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population

Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population

Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population

Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband)

Globalization has various aspects which affect the world in several different ways such as:

Industrial (alias trans nationalization) - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within transnational corporations, and access to goods by wealthier nations and individuals at the expense of poorer nations and individuals who supply the labour.

Financial - emergence of worldwide financial markets and better access to external financing for corporate, national and subnational borrowers. Simultaneous though not necessarily purely globalist is the emergence of under or un-regulated foreign exchange and speculative markets leading to inflated wealth of investors and artificial inflation of commodities, goods, and in some instances entire nations as with the Asian economic boom-bust that was brought on externally by "free" trade.

Economic - realization of a global common market, based on the freedom of exchange of goods and capital.

Political - political globalization is the creation of a world government which regulates the relationships among nations and guarantees the rights arising from social and economic globalization. [11] Politically, the United States has enjoyed a position of power among the world powers; in part because of its strong and wealthy economy. With the influence of Globalization and with the help of The United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. [12] The European Union, Russian Federation and India are among the other already- established world powers which may have the ability to influence future world politics.

Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephony and Internet, possibly ancillary or unrelated to the globalist ideology.

Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities such as Globalism - which embodies cultural diffusion, the desire to consume and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture"; loss of languages (and corresponding loss of ideas), also see Transformation of culture

Ecological- the advent of global environmental challenges that can not be solved without international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Many factories are built in developing countries where they can pollute freely. Globalism and free trade interplay to increase pollution and accelerate it in the name of an ever expanding capitalist growth economy in a non-expanding world. The detriment is again to the poorer nations while the benefit is allocated to the wealthier nations.

Social - increased circulation by people of all nations with fewer restrictions. Provided that the people of those nations are wealthy enough to afford international travel, which the majority of the world's population is not. An illusory 'benefit' recognized by the elite and wealthy, and increasingly so as fuel and transport costs rise.

Transportation - fewer and fewer European cars on European roads each year (the same can also be said about American cars on American roads) and the death of distance through the incorporation of technology to decrease travel time.[clarify] This would appear to be a technological advancement recognized by those who work in information, rather than labour intensive markets, accessible to the few rather than the many, and if it is indeed an effect of globalism, reflects the disproportionate inequitable allocation of resources rather than a benefit to humanity overall.

International cultural exchange

Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). However, the imported culture can easily supplant the local culture, causing reduction in diversity through hybridization or even assimilation. The most prominent form of this is Westernization, but Sinicization of cultures has taken place over most of Asia for many centuries. Arguably the hegemonic efects of globalism and homogenization of culture as the capitalist globalist economy becomes the "only" way that countries may participate through the IMF and World Bank leads to a destruction rather than an appreciation of differences in culture. Greater international travel and tourism for the few who can afford international travel and tourism.

Greater immigration, including illegal immigration, except for those countries around the world including the UK, Canada, and the United States who have in 2008 accelerated removal of illegal migrants and modified laws to increase the ease of removing those who have entered the country illegally, while ensuring that immigration policies allow those more favourable to the stimulation of economy to enter, primarily focusing on the capital that immigrants can move into a country with them.

Spread of local consumer products (e.g. food) to other countries (often adapted to their culture) including genetically modified organisms. A new and novel feature of the globalist growth economy is the birth of the licensed seed which will only be viable for one season and can not be replanted in a subsequent season - ensuring a captive market to a corporation. Entire nations may have their food supply controlled by a company successful in implementing such GMOs potentially through World Bank or IMF loan conditions.

World-wide fads and pop culture such as Pokémon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earth's population.

World-wide sporting events such as FIFA World Cup and the Olympic Games.

Formation or development of a set of universal values - Homogenization of Culture

Technical

Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones

Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements.

Legal/Ethical

The creation of the international criminal court, which the United States has refused to sign on to, and international justice movements.

Crime importation and raising awareness of global crime-fighting efforts and cooperation.

Sexual awareness – It is often easy to only focus on the economic aspects of Globalization. This term also has strong social meanings behind it. Globalization can also mean a cultural interaction between different countries. Globalization may also have social effects such changes in sexual inequality, and to this issue brought about a greater awareness of the different (often more brutal) types of gender discrimination throughout the world. For example, Women and girls in African countries have long been subjected to female circumcision- such a harmful procedure has been since exposed to the world, and the practice is now decreasing in occurrence.

Increasing concentration of wealth in fewer and fewer hands. Media and other multinational mergers leading to fewer corporations controlling vaster segments of society and production. The decrease in the middle class, and the increase in poverty observed within Globalized and deregulated nations. Globalization was responsible for the largest sovereign debt default in world history, bankrupting the entire nation of Argentina in 2002. Globalization did, however, benefit business and finance in that large corporations and multinational banks were able to move over $40BN in cash out of Argentina literally in the dead of night as there were no regulations in this deregulated and globalized country to prevent them from doing so. Opponents of Globalization argue that the banks locking the citizens out of their own accounts, the 60% and above unemployment rate, and the bankruptcy of an entire nation are arguments against globalization. Week 3

Student Presentations Week 4

Globalisation and Africa

The African continent remains by and large marginalized in the world economy, with over half of the population living under US$1 a day per person. If the major Millennium Development Goal of reducing poverty by half by the year 2015 is to be achieved in Africa, a major policy shift is required, both at the national and

Some regions and countries have struggled to make any sustained progress in using trade as an instrument for long term growth and development. Africa, for example, experienced marginal economic growth during the 1990s leading to an ever-widening gap between living standards in Africa and the rest of the world. Its share of world trade continued to fall, from only 2.7 per cent in 1990 to 2.1 per cent in 2000, and critics argue that the global trading system continues to discriminate against the world's poorest countries.

They argue that high-income countries continue to protect their agricultural industries against imports from low-income economies, pointing in particular to the inequities created by the European Union Common Agricultural Policy whereas developing countries' markets have been liberalised opening them up to exports from the developed world. Developed nations spent £154bn on agricultural support in 2005 according to the Organisation for Economic Cooperation and Development (OECD). In fact Average tariff levels on agricultural products coming into developed countries are far higher than those set for industrial products.

Exports of the least developed countries by major product in 2003 Source: World Trade Organisation Per cent 2003 2000 Others 21.6 15.3 Textiles 1.7 1.9 Other semi-manufactures 3.5 6.5 Raw materials 5.4 5.9 Food 11.9 13.3 Clothing 19.9 21.4 Fuels 36.0 35.6 In a recent report on Global Poverty and Fair Trade, Oxfam argued that "global trade has the potential to act as a ‘powerful motor for the reduction of poverty, as well as for economic growth, but that potential is being lost’. The problem according to Oxfam is not that international trade is inherently opposed to the needs and interests of the poor, but that the rules that govern it are rigged in favour of the rich. Barriers to imports in the advanced countries are, argues Oxfam, ‘biased against the exports of developing countries at a cost to the latter of $100bn (or nearly £70bn) a year. The Make Poverty History campaign also focuses on some of the barriers to fair trade that holds back the growth and development of many of the world’s poorest countries.

Many development economists claim that the current asymmetry of international trade barriers is actually biased against high-income countries. Tariffs on industrial products set by high-income countries average 3% whereas poor countries' tariffs average 13%.

Dependence on Primary Exports

The least developed countries have a greater dependence on exports of primary commodities despite attempts at import substitution. For many of the poorest African countries, primary exports account for over 90% of total exports Demand for fair access

Low-income countries should look to the international system to meet their very reasonable demands—not for special preferences to some markets and exemptions from rules, but for non-discriminatory market access to every market in products in which they have a comparative advantage

For many developing countries, free market access to the high income and high spending markets of developed countries remains the single most important objective in trade negotiations with other countries. Domestic markets for lower income nations can often be small-scale – so producers have little chance of achieving important economies of scale that would reduce their average costs and allow them to generate a higher rate of profit from their production. This, added to the fact that foreign markets in developed countries are often protected by high tariffs, means that industries and firms based in developing economies will find it difficult to become competitive in the international market.

Export subsidies promote cotton dumping

A decision by the World Trade Organisation that found the US’s $3 billion support for cotton growers violates global trade rules. The WTO has found in favour of a complaint from Brazil that US subsidies distorted world cotton prices, allowing the US to dump cotton on world markets at the expense of growers in poor countries, such as Mali and Burkina Faso. The subsidy allows the high-cost American growers in the southern states to gain market share at the expense of farmers in the developing world. The WTO also found that $1.6 billion of US export credits, which include price support for corn, soya beans and oil-seed products were distorting trade and must be removed.

That said it is often the case that tariffs on trade between developing countries are in fact much higher than between developing and developed nations. There is much to do to bring tariff rates down and to gradually erode the wide range of non-tariff barriers that exist all of which distort the nature of free trade based on the principle of comparative advantage.

Some examples to discuss

Market for Copper

The market for copper has hit the headlines in the last two years as a price boom has occurred.

The world price of copper nearly trebled between the start of 2005 and the summer of 2006, one of the most remarkable booms in commodity markets in many years. Much of the steep rise in price has been due to demand-side factors. World demand for copper has been rising much faster than the growth in market supply that result from new discoveries of copper and increased extraction rates of known reserves. In 2004, world copper consumption exceeded production by 843,000 tons and a similar demand-supply imbalance occurred in 2005 and the early months of 2006.

According to a recent study from geologists at Yale University, new discoveries of copper have raised global reserves by just 0.63 per cent a year since 1925 but usage (final demand) has risen at 3.3 per cent per annum. And now demand is growing strongly on the back of phenomenal growth in China, India and other emerging market economies. Stocks of copper have been in sharp decline in the last few years and it is this scarcity that has driven prices higher as commodities traders out-bid each other as they scramble for available supplies. Supply has fallen behind the growth of demand and prices can move in only one direction when this happens! The world supply of and demand for copper

Most copper ore is mined or extracted as copper sulphides from large open pit mines in copper porphyry deposits that contain 0.4 to 1.0 percent copper. Over 40 per cent of world copper supply comes from North and South America; 31 per cent from Asia and 21 per cent from Europe. Chile is the world’s biggest supplier of copper (it provided 35 per cent of the total in 2003 with Indonesia and the USA each contributing 8 per cent).

Copper – an example of derived demand

Because copper is malleable and ductile, there is a huge industrial demand for copper. Like most metals the demand for it is derived in part from the final demand for products that use copper as an important component or raw material. Nearly 50 per cent of the demand for copper comes from the construction industry, and 17 per cent is from the electrical sector. Copper is also used extensively in heavy and light engineering and in transport industries. From copper wire to copper plumbing, from the use of copper in integrated circuits to its value as a corrosive resistant material in shipbuilding and as a component of coins, cutlery and to colour glass, copper has a huge array of possible industrial uses.

A good example of where demand for copper comes from is the automobile industry. The average new car contains 27.6kg of copper. And hybrid cars which incorporate electric motors in conjunction with combustion engines could lead to further rises in copper demand. A typical electric hybrid car might use around 2 times the current usage of copper in extra cabling and windings for electric motors."

Incremental demand – the China and India effect

Recent data suggests that the incremental growth in world demand for copper has come almost exclusively from China and other Asian economies. HSBC analysts calculate that between the years 2000-04, the compound annual growth in copper consumption from North America has fallen by 3 per cent and by 1.8 per cent from Western Europe and 2 per cent from Japan. In contrast, demand from Asian countries other than Japan has increased by 8.6 per cent each year whilst in China the growth has been a staggering 15 per cent per year.

There has also been a noticeable speculative demand for copper as investment funds around the world have started to track commodity prices. In the case of copper, thus far, the market has been a one way street for financial investors, although you may have heard about the rogue copper trader from China who a fortune betting that the market price of copper would fall back in November 2005!

The volatility of commodity prices

As we have seen, price volatility stems from a lack of responsiveness of both demand and supply in the short term, i.e. both demand and supply are assumed to be inelastic in response to price movements. The low price elasticity of demand for copper usually stems from a lack of close substitutes in the market. For some products and processes, aluminium or plastic may act as a substitute to copper for some uses, but there are costs and delays involved in switching between them.

The elasticity of supply is also low. Supply is usually unresponsive to price movements in the short term because of the high fixed costs of developing new extraction plants which also involve lengthy lead-times. If existing copper mining businesses are working close to their current capacity then a rise in world demand will simple lead to a reduction in available stocks. And as stocks fall, so buyers in the market will bid up the price either to finance immediate delivery (the spot price) or to guarantee delivery of copper in the future (reflected in the futures price). It can take huge price swings in the market for supply and demand to respond sufficient to bring the market back to some sort of equilibrium.

The effects of rising copper prices

The demand for copper will continue to remain strong provided that the global industrial sectors continue to expand production. But if price remain high then we can expect to see some shifts occurring. For a start, copper can be recycled although the costs of doing so are often high and there are fears concerning the negative externalities arising from the pollution created by trying to recycle used copper. These external costs include atmospheric emissions from recycling plants and waste products dumped into rivers. Nonetheless price theory would predict an increase in demand for scrapped copper and perhaps a substitution effect away from copper towards aluminium. And in the medium term high prices and emerging new technologies may cause an even bigger shift in demand away from copper based products. Plastics provide lower material and installation costs for businesses. And the take off in wireless technology and fibre optics will also have an impact.

And higher prices might also be the stimulus required for an expansion of copper ore production as supply responds to the incentives of increased potential revenues and profits. In recent years, copper mining production has fallen short of expectations. But as with any market, if the price is high enough suppliers will eventually respond! Market for Coffee

Each day nearly 2.5 billion cups of coffee are consumed. It is the 5th most widely traded commodity in the world and millions of people depend directly or indirectly on the production and sale of coffee for their livelihoods. The global market for coffee is characterised by volatile prices and production levels which impacts directly on the incomes of producers and prices facing consumers.

The World Coffee Market

Experts on the world coffee market often make reference to the “coffee paradox”.

A coffee crisis in producing countries with a trend towards lower prices, declining producer incomes and profits with important consequences for the export revenues of leading coffee exporting countries and the living standards of millions of people in developing nations

A coffee ‘boom’ in consuming countries with rising retail sales and profits for coffee retailers

A widening gap between producer and consumer prices

Coffee production and developing countries

The World Bank estimates that out of the total 141 developing countries, 95 depend on exports of commodities for at least 50 percent of their total export earnings. Coffee is a very good example of such “commodity-dependency” representing, for example, 75% of the total exports of Burundi and 54% in Uganda, and about 22% in the case of Honduras. About 20 to 25 million families produce and sell coffee for their livelihood and most of them are small-scale farmers with limited financial resources and scope to diversify out of coffee production.

Globally, coffee sales each year exceed $70 billion, but coffee producing countries only capture $5 billion of this value, with the bulk of revenues from the coffee trade retained by developed countries. Coffee farmers in producing countries only obtain a fraction of the final retail price of coffee. A recent Oxfam research report showed that Ugandan coffee farmers only get about 2.5 percent of the final retail price of their coffee in the UK market. One strongly positive sign has been the surge in demand for Fairtrade coffee in the UK and other countries. The Fairtrade organisation claimed in July 2006 that one in five cups of filter coffee drunk in the UK are now being supplied from a "fair" source. Sales of Fairtrade coffee in the UK totalled £65.8m on 2005, up from £34.3m in 2003 (5 % of the UK market) although Fairtrade coffee sales account for only 0.5% of the global market

Coffee prices

There have been no price controls in the global coffee trade since 1989, when the buffer-stock system run by the International Coffee Agreement broke down.

The main reason for the decline in prices in the early years of the current decade was a gradual and continuous increase in coffee production throughout the world, particularly the new coffee exporting countries entering the international market, a good example being Vietnam. Global coffee production grew faster than demand leading to large surpluses of production. Our chart below shows the average monthly price for coffee in the world markets. The price chart shows a composite price for the different grades of coffee such as Robusta and Arabica beans. From the second half of 1997 through to the trough of prices in 2001, the average price of coffee collapsed from $180 per lb to less than $40 per lb. Prices remained very low until 2004 since when there has been some recovery in prices, but they remain well below the levels witnessed in the mid 1990

World coffee consumption is estimated at 114.7 million bags in 2005. Domestic consumption in exporting countries in 2005 was just over 30 million bags and in importing countries consumption was estimated at just fewer than 85 million bags. The main buyers of raw coffee beans are the largest multinational buyers, dominated by four firms: Nestlé, Kraft, Procter & Gamble and Sara Lee.

According to recent Cecafé estimates, the value of retail sales of processed coffee (roasted and soluble) is in the order of US$35 billion, while the retail value of coffee sold by the cup in places such as Costa Coffee and Starbucks (accounting for 20% to 30% of world coffee consumption outside the home) is estimated at over US$120 billion.

Coffee consumption has been growing at a steady rate of between 1 and 1.5 % per year; a growth rate is well below that for food products as a whole which is closer to 4% per annum. Changes in eating habits and increased demand for alternative drinks to coffee are largely behind this relatively slow growth of global market demand. Even the sharp fall in coffee prices during 2000 - 2004 seemed to have little impact on world demand, suggesting that coffee has a very low price elasticity of demand. Employment in coffee producing countries

Coffee production employs a labour force estimated at around 25 million families by the ICO and accounts for more than 50% of export earnings in many countries, an increase in consumption favouring a gradual rise in world prices would be a positive factor for economic growth and increased per capita incomes in these countries. In Brazil alone more than a million jobs are generated by the coffee industry.

The International Coffee Organisation (ICO)

The International Coffee Organization (ICO) is the main intergovernmental organization for coffee, bringing together 74 producing and consuming countries to tackle the challenges facing the world coffee sector through international cooperation. It makes a practical contribution to the world coffee economy and to improving standards of living in developing countries by helping to increase world coffee consumption through innovative market development activities and improving coffee quality through the Coffee Quality-Improvement Programme.

Leading coffee producers and exporters in 2005

The main coffee producers and exporters are shown in the table below. The data comes from the annual reports on the world coffee industry produced by the International Coffee Organisation. Brazil is far and away the biggest supplier of coffee beans in the global economy although nations such as Vietnam, India and Mexico have been gaining ground in recent years.

Production of 60kg bags per year 2004 2005 % change 2004-05

Brazil 39272000 32944000 -16 Colombia 11405000 11550000 1 Vietnam 13844000 11000000 -21 Indonesia 7386000 6750000 -9 India 3844000 4630000 20 Ethiopia 5000000 4500000 -10 Mexico 3407000 4200000 23 Guatemala 3703000 3675000 -1 Honduras 2575000 2990000 16 Peru 3355000 2750000 -18 Uganda 2750000 2750000 0 Cote d'Ivoire 1750000 2500000 43 Costa Rica 1720000 2157404 25 Nicaragua 1127000 1400000 24 El Salvador 1447000 1371700 -5 Papua New Guinea 1002000 1232000 23 Kenya 709000 1002000 41 Cameroon 727000 1000000 38

Brazil is effectively the “swing producer” for the global coffee markets, in other words, since Brazil is the largest coffee producer, changes in Brazil's supplies of coffee account for a large portion of the change in the world total supplies of coffee which then directly affects the prevailing international price. Brazilian coffee production peaked at 3.75 million tons in the year 2000 but fell into a steep recession from 2001 onwards as producers cut back supply in the wake of the collapse in coffee prices. Supply has stabilised in 2004 and 2005 with prices recovering ground. Week 5

Consolidation Week Week 6

The social and political implications of globalisation

The current situation

The economies of the world are becoming increasingly linked and so we have to watch how trends are developing and what influence they have on each other. At present some of the main worries include:

 the value of the US dollar – which continues to be low  the massive US trade deficit  the increasing trade surpluses being recorded amongst many Asian economies  the sluggish economies of the EU

The first is closely linked to the second and so we need to look at what has happened and what might happen as a result of over consumption by Americans. At present most US citizens do not appear to be aware of the potential dangers that such high levels of consumption might cause. Though some concern has been raised about the increase in Chinese imports to the richest economy in the world most seem unaware of this trend. It is also now thought highly likely that Asian economies, especially the Chinese will have to let their currencies rise. This would, in the opinion of many reduce an unfair competitive advantage that their exports enjoy when competing against products made elsewhere. If Asian currencies are valued upwards then the under performing economies of Europe may be able to take up some of the business that will be lost. If this does take place then the populations of the EU will increase their spending and so assist the world economy to adjust to the predicted down turn in US consumption. The big two EU economies (allowing for UK statistically being the fourth largest economy in the world) namely France and Germany continue to be very sluggish and face difficult political decisions regarding modernisation of their economies. The US trade deficit is now 5.7% of GDP and growing. US citizens continue to import:  cars  clothes  electronic goods

And the dollars they pay in find themselves into the pockets of foreigners who effectively lend them back to the US to cover its deficit – such sums are invested in US Treasury Bonds and other securities. The IMF now estimates that if this trend continues the US will be indebted to 50% of its GDP by 2011. This may not cause any problems for the US $ but if confidence fell amongst investors then its value could fall steeply. The IMF is now forecasting world economic growth of 4.3% in 2005 and 4.4% in 2006, down from the 5.1% recorded in 2004. Economist agree that these ‘imbalances’ must be addressed but no one can agree how or when to move against them. Some current trends

 China is emerging as the power house economy of the future  Both Japan and the EU are losing economic importance  Both Japan and the EU are running out of workers and the current stance against wide scale immigration means that this problem will continue  Structural flexibility has allowed some economies to take advantage of new technologies more quickly than others – this has been apparent in both the US and Australia whilst most of the EU has struggled to adopt to the new rules of economics  The emergence of China is in some ways similar to rise of Japan and South Korea 40 years ago  The US is now enjoying transpacific growth more than transatlantic  Global growth is becoming stronger but it has yet to reach the levels recorded in thee 1950’s and 60’s

As global mobility increases might it be the case that ‘globalisation is not just the dominance of the West over the rest?’ Might it be that the trends inherent in modern economics will also affect the USA? The west will increasingly absorb personnel, ideas and other features from cultures many thousands of miles away from its geographic shores. Globalisation is not intrinsically American, even if the present situation is one dominated by the US. So, why is the US the central force in this move to interdependent global networks? Well, let’s briefly examine US society and note some of its fundamentals.

* It is multiethnic and has always absorbed other cultures since non- indigenous peoples first population its lands  it has borrowed freely from the cultures of those who have arrived on its shores  ideas have flowed freely from its population and they have always been prepared to experiment with such innovations  capital has always been prepared to take risks  US culture does alter as it moves around the world – an example of this is the differences in Mac Donald menus across the world

One is not an apologist for US commercial expansion but it is interesting to note how the exportation of its culture is often more acceptable to the masses than it is to their political elite and the institutions they control. By touching on ‘US culture’ we enter the often fraught area of ‘soft power’ – topic on which many French thinkers have concentrated.

Does globalisation infer universality?

In reality globalisation has made national boundaries more porous but not irrelevant. However, there is little evidence of an emergence of what we might call a universal community – though may argue that values are moving towards a degree of homogeneity – which in a strange way seems to offer room for more radical or fundamental beliefs to excite an increasing number of people. Perhaps we are tending to make globalisation a mere economic term and thereby ignore its history – which involves more breadth. Diseases have long spread from one part of the world to another and now we have climate change threatening to alter the ways in which future generations will live. Military power, the ‘hard’ opposite to our earlier inclusion of ‘soft’ power has long been trying to become more global and yet even at the height of the ‘Cold War’ both sides struggles to get uniformity amongst its allies. The solidarity seemed more to be based on the speed and scale of possible military conflict than on permanent alliances. The onset of ‘international terrorism’ has tested old alliances and started some which are new – for example the interest of the US in the northern area of what we refer to as the ‘Indian sub-continent’. Social globalisation has spread and is spreading people, culture, images and ideas. Indeed, this very piece is being written in the United Kingdom to be read by people who live in Africa and if the Interaction Programme widens its coverage to say the Far East then the words will be read by those even further from its geographic origin. Four great religions have spread across the globe and so has scientific method and as one of the main platforms of the colonial era so did the institutions of politics and government. To the latter the post world war two eras has added international rules and objectives under the umbrella of the United Nations. The spread of globalisation has not been without its controversy and for many the inequalities it has brought remain its most negative impact of the planet. Before 1939 the doctrines of communism and fascism stemmed in part from the dislike of the inequalities associated with laissez-faire economics. In the developed world we now have a consensus broadly based on the social market and its provision of a ‘welfare state’. Elsewhere around the globe the inequalities persist in our growing. This is apparent in both the two largest economies in the world, namely China and India and the fear of unrest within those who previously distrusted each other is a driving force behind the Enlargement of the European Union. The awareness that globalisation has deepened inequality is a major cause of the increase in international protest movements. In short globalisation has been the result of technological change and the deliberate promotion by governments around the world to reduce barriers to international exchange. The USA has been a major instigator of global trade and its most noticeable beneficiary. Like so much of what we loosely call economics the current outcome of globalisation is ‘mixed’ – to one side the spread of international trade and its inherent advantages and on the other the increase in military, environmental and equity globalisation which has many concerned as to its eventual outcome. In the next section of this brief analysis of globalisation I will turn my attention to:  the implications of the speed and the amount of information now available to a growing number of us and how this is affecting the global events and interpretations  the arrival of one supra power  the growing concern that a global culture will be part of the drive towards efficiency and the global market Globalisation has been going on for centuries. The difference with the modern form is that it is thicker and quicker. We now see greater network effects that are where a product becomes more valuable once many other people have a use for it. A single telephone adds little to an economy but a ‘network’ does. A knowledge- based economy generates triggers within it and this act as stimulants to further innovation. Though goods tend to change at a slower pace that the acquisition of knowledge the greater interdependence of networks has become thicker and quicker and as such a small change in one part of the system can have a considerable impact elsewhere in the system. The ‘financial markets’ are a good example of this. Alas, military globalisation also shows these characteristics. An event many miles from say the US can have a noticeable influence on foreign policy. In very complex markets and ideological battles individuals will act in as unpredictable way as possible – so as to confuse their rivals or enemies. As students of business will appreciate uncertainty is detested by profit seekers and now they have to content with an increase in the speed at which information and transactions can flow. Though the velocity of information has not changed greatly between individuals the pace of change within institutions has been enormous. Information now diffuses more and so the impact of its content can be seen is shortening periods of time. News cycles are becoming shorter and with 24 hour satellite broadcasting it is not unusual to see government officials watching CNN or BBC World in order to discover what is happening. The increased mobility of capital also illustrates the ‘thicker’ global relationships as ordinary workers in Europe or any other ‘developed’ economy may have their savings invested in markets thousands of miles away from their home country. At present this awareness of global events and the fluidity of money flows seldom apply to those living in the developing world but things are changing. I recently watched a live football transmission in a small bar in a rural town in West Africa. Many of the occupants of the bar were dressed in the colours of the two teams. They watched with interest the life styles illustrated in the adverts that accompanied the broadcast and also listened to the news headlines that followed the end of the match. Though most of the individuals had little personal access to the forms of communication now central to the lives of many of those living in the developed world ‘collectively’ they could afford about 20 US cents to watch TV in a bar. As noted earlier physical goods both more slowly than capital and knowledge but modern business techniques are addressing this ‘gap’. The transmission of knowledge is now virtually instantaneous but its understanding tends be far slower. Culture dictates acceptance and understanding and can cause significant difficulties. An example of this is US-led youth culture, where the baseball cap is universal but even in the United Kingdom it is becoming associated with youth crime and violence. To some this ‘westernisation’ threatens their core values and leads to tension. Finally, elements of social globalisation that rely on the migration of people are constrained by distance and legal jurisdiction and increasing numbers of governments are seeking to control immigration. What this modern form of globalisation has added to the entire issue is a quickness and thickness in the network connections that are more complex. Policy makers will have to accept a background against which they formulate ideas that will be:  more complex  more uncertain  involving shorter response times  involving broader participation by groups and individuals  Dealing with uneven shrinkages in distances.

What of local cultures? This makes us ask if globalisation is homogenising the cultures of the world. It also makes us address if globalisation and modernisation necessarily accompany one another. Britain became a world power as it adapted to technical breakthroughs faster than other nations but it was eventually caught and overtaken by others. Part of the colonial expansion of the United Kingdom involved some of its culture being exported but a visit to any of the participants countries sees local culture very much in evidence. Will Africa both industrialise in the same way as UK, France etc did in the nineteenth century and will they create similar institutions to manage a drive towards value adding production? We could ask the same question in a modern setting, namely the internet. Is the adoption of some aspects of a US-led move to information technology simply an acceptance of Americanisation? Put in mathematical terms ‘correlation is not necessarily causation’. The challenge to Africa is not modernise without becoming a simple blue print of US society. There is interesting precedent for a country not simply adopting everything it saw as ‘successful’ within its rivals and this is Japan. It underwent considerable industrialisation during the late nineteenth and early twentieth centuries but it remains ‘Japanese’ and has adopted technology into its unique cultural base values. Few cultures are static and more Africans are now travelling outside their immediate political boundaries. Vibrant cultures are constantly changing and borrowing from others. In this century Africa may borrow more and not changes more quickly but will society remain essentially ‘local’ in its cultural values? As technology spreads so less powerful actors on the world stage become more powerful. We have seen both the fear of asymmetric terrorism and the power of Trans national corporations increase in recent years. So, is economic and social globalisation producing cultural homogeneity? US soft power is apparent in most countries around the world but immigrants to the Use changing its culture. Maybe the US is exporting soft cultural values so as to make the world more tolerant when it too has grown past its dominance and others now dictate global trade? As globalisation spreads technical capabilities and information technology broader will allow wider participation in global communications and this will probably result in US influence diminishing. The reaction of the US to this loss of power may rest on:  how other states use democratic power  the existence of free markets  the application of human rights Week 7 Group presentations on the economic, social and political changes taking place in the various countries selected by students. Week 8

The role of multi-national companies in global trade

Why the drive to MNCs? For many companies, the following might be some or all of the reasons to expand into different countries:

 Reduce transport and distribution costs

 Avoid trade barriers

 Meet different rules and regulations (avoid non-tariff barriers)

 Secure supplies of raw materials or markets

 Cost advantages - for example low labour costs

The advantages of MNCs

Economic Growth and Employment The essence of a MNC is that they bring inward investment to countries that are not their home base. If they choose to expand by building production facilities they will be bringing in inward investment into the country. This investment is likely to provide a boost, not only to the local economy but also the national economy.

Building a new plant requires resources - land, labour and capital. Labour has to be found to help construct the plant and all the equipment that goes into it and some firm somewhere will be hired to build the machinery and equipment, provide the bricks, steel, cement, glass etc. that go into the building. If it is announced that Company X from Germany are to build a new distribution centre in the UK at a cost of £10 million, this effectively means that a whole host of firms will be getting additional work to the value of £10 million.

Let us assume that a firm manufactures and supplies cable for electrical work. To this firm, the contract to supply the cabling for the new plant might be worth £350,000. If the plant was not built then the firm would not generate that order and not receive that work. For workers in the cabling plant, the order helps to maintain the flow of orders and can keep them in employment.

It can also be expected that the additional income will find its way through the local economy. If additional people are hired, they will receive an income which they spend. For existing workers, increased orders might equate to job security and they too might feel more confident in spending on new items - furniture, house extension, new white goods, and holidays and so on. Inward investment therefore can act as a trigger to generating wealth in the local economy. If a MNC is attracted to an area then this might also lead to other smaller firms in the supply chain deciding to locate in those areas. Other firms providing services to these firms are then attracted to the area and so on.

This type of wealth generation has been witnessed in many UK regions. The siting of the car manufacturing plants in Sunderland, Swindon and Derby has done much to help those regions experience a boost to the local economy. In the case of Sunderland and Derby, the investment has partly helped to offset the decline in other industries that caused unemployment. For less developed countries, inward investment can again act as a catalyst for other forms of investment. The effects of the investment might be less dramatic but nevertheless, it can be something that is seen as essential for helping a country escape from poverty.

Skills, production techniques and improvements in the quality of human capital It can be argued that MNCs bring with them new ideas and new techniques that can help to improve the quality of production and help boost the quality of human capital in the host country. Many will not only look to employ local labour but also provide them with training and new skills to help them improve productivity and efficiency.

In Sunderland, one of Europe's most productive car manufacturing plants, the workers have had to get used to different ways of working and different expectations than many might have been used to if working for other British firms. In some cases this can prove a challenge but in others it can lead to improvements in motivation and productivity. The skills that workers build up can then be passed on to other workers and this improves the supply of skilled labour in the area. This makes the area even more attractive to new industry as it helps to reduce the costs of training and skilling of workers.

Availability of quality goods and services in the host country: In some cases, production in a host country may be primarily aimed at the export market. However, in other cases, the inward investment might have been made to gain access to the host country market to circumvent trade barriers. In the case of many Japanese car manufacturers the investment made into UK production has enabled them to get a foothold in the EU and to avoid tariff barriers. The UK has had access to high quality vehicles at cheaper prices and has also led to improvements in working practices, prices and quality in other related industries.

Tax Revenues For the host country, there is a likelihood that the MNC will have to be subject to the tax regime in that country. As a result, many MNCs pay large sums in taxes to the host government. In less developed countries the problem might be that there is a large amount of corruption and bad governance and as a result MNCs might not contribute the tax revenue they could and even if they do it might not find its way through to the government itself.

Improvements in Infrastructure In addition to the investment in a country in production or distribution facilities, a company might also invest in additional infrastructure facilities like road, rail, port and communications facilities. This can provide benefits for the whole country. The Costs of Multinationals

The costs can be summarised in the points below - for the most part, the costs are closely linked to the benefits but it will depend on the extent of the benefits that might arise as a result of the activity of the MNC.

Employment might not be as extensive as hoped - many jobs might go to skilled workers from other countries rather than to domestic workers.

There might be a limit in the effect on the local economy - it will depend on how big the investment into the local economy actually is.

Some MNCs may be 'footloose'; this means that they might locate in a country to gain the tax or grant advantages but then move away when these run out. As a result there might not be a long term benefit to the country.

How many new jobs are created depends on the type of investment. Investment into capital intensive production facilities might not bring as many jobs to an area as hoped.

The size and power of multinationals can be used, it is argued, to exploit weak or corrupt governments to get better deals for the MNC. Mittal, for example, a major steel producer, negotiated a $900 million deal to secure rights to mine iron ore in Liberia. The government that negotiated the deal was not elected. When a new, elected government came to power, they re-negotiated the deal and took the investment to well over $1 billion.

Pollution and environmental damage. Some countries may have less rigorous regulatory authorities that monitor the environmental impact of MNC activities. This can cause long term problems. In India, Coca-Cola has been accused of using up water supplies in its bottling plant in Kerala in Southern India and also of dumping waste products onto land and claiming it was useful as fertiliser when it appeared to have no such beneficial properties.

De-merit goods. Some companies might be producing goods that are not beneficial. Examples might include tobacco products and baby milk - mentioned earlier.

Repatriation of profits. Profits might go back to the headquarters of the MNC rather than staying in the host country - the benefits, therefore, might not be as great. Week 9 – MNC’s – Part 2

Is Globalisation and the rise of MNC’s a Good Thing?

Please read this essay and comment on it.

Globalisation is probably the most powerful trend of our time. Almost every single rich company in the world today has taken part in the process. Some countries such as America have more than one multinational company. This is why America is so rich, multinational companies can earn more money in a year than a country does. For example General Motors, an American company earns more than 165 billion dollars per year. This is more than Turkey and Denmark who both roughly earn 145 billion dollars per year. Globalisation is happening all the time, the more we the public spend, the bigger multinational companies will get.

The term globalisation means when rich powerful companies expand their business and take their trade to other parts of the globe. Companies will set up factories and give people in towns and villages jobs. Globalisation has an impact on everybody in the world. The effects of globalisation differ, depending on your circumstances in life and where you live in the world. If you live in a rich country then globalisation affects you in a bad way. Because rich companies are manufacturing their products in countries where people will work for less, jobs can become scarce. If you are in a poorer country and a multinational company moves in then life could be made easier. Job opportunities will be available and wages will probably be more than what you earn at your current job. However this is not always the case. Up until recently some multinational companies have been exploiting the public and their workers. Some companies have had to pay out millions of pounds in legal fees and compensation. Accidents have occurred in multinational company owned factories; in fact the biggest human disaster ever occurred in such a factory. Special watch groups have been set up to monitor these multinational companies to make sure that nothing unacceptable happens.

An example of a multinational company is Phillip Morris. Phillip Morris produces cigarettes, alcohol, non-alcoholic drinks and food products. The company is based in New York and employs 137,000 people. The reported sales of 1999 were 78.5 billion dollars. Phillip Morris brands include:

Benson & Hedges Callard & Bowser Cote D'or Cracker Barrel Dairylea Foster's Marlboro Miller Lite Seven Seas There are 183 brands in total. All of these brands are big name brands and are mostly popular with the public. Most of the Phillip Morris brands are cigarettes. The fact that Phillip Morris brands all of these products increases the amount of complaints received to the company. Phillip Morris has been under criticism and has had to payout a lot of money. The company has been under scrutiny for tobacco five times, three times for corporal influence, two legal disputes and unfair trade. The most the company has ever had to payout is 73.96 billion dollars in July 2000. The cigarette industry altogether paid out I45 billion dollars. A judge decided that the nation's five largest cigarette makers and industry groups had produced defective and deadly products for decades and had concealed their knowledge of its harmfulness. In May of 2001 Philip Morris and two other companies agreed to pay 710 million dollars to smokers no matter how their appeals processes turned out. Phillip Morris has also been involved in fair trade matters concerning their coffee beans and how much the farmer earns from the profit. The company does not have a policy on this and the coffee packaging displays no organic or shade grown sign (meaning that coffee beans aren't grown with pesticides or fertiliser). The company is under fire from the public~ Phillip Morris is profiting from cigarettes, which can cause illnesses and exploiting workers of the company. Phillip Morris has been praised for some charitable deeds, such as donating 10 million dollars to the victims of the terrorist attacks on September 11th. One of the brands, Kraft Foods sent two food processing experts out to Mongolia to help Monsuu. Monsuu is a private dairy company to learn the world standards of dairy production and processing. The program was set up by UNISTAR, an operation run by UN volunteers. There may be some good in Phillip Morris, but I think that the company is more interested in making money than people's rights and people's health.

A place that has been affected by globalisation is Bhopal in India. A multinational company named Union Carbide, an American company, set up a chemical plant there and wanted to produce a certain chemical called methyl isocyanate. Union Carbide produced this gas in Bhopal because it is illegal to produce it in America because of the damage it can cause. The chemical plant was in the heart of Bhopal, in the middle of the city. This would certainly have not been allowed in America because of the dangers if ever an accident occurred. Because a multinational company moved into Bhopal people started to come into the city to find work. As a result Bhopal grew in size. On December the 3rd 1984, gas leaked from a tank of methyl iscocyanate as well as other gases hydrogen cyanide and mono methyl amine. This led to the fleeing of local residents and neighbouring communities. The gases burn the tissues of your eyes and lungs. The gases can do damage to every single system in your body. This is exactly why these gases are not allowed to be produced in America. There were approximately 500,000 people living in or around Bhopal at the time, unofficial figures stated that 8,000 people died in the immediate aftermath of the disaster. Recently the figures have been updated and state that 16,000 deaths have been caused. Union Carbide released a report on the accident and claimed that approximately 3,800 people had died and that the gases did little or no infection to eyes or lungs. The company blamed the accident on a worker and accused an employee of sabotage. In February 1989, the Supreme Court of India made Union Carbide Corporation and Union Carbide India Limited to payout 470 million dollars to all of the claims stating that they had been affected severely by the gas leak. I think that Union Carbide should never have been allowed to have a chemical plant, where dangerous gases would be produced in the middle of a city. If it's not allowed in America what gives them the right to do it in India? If the plant had been out of the city in a remote part of India, then maybe the whole accident would never have happened.

Another place affected by globalisation is Puerto Rica in South America. People working on Del Monte banana plantations have been complaining of poor working and living conditions. The fields are sprayed with pesticides without any warning to workers; this causes skin infections and impotence. The employees are supplied with a few pesticide spraying suits which protect them, but employees complain that the suits are bulky and old fashioned. Also, the suits are too hot to work in and slow the employees down. Living conditions are quite primitive with houses being only one or two rooms. The sewage systems by the workers houses are open and disease has been known to spread. After the workers first 10 months on the plantation 85% are fired because they can no longer keep up with the demand or have health related problems such are backache, liver and kidney problems and exhaustion. Del Monte are clearly exploiting their workers and making a bigger profit from taking advantage of these people.

Some of the main problems of globalisation are that multinational companies take over their surroundings. The environment can be totally changed, Globalisation doesn't just affect people. Cities in India have been totally transformed by globalisation and look like modern western cities. For example Bangalore in Karnataka looks like a typical western city; it has a resemblance to Florida in America because of globalisation. Small villages have turned into bustling cities and pollution has risen because of the number of people in a city being able to buy cars. The city starts to become less environmentally friendly. The bigger a company gets, the less it remembers all of its labour workers such as factory workers. The standard of human rights can decrease because of this and people may be affected in numerous ways. Workers may be exploited by big companies and given less of a wage than they should be getting. Staff may be treated poorly by inspectors and children may be able to get jobs because of staff not checking documents to prove when a certain person was born. This scenario occurred in Indonesia, girls as young as 14 were getting jobs in factories and working up to 12 hours a day. Wages in poorer countries are less, so the company can make the same product, just as good quality for a fraction of the price it would cost to make them in its own country. Factory work in richer countries is harder to come by because of this. Therefore prices of things such as brand name trainers are over priced because the companies can afford to make them expensive. The company will never be making a loss; it costs a manufacturer like Nike a mere £3:75 to get a shoemaker to make a shoe. The company can then sell off the shoe for as much as £120. In richer countries like America a shoe would cost a lot more to make because of the status of the country and the pay given to workers. Materials may be a lot cheaper in poorer countries as well because they will accept whatever offer they are given. The country cannot afford to refuse an offer from a big company. It's hard to keep track of so many multinational companies going abroad and manufacturing their products. An advantage for multinational companies is that they can manufacture things they are not allowed to manufacture in their own country. Union Carbide is a good example of this. Poorer countries have to accept globalisation or they will remain poor and multinational companies will go elsewhere. Globalisation can benefit people, it's not all bad. The people who benefit the most from are the multinational companies. If you are the boss of a multinational company then you are making an extraordinary amount of money. Because people in poorer countries will work for less, multinational companies save money on wages. If you had to pay someone in Europe or America £20 a day, someone in a less fortunate country could work for as little as 50 pence a day. You can then sell your products for a higher price than they are actually worth. Which all means at the end of the day you earn more money form your products and save money on wages. Secondly by poorer countries having multinational companies in their cities, the people of that city have a chance to learn new skills and get a well paid job. The more money people have to spend the richer the government becomes, so cities can become cleaner and services such as hospitals may become more advanced. If a country starts to earn more money then life expectancy will increases, if families have enough money to pay for medical bills then people will live longer. According to the World Trade Organisation (WTO) globalisation helps make peace between international countries. By multinational companies doing business in less fortunate countries that country then earns more money and therefore becomes friends with that country. Relations between rival countries may strengthen because of trade. Development of poorer countries can rapidly increase. If you look at places like Bangalore and Indonesia you soon learn that these places have developed in a space of thirty years. Places have become richer a lot quicker because of globalisation. The citizens of these countries have benefited by earning larger amounts of money quickly because of rapid development.

In conclusion, I do not have a lot of positive things to say about globalisation. In my opinion multinational companies do more harm than good. Based on evidence from accidents in Bhopal and exploitation in banana plantations like the ones in Puerto Rica, multinational companies seem to take advantage of money saving scheme they can think of. Paying low wages to factory workers and setting up offices in poorer countries so it will cost them less is scandalous. Globalisation isn't just a thing that affects poorer countries; it affects everyone living in the world today. If a multinational company like Nike suddenly goes bust hundreds of thousands of people would be out of work. A poor country where Nike goods are manufactured would suffer without a doubt. Poor countries need multinational companies and multinational companies need poor countries to survive. This chain is what keeps poor countries poor. Nike being a big American company brings in a lot of income to the United States. The fact that America has so many multinational companies keeps them rich, by there being poor countries where cheap labour is accepted these companies will always be making a profit. America and other rich countries will never end poverty because of this chain. Globalisation keeps poor countries poor. Multinational companies are rich enough to set up factories in their own countries but wages would be higher and they could not get away with short changing employees. Having explored evidence from web sites such as Responsible Shopper.org I have learnt that multinational companies seem to receive a lot more criticism than they get praise. Some of the stories about these companies are shocking, amounts of money that these companies have had to payout is astonishing. I learnt from this site about Phillip Morris. I find it unbelievable that one company can own so many brands of cigarettes, alcohol, non-alcoholic drinks and food products. Globalization is such a powerful movement that two thirds of the entire world's trade is controlled by 500 companies. However globalization isn't all bad, countries like Indonesia been modernised in the space of thirty years. There are more jobs so people are becoming wealthier. Quality of life in Indonesia is rising; the government now has more money to spend because people can afford to buy more expensive things. Gross Domestic Product (GDP) in Indonesia is 174 billion dollars. Multinational companies are rich enough to manufacture their own products in their own countries but don't because it's cheaper not to. Surely they could spare a few million pounds to build factories in their own countries and pay people in richer countries a fair wage? These companies are earning enough money to rid the world of poverty, yet still pay measly wages to workers in poorer countries. They keep poorer countries poor and that is wrong.

If globalisation had never happened and there were no multinational companies the world would be a much fairer and equal place for everybody. I don't agree with globalisation, but it has made its mark, and is here to stay.

Globalisation and the right to knowledge

What follows is another perspective which you are advised to read and comment on.

Intellectual-property rights are not just for the rich world. Carefully constructed, they can help the poorest too.

"PATENTS kill!" was the simple message of AIDS activists in South Africa earlier this year. Battle had broken out between the government and multinational drug companies over the relaxing of patent restrictions which, it was hoped, would improve the flow of costly medicines to the country’s 5m sufferers from HIV. Meanwhile, in north-west Mexico, poor farmers are furious about a patent issued to an American company giving it the exclusive right to market yellow enola beans in the United States. The Mexicans say the bean, which they have grown for generations, is not a novel invention, and that the patent unfairly restricts their ability to export the crop north of the border.

So patents are obviously bad for poor countries—or so many activists argue. They are largely the preserve of western multinational companies, allowing them to establish monopolies, drive out local competition, divert research and development away from the needs of poor countries and force up the price of everything from seeds to software. In the process, patents prevent poor people from getting life-saving drugs, interfere with age-old farming practices and allow foreign "pirates" to raid local resources, such as medicinal plants, without getting permission or paying compensation.

Yet the picture has another side. In Mexico, local musicians are finding it increasingly hard to sign contracts with international record companies, since almost two-thirds of the cassettes and CDs sold in the country are pirated. In India, biotech entrepreneurs are busy trying to hawk their products abroad but are wary of commercialising them at home. Since Indian patent law does not fully cover pharmaceuticals, the fruits of their costly research are hard to protect from copycats.

By this token, intellectual-property protection is good for poor countries. It encourages domestic industry, boosts foreign investment and improves access to new technologies. To true believers, intellectual-property protection is part of the gospel of modern economic growth, along with free trade and democracy. These two conflicting views have turned intellectual-property rights—such as patents, copyright, trademarks and trade secrets—into one of the most contentious areas in international development. The debate has been sharpened by two new forces. The first is increased interest in the "knowledge economy", in which a company’s chief assets are not so much physical capital as bright ideas and the intellectual-property rights which control their exploitation and give the firm a competitive advantage. Some of these patentable innovations, such as "one-click" business methods, challenge conventional ideas of invention. Other advances, such as genetically modified organisms, not only tilt at that standard, but also raise tricky questions about the ethics of laying claim to living things. Between them, however, such developments have led to a surge in patent applications.

The second force is globalisation. Intellectual-property rights used to be largely a domestic issue, with countries deciding on their own levels of legal protection and enforcement. The World Trade Organisation (WTO) has changed all that. As part of the trade deal hammered out seven years ago, countries joining the WTO also signed on to Trips (trade-related aspects of intellectual-property rights), an international agreement that sets out minimum standards for the legal protection of intellectual property.

Many poor countries think that Trips gives them a raw deal. According to Rashid Kaukab, of the South Centre in Geneva, they feel it commits them to the heavy expense of bringing their legal protections and enforcement up to western levels without much sign of the benefits claimed for it. Like almost every other measure associated with the WTO, Trips has become a battleground between those who favour, and those who oppose, the spread of global capitalism.

What Trips demands

On June 18th, the 141 member-governments that make up the Trips council sat down in Geneva for their regular review of how members are getting on with the tricky business of implementing its provisions. Contrary to popular misconception, Trips does not create a single, universal patent system. Much to their annoyance, multinational companies seeking protection round the world still depend on each country’s patent office to grant those rights and their judicial, customs and police services to enforce them, although some European countries, for example, have got together to offer region-wide patents.

What Trips does, however, is lay down a long list of ground-rules describing the protection these systems must provide. These include extending intellectual-property rights to include computer programs, integrated circuits, plant varieties and pharmaceuticals, which were unprotected in most developing countries until the agreement came along. Patents can be granted for any technological process or product, so long as it is new, inventive and has an industrial application; such protection lasts 20 years from the date of application. Patent rights are valid no matter whether the products are imported or locally produced, and protection and enforcement must be extended equally to all patent-holders, foreign or domestic. Countries vary greatly in how closely their existing law matches the Tripsmark, largely according to their degree of economic development. America, for example, has a Patent and Trademark Office with an annual budget of $1 billion and a staff of more than 3,000 highly-trained scientists, engineers and legal experts to examine claims. It also has more than 600 judges to preside over patent disputes, an extensive antitrust authority on the lookout for monopolies and a vast customs service to clamp down on counterfeiting. At best, least-developed countries have half a dozen patent examiners and not much else.

Such disparities are nothing new. As Graham Dutfield, at the Oxford Centre for the Environment, Ethics and Society, points out, countries tend to clamour for strong patents once they have an industry to protect. For most of the 19th century, Switzerland had no patent system at all. Once its industrial base was mature enough to foster home-grown innovation, patent enforcement became a matter of urgent self- interest.

With Trips, however, developing countries no longer have the luxury of moving at their own speed. According to the terms of the agreement, most of the poor world had until the beginning of 2000 to bring their legal protections up to scratch. The least- developed countries were given a stay of execution until the end of 2005.

Upgrading does not come cheap. Keith Maskus, an economist at the University of Colorado, reckons that it will cost a poor country roughly $1.5m-2m just to build a bare-bones infrastructure to implement Trips. The World Intellectual Property Organisation gives technical assistance to countries trying to draft intellectual- property legislation or set up their patent offices, but poor places like Mauritius say more money and skilled manpower is needed. Not surprisingly, countries fighting infectious disease or civil war would rather deal with these than with patents.

So far, few countries have managed fully to comply with the agreement. As with other trade-related squabbles, countries that consider themselves damaged by another’s failure to live up to Trips can take their grievance to a dispute-settlement panel at the WTO. There are other means of persuasion, too. The office of the United States Trade Representative has a special procedure for investigating countries whose legal protections do not come up to scratch, and reserves the right to take action against them. America has also been busy signing trade agreements with countries such as Jordan, which include a requirement for higher standards than Trips demands.

The rich world’s language

In theory, such mechanisms should serve both rich and poor alike. But Trips is essentially a set of rich-world conventions that include a few concessions to poor countries. It was pushed on to the trade agenda by America, Europe and Japan, which together hold the lion’s share of the world’s patents and whose companies wanted more protection abroad. The American pharmaceutical industry, for example, estimates it loses $500m in India alone each year because of poor patent protection. The rich world certainly does well out of stronger protection abroad: America, for example, earned $36 billion in royalties in 1998 from patent licences and the like.

As Jayashree Watal, a former trade negotiator for India and now an intellectual- property expert at the WTO, recalls, developing countries went along with Tripsin the hope of winning trade concessions in such areas as farming and textiles. Such indirect gains have yet to materialise. Some developing countries would like to see Trips taken out of the WTO altogether. But most see a virtue in keeping it in the hothouse of world trade, and using it as a bargaining chip with industrialised countries.

In the meantime, the world’s poorest countries are still waiting for the promised benefits of stronger patent protection at home. But that flood of foreign direct investment, technology transfer and home-grown innovation also depends on other things, including market size and competition policy. More advanced developing countries, such as India, may see such rewards eventually. In the short term, however, a stronger patent regime will mean higher prices for goods and more unemployment once copycats are driven from the market.

Room to wriggle

Much of the poor world’s anxiety about Trips is focused on two issues: access to medicines and protection of traditional resources. Both were on the agenda at this week’s meeting in Geneva, where members aired their differences. Many developing countries, among them India and a clutch of sub-Saharan states, would like clarification of the agreement’s provisions and exceptions to protect public health and the environment, and amendment of its articles on the patenting of life-forms. America and Japan are opposed to any change in the letter of the agreement; the EU may be more accommodating. Patents have attracted much of the blame for the gap between rich and poor countries in their supply of high-tech medicines. Earlier this year, Oxfam, an international aid charity, launched a campaign to improve poor countries’ access to such drugs with a call for a wide reform of Trips. Yet some developing countries, such as Brazil, concede that the agreement is flexible enough in theory, giving them sufficient room to craft their domestic patent legislation in a way that also protects public health. What they want to ensure is that the developed world interprets these provisions in the same generous light.

Many of the most effective drugs to treat such scourges as HIV and malaria are covered by patents in the industrialised world. These allow the developers to recoup their steep research spending, but also drive the cost of the drugs far higher than poor countries can afford. In much of the least-developed world, however, these patents do not apply. In theory, these countries could import generic copies from other poor countries that are not yet obliged to comply with Trips but have the capacity to churn them out, such as India. In practice they do not, largely because they lack both the money to buy the drugs even at bargain-basement prices, and health-care systems to deliver them.

There is, however, a group of developing countries, such as South Africa, that are expected to toe the line and enforce such drug patents, but find it hard to pay the sort of prices pharmaceutical companies have, until recently, been asking. The Trips agreement offers two main options to ease their way. The first, called "compulsory licensing", allows countries either to manufacture or import copies of a drug without the patent-holder’s approval, in some circumstances—a national emergency, for example—provided that they fulfil certain conditions, such as paying the patent- holder compensation. The second possible fix is parallel importing, which allows countries to seek cheaper sources of a patented drug from abroad. Drug companies hate this practice, but Trips has nothing to say against it.

Rich as well as poor countries are worried about the effect of patents on drug prices. They are equally concerned about the patenting of plants, animals and genes. Part of this is a moral objection to the exclusive exploitation of living things. But poor countries also have practical objections. The developing world, home to a rich array of the world’s plants, animals and micro-organisms, is a potential treasure trove of starting material for new drugs and crops, which could do the poor much good. But few people in, say, Andean or Indonesian villages have the $20,000 needed to obtain a patent in America, or the $1.5m it costs to challenge one.

Money is little object, however, to many western entrepreneurs who venture to far- flung parts, bring home such riches and then proceed to patent them. Some of these patents will be warranted, since the "bioprospectors" will have enhanced nature with some inventive step. But ActionAid, a British charity, and other NGOs have documented dozens of instances where nature is left pretty much unadorned and a patent is issued anyway, without any acknowledgment or reward for the villagers who may have tipped off the "inventor" in the first place.

A growing alliance of developing countries would like to see this "biopiracy" stopped. Costa Rica, for example, has laws exempting genes from patenting. Others are introducing laws that would require all those applying for intellectual-property rights over, say, a plant variety, to declare where they got it and to prove that they not only have the consent of its native users, but have arranged to share the eventual rewards of commercialisation. Brazil, among other countries, would like to see such provisions explicitly written into Trips. The United States, however, is strongly opposed to any change.

For richer, for poorer

As the fuss over biopiracy shows, poor countries are not opposed to a proper patent regime; they simply want one that fits their needs. A few interesting experiments are in progress. One of them is the Honey Bee network, run by the Society for Research and Initiatives for Sustainable Technologies and Institutions (SRISTI), which sends out volunteers into rural India to find village "oddballs", the people who are known for working in a different way from others. The volunteers then document their bright ideas or early inventions, such as a motorcycle-powered plough or a tilting manure cart, in a database which comes in seven local languages, and includes plenty of pictures to help illiterate farmers understand the gist of the invention. The network now has 10,000 innovations on its database, with eight patents pending, and has also benefited from a micro-venture-capital fund to help get the inventions off the ground.

A similar project is under way in Venezuela, where Otro Futuro, a local charity, and the Policy Sciences Centre of New Haven, Connecticut, are working jointly to help the Indians of the Dhekuana tribe assemble their traditional myths, music, knowledge of medicinal plants and other traditional folklore into an atlas. A written record is not only a valuable precaution against a sudden loss of this largely oral heritage, but also serves as a safeguard against piracy abroad. The United States Patent Office, for example, will not grant a patent on an invention if there is "prior art", or earlier evidence of its existence in the public domain. But, unlike its European counterpart, the American office does not recognise foreign oral evidence as prior art.

Making the Dhekuana database public might help to stem biopiracy. But as Frank Penna of the Policy Sciences Centre points out, it may not bring the tribes much material reward, since they themselves cannot patent the contents of the database once it has been disclosed. The Dhekuana now have their own team of patent lawyers, paid for by the World Bank, who are trying to find a way to register their traditional knowledge, possibly as a trade secret, in order to secure the tribe’s interests.

But according to Michael Blakeney, of Queen Mary and Westfield College in London, there are limits to shoehorning such traditional practices into the holes provided by conventional intellectual-property law. Western patent systems grew out of a particular model of innovation at a particular time in history. They assign specific rights to individuals or corporate entities for well-defined developments for prescribed periods of time. This model does not fit neatly with the sort of collective ownership the Dhekuana have, where the "invention" is vague and its origins are lost in the mists of time.

New models will probably be needed to protect such traditional knowledge, and these will not be easy to create. To some, such initiatives smack of political correctness; others see them as fair reward. Their introduction would help to turn the rising tide against Trips by showing even the poorest developing countries that intellectual- property rights can be an opportunity, not just a threat. Week 11 – International Organisations

Organisations such the World Trade Organisation aim to free up world trade from trade barriers on a global scale. On a regional scale groups of countries or trade blocs have also been trying to lower trade barriers between them and stimulate regional trade. Increasingly the trade creation effect of regional co-operation is being viewed as an important cause of economic growth. However, the impact of trading blocs also has a trade diversion effect.

There are a number of types of trade blocs:

Free Trade Areas Customs Unions Common Market Economic Union Free Trade Area

Sovereign countries belonging to the free trade area trade freely amongst them but have individual trade barriers with countries outside the free trade area. All members have most favoured nation status, which means that they are all treated equally.

Examples include North American Free Trade Area (NAFTA) between the USA, Canada and Mexico; Asia Pacific Economic Cooperation (APEC) and COMESA

Customs Union

The countries are no longer fully sovereign over trade policy. There will be some degree of unification of custom or trade policies. They will have a common external tariff (CET) which is applied to all countries outside the customs union. The countries will be represented at trade negotiations with organisations such as the World Trade Organisation by supra-national organisations e.g. the European Union.

Common Market

This trading bloc is a customs union, which has in addition the free movement of factors of production such as labour and capital between the member countries without restriction. Mercosur is an example of a common market comprising of a number of South American nations.

An Economic Union

This is a common market where the level of integration is more developed. The member states may adopt common economic policies e.g. the Common Agricultural Policy (CAP) of the European Union. They may have a fixed exchange rate regime such as the ERM of the EMU. Indeed, they may have integrated further and have a single common currency. This will involve common monetary policy. The ultimate act of integration is likely to be some form of political integration where the national sovereignty is replaced by some form of over-arching political authority. The World Trade Organisation was established in 1995 following its creation as one of the outcomes of the Uruguay Round of negotiations of the General Agreement of Tariffs and Trade (GATT). GATT was very much an ad hoc organisation that dealt solely with trade in goods. The Uruguay Round sought to expand its terms of reference to include services and also intellectual property and create a more formal legal framework in which to carry out trade negotiations. By April 2000 136 countries were members of the WTO. The aims of the WTO are three-fold:

To help trade flow smoothly, in a system based on transparent rules To settle trade disputes between countries To organise trade negotiations The WTO provides a forum for its members to reach agreements through negotiation about how international trade should be liberalised to the benefits its members. It monitors and scrutinises the trade policies in the various regions of the world and those of member countries. It also facilitates solutions to trade disputes.

Currently the WTO has three Agreements, which are periodically re-negotiated:

General Agreement on Tariffs and Trade - dealing with trade in goods General Agreement on Trade in Services (GATS) dealing with trade in services Agreement on Trade-Related Aspects of Intellectual property (TRIPS) dealing with copyright, trademarks, patents, industrial designs and trade secrets One of the stated principles of the WTO is that of non-discrimination. All members are conferred with Most Favoured-Nation status. If one country grants another country a special favour then all members of the WTO should receive the benefit. However, there are some exceptions to this that have been negotiated by the member countries.

In 1994 economists, at what was then GATT, estimated that the agreements could contribute between $184 billion to $510 billion to the world economy by 2005. From the point of view of countries like Zambia the question is how much of this trade will benefit the poor countries. Freeing up international trade and breaking down protectionist barriers exposes many of the LDCs to competition that places great pressures on domestic industry and agriculture and local employment. As many LDCs lack a taxpaying base tariffs on imports are an important form of government revenue.

It should also be remembered that the economic success of many of the MDCs has occurred behind protectionist barriers. The Multi Fibre Agreement of 1961 was a short-term system of quotas on cotton textiles exported by LDCs. It is still in place although the Uruguay round required that it be phased out during the next five years. Despite being advocates of free trade and putting pressure on the LDCs through organisations such as the WTO and the IMF to liberalise trade, many of the MDCs still operate tariffs and other more subtle forms of non tariff barriers. Producer subsidies, and investment grants to depressed areas within trading blocs such as the European Union have the effect of lowering firms' costs in MDCs making their output more competitive than the firms in LDCs. Terms of Trade

The value of a country's exports and imports, and consequently the flows of money into and out of a country that are recorded in it balance of payments, is determined by the quantity of the good or service traded and their prices.

Changes in the relative prices of exports and imports are important factors in influencing the values of exports and imports and the balance of payments of a country. The terms of trade is a measure of the relative prices of imports and exports.

The coefficient of income elasticity can be calculated by the following formula

Terms of Trade index = Index of Export Prices x 100

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Index of Import Prices

If the terms of trade index number increases (DPx>DPm) it is described as a favourable movement (a unit of exports will buy more imports).

If the terms of trade index number decreases (DPx

This terminology is somewhat ambiguous as it is important to bear in mind that a favourable or worsening of a countries terms of trade does not necessarily mean that anything is better or worse in term of the balance of payments situation. Both the price and the quantity of goods traded must be taken into account when considering the balance of payments situation.

An increase or favourable change in the Terms of Trade index caused by an increase in the price of exports may bring about a proportionately greater fall in the demand for exports leading to a worsening of the balance of payments situation. Conversely, a worsening of the terms of trade index caused by a fall in export prices may lead to a proportionately greater increase in the demand for exports and an improvement in the balance of payments.

It is important to consider how responsive the quantity demanded is to changes in the price of exports and imports. The price elasticity of demand is thus crucial.

The Balance of Payments is part of the national accounts which records payments to, and receipts from the rest of the world. The account is made up of three sections. These record details of inflows and outflows of foreign exchange the current account : inflows and outflows generated by international trade the capital account :inflows and outflows resulting from the movement of capital and money financing: inflows and outflows that enable the balance of payments to balance Balance of Payments on Current Account

This includes all the payments made and receipts earned that result from trade. Hence this part of the accounts allows us to judge the international competitiveness of a country. When Zambia exports copper to another country it generates a flow of foreign exchange into Zambia and out of the other country.

If exports are greater than imports i.e. inflows of funds are greater than outflows of funds then there is a Balance of Payments surplus on current account. If imports are greater than exports i.e. outflows of funds are greater than inflows of funds then there is a Balance of Payments deficit on current account. In the accounts, outflows of foreign currency are denoted with a minus sign.

The Balance of Payments on Current Account is broken down into:

The Balance of Trade or the Visible Balance which measures the net flow of funds resulting from trade in goods. If the value is positive then there is an overall inflow of foreign exchange. If negative there is an overall outflow of foreign exchange. The balance of invisible trade measures the net flow of funds resulting from the trade of services. This balance of invisible trade will include all of the following inflows or  flows resulting from financial services e.g. banking , insurance , brokerage firms  flows from shipping and aviation services * expenditure by for gifts of money from overseas residents to domestic residents

*payments of interest on official debt. By looking to see if the value of the account item is positive or negative indicates whether there is an inward or outward flow. However, there are many other flows of foreign exchange taking place unrelated directly to trade. These are recorded in the capital account.

The Capital Account

The capital account records inflows and outflows of foreign exchange that result from capital flows. In the case of Zambia the capital account will include flows resulting from: repaying of debt to foreign commercial banks, foreign governments and borrowing from foreign governments and foreign commercial banks flows of aid into the country from overseas agencies flows of foreign direct investment such as investment by multinational corporations resident capital outflow or capital flight as a country's citizens send money out of the country into foreign banks, or to purchase foreign property or financial assets. In addition an outflow of funds occurs where a Zambian resident or firm acquires capital or financial assets in another country. An inflow occurs where a foreign resident from another country acquires capital or financial assets in Zambia.

The Overall Balance and the Need for Financing

The current account and the capital account are added to obtain the overall balance of payments. Once again the sign will determine whether there is an overall inflow or outflow.

As the name suggests the balance of payments must, by definition, balance. As it is the inflows of foreign exchange that ultimately enable subsequent outflows to occur there must be some way of ensuring that the inflows of funds always equals the outflow of funds. Indeed, if it looks as though there is going to be an imbalance and inflows are less that the outflows, the government or its agent the Central Bank may resort to a number of ways of generating additional inflows of funds. This is referred to Financing. These can be referred to accommodating flows.

In the case of Zambia the data shows that the country regularly experiences a balance of payments deficits and needs to generate an inflow to finance it. Normally there are a number of financing options open to countries in this situation.

Use up reserves of foreign currencies held at the Central Bank. Borrow from foreign central or commercial banks Borrow from organisations such as the International Monetary Fund Reschedule its debt or having its debt reduced

Trade Creation and Trade Diversion

With the growth of regional trading blocs such as COMESA, the European Union and Mercosur, the question arises; do such arrangements benefit world trade and increase overall welfare? The answer depends upon the difference between the trade creation effect and trade diversion effects.

The trade creation effect is caused by the extra output produced by the member countries. This extra output is generated due to the freeing up of trade between them. Increased specialisation and economies of scale should increase productive efficiency within member countries.

The trade diversion effect exists because countries within trading blocs, protected by trade barriers, will now find they can produce goods more cheaply than countries outside the trade bloc. Production will be diverted away from those countries outside the trade bloc that have a natural comparative advantage to those within the trading bloc.

The diagram below shows the trade creation and trade diversion effects. Zambia has a domestic supply curve for maize Sz. If it forms a trading bloc with South Africa then the supply curve for maize is Sz/sa. The world output of maize is shown by the horizontal supply curve Sw. The Zambian demand curve for maize is Dz.

Assuming no trade the domestic price of maize in Zambia would be Pz and the quantity would be Q1. By forming a trade bloc with South Africa the price of maize would fall to Pz+SA and the quantity produced to Q2. The triangle AEB represents the resulting welfare gain or trade creation effect. If Zambia trade freely on the world market, quantity Q3 of maize could be purchased at the world price of Pw. This has been prevented from happening by the formation of the trade bloc with South Africa, and the imposition of some form of trade barrier. There has therefore been a welfare loss of BFC. This is the trade diversion effect.

A comparison of the two effects enables the overall welfare gain or loss of the formation of the trading bloc to be assessed. The welfare implication of the trade creation and trade diversion effect are summarised in the table below:

With no trade With trade bloc With free trade

Price and Quantity Pz Q1 Pz+sa, Qz+sa Pw Trade Creation - EAB DAC Trade Diversion ADC BFC - From the point of view of LDCs the existence of trading blocs depends rather on firstly whether the country is in the trading bloc and secondly which other countries are also members.

Being outside a trading bloc will often mean that a country loses out through the trade diversion effect. Zambian textile producers will face trade barriers such as tariffs into the European Union and consequently be disadvantaged.

Forming a trade bloc with other LDCs may result in only a small trade creation effect as the share of world trade involving LDCs is so small, that the trade bloc has limited influence on the market price and quantity. If the country joins a trade bloc with a MDC then there may be real advantages to the LDC as resources flow within the bloc to the countries where there are cost advantages and the potential market for exports is significantly expanded. The International Monetary Fund

The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established its purposes have remained unchanged but its operations—which involve surveillance, financial assistance, and technical assistance—have developed to meet the changing needs of its member countries in an evolving world economy.

Growth in IMF Membership, 1945 - 2005 (number of countries)

The IMF at a Glance

The International Monetary Fund was created in 1945 to help promote the health of the world economy through international monetary cooperation. Headquartered in Washington DC, it is governed by and accountable to the governments of the 185 countries that make up its global membership.

What is the International Monetary Fund? The International Monetary Fund—also known as the “IMF” or the “Fund”—was conceived at a United Nations conference convened in Bretton Woods, New Hampshire, U.S. in July 1944. The 45 governments represented at that conference sought to build a framework for economic cooperation that would avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s.

Fast Facts on the IMF Current membership: 185 countries Staff: approximately 2,596 from 146 countries Total Quotas: $352 billion (as of 5/31/08) Loans outstanding (as of 5/31/08): $19.4 billion to 65 countries, of which $6.4 billion to 57 countries on concessional terms Field delivery of technical assistance: 186.2 person years during FY2008 Surveillance consultations concluded: 123 countries during FY2008, of which 115 voluntarily published information on their consultation.

Article I of the Articles of Agreement sets out the IMF's main responsibilities: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making its resources available (with adequate safeguards) to members experiencing balance of payments difficulties.

IMF activities

The IMF is generally, responsible for promoting the stability of the international monetary and financial system—the system of international payments and exchange rates among national currencies that enable trade and financial transactions to take place between countries. The Fund's job is to promote economic stability, help prevent crises, and help resolve them when they do occur, thereby promoting growth and alleviating poverty. Its three main activites—surveillance, technical assistance, and lending—are intended to meet these goals.

The IMF works to promote global growth and economic stability—and thereby prevent economic crisis—by encouraging countries to adopt sound economic policies.

Surveillance comprises multilateral surveillance, under which the IMF provides periodic assessments of global and regional developments and prospects, published twice each year in the World Economic Outlook; and bilateral surveillance which is the regular dialogue and policy advice that the IMF offers to each of its members. Usually once a year, the Fund conducts in-depth appraisals of each member country’s economic situation and policies, and advises on desirable policy adjustments. A new Surveillance Decision, adopted in 2007, clarified best practices in this area, calling in particular for greater focus on assessing whether policies are conducive to external and domestic stability. The overwhelming majority of countries opt for transparency, publishing extensive information on bilateral surveillance.

Technical assistance and training are offered—mostly free of charge—to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including fiscal policy, monetary and exchange rate policies, banking and financial system supervision and regulation, and statistics.

In the event that member countries do experience crises, the IMF resources may be tapped to help finance balance of payments needs.

Financial assistance is available to give member countries the breathing room they need to correct balance of payments problems. A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF, and continued financial support is conditional on effective implementation of this program. In low-income countries, the IMF provides financial support through its concessional lending facilities—the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF)—and through debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). In most low-income countries, this support is underpinned by Poverty Reduction Strategy Papers (PRSP). These papers are prepared by country authorities —in consultation with civil society and external development partners—to describe a comprehensive economic, structural and social policy framework that is being implemented to promote growth and reduce poverty.

Through all these activities, the IMF contributes to international efforts to reduce poverty around the globe, in collaboration with the World Bank and other organizations.

IMF governance and organization

The IMF is accountable to the governments of its member countries. At the apex of its organizational structure is its Board of Governors, which consists of one Governor from each of the IMF's 185 member countries. All Governors meet once each year at the IMF-World Bank Annual Meetings. Twenty-four of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet twice each year. The day-to-day work of the IMF is conducted at its Washington DC headquarters by its 24-member Executive Board; this work is guided by the IMFC and supported by the IMF's professional staff. The Managing Director is Head of IMF staff and Chairman of the Executive Board, and is assisted by three Deputy Managing Directors.

The IMF's resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each country's economic size. The total amount of quotas is the most important factor determining the IMF's lending capacity. The annual expenses of running the Fund have been met mainly by the difference between interest receipts (on outstanding loans) and interest payments (on quotas used to finance the loans "reserve positions"), but the membership recently agreed to adopt a new income model with a range of revenue sources more suited to the diverse activities of the Fund.

The World Bank

The World Bank Institute is the capacity development arm of the World Bank, and helps countries share and applies global and local knowledge to meet development challenges. WBI's capacity development programs are designed to build skills among groups of individuals involved in performing tasks, and also to strengthen the organizations in which they work, and the socio-political environment in which they operate.

Capacity for Development is the ability of individuals, institutions, and whole societies to solve problems, make informed choices, order their priorities and plan their futures, as well as implement programs and projects, and sustain them over time. Building capacity is at the heart of development and development effectiveness. It depends heavily on society’s ability to acquire and use knowledge. WBI...

Builds capacity for development in response to specific country needs by providing learning programs and policy advice on economic management and poverty reduction, environmentally and socially sustainable development, financial and private sector development, governance, human development, infrastructure, and knowledge for development

Reaches policymakers, academics, and development practitioners in every corner of the world. In recent years, WBI has broadened its reach to include parliamentarians, journalists, teachers, youth, and civil society leaders.

Helps clients apply knowledge to development challenges, country by country. Through courses, seminars, knowledge networks, communities of practice, and expert advice, WBI and its partners reach people all over the world, promoting the exchange of global and local knowledge.

Uses interactive technologies as well as blended applications of new and traditional educational methods to take knowledge around the world WBI and its partners deliver learning activities through videoconference, the web, print publications, instructional video, CD-ROM, interactive multimedia and e-learning, as well as face-to-face in the classroom.

Works in partnership. WBI depends on a global network of strategic partnerships to promote the sharing of local and global knowledge among countries. Partners help expand WBI's professional expertise, staffing, funding, facilities, and administration. Contributions of WBI resource partners represent nearly half of WBI's total working capital. Resource partners include bilateral aid agencies, foundations, the private sector, and other organizations. More than half of WBI's activities are developed and delivered jointly with partners in developing countries.

Is guided by an External Advisory Council whose candid feedback and recommendations have helped shape WBI's programs and strategy over the last years. World Trade Organisation

There are a number of ways of looking at the WTO. It’s an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules. (But it’s not Superman, just in case anyone thought it could solve — or cause — all the world’s problems!)

Above all, it’s a negotiating forum … Essentially, the WTO is a place where member governments go, to try to sort out the trade problems they face with each other. The first step is to talk. The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. The bulk of the WTO's current work comes from the 1986-94 negotiations called the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade (GATT). The WTO is currently the host to new negotiations, under the “Doha Development Agenda” launched in 2001.

Where countries have faced trade barriers and wanted them lowered, the negotiations have helped to liberalize trade. But the WTO is not just about liberalizing trade, and in some circumstances its rules support maintaining trade barriers — for example to protect consumers or prevent the spread of disease.

It’s a set of rules … At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. These documents provide the legal ground- rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives.

The system’s overriding purpose is to help trade flow as freely as possible — so long as there are no undesirable side-effects — because this is important for economic development and well-being. That partly means removing obstacles. It also means ensuring that individuals, companies and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes of policy. In other words, the rules have to be “transparent” and predictable.

And it helps to settle disputes … This is a third important side to the WTO’s work. Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting. The most harmonious way to settle these differences is through some neutral procedure based on an agreed legal foundation. That is the purpose behind the dispute settlement process written into the WTO agreements Born in 1995, but not so young back to top The WTO began life on 1 January 1995, but its trading system is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. The second WTO ministerial meeting, held in Geneva in May 1998, included a celebration of the 50th anniversary of the system

It did not take long for the General Agreement to give birth to an unofficial, de facto international organization, also known informally as GATT. Over the years GATT evolved through several rounds of negotiations.

The last and largest GATT round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTO’s creation. Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property).

The case for more open trade

The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense. But it is also supported by evidence: the experience of world trade and economic growth since the Second World War. Tariffs on industrial products have fallen steeply and now average less than 5% in industrial countries. During the first 25 years after the war, world economic growth averaged about 5% per year, a high rate that was partly the result of lower trade barriers. World trade grew even faster, averaging about 8% during the period.

The data show a definite statistical link between freer trade and economic growth. Economic theory points to strong reasons for the link. All countries, including the poorest, have assets — human, industrial, natural, financial — which they can employ to produce goods and services for their domestic markets or to compete overseas. Economics tells us that we can benefit when these goods and services are traded. Simply put, the principle of “comparative advantage” says that countries prosper first by taking advantage of their assets in order to concentrate on what they can produce best, and then by trading these products for products that other countries produce best.

In other words, liberal trade policies — policies that allow the unrestricted flow of goods and services — sharpen competition, motivate innovation and breed success. They multiply the rewards that result from producing the best products, with the best design, at the best price. But success in trade is not static. The ability to compete well in particular products can shift from company to company when the market changes or new technologies make cheaper and better products possible. Producers are encouraged to adapt gradually and in a relatively painless way. They can focus on new products, find a new “niche” in their current area or expand into new areas.

Experience shows that competitiveness can also shift between whole countries. A country that may have enjoyed an advantage because of lower labour costs or because it had good supplies of some natural resources, could also become uncompetitive in some goods or services as its economy develops. However, with the stimulus of an open economy, the country can move on to become competitive in some other goods or services. This is normally a gradual process.

Nevertheless, the temptation to ward off the challenge of competitive imports is always present. And richer governments are more likely to yield to the siren call of protectionism, for short term political gain — through subsidies, complicated red tape, and hiding behind legitimate policy objectives such as environmental preservation or consumer protection as an excuse to protect producers.

Protection ultimately leads to bloated, inefficient producers supplying consumers with outdated, unattractive products. In the end, factories close and jobs are lost despite the protection and subsidies. If other governments around the world pursue the same policies, markets contract and world economic activity is reduced. One of the objectives that governments bring to WTO negotiations is to prevent such a self- defeating and destructive drift into protectionism.

Comparative advantage

This is arguably the single most powerful insight into economics.

Suppose country A is better than country B at making automobiles, and country B is better than country A at making bread. It is obvious (the academics would say “trivial”) that both would benefit if A specialized in automobiles, B specialized in bread and they traded their products. That is a case of absolute advantage.

But what if a country is bad at making everything? Will trade drive all producers out of business? The answer, according to Ricardo, is no. The reason is the principle of comparative advantage. It says, countries A and B still stand to benefit from trading with each other even if A is better than B at making everything. If A is much more superior at making automobiles and only slightly superior at making bread, then A should still invest resources in what it does best — producing automobiles — and export the product to B. B should still invest in what it does best — making bread — and export that product to A, even if it is not as efficient as A. Both would still benefit from the trade. A country does not have to be best at anything to gain from trade. That is comparative advantage.

The theory dates back to classical economist David Ricardo. It is one of the most widely accepted among economists. It is also one of the most misunderstood among non-economists because it is confused with absolute advantage.

It is often claimed, for example, that some countries have no comparative advantage in anything. That is virtually impossible

Both trade and GDP fell in the late 1920s, before bottoming out in 1932. After World War II, both have risen exponentially, most of the time with trade outpacing GDP. (1950 = 100. Trade and GDP: log scale)

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