Chapter 2 Globalization and Worldwide Infrastructure Development John

Chapter 2 Globalization and Worldwide Infrastructure Development John S. Hill

Chapter Outline q Global Infrastructure Development: UN Facilitators of World Business q Private Sector Infrastructure Developments q Regional Economic and Political Integration q Global Privatization and Deregulation Programs q World Infrastructure Development and International Business Growth

Global Infrastructure Development: UN Facilitators of World Business United Nations Background: Forerunner was League of Nations (1919); died out during Great Depression (1930 s). United Nations created 1945 Ø UN Agencies and Global Infrastructure Development Ø Ø Figure 2. 2 (page 41) International Telecommunications Union (ITU): coordinates national and global telecommunications policies Ø International Civil Aviation Organization (ICAO): coordinates global procedures, safety, security Ø

Global Infrastructure Development: UN Facilitators of World Business Universal Postal Union (UPU): coordinates international mail Ø International Maritime Organization (IMO): global shipping regulations: safety Ø UN Commission on International Trade Laws (UNCITRAL): rights, obligations of international shippers; documentation protocols Ø World Intellectual Property Organization (WIPO): helps nations set up laws to protect industrial properties and copyrights Ø

Global Infrastructure Development: UN Facilitators of World Business International Labor Organization (ILO): monitors international labor rights q International Court of Justice: arbitrates disputes among nations (boundaries, terrorism) q Financial Infrastructures: International Monetary Fund q – Establishing Foreign Exchange Rate Values: A Historic Perspective (Gold Standard to Bretton Woods 1944 to floating exchange rates 1973) – The 1999 International Monetary System

The 1999 International Monetary System 1. Exchange Arrangements With No Separate Legal Tenders (40 countries) – – – Another currency as legal tender (US dollar in Ecuador 2000) Common external currency: East Caribbean dollar; CFA Franc in Africa Currency created for multi-country use (Euro) 2. Currency Board Arrangements: pegged currency, fully convertible, strict financial disciplines 3. Fixed to a Single Currency of Currency Basket (40 currencies): currency pegged to major commercial partner(s) to reduce uncertainty

The 1999 International Monetary System l l l 4. Currency Pegged within a Horizontal Band but some flexibility allowed 5. Crawling pegs: inflationary countries; constant depreciations 6. Exchange Rates within Crawling Bands: currencies move within prescribed limits 7. Managed Floats (42 countries): governments use fiscal/monetary policies to influence currencies 8. Independently Floating Currencies

Global Infrastructure Development: UN Facilitators of World Business q Floating Currencies: Supply and Demand Basics Dollar supply consists of all dollar to yen conversions (Japanese exports to US; US tourists to Japan) Ø Dollar demand consists of yen to dollar conversions (Japan to US royalties; Japanese investments in US) Ø D>S for dollars, $ appreciation (100 to 120 yen/$) Ø S>D for dollars, $ depreciation (110 to 90 yen/$) Ø q Exchange Rate Arrangements and Currency Stability: What Management looks for Exchange Rates and Country Competitive Advantage: Many nations like weak currencies (exports, investments) Ø Exchange Rate Regime and Currency: shows degree of stability/volatility that may be expected Ø

Global Infrastructure Development: UN Facilitators of World Business Ø Currency Convertibility and the IMF Ø The Currency Convertibility Process (currency floats, depreciates; IMF lends hard currencies to buy back floating national currency to stabilize it) Ø World Trade Organization (WTO) Ø www. wto. org Ø Free Trade-Protectionism Debate

Global Infrastructure Development: UN Facilitators of World Business q Pro Free Trade Arguments 1. Free trade promotes global competition, which benefits consumers through increased varieties of products and lower prices (price of Nike shoes? ) The economic interdependencies of trade and global commerce make countries less likely to go to war (but trade wars? ) The uneven distribution of global resources, particularly in commodities, makes trade inevitable. Trade helps emerging economies develop through technology transfers (perhaps to become competitors) 2. 3. 4.

Global Infrastructure Development: UN Facilitators of World Business q Pro Free Trade Arguments 5. World trade encourages efficient use of global resources. 6. Global competition forces companies to become more efficient and innovative. 7. Trade as a source of global education has made countries and peoples increasingly aware of world events. 8. Exporting creates jobs (7000 per US$1 billion)

Global Infrastructure Development: UN Facilitators of World Business q Protectionist / Anti Free-Trade Arguments 1. Job loss (7000 per US$1 billion in imports? ) Low developing country wage rates represent unfair competition (but capital determines labor productivity—developed nations have lots) Infant industry argument (but when to remove protection? ) Strategic industry arguments: Infrastructure sectors; agriculture; defense; nuclear products 2. 3. 4.

Global Infrastructure Development: UN Facilitators of World Business q Protectionist / Anti Free-Trade Arguments 5. Uneven playing fields (xenophobia? Japan? ) 6. Managed trade accounts: prevents hard currency debts for developing nations 7. Free trade and economic restructuring: protectionism while ‘adjustments’ are made 8. Cultural protectionism: protection from western cultural imperialism—preserve traditional cultures

Global Infrastructure Development: UN Facilitators of World Business q National Infrastructure Development: World Bank Group (Exhibit 2 -1 p. 58): food, water, energy needs q Most World Bank activities have market-related interest rates and short grace periods before repayment begins; special concessions for extremely poor nations

Private Sector Infrastructure Developments q q q Internationalization of Channels: retailers Electronic Commerce: Internet, international credit cards and electronic transfers of funds Shipping Developments: trans-Atlantic crossing in 100 hours Growth in International Air Express Services has doubled to 1 million deliveries per day in 1990 s Satellite technology: global communications Global Media Developments: CNN, ESPN, Sky Sports; print media

Regional Economic and Political Integration q Ø Ø Ø q Degrees of Integration: Types of Trade Blocs Free Trade Areas: no internal tariffs; own external tariffs (NAFTA) Customs Unions: no internal tariffs, common external tariff (MERCOSUR) Common Markets customs union + free movement of labor and capital Full Economic Integration common industry standards and regional policies Political Integration Parliament, laws, common currency Formation of Economic/Political Blocs: The Evolution of the EU q EC ’ 92 European Economic Integration

EC ’ 92 European Economic Integration l EC ’ 92 – Eliminated major non-tariff barriers and moved towards – – – economic unification Established Europe-wide technical standards for major industries Eliminated border controls among member countries Liberalized public-procurement policies to allow nonnationals access to government contracts Deregulated the financial services industry Privatized telecommunications, electric, coal, gas, communications, and transportation systems

EC ’ 92 European Economic Integration l EC ’ 92 – Harmonized regulatory and safety standards – Liberalized capital – Established free movement of labor – Harmonized laws concerning intellectual property, company law, mergers and acquisitions, bankruptcies, and environmental protection – Harmonized taxation policies

The Evolution of the EU l 1992 Members – Belgium, Netherlands, Luxembourg, France, Germany, Italy, Denmark, United Kingdom, Greece, Spain, Portugal, Ireland l EU (1992) Impact – Created 900, 000 new jobs – Added 1 -1. 5 percent to EU’s GDP – Some problems remained (more integration needed)

Regional Economic and Political Integration q Political Integration: Mechanisms and Single Currency Issues Ø The European Commission: the civil service The European Parliament 620+ members elected The Council of Ministers Major decision-makers The Court of Justice interprets laws, settles disputes The Maastricht Agreement: set up Euro Participants and Impact Analysis 12/15 charter members; major currency rivals dollar Ø Ø Ø

Regional Economic and Political Integration q EU Enlargement q 6 original members in 1957 q 15 in 1995 q May 2004 -10 new nations admitted q Poland, Hungary, Czech Republic, Slovakia, Malta, Cyprus, Latvia, Lithuania, Estonia, Slovenia q Added 100 million consumers and 7 percent to EU GDP q 2000 -signed a framework agreement with Mercosur (Mexico) q Preferential access granted to African, Caribbean, and Pacific nations q Commercial partnership between EU and Russia

Regional Economic and Political Integration q Key Success Factors in Regional Blocs: the European Union Ø Tradition of International Trade: thousands of years Timing: after two world wars Outside Encouragement: from US Geographic Proximity Pressure from Industrial Organizations Disappearance of Overseas Colonies: 1940 s/50 s Political Personalities Cultural Similarities among European Countries: economic development levels, mixed economies, developed infrastructures, convertible currencies Ø Ø Ø Ø

Other Trade Blocs l l l l North American Free Trade Area (NAFTA): USA + Canada (1989) + Mexico (1994) Mercosur: Brazil, Argentina, Paraguay, Uruguay Association of Southeastern Asian Nations (ASEAN) formed 1967 but no Japan, Korea, China Asia-Pacific Economic Cooperation (APEC): 21 nations—developed and developing countries Common Market for Eastern and Southern Africa (COMESA): formed 2000; 20 nations East Africa Community (EAC) Major Economic Blocs (Exhibit 2 -2) pages 66 -67

Global Privatization and Deregulation Programs q National Privatization and Deregulation Programs -For security reasons, developed nation infrastructure industries (airlines, utilities and energy) were state-owned -Former communist nations have had major problems in making transitions q Industry and Company Effects q For individual companies, privatization and deregulation cause internal upheavals as firms are reoriented to face marketplace realities q Exhibit 2 -3 Reorienting State-Owned Enterprises to face marketplace competition (page 69)

World Infrastructure Development and International Business Growth There are 64, 000 international corporations in the world with 870, 000 subsidiaries. q Foreign affiliates employed more than 53 million people in 2002 and accounted for a tenth of world GDP. q Two-thirds of world trade results from internal transfers of goods and services among international corporations q When country GDPs are compared to corporate turnovers, 51 of the top 100 economic units are international corporations q

Key Points q q q World economic progress has been greatly facilitated by public and private infrastructure developments United Nations a major contributor to global infrastructure Private sector contributions to world infrastructures include more efficient transportation, global media and communications, and worldwide distribution services Economic and political integration has occurred as countries have joined together in trade blocs to access each other’s markets and products Market forces capitalism has prompted national governments to privatize and deregulate state-owned industries to be more efficient and marketplace-responsive

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