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Table of contents :
Cover
Title Page
Copyright
Contents
Preface
Acknowledgments
Introduction: History of the Global Economy
Chronology
Chapter 1. Economic Rules of the Global Economy
Chapter 2. Global Economy, Politics, and Culture
Chapter 3. Gains from Trade
Chapter 4. Protectionism and Standards
Chapter 5. Measuring the Global Economy
Chapter 6. Global Financial Systems: Exchange Rates and Exchange Rate Systems
Chapter 7. The Organizations That Influence the Global Economy
Chapter 8. International Rules, Trade Agreements, and Trade Unions
Chapter 9. Major Controversies of the Global Economy
Chapter 10. The Influencers of the Global Economy
Conclusion: The Future of the Global Economy
Questions for Further Exploration
Bibliography
Index
About the Author
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The Global Economy

Recent Titles in Student Guides to Business and Economics Taxation David A. Dieterle

The Global Economy David A. Dieterle

Student Guides to Business and Economics

Copyright © 2020 by ABC-CLIO, LLC All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher. Library of Congress Cataloging-in-Publication Data Names: Dieterle, David Anthony, author. Title: The global economy / David A. Dieterle. Description: Santa Barbara : ABC-CLIO, 2020. | Series: Student guides to business and economics | Includes bibliographical references and index. Identifiers: LCCN 2019049262 (print) | LCCN 2019049263 (ebook) | ISBN 9781440869853 (print) | ISBN 9781440869860 (ebook) Subjects: LCSH: Economic history. | International economic relations. Classification: LCC HC21 .D474 2020 (print) | LCC HC21 (ebook) | DDC 337—dc23 LC record available at https://lccn.loc.gov/2019049262 LC ebook record available at https://lccn.loc.gov/2019049263 ISBN: 978-1-4408-6985-3 (print) 978-1-4408-6986-0 (ebook) 24 23 22 21 20   1 2 3 4 5 This book is also available as an eBook. Greenwood An Imprint of ABC-CLIO, LLC ABC-CLIO, LLC 147 Castilian Drive Santa Barbara, California 93117 www.abc-clio.com This book is printed on acid-free paper Manufactured in the United States of America

To Branda, Laura, Jillian, and Mary, my four tax deductions who grew into beautiful women with beautiful families. Thank you for a life blessed.

Contents

Preface ix Acknowledgments xiii Introduction: History of the Global Economy  xv Chronology xxxvii Chapter 1 Economic Rules of the Global Economy 1 Chapter 2 Global Economy, Politics, and Culture 11 Chapter 3 Gains from Trade 17 Chapter 4 Protectionism and Standards 23 Chapter 5 Measuring the Global Economy 33 Chapter 6 Global Financial Systems: Exchange Rates and Exchange Rate Systems 43

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Chapter 7 The Organizations That Influence the Global Economy 57 Chapter 8 International Rules, Trade Agreements, and Trade Unions 77 Chapter 9 Major Controversies of the Global Economy 97 Chapter 10 The Influencers of the Global Economy 111 Conclusion: The Future of the Global Economy 127 Questions for Further Exploration  143 Bibliography 149 Index 169

Preface

At the time of this writing, the United States (the world, actually) is celebrating the fiftieth anniversary of Neil Armstrong’s first steps on the moon. One of the most famous pictures of all time, arguably, is the picture of the earth from the moon taken during an earlier Apollo space flight. That picture not only symbolizes man’s quest into space but also shows us how small and fragile the earth is in the grand scheme of the cosmos. Our journey through the following pages is a look at why and how the nations of our small, fragile sphere in the cosmos cooperate, or not, with each other in a global economy. There is a saying that if we don’t learn from history, we are bound to repeat it. There is a lot of truth in that statement as history has shown us many times. It is important for us to begin by looking backward at the history of the global economy. The Chronology and Introduction will take you on a journey back in time to explore what history has to tell us how the global economy of today took shape. Chapters 1 and 2 set the background, identifying the rules and backdrops by which the nations of the global economy participate. Rules keep us organized. The global economy is no different. Chapter 1 provides a set of rules that guides us in determining if the global economy is functioning at its best or falling short. Chapter 2 gives the background against which the nations are participating. We get an opportunity in chapter 2 to determine if the nations themselves are functioning so that they can fully participate and benefit in the global economy. Chapter 3 considers the fulcrum on which the global economy teeters. Albeit brief, it could arguably be considered the most powerful of the chapters. In chapter 3, we will explore the vital concepts of trade: absolute advantage and comparative advantage. Without trade, there is no global economy. Why do nations trade? How can all nations trade and be part of the global economy? We will answer all these questions. ix

x Preface

The global economy is a dynamic institution, always changing. In chapter 4, we will explore why changes occur in the global economy. We will dig deeper into why nations feel the need to change the rules from time to time. We will look at how nations try to protect their domestic economy and, at the same time, still be a global economic partner. All nations want to know how their economies are measuring up to other economies. In chapter 5, we will see how nations measure their international participation in trade and financial transactions. Chapter 6 extends that discussion, as we explore the money exchanges of trade and financial transactions across the globe. Exchange rates and exchange rate systems have become a vital component to the functioning of an efficient global economy. Companies of different countries with different currencies must exchange currencies. Foreign exchange markets facilitate currency exchanges, making global trade possible. In chapters 7 and 8, we will shift to the “who” of the global economy. Chapter 7 introduces the international organizations that try to make the global economy function efficiently as well as other major organizations, such as central banks. In chapter 8, the discussion extends to trade agreements, trade unions, and international rules for the global economy. In today’s global economy, nations need trading partners. Often, these partners agree to their own set of rules. In this chapter, we will explore some of those agreements and the ways that they help both the nations and global economy. Chapters 9 and 10 and the Conclusion take you into the final part of the journey. No institution is without controversy; the global economy is no different. In chapter 9, we will take a look at what keeps nations apart, what keeps them debating and disagreeing, and what, at worst, prevents their global participation. An overriding theme here is the continuing battle between politics and economics. In chapter 10, you will be introduced to some of the individuals whose work and writings have had a major influence in determining today’s global economy landscape. From the earliest explorers of the thirteenth to fifteenth centuries to the historical masters Adam Smith and David Ricardo, to the modern development economists Emily Oster and Paul Collier and others, their writings, research, and practices have paved the way for nations to participate in today’s global economy. While we certainly could not identify all contributors in these few pages, you will note the cross section of expertise, experience, and views that makes the global economy the dynamic mechanism it is today. Finally, in the Conclusion, we look out with our crystal ball into what could be the key issues of the future. These are the potential issues of your future global economy. It will be up to your generation to create solutions. It will be your generation who takes these challenges and turns them into

Preface xi

opportunities. There will be issues and challenges for the future global economy that we cannot even imagine or anticipate today. It is our hope that this journey will prepare you to address them as knowledgeable, educated global citizens. To assist your becoming that educated global citizen, we finalize our journey with a few questions for further exploration. The global economy is master to over seven billion people and growing. How nations choose to cooperate and work together in the future global economy will ultimately dictate the terms by which all nations live, work, play, and survive. Good luck.

Acknowledgments

No project succeeds in a vacuum. Without the confidence of my editors at ABC-CLIO, specifically Hilary Claggett for helping start the project and Maxine Taylor for navigating our way to the end, this book would not have been possible. I also need to recognize the editing skills of Angel Daphnee. She definitely made the book look and read better. To all you, thank you. Of course, no project like this survives without the super support of family. My daughters and their families exhibited the patience of Job. Thank you for putting up with me one more time. Babe, as always, you are my inspiration. You are Beautiful.

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Introduction: History of the Global Economy

“In the beginning”1 seems an appropriate start for a journey about the global economy. In the beginning, how did one define a global economy? Certainly they did not understand our economy of the twenty-first century. Did the early hunters and gatherers have a global economy? If we use the literal definition of “global” as round, then we can be confident it was not global. If the term “global,” however, refers to the economy that the people of an era know and understand, then they participated in their global economy. Each era has its own frame of reference for how the world and its economy are defined. If one looks up “global” in a dictionary, the term can also mean overall or relating to the whole system.2 While hunters and gatherers did not have a “round” economy, hunting and food gathering was their whole economy. It was their global economy. The human race progressed, invented more tools, and discovered new ways to make life better. With each step forward, the global economy expanded.

GLOBAL EXPANSIONS Over time, more and more people banded together to build, grow, and trade. Soon people were traveling and trading from town to town. More new lands were discovered, and peoples ventured farther and farther away from home. With each new venture came a bigger global economy, as there were more new lands to explore and new opportunities. During these early economic periods, a person’s local economy was their global economy. A person’s labor and ability to build their own home, make their own clothes, or grow their own food was their economic life. An individual or family could only build or grow with the resources they xv

xvi Introduction

owned. With time and need for resources, sometimes a person would barter with a neighbor or towns person to swap skills, utensils, or crops. Population grew, and economies took on different forms. Trading from town to town was not out of the ordinary. City-states emerged as peoples and civilizations developed and collectively lived together as communities. Economic, political, and social institutions evolved to help peoples live in harmony.

The Cradle of Civilization Between 4000 and 3000 BCE, large numbers of peoples began to congregate, creating a large population in a central location. They shared not only geography but also communications (language), along with political and economic institutions. They also shared social and cultural customs, such as music, dance, and architecture. They learned to do different jobs and trade with each other for their necessities. The earliest-known civilization to have these common characteristics was the land between the Tigris and Euphrates Rivers, known as Mesopotamia. The major population centers were the cities of Babylon, Sumer, and Assyria. This area is today’s Iraq, Syria, and Turkey. Another civilization around this time was the Indus Valley civilization. Today this region is parts of Pakistan, India, and Afghanistan. The Indus Valley civilization is known for its size, which is almost over one million kilometers, as well as for arts and crafts.

The Ancient Egyptians It is important to distinguish the Egypt of ancient times with the modern Egypt of today. Relative to other ancient civilizations of the period, ancient Egypt was a civilization of progress. We are all familiar with the pyramids and sphinx sculptures. The ancient Egyptians gave us the sundial, our first solar clock. Their economy centered on farming and life along the Nile River. We are familiar with the pharaohs from their practice of embalming and creating mummies, many of which are preserved for us to view today. Their pictorial form of communication, hieroglyphics, left us a rich picture of life in Ancient Egypt. In this day of emojis, some have suggested we are returning to a day of communicating in hieroglyphics.

The Early Chinese Civilization During the periods of ancient China they were an inventive civilization. They invented paper, silk, gunpowder, porcelain, printing, noodles, alcohol, and the compass. We can thank the Chinese for kite flying, as they are



Introduction xvii

also considered the first to fly kites. Marco Polo is credited as the first European to travel to China and discover the Chinese products for the Europeans. It was ancient China the Europeans were trying to reach by water routes that began the Age of Exploration, which we will discuss shortly.

The Greeks The ancient Greek civilization was one of the most influential civilizations in all of history. The Greeks gave us art, literature, philosophers, democracy, and, of course, the Olympics. The Greeks invented biology, geometry, and physics classes. You can blame them for having to take those classes in school. They created the modern form of democracy and political institutions, such as the senate to discuss and pass laws. The Greeks added to our body of knowledge with mathematicians like Pythagoras (yes, the same as the theorem) and Euclid and scientists like Archimedes. We cannot forget arguably the greatest philosophers and teachers of all history: Plato, Socrates, and Aristotle. Greek history and influence go far beyond the scope of our discussion, but Greece’s ultimate influence on the global economy today is immeasurable.

The Roman Empire Under the Roman Empire, for the first time many different lands and cultures intermingled. The Roman Empire extended east into the Middle East, north to Britain, south to Africa, and west to the Atlantic Ocean. All the countries adjacent to the Mediterranean Sea were part of the empire. It could be said that the Roman Empire was in fact its own global economy. Ruled by kings, then emperors, and a senate, the Roman Empire eventually was a victim of its own vastness. We remember the Roman emperors like Julius Caesar and Augustus Caesar, whose rules gave us wonderful works of art and architecture.

Other Civilizations in Other Lands As the Europeans sought an all-water route to India and China, two civilizations already occupied some of the lands they were about to discover. The Aztecs and the Incas were highly developed civilizations in what is now Mexico and South America. The Aztecs lived in what is current day Mexico around the fourteenth century. The civilization itself was the merging of three major cities: Tenochtitlan, Texcoco, and Tlacopan. For a large civilization, the Aztecs

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had an interesting form of governance. The Aztecs retained a local rule but paid a tribute to the Aztec emperor. In 1521, the Aztec civilization eventually ended, when Hernando Cortez and the Spanish defeated it. The Incas lived farther south, in what is now Peru and Chile in South America. The Incas had a very powerful military presence in the lands. They were ruled by a king and were known for their buildings. The Incas built the famous site Machu Picchu, which still stands today in Peru.

The Middle Ages As wars were won or lost, nations emerged and their leaders (kings) came to own the land. This period of history, known as the Middle Ages, was a time of feudalism throughout Europe. Under feudalism, the king was the ultimate landlord and decided who would own the land. Known as barons, these people would pay the king rents and decide who would work the land and grow the crops. The farmers, known as serfs, would ultimately receive a portion of the crop. Most of the rents were paid to the barons and the king. The barons and kings were very rich, the king obviously being the richest person in the nation.3 The Middle Ages was the era of King Arthur, the Knights of the Round Table, Maid Marian, the backdrop for the stories of the fictional Robin Hood, of castles and moats and drawbridges protecting a city. When the Middle Ages ended in the 1500s, the kings and queens of Europe realized they needed to find more efficient routes to India, China, and the spices and riches of the East. This is the era in history where we will begin our journey. Power and wealth of a nation came to be defined by the amount of gold, silver, and riches held by the royal families. Mercantilism became the dominant economic system of the fifteenth century. The royal families of each country knew that they needed to expand their holdings of wealth, including land. Within each society were individuals who had ideas about how to find those riches and lands more effectively and efficiently than the dangerous land routes currently being used. The nations and royalties of Europe were about to embark on the first age of globalization.

FIRST ERA OF THE GLOBAL ECONOMY Marco Polo Before Marco Polo, there was Maffeo and Niccilo Polo. The brothers left Venice in 1260 and traveled east on a trading trip. Six years later, they entered Beijing and met the Great Khan. The Marco brothers were the first



Introduction xix

Westerners seen by the Great Khan. They stayed in China (then known as Cathay) for one year before returning to Venice. When Marco’s father and uncle made their first trip to China, young Marco was six years old. When they left for their second trip, he was a young man of seventeen and he joined them. Marco had been well educated during his youth in Venice, and he was able to write significantly about his journeys. It is because of his records and accounts of their journeys that we remember him as the famous brother. On this journey to Cathay, they took many gifts from Venice to give to the Great Khan. This trip was very difficult, as they traveled the Silk Road. Their journey to Cathay was quite eventful. Marco was sick, and they spent one entire year in one place before he was well enough to travel. As they continued their journey they reached Pamir, the highest spot in the world. In one river village, they found a local stone that happen to be jade, which became a very valuable European jewel. While crossing the Gobi Desert young Polo wrote about what it felt like to cross such vast nothingness: “This desert is reported to be so long that it would take a year to go from end to end; and at the narrowest point it takes a month to cross it. It consists entirely of mountains and sands and valleys. There is nothing at all to eat.”4 Marco and his brothers arrived in Cathay in May 1275. The trip had taken them three and one-half years. In his accounts, Marco recalls his first meeting with the Great Khan: They knelt before him and made obeisance with the utmost humility. The Great Khan . . . received them honorably and entertained them with good cheer. . . . Then they [Polo Brothers] presented the privileges and letters which the Pope had sent, with which he was greatly pleased, and handed over the holy oil, which he received with joy and prized very highly. When the Great Khan saw Marco, who was then a young stripling, he asked who he was. “Sir” said Messer Niccolo, “he is my son and your liege man.” “He is heartily welcome,” said the Khan. . . . Great Khan and all his Court welcomed the arrival of these emissaries. . . . They stayed at Court and had a place of honor above the other barons.5

Marco Polo became a favorite of the Great Khan and ultimately was a member of the Khan’s court. He traveled throughout China, mostly at the request of and representing the Great Khan. He visited places in China and Asia that were not going to be seen by other Europeans for several more centuries. During his travels, Marco Polo was witness to new products discovered by the Chinese or other peoples he met during his travels. He and his brothers were the first to be introduced to asbestos, paper money, and coal. They were accustomed to firewood, which burns and disintegrates into

xx Introduction

ash. Coal, a substance that burned but did not seem to burn, was known in Europe but very new to young Marco and his brothers. They thought of how much firewood could be saved using coal as a substitute. Paper money was not used in Venice or Europe. Money in thirteenthcentury Europe was weight-based gold or silver. In Cathay, they used weight­less paper for money and exchange. This was very strange to the Polo brothers. Other inventions witnessed by these three Europeans included a postal service, a canal-based internal transportation system, porcelain bowls, and silk garments. The Polo brothers stayed in Cathay for seventeen years. They became very wealthy in gold and jewels. They left Cathay with their fortunes, traveling by sea across the Indian Ocean to the Middle East. It was not an easy journey, and many of the passengers died while at sea. They had received the golden tablet of authority from the Great Khan, which allowed them to travel safely through bandit-ravaged territories of the Middle East. They completed their travels to Venice by sea, arriving in 1295. Several years later while a prisoner of war, Marco Polo dictated to another prisoner the accounts of his travels. The book had two titles. The first was The Description of the World, and the second was The Travels of Marco Polo. Much of what we know today about the early Chinese we first learned from Marco Polo. He wrote of Cathay’s wealth and his journey adventures in Africa and through India. Very popular in Europe, the book was mostly thought of as an adventurous book of fiction. The book later was known as II Milione, or the Million Lies. Most of Europe considered the book pure fantasy, a modern-day Harry Potter. Marco Polo died in 1324 at the age of seventy. In the years and centuries since, there continues to be some question as to whether he really did travel to China, not so much because of what he wrote but because of what he did not write. There was no mention of the Great Wall or tea, for example. Travelers of eighteenth and nineteenth centuries, however, have confirmed much of his accounts in their writings. Regardless, his book expanded the globe and the idea of an expanded global economy. In his book, Marco Polo notes, “I believe it was God’s will that we should come back, so that men might know the things that are in the world, since, as we have said in the first chapter of this book, no other man, Christian or Saracen, Mongol or pagan, has explored so much of the world as Messer Marco, son of Messer Niccolo Polo, great and noble citizen of the city of Venice.”6 Fiction or not, Marco Polo’s book gave Europe a glimpse of another part of the world and a more global economy. Throughout the fourteenth century, Europeans traveled the Silk Road. Another group of adventurers, however, began thinking there must be a more efficient, safer route by water around Africa, straight into the Indian Ocean, and directly to China.



Introduction xxi

SECOND ERA OF THE GLOBAL ECONOMY The Age of Discovery The land routes once traveled by Marco Polo were becoming harder to travel. The many cities and nation-states that had to be passed became more dangerous, as bandits, thieves, and warring cities grew in number along the route. The odds of successfully reaching one’s destination and returning were becoming very low. The two powerful seafaring nations, Portugal and Spain, decided that they had a better idea. They knew the oceans, so they embarked on finding a water route to the riches of India and the lands of the East. Each had a plan to reach India by sea, but in two different directions.

Portugal One sailor, Prince Henry the Navigator, influenced much of Portugal’s early seafaring experiences. Believing there was a more effective and efficient southern route to India and China around Africa, he sponsored voyages that began sailing south. Each expedition south increased what was known of the African coastline. His expeditions sailed only as far south as the Canary Islands. While the expeditions only reached the Canary Islands along Africa’s coastline, they served purposes. First, Prince Henry’s exploits established Portugal as the sea power of the time. Second, they were the unofficial launch of the age of exploration, discovery, and an expanding global economy. Third, they showed that there might be something to this idea that the earth was round and not flat. Also sailing for the king of Portugal, Bartholomeu Dias proved that sailing to India was possible when he followed the expeditions of Prince Henry the Navigator and sailed the African coastline to the Cape of Good Hope in 1488. His voyages revealed that the Atlantic and Indian Oceans were indeed one continuous body of connected water. A third Portuguese sailor, Vasco da Gama, completed the venture, sailing to India in 1498.

Spain While Portugal was searching for way to the riches of India by a water route to the south, others were convinced that India could be reached by sailing due west. This theory was only valid if the earth was round and not flat, as was still considered by some of the day. Interestingly, some historians are convinced that the Romans were the first to consider the earth to

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be round. A young Italian, Christopher Columbus, had an idea to avoid sailing around Africa and instead to just sail due west. He calculated that the earth was small and that sailing due west would be shorter than going around Africa. Columbus agreed to sail for King Ferdinand and Queen Isabella of Spain. In 1492, he set sail due west for India with three ships (the Nina, Pinta, and Santa Maria) to conquer lands and discover treasures for the king and queen. We know, of course, that he did not reach India but instead landed in what is now known as the Bahamas on his original voyage. Columbus made three voyages, landing and claiming for Spain lands that are now several of the Caribbean Islands and Panama. He had also set foot in what is now South America. As you are probably aware, the Vikings had set foot on the “new world” centuries before, so Columbus was not the first European. He was, however, the first explorer to begin a series of explorations by not only Spanish explorers but also Portuguese, English, Dutch, and Italian explorers. Throughout the sixteenth and seventeenth centuries, Columbus was followed by Ferdinand Magellan, Hernando De Soto, Juan Pizarro, Amerigo Vespucci (where we get the name America), John Cabot, Sir Walter Raleigh, and others to claim new lands in the name of the king and/or queen who sent them. Along with the new lands, they were to begin settlements and provide resources to be sent back to their native country. The world was changing. The global economy was growing and changing. Wealth for the crown and resources for producing goods became the aim and goal of every new explorer and every new settlement.

Mercantilism As the population of Europe grew and cities became city-states and then nation-states and nations, the need for more resources rose. The royal families of the nations counted their nations wealth in gold, silver, riches, land conquests, and ownership of resources. The Age of Discovery was in reality a competition between nations for ownership of the new resources and wealth of an expanding globe. Beginning around the fifteenth century, a new economic system was evolving that centered on the accumulation of a nation’s wealth and power. To gain power and leverage, countries would sell goods produced in their country to another country in exchange for gold or silver. In this type of economic system, there was a constant need for more land, labor, and tools to produce products they could sell for more gold or silver. Other countries were, of course, doing the same thing and were selling their products for other countries gold or silver. Trade between nations did not exist.



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Mercantilism was the economic system in which countries would export but not import. They would sell but not trade. European countries were fighting wars over their new land discoveries. The European countries that won the wars won the new lands. The nations colonized their new lands as part of their domestic economic system. The resources of the new colonies belonged to the mother country. The larger a nation’s empire, the larger the cache of resources to make products to use domestically or sell to other nations. The mercantilist global economic system was at its height into the eighteenth century. Local economies were quite different. From the very beginning peoples started forming social and political units. Individuals would specialize in what they would produce for the town. Farmers would grow crops and trade their crops to the seamstress for cloth to make clothes, and vice versa. In towns and cities, individuals learned to specialize and trade, either through barter or with money, for their other necessities. This specialization led citizens within a town or city to be interdependent. Nationally, however, this form of cooperation did not exist within the mercantilist global economy. Nations were still laying claim to new lands, accumulating wealth that did not impact their citizens, who mostly remained poor, and extracting resources from their colonies without any regard for their welfare. The global economy was a zero-sum game. On one side, there was a winner and equally a loser on the other. The times were beginning to change in the eighteenth century. In the British Empire, a small group of thirteen colonies across the Atlantic rebelled and claimed their political independence. Plus, a small-statured Scotsman professor was about to publish a book that would change this nationalistic way of thinking and the global economy forever.

THIRD ERA OF THE GLOBAL ECONOMY Adam Smith The middle to late eighteenth century was a time of life-altering change for individuals, nations, and the global economy. In 1759, Adam Smith published The Theory of Moral Sentiments.7 Adam Smith was a professor of moral philosophy at the University of Glasgow, and a book with this title by a moral philosophy professor was no big surprise to the mid-eighteenthcentury reading public. Very briefly, the book focused on individuals doing and thinking for the moral benefit of the individual. What was important to the global economy at the time was Smith’s first references of his famous “invisible hand” reference and that individual choices add up to better society as a whole. It was a mid-eighteenth-century best seller.

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The theme of The Theory of Moral Sentiments set the stage for his sequel published in 1776. In his sequel, An Inquiry into the Nature and Causes of the Wealth of Nations,8 Adam Smith submitted that a nation’s wealth is not based on how much gold and silver are in the national treasury but on the wealth and prosperity of the individual citizen. We will spend more time on the details of Smith and the Wealth of Nations, including his “invisible hand” and the advantages of trade, in the next chapter. Other philosophers and groups had thought about some of these ideas earlier. The Physiocrats in France created a model showing how an economy’s components are interrelated in the farming industry. Earlier we ­discussed how individuals in towns and cities specialize and are interdependent. The Wealth of Nations stands alone, because for the first time, Adam Smith presented these ideas as an argument against mercantilism and argued that these concepts also hold true in the interactions between nations.

Industrial Revolution Like the American Revolution, the Industrial Revolution was a time of significant change, especially in Europe and the young United States. The Industrial Revolution was approximately a century of change from the mid-eighteenth century to the mid-nineteenth century. Much of this economic revolution centered on the relatively new country of the United States and the writings of Adam Smith. As with most revolutions, the world would change forever and, with it, the global economy. Virtually every component of the global economy changed, including transportation, communication, and agriculture. The Industrial Revolution brought new technologies in energy, development of metals such as iron and steel, and inventions such as the steam engine. The influence of Adam Smith was reflected as manufacturing improved processes through the use of Adam Smith’s concepts of division of labor and specialization. It improved communications with the radio and the telegraph. Regardless of where the invention or new technology originated, its influence was being felt universally. The Industrial Revolution was more than just industrial. It changed the social, cultural, and political landscapes as well. Initially focused on Britain in the eighteenth century, it soon spread to other parts of Europe before coming to the United States. While other parts of the world may not have participated in the Industrial Revolution directly, they were either indirectly impacted through trade or eventually impacted in the inventions, technologies, and resources the Industrial Revolution left behind.



Introduction xxv

The world became more specialized and more productive. The Industrial Revolution saw significant population growth, and living standards improved for everyone. People were eating healthier as food supplies increased, resulting in fewer disease plagues. Fewer children were dying at birth. Throughout Europe and the United States, people were migrating to the cities to work in the new factories and ever-expanding manufacturing sector. Even the poor, while still poor in relative terms, were living better than those considered poor a century ago. Agricultural and manufactured products were being produced in surplus quantities. Expanding global trade was the outlet for the surpluses created. In the early nineteenth century, David Ricardo wrote a political economy textbook that would again bring new ideas and growth to the changing global economy. David Ricardo was a proponent of Adam Smith’s ideas about how nations should trade for wealth. Ricardo took Smith’s idea about the gains from trade and went one idea further, introducing the concept of comparative advantage.9 Ricardo submitted that every nation regardless of resources could participate in the global economy. As with Adam Smith, in the next chapter we will explore Ricardo’s concepts in greater detail.

The World Gets Smaller The Industrial Revolution was the beginning of a shrinking globe. Since Europe’s first discovery of the lands beyond the Atlantic, inventions such as steamships (1819), the telegraph (1844), and the telephone (1876) brought the two continents closer together. Communications and travel increased global trade as well. The lands of what is now North America and South America became very important providers of resources to the empires of Europe. The American colonies had won their independence from England, but the British Empire remained mostly intact. Global trading among the nations of an empire was as important to the global economy as trade between nations. As telegraph and telephone communications continued to improve and increase in relevance and accessibility, a second era of a shrinking globe came at the beginning of the twentieth century. With the improved use of steam engines, building of larger ships, and the early use of air flight, the world became even smaller and the global economy larger. In the early years of the twentieth century, the global economy continued to grow in both trade of goods and global financial transactions. In 1918, however, the growth of the global economy came to an abrupt end with the beginning of World War I. Through World War I, the Great

xxvi Introduction

Depression, and World War II, the global economy was virtually nonexistent. The global economy would not come close to its 1918 level of activity until the mid-1940s, when the end of World War II was in sight.

POST–WORLD WAR II GLOBAL ECONOMY The post–World War II global economy had a new road map. In 1936 at the height of the Great Depression, John Maynard Keynes changed the economic world with the publication of General Theory of Employment, Interest, and Money.10 Adolph Hitler was trying to change the political and economic face of Europe. Keynes was succeeding in changing the face of economics, both domestically and globally. As the 1930s came to an end, the Great Depression gave way to World War II. Did World War II end the Great Depression, or did Keynes’s new economic philosophy? This is still a matter of debate among economic historians. Regardless, the nations of the world united to defeat the Axis powers of Germany, Italy, and Japan, bringing an end to World War II. Through these two major global events of the mid-twentieth century, the nations of the world learned that global trade and a global economy were necessary for world growth.

Bretton Woods By 1944, with a victorious end of World War II in sight, forty-four nations gathered in Bretton Woods, New Hampshire, to create a new world economy. Commonly known as the Bretton Woods Conference, the conference was formally known as United Nations Monetary and Financial Conference. It is an interesting formal name, considering that the United Nations (UN) organization was not officially created until one year later in 1945. A second interesting note is that the Soviet Union was in attendance; soon after, they would be the Cold War nemesis of the Free World. Bretton Woods took place throughout July 1944. The two key nation players during these July days were the United States and Great Britain. Through the early part of the twentieth century and into the beginnings of World War II, Great Britain, led by Keynes, was the globe’s economic power. World War II, however, had imposed very heavy debts on Great Britain. Keynes and his British colleagues envisioned Bretton Woods as their way to create a new global economy that would alleviate Britain’s debt burden. The United States, led by Secretary of the Treasury Harry Dexter White, envisioned Bretton Woods as the path to assert the Unites States as a new global partner in the post–World War II global economy.



Introduction xxvii

The July summer days in New Hampshire were long and hot. The meetings were long and hot as well. Two primary plans were submitted and considered by the congregation. Keynes and the British presented a plan for an international currency and global economy that did not include a gold standard. The United States presented a plan that did include the gold standard. The debate over which plan to implement was often as heated as the New Hampshire summer days. As the July days wore on, the attendees were getting tired and sick. Keynes himself had been bedridden for several days. He had not been well when the conference began. The conference was coming to a close, and an agreement was close. Most of the debates centered on two key issues, both important to Great Britain and the United States. One was liquidity to rebuild Europe and Japan in a postwar environment as well as to assist nations with their post-wartime debts. The other was to create an exchange rate system that would benefit and incentivize global trade. The attendees were not comfortable with the completely flexible exchange rate that existed during the war. They also were not interested in returning to the fixed gold standard system prior to the war. What evolved was a new compromise global monetary system. A blended system between the fixed and flexible systems, it was closely aligned with the plan proposed by the United States. The United States was now on the verge of dominating the postwar global economy. The final agreement for a new monetary system had several components. One, the U.S. dollar would anchor the new global exchange rate system. The value of the U.S. dollar would be fixed to gold at thirty-five dollars per ounce. The other world currencies would be have a value fixed to the dollar. These currencies would be flexible within a range of values. With other currencies tied to the U.S. dollar, it soon became the global reserve currency. For the other nations to maintain their currencies’ predetermined relationship (known as par value) with the U.S. dollar, they could exchange their currency for U.S. dollars or gold. This was the beginning of the U.S. dominance as the world financial power and the dollar as a currency all governments needed to own. Each nation would only be allowed to change their values if they had domestic financial emergencies or they did not have enough dollars on reserve. To provide stability, a quota system was established. Each nation participating was required to provide an amount of gold (25 percent) and their currency (75 percent). This deposit gave nations borrowing rights to maintain appropriate reserve ratios for their fixed exchange rate to the dollar. The new agreement set up a voting system for the organizations created based on the size of each nations quota. With the highest quota, the United States had the most votes. The U.S. global influence was increased significantly once again.

xxviii Introduction

Bretton Woods also created two new organizations to deal with the postwar global economy and a third for trade. We will explore these organizations in greater detail later in the book. For now, however, it is important to introduce them here, as they have become major influences in today’s global economy. The International Bank for Reconstruction and Development (IBRD) was created directly for the rebuilding of the world following World War II. It was the genesis of the broader World Bank, which would come later. The other organization created was more aligned with the conference’s newly created global monetary system. The International Monetary Fund (IMF) was established to stabilize a nation’s currency and to provide financial assistance in times of financial or currency crisis. As it was funded through quotas and subscriptions, the United States had the most votes and influence on the IMF. With the creation of the IMF’s Special Drawing Rights (SDRs),11 one of Keynes’ major initiatives came to fruition. Interestingly Keynes had come to Bretton Woods with a plan to create an entirely new global monetary system based on one global currency. The creation of the IMF and SDRs was a small success of his plan although Keynes did not see it that way. The organization that was created for trade never really materialized as a functional organization until much later. The free nations of the world realized that they needed to open trade with one another if postwar growth was going to occur. As part of the Bretton Woods discussions, the International Trade Organization (ITO) was established. Given all the different topics covered by the conference attendees, it was agreed that these discussions would take place after the conference’s conclusion. With its new monetary system and global organization, the Bretton Woods Conference became a hallmark turning point of the global economy. The following year (1945), the United Nations was formally established. The IMF and IBRD were officially implemented as specialized agencies of the United Nations. The ITO was not approved by the U. S. Congress and was disbanded. In 1947, fifty-five nations gathered once again and created the General Agreement on Tariffs and Trade (GATT) as a replacement of the ITO in order to promote free global trade. Again, we will explore these and other organizations in chapter 7, on global institutions and organizations.

A Growing Global Economy, a Smaller World As the midpoint of the twentieth century arrived, the world was about to get both smaller and bigger. It was smaller, in the forms of passenger jet transportation with better access to more cities around the globe, improved



Introduction xxix

long-distance telephone communication, and the growing popularity of radio and the new technology called television. The global economy was bigger in the forms of more new, participating independent countries, newer and improved goods, and more goods being produced and available to a growing global economy. The postwar and post–Bretton Woods world had a new but not necessarily good look. One leftover product from the war was the nuclear weapon. The 1950s brought on the Cold War and a divided world between democratic and communist countries with nuclear weapons. Led by the Soviet Union the communist countries strove for global expansion. Led by the United States, the democratic countries assembled to prevent the communist expansion. In the background were growing arsenals of nuclear weapons. The global economy was divided between these two political forces.

Growing World, New Nations Following World War II, most of Europe, regardless of allegiance, had been destroyed by the war, both physically and financially. Great Britain’s debt had reached crisis level. As the war ended, Great Britain was still a global empire. Other than the skirmish it had lost with thirteen colonies two centuries ago, much of the British Empire was still intact. In 1947, the post–World War II nations grew by two, when both Pakistan and India gained their independence from Great Britain. France and other European nations with non-European colonies, many in Africa, were also struggling financially as World War II ended. The 1950s and 1960s began the end of European dominance in Africa. Many former European colonies became independent nations. Many of these new, young independent countries adopted isolationist economic policies and were not influential players in the global economy in their early years.

China and the Pacific On the other side of the globe changes were also happening. In 1947, the Chinese Revolution successfully brought Mao Zedong and the Communist Party to power. The new communist Chinese government did not follow the Soviet Union. Communist China followed its own path in the global economy. Early on, communist China was not a participant in the global economy. Mao Zedong focused on industrializing China and spreading the communist doctrine throughout the land at any cost, including the lives of many Chinese he considered his enemies. Mao’s death in 1976 was to bring significant economic changes to China.

xxx Introduction

A CHANGING GLOBAL ECONOMY During the 1950s and 1960s, the global economy, on the whole, was thriving. Consumers across the globe were buying more products than ever before. Individuals were making more money than ever before and buying new homes, new cars, new stereos, and a myriad of new products being produced all over the world. Global trade between the democratic nations of the world was active as never before in history. The communist countries traded between themselves. In total, world trade and the global economy was booming. As the 1970s began, a serious change was about to occur.

End of the Gold Standard To understand what happened at the end of the 1960s and early 1970s, we need a return to 1944. Remember the 1944 Bretton Woods Conference and the creation of a new global exchange rate monetary system. The U.S. dollar was the anchor currency fixed to gold at thirty-five dollars per ounce, and the other nations’ currencies had values set to the U.S. dollar, with allowances to float within a narrow range, making the dollar the global economy’s reserve currency. Nations could transact global business with their currency, the dollar, or gold. They had their choice of these three options. In the mid- to late 1960s, these three options became a problem for the United States where inflation was beginning to rise (we will discuss what inflation is and its consequences in the next chapter). This was reducing the world value of the dollar. Nations decided to own gold and not dollars. As a result, the United States was losing its gold reserves. In 1971, instead of changing the value of the dollar to gold, President Nixon chose to completely separate the dollar from gold. With this move, President Nixon ended the Bretton Woods Agreement and set the global economy on a new path. The other industrial nations also detached themselves from gold. From 1971 to today, the value of the global economy’s major currencies is based on their relative value to each other.

Oil, War (Again), and Politics Oil was discovered in Persia at the beginning of the twentieth century. Persia is now comprised of several Arab nations, including Iran, Iraq, and Saudi Arabia. These oil-rich nations and several other oil-rich nations formed the Organization for Oil Exporting Countries (OPEC).12 Oil was very important to the global economy. In the 1970s, OPEC controlled most



Introduction xxxi

of the world’s oil. As a result, OPEC was very powerful and could control how the global economy functioned. War was not done influencing the global economy. In 1973, OPEC exerted their power on the global economy when a regional war broke out between Israel and OPEC’s Arab nations. During this war, OPEC put an embargo (would not provide oil) on the nations that supported Israel, including the United States, South Africa, the Netherlands, and Portugal. Since the United States was by far the largest and most active participant in the global economy, it was impacted the most. OPEC also cut production so that there was less oil for the world. Eventually, the low oil production impacted the global economy, which slowed into a recession. Gasoline prices increased significantly as oil companies had to pay higher oil prices. OPEC was proving the significant influence it had over the global economy. Given the size of the U.S. economy and its reliance on imported oil, ending the embargo was especially crucial to the United States. Lines of cars would form at gas stations, as there was not enough for everyone. Political leaders of many countries including the United States met with OPEC officials to end the embargoes and low oil production. At the same time, they were meeting with Arab and Israeli leaders to end the war. During this time it was a much more difficult than usual for the global economy to separate economics and politics. Peace agreements for both the war and oil embargo were reached during 1974. Nations across the globe became aware of the need to become less reliant on OPEC oil. Over time the global economy would face another shift.

The Global Economy Really Expands (the End of the Cold War) Surviving a global recession and higher-than-normal inflation rates during the 1970s, the 1980s brought another major shock to the global economy. This shock, however, was a very good shock. In 1985, when Mikael Gorbachev became leader of the Soviet Union, he initiated a major change. He introduced a new plan called “glasnost and perestroika” to make the Soviet Union more open to trade with the rest of the world.13 The first part of his plan, glasnost, was to increase trade and relations with rest of the world. The second half, perestroika, was intended to bring market ideas and incentives to the Soviet economy. What Gorbachev may or may not have intended was for the other nations of the Soviet bloc to also want the trade, incentives, and freedom he proposed for the Soviet Union. In 1989, Poland voted for a noncommunist government. During events like this in the past, the Soviet Union

xxxii Introduction

would send in military troops or call for new elections. Gorbachev, however, endorsed the results of the free Polish election. Soon after, the other Soviet bloc nations of Hungary, Czechoslovakia, Romania, and Yugoslavia also voted in noncommunist governments. The ultimate symbol of the Cold War’s end was what occurred later that year in Germany. Earlier in the year, President Ronald Reagan had visited the wall separating East and West Berlin. During that visit, he made his now famous plea to Gorbachev: “If you are serious about freedom, Mr. Gorbachev, tear down this wall!”14 In the fall of 1989, Berliners from both sides attacked the wall with hammers, axes, and any tool they could find that would chip away at history and separation. The Berlin Wall came down. This was the unofficial symbol ending the Cold War. The Cold War may have been over, but there was still one more historical event that would again change the global economy. The Soviet bloc was no more. The nations that defined it were now independent nations. Several like Yugoslavia were about to face their own civil war. The states of the Soviet Union, however, had yet to be heard. Now it was their turn. One by one, they, too, demanded their independence. This was beyond what Gorbachev had intended. Disbanding the Soviet bloc was one act. Disbanding the Soviet Union was entirely different. The forces of freedom, however, are indeed forces that often, like the weather, cannot be controlled. In 1991, the Russian Soviet Republic (Russia) became an independent nation. The Ukraine and Byelorussia followed Russia and other states to independence. The Soviet Union was no more. The global economy had grown significantly, as all these new and free nations prepared their economies to be global economic participants.

European Nations Unite The twentieth century was not quite finished reshaping the global economy. Recall that the European nations began to align themselves economically in the 1950s, as the European Common Market eventually became the European Union (EU) with six original members. As the end of the twentieth century approached, there were now fifteen members of the European Union. You can see who and when they entered in the Chronology. The European nations had many different types of trade agreements throughout modern history. During the 1990s, the European nations met to discuss how to better achieve what they labeled the “four freedoms”: movement of goods, services, people, and money (we will discuss these in broader context in the next chapter). These discussions culminated in several treaties and agreements to address the four freedoms, such as the



Introduction xxxiii

Single Market Treaty in 1993. In 1995, the Schengen Agreement gave all EU citizens the right to travel between nations without a passport. For the global economy, the second major event for the European Union was the introduction of the euro, the EU common currency, in 1999. A nation using the euro as common currency also needed to belong to the European Monetary Zone (EMZ). Not all EU nations belonged to the EMZ. Great Britain and Switzerland are two nations that belong to the European Union but not the EMZ. Great Britain maintained the pound sterling, and Switzerland the krona. At the time of this writing, Great Britain is in the process of leaving the European Union. The European Union is a major participant in the global economy. The euro is one of the four reserve currencies. The size of the EU economy rivals that of the United States. How Great Britain’s exit from the European Union will impact it, only time will tell. More nations are interested in joining it, but for now, the union is holding to its membership size.

THE GLOBAL ECONOMY TODAY The global economy continues to expand in the early twenty-first century. It is growing and being reshaped in many ways from the West to the East that will present challenges in the future. As we begin our journey, we will mention them here, and they will resurface as we conclude our journey in the conclusion.

Africa One of the most noticeable areas of the global economy’s expansion are the many new participants from the African continent. Many, if not most, of the African nations are awakening from their early days of independence and economic isolation. They are vying for a place in the global economy as providers of rich natural resources and trading partners. One of the areas we will explore later is China’s inroads into the economies of many African nations.

A New Middle East The nations of the Middle East are still the major providers of oil to the global economy, but they are not without competition. Will OPEC continue its influence on the oil market, or will other nations and regions of the world overtake its dominance? This question we will explore later when

xxxiv Introduction

we discuss future issues. For the present, however, OPEC heavily influences the price and supply level of oil and the many products that have oil as a resource component.

A New West The “West” is generally considered to be the developed nations of Europe, Canada, and the United States. In the early twenty-first century, all areas of the Western world are in some form of transition. The European Union’s central focus is dealing the exiting of Great Britain (Brexit), along with the stability of the euro. The United States and Canada, along with Mexico, are in the middle of revising the North American Free Trade Agreement (NAFTA). An agreement has been reached, but ratification still seems far off, as of this writing. The governments have not ratified the new United States-Mexico-Canada Agreement (USMCA), which will replace NAFTA. How different the two are is mostly a matter of perspective. We will explore USMCA in more detail in several other areas of the global economy, particularly when we explore laws and regulations and when we focus on future issues. A second issue is Britain’s exit from the European Union, more commonly known as Brexit. Britain is the first nation to exit the European Union, so it is new ground for everyone involved. Again, we will explore Brexit and its consequences in more detail throughout our journey. Oil independence from OPEC continues to be a goal of the West. Canada and the United States have vastly improved and increased their resources and ability to produce oil. Finding the balance between oil production and the environment and other social issues continues to plague the future of North American oil production.

A New East We used to consider Japan and the nations of the Pacific as the “Far East.” In this day of the internet and jet travel, they are not nearly as far away. The economies of eastern Asia are definitely new and on the rise as global economy participants. Whether Malaysia, Singapore, Vietnam, or Thailand, they are all twenty-first-century global economic traders and resource providers. South Korea continues to be an important global participant. New trade agreements including the revamped Trans-Pacific Partnership (TPP) add to their level of global participation. Several of these economies have flourished on the heels of China’s growth.



Introduction xxxv

The New Economic China Under Mao, China’s economy had stagnated, as most communist economies had done in the 1970s. After Mao’s death, a new China began to emerge. In 1976, China’s new leader, Deng Xiaoping, launched China on a new road of economic development that became known as “capitalism with Chinese characteristics.” He promoted development in four areas of economic concentration: agriculture, defense, industry, and science and technology. He called these the Four Modernizations. Under Xiaoping’s leadership, China today rivals the United States for the title of the largest economy on the planet. They instituted Free Enterprise Zones for foreign businesses to set up business in China as well as initiated incentives and a quota system so that they could keep their surplus and establish outside businesses. Under the Household Responsibility System, farmers identified their farm production quota. Rural Chinese citizens could move to the cities and work in the manufacturing plants. We will discuss many of China’s ideas and their impact in future chapters. Attempts are being made to replicate the Chinese experiment in other countries around the world. Whether the new nations of Africa or the old nations of South America, many are vying for a piece of the global economic pie. In the next chapter, we will explore the economic concepts that help us understand the benefits of trade and the reasons why nations respond to outside influences in the manner they do. A popular cliché of human nature is “if we do not learn from the past, we are bound to repeat it.” If you observe closely as we proceed through our journey, you will notice some of the same themes playing out in the twenty-first century that we experienced in the twentieth century.

NOTES   1. These are the first words in the Bible (Genesis I:1).   2. This definition comes from the dictionary tool of Microsoft Word. Possible synonyms include “universal,” “comprehensive,” and “total.” The point is that the term does more than just refer to the globe.   3. “Medieval Life–Feudalism and the Feudal System,” History on the Net, https://www.historyonthenet.com/medieval-life-feudalism-feudal-system.   4. “Marco Polo and His Travels,” Silkroad Foundation, http://www.silkroad foundation.org/artl/marcopolo.shtml.   5. Ibid.   6. Ibid.   7. Adam Smith, Theory of Moral Sentiments (London: A. Millar, 1759).  8. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776).

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  9. David Ricardo introduced the economic concept of comparative advantage in his textbook, On the Principles of Political Economy and Taxation (London: John Murray, 1817). 10. John Maynard Keynes, General Theory of Employment, Interest, and Money (London: Macmillan, 1936). 11. Keynes called his global currency the “banknote.” His plan was to replace domestic currencies with this one currency in order to create a global economy. More important, it would cancel out all of Britain’s war and trade debts. 12. The original OPEC nations were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Today there are fourteen members of OPEC, including Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, and United Arab Emirates. 13. Glasnost, or openness, was a greater willingness on the part of Soviet officials to allow Western ideas and goods into the USSR. Perestroika was an initiative that allowed limited market incentives to Soviet citizens. 14. This quote comes from a speech given by President Reagan on June 12, 1987, at the wall that divided East and West Berlin.

Chronology

“All the world’s a stage, And all the men and women merely players; They have their exits and their entrances” (As You Like It, Act 2, Scene 7, Lines 139–66).1 William Shakespeare wrote these words in the sixteenth century, but they seem quite appropriate as we begin our journey into the global economy. The global economy, like global history, has had its stages and players and different eras of achievement, failures, growth, and depression. Let’s begin our journey with a look at some of the major highlights that impacted how our global economy looks today. 8000 BCE People learn to farm and domesticate animals. 4000 BCE People begin to trade, since farmers can grow more food than they need. Others become other tradesmen and trade for the surplus food. 3300 BCE Mesopotamia (Babylon) is the first known civilization to have formal institutions. 3150 BCE The Ancient Egyptian civilization builds the pyramids and sphinx. 2700 BCE Ancient Greek civilization governs by democracy and conducts the first Olympics. 1600 BCE Ancient Chinese civilization invents paper, silk, gunpowder, and alcohol, among other things.

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xxxviii Chronology

325 BCE Chandragupta Maurya converts to Buddhism, using the world religion to expand trade and armies. Alexander the Great sues for peace and to combine forces with Chandragupta. For the first time, the states of the Mediterranean and India with Central Asia are connected for trade through overland routes. 6 BCE The Roman Empire changes, expanding the global economy. First Century CE As Buddhism expands around the known world, the Silk Road is founded to expand economic and cultural links between India and China. 960–1279 During the medieval era, the economies of Europe and the Song Dynasty of China connect by both Eurasian land routes and Indian Ocean sea routes. 1100 Genghis Khan comes to power and increases the overland routes to Europe and Asia (Eurasia). 1275 Marco Polo and his brothers arrive in Kubla Khan, the capital of China. 1297 The Polo brothers return to Venice two years earlier, and he writes his adventures, The Travels of Marco Polo. 1300 The Ottoman Empire covers parts of North Africa, Middle East, and Europe. Trade expands between Europe and Asia. As trade expands, so does the cost of global trade. European royalties begin sponsoring exploration to find a western ocean route to India and parts of Asia. 1324 Marco Polo dies in Venice at the age of seventy. 1350 Trade between Europe and China increases along land routes through Central Asia. Along the Silk Road through parts of Asia and the Mediterranean to China, trade of goods and migrations of people is increasing. 1400s–1600s Age of Exploration, also known as the Age of Discovery.

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1418 Prince Henry the Navigator is sailing the coast of Africa in search of a sea route to India. Other explorers are also searching for the ocean routes to the East. 1492 Sailing for the Spanish, Christopher Columbus sets sail for India, heading due west. Instead of India, his voyage lands on a small island he names San Salvador (known today as the Bahamas). He also explores what is today known as the island of Haiti and Dominican Republic. 1497 Sailing for the English, Italian John Cabot lands on soil that is not India (Newfoundland). 1498 Vasco da Gama sails around Africa into the Indian Ocean under the Portuguese flag. Portugal is becoming the world sea power, controlling the sea routes from Europe around Africa to India, China, and the Indies. 1519 Ferdinand Magellan sails for the Spanish king and queen to find a new sea route to the Spice Islands (Asia). He passes through the southern tip of South America (now known as the Strait of Magellan) and becomes the first European to sail across the Pacific Ocean. 1607 The British establish the first European settlement in Jamestown, Virginia. 1608 The Frenchman Samuel du Champlain begins a settlement in Quebec City. 1624 Holland also establishes a settlement and trading post in the new lands found by the Europeans, at the site of present New York City. 1650 During the seventeenth century, economic activity expands among the “new” western lands with Europe and Africa. The economic integration of economies expands again, as trade between East and West increases across the Atlantic Ocean. 1763 At the end of the Seven Years’ War and the Treaty of Paris, Great Britain emerges as the world’s dominant empire, while France’s empire is totally lost. Spain remains the other dominant global colonial power.

xl Chronology

1776 The American Revolution and ultimate independence of the British thirteen colonies changes the global trading landscape across the Atlantic. No longer are the European countries trading among themselves west to east. They are now trading with the new United States. Adam Smith publishes the An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and C. Cadell)2 where he promotes the positive sum nature of trade between nations. Smith notes that wealth is created through trade and not accumulation of gold as practiced by the mercantilists. 1789 In Europe, the French Revolution changes the European landscape. National governments and economies emerge during the Industrial Revolution on both sides of the Atlantic. 1815 British Parliament passes the Corn Laws to protect British farmers from imports of agricultural products. The short supply of grains and other foods raises prices significantly. Families cannot afford the high prices. 1817 David Ricardo publishes On the Principles of Political Economy and Taxation (London: John Murray).3 Ricardo claims all nations can benefit from trade by comparing opportunity costs of production. If nations produce only those goods with low opportunity costs and trade for other goods, gains from trade result. His idea of comparative advantage is key to all nations gaining from trade. 1846 The consequences of the Corn Laws (high prices, insufficient supplies) cause Parliament to repeal them. 1848 Karl Marx and Friedrich Engels publish The Communist Manifesto. 1878–1900 The Industrial Revolution brings new wealth to nations. Nations are producing more goods than the countries of Europe can consume and are searching for new markets. Africa appears an excellent trading opportunity for their new productivity. The European nations rush to colonize African lands. The “new” African territories become new markets for European goods. 1908 William D’Arcy and Burmah Oil Company, a British company, discover oil in Persia.

Chronology xli

1909 D’Arcy and Burmah Oil create the Anglo-Persian Oil Co. in order to expand the exploration and discovery of oil in the Middle East. 1914 The first era of globalization ends as World War I begins. President Woodrow Wilson takes a stand of neutrality for the United States. Global trade completely stops. 1916 President Wilson proposes a League of Nations to promote peace among nations and global open trade. 1917 President Wilson cannot remain neutral. The United States enters World War I. 1918 President Wilson proposes the Fourteen Points to end World War I. They include free oceans for open global trade. The Fourteen Points are the foundation for the League of Nations, which is not popular in the United States. 1921 Warren Harding is inaugurated president and takes a hard-line isolationist position on global trade for the United States. He does not support or join the League of Nations, which dismantles Wilson’s progressive globalization ideas. 1921 An Emergency Tariff is being implemented to limit foreign agricultural products. 1922 The Fordney-McCumber Act is imposed to raise tariffs 25 percent. The act also allows the president to raise tariffs without congressional approval. 1929 The New York Stock market crashes, beginning a U.S. depression that spreads globally. 1930 To protect U.S. jobs, Congress passes the Smoot-Hawley Tariff (Tariff Act of 1930), raising tariffs on all foreign goods coming into the United States. Other countries retaliate by raising their tariffs on U.S. goods imported into their countries, which results in all global trade decreasing by 60 percent. The Great Depression affects every country and deepens.

xlii Chronology

1933 In response to the post–World War I hyperinflation happening in Germany, Adolf Hitler is elected chancellor of Germany. Europe begins to divide, and global trade decreases even more. 1935 The automobile and the need for transportation continue to grow. So does the economic importance of oil and the Middle East. The Anglo-Persian Oil Co. becomes the Anglo-Iranian Oil Co. 1939 Hitler’s Germany invades Poland. World War II begins, and global trade continues virtually nonexistent. 1941 Japan bombs Pearl Harbor, and the United States enters World War II. 1944 The defeat of Germany and the Axis powers seems all but certain to end World War II. Forty-four nations meet in Bretton Woods, New Hampshire, to design a new postwar global monetary system, resulting in the establishment of two global organizations: the International Monetary Fund to provide loans for nations in need of financial assistance and the International Bank for Reconstruction and Development to provide loans to nations in order to rebuild their infrastructure post–World War II. The conference established a new monetary system exchange rate system in which the U.S. dollar is fixed to gold and the other currencies are fixed to the dollar.4 1945 Fifty-one nations sign and become charter members of the new United Nations.5 1947 India and Pakistan gain their independence from Great Britain. 1948 In an effort to eliminate trade barriers and create a freer global economy, the nations create a General Agreement for Tariffs and Trade. 1949 The reunification discussions for a post–World War II Germany have ended, and two Germanys are created: the Federal Republic of Germany, known as West Germany, and the German Democratic Republic, known as East Germany. West Germany is a democratic nation, and East Germany is member of the Communist Soviet Bloc. The first Five-Year Plan (1949– 1954) of the People’s Republic of China is launched with the assistance and support of the Soviet Union.

Chronology xliii

1950 Six European nations join their economics and politics to create the European Coal and Steel Community (European Union). The six nations are France, the Federal Republic of Germany (West Germany), Belgium, Italy, Luxembourg, and Netherlands. 1953 An armistice is being signed to end the Korean War. As a condition of the armistice, two Koreas are being created, North Korea and South Korea. 1954 The Anglo-Iranian Oil Co. is renamed British Petroleum. 1955 China’s Great Leap Forward loses the gains achieved during the FiveYear Plan. 1957 The six nations of the European Union create the European Economic Community (European Common Market). Ghana becomes an independent nation from Britain. 1958 Guinea gains its independence from France. 1959 Fidel Castro has successfully overthrown the Cuban government and creates a communist Cuba, which escalates the Cold War. The United States imposes an embargo on Cuba. Castro establishes stronger ties with the Soviet Union. 1960 The French African colonies gain their independence from France, including Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Congo, Cote d’Ivoire, Madagascar, Mali, Mauritania, Senegal, and Togo. Britain begins dismantling its colonial empire in Africa, allowing British Somaliland to merge with Italian Somaliland to create the new nation of Somalia. 1961 Britain continues to leave Africa, turning over South Africa and Tanzania to independent national governments. 1962 China’s Great Leap Forward ends. 1963 Britain continues its march out of Africa. Kenya is the newest British colony to become independent.

xliv Chronology

1964 Zambia and Malawi join Kenya as new independent nations. 1965 Britain’s Rhodesia is divided, creating independent Zimbabwe and Gambia. 1966 The last two British colonies, Botswana and Lesotho, gain their independence. Britain is now totally out of Africa. 1968 Spain grants independence to its African colony, Equatorial Guinea. 1973 The United Kingdom, Ireland, and Denmark join the European Union, raising membership to nine nations. The Organization of Petroleum Exporting Countries imposes an embargo on exporting oil to the United States. The oil-producing countries’ influence on the global economy expands significantly. 1978 China’s premier Deng Xiaoping introduces economic reforms, including market incentives for farmers and other market reforms. 1981 Greece joins the European Union, becoming the tenth member. 1985 Mikhail Gorbachev becomes leader of Soviet Union, as general secretary of the Communist Party and president. He introduces economic reforms known as glasnost (openness to new ideas) and perestroika (permits market incentives into the economy). 1986 Spain and Portugal are the eleventh and twelfth nations to join the European Union, and the members sign the Single European Act. The European Union embarks on a six-year program to establish free trade throughout all EU nations as a single market. 1989 Poland elects a noncommunist majority government. Soviet president Gorbachev and the Communist Party allow the election to stand. The Soviet Union’s nonaction is the beginning of the end of the Soviet Union. The Berlin Wall separating East and West Berlin since the end of World War II is torn down. The reunification of Germany begins, symbolizing the end of the Cold War.

Chronology xlv

1990 The reunification of East Germany and West Germany is complete, creating the Federal Republic of Germany. For the first time since 1945, Germany is again one nation. The Shanghai Stock Exchange reopens in China after being closed for forty years. 1991 The dissolution of the Soviet Union continues as Russia, Ukraine, and Byelorussia claim their independence. 1993 The signed North American Free Trade Agreement is ratified by the three countries’ governments: Canada, Mexico, and the United States. 1994 NAFTA becomes effective January 1. 1995 Three nations become thirteenth, fourteenth, and fifteenth new members of the European Union: Finland, Sweden, and Austria. The Schengen Agreement allows people to travel between EU nations without passports. 1997 Great Britain turns Hong Kong over to Chinese rule, completing the dissolution of the British Empire. 1999 The euro becomes the currency for most of the EU nations. England and Denmark opt out and are not part of the European Monetary Zone. 2000 British Petroleum takes the new name of BP. 2001 China joins the World Trade Organization (WTO). 2004 Ten nations, mostly from the former Soviet Union or Soviet Union bloc, join the EU (listed in order of joining): Cyprus, Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. This brings EU membership to twenty-five countries. 2007 Bulgaria, number twenty-six, and Romania, number twenty-seven, join the European Union. 2008 The worldwide financial crisis happens.

xlvi Chronology

2011 South Sudan gains its independence from the Republic of Sudan. 2013 Croatia joins the European Union, bringing the number of nations to twenty-eight. 2014 Scotland votes not to be independent and leave Great Britain. 2016 Great Britain votes to leave the European Union, in a process known as Brexit. Twelve nations sign the Trans-Pacific Partnership: Australia, Brunei, Chile, Canada, New Zealand, Peru, Singapore, Vietnam, Malaysia, Mexico, Japan, and the United States. 2017 President Trump withdraws the United States from the Trans-Pacific Partnership. 2018 Canada, Mexico, and United States agree to a new trilateral trade agreement to replace NAFTA (as of this writing, the agreement has not been passed by the U.S. Congress). The eleven remaining members of the TransPacific Partnership sign the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) pact.

NOTES   1. William Shakespeare, As You Like It, Act 2, Scene 7, Lines 139–66.  2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and C. Cadell, 1776).  3. David Ricardo, On the Principles of Political Economy and Taxation (London: John Murray, 1817).   4. Sandra Kollen Ghizoni, “Creation of the Bretton Woods System,” History of the Federal Reserve History.org, accessed January 13, 2019, 2013, https://www .federalreservehistory.org/essays/bretton_woods_created.   5. “History of the United Nations,” United Nations, accessed January 13, 2019, http://www.un.org/en/sections/history/history-united-nations/.

1 Economic Rules of the Global Economy

The global economy involves pretty much the entire scope of what is known in the world of economics. To understand the global economy, it is important to first understand the characteristics that every economy has in common. While there are differences between economies, some quite extreme, there are also similarities. All economies play by the same six basic economic rules. As you will soon see, they interpret them differently, but the rules are the same. Before we hone in on the key economic concepts that create the global economy, let us first take a look at what each economy and every citizen has in common.

FIVE CORE ECONOMIC RULES OF EVERY ECONOMY Rule #1: Everyone Chooses. All Economies Choose How to Allocate Resources Try a little experiment tomorrow morning when you wake up. As you lie there, tell yourself that today is the day you are not going to make any decisions. Being a wise individual, you are already thinking, “Hold on! If I am telling myself not to make any decisions, didn’t I just make a decision to tell myself not to make any decisions?” Of course you did! That is exactly the point of this somewhat silly experiment. From the moment we wake up until the time we go to sleep, we are making decisions. Some decisions are 1

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The Global Economy

quite minor, while others can be very major. They all have one thing in common: economics. Each individual on the planet, including you, has a level of natural, labor, or capital resources available for their use. We will elaborate on these shortly, but for now, it is important to know that the amount of these resources available to you is limited. It may not seem like it now, but what you want to do with your resources far exceeds the availability of your resources to do them. You and your seven billion fellow earthlings all have the same economic problem: scarcity. Scarcity forces us to make decisions. We always want more than our resources will let us. It is true for individuals, and it is also true for nations. All nations large and small have a limited amount of resources for their use to produce goods and services for their citizens. As a society, they have to make economic decisions about how to allocate the natural, labor, and capital resources of their nation. This idea will have greater significance for us later in the chapter when we begin our discussion of trade. The importance of making wise decisions with our resources is Rule #2. Scarcity and decision-making are the result of limited resources. Before we journey farther, we need to further expand our understanding of the resources. Resources come in three types: human resources, natural resources, and capital resources. Let us take a moment and look into each of these three. Human resources is a fancy term for labor. Each of us has access to labor, our labor. Early in the history of mankind, all labor was unskilled. All humans were hunters and gatherers. As history progressed, individuals learned special skills, and specialization evolved. Specialization led to division of labor, interdependence, and different skill levels for different jobs. As skill levels became more differentiated, so did the need for different levels of education. A key component of today’s global economy is the specialization and education necessary to participate in it. How different economies use their labor is a later story. Natural resources are the resources from nature. Natural resources are considered anything that comes from underneath the ground, is grown and comes from the ground, or is a product of the ground. Commodities such as oil, copper and other minerals, and gold are examples of natural resources underneath the ground. The farmers’ crops used to feed cows, wheat or corn milled to create flour for bread and other products, and cattle for meat products are examples of natural resources. The air we breathe and water we use in the production of goods and services are also natural resources. This brings us to the issue of the quality of our natural resources. As our global economy grows and options for goods and services increase, quality has become more of an issue. Natural resource quality will be an issue we will explore later in our journey.



Economic Rules of the Global Economy 3

Capital resources are the man-made tools used to manufacture the products and services we use in our homes and businesses. In the world of economics, there is sometimes a bit of confusion over the term “capital.” In finance, the term is used to mean money. That is not so in economics. Since this is a journey into the global economy, when you see the term “capital,” it will refer to the tools used in the production of goods and services. As new capital resources are invented, implemented, and become an integral component of the global economy, they become more important. Change in capital resources has been significant the last one hundred years. At the turn of the twentieth century, new technologies included the telephone and telegraph. Changes in travel made the world smaller. Since we entered the twenty-first century, we have not just a telephone but a phone so small without wires that we are able to carry it in our pocket. What we carry is really a small computer with a phone component. Computers have been reduced in size that they can fit on our wrist to measure our health. Satellites revolve around the earth, giving us better communications visually and auditorily from virtually anywhere on the globe. The steady increases and changes in technology and capital are constantly changing the global economy landscape. New capital inventions and improvements have made the global economy more accessible today than at any time in history. As we travel through our journey, note how capital and labor are trade-offs in the expanding global economy.

Rule #2: All Choices Have Costs (Trade-Offs) Today and Consequences Tomorrow Because of the scarcity of our resources, we are forced to make decisions in every circumstance. We make them as individuals, families, school groups, and nations. In each circumstance, we make decisions because our desire for the many uses of our resources exceeds the level of resources available to us. Decisions themselves have several parts. When we make a decision as an individual or a group such as a nation, we do more than just decide to do something. Maybe you have heard the phrase “nothing is free.” It is true, because every time we make a decision, we give something up. At the time of the decision, we also choose not to do another thing. In economics, what we give up is called “opportunity cost.” All choices have an opportunity cost. The opportunity cost of a decision is the trade-off between two options. The next time you go to your favorite restaurant, think in terms not of what you choose but what you do not choose. When you make your menu selection, what did you not choose? Every decision, small or large, has a trade-off, or opportunity cost. As our individual decisions have a trade-off,

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so also do the decisions of nations. Are the farmers in the nation growing corn or wheat? Are they using horse-drawn plows or tractors? Every choice a nation makes to allocate its resources, it is giving up the opportunity to allocate it elsewhere. Decisions have an immediate trade-off as well as future consequences. Consequences can be positive and negative. Years ago, there was a television show called Truth and Consequences. Since the premise of the show gave the term “consequences” a negative connotation, the word has since usually been associated with bad or negative actions or results. There are, however, also many positive consequences to decisions. Some consequences are intended. Other consequences are surprises. It is the unintended consequences of decisions that make the news. The decisions of nations are no different with regard to consequences, both intended and unintended. The opportunity cost of a nation’s decisions is a cost in the present. Consequences are the future costs and/or benefits of decisions. When nations make decisions as to how to allocate their resources, there are both trade-offs immediately and consequences in the future. Whether it is how a society utilizes its labor, natural resources, or available tools, for every political, economic, or civic decision, there will be a tradeoff with future consequences. The consequences of a nation’s decisions could be positive, negative, or a combination. Often, those decisions are determined by the incentives in their use. This brings us to Rule #3.

Rule #3: Incentives Influence Choices Incentives are rules, laws, regulations, or lack of them that encourages individuals or nations to make decisions. We know from our Rule #1 silly experiment earlier that decisions are made individually from the time we wake up to when we go to sleep. The decisions, opportunity costs, and consequences are different, because the incentives behind the decisions vary. Every economy has the same three components: economic, political, and civic. Within each of the three components are institutions and incentives that ultimately create the behavior of the economy’s producers and consumers. The incentives vary depending on the structure of each system. Economies can be structured very differently. With our next rule, let us now explore how economic systems are structured in depth.

Rule #4: Economic Systems Influence Incentives To accurately view how economic systems influence an economy’s incentives, we first have to understand what an economic system is and how they differ. Economic systems have two main differences. The first are



Economic Rules of the Global Economy 5

the economic institutions of a nation’s economy. In economics, institutions are not buildings or organizations as we often use the term. Instead, “institutions” refer to both organizations as well as the rules and characteristics that define how an economic system functions. There are many types of different institutions used to define societies. Three of them (property rights, rule of law, and a credible court system) differentiate economic systems and influence the incentives of an economic system.

Property Rights A fundamental institution of a democratic nation and market economic system is the right of private individuals to own property. Property can be owned either privately or publicly. Private property like homes, farms, factories, and business buildings is owned by individuals, companies, and essentially any nongovernmental person or organization. Government entities like schools, public libraries, parks, and government offices at all levels are examples of publicly owned property. The rights of citizens to own property differentiate economic systems. That right of the individual, however, is only valid if society has a political component with a credible court system.

Credible Court System Private property rights are only as good as the validity and credibility of the nation’s court system. The issue arises when the court system is put in the position to protect the property rights of an individual. A court system is valid when their decisions on private property cases are accepted and properly administered. Many nations claim they have private property rights. Their issue is that the courts are so corrupt or have been so discredited that any decisions they do make are not followed through on by the government. Often in these situations, courts are political puppets that only serve the powerful and most influential. The courts must adhere to the next institution.

Rule of Law An additional institution that involves the courts is rule of law. Rule of law is the idea that the courts treat everyone the same. Every citizen within a nation has the same rights under the law. Rule of law is missing from nations with court systems under government control and those that support only a few powerful and influential individuals. Notice the close connection between rule of law and credible court system.

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The Global Economy

These three main institutions define the Rule #3 incentives of an economic system. The incentives, or disincentives, provided by property rights, a creditable court system, and rule of law, can differ within economic systems. These three institutions lay the groundwork for defining and differentiating the various economic systems that we will be exploring shortly.

Rule #5: Voluntary Trade (Exchange) Creates Wealth The final rule will lead us into our next discussion on the different economic systems. Trade can occur either voluntarily or involuntarily. The key word to this rule is that trade is “voluntary.” When you choose to trade something with a friend, the exchange makes you both better off. Both you and your friend have increased your personal wealth. The trade is a plus for both of you with a positive outcome for the whole. This same idea holds true for nations. The other type of exchange is involuntary. An involuntary trade occurs under duress, pressure, or law. An involuntary exchange benefits one party at the cost of the other. When a robbery occurs, the robber gains while the victim loses. Contrary to the earlier voluntary exchange, this exchange is not positive for both parties. The involuntary exchange is a zero-sum exchange. On the whole, no wealth is created. These five rules provide the backdrop for how all seven million of us on this planet behave. The ways in which these rules apply in a society create the environment for the incentives that influence our behavior. Collectively the actions of individuals and decisions of politicians, elected and self-proclaimed, create economic systems, our next topics of exploration.

ECONOMIC SYSTEMS Economic systems, along with the political and civic systems of a society, provide the landscape in which we live. Economic systems define the organizations and institutions of a society. As Rule #4 above states, economic systems define the incentives by which individuals act. The economic system in which we live determines the freedom and level of economic activities we will experience. Most importantly, the economic system of a society defines the level of international and global economic participation in the global economy. Economic systems are defined by how society answers three basic economic questions. The first is, “What will be introduced?” When society answers this question, it is allocating its resources. What goods and services will be produced within the nation’s economy? The second question, “How will it be produced?” This question addresses how the nation’s resources will be economically used. Will the resources of



Economic Rules of the Global Economy 7

the nation be used efficiently or inefficiently? Will the economy be labor intensive, capital intensive, or in combination? How will be the nation’s land be used? The final question is, “For whom will it be produced?” This question determines the distribution of the nation’s goods and services. Who answers this question decides whether the goods or services will be available for everyone or for a select population of the nation. As you can see from the many questions above, an economic system is very important to the ways a nation and its citizens function. How a nation addresses these questions determines many things. Are these questions answered by custom, by the interaction of buyers and sellers, or by a government’s central authority? This final question is the key question that societies answer regarding their economy. Who is the driving force behind answering the three basic economic questions (who, what, for whom) will determine the nation’s role in the global economy.

TRADITIONAL ECONOMY The traditional economy has answered the three questions the same way for generations. Customs, traditions, and family ties determine the type of labor a young person will pursue. They determine the mix of goods and services that an individual and family will have access to, and these are generally are only those needed for daily survival. Traditional economies do not exist in many places in the world today. There are a few that have been cut off from other economies by geography, weather, or other natural barriers. Others choose to remain tradition by custom. Portions of the Aboriginal tribes in Australia, the Kayango tribes of Namibia, or the Mbuti Pygmies of the Congo are examples of traditional economies. The more a traditional economy remains the same, the less it grows. Traditional economies, by definition, do not have much economic growth. They do not innovate, nor do we see entrepreneurial efforts within a traditional economy. Their tools of production are the same tools used by their great-great-great grandparents and even longer in the past. Given their constraints, traditional economies are not participants in the global economy. Little, if any, of our further discussions on the global economy will apply to these economies.

COMMAND ECONOMY Our global economies today are covered in the next three ways the basic economic questions are answered. The command economic system is a system in which the basic economic questions are answered by a central

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authority, usually an agency of the government. The popular term for this type of economy is “socialism.” In a command economy, all the resources (land, labor, capital) are owned by the state. The state determines the what, how, and for whom to benefit the leaders. The questions are answered to create a state that fits their definitions and philosophies. The government is in total control of the economy. We will discuss this political-economic interdependence shortly. If you lived in a pure command economic system, you could not choose your career. You would go to school for some years and take a national exam or two, and the government would then assign you to a career and determine how you would make a living. The government would own the factories, farms, homes, and businesses. The government would set the wages you would earn and would determine the goods and services you could purchase as well as the prices you would pay. Pure command (pure socialist) economies are rare in today’s global economy. Some domestic economies that participate in the global economy have leanings toward pure socialism, but they would not be defined as pure command economies. We will expand on these shortly, but what many call socialism today is not pure socialism. “Socialism” is a popular term that has been adopted today by many politicians, journalists, and commentators to signify a shift toward more government spending. Pure socialism, command economy, is government ownership of the nation’s resources. Most who use the term today, however, are using “socialism” to define increased income redistribution, not necessarily government taking over ownership of the nation’s resources. That can certainly be a step towards pure socialism, one we will explore further. How these discussions unfold both politically, and amongst the nation’s citizens goes a long way in determining a nation’s role and participation in the global economy.

MARKET ECONOMY If we consider the command economy as one far side of the economic systems spectrum, the market economy is the other far side. All the command economy’s characteristics are reversed. Private individuals, businesses, or organizations own the nation’s economic resources (land, labor, capital). The government has no role in the economy (or almost no role). The interactions between the buyer and seller answer the who, what, and for whom of an economy. The market economy is based on Rule #5 that voluntary exchange (trade) creates wealth. A hallmark of a market economy are private property and private property rights. Individual private ownership of a nation’s resources provides



Economic Rules of the Global Economy 9

many incentives to use the resources wisely and efficiently. Unlike the command economy example, in a market economy, you can decide what you would like to do as a career. Of course there are levels of education, training, and experiences necessary for some professions (doctors, for example), but you decide on your profession, not the government. Remember we mentioned earlier that the institution of private property rights is only as credible as the court system upholding the laws. There is a role for government in a market economy. Market economies are major players in the global economy. The incentives of a market economy and private ownership of the resources also includes innovation, invention, and entrepreneurship. The freedoms of a market economy incentivize individuals to be creative, to invent new products and processes, and to share their new tools or ways of doing something, business or otherwise, with the rest of the world. Market economies, like market forces, are the force of the global economy. Again as with the command economy, there are not many pure market economies in the world today. Many economies today have some component of a market economy. We will elaborate on these distinctions shortly. It is also important to notice the political-economic interdependence once more, even in market economies. That both ends of our economic spectrum need politics, although in different ways, leads us into a discussion of our next and most realistic economic system.

MIXED ECONOMY Most nations of the global economy ultimately function somewhere between the command economy and the market economy. They answer the who, what, and for whom questions in concert with their political and civic systems. We will explore these connections shortly. Let us use nations to best illustrate the various types of mixed economies. At the time of this writing, those nearest the command economy profile would include North Korea and Venezuela. Both North Korea and Venezuela could conceivably be considered pure command economies, but for discussion purposes, we are giving them the benefit of the doubt that some market economy characteristics exist. Moving away from command economies are those still mostly influenced by command economy with political characteristics. Cuba is command except for approximately two hundred jobs in which they allow some market incentives and characteristics. China is unique in that while it has adopted many of the market economy characteristics, it has also retained many command economy characteristics. We will discuss this paradox in detail shortly, because it gives us a lot of information about how and why China has become such a major player in the global economy.

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The government still mostly owns many of China’s resources. Some of the resources, however, are also privately owned. This is especially true in the rural, agricultural sector. Chinese people own some of the companies and businesses, and some are Chinese-foreign company partnerships. All, however, are still under the control of the Communist Party if the need arises. Ian Bremmer has called China’s economic system the “state-owned economy.”1 As we move closer to the market economy, we have Western Europe, Japan, Canada, Australia, and the United States, to identify a few. These economies are the dominant participants (along with China, India, and a few others) in the global economy. They have a dominant role for a reason. As we discussed earlier, the freedoms and characteristics associated with the market economy allow for the free flow of goods and services around the world, both in terms of what is produced in other nations and comes into the country (imports) and what is produced domestically and goes to other nations (exports). These economies are dominated by the characteristics of the market economy, but they do possess a minor element of the command economy. The government owns some of the resources in each of these nations. In the United States, the federal government owns lands and claims the mineral rights to those lands. It decides through the courts or laws how some resources will be used. All these decisions influence the level of participation in the global economy. Finally are those nations that are almost pure market economies. Hong Kong and Singapore rank numbers one and two for Economic Freedom on the 2019 Human Freedom Index.2 Hong Kong still ranks high on economic freedom even though Great Britain turned it over to China in 1997 (China ranks hundredth, the United States twelfth). Pick a nation, and see how they rank among 162 nations, most of them either participating in the global economy or trying to do so. As you can see, no two countries are alike, and they participate in the global economy in just as many different ways. It is time to explore the key economic concepts that will help you understand both why nations make the decisions they do and how those decisions are made.

NOTES   1. Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations (New York: Penguin, 2010), 54.   2. “2019 Index of Economic Freedom,” Heritage Foundation, accessed September 12, 2019, https://www.heritage.org/index/ranking.

2 Global Economy, Politics, and Culture

The global economy today is very complex with many moving parts, both economic and noneconomic. Before we leave this discussion on economic systems, it is important to understand how they exist relative to the society as a whole and their role in a nation’s global economy participation. We need to understand how all the global economy’s moving parts work together. Only then can we understand our complete role as an economically educated citizen. The economic systems of the global economy do not operate in a vacuum. An economy’s participation is influenced by their society’s political and civic systems and those in other nations. Political systems, civic systems, and economic systems are all interdependent on each other’s philosophies and actions. Institutions discussed earlier, such as property rights and the incentives of a society, are ordered by the interdependent coordination of all three systems. Political systems are either determined by the people or rule the people. Free elections, a credible court system, the rule of law, and a democratic form of government define political freedom. Or, the political system is controlled by a dictator who determines elections, controls the courts, and rules over the people with an iron hand of the law. Each of these political systems has an economic system that pairs with it nicely, the other not so much. The other system of society is its civic society, which determines the level of freedom for an individual. Freedom of press, freedom of religion 11

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and to worship, and freedom to congregate and assemble are examples of the kinds of freedom determined by the civic system. Those types of freedom do not have to exist. They either are present because of the actions of society or do not exist because of the actions of the ruling political system. Either way, the rules of the civic system are determined by the actions of the other two systems. To illustrate the distinctions about how these domestic systems interrelate and ultimately determine their participation in the global economy, let us look at the different combinations of political-economic-civic societies and explore why they fare as they do in the global economy. To make these comparisons, we need to define our subcategories: • • •

Political-Dictator (one-party rule) or Democracy (representative government) Economic-Socialism (command) or Capitalism (market) Civic-Personal Freedom (Bill of Rights) or No Personal Freedom

Before we briefly identify these combinations, a few caveats. One, these are generalities. In some cases, there are exceptions, but they are few. Two, history has shown us that the exceptions are generally only short term. In the long term, these scenarios usually are the outcomes. Three, a country’s combination today (or yesterday) may be different in the future. History is quite clear that a country can change its stripes, for good and for bad. How these determine a nation’s role in the global economy we will explore after we view the different scenarios.

DICTATOR-SOCIALISM-PERSONAL FREEDOM This combination would not be a viable model. A political dictator demands total control over all aspects of the society and its nation. Absolute political control would include ridding themselves of all the opposition. It would be natural for a dictator to demand a command economy to control all the resources. Civic freedoms do not fit a dictator’s control, so all civic freedoms would be eliminated and punished. In 1989, Chinese students protested the lack of personal freedom and were quickly and firmly dispersed by the communist government.

DICTATOR-CAPITALISM-PERSONAL FREEDOM We have already discussed why personal freedom will not work for the dictator. For the same reason, capitalism too will not work. The characteristics of a market economy (freedom and interaction of buyers and



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sellers) are directly opposite the control demanded by a dictator. Control is paramount for the dictator. Without it, they are not, by definition, a dictator. Interestingly enough, however, this is precisely the current combination that China would like us to believe they use. They have unquestionably had significant short-term success. Even with their recent gains in global trade, some in the global economy are suspicious of their ability to maintain this global position. Much has been documented of their restrictions on personal freedom relative to religion and a free press. Even though it was twenty years ago, the protest of Tiananmen Square remains fresh in the minds of many human rights activists. Politically China is still governed by a one-party system. Their emphasis on exports has led their economy to be called the “modern mercantilist.” China claims this combination, and, for now, the world seems to accept their claim, exceptions aside. Changes to the global perception of China as a Dictator-Capitalism-Personal Freedom nation would have significant repercussions to the global economy. We will explore this idea when we end our journey and try to look into the future.

DICTATOR-CAPITALISM-NO PERSONAL FREEDOM This combination is the recipe for a fascist society or one dominated by culture or religion (theocracies). Fascism is when the nation’s economic organizations (farms, businesses, unions) might be privately owned but a dictator-style government controls their operations. Obviously, we are using the term “capitalism” here only because the resources are privately owned, differentiating it from socialism. In this form, their actions and control are definitely those of a command economy. Economies of fascist governments participate in the global economy in various levels. Some only trade with other fascist or dictator nations. Some South American nations would be considered fascist nations. Not considered fascist by definition, culturally and religiously dominant societies could fit this combination as well. Having few, restricted, or no personal freedoms, the economy takes its direction from the government. Culturally and religiously dominant societies can be global traders because of their possession of a major resource, such as oil in the Middle East.

DICTATOR-SOCIALISM-NO PERSONAL FREEDOM This is the perfect combination for a dictator. Communism is complete control over all systems of society. The government answers the three basic

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economic questions. Different from the fascists, the communists own the nation’s resources, including businesses, farms, and homes. Any attempt to change the status quo is generally met with force and eliminated. North Korea is a prime example of this combination, as is Venezuela. The current situation in Venezuela is a prime example of how combinations change. It has not been that long ago that Venezuela was Democratic-Capitalism-Personal Freedom. Now it is none of those, and its participation in the global economy has changed as well. No country is immune to change.

DEMOCRACY-SOCIALISM-PERSONAL FREEDOM Using the command economy definition of socialism, this combination does not work. As democracy and personal freedom bring freedoms to the society, economic freedom would be expected as well. There are several countries, however, that fit this combination, if we use today’s definition of socialism as income redistribution. These countries, even with significant income redistribution, could be meaningful trading partners in the global economy. Political debates and rhetoric often suggest that this is the direction of the United States.

DEMOCRACY-SOCIALISM-NO PERSONAL FREEDOM This form is internally inconsistent, which is why nations do not normally use this combination in the long term. The lack of economic and personal freedoms is inconsistent with free democratic elections and representative government. This combination may be a short-term transition condition on its way either to democracy or to a dictatorship.

DEMOCRACY-CAPITALISM-PERSONAL FREEDOM This final combination is the perfect scenario for a totally free society. Hong Kong and Singapore lead the nations in providing all three freedoms. Representative government, market economy, and civic freedoms are a way of life and are also supported by a credible court system that protects property rights and the rules of the game for both the buyer and the seller. For all the discussions and rhetoric in today’s world, the United States, Japan, the European Union, and the United Kingdom exemplify this combination. Many other nations, such as Sub-Saharan African nations, are pursuing this combination with varying degrees of success. As nations move toward this combination, they move closer to being participants in



Global Economy, Politics, and Culture 15

the global economy. Interestingly, as some have moved from this combination (Brazil, Ecuador, Egypt), they have become more insular, and their global participation has reduced. It is important keep these political, economic, and civic combinations before us and for us to remember that for a nation, participating in the global economy is more than an economic gesture. Remember that all choices have costs in the short term and consequences in the long term. This most definitely applies to political, economic, and civic systems of a society and their role in the global economy.

3 Gains from Trade

A favorite hobby for many of us is collecting. If you are into sports, you may collect trading cards of your favorite baseball, basketball, soccer, or football players. You may collect Harry Potter figurines or Lego movie characters. Have you ever traded an item from your collection to obtain a new item for your collection? When you did trade, which of you was better off after the trade? As with most trades, both of you were better off, or why would you have traded at all? The same holds for nations. It is time to shift our direction and explore why trade is such a good thing for nations. Have nations always traded? Why is it so important for nations to trade? To answer these questions, we need to pause and go back to our earlier history lesson. If you remember, prior to the eighteenth century, nations used the mercantilist system. Nations would not trade their goods but would sell them to other nations for gold, silver, or other precious commodities. Economic growth was a zero-sum game. Each time the nation sold, it won, and each time it bought, the nation lost. Then in 1776, the world of global trade changed forever.

ABSOLUTE ADVANTAGE In 1776, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations1 was published. In Wealth of Nations, Smith advocated two extremely novel ideas for his era. One was specialization, and the other was division of labor. Remember that this was just at the beginning 17

18

The Global Economy

of the Industrial Revolution. Specialization was occurring in cities and villages. To address of the needs of the town or village, there was the town blacksmith, shoe cobbler, furniture builder, and so on. The idea, however, had not been applied to production and trade. Division of labor as an economic concept to increase national wealth was an idea promoted by Smith in the Wealth of Nations. He illustrates division of labor with what is now the famous pin factory example.2 Between specialization and division of labor, Smith proposed that if nations did not sell but instead traded their goods, both nations would be better off and each nation’s economy would grow. Smith expanded on these two novel ideas, suggesting that nations produce what they are best at producing and trade for those items they do not produce well or produce at the cost of using many of their precious scarce resources. This idea is known as “absolute advantage.” Smith proposed that if each nation focused on what it produced best and traded for the other goods, it would actually have more goods, and the economy would grow. This scenario of global trade would be a win-win for both nations, a positive sum to the global economy. There was one drawback to Adam Smith’s idea of absolute advantage. For a nation to participate in the global economy, it needed to have the resources to produce a product better than any other nation; it needed to have an absolute advantage in the production of a good. Even for these nations, however, their resources for producing their goods were limited. Between limited resources and mercantilism, the age of discovery and colonialism was dominant until the Wealth of Nations. Not having an absolute advantage in producing any product was a problem for many nations. For these nations, the answer was in the writings of David Ricardo forty years later.

COMPARATIVE ADVANTAGE David Ricardo had read the writings of Adam Smith and began writing on his own ideas about the economy. In 1817, he published the On the Principles of Political Economy and Taxation.3 In his work, Ricardo goes one step beyond Smith, suggesting that even nations without an absolute advantage in the production of a good can participate in the global economy. By two nations comparing the opportunity costs (trade-offs) of producing two goods, they could then determine that each country could be more efficient in producing one good then the other, produce that good, and trade for the other. By comparing the opportunity costs of producing a good, nations determine their comparative advantage. Introducing the idea of comparative



Gains from Trade 19

advantage allowed nations for whom there was no absolute advantage to participate and benefit from the global economy. It is important to emphasize here that in comparative advantage, the opportunity costs of production between only two nations producing two goods are compared. The following examples (and only an example) of global trade illustrate how comparative advantage benefits both nations. The first comparison illustrates Smith’s absolute advantage. Let’s say that the United States has an absolute advantage in the production of skateboards. France has an absolute advantage in the production of bicycles, as the Table 3.1 below shows. Using the same input of resources, the United States can produce ten skateboards or one bicycle. France can produce six skateboards or three bicycles. For the United States to produce one skateboard, it costs 0.1 bicycles. It costs France 0.5 bicycles to produce one skateboard. Therefore, the United States has absolute advantage in producing skateboards. It costs the United States ten skateboards to produce only one bicycle. It costs France two skateboards to produce one bicycle. France has absolute advantage in producing bicycles. Each has an absolute advantage in one product. Let’s see how Adam Smith was correct. If the United States were to use all its resources to produce only skateboards, they could produce twenty skateboards (more than the combined sixteen). France could produce six bicycles (more than the combined four). By specializing, they could have twenty skateboards and six bicycles instead of sixteen and four. Both countries are better off and gain from trade. If the two nations trade for the product they do not produce, both countries will be better off. Both economies will be more efficient, and both economies will grow. Let’s change our story and the relationship between our two countries. In this scenario, the United States has absolute advantage in both producing skateboards and bicycles (Table 3.2). Table 3.1  Absolute advantage Skateboards

United States

France

10

6

1

3

Bicycles Table 3.2  Comparative advantage Skateboards Bicycles

United States

France

10

5

5

1

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In Smith’s terms, the United States has absolute advantage in both, and trade most likely will not occur for these two products. They may trade for other products but not for skateboards and bicycles. David Ricardo’s comparative advantage, however, creates another outcome. Even though France does not have absolute advantage producing either product, it does produce skateboards more efficiently than it produces bicycles (five to one). Remember our earlier discussion on opportunity costs. Opportunity cost is the key measure in determining comparative advantage. While France does not have absolute advantage, it does have lower opportunity costs in producing skateboards. Since it gives up less of its resources, this creates an opportunity for France to participate in trade with the United States for bicycles. Let’s see how this works. France can produce ten skateboards if it does not produce bicycles (it transfers its resources from producing one bicycle to five more skateboards). The United States already produces ten skateboards, so together, the two nations can produce twenty total. To make up for France’s loss of one bicycle to produce skateboards, the United States needs to produce at least one more bicycle for both nations to gain from trade. Since the United States has absolute advantage in both products, it has several options for both nations to be better off. One option is for the United States to produce only eight skateboards. This allows it to switch its resources for one more bicycle. Both nations now have eighteen skateboards and six bicycles, more skateboards with the same number of bicycles. The second option is for the United States to produce only six skateboards for a total of sixteen skateboards and seven bicycles; both countries still gain from trade. France produces skateboards and then trades skateboards with the United States for bicycles. The United States can produce fewer skateboards and transfer its resources into the production of other domestic goods, including more bicycles if the market demands more bicycles. France is now a player in the global economy. The United States can now refocus the use of its resources into more bicycles to trade or increase production of other goods for domestic consumption. Comparative advantage gives all nations an opportunity to participate in the global economy. By comparing their advantages to each other, both countries can participate and gain from trade. The global economy has more skateboards and bicycles. Trade is a win-win for everyone.

Comparative Advantage in Your Own Lives Comparative advantage is a concept we practice in our everyday lives. Have you had a part-time job mowing lawns, shoveling snow, babysitting,



Gains from Trade 21

or cleaning someone’s house? Have your parents hired you to do work around the house? You were hired because the individuals, whether your parents or neighbors, were practicing comparative advantage. They could have done the job they hired you to do at least as well (i.e., absolute advantage). They hired you, however, so that they could spend their time doing a second task for which they may or may not have had an absolute advantage. By hiring you, they practiced comparative advantage so that they could do a second task which had a greater opportunity cost for them. When practicing comparative advantage, both nations and individuals specialize in the production of goods and services with lower opportunity costs. The nation’s economy is more efficient and results in more goods and services for the entire economy. As the global economy expands, it will become more important for nations to discover their comparative advantage with trading partners.

YOU MUST REMEMBER THIS IMPORTANT FACT Throughout this chapter, we have made reference to the notion that a country trades with another country. That is a shortcut that we almost always use in economics when discussing the exchange of goods between countries. It is easy, it is simple, but it is not accurate. Countries do not trade with each other. The trade really occurs between companies of different nations. Remember our discussion on economic systems. In a market economy, such as the United States, where private property and property rights are so important, it is not the government (country) that actually produces the products. They may provide certain products and services in specific situations. Companies produce the products. If countries do not trade, why state it that way? Good question. It is easier to discuss global trade in terms of a country’s trade for several reasons. First, it is a simpler method for discussing global trade. Think of the many thousands of trades that occur between companies of different nations. It is easier to discuss them as an aggregate trade. Second, that is how global trade is measured. We will discuss how we measure trade in detail shortly. For now, it is enough to know that the many thousand export and import trades of the nation’s companies are measured in their aggregate entirety. Some domestic companies of nations send their products to companies in other nations virtually every day. Foreign companies are sending their products to us virtually every day. Besides products crossing borders, money also crosses borders. These different actions define a dynamic and growing global economy. Yet there are times when a government wants to limit the flow of products or money either entering or leaving the nation.

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These deliberate actions to halt the global economy are the next topic of our journey.

NOTES  1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776).   2. Instead of just reading about Smith’s pin factory in the Wealth of Nations, we suggest you explore it personally at Adam Smith Works, “The Pin Factory,” https://www.adamsmithworks.org/pin_factory.html. This website is a project of the Liberty Fund.  3. David Ricardo, On the Principles of Political Economy and Taxation (London, John Murray, 1817).

4 Protectionism and Standards

Most economists would tell you that the best trade is free trade. They would also agree about fair trade. Free trade is self-explanatory. Fair trade is much more subjective. Each country views fair trade differently. Politicians and special interest groups often believe another country is imposing unfair trade practices. When trade interferes with the jobs, utilization of the nation’s scarce resources, or both, politicians and special interest groups band together to limit free trade. The global economy becomes political. When a politician’s electorate or a special interest group views trade as unfair, politicians get involved. Protectionist measures are used when one country has a different view of trade. Politicians have many tools to restrict trade. We will explore four major tools here: tariffs, quotas, subsidies, and embargoes. Before we get into the specific tools of protectionism, there is one term often used we need to introduce. “Economic sanction” is a popular term referring to a government-imposed protectionist measure against another country. Economic sanctions are trade or financial restrictions against another country. Tariffs and quotas are generally instituted against specific goods and services and the trade between countries.

ECONOMIC SANCTIONS Tariffs In its simplest term, a tariff is a tax on a nation’s imports, those goods and services that come into a country from another country. Until the 23

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The Global Economy

Sixteenth Amendment of the U.S. Constitution (income tax), tariffs were the major source of federal government revenue. This is still true for many developing nations. In today’s global economy, the developed countries mostly use tariffs as economic/political tools and not for purposes of generating revenue. Countries like the United States, those of the European Union, or Japan use tariffs to protect their domestic industries and to level what they consider an unfair trading field. At the time of this writing, government officials are using tariffs as an economic/political tool in an attempt to generate what they consider fairer trade policies with several U.S. trading partners. What might occur in the global economy is that there are two prices for a good: a domestic price and a world price. When the domestic price is lower than the world price, a tariff might be imposed to raise the domestic price closer to the world price. When a government imposes the tariff, there are generally two results. The first is that the cost of the tariff is usually passed on to the consumer in a higher price of the good. The second is government receives the amount of the tariff as tax revenue. Implementation of a tariff by a developed nation’s government frequently results in a higher world price. The higher world price increases profits for the domestic companies in the industry and generates new revenue for the government, paid by consumers paying higher prices.

Quotas A quota is both different and the same as the tariff. A quota is a limit on the amount of imports. It is not a tax like a tariff. Like tariffs, however, a quota raises the domestic price. Depending on the goal of the government, a quota may be a more effective protectionist tool. Quotas emphasize the quantity, or supply, of the product. A tariff does not limit the supply. If the foreign country pays the tariff, there is no limit to the quantity it can import. A quota places limits on what can come into the country. There is one significant difference between the quota and the tariff. The tariff, being a tax, generates revenue for the government. A quota does not generate that revenue for the government. The two main winners of a quota are the domestic and foreign producers. They both receive the additional revenue from the higher price, not the government. An important likeness to the tariff, however, is that both tariffs and quotas raise the price for consumers. Regardless of whether it is a tariff or quota, the consumer pays.



Protectionism and Standards 25

Subsidies A subsidy is the protective sanction policy that addresses an industry of the domestic economy. Subsidies generally result from the political efforts of a special interest group. The U.S. government applies subsidies to various domestic products from farm subsidies for sugar and corn for ethanol production, dairy exports, and housing.1 Tariffs and quotas are sanctions instituted on the imports of a foreign good or service. Subsidies are government policies to support domestic industries. Subsidies on a product lower the production costs so that the domestic industry can charge a price lower than the world price. The lower price serves as a barrier to keep foreign competitors from being able to participate in the domestic market.

Embargoes Like the other protectionist tools, embargoes are most generally used by developed nations for economic/political reasons. An embargo differs from tariffs, quotas, and subsidies in one major way. The previous three are limits but not total restrictions. An embargo is a total restriction. It is comparable to a country having a No Entry sign on its borders. Embargoes are 100 percent prohibitions on a product or service from entering a country. Embargoes are the severest and most punitive of the protectionist tools.

REASONS GOVERNMENTS TURN TO PROTECTIONISM Remember when we discussed earlier the interdependence between politics and economics. When governments impose one of the sanctions, it eliminates the economists’ goal of free trade. Subjectively, the sanctions may or may not even achieve fair trade. When politics overtakes economics, protectionism is aimed to achieve a political outcome more than an economic one. Governments impose sanctions for several reasons.

Protect Domestic Jobs A common goal for politicians is to protect domestic jobs. Special interest groups represent many politicians’ constituents, and they usually have a significant influence on the policy actions of politicians, regardless of the politicians’ party affiliation. Protecting domestic jobs is a news maker for politicians and special interest groups.

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The Global Economy

This reason often arises during trade agreement discussions. During recent discussions leading to the revised North American Free Trade Agreement (United States-Mexico-Canada Agreement), protecting domestic jobs was a key topic. During the original NAFTA discussions, labor (both organized and unorganized) vehemently opposed the agreement, suggesting that jobs would leave the United States. At the time of this writing, President Trump is using tariffs with the intent of protecting steel industry jobs.2

Infant Industry A second reason governments impose economic sanctions is to protect new domestic industries, known as “infant industries.” This reason is most often used by developing countries to protect and allow their new industries to compete in the global economy. In our global economy, international mergers and acquisitions are fairly common. Developing country governments fear that larger companies from developed countries may interfere with their industry’s ability to participate or even survive.

National Security One purpose of every government is the national defense and security of the nation. If a particular industry is necessary for defending the nation and its citizens, governments may move to protect their national defense interests. Such industries include military jets and weapons, technology specific to national security, or transportation or communication that benefits protecting their borders and citizens.

Intellectual Property An issue often in today’s news is a nation protecting its media and arts, including music, movies, books, and software technology. Protecting one’s culture is very important to most nations. The United States is a giant in the arts and media and is very protective of its outlets. The United States spends a great deal of resources to protect those arts and media industries created here in the United States. Other nations often protect their arts against being overwhelmed by the size of the U.S. markets in these areas.

Retaliation When Country A imposes a tariff on specific goods of Country B, Country B most likely will retaliate with their own tariffs on certain Country A



Protectionism and Standards 27

goods. The retaliation usually leads the two countries to discussing a “fair” trade settlement for both countries. There are times when the two countries do not agree to a settlement. Stalemate discussions can lead to trade wars. In 1930, the consequences of the Smoot-Hawley Tariff Act led to global retaliations. The result was a basic shutdown of global trade and heightened the severity of the Great Depression. As of this writing, certain agreements have been achieved to deter the implementation of economic sanctions. President Trump threatened tariffs on Canadian goods if an agreement to revise NAFTA were not achieved. An agreement was arrived at, and the tariffs were not implemented.

Dumping A form of retaliation is when a country (Country A) tries to sell its product in another country (Country B) at a price lower than it cost to produce the product. This is known as “dumping.” You may have seen this term used in the media. According to global trading rules established by the World Trade Organization (see chapter 7), dumping is illegal. The abused country (Country B) has the right, according to the WTO, to impose its own protective measures to protect its domestic industries of the same product.

Developing Nations Use Tariffs to Generate Revenue When we first introduced tariffs, we mentioned that there is one scenario where tariffs make sense. For many developing nations, tariffs are the government’s main form of revenue. Compare that to how the taxes the U.S. government (and most developed nations’ governments) institutes to generate revenue for public goods and services. This was not always true. As previously mentioned, tariffs were a main source of the U.S. government until passage of the Sixteenth Amendment to the U.S. Constitution in the 1920s, which made the income tax legal. Much of the economy in a developing nation is known as an “informal economy.” The economy consists of significant barter and self-sufficiency. Government corruption also lends itself to an informal economy out of sight of corrupt government officials. Income taxes in a developing nation with very little income would not provide much in tax revenue. Measuring the economy’s income would also be difficult. Sales or property taxes would also not provide much revenue, for much the same reason. Since they import many of their products, the tariff is the one tax these governments can reasonably count on to provide sufficient income.

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The Global Economy

The Costs and Consequences of Protectionist Policies Remember that very early you were introduced to five rules of every economy. One of those rules was that every decision has costs today and consequences tomorrow. This rule most definitely applies to trade between nations and decisions that involve protectionist policies. The costs and consequences of economic sanctions to protect domestic industries are far greater than the costs and consequences of free trade. This is why most economists prefer free trade to protectionist trade. Earlier we discussed the market costs to consumers. There are also macroeconomic consequences to everyone in the economy.

Trade War or Retaliation Tactics When nations retaliate and trade wars follow, no one wins in either nation. If a country believes it won, that usually means they were only the least loser, because there is no winner. Trade wars isolate countries from the rest of the world, reducing their trade with other countries. They also isolate countries in more ways than just trade, as we will discuss shortly. As mentioned earlier the Smoot-Hawley Tariff Act essentially closed the world to trade and deepened the Great Depression. Current trade disputes taken to their extreme could have similar results. There is an interesting and somewhat ironic twist to most protectionist policies to protect domestic jobs. History has shown that while some jobs may be saved in one industry, the retaliation creates job losses in other sectors of the economy. The net effect on the overall economy of most economic sanctions is often a macroeconomic net loss of domestic jobs.

Economic Rent Another consequence to the economy is what economists call “economic rent.” Economic rent is the idea that a person, company, or industry can increase profits or economic gain without doing anything productive to earn the gain. Instead of being more productive or efficient in producing their good or service, they employ lobbyists to encourage politicians of the need for economic sanctions against their foreign competitors. A sanction is imposed, the price goes up, and the industry earns more profits. They earn profits without changing the way they do business. They receive economic rents paid by the consumer.

Lack of Innovation When trade wars close off economies, they close it off to more than foreign goods and services. Since industries are earning economic rents, they



Protectionism and Standards 29

do not have an incentive to be more creative in their business model or production. Without open trade, they close society off to new inventions, new production processes, new technologies, or new ideas in education, training, or the arts. Countries continue to use horse-drawn plows while other countries are using tractors. Without inventions and innovation, countries do not grow, and their standard of living remains low or is even reduced.

Benefits to the Few at the Cost of Many When citizens hear the news of a new tariff and price increases, why don’t they protest? They may grumble a while, but then they pay the higher price and life goes on as before. Companies and industries receive the higher prices (economic rents) from the sanction. Economist Mancur Olson called this “the logic of collective action.” What did he mean? Olson was referring to the idea of numbers. The economic sanction, regardless of type, benefits only a relatively few parties, whether it is individuals, companies, or industries. The per-unit benefits of the sanction can be quite high. The costs of the sanctions, however, are spread out over many more people. The per-unit costs of the sanction is quite small. So consumers may complain, but the costs of the sanction are so small per consumer that the consumers decide that their complaints and the higher price are inconsequential. Life goes on.

STANDARDS AND THE GLOBAL ECONOMY In our modern world, many individuals, interest groups, and nonprofit organizations are concerned with how nations treat their laborers, the environment, and technology. These concerns are often carried over by politicians into negotiations on trade and global economy participation. At times, the standards are bargaining points to be agreed upon. Other times, they are actually used as a form of protectionism for a domestic industry. Before we leave our discussion of protectionism, we need to briefly introduce you to the major categories of standards that, at times, have been a trade or global economic agenda issue.

Labor To a politician, a laborer is also a voter. As we mentioned earlier, protecting a domestic job is high on a politician’s agenda. Labor standards are arguably the most popular of protectionist standards. There are several ways labor standards are imposed as protectionist or trade policy issues. One labor standard that may be included is a restriction on child labor.

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The Global Economy

Child labor is often an issue in very poorest of countries. Many children in these countries need to work for the family to survive. How children are used in factories, mines, or in the fields can be quite controversial. A second labor standard issue often implemented in trade discussions is a minimum wage for workers in a poorer nation. To avoid a “race to the bottom” regarding wages, one nation may insist on a minimum wage comparable to their prevailing wage. This standard protects domestic workers from losing jobs to another nation purely on wage levels. The recent United States-Mexico-Canada Agreement included such a protection for U.S. workers. Finally, a labor issue often addressed during trade negotiations is the ability of laborers to organize and be represented by labor unions. Unions contend that this is important as a protectionist measure in order to assure that all labor of the same industry regardless of nation has the same working conditions. The right to assemble is one of the standards endorsed by the International Labor Organization (ILO).

Environment Another popular standard often promoted by special interest groups of the richer nation is protection of the environment. They fear that the poorer nations will have less restrictive environmental standards for factories and production facilities and that therefore businesses will find those locations more attractive for their facilities and relocate, taking both jobs and resources. Economists who have researched this issue have found that, generally, less environmental standards are not enough of an incentive for businesses to relocate to the poorer nation. They continue to remain, however, an issue that trade negotiators need to address.

Technical and Intellectual Property As the world of work becomes more automated and technological, it is becoming important for nations to include standards for intellectual and technical property, and such standards often feature in trade discussions between nations. There are times when standards are implemented in trade policies for the sharing of technology. At other times, however, the standards may be needed to protect or restrict their sharing between nations. In many ways, as both technology and intellectual property grow and change, so too will the standards by which they are treated in trade negotiations. We have covered a lot of ground on the global economy. You have learned that there are rules that apply to all nations regardless of their location, politics, or culture. You now know why nations trade and how



Protectionism and Standards 31

they gain from trade. Nations gain from trade, but they also at times have reasons for desiring to protect their domestic industries. Nations need to know to what extent they are benefitting from their economic partnerships with other nations. In our next section, we will explore how nations measure their participation in the global economy with a closer look at the United States.

NOTES   1. Kimberly Amadeo, “Government Subsidies,” The Balance, January 17, 2019, https://www.thebalance.com/government-subsidies-definition-farm-oil-export -etc-3305788.   2. Ana Swanson, “Trump to Impose Sweeping Steel and Aluminum Tariffs, New York Times, March 1, 2018, https://www.nytimes.com/2018/03/01/business /trump-tariffs.html.

5 Measuring the Global Economy

It is important for nations to know how global trade has benefited their citizens, businesses, and communities. To do so, every nation measures their global transactions with what is known as a “balance of payments,” which provides an accounting of a nation’s trade of goods and services as well as capital transactions that have occurred between nations. In this chapter, we are going break down each of the components and explain the way each measure impacts the global economy. Before we get into the specifics, let’s discuss a few details about the U.S. balance of payments. One, the Bureau of Economic Analysis (BEA), an agency in the Department of Commerce, creates the U.S. balance of payments. The BEA provides much more information than just on the United States in the global economy. For our purposes, however, we are exploring the BEA only in terms the global economy.1 Two, the balance of payments is calculated and presented quarterly. Three, unlike other government data that is static, the balance of payments is based on net calculations. A net calculation is the balance of inflows and outflows. Because of these net calculations, the balance of payments never really balances. We will explain shortly. There is another, very important detail regarding the balance of payments and international accounting. It is very important to remember that the interactions, while measured as a nation, are actually between individuals and companies of other nations. Nations themselves do not trade. The balance of payments measures the global actions of individuals and companies. 33

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BALANCE OF PAYMENTS The balance of payments has three components: current account, financial account, and the capital account. The current and financial accounts are the most important of three accounts. The capital account is the most minor of the three and is often so small that it is not discussed. We will do likewise. We will focus on the current account, the financial account, their components, and their relationship to each other relative to a country’s participation in the global economy.

Current Account The current account primarily measures the flow of goods and services going out of the country (exports) and those coming into the country (imports). The difference between the two is known as the balance of trade. Earlier, we discussed how politicians try to protect domestic jobs. The balance of trade is often used as a predictive measure of domestic jobs (exports) versus foreign competition (imports). We will discuss this fallacy later. For now, know that the balance of trade is a net metric, measuring the difference between the two. The balance of trade is arguably the most popular international measure. Along with exchange rates, which we will discuss in the next chapter, the balance of trade is a favorite international measure of the media. The current account also measures net investment income flows. There are U.S. citizens who have investments in other countries. They earn income on those investments and bring their earnings back into the United States. The income earned outside the United States and then brought back and spent or saved here adds to the U.S. domestic economy. There are foreigners, conversely, who own investments in the United States. These foreigners earn income on their U.S. investments and take it to their own country. This income leaves the United States and is not spent or saved here. It is important to know what income earned within the United States will not be spent or saved here as well. The third component of the current account is a very small component compared to the balance of trade and investment income accounting. It is for unilateral transfers, one-way transfers of money to other countries. U.S. aid to other countries would be an example of a unilateral transfer, where the United States provides funds to another country without any stipulation for the other country to pay it back. As we mentioned and will see shortly, this is a relatively small global component. You can see why the current account is so popular with the media, as it measures those recent (“current”) global transactions that are important to the domestic economy. This is also why it is one of those economic



Measuring the Global Economy 35

measures watched by politicians. It is interesting to note how the media and politicians pick up and use the current account measures for their own gain. It is up to you as the economically literate citizen to understand the true nature of the current account in what it does and does not provide relative to the U.S. participation in the global economy.

FINANCIAL ACCOUNT When companies participate in the global economy, they intend to be paid for their goods or services if exporting and to pay if they are importing and receiving goods or services. The accounting of net money flows between nations occurs in the financial account.2 The financial account also has three components. As we discuss these components, remember that we are using net and not gross data. The financial account measures the flow of asset values and not the stock of asset values.3 When we use the term “assets,” we are referring to a tangible item with value. Assets measured in the financial account include both property and investments such as factories, office buildings, land, stocks, bonds, and any type of bank account in a foreign bank. Shortly we will make a finer distinction between assets. The first component of the financial account is the change of the foreign asset values of assets owned by U.S. citizens or U.S. companies in other lands. Earlier in the current account, we referred to investment income being earned by U.S. citizens returning to the U.S. and foreigners earning income in the United States and returning to their country. The same is true of owning assets in a global economy. There are U.S. individuals who own assets in foreign countries and foreigners who own assets here in the United States. The first component of the financial account measures the net change in value of the assets that U.S. citizens own in other nations. The second component measures the net change in asset values of U.S. property owned by foreigners. Within both components, there are three main types of investments in which financial exchanges between nations occur. One financial exchange is the flow of stocks, bonds, and money within financial institutions. These investments are known as “foreign portfolio investments” (FPI). The other investments are when companies build factories, buy foreign company, or own real estate in a foreign nation. These investments are known as “foreign direct investment” (FDI). Whether a nation receives FPI or FDI is often a very important criterion to a nation’s overall economic stability. Why is the difference between FPI and FDI important? Whether individuals and companies in other nations are investing in FPI or FDI is very important to a nation. This is especially true of nations trying to be global

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economy partners. Foreign portfolio investments are important because they bring financial resources to a nation. Foreign direct investments are more important, because they can bring jobs and can be more directly related to the nation’s economic growth. When FDI occurs, the individual or company is making an investment in the long-term viability of the nation’s economy. They are investing in the nation’s future. For such a long-term investment to occur, other variables are also important. First and foremost, if a company is going to invest into a nation with FDI, the nation must reflect political stability now and in the future. This generally refers countries that have democratic political structures, although this is obviously not always the case, as is evidenced by the many U.S. companies with FDIs in China and other communist countries. Foreign direct investment in developing nations is usually very difficult, since political stability is often absent. Currently Venezuela is an exception here, as it was once one of the richest nations in the world.4 Most countries will not invest in Venezuela now because of its political instability (Cuba and China being the exceptions). Companies do not want to gamble that their foreign investments will be lost to nationalization by a dictator. Of course other variables beyond political stability determine the amount of FDI in a country. These are especially important variables for a company in relation to their employees and their plans to export the factory’s product back to the company’s nation of origin. For their employees, these would include housing, education opportunities for the employee and their family, telecommunications, health, sanitation, and safety concerns. To export their product back to the country of origin, good roads, airports, or ocean ports and transportation infrastructure are very important, along with the other variables for the employees. You can see that FDIs are very large investments, and companies do not make decisions to make these investments lightly. Foreign portfolio investment, conversely, can be taken more lightly. These decisions can be much more short term and are much more flexible if political or other changes within a country occur. The one caveat for the nation with FPIs is if many of the investors holding the stocks and bonds or having bank accounts decided to withdraw their funds at the same time. We will dig deeper into this in the next chapter when we explore financial crises in the global economy. We will also look further into the third type of financial exchange known as “official reserve assets” in the next chapter when we discuss exchange rates. The third component of the financial account is a fairly new component. Derivatives are an investment instrument whose value is “derived” from other investments, such as interest rates, mortgages, or exchange rates, hence the name. Since their value is dependent on the value of other



Measuring the Global Economy 37

investments, they are quite complicated for the average person to understand, and trading them is quite complex. Derivatives became very popular in the 1990s and into the twenty-first century. Since the trading of derivatives has been a global phenomenon since 2006, the BEA has attempted to capture their value with this line item.

CAPITAL ACCOUNT As mentioned earlier, we are not going to discuss the capital account in detail. Since it is one of the three components of the balance of payments, however, we should at least define it. Like the financial account, it measures the net or flow of accounts between nations. Briefly, the capital account is the net change when certain types of assets are transferred from one country to the other. Examples of capital account transfers include military or state department assets as well as when migrants take money to their homeland or a nation forgives another’s trade or financial debt. As it is such a small amount, for simplicity, we will consider the capital account zero and focus on the relationship between the current and financial accounts.

Relationship between the Current and Financial Accounts Since we have reduced the significance of the capital account to zero, this discussion will focus on the interdependence between the current and financial accounts. The current account measures goods and services; financial and capital accounts measure money flows. When goods and services are bought and sold, it is expected that they are paid with money. When the transaction involves companies in two separate countries, a second transaction of currencies is also involved. This second transaction will be more deeply explored in the next chapter on exchange rates. One side of the transaction involves goods and services—that is, the current account. The other side of the transaction involves money—that is, the financial account. This is true whether the foreign transaction is an export or import for the domestic economy. This interdependence implies that the value of the money transactions equals the value of the goods and services transactions. When measured, the current account balances equal the financial account balances (when the capital account equals zero), only with the reverse sign. The producers of the domestic economy may export goods and services (current account credit). The foreign companies pay for the goods and services with money (financial account credit). In the reverse, the foreign producers may import goods and services to the domestic economy (current

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account debit). The domestic companies pay for the imported goods with money (financial account debit). To summarize: • • • •

Exports (credits) – Imports (debits) = Net trade Money flows to pay for exports (credits) – Money flows to pay for imports (debits) = Net financial flows If net trade is positive, net financial flows is negative. If net trade is negative, net financial flows is positive.

This interdependence equality of values exists only in theory. The BEA balance of payments needs to deal with reality.

STATISTICAL DISCREPANCY Before we view a real-life example of a U.S. balance of payments accounting, we need to address one more aspect of the balance of payments. Since the balance of payments measures the net changes of the domestic economy’s participation in the global economy, the value of the current account and the value of the financial account should be equal but an opposite sign. When one of the accounts is positive (+) the other is negative (−). The reality of measuring net changes is that the two will not be equal at any given point in time. The BEA, therefore, adds one more line item to the balance of payments, known as the “statistical discrepancy.” The statistical discrepancy measures the difference between the current and financial accounts so that in the balance of payments, as its title suggest, the credits minus the debits equal zero.

THE OFFICIAL BALANCE OF STATEMENTS For the United States, the official title is the U.S. International Transactions and can be found on the Bureau of Economic Analysis website (https://www.bea.gov/data/intl-trade-investment/international-transactions). The balance of payments measure is announced, and a press release to the media provided every quarter (three months). At the time of this writing, the last official U.S. International Transactions was released December 19, 2018. Table 5.1 below shows the major categories of the U.S. balance of payments. These categories are taken directly from the December 19, 2018, release of the U.S. International Transaction. We can make many observations, but let us emphasize a couple here. First, as discussed earlier, notice the minimal capital account to the



Measuring the Global Economy 39

Table 5.1  U.S. International Transactions, 2018 (Seasonally adjusted, Q3, 2018) (Millions of dollars)

Line Current account

  1

Exports of goods and services and income receipts (credits)

9,30,276

  2

  Exports of goods and services

6,29,398

  3

  Goods

4,21,762

 13

  Services

2,07,635

 23

  Primary income receipts

2,64,523

 30

 Secondary income (current transfer) receipts

 31

Imports of goods and services and income payments (debits)

 32

  Imports of goods and services

7,88,054

 33

  Goods

6,48,775

 42

  Services

1,39,279

 52

  Primary income payments

2,05,098

 58

 Secondary income (current transfer) payments Capital account

36,355 10,55,093

61,942

 59

Capital transfer receipts and other credits

562

 60

Capital transfer payments and other debits

n.a.

 61

Net U.S. acquisition of financial assets excluding financial derivatives (net increase in assets / financial outflow (+))

 62

Direct investment assets

 65

Portfolio investment assets

 70

Other investment assets

 75

Reserve assets

 84

Net U.S. incurrence of liabilities excluding financial derivatives (net increase in liabilities / financial inflow (+))

1,51,723

 85

Direct investment liabilities

1,22,336

 88

Portfolio investment liabilities

12,469

 93

Other investment liabilities

16,918

 99

Financial derivatives other than reserves, net transactions

Financial account

1,32,689 76,846 72,598 −16,577 −177

−12,255 (continued)

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Table 5.1  (continued) (Seasonally adjusted, Q3, 2018) (Millions of dollars)

Line 100

Statistical discrepancy

Statistical discrepancy

92,966

Source: Department of Commerce, Bureau of Economic Analysis, https://www .bea.gov/system/files/2018-12/trans318.pdf.

balance of payments. Zeroing the capital account, as we did earlier, did not significantly alter our earlier observations. The negative trade balance often mentioned in the media is reflected here in the difference between exports and imports. Take note of the various categories. In the next chapter, we will focus on “Line 75, Reserve Assets” and its subcategories “Monetary Gold,” “Special Drawing Rights,” and “Reserve Position in the International Monetary Fund.”5 Finally, notice the statistical discrepancy to balance the balance of payments.

Relationship between the Domestic Economy and Global Economy When an economy participates in the global economy, it is known as an “open economy.” A country that does not participate in the global economy is known as a “closed economy.” Obviously we have been focusing on the open economies of the global economy. The balance of payments reflects a nation’s participation in the global economy. Government and political leaders’ number one priority, however, is to their domestic economy. Participation in the global economy has a direct relationship to the activity of a country’s domestic relationship. To explore this relationship further, we need to first go back and view how the domestic economy is measured. The most popular and recognized measure of a domestic economy is the gross domestic product (GDP). GDP is measured by both income and spending, which is the one we will focus on here. This measure is based on the final value of goods and services produced within an economy during a specified period of time. The GDP measure on spending has four main components: consumer spending, government spending, business spending, and the difference between exports and imports (net trade). It is this last component that is important to us in this discussion. Net trade in GDP is the same net trade in the balance of payments. It is important to note that closed economies do not have a net trade measure in their GDP.



Measuring the Global Economy 41

TRADE SURPLUSES AND TRADE DEFICITS As we discussed, balanced trade is virtually impossible. Net trade, therefore, is either a trade surplus (exports > imports) or a trade deficit (exports < imports). In each instance, there are various reasons both surpluses and deficits can occur. Trade surpluses occur when a government limits the nation’s imports by protectionist or mercantilist policies. In both instances, the quantity of imports is restricted. The imposed policies lead to the nation’s exports exceeding their imports. China’s trade policies increase the incentives for Chinese businesses to export at the expense of imports. Nations often try to manipulate their exchange rates to devalue their exports and increase the cost of imports. Again, China is a prime example of a nation that manages its exchange rate to maintain a trade surplus. In both Europe and the United States we often hear political leaders advocate for a weaker currency to promote exports and a trade surplus. We will explore the role of exchange rates in greater detail in our next chapter. Trade surpluses also occur when a domestic economy is not doing well yet the global economy is growing. When the economy is in a recession, many people are not working and earning money and so are not spending and buying products. The vicious cycle of not producing means that fewer jobs lead to less spending, and so it goes. As the domestic cycle continues its downward trend, fewer and fewer products are bought, including imports. As long as the global economy has not been impacted, the nation’s exports will continue to eventually exceed imports. Trade deficits can occur for very different reasons. First, trade deficits can occur when a domestic economy is doing well. This is especially true in large developed economies like those in the United States and the European Union. Many people have jobs and earn money and then spend their money on goods and services, many of which are going to be imported from other countries. The more imports we buy, the larger the trade deficit. The second reason is not so good. Many developing or smaller countries either do not have the resources to produce enough goods and services for their citizens or have a corrupt government that restricts their productive abilities. As a result, they are forced to import many of their products. The more they import to address their citizens’ needs, the larger the trade deficit. All of the scenarios above create trade imbalances. One is the result of a good economy, and in the second, the citizens’ needs exceed the economy’s ability to produce to necessary level of products and services. Conversely, net trade becomes a surplus when government manipulates the economy or an open economy is in recession when the global economy is not.

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It is time to turn our attention to one of the instruments often used by governments in an attempt to create trade surpluses: exchange rates and exchange rate systems.

OTHER MEASURES OF THE GLOBAL ECONOMY In chapter 7, we will introduce you to other international organizations that are also measuring the global economy. We will discuss how the IMF, World Bank, WTO, and United Nations collect data and report on the global economy. Additionally, the central banks do research on the global economy as it relates to their domestic economy. There are other U.S. organizations that report on the research, most notably in the United States, the Central Intelligence Agency (CIA). Yes, the same CIA who does the spying. Their CIA World Factbook website has a wealth of information on every nation. You should take some time and check it out at https://www .cia.gov/library/publications/the-world-factbook/.

NOTES   1. We encourage you to spend some time and explore the Bureau of Economic Analysis website at www.bea.gov.   2. The difference between gross and net can be substantial. Gross is the total amount without subtracting any amount from the total. Net is what remains after subtracting something from the gross amount. Using the terms here, the financial account adds monies received (gross) but then subtracts monies sent to other countries, resulting in net amount.   3. Gross and net also align with stock and flow—stock with gross and flow with net. To help distinguish between a stock measure and a flow, think of the difference between a picture and a video. A picture captures one moment in time (apologies to the network that likes that phrase), as does a stock measure. A video, however, captures events through time, as does a flow measure.   4. CIA Factbook, “Venezuela,” CIA, accessed February 14, 2019, https://www .cia.gov/library/publications/the-world-factbook/geos/ve.html   5. Reserve assets are comprised of Lines 75 to 83. These three categories are Lines 76, 77, and 78. They are not shown here.

6 Global Financial Systems: Exchange Rates and Exchange Rate Systems

When you use money to buy an item at the local store, you use our domestic currency, the U.S. dollar. The money was earned at your job, as an allowance, or maybe a birthday or holiday gift. Using dollars is probably something you do not think much about it. It is a fairly straightforward transaction. Transactions between individuals or companies from different countries in a global economy get a bit trickier. If the two countries have different currencies, a second transaction is now involved. Since the selling company would like to receive payment in its home currency, the buying company needs to convert its home currency to the selling company’s currency. This second transaction occurs through exchange rates and exchange rate systems. Exchange rates are determined based on the exchange rate system of an economy.

EXCHANGE RATES As you get ready for school, check out one of the morning television business shows. It is a fairly certain that at some segment of the program, they will announce the current exchange rates of the more popular currencies. These are the currencies used most often throughout the global economy (we will discuss why these currencies shortly). 43

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An exchange rate is the price of one currency expressed in a second currency. The exchange rate of the U.S. dollar is price of the dollar in another currency. If, for example, it takes two euros to buy one dollar, the dollar exchange rate in euros is two. In reverse, to buy one euro using dollars, you would only need fifty cents. Exchange rates can act as indicators of an economy’s health. Exchange rates can determine the potential for the number of jobs gained or lost in an economy. Exchange rates are very important in a global economy, able to make a big difference. Exchange rates are important to different participants in the global economy. First, as we mentioned, are international businesses and those companies that do business with foreign companies or have foreign sales. International investors and speculators are also interested in the value of currencies. Investors want to invest in countries with stable currencies. Speculators are trying to make money on changing exchange rates. For speculators, their business is the currency. They buy and sell currencies on expectations of rising or lowering currency values. Of course, exchange rates are important for tourists and global travelers. All these players have a stake in the value of an exchange rate. That is why they are reported on frequently in the news. Depending on your local bank, you may or may not be able to access a foreign currency. If you live in an area with only smaller community banks, they generally do not hold foreign currencies. If you live in an area with a bank whose business clients would need access to foreign currencies, they quite possibly do hold foreign currencies for their international customers. A nation’s central bank would also hold foreign currency. If the country is a small country that imports many of its goods, their central bank most certainly will hold foreign currencies. There are two main methods in which exchange rates are determined. We will return to these methods, but for now, it is important to know that exchange rates are determined by supply and demand or by government decree. When they are determined by the supply of a currency available to the global economy versus the demand for the same currency, it is called a flexible or floating exchange rate. When the government decrees the value of the home currency, it is called a fixed exchange rate. Both are factors in today’s global economy. They can impose different costs and consequences to both the home economy and impact their participation in the global economy.

Exchanging Currencies Whether the exchange rate is flexible and fixed determines how much one receives when currencies are exchanged. If the exchange rate is fixed,



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the value of exchanging one currency for another is, as the term implies already, established. In our earlier example, if the dollar exchange rate of two euros is fixed, you will receive two euros for your dollar regardless of what is going on in either home economies or the global economy. Exchanging currencies in a flexible exchange rate system is more complex. Since flexible exchange rates are dynamic, they are constantly in flux, increasing or decreasing in value based on relative home economy strength or weakness and the global economy. This dynamic characteristic of flexible exchange rates can be a problem for a business or even an individual. Depending on the length of time it takes to complete a transaction, a business could be exposed to exchange rate risk. During the time of the transaction, changes in an economy could alter an exchange rate, potentially costing a business its profit from the transaction. Granted, the business could also gain if the change was in their favor, but the other company would lose. Many companies on both sides of the transaction are willing to lock in an exchange rate and not take that chance. They can lock in the exchange rate with a forward exchange rate, a contract value predetermined in the forward market. This market predetermines a future value so that both parties of the transaction know the exchange rate at the time of the product’s future delivery. With a forward exchange rate, the exchange rate risk of the transaction is minimized at the worst, eliminated at best. When you are traveling to another country, you will also need to exchange dollars for the currency of your destination. As a tourist or business traveler, you usually have several options. First, if there is a larger bank nearby, you can visit it and convert your dollars to the currency of your destination, based on the exchange rate of the day known as the “spot market exchange rate.” The bank may charge a small transaction fee. You will have your new currency and are good to travel. The other option is to wait and convert your dollars in the other country. Since you are exchanging currencies on the spot, exchange rate risk is not an issue. Since flexible exchange rates are dependent on the supply and demand of the currency, their value can be quite volatile (Figure 6.1). When the demand for the currency increases, it results in an appreciation of the value. A currency appreciates when its value (price) goes up. When the central bank of a country increases the supply of the currency, it results in a depreciation of the currency’s value. The currency depreciates when its value (price) goes down. When currencies appreciate and depreciate, they can have consequences on both the home economy and global economy. Notice a currency depreciates when either its supply increases or its demand decreases (Figure 6.2; R to R1). The supply may increase when holders of the currency decide to sell their currency in the currency

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The Global Economy

Figure 6.1  Supply and Demand of Flexible Exchange Rate

$/€ S S1

R R1 D D1 Q1

Q

Q€

Figure 6.2  Change in Flexible Exchange Rate (Depreciating Currency)



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markets or convert to another currency. A central bank can also increase the money supply. The demand decreases when investors or speculators decide not to hold the currency. Demand will also decrease if tourists do not choose the nation as a destination. In reverse, a currency appreciates when either its supply decreases or its demand increases (Figure 6.3; R to R2). The supply usually decreases when holders of the currency decide to hold their currency or the central bank decreases the money supply. The demand increases when investors or speculators decide to hold more of the currency because of a nation’s higher interest rates. Demand will also increase if a nation becomes a popular vacation destination. Before we move on and discuss exchange rate systems, a couple of basic exchange rate rules to remember. One, an exchange rate is the relationship between only two currencies. The dollar-euro exchange rate does not have any significance with the euro–British pound or yen-euro exchange rate. Global economic events may move them in a direction (appreciating or depreciating), but the relationships between the currencies are independent. The second rule is that if the price of one currency goes in one direction, the price of the second currency must go in the opposite direction. If the

Figure 6.3  Change in Flexible Exchange Rate (Appreciating Currency)

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dollar’s value versus the euro goes up (appreciates), the value of the euro must go down (depreciate). Instead of two euros to buy one dollar, it now takes three euros. The dollar is more valuable against the euro, which means that, by definition, the euro is worth less (depreciated). Likewise, it now only takes thirty-three cents to buy a euro. Always remember that when one currency appreciates, the other depreciates.

EXCHANGE RATE SYSTEMS A major determination of whether an exchange rate is fixed or flexible is based on the economy’s exchange rate system. Exchange rate systems range from a fixed exchange rate that does not change without major political action to the supply-and-demand-dependent flexible-exchange-rate systems discussed earlier, with several variations in between. It is now time to explore each of these exchange rate systems in more detail.

FIXED (PEGGED) EXCHANGE RATE SYSTEMS Fixed exchange rate systems are when the currency is pegged to a commodity or another currency. There are two types of fixed exchange rates: hard peg or a soft peg. Hard pegs have no variation in their exchange rate, while soft pegs do allow for modifications of the exchange rate from time to time. These are sometimes also known as modified exchange rates or crawling peg. Which term is used often depends on the author or speaker, but the idea is the same.

Commodity-Based The most popular commodity-based fixed exchange rate system is the gold standard. A gold standard infers that a nation has enough gold on reserve to match the value of the dollars in circulation. A simple example of a gold standard would be if the nation’s money is valued at ten dollars per ounce, for every ten dollars in the economy’s circulation, they need one ounce of gold in reserve at their central bank or some other bank depository. If they want to increase the amount of money in circulation, they need to buy more gold and increase their reserves. The United States was officially on a gold standard for most of its history until the Great Depression and World War II. President Franklin Roosevelt took the United States off the gold standard during the Great Depression. During World War II, the United States needed to spend more money to build war materiel then it owned in gold. Following World War II, the U.S. exchange rate system took another modification.



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U.S. Exchange Rate System following World War II As we discussed during the introduction, World War II was a turning point in the U.S. exchange rate system. It was not due to World War II itself but to the preparation for a new post–World War II global economy that a new exchange rate system was adopted with gold and the U.S. dollar at its center. The 1944 conference held in Bretton Woods, New Hampshire, to create a postwar global exchange rate system was the genesis of our revised system. The result of Bretton Woods for the United States was a modified (or pegged) exchange rate system. First, the U.S. dollar was pegged to gold at thirty-five dollars per ounce. Second, the currencies of other nations were then pegged to the dollar. Nations could use gold or the dollar as the anchor for their currency. The U.S. dollar became the global reserve currency, the same as gold. Nations could base their domestic money supply on their reserves of either dollars or gold. The United States had a world market for dollars. The system survived to the early 1970s. Given the U.S. economic times, in 1971 President Nixon devalued the dollar to thirty-eight dollars an ounce of gold. In 1973, Nixon disconnected the dollar from gold, and the United States adopted a flexible exchange rate system. The dollar’s value was now a function of the supply and demand for buying or selling the currency. The Bretton Woods system was officially over.

Anchor Currency In today’s modern global economy, the more popular fixed exchange rate system is where the home currency’s value is fixed to a second currency, or anchor currency. Most developing and some transitional economies use this type of exchange rate system. Most of these fixed exchange rate systems use the dollar or the euro as their anchor currency, since the United States and Europe, respectively, are often their major trading partners. The nation’s government or central bank sets the value of an anchorbased currency exchange rate system. To maintain a stable currency, governments or central banks need to retain a sufficient ratio of anchor currency reserves to the home currency in circulation. The government or central bank’s set fixed value is often based on the needs of their domestic economy. If the ratio of anchor currency reserves and supply of domestic currency gets too far out of balance, problems arise. In today’s global economy, this can often lead to a contradiction between what is best for the domestic economy and how they participate in the global economy. One fixed value is best for the nation, yet another value is best for their global participation. We will return to these issues later.

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Managed Float (Dirty) There is one additional type of fixed exchange system, the managed or dirty float. Officially, the currency has a stated fixed exchange rate. The central bank or government, however, allows the currency’s value to float between a certain range of values with a upper and lower boundary. When the monetary authority believes the currency is at or near a range boundary, it will reset (i.e., manage) the exchange rate in an effort to accomplish its economic goals. China is considered to manage the exchange rate of the Chinese yuan. Until 2005, the Chinese yuan was pegged to the U.S. dollar at approximately eight to one (eight yuan to one dollar). In 2005, the People’s Bank of China allowed the yuan to trade within a value of approximately 0.15 percent up and 0.15 percent down (0.3 percent). China instituted a managed floating exchange rate system. In 2014, they widened the band further to approximately 1 percent in each direction (+ or – 2 percent).1 The People’s Bank of China monitors the yuan’s value every day, making adjustments as necessary.

FLEXIBLE EXCHANGE RATE SYSTEMS The final major exchange rate system is the flexible exchange rate system. Throughout our discussion of exchange rates and exchange rate systems, we have made reference to flexible exchange rates. Flexible exchange rate systems have flexible exchange rates and their system currencies are based on supply and demand. The exchange rates of the major currencies of the global economy are from flexible exchange rate systems. Currencies are considered major when they are used as an anchor currency or are involved in many of the global transactions. There are currently four major, or reserve, currencies: dollar, euro, British pound, and Japanese yen. If you remember from our discussion on balance of payments, a key line item for developing nations was official reserve assets. Since countries need the major currencies to transact business globally, their central banks need to have these currencies on reserve. The values of these currencies relative to each other are determined by the supply of the currencies relative to the demand for each currency. There are two values for flexible exchange rates. One is the real exchange rate, determined entirely on the supply and demand for the currency relative to the second currency. The second is the nominal exchange rate, determined by the real exchange rate and an additional factor for inflation.



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The Impact of Inflation on Exchange Rates When an economy is experiencing inflation, it can have disastrous results on a nation’s currency. For the importance of participating in the global economy inflation is caused by an increase in the money supply. As the supply increases, the currency’s exchange rate depreciates. If the supply continues to increase steadily, the depreciation will continue until the currency virtually has no value. If the central bank or government continue to print money, hyperinflation results, and the economy and the exchange rate collapse. Zimbabwe had the world’s highest hyperinflation rate in 2008 at an annual 231,000,000 percent!2 The Zimbabwean currency was worthless. To rid themselves of the hyperinflation, Zimbabwe did away with their currency and adopted the U.S. dollar in a process known as dollarization. Zimbabwe used the dollar as their unit of account and medium of exchange. At the time, you could vacation in Zimbabwe and not have to exchange currency.

Black Market Values There is one more currency market we need to acknowledge. When a nation’s currency depreciates significantly and the government has lost investor confidence, a black market usually evolves for the currency. This is precisely the case with the Venezuelan bolivar. As of July 1, 2019, the official exchange rate for the Venezuelan bolivar is 6,733.29.3 We have discussed previously the hyperinflation of the bolivar. As the hyperinflation rate continues to climb and the bolivar depreciates further, the black market value for the bolivar has been predicted to almost double the official rate. The higher the black market rate for the bolivar, the more valuable the dollar is to the Venezuelan economy. Given current bad U.S.-Venezuelan relations, this presents the Venezuelan leadership with an economic dilemma.

OTHER EXCHANGE RATE SYSTEMS Dollarization Dollarization is when a nation uses the currency of another nation. As mentioned, Zimbabwe converted to the U.S. dollar in order to reduce their hyperinflation. Many of the Caribbean and Central American nations use the dollar, including the Bahamas, Belize, and Costa Rica. Panama has a domestic currency (cordoba), but it is fixed one to one with the dollar,

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essentially dollarizing the currency. South American countries Ecuador and El Salvador use the U.S. dollar. The disadvantage of dollarization is that the country does not have its own monetary policy.

Monetary Unions Some countries may group together and create a monetary union. These single currency areas band together and establish a common exchange rate system. Single currency areas are not exactly exchange rate systems, but they do change the currency landscape for the global economy. In joining together with a common system, they reduce the number of currencies in the global economy. The largest single currency area is the European Monetary Zone. The EMZ includes over three hundred billion European citizens in nineteen countries (there are twenty-eight countries in the European Union). The European Union has a central bank, the European Central Bank (ECB), which makes the monetary policy decisions for all the nations of the European Monetary Union. As a nation, the forfeiture of monetary policy power is one of the major drawbacks of a single currency area. Take note that the EMZ and the EU are not the same. The twenty-eight nations of the European Union focus around trade, open borders, and freer movement of capital and labor between the nations. The nineteen EMZ countries are those nations who use the euro as their currency. Not all EU members use the euro. Britain, for one, was a EU member but maintained the British pound as its domestic currency. With Brexit ahead, this of course will change. Bulgaria, Denmark, Poland, and Sweden are examples of EU nations who use their own domestic currency and do not belong to the EMZ.4 A second single monetary zone is the West African Single Monetary Zone (SMZ). This single currency has been in the making for over twenty years. Even now it is not a reality. The fifteen nations involved have agreed for its implementation to begin in 2020 (about the time for publication of this book).5 We will be discussing this SMZ in a bit more detail during our conclusion on future issues.

FINANCIAL CRISES When an economy reaches a breaking point, the domestic financial system usually experiences a crisis, and the value of the economy’s currency is usually a casualty. When a currency loses value, it is often a difficult road to restore it to the original precrisis value. This is a key reason why it is so important for central banks and governments to protect their currency



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values. Governments are often unwilling to accept that their currency need to be revalued, and crisis results. A crisis can seriously impact the nation’s ability to participate in the global economy. Financial crises can begin on several fronts. One, the nation’s own banking system may be the culprit. Banks are institutions that receive money from savers and lend money to borrowers. When this process of intermediation operates as it should, savers win by earning interest on their savings and borrowers win by increasing their ability to purchase goods for personal or business use. When there are not enough savers or the banks have made bad investments and loans and do have enough funds for borrowers, the economy falters. Global participants avoid investing in the banks or the economy. When the currency is not needed, its value falls. When the economy has a fixed exchange rate system, a financial crisis occurs if the central bank does not have enough reserves of the anchor currency to support the supply of domestic currency in the economy. This crisis forces the central bank or government to buy enough of the anchor currency to support its domestic currency or to devalue its currency. The currency’s devaluation reduces the value of assets and the economy as a whole. This can also occur with a flexible exchange rate system, as holders of the domestic currency suddenly decide to sell, greatly increasing the supply of the currency and reducing demand causing the currency value to collapse. There is one additional type of financial crisis. When a nation has substantial debt and cannot make its payments, the global economy suffers. If you cannot make your car payments, you most likely will lose your car. It becomes a bit trickier when a country cannot pay. A country cannot be taken away. It can, however, stop paying and default on its loans. For the global economy, there is no upside for any country to default on its loans. When a debt crisis occurs, investors stop investing, traders will not trade, and the ability of the nation’s economy to grow is questioned. The global financial system of banks and institutions holding the loans most likely will work with the nation to restructure its debt payments rather lose the entire amount of the loan.

DEVALUATION LEADS TO DEPRECIATION; REVALUATION LEADS TO APPRECIATION Contrary to how the terms “devaluation” and “depreciation” may be used in the media, they are not the same. Devaluation is an act of reducing the value of a currency, while depreciation is the resulting value. Devaluations occur in two different ways. One, when a fixed exchange rate needs to accurately reflect the value of the currency in the global economy, the central bank or government will, by edict or law, take steps necessary to

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devalue the currency. The result is that the currency depreciates relative to other currencies. A second type of devaluation is when a flexible exchange rate is devalued by the central bank. Earlier, we defined depreciation as an increase in the supply of the domestic currency, which lowers the value of the currency. When a central bank deliberately increases the domestic money supply, it is devaluing the currency. Depreciation is the result, as the central bank changes the dynamics between the supply and demand of the currency. In the opposite way, central banks or governments can revalue or increase the value of their domestic currency. A revaluation for a fixed exchange rate occurs in exactly the same fashion as devaluation. The central bank or government decides to raise the value of their currency and does so by edict or law. A central bank can revalue a currency by contracting the money supply, thereby creating an appreciation of the exchange rate.

IMPACT OF A DEPRECIATED OR APPRECIATED CURRENCY Politicians and Labor versus Consumers Forever in debate about exchange rates is which is more advantageous for an economy. Should the domestic currency be depreciated against other currencies or appreciated? The answer to the question really depends on which side of the economy one favors. Politicians and labor prefer a currency that is lower in value (depreciated) relative to other currencies. Their reason for a depreciated currency is pretty straightforward. The lower the value of the domestic currency, the less expensive the nation’s exports are to foreign markets. As the theory goes, since the goods cost less, foreigners will demand more of them. If there is greater demand, more domestic products need to be produced, and that translates into more domestic jobs. Labor, therefore, prefers the depreciated currency. Politicians win; they know that if there are more jobs, that usually equates to more votes for them as incumbents. One cost of the depreciated currency is that the consumer pays higher prices for imports. While not always the case, another potential cost is in the nation’s balance of trade. If the value of exports is significantly lower than the value of imports, a negative trade balance may be the result. When the currency is appreciated against other currencies, the perceived winners and losers are opposite. Consumers prefer an appreciated currency. Now imports are less expensive in the domestic marketplace. In a competitive market, domestic competitors have to lower their price to



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compete against the imports. As markets work, greater competition will also improve the quality as well as quantity of domestic and foreign products available to the domestic consumer. For labor and politicians, an appreciated currency may or may not be a negative. Jobs in certain products or industries may be lost. Politicians would then have to explain why the jobs were lost or to pass legislation protecting jobs. Enter protectionism. As we saw in the previous chapter, now everyone loses. We are going to explore this relationship much more in future chapters.

PURCHASING POWER PARITY (PPP) There is one more topic we should address before moving on from exchange rates and exchange rate systems. In the last chapter, we explored how to measure the global economy. How do investors, traders, and economic and political leaders know when their currency is properly valued? One way is the currency’s acceptance in the global marketplace. While that measure might work within the nation, it is not a very good comparative measure, since the global economy is such a dynamic market. A comparative measure used by many world agencies and organizations is an idea known as purchasing power parity (PPP). The idea behind PPP is to measure the domestic value of a similar market basket of goods in all currencies. If we use the United States and the dollar as our base, let’s say that this particular basket of goods is valued at $100. If we go to Germany and the same market basket of goods is valued at 300 euros, then the exchange rate between the dollar and euro should be three to one (3 euros to 1 dollar). If the dollar/euro exchange rate is anything other than three to one, one of the currencies is either overvalued or undervalued. Economists generally do not view the precise nature of PPP to be credible. PPP does, however, allow for organizations like the World Bank and IMF to draw comparisons between economies and currencies. It also makes possible observing trends of domestic economies and the dynamic value of their currencies. A stable exchange rate of a domestic currency to the other currencies is vital for a nation to participate in the global economy. If the value is too high, exports become too expensive, and the economy may experience a net loss in domestic jobs. If the value is too low, they will experience inflation or hyperinflation, such as in Venezuela. Confidence in the economy is lost, while prices, including imports, continuously rise and the domestic economy experiences net job losses. Historically, this balancing act has only been achieved when the central bank is independent of political and special interest pressures.

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International organizations also play an important role in creating an environment for a healthy global economy. These organizations are the topic of our next road on our journey of the global economy.

NOTES   1. “How Does China Control Exchange Rates?” FXCM, accessed June 25, 2019, https://www.fxcm.com/uk/insights/how-does-china-control-exchange-rates/.   2. “Zimbabwe inflation hits new high,” BBC News, October 9, 2008, http:// news.bbc.co.uk/2/hi/africa/7660569.stm.   3. See the Banco Central de Venezuela at http://www.bcv.org.ve/.   4. For a closer look at each of the countries that use the euro and those that do not, visit European Commission, “EU Countries and the euro,” https://ec.europa .eu/info/business-economy-euro/euro-area/euro/eu-countries-and-euro_en.  5. Tahiru Azaaviele Liedong, “Could West Africa Introduce a Single Currency?” CNN: The Conversation, August 8, 2017, https://www.cnn.com/2017/08/08 /africa/single-currency-west-africa/index.html.

7 The Organizations That Influence the Global Economy

The foundation of any domestic economy is a set of institutions and organizations on which the economy is structured. Every domestic economy has a monetary system and central bank. As we discussed in the beginning chapters, the institutions include private property, a government structure, and economic, political, and cultural influences. The spectrum of these institutions ranges from command and authoritarian economic and political institutions, respectively, to market capitalism and republics and democratic systems. The global economy is not so neat and structured. It is a comprehensive collective of diverse economic and political systems. The extent to which a nation participates in the global economy is directly related to its domestic economy. All nations are independent sovereign nations. Whether command or market, authoritarian or democratic, a nation will make decisions for the global economy only if those decisions will have a positive impact on their domestic economy. A nation’s sovereignty is their first priority, not the global economy. Global organizations are in a difficult position. Regardless of the organization, their mission is to create a global environment conducive to active trading partnerships. This includes partnerships involving all nations regardless of economic, political, and cultural differences. The sovereignty of individual nations trumps the global economy. If two nations are in a 57

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trade dispute, each of the nations will first assess the global economy against their domestic economy. Nations will impose their sovereignty as an independent nation first and concern themselves with the global economy second.

INTERNATIONAL ORGANIZATIONS United Nations Conference on Trade and Development (UNCTAD) Most of us are familiar with the United Nations. In 1945, the United Nations was created in the aftermath of World War II. The primary role of the United Nations when it was formed was to maintain world peace. In the years since, it has expanded into other areas of the global landscape. For our discussion, the most relevant expansion is the UN Conference on Trade and Development created in 1964. While it also has an office in New York along with the United Nations, UNCTAD’s main office is in Geneva, Switzerland. It also has an office in Addis Abba, Ethiopia. UNCTAD is part of the UN Development Group organized under the UN Secretariat. UNCTAD is independent in that it has its own membership and budget. UNCTAD focuses on trade and development, finance and investment, technology, and the Sustainable Development Goals (SDG). UNCTAD provides much of the statistical data and analysis of the trade and economic development occurring within the global economy. UNCTAD provides us with over 150 different economic indicators and data sets going all the way back to 1948, shortly after the United Nations was created. Collected from both countries and international sources, the statistical data is very diverse. According to the UNCTAD website statistics (https://unctad.org/en/Pages/Statistics/About-UNCTAD-Statistics.aspx), the organization’s areas of focus include the following: • • • • • • • •

International trade Economic trends Foreign direct investment External financial resources Population and labor force Commodities Information economy Maritime transport1

Their work heavily focuses on trade and development in the developing countries around the world. Their membership includes 195 nations around the world, including the United States.



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Sustainable Development Goals UNCTAD is responsible for tracking the progress in reaching the United Nations Sustainable Development Goals. The Sustainable Development Goals were created in 2015 as part of the 2030 Agenda for Sustainable Development by the United Nations. There are fifty-two specific targets bundled into seventeen SDGs. The SDGs range in topics from poverty and hunger to economic growth. Goals eight, nine, and ten fall under the category of “prosperity for all” SDGs. These three goals focus on work, economic growth, industry, innovation and infrastructure, and global wealth. While all seventeen of the goals can be relevant to the global economy, these three are the most directly relevant for our discussion. You can read about all seventeen at the UNCTAD website, https://unctad.org/en/Pages/About%20UNCTAD /UNCTAD-and-the-Global-Goals.aspx. For our purposes, we will keep our discussion to goals eight, nine, and ten, but you should take some time and read through all seventeen. Goal eight: Decent work and economic growth. Goal eight focuses on developing an educated, efficient, and effective workforce in the Least Developed Countries (LDCs). It also works to promote trade, investment, and technology in these countries so that there are opportunities for the nation’s labor force. UNCTAD’s efforts to achieving goal eight encourage entrepreneurship and innovation by the private sector, which is encouraged in both a nation’s goods sector and services sector. A focus of goal eight is also to increase both access and accountability of the financial services sector of an LDC. Goal nine: Industry, innovation, and infrastructure. This goal focuses on changing the dynamics of a Least Developed Country’s domestic economy. That means infusing the economy with technology, industrialization, and markets. For an economy to grow, it must have an infrastructure of roads, bridges, sanitation, water, and communication technology that is dependable and will last for many years. Achieving this goal takes research and development, entrepreneurship and innovation, and diversification of the economic base with more industrialization. UNCTAD and its partners strive to makes these changes reality. Goal ten: Reduced inequalities. A key goal for UNCTAD’s creation was to increase trade and investment among the world’s nations. A large share of their data collecting monitors the global economy, especially how well nations are cooperating with each other. Goal ten goes directly to the heart of the UNCTAD’s role in the global economy, and a main emphasis is giving all nations (especially the LDCs) a platform for representation in an effort to achieve a more inclusive global economy. The closer goals eight and nine are to being achieved, the closer UNCTAD and its partners come to achieving goal ten as well.

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The UN Conference on Trade and Development is not working on the seventeen Sustainable Development Goals in a vacuum. They have many partners around the globe working with them. Some of these include the World Trade Organization, International Labor Organization, World Bank Group, the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund. Cooperation and partnerships are critical to a functioning global economy. It is almost certain, however, that without this type of cooperation between international organizations and between nations, the global economy will never be at peace. We will explore this idea further as we conclude our journey and discuss the global economy’s future.

Bank of International Settlements (BIS) Any economic system that uses money has a central bank with the goal of maintaining the economy’s money supply. We will discuss a central bank’s role in the global economy later. Central banks themselves have a central bank, the Bank of International Settlements. The mission of the BIS is to provide support to the world’s central banks so that they can best serve and accomplish their economic goals. The BIS is the central banks’ bank. The Bank of International Settlements was established at the beginning of the Great Depression in 1930. Its headquarters are in Basel, Switzerland. When you read or see news about a Basil Accord relating to bank regulations, they are named for this Swiss town. BIS also has offices in Hong Kong and Mexico City. In its earlier beginnings, BIS served as the clearinghouse for Germany’s World War I reparation payments. In the last chapter, we discussed the gold standard exchange rate. During World War II, the BIS was responsible for shipping gold between nations to maintain exchange rate levels. From post–World War II to the end of the twentieth century, the BIS evolved into the central banks’ bank. In 2009, the Basel Accords established international standards for the world’s central banks. The BIS is a bank owned by the central banks. Sixty central banks are members of the BIS, and they hold all the capital of the BIS. These sixty central banks have the responsibility of maintaining the monetary policy for approximately 95 percent of the world’s gross domestic product. One of the key missions of the BIS is facilitating relationships between the central bank members. Between central banks functioning in different economic systems (i.e., authoritarian versus market) with potentially different ex­change rates, this task can at times be very difficult. In a domestic economy, savers deposit money in a financial institution (bank, credit union, etc.), and the financial institution loans the money to



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borrowers. Whether it is bank or credit union, the BIS serve as an intermediary between the two. The BIS serves the same function between central banks as the central banks’ intermediary. When central banks need to exchange currencies, they do so through the Bank of International Settlements. These transactions can occur for several reasons. A central bank may need liquidity to maintain a stable domestic currency, assist a nation to buy or sell gold reserves, or exchange one currency for another to stabilize exchange rates when necessary. If the People’s Bank of China needs euros for an asset reserves balance sheet, they can exchange yuan for euros through the BIS. A central bank can also access gold reserves from the BIS, one of the locations at which BIS stores gold is at the Federal Reserve Bank of New York. The BIS pays interest on a central bank’s deposits just like our bank pays us for deposits. It is not the same interest rate amount, however. While the BIS holds reserves and currencies for all its central bank members, as of March 2018, 80 percent of its balance sheet’s currency deposits were in U.S. dollars.2 Remember our discussion of exchange rates and the way that many foreign exchange transactions involve the dollar. This lopsided amount of dollar deposits is a direct result. One fact important to remember regarding the size of deposits is that the BIS reports its currency holdings in Special Drawing Rights. Discussed in more detail shortly, SDRs are the unit of account of the International Monetary Fund. Using a market basket of currencies, currently 1 SDR = 0.583 dollars + 0.387 euros + 11.9 yen + 0.08 British pound + 1.02 Chinese yuan.3 This relative value is reviewed by the BIS every five years. The BIS holds total deposits of 221.5 billion SDRs, equal to 80 percent of United States BIS participation value. The numbers aside, the important point to understand is the size and influence of the U.S. markets on the global economy and the ability of the BIS to serve its member central banks. The BIS is also the key regulatory agency for the world’s central banks. We will address this function of the Bank of International Settlements and the Basil Accords in the next chapter on laws and regulations. BIS is one of the global organizations closest to having some enforcement authority. As we will see, this is rare for international organizations.

International Monetary Fund In 1944, the end of World War II was within sight. Germany was on the retreat, and the Allies were on the verge of ending the global terror. World War II had followed one of the longest periods of global isolation. The Great Depression, the Tariff Act of 1930 (Smoot-Hawley Tariff Act), and

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subsequent retaliation tariffs by other nations had all but brought global trade to a standstill. World War II was just one more reason for the global economy not to exist. Now these reasons for global isolation were about to end. Leaders around the world did not want another period of global isolation and were ready to do something about it. In preparation for the formal end of World War II, representatives from forty-four nations gathered for a UN conference in Bretton Woods, New Hampshire, to design a global environment that would avoid the pitfalls of those prior to World War II that had caused or deepened the Great Depression. If you like history, there a some very good books on this period surrounding the end of World War II and the Bretton Woods Conference. We will identify a couple for you in the bibliography. Out of the Bretton Woods Conference came the infrastructure for a new global economy. We discussed the new Bretton Woods exchange rate system in the last chapter. There were also two new organizations created in Bretton Woods and a consensus for need of a third. We will begin our discussion with the one organization that can trace its direct creation to 1944 and Bretton Woods. The International Monetary Fund was officially created in 1945. “The Fund” was established as a way to create financial and currency stability in a postwar era. During the war, currency instability was common, as nations spent money and then spent more money on warplanes, tanks, armaments, and military clothing and supplies to defeat the Germans and other Axis nations. The new Bretton Woods exchange rate system was created along with the IMF to prevent further devaluations.

Very Brief History of the IMF As Victory in Europe Day came and World War II ended, the challenge to rebuild many nations began. The IMF was responsible for implementing the new Bretton Woods monetary system. The healing of World War II was largely the responsibility of the IMF. When the Bretton Woods exchange rate system became history in 1971, the role of the IMF began to evolve. It was consulted to help several nations whose economies collapsed during the 1973–74 and 1979 oil shocks. During these periods of global oil shocks, the international economy experienced a serious debt crisis. Again, the IMF was called in to alleviate the oil shock debt crisis. One other period when the IMF was especially busy was the breakup of the Soviet Union during the 1990s. Many of the new countries needed the consulting services of the IMF as they transitioned from a socialist, planned economy to a capitalist, market-driven economy.



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IMF Today It has now been some seventy years after the IMF’s creation; its mission and global responsibility have evolved, and the IMF is now one of the key international organizations. Today’s primary mission is to safeguard the stability of exchange rates and international payments in order to create a positive global environment for trade and investment. Membership in the IMF has grown from those 44 nations in New Hampshire to 189 nations today. The mission now focuses on assisting nations to be financially stable, promoting ever-expanding global trade, and working to bridge trade between nations. Teams of IMF economists track the global economy to ensure that the member countries have stable currencies, their balance sheets are in good order, and their reserves of anchor currency are sufficient to maintain a fixed exchange rate. When nations have financial troubles, it is often for one of the last two reasons. This usually happens to smaller economies with fixed exchange rates that have tried to grow too fast. We discussed financial crises in the last chapter. If the holders of the domestic currency do not have faith the anchor currency reserves, a rush to turn in the domestic currency for the anchor currency may result. This is when economies crash. A classic example of this was the overly rapid growth of Thailand at the end of the twentieth century, when there were more Thai bahts (Thailand currency) in circulation than there were U.S. dollars (the anchor currency) to cover the given exchange rate at the time. The IMF stepped in to support the Thai baht in an attempt to squelch the currency run. In this case, it spread to other countries, and a world contagion erupted. The IMF was kept very busy. When the IMF is called into a situation as they were in Thailand or more recently Greece, they have an obligation to monitor both the international monetary system and the monetary system of its member nations. Prior to entering a crisis, the IMF is known for identifying a list or series of steps the country in crisis must implement before receiving IMF funding or service assistance. This conditionality is often a point of debate by both economists and politicians. Once a member nation accepts the conditions of the IMF, they are in a position to receive a loan to alleviate their balance of payments issues. The loan may be used to stabilize their domestic currency, rebuild their reserves, pay for imports, or implement additional economic growth policies. Loans from the IMF are often widely publicized in a negative light by the media. These are often the challenges of developing countries. Developing nations often owe more for their imports than they receive for their exports. Over time, these deficits grow into a major problem. The developing

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nation often needs assistance from either its trade partners or the IMF to pay for its imports. One of the IMF’s roles that is less well known but just as critical is working with a government to help update their economic policies or institutions. The nations agree to pay a quota subscription as part of their IMF membership. Most of the organization’s resources come from the quota subscriptions. The United States is the largest quota subscription payer of the members. The size of each country’s subscription is roughly based on their influence and impact on the global economy, which means that the United States is the largest payer. Gold is also an important component of some country’s reserves. The IMF, therefore, has gold holdings. They are one of the world’s largest holders of gold reserves. When necessary, the IMF also has the ability to borrow for short-term shortfalls. An interesting aspect of IMF governance is the voting procedure. Most of us are accustomed to the idea that one member per organization gets one vote. It is not so with the IMF. In the same way that the quota subscription amount is determined by a nation’s position in the global economy, so is the voting. The number of votes for each member essentially corresponds to the size of their quota subscription. The United States is the largest and most influential economy, so they pay the most in quota subscription. In return, they also receive the most votes to cast for IMF reforms or policy changes to the IMF structure.

Special Drawing Rights The IMF has one thing has that no other international organization can claim: its own unit of account. Special Drawing Rights, or SDRs, is an international unit of account that IMF members can use to solve an international trade imbalance. The SDRs were created in 1969 as another official reserve asset for IMF members. Members agree to accept SDRs as payment for their exports. Like voting, the quantity of SDRs a nation receives is in direct proportion to its IMF quota. As mentioned earlier, other organizations such as the Bank of International Settlements use SDRs as their currency of account. Today the IMF is one of the better known of the international organizations. Headquartered in Washington, DC, the managing director of the IMF is, by design, always, or least to date, from outside the United States. The IMF continues today to consult and, when necessary, to loan money to nations to modernize, to avoid or alleviate the pain of a financial crisis, and to strengthen domestic economies and improve a nation’s standard of living.



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World Bank The second organization that is a direct descendant of the Bretton Woods Conference is the World Bank. In 1944, it was originally called the International Bank for Reconstruction and Development, or IBRD. The IBRD became the World Bank, which is now part of what is officially the World Bank Group. Use of the word “bank” is a bit of a misnomer. The World Bank is not a bank in the normal sense of the word. It is not a bank for individuals. This bank is a membership of nations designed to support economic development and poverty reduction within the globe’s poorest nations. The Bretton Woods conferees knew that without a formal international mechanism to rebuild Europe and Japan, their economies and cultures may never recover. As part of the Bretton Woods Agreement, the World Bank was established with the original charge to provide loans and assistance to help rebuild Europe and Japan after World War II. Once the reconstruction phase of IBRD was completed, the development part of its mission began. During the 1950s, the world was returning to a new, fresh normal, thanks in large part to the efforts of what is now known as the World Bank. In the mid-1950s, the World Bank turned its attention to the countries of the developing world with the creation of the International Finance Corporation (IFC). With the IFC, the World Bank’s focus turned to major infrastructure projects in developing nations, such as dams and water treatment, electrical grids, water and irrigation systems, and roads and bridges. The World Bank changed its policy to now make loans to private companies and other financial institutions located in developing countries. This was a major turn in its mission. The modern World Bank was beginning to evolve. The International Bank for Reconstruction and Development was still intact as a component of an increasingly expanding World Bank. It would not be a stretch to claim that the genesis of today’s World Bank Group began with the creation of the International Development Association (IDA) in 1960. The IDA was created to provide interest-free loans to the poorest countries in order to improve their infrastructure. These two organizations formed the World Bank. The focus of the World Bank took another major shift toward the development and growth of the globe’s poorest countries. Another major goal of the World Bank became the fight against poverty, especially in the nation’s poorest countries. In future years, the International Centre for Settlement of Investment Disputes was created as a pseudointernational court. This provided nations and companies with disputes with each other an avenue to pursue an equitable dispute conclusion over loans, projects, and other World Bank

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projects and investments. The other component of the World Bank Group to be created was the Multilateral Investment Guarantee Agency in 1988. This agency, as the name suggests, was a way for nations and borrowers of World Bank funds to have political risk insurance for funding and projects. Political risk insurance protects investors from having their projects taken over because of a change in a nation’s government by an authoritarian dictator. The modern World Bank Group was now reality.

World Bank Group Today Today’s World Bank Group operates through the cooperation of 189 member countries, also known as shareholders. Similar to the IMF, the member countries receive a bloc of votes relative in size to the subscriptions to provide World Bank capital. Each individual institution has a separate voting process. While each are based on a different formula, there is a general similarity; votes allocated are based on the size of a nation’s capital subscription contribution to the institution. To view the formulas in more detail, you can go to the World Bank’s website at www.worldbank .org/en/about/leadership/votingpowers. The mission of the World Bank Group is to end poverty, and this organization defines poverty on a global scale. At the time of this writing, the World Bank defines poverty as living under $1.90 per day. Of the nearly seven billion people on the planet, approximately one billion live below this standard of living. We have already mentioned the World Bank Group’s five institutions: International Bank for Reconstruction and Development, International Development Association, International Finance Corporation, International Centre for Settlement of Investment Disputes, and Multilateral Investment Guarantee Agency. The World Bank’s staff is located in over 170 countries. It is important to remember that the World Bank wants to reduce poverty through viable, long-lasting solutions that will raise the poor country’s standard of living. All five of the World Bank Group’s institutions aim for the same target: reducing poverty. Through both financial and technical assistance among the five institutions, the World Bank Group aims to reduce poverty through several different strategies. The World Bank’s financial products include low- or zero-interest loans and grants to the poorest countries, which can be used for education, health and safety, agriculture, and natural resources development. They are made to governments, private companies, or financial institutions. Some of the loans and grants are publicprivate partnerships. A second important strategy provided by the World Bank is sharing innovative and creative financial and technical knowledge through



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consultant services, research, and research analysis. The five institutions use research and analytics to identify the goals and priorities for their investments. These priorities drive the strategies for the World Bank Group to help the poorest nations build capacity, infrastructure, and raise their standard of living. A third strategy of the World Bank Group is partnerships with other organizations, both national and international. One of the most important partnerships, arguably, is with its Bretton Woods twin, the International Monetary Fund. The two organizations formally meet twice a year to coordinate their roles. The IMF is the organization whose primary focus is on financial stability, while the World Bank strives to improve infrastructure, capacity building, and standard of living. The two organizations are distinctly different in their roles to improve and provide stability to the global economy. The International Bank for Reconstruction and Development began in 1944 with 38 members. The World Bank Group has evolved from those 1944 beginnings and today has 189 nations as members and five agencies or organizations within the group, and it focuses on rebuilding the world to reduce poverty, build capacity, and raise the standard of living in the world’s poorest countries. The president of the World Bank is always from United States. With over 120 offices around the world, the World Bank is located in Washington, DC, across the street from the International Monetary Fund. They are often referred to as the “twin buildings,” as their exteriors are identical.

World Trade Organization The World Trade Organization grew out of a Bretton Woods consensus but was not acted upon during the conference. As we have discussed on previous occasions, the Bretton Woods conferees wanted to create a post– World War II global economy based on free and open trade. Having not addressed the specific issue of open borders and free trade during the conference, in a post–Bretton Woods move, they established the General Agreement of Trade and Tariffs. The General Agreement on Tariffs and Trade was not a formal organization, but as the title suggests, it was a general understanding between nations to work for a global economy with free and open borders. We will explore GATT in greater detail in our next chapter when we discuss global regulations. For now, however, it is important to know that GATT came before the WTO. Nations would meet in conferences known as “Rounds” to discuss trade policies, issues, and address disputes between nations. Over time, it became clear that a more formal organization was necessary to achieve free and open world trade in a growing global economy. In

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1995, the World Trade Organization was created to implement GATT and other global trade policies. The World Trade Organization was instrumental in creating a global system of trade. Since the end of World War II, with first the creation of GATT and later the WTO, global economic growth has never been higher.

Functions of the WTO The WTO serves the global economy in several ways. It provides a forum for governments to negotiate trade policies and a set of rules for trade that all member nations are required to follow. When those rules are not followed, the WTO provides the court to settle those disagreements between trading partners. All these responsibilities focus around the WTO making sure the member nations continue to follow the trade policies and guidelines set up during the different rounds of GATT meetings. Specifically the functions of the WTO include the following. Assist in trade negotiations. As noted, one of the most important functions of the WTO is to create an open and free trade environment. The goal of WTO agreements is to lower the protectionist barriers of trade worldwide. They include reducing or ideally eliminating tariffs, quotas, and other sanctions on goods, services, and trade-related intellectual property rights (TRIPS). Many old agreements are now being renegotiated under a new 2001 WTO program, the Doha Development Agenda. Provide court for settling disputes. While the WTO’s main goal is to create a global environment of free trade, it also provides a place for countries to settle their trade disagreements. Trade experts from around the world hear the nation’s disputes and present a ruling. If a nation has been wronged, the guilty nation must, as a member, correct its policy. The nation that brought the dispute to the WTO may also be given the privilege to institute a WTO-endorsed sanction (tariff, quota, etc.) to rectify the injustice. Monitor trade agreements. All members must treat each other equally, known as the “most favored nation” (MFN) status. The WTO monitors both their members and the trade policies to be sure that this membership criterion is being met. Nation members are required to provide the WTO policies of all its trade laws, regulations, and treaties. From time to time, the WTO Secretariat, the legislative body of the WTO, will review a nation’s trade policies to be sure they follow the rules. Improve a nation’s standard of living. For the two-thirds of the membership that are developing nations, the WTO assists them with providing extended opportunities for trade. The WTO may increase the time period for them implement or correct a trade inequality. It may also provide



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technical assistance as needed to these members. The WTO tries to provide these members with greater opportunities to become trade partners in the global community. The WTO works with many of these member nations through a program, Aid for Trade. Partner with other organizations. The WTO does not operate in a vacuum. Many of its programs and efforts are jointly conducted with other nonprofits, nongovernment organizations, or other international organizations. The goal of the WTO is a global economy of free trade, and they will do whatever is necessary to achieve that goal. The WTO also collects data and conducts research on the global economy.4

The Doha Round As we mentioned earlier, when all the member nations gather to discuss trade negotiations, GATT, and later WTO, the gatherings were known as Rounds, which are not only the meeting itself but also the period of time between meetings when the business of the WTO follows the meeting of the whole. Throughout the existence of GATT and the WTO, two rounds stand out as most significant. The first was the Uruguay Round, from which the World Trade Organization was formed. The second is the last meeting of the WTO, the Doha Round, called this since the meeting was held in Doha, Qatar, in 2001. The work of the Doha Round was the creation of a major reform to the set of global trade rules. The Doha Development Agenda introduced reform trade policies reducing approximately twenty different trade sanctions.5 The reforms are aimed at helping developing nations become more involved participants in the global economy. The areas of reform include agriculture, services, and intellectual property rights. The World Trade Organization headquarters are in Geneva, Switzerland. There are 164 members of the WTO, almost two-thirds of which are developing countries. The executive leadership of the WTO is the directorgeneral with a secretariat to provide legislative and administrative support. The business of the WTO is conducted through different legislative bodies led by the member nations or decisions of the whole with voting by all member nations.

International Labor Organization Established in 1919 as a component of the Treaty of Versailles ending World War I, the International Labor Organization was the first special agency of the United Nations in 1946. The organization has 187 nation members committed to promote the rights of labor, improve social

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protection of labor, and constantly work for improved relations regarding labor-related problems and issues. The ILO global headquarters are in Geneva, Switzerland. It conducts its business through a series of what are called “conventions” toward more social justice. These conventions focus on seven fundamentals of labor: 1. 2. 3. 4. 5. 6. 7.

Freedom to associate Right to organize and collective bargaining Prohibition and abolition of forced labor (i.e., slavery) Nondiscrimination in employment End to the exploitation of child labor Minimum wage Equal pay for equal labor

NATIONAL ORGANIZATIONS THAT IMPACT THE GLOBAL ECONOMY Important Central Banks Along with the international organizations we have discussed, a few national organizations can have a significant influence on the global economy, primarily the central banks of the countries whose currencies are most likely to be used in an international trade transaction. We are going to focus in on five central banks and their currencies: the United States and the dollar, the European Central Bank and the euro, Great Britain and the British pound, Japan and the yen, and China and the renminbi.

Federal Reserve System (Fed) The Federal Reserve System (popularly known as the Fed) is the central bank of the United States. It was created as part of the Federal Reserve Act of 1913. The result of a 1913 compromise, the Fed has a different structure than most central banks. Technically the Fed is not one bank but twelve regional banks all associated together and coordinated through a central board of governors located in Washington, DC. The chair of the Board of Governors has often been labeled the most important monetary policy leader in the world and includes people such as Alan Greenspan, Ben Bernanke, and the first female chair Janet Yellen. Members of the Board of Governors, including the position of chair, are nominated by the President and confirmed by the Senate. Even though regional banks have a high degree of independence, they all have the same functions and follow the same guidelines and rules as



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determined by the board of governors. The twelve regional banks are located in Boston, Massachusetts; New York City, New York; Philadelphia, Pennsylvania; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Chicago, Illinois; St. Louis, Missouri; Minneapolis, Minnesota; Kansas City, Kansas; Dallas, Texas; and San Francisco, California. The Fed has many different roles and responsibilities for the nation’s financial system. The most important, and probably most popular, is the Fed’s responsibility to establish U.S. monetary policy to achieve price stability, low unemployment, and economic growth within the United States. How the Fed conducts monetary policy impacts the value of dollar nationally, but it can have international impact as well. This is one area in which the Fed can directly impact our story on the global economy. Fed monetary policy can have a direct impact on the exchange rate of the dollar. This is important because almost 90 percent of all global transactions involve the U.S. dollar. The exchange rate value of the dollar can have a significant impact on the both the quantity and value of global trade. Remember that in our exchange rate chapter, we discussed the reserve currencies. The dollar is the number one reserve currency, proved by how many global transactions involve the dollar. More than the other central banks and currencies we are going to mention here, the dollar is without question, at least now, the most important currency on the planet. We will return to this notion as we look at future issues in the conclusion.

European Central Bank A second most important central bank is the European Central Bank. The ECB determines the monetary policy of the euro, the key currency of the European Monetary Zone, or Eurosystem. Remember that the Eurosystem is not the same as the European Union. Since most fixed exchange rates have as their anchor currency either the dollar or euro, many consider the euro the second most important global currency.

History of the ECB The origins of the European Central Bank date back to 1988, when many countries of Europe decided to collectively create an economic union complete with its own currency. Through various agreements and treaties, the European countries created a free trade zone. The new trade zone (European Union) eliminated trade sanctions, allowed for freer movements of labor and money between nations, and stabilized exchange rates between different European currencies. The final step was the creation of a common currency for all EU members who wanted to participate.

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In 1999, the euro was introduced to the world. At this time, all monetary policy from the participating central banks was shifted to the European Central Bank. For most of the domestic economies of Europe, their trading partners now transacted business in euros only. From a financial point of view, trading in Europe became much easier.

The ECB Today The European Central Bank is headquartered in Frankfurt, Germany. Similar to the Fed, the ECB is responsible for monetary policy, bank regulation, and coordinating national supervisors. The executive leader of the ECB is the president. He works with a governing council comprised of representatives from the executive board and each of the nineteen central bank governors of the ECB countries. The ECB along with the member nations’ central banks officially make up the Eurosystem.6 Each of the nations of the Eurosystem still maintain a central bank; however, they do not have their own currency and instead all share the euro. Monetary decisions are made at the ECB level and not the domestic, central bank level. This is a major drawback of a single currency area. The participating nations have fiscal control for their domestic economy but not monetary control. This can significantly hamper a nation’s ability to address domestic economic issues. The ECB has only one goal: price stability. It has other responsibilities, but all actions of the ECB should ultimately be driven to achieve low inflation and stabilize the value of the euro on world markets. This is where the euro has relevance for our story. The ECB maintains the euro’s value by conducting foreign exchange transactions when necessary. The central bank also maintains significant holdings of foreign currency reserves for the central banks of its members.

Bank of England One of the oldest central banks is the Bank of England. It has only been a central bank since 1946 when it was nationalized. Prior to 1946, the Bank of England was a private bank like any other; shareholders owned the bank, and the goal was profits. Even though the Bank of England has been government owned since 1946, it was not until 1997 that it was truly a central bank with the responsibility of setting monetary policy. As the European Union was developing during the 1970s to stabilize exchange rates, it established the European Exchange Rate Mechanism (ERM). The United Kingdom joined the ERM in 1990 with every expectation of being a full member of the European Union. Then a British



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financial crash with high interest rates forced the United Kingdom to withdraw from the ERM. In 1999 when the euro was introduced, the United Kingdom maintained the British pound as their domestic currency. Comparable to the Federal Reserve’s Board of Governors, the Court of Directors is responsible for setting monetary policy and financial stability for the United Kingdom. The use of the British pound as an anchor currency for some nations’ fixed exchange rate and its use in international trade makes the pound sterling one of the world’s reserve currencies. The Bank of England is headquartered in London. The queen or king nominates the members of the Court of Directors from recommendations from the prime minister, and one member is selected as chair. The Bank of England acts independently of the government, but they do report to Parliament several times a year.

Bank of Japan Until the economic rise of China, South Korea, and the Asian Tigers in the Pacific Rim, the Japanese economy was the Pacific economy’s main economic factor. Even though the Japanese economy may no longer be on the front pages, the most important currency in the Pacific is still the Japanese yen. If financial stability in the region is dependent on the yen, then the Bank of Japan, Japan’s central bank, is still the most important central bank in Asia. As with all central banks, the goals of financial stability and setting monetary policy apply to the Bank of Japan. The Bank of Japan is also directly responsible for maintaining an appropriate exchange rate and value of the yen in the global economy. Given its importance in the global economy, the yen is also one of the reserve currencies many nations need in reserves for trade. The Bank of Japan is responsible for making sure that the money supply of yen reflects a confidence in the currency in world markets. For over a decade or longer, the Japanese economy has been deflationary. In a deflationary economy, prices, wages, and all asset values actually lose value over time. Like a slow leak of air out of a tire, the economy deflates or shrinks. As a result, relative to interest rates in other countries, Japanese interest rates have been relatively low. This has led Japan to be the focus of a financial tool called the “carry trade.” A carry trade is when an investor borrows Japanese yen at the lower interest rates to then invest in the higher-yielding interest rates in another country such as the United States. The Bank of Japan is one of the oldest central banks, created in 1882. It is located in Tokyo.

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People’s Bank of China (PBC) The central bank that is attempting to grow in global influence is the People’s Bank of China, and it is the only central bank we are discussing that represents a communist government. Located in Beijing, the People’s Bank of China was created in 1948, only one year before the communists, led by Mao Zedong, assumed control of the Chinese government. Some of the People’s Bank’s responsibilities are similar to the others. This central bank, however, also has responsibilities the others do not. It is difficult to determine if these additional responsibilities are the result of a communist government, but this factor certainly needs to be considered. The similarities are setting monetary policy that influences interest rates, regulating the domestic financial industry, and maintaining price stability. The major difference between the People’s Bank of China and other central banks is that PBC is the manager of China’s national treasury. In the United States, for example, the Fed and Treasury work together but are very different agencies. The Fed is independent of government, and the Treasury is part of the Executive Branch. As both central bank and treasury, the PBC is also responsible for issuing Chinese currency, the renminbi, and controls the money supply of Chinese renminbi in circulation. When the new mentions China’s managed exchange rate, it is the PBC who is doing the managing. Different politicians from different countries have accused China and the PBC on many occasions of undervaluing their currency. Whether such actions are independent decisions by the PCB or directive from the government is hard to tell. You may notice the Chinese currency referred to as either the renminbi or the yuan. The difference is that the Chinese currency is known as the renminbi. The yuan is the currency’s denomination unit of accounting. Renminbi can come in one yuan, two yuan, ten yuan, and so on. The U.S. monetary system, by contrast, is the dollar. Our unit of account, however, might be the dollar or cents, since we also have coins. The People’s Bank of China uses many of the same financial tools as the Fed to promote financial stability. Like the Fed, the PBC uses open-market operations to buy and sell government securities and controls the reserve requirement of the central bank’s client banks and short-term interest rates to maintain economic growth. Even though the communist government and the PBC are not far apart in control, the PBC has a responsibility to maintain the financial health of the Chinese domestic economy similar to all our central banks. In recent years, the PBC has made suggestions that the renminbi should be treated the same as the other reserve currencies. In 2016, the IMF announced that they would add the renminbi to the market basket of



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currencies that determines the value of their Special Drawing Rights. It may not be too far in the future that the renminbi will also be a reserve currency for the global economy.

NOTES   1. “About UNCTAD Statistics,” UNCTAD, accessed July 2, 2019, https://unctad .org/en/Pages/Statistics/About-UNCTAD-Statistics.aspx.  2. “Financial Statements,” BIS, accessed July 2, 2019, https://www.bis.org /banking/balsheet.htm?m=4%7C21.  3. “Reporting Currency,” BIS, accessed July 2, 2019, https://www.bis.org /banking/bank_reporting_currency.htm.   4. To read more about the functions of the WTO, go to “What We Do,” World Trade Organization, accessed July 2, 2019, https://www.wto.org/english/thewto_e /whatis_e/what_we_do_e.htm.   5. To read more about the Doha Development Agenda, you can go to “Doha Round,” World Trade Organization, accessed July 2, 2019, https://www.wto.org /english/tratop_e/dda_e/dda_e.htm.   6. Like the Fed the ECB has other tasks and responsibilities that are not relevant to our discussion on the global economy. To read more about the European Central Bank visit “About,” European Central Bank, accessed July 2, 2019, https:// www.ecb.europa.eu/ecb/html/index.en.html.

8 International Rules, Trade Agreements, and Trade Unions

If you want to drive a car, you need a license. If the police catch you driving too fast, you get a ticket for speeding. If the police catch you taking something that is not yours, you are arrested for stealing. It is against the law to not pay for an item. It is against the law to sell certain items. It is against the law to sell items in certain regions. Whether there are too many laws or which laws are good and which ones are bad is another story for another day. Laws govern our world at all levels of government and society. Laws and regulations provide us a civil society. The same is true of our global economy. You have a local police, a county sheriff, a state police, and the national FBI to keep you safe and ensure that you obey the laws. If you do not obey the laws and one of these law enforcement agencies catches you, there are consequences. In the global economy, there are rules, regulations, and treaties nations agree to obey. Each organization has their own set of rules they enforce. In reality, between the organizations discussed in the previous chapter and a few we will include here, there are many more rules of the global economy than we can possibly cover in our relatively short space. Just as we have several different levels of laws and rules and respective levels of enforcement, so does the global economy. The key difference between the two is that domestic enforcement is generally by geography, 77

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where in the global economy, enforcement or dispute settlement is by organization or agreement. What does not exist in the global economy are global police forces to ensure that nations obey international rules and treaties. Each organization acts to enforce the rules of their organization. Nations are pretty much left to self-police. In each instance, we are using the term “police” very loosely. Officially, organizations are not a police agency. They cannot, and do not, go around the world handing out tickets for not obeying the rules. They only get involved when a nation files a claim against them or two nations come to them when they need an arbitrator to settle a dispute. Nations are sovereign nations. They are independent and decide whether and how they will participate in the global economy. No other nation or organization can interfere with a nation’s sovereignty. When one nation intrudes on another nation’s sovereignty, it usually leads to something much worse than a dispute. It usually leads to war. Most of the organizations from our previous chapter have evolved ways to enforce their international rules. The IMF has evolved from the lender to rebuild financial systems into a lender of last resort to protects financial systems. The World Bank was established to rebuild a post–World War II world and has since evolved into an organization that polices the global fight against poverty. GATT has evolved into the World Trade Organization (WTO). In this chapter we will expand our conversation regarding these organizations. We will also add a few organizations of the United Nations whose sole purpose is the enforcement of international law. With so many rules, regulations, and laws being instituted by so many different organizations, it is no wonder that there are so many global economic disputes.1 When nations decide to participate in the global economy, they usually do so through membership in these organizations and trade treaties with other nations. Once nations belong to these groups or sign certain treaties, they have obligated themselves to obey those set of rules. Unfortunately, they do not always obey what they have agreed to do.

INTERNATIONAL ORGANIZATIONS International Monetary Fund In the last chapter, you were introduced to the IMF, created in 1945 during the Bretton Woods Conference to finance rebuilding after World War II. Beginning with 44 members, today it has evolved into a lender of last resort to assist its 189 members when they find themselves in a financial crisis because of unstable exchange rates or lack of reserve currencies (dollar, euro, yen, or pound). Once the IMF is asked to intervene in a crisis, it



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“polices” to determine if the situation needs its involvement, how involved it should be, and what the nation in crisis needs to do for the IMF to become involved.

IMF Conditionality We briefly introduced IMF conditionality in the previous chapter. This is the term that refers to the stipulations the IMF puts on a government in order for them to receive a loan. These stipulations can be almost anything, but there is one list of criteria they often refer to when determining the conditions of a loan. Let us not get too far ahead of the story; we will return to these criteria shortly. For now, we know that the list is going to include economic reforms that will impact the financial system, the exchange rate of the domestic currency, or the level of reserves being held by the nation’s central bank. Another consideration is that the borrowing nation will be financially able to repay the loan. IMF loan programs also include the police component of the loan. Every loan includes a monitoring process to be sure that the borrowing nation is abiding by the terms of the loan and implementing the conditions set forth in the loan package. Remember that the borrowing country has two aspects of the loan they need to consider: advancing the IMF conditions for the loan and repaying the loan. In both, the IMF is watchful and prominent until their conditions are met and the load repaid.

The Incentive for Nations to Accept the Conditions If the IMF can assert stringent conditions to a loan, why would a nation go to the IMF for financial assistance? First, a nation usually does not invite the IMF to be involved in their domestic financial situation unless it is absolutely necessary and usually after the nation has run out of all other options. Before calling the IMF, the government and finance leaders of a nation probably had conversations with international commercial banks, request an aid package or loan from a developed nation, or considered taking domestic action with tax or spend policies. Almost always, only after all other financing avenues have been exhausted does a nation pick up the phone and call 1-800-IMF.2 This is why the IMF is aptly named the lender of last resort. Nations contact the IMF to help solve a problem they themselves created. The conditions set forth by the IMF are usually directly contrary to the way the nation had been conducting the nation’s financial business. They are in trouble for a reason. So the conditions can be very hard on the nation. Yet at the same time, they help nations restructure and establish

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sound fiscal and/or monetary policies. They permit nations to rectify balance of payments problems that have been created with trading partners, exchange rates, or reserve currency deficiencies. The IMF can bring financial relief to a nation’s balance of payments and do so in a way that the borrowing nation can afford to repay the loan.

Qualifying for an IMF Loan The most important criterion is that the nation needs the loan to achieve macroeconomic stability, as outlined for IMF members. Macroeconomic stability includes a stable balance of payments, ability to achieve economic growth with sound money (stable prices), and for the developing nations reduction of poverty. While the IMF may spell out the conditions for a loan, the program is actually designed by the member country applying for the loan.

The IMF “Police”—Monitoring Success of the Loan Program When the IMF and a member nation agree on a loan package including conditions and agree on the repayment procedure, the next steps are payments and police. The IMF makes payments to nations in partial payments known as tranches. This is one way that the IMF can be sure the nation is living up to its part of the agreement and making the financial changes it agreed to make. If the agreement is being met, the IMF will continue the installment payments. If not, they may delay or even cancel any remaining payments. Another method for the IMF loan police is to determine a country’s participation in program reviews. Using program reviews, the IMF again can determine that the country is implementing and practicing the agreedupon components for the loan. At these midpoints, the IMF can also suggest modifications in the agreement if they believe it is in the best interest of the borrowing nation.

Setting the Conditions In the 1980s, a British economist coined the term “Washington Consensus” for these ten main economic and financial conditions for the IMF borrowers. The conditions are also used by the World Bank, and we will discuss their rules next. As you will see, these conditions focus on the creation of capitalist, open-market policies. They were considered by some economists to be the key to development of developing nations. Notice we mentioned some economists, not all. We will look at the others shortly.



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The ten key conditions known as the Washington Consensus3 are the following: 1. Fiscal deficits relative to GDP should be minimal. Governments borrow only what is absolutely necessary. 2. Public spending should promote economic growth and should be used on infrastructure such as education, health care, roads, and bridges. 3. Tax reform policies need to be implemented that expand the tax base with marginal tax rates implemented. 4. Nominal interest rates should be market driven and positive. 5. A flexible exchange rate should be implemented so that the currency is competitive in the global economy. 6. Also regarding the global economy, the nation’s trade policies should promote open trade and not conduct protectionist policies such as tariffs and quotas. 7. More foreign direct investment for their domestic economy should be promoted. 8. If necessary, the nation’s commanding heights, such as railroad transportation, oil and gas production, and steel production, should be privatized. 9. More competitive domestic markets should be created. 10. The system of property rights and rule of law should be established. As you notice, most of these focus on macroeconomic policies. The IMF’s focus is on assisting developing nations to become active participants in the global economy. In the 1990s, after significant criticism that the ten rules were not successful for some nations, the IMF made some modifications to the IMF conditions. In 2002, the guidelines were revised, and the Washington Consensus ten were made less important. The IMF became more adaptable in identifying the structural issues of a nation, and the conditions became more individual and less boilerplate. In 2009, the IMF changed again in its efforts, focusing more on prevention in their conditions. Today the IMF is more willing to work with the nation in crisis to develop a plan of conditions that best fits their needs to cure the crisis as well as to prevent future crises through the program review process.

Critics of the IMF Conditions The IMF actions, especially the use of the Washington Consensus as a boilerplate for IMF conditions, drew both praise and criticism. The IMF,

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remember, was created to finance the rebuilding of the global economy after World War II. Through mission creep, the organization has evolved into a lender of last resort to help countries that find themselves in a financial crisis. The supporters of the IMF and its new mission point to the longterm opener and more positive growth of an economy is a sign that IMF conditions were appropriate. Criticism of the IMF takes two forms. There are those who are against the IMF as an organization. Their main criticism is that the IMF was created as a financial organization in 1944 for a specific mission and that the organization has evolved to encompass things that it was not designed to do. The reality is that the IMF is not going away any time soon. A second form of criticism focused on the way the IMF conducted its lender-of-last-resort support to nations in financial trouble. This criticism was an external form of police that the IMF heeded. Early on, there were critics of the IMF’s use of the Washington Consensus rules as a standard template for all nations. The critics were especially tough on the IMF about how it created these conditions for developing nations. As we noted earlier, from the 1990s on, the IMF became much more flexible in how they addressed many of these concerns.

World Trade Organization Quite possibly the most influential set of international rules for the global economy are those by the WTO, more specifically those of the General Agreement on Tariffs and Trade. We will cover GATT shortly, but when it comes to rules and regulations for the global economy, the WTO extends beyond GATT. The WTO provides the framework and serves as the overseer of trade agreements. Along with GATT and trade agreements, the WTO has become the organization that has set the rules for what is, arguably, the newest global issue of the twenty-first century: intellectual property. The WTO deals with the global issues of the global economy. We described the various roles of the WTO in the previous chapter. One of those applicable here is setting the framework for nations to partner together to create a more open trade environment. The WTO serves as the arbiter of disputes between nations who have a trade agreement. We will keep our focus on two areas of the WTO: GATT and intellectual property rights. Let us explore intellectual property rights first.

The Rules of the Game for Intellectual Property Rights The WTO does not police the world of intellectual property alone. They work with their member nations, but their main international partner is



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the World Intellectual Property Organization (WIPO). This partnership serves as the intellectual property police. Between these two organizations, the laws and regulations regarding intellectual property are controlled and managed. When member nations establish intellectual property rules, they forward them on to these two organizations. These two organizations review the documents to be sure that they are consistent with the TRIPS Agreement. The two organizations determine whether a nation’s patent, copyright, and trademark rules meet the standards set forth in TRIPS. When they agree that the standards are met, the nation’s rules for intellectual property are published in the Collection of Laws for Electronic Access (CLEA).

Trade-Related Aspects of Intellectual Property Rights— Defining Intellectual Property During the Uruguay Round of WTO trade negotiations (1986–94), the member nations created the Agreement on Trade-Related Aspects of Intellectual Property Rights. The TRIPS agreement is the global economy’s main document for defining and creating a common ground for how member nations deal with intellectual property. First, it established a global definition of intellectual property for member nations to follow. Simply stated, TRIPS defines intellectual property as anything that is generated, invented, or created by the mind. This includes the fine arts, such as art, music, books and movies, as well as inventions. If something can be copyrighted, trademarked, or patented, it falls under the category of intellectual property and is covered by TRIPS. This broad definition of intellectual property gives the WTO and WIPO wide discretion in enforcing the TRIPS agreement when disputes arise between nations. The TRIPS Council administers the agreement. All WTO members are members of the TRIPS Council. When there are disputes, the nations take their grievances to the TRIPS Grievance and Ethics Council, a subcouncil of the TRIPS Council.4

General Agreement on Tariffs and Trade (GATT) There are not many organizations that ultimately enforce the agreement that established the rules from which it was born. As we mentioned previously, the WTO is precisely one of those organizations. The agreement that ultimately led to the WTO was the General Agreement on Tariffs and Trade, a thought coming from, but not a product of, the Bretton Woods Conference in 1944. An end to World War II was in sight, and the Great Depression was fresh in the minds of government leaders around the world. Avoiding a repeat of the 1930s was one thing everyone agreed on.

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The year was 1947. World War II was now history. The Bretton Woods Agreement was being implemented in order to create a more a stable and secure global economy. One goal that remained was to create a set of global trade rules and institutions for the nations to promote more open trade and create a structure for settling trade disputes as they arose. Negotiations to create such a document were heated and often contentious. This was especially true between the United States and United Kingdom. Both were positioning as leader of the global economy. The United States wanted a principle of “most favored nation” included in the agreement. In retrospect, MFN seems a fairly obvious principle for a document trying to create a peaceful, open global economy. World War II was still too fresh in everyone’s minds. MFN would mean that a member nation would have to treat all members equally. If it wanted to have a special agreement with one nation, it must have the same agreement for all nations. In the minds of many government leaders in Europe, nations like Germany, Italy, and Japan were still the enemy. The United States prevailed, and GATT became the trade law of the new global economy. This was not, however, the way it was supposed to happen. There was supposed to be an international organization to administer GATT. In 1947 in Havana, Cuba, shortly after signing GATT, a UN conference on trade and employment created a charter to establish the International Trade Organization. The United States Congress would not ratify the ITO charter. The United States having the influence it did essentially put an end to the ITO, and as a result, GATT was an agreement without an organization. The General Agreement on Tariffs and Trade was the multilateral trade law of the global economy until 1994, when the WTO was created. The bases of GATT’s rules were twofold. The first is that all nations are treated the same. A nation could not discriminate against another nation regarding trade practices. The United States, as a signatory of GATT, has to apply the same trade rules to China and Europe exactly the same. The second is that all products within a nation are treated equally. All cars whether they are imports or exports must be treated equally. Between 1948 and 1994, the global economy grew and expanded significantly. The quantity of goods exported and imported by countries grew exponentially. The number of countries joining the global economy (and becoming members of GATT) grew significantly. GATT was responsible for a significant reduction in tariffs and trade protectionism around the world. Over forty-five thousand tariff concessions were agreed to in the first year alone. GATT was on its way to be the road map to global free trade. There have been nine GATT Rounds since 1948. We will not go into the details of most of them. The first of two was held in Geneva (it is known as Geneva I) with twenty-three participants. As we have noted, the Uruguay



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Round from 1986 to 1993 established the WTO. The current GATT Round, is Doha, which began in 2001. This most recent round has 153 members, reflecting the growth of the global economy and increased number of participants. During the GATT years, there were very few changes to the agreement. In the 1960s, GATT expanded to include developing nations. In the 1970s, GATT extended its efforts beyond tariffs and into other forms of trade protectionism as well. As the GATT Rounds were held during these years, the nations constantly negotiated among themselves to liberalize trade. In later rounds, GATT addressed the issue of dumping with an Anti-Dumping Agreement. If you remember from chapter 4, dumping is when a country exports a product to another country and sells it below the cost of producing that product. By selling at such a low price (and below production costs), it gives the foreign product an unfair competitive advantage. The lower price forces the domestic producers of the same product to lower their price to compete. The lower price forces the domestic companies to take a loss or, worse, go out of business, because they can no longer compete in the domestic market. By signing the Anti-Dumping Agreement, nations agree not to condone this behavior. Unfortunately, it still happens. We will take yet another look at dumping in the next chapter. As the name suggests, the General Agreement on Tariffs and Trade was a trade agreement. The WTO created an expanded set of rules, regulations, and procedures for its member nations to abide. With the WTO, the global economy now has a set of rules for trade in services, rules for intellectual property, and expanded ways for nations to settle disputes. The global economy is much more complex and intricate than it was post–World War II, and GATT and the WTO have grown with a growing global economy.

United Nations We are going to shift our focus to an international organization that has many facets to its existence. When it comes to the rules and regulations of the global economy, we must devote some space and time to the United Nations. In chapter 7, we explored one component of the United Nations that is directly involved with the global economy: the UN Conference on Trade and Development. In this chapter, we need to address the United Nations from another perspective: international law. Distinguishing between international law for the global economy and international law regarding peace and war can sometimes get blurred. Bretton Woods was a conference on the global economy (remember, it was officially a UN conference), yet its genesis was a war. Bretton Woods ended with an agreement, not a treaty. Treaties create rules. There are

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trade agreements or economic treaties, some of which we will explore shortly. There are political treaties, such as the North Atlantic Treaty Organization. Then there are treaties that end wars, such as the Treaty of Versailles ending World War I. For now, it is enough to describe the different types of treaties. In the next chapter, we will look at the issues that surround their interdependence. There needs to be one organization that differentiates them from each other. That organization is usually the United Nations. There is the WTO, GATT, and the IMF to guide and grow the global economy. They each have their own set of rules and regulations that all nations are obligated to use to conduct business and participate in the global economy. The UN Charter establishes itself as the organization that maintains world peace, provides justice when necessary, and essentially keeps the world order. This is a very tall order for one organization, and whether it has been successful is the topic of many debates. That, too, is a later discussion. The UN mission is multifaceted. Politically, it has a peacekeeping mission. It implements courts or tribunals, and treaties, and the UN charter itself is considered a treaty by which all members need to abide. The UN Security Council has wide-ranging authority for peacekeeping as well as authorizing force when necessary. Of course, all of this is wrapped in politics. International law, whether economic or political, can be quite distorted.

Defining and Enforcing International Law Simply stated, international law covers every aspect of nations interacting with each other. For our conversation, that means global trade and the global economy. In today’s world, it is also refers to topics important to world trade, such as the environment and sustainable sources of energy, global communications, commons areas (areas with no owners, such as oceans or the air), international crime, human rights, migration, war, and other global issues. International law is much easier to define than to enforce. The United Nations has an array of courts and tribunals that hear and adjudicate accusations of breaking international law. The UN Security Council and the UN General Assembly also have their input relative to sanctions (these are usually political sanctions), creating ad hoc tribunals or approving and dispensing a peacekeeping mission to a troubled part of the world. Two subgroups of the General Assembly are pertinent to our conversation. The first is the UN Commission on International Trade Law. This group studies and makes recommendations to the General Assembly



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regarding the laws of international trade. A second UN group whose work is important for the global economy is the UN Convention on the Law of the Sea. This subgroup determines the rules that govern the seas, oceans, and their resources.

International Court of Justice The International Court of Justice, more commonly known as the World Court, is a main judicial branch of the United Nations. The court is located in The Hague, Netherlands. When the United Nations was chartered in 1945, the World Court was one of the original components and began hearing cases a year later. It is the only original chartered component of the UN that is not located in New York. There are fifteen judges elected by the UN General Assembly and Security Council. They each serve nineyear terms. It conducts its business in two languages, English and French. Nations come to the World Court for many reasons besides the economic. The World Court hears two sets of cases. The first are the legal disputes between nations. These are brought to the court by the nations themselves. These hearings end with a decision in favor of one of the nations involved. By bringing the case before the World Court, the nations are bound to support the final decision. The subject of these cases could range from trade and economic jurisdiction to crimes against humanity. The second type of case is advisory, in which an opinion of the court is asked for by the General Assembly, Security Council, one of the five UN suborganizations, or other UN affiliates. The advisory opinion can be regarding anything legal. The World Court holds hearings on the matter and provides a written opinion to the group of their findings. These findings are public, but the group asking for the opinion is not bound to it.

World Intellectual Property Organization In chapter 7, you were introduced to one very important UN agency regarding the global economy, UNCTAD. Since we are discussing intellectual property, it is now appropriate to provide you a bit more information on this secondary UN organization: the World Intellectual Property Organization. Created in 1967, the World Intellectual Property Organization is officially part of the United Nations, with 191 member nations. WIPO world headquarters are in Geneva, Switzerland. WIPO serves as an international forum for nations to discuss the different ideas and aspects of intellectual property. The organization serves as a form of clearinghouse for intellectual property rules and regulations for the nation members. It promotes cooperation between nations so that all

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nations can be more effective in encouraging invention and creativity of the mind, as defined by the TRIPS Agreement. If you remember, very early in our journey we discussed the crossover between economics and politics. That crossover is exhibited no better than in many of the actions conducted by the United Nations.

TRADE AGREEMENTS Trade between nations, arguably, has been the number one peacetime activity of the global economy. Often it is difficult to distinguish nations’ actions as either economic or politic. At times, one helps the other, and at other times, the reverse is true. An often-overused cliché in economics is that good trading partners do not go to war against each other because economic compatibility is more important than political differences. Later we will discuss the accuracy of that cliché, but it works for us now. Before we explore a few specific, more relevant trade agreements, we need to discuss the many different types of trade agreements that are being negotiated and signed virtually every day. Worldwide, there are over 420 different regional trade agreements determining global economic trade.5 Trade agreements come in basically three forms. Bilateral agreements are those between two nations. Multilateral agreements involve more than two nations. Some multilateral agreements are regional trade agreements expressly for the purpose of benefitting trade in a specific designated region of the world. Two regional trade agreements directly impact the western hemisphere: the North American Free Trade Agreement and the Central American Free Trade Agreement (CAFTA). A revised NAFTA (United States-MexicoCanada Agreement) has been agreed upon, but it still has potentially significant political hurdles before it will replace NAFTA. We will explore its revisions and differences with NAFTA in more detail later in the book. For now, however, let us take a look at the two key trade agreements that impact North America and South America.

North American Free Trade Agreement Trade agreements between North American nations began long before NAFTA. In the late 1980s, the United States and Canada implemented the Canada-U.S. Free Trade Agreement (CUSFTA). The primary focus of this agreement was the automobile industry and the intraindustry trade occurring between the two nations. As the United States turned south to negotiate a bilateral trade agreement, the neighbor to the north, Canada, joined in the trade conversation. The outcome of those discussions was a multilateral agreement, the North American Free Trade Agreement, popularly known as NAFTA.



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NAFTA did not have an easy road to ratification. Negotiations for NAFTA occurred during the George H. W. Bush administration. He signed the agreement along with Mexico’s president Carlos Salina de Gortari and Canada’s prime minister Brian Mulroney in 1992. Trade agreements in the United States have to be ratified by Congress before they can become law. In the United States, environmental and labor special interests were against NAFTA. They were very outspoken and critical of the agreement. As a result of these special interest groups along with the independent presidential candidacy of anti-NAFTA Ross Perot, Bush lost the following election that same year to Bill Clinton. Under the new Clinton administration and with all the campaign rhetoric that preceded the election, it appeared that the United States would not ratify NAFTA and the agreement would not go into effect. Clinton, however, did an about-face. Working with a Republican Congress and the new Canadian prime minister Jean Chretien (Mulroney also lost his reelection), NAFTA was ratified with a few new addenda items regarding the environment and labor. Even though these addenda had been included to appease the special interest groups, they felt betrayed by Clinton. The link between economics and politics was never more evident than in the negotiations, elections, and ratification process that led to NAFTA becoming North American trade law in 1994. Between 1994 and 2008, NAFTA eliminated all U.S. and Mexico tariffs, and all but a few Canadian agricultural tariffs, that had been in place prior to the agreement. Other important aspects of NAFTA included intellectual property rights; rules regarding origin of goods, trade in services, and investment; and environmental and labor standards, as mentioned earlier. NAFTA changed the economic landscape of all three nations. Trade among the three nations rose significantly, even though the net effect of NAFTA is often disputed. Labor unions naturally held an anti-NAFTA position. Others argued that NAFTA generated net employment in the United States. Most certainly, some U.S. jobs were lost, and certain regions of the country experienced hardship. Other U.S. regions gained jobs, and overall, NAFTA appears to have been a positive influence. Clearly the future of NAFTA is in question, with the agreement of the United States-Mexico-Canada Agreement. Until USMCA is ratified, NAFTA remains the dominant influence on trade and investment among the United States and its neighbors to the north and south.

Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) The United States has free trade agreements with many countries, large and small. One western hemisphere agreement is the free trade agreement between the United States and many of the hemisphere’s smaller,

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developing nations. The Dominican Republic-Central America Free Trade Agreement includes the Central American countries of Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua, and the Dominican Republic. Together they form the United States’ sixteenth-largest trading partner in combined (exports and imports) products. This is one region of the world where the United States actually has a trade surplus.

Other U.S. Free Trade Agreements The United States has many bilateral free trade agreements with many nations around the globe. Besides NAFTA and CAFTA, the United States has free agreements with Australia, Bahrain, Chile, Colombia, Israel, Jordan, South Korea, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. Along with the countries of NAFTA and CAFTA, the United States has trade agreements with twenty nations. Notice that two of our larger trading partners, China and Europe, are missing. Not having a trade agreement does not mean that nations will not trade with each other. At the time of this writing, the United States and China are trying to negotiate a bilateral trade agreement.

Trans-Pacific Partnership (TPP) Since President Trump withdrew the United States from the TPP, there is not much to state, except that it still exists. The TPP was created to reduce barriers of trade, including tariffs, among eleven countries, including Japan, Malaysia, New Zealand, Australia, Peru, and Singapore, along with NAFTA partners Mexico and Canada. Both President Bush and Obama’s administrations had worked to make TPP a reality. President Trump’s withdrawal was not without controversy. We will explore this decision a bit more in our next chapter on controversial issues.

Bilateral Investment Treaties Before we move on from the United States and take a brief trip around the world to look at other global economic trade and investment partnerships, there is one more treaty we need to introduce. Up to this point, we have explored only the trade of goods and services. There is one additional trade that occurs every day just as often: the trade of money. Remember that in chapter 6, we discussed currencies and exchange rates. Often these trades are the result of investment opportunities that individuals and investors from one country make in another country.



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The United States has a series of treaties with nations specifically for investments. These are bilateral investment treaties (BIT). As the name suggests, these are treaties between two nations for the express purpose of private investments in each nation. Essentially a BIT has two main functions. First, the BIT is to protect investors’ rights if they are not protected in another bilateral or multilateral agreement between the nations. This does not mean that BITs protect the success of the investment. Second, BIT focuses on nations adopting market-oriented business practices. The United States has BITs with many countries around the world. If you are interested, you can view the list at tcc.export.gov/Trade_Agree​ ments/Bilateral_Investment_Treaties/index.asp.

REGIONAL UNIONS AND TREATIES OUTSIDE NORTH AMERICA European Union In the span of less than fifty years in the early to mid-twentieth century, Europe was the battleground of two world wars. The predecessor of the European Union was the European Economic Community (EEC), following World War II. The hope was that if the European nations became integral trading partners with each other, they would not want to declare war. The EEC was created in 1958 between Belgium, France, Germany, the Netherlands, Luxembourg, and Italy. The regional market grew in both its economics and its politics. We will keep our discussion focused on the economics of the European Union and the global economy. The EEC was successful in bringing the nations together economically. As it did so, the nations also began to come closer politically. They began to work together on climate, the environment, justice, and security, and they were becoming a single market in more ways. In 1993, the EEC became the European Union. They were also beginning to discuss the use of one currency for the nations. We will discuss this evolution later in the chapter. Today the European Union has twenty-eight member nations. Established on the foundation of an open market and free trade, it is the largest single market in the world and is the world’s biggest exporter of manufactured goods. It has created a regional economic market with free movement of people, goods, services, and money. Governance is a shared responsibility among the member states. There is not one institution responsible. Within the European Union are several cooperating councils (European Council and Council of the EU) that provide guidance and coordination of economic policies important to all the members. There is also the European Commission, which monitors the

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member states to ensure compliance with EU policies. Finally, regarding economic policy, the European Central Bank is responsible for setting monetary policy for the euro zone. Institutions are very important to the EU’s success. It has been intentional in its ability to protect property rights with rule of law and to promote security and justice both within the domestic borders but externally as well. The European Union is democratic and transparent in all its policies and decisions. The freedoms we appreciate, such as freedom of speech, religion, and press, are also vital to the EU way of life. With peace throughout the region for more than seventy-five years, the European Union has accomplished the goal of its predecessor. For these efforts, the EU was awarded the Nobel Peace Prize in 2012.

African Union (AU) A second regional union of special interest is the African Union. Similar to the European Union, the African Union also had a predecessor organization that brought African nations together in the spirit of peace and harmony. During the 1960s, many African nations became independent from their European colonizers, France, the United Kingdom, Portugal, or the Netherlands, after years, or centuries, of European rule. They wanted to be sure that they controlled their own futures. In 1963, thirty-two relatively new African nations created the Organization of African Unity (OAU), their vision of freedom and continental cooperation. A key difference between the European Union and the African Union was their approach to the economy. While the European Union advocated free trade and open markets, the African Union organized just the opposite. Among their member nations, they promoted socialism and unity within the African community. They were now independent and sovereign nations. They did not want to lose their sovereignty, and for them, the best way to do that was solidarity among themselves and shunning the outside world. They would cooperate internationally but only in matters regarding the United Nations and human rights. For the next thirty years, the continent of Africa was fairly quiet internationally. Within Africa, there was much turmoil. Civil wars were commonplace. Dictators and authoritarian leaders ruled by force, not by law. There were tragedies such as those perpetrated by dictators like Idi Amin in Uganda, Siad Barre of Somalia, or Sékou Touré of Guinea, to name just a few. There have been more dictators as well, but these three were known for their atrocities during this time of African awareness and global isolation. In 1999, the leaders of the Organization of African Unity gathered to discuss the organization. The African leaders were still intent on



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preserving and progressing the African culture and social life, but they knew that they needed to expand their horizons and become global partners in the global economy. A new agreement was needed to reflect this expanded vision. The African Union was officially implemented in 2002. The African Union currently has fifty-five member states of the African continent. Its headquarters are in Addis Ababa, Ethiopia. The key difference in wording between the Organization of African Unity and the new African Union agreement is the inclusion of being a “dynamic force in the global arena.”6 Much like the European Union, the African Union has both economic and political reasons for its existence. On the economics side, the African Union reflects the new focus of being active participants in the global economy while at the same time protecting their domestic economies. We will explore Africa’s future when we look at future issues of the global economy. Africa most definitely deserves our attention to the future.

Agenda 2063 It was important for all the African nations to create a new environment of economic growth and economic development. Signed in 2013, Agenda 2063 is a long-range strategic plan to transform the African continent into a major participant in the global economy. The major goals of the agenda include self-rule, freedom and democratic governance, unity of nations, economic progress through global integration, and prosperity for all of Africa. For these nations, changing their internal focus to a global one was not going to be easy. The fifty-year time frame was a deliberately developed by the African leaders, as they knew that what was needed was not going to happen in the short term. The agenda stressed the need for improved infrastructure, better peace and harmony among the nations, gender equity, and youth empowerment. The leaders emphasized growth and investment in agriculture, health, and education, along with transportation and communication infrastructure. All of these take years to achieve. The leaders knew that globalization of the continent was needed and the time to begin was now.

Africa Free Trade Agreement In 2015, the African Union gathered in a series of meetings to further realize their goal of a united, peaceful, and prosperous Africa. The result of meetings was the African Free Trade Agreement and the establishment of the African Continental Free Trade Area (ACFTA). As with other trade agreements, the African Continental Free Trade Area was to improve trade among the AU members.

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The ultimate goal of the ACFTA is to more fully integrate the African nations in both trade and economic development. It is also, however, to retain the sovereignty rights of each member. An interesting idea for the African nations is that ACFTA promotes the freedom of individuals to move among the nations. Remember that it was not that long ago that the nations were each isolated from the rest of the global economy. This objective is a vast departure from Africa’s past. The major economic sectors ACFTA focuses on are agriculture, food security, manufacturing, and industrialization of the region, with the aforementioned focus on infrastructure building. The ACFTA also takes aim at the reduction of tariffs, quotas, and other trade and investment barriers that might stifle progress toward Agenda 2063. The ACFTA addresses several political issues. It stresses the importance of international security as the member countries progress toward more international trade as well as democracy and rule of law, long a seldomachieved political goal for most of the African nations. The agreement also addresses the political-social issues of human rights and gender equality. Between the African Union and the ACFTA, Africa as a group of nations is poised to ascend as a significant and influential partner of the global economy in the twenty-first century.7

TRADE ASSOCIATIONS The final global piece of the trade story is countries joining each other to create trade associations, generally with geographical commonality. A few of the trade associations use the term “cooperation” to define their trade relationship. With a trade association, the nations involved maintain their political sovereignty but forfeit their economic sovereignty for the good of the whole. Trade associations are usually one step beyond a trade agreement. Examples of trade associations include ones who include the nations from Southeast Asia (Association of Southeast Asian Nations) and one West Africa (Economic Community of West African States). One group, referred to as the BRICS nations,8 created a trade and development group based on their common interests in building their economies. These nations build on each other’s strengths, have created their own development bank, and continue to transition their economies to join the developed nations of the global economy.

NOTES   1. The number of international rules, regulations, and laws is voluminous. In order to maintain some civility and keep our conversation focused, we are going



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to devote our journey to a few major areas of rules and the way that organizations enforce the rules and settle disputes between nations.   2. This is not a real number! It is made up to make the point that the IMF is the last to be called when financial events are all but hopeless.   3. Economist John Williamson first used the term in 1989 when he worked at the World Bank. The IMF, World Bank, and others now use this set of recommendations in working primarily with the developing countries.   4. There are many intricacies to the TRIPS Agreement. If you would like to read more about TRIPS, go to https://www.wto.org/english/tratop_e/trips_e/trips _e.htm.  5. Joe Myers, “The World’s Free Trade Areas–and All You Need to Know about Them,” World Economic Forum, May 6, 2016, https://www.weforum.org /agenda/2016/05/world-free-trade-areas-everything-you-need-to-know/.   6. Chris Giles, “44 African Countries Agree Free Trade Agreement, Nigeria Yet to Sign,” CNN Online, March 23, 2018, https://www.cnn.com/2018/03/22 /africa/african-trade-agreement-world/index.html.   7. Ibid.   8. The BRICS countries are Brazil, Russia, India, China, and South Africa. Jim O’Neil of Goldman Sachs first used the term “BRIC” to represent Brazil, Russia, India, and China. The acronym stuck. The S was added when South Africa joined the group.

9 Major Controversies of the Global Economy

If you have a brother or sister, it is fairly certain there have been times when you did not agree. The same is true in relationships with parents, neighbors, friends, or just about anyone else in your life. Disagreements abound within every country. The global economy is no different than any relationship between two entities. There are events that pull nations together and events that separate nations. There are over 150 nations in the world today. There are times when two countries or regions do not agree. As we explore a few of the major controversies in this chapter, remember there are also many things that bind nations together.

GLOBAL ECONOMY VERSUS GLOBAL POLITICS Before we break down a few of the major controversies, it is important to take a holistic view of the relationships between nations. The relationships and partnerships between nations and regions can be essentially broken down into two major categories: economic and political. From the beginning of our journey, we have discussed the often-difficult task of separating the two. The distinction between these two types of relationships can become even blurrier during times of disagreements. 97

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The Bretton Woods conference is a prime example of how the two relationship types comingle. Officially a United Nations conference, Bretton Woods was a conference on the global economy, yet its genesis was a war. Bretton Woods ended with an agreement, not a treaty. World War II ended with surrender but not a treaty. Earlier, World War I ended with a treaty. There are economic treaties, some of which we will explore shortly. There are also political treaties, such as the North Atlantic Treaty Organization, or NATO. For now, it is enough to describe the different types of treaties. As we conclude our journey, we will look at their interdependence. There are partnerships where economic controversies and political controversies are not comingled. Our economic agreement with Canada and Mexico (NAFTA) does not include aspects of the three nations’ politics. The U.S. economic and trade agreements with Europe, Japan, and a host of other nations are devoid of political structural changes. There are a few instances where one is dependent on the other. The most notable example is the U.S. relationship with Cuba, which, since the Cuban Revolution in 1959, has run from cold (no relationship at all) to at times lukewarm (almost normal but not quite). Every U.S. president since 1959 has stipulated that economic relationships can normalize with Cuba only after they change their political structure. It emphasizes again how complicated relationships between nations can be. Economic controversies are more prevalent in today’s global economy. The most discussed controversies in today’s global economy are those that arise over trade. These disagreements range from specific aspects of a trade agreement, such as working or environmental standards, to entire trade agreements and to the idea of trade itself. Earlier, we mentioned trade treaties. As trade treaties and trade agreements grow throughout the world in both number and complexity, disagreements and controversies are all but guaranteed. We cannot possibly explore all of them. Let us take a look at the controversies whose outcome will most likely impact us personally and the United States as a nation.

GLOBAL TRADE Trade Agreements The world of global trade is made up of many trade agreements. Most of them are regional, and all involve advocating free trade. According to the World Bank at the time of this writing, there are approximately 420 regional free-trade agreements worldwide.1 A few of them make worldwide attention, while others go virtually unnoticed except to the nations



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involved. We are going to focus on three that have been at the forefront of media attention in the United States for the last few years.

United States-Mexico-Canada Agreement The USMCA is a revised updated version of the North American Free Trade Agreement. Before we get into the major controversies surrounding NAFTA and its supposed successor, it is important to remember that at the time of this writing, this agreement has not been approved by any of the three nations’ governments. We will explore the major distinctions between NAFTA and the USMCA further, in our conclusion on the future. For now, however, NAFTA is still the trade agreement by which the three nations conduct trade. As the USMCA was being negotiated by representatives of the three nations the controversy primarily focused on making sure they did not lose the trade benefits they had gained from NAFTA. The USMCA controversy gained momentum as the three nations’ governments and special interest groups began to circle the wagons in order to maintain their gains and/or minimize their losses of a new agreement. Representatives of the three nations have agreed to a new trade agreement. As of this writing none of the three nations, however, have officially approved the agreement. Approval seems far from certain. The more vocal opponents of USMCA are mostly the same opponents against NAFTA, with labor unions and environmental groups leading the opposition. In the United States, a Republican president agreed to the USMCA, and the Democrats are leading the political opposition. Many of the labor union’s anti-USMCA arguments are the same ones they had with the original NAFTA when it was signed in 1988. They claimed, and still do, that the low wages and poorer working conditions hurt U.S. manufacturing and U.S. competitiveness. According to them, the original NAFTA hurt U.S. workers, and the USMCA does not make the manufacturing environment any better. Like their labor-union brethren, environmental groups protested that USMCA continued NAFTA’s probusiness and antienvironment orientation. According to these groups, the new USMCA will allow corporations to avoid the United States’ more stringent environmental standards. There were other groups against the new USMCA, but there were also several groups in favor of the revised agreement. Given the opponents of USMCA, it is not hard to conclude who the USMCA supporters are. Most business groups support USMCA. The supporters are so organized that they have their own website (https://passusmca.org). The group is

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comprised of mostly businesses with agricultural and trade associations from the United States, Canada, and Mexico. Politically, Republicans largely support the revised agreement. Congressional passage of USMCA is going to require support from both political parties.

United States–China Trade Agreement At the time of this writing, the trade controversy between the United States and China is still raging. At times, it appears to be settled, while at other times, it is an all-out trade war. Historically, the economic relationship between the two nations has been as tumultuous as the current negotiations. Early in this trading relationship, the opponents have been loud and constant. One of the first controversies was when China opened up to U.S. manufacturing businesses. From the late 1970s, Chinese leader Deng Xiaoping began reforming the Chinese economy. With the creation of economic trade zones, U.S. manufacturing began moving operations to China. As U.S. manufacturing jobs began leaving the United States for China, labor unions, city and state government officials, and some consumer groups began protesting the loss of jobs, tax revenue, and product quality and production oversight. As the quantity of goods arriving in the U.S. marketplace with Made in China tags continued to increase, the issues became front-page news. Investigative journalists began searching out problems with Chinese goods, and the U.S. media focused on two issues especially prominently: the use of child labor in the production of goods exported to the United States2 and lead paint in children’s toys coming to the United States.3 With the U.S. losing jobs to China in assorted manufacturing industries and the quantity of goods increasing but their apparent quality decreasing, the economic partnership between the two nations seemed very one-sided to many U.S. citizens. The value of the partnership was under scrutiny in many ways. The controversy was about to take on another turn. U.S. government officials began referring to China as a “currency manipulator.” A currency manipulator is a nation that artificially maintains an undervalued currency to promote exports and limit imports, the implication being that the nation is not open to free trade but instead engages in one-sided trade. They are willing to export but not willing to import, or at least enthusiastic about importing, products for their domestic economy. This has become an important issue in the controversy between these two trading partners, as we will explore further shortly and in our concluding chapter on the future.



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Trans-Pacific Partnership When President Trump withdrew the United States from Trans-Pacific Partnership, it started an ongoing controversy between those who supported TPP and therefore opposed the president’s withdrawal and those who were opposed TPP and thus supported the president. The controversy continues today because of the geographical area involved (Pacific Ocean) and the fact that we, the United States, were part of the pact and not our Asia-Pacific competitor, China. The Trans-Pacific Partnership is a regional free-trade agreement between nations who have an interest in free trade across the Pacific Ocean. It includes several nations on this side of the Pacific, including the United States, Canada, Mexico, and Peru; nations from the other Pacific shore include Japan, Malaysia, Australia, Singapore, New Zealand, Brunei, and Vietnam. Of special note is the absence of China. Presidents Bush and Obama negotiated the agreement, and President Obama signed it in 2016. Many considered it a strong foothold into creating free trade in the Pacific. Others felt differently. Even during the negotiations, the idea of such a multination regional agreement had both supporters and opponents. When President Trump withdrew in March 2018, the debate began in earnest, with President Trump leading the opponents’ side of the argument, which focused on three primary aspects. First, the agreement stated the United States, Canada, and Japan would give up tariffs for the dairy, beef, and poultry industry. This was a major problem, since the United States significantly subsidizes the agricultural industries. Second, the three countries also agreed to open up the automotive industry, potentially costing the United States automotive jobs. Cars and trucks, however, would have lower price tags in the United States. Third, the agreement would have restricted the trade of tobacco, an industry important to the U.S. south. The majority of TPP supporters were businesses whose business model included exporting products including the automobile, machinery, and plastics industries. Interestingly, a benefactor of the TPP would also have been the agricultural industry. The Trans-Pacific Partnership would have increased exports, since it would have eliminated an estimated eighteen thousand tariffs on U.S. exports to the other TPP nations. U.S. tariffs on imports would have continued to be removed, so products in the United States would also be less expensive. A noneconomic selling point for the TPP was that China was not included. Many considered this a major win for the United States in establishing an economic base in the Asia-Pacific region. In withdrawing from TPP, the United States would lose that political advantage as well as the economic advantages gained. The TPP trade area would have been larger

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than the NAFTA area. Many of the TPP supporters pointed that this was a major victory for the United States in the global economy. Even though the United States has withdrawn for now from the TPP, the other nations moved ahead and created a second agreement without the United States. In 2018, eleven of the original members signed a revised TPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Seven countries have already approved the CPTPP as of January 1, 2019. China has expressed interest in joining the revised TPP agreement. If China decides to join and essentially replace the United States, it would take significant step in altering the economic balance of the global economy. President Trump has stated the United States would be willing to rejoin with a “better deal.” The other nations seem content to move on, and the U.S. debate continues.

Currencies around the World Earlier we discussed the U.S. concerns that China was altering the value of their currency to benefit their exporting industries at the expense of other nations’ ability to export to China. While China is the largest economy to engage in currency manipulation, other economies also do it. Some do so to protect their economy, in a similar manner to China. Others have to manipulate their currency in order to prevent their economy from collapsing due to a financial crisis. When dealing with currencies of the world that impact the global economy, controversies are usually of several types. The first is when a nation manipulates their currency, as China is accused of doing. The second currency crisis is when a nation’s leader tries to pay off political favors with poor monetary policies, such as just printing more money. Nations also make poor monetary decisions, and their central banks cannot support the currency. A nation may also use its currency as an economic-political weapon and create a currency war. Each of these can have global economic implications as well as domestic. We are going to take a brief look at each of these controversies. We explored exchange rates and exchange rate systems back in chapter 6, so return there if you need to review. These are far more complex issues and controversies than can be mentioned here. Consider this an introduction to these issues that seemingly never go away. The countries may change and the government leaders may change, but somewhere in the world, one of these controversies is creating an issue for the global economy.

China as a Major Economy with a Fixed Exchange Rate Throughout our journey, we have referenced the Chinese economy and the way that the Chinese government controls much of what happens



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within. One more example is controlling its currency. While the specific ways China does this are not for this space, the controversy surrounding that control is most certainly part of our discussion. China has a fixed exchange rate system. The Chinese yuan is fixed to the U.S. dollar. Their fixed rate, however, is often changed by China’s central bank. Given the size and impact of the Chinese economy on the global economy, much of the currency controversy revolves around the fact the exchange rate system is fixed and not flexible. As you remember, fixed exchange rate systems have an anchor currency, and the domestic currency’s value is fixed to the anchor currency. Flexible exchange rates are, conversely, determined by the supply and demand for the domestic currency, both domestically and globally. All the major global economies have flexible exchange rate systems except one, China, which manipulates their currency to keep it undervalued, resulting in less expensive exports and more expensive imports. This imbalance is at the heart of the China currency controversy. This controversy with China could potentially go away completely. If China would convert to a flexible exchange rate system with the other major economies and currencies, this issue would solve itself. The marketplace for Chinese yuan would determine its value. China does not implement a flexible exchange rate because of the consequences. Under a flexible exchange rate system, the demand on the renminbi would be significant. The size and impact of the Chinese economy would cause the renminbi to appreciate, resulting in increased prices of exports and decreased prices of imports. The stress on China’s domestic economy would be severe. Interest rates would rise, and consumer prices would be under substantial inflationary pressure to increase. China does not see controlling its currency to be controversial. They have chosen and continue to choose what is best of their domestic economy over what might be best for the global economy. As the global economy continues to evolve along with China’s increasing role, there is certainly room for their attitude to change in the future.

Poor Monetary Decisions Create Global Currency Crises When a nation has a fixed exchange rate, it is important for the central bank to maintain sufficient reserves of the anchor currency so that the value ratio of the domestic currency will remain fixed. When an imbalance occurs, it is the responsibility of the central bank to either reduce the amount of domestic currency in the global economy, purchase additional anchor currency to maintain the fixed ratio, or devalue their currency to the level met by their level of reserves. If the central bank does none of the above, a domestic financial crisis can quickly turn into a global financial contagion, such as how the currency financial crisis in Thailand exploded into a global financial contagion.

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It is imperative for central banks to maintain adequate reserves or to be willing to take steps to resolve the issue. In Thailand, they refused to devalue the Thai baht, which was fixed to the U.S. dollar. Bankers, investors, and speculators around the world saw the problem and took steps to protect their investments by trying to exchange the Thai bahts they held for dollars. However, there was one problem: the Thai central bank did not have enough dollars to cover all the Thai bahts at the fixed exchange rate. The bankers, investors, and speculators began to fear as other countries were in the same monetary and financial condition as Thailand. To protect their investments they began selling other Asian currencies for dollars. What became one nation’s national problem was now a global problem, and controversy always follows problems. In today’s global economy, central banks around the world are much more aware of the global consequences of their decisions. Even central banks of relatively small nations and economies like Thailand need to understand the consequences of their decisions on the global economy. Debates, discussions, and controversy regarding monetary policy decisions on both their domestic and the global economy are now commonplace. As we noted with China, domestic sovereignty virtually always wins out. Yet the consequences and problems that extend to the global economy are still present.

Using an Economy as a Political Tool When government leaders use their economies to make political payoffs, there is always controversy, debate, and ultimately problems. President Robert Mugabe mortgaged Zimbabwe’s economy and future to payoff political cronies (see chapter 7). If Zimbabwe’s economy had been capitalist, economists would have labeled his actions “crony capitalism.” Being a dictator, however, he controlled both government policy and monetary policy. Using monetary policy for his political gain led to the highest hyperinflation rate in history (one more reason for an independent central bank).4 A more recent example of the economy being used for political purposes has been the actions of Venezuela’s Caesar Chavez and his successor, Nicholas Maduro (see chapter 7). Chavez nationalized all industries and conducted monetary policy to his political benefit. The consequence of these actions and the ultimate controversies involved the use of monetary policy to dismantle an economy that once was the most productive in South America and rivaled the United States. Upon Chavez’s death, his handpicked successor, Maduro, continued to dismantle the Venezuelan economy for personal political and economic



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gain, and hyperinflation reached Zimbabwe proportions. Venezuela is now one of the least free and poorest nations in the global economy, even with the world’s largest oil reserves. The nations of the global economy have now taken sides either for or against the current Maduro regime. Throughout history, using the economy as a political tool has never benefitted the domestic economy and has only caused debate and controversy for the global economy.

Specific Issues of Trade and Global Economy Controversies also arise around certain topics or single issues. As we close out our discussion of global economy controversies, we need to briefly identify a few of the single issues you are most likely to hear or read about in the media.

Dumping We will begin our discussion about a popular topic we discussed in chapter 8. Governments often claim that they are dumping for political purposes, but they are also protecting their domestic economy against such actions. Dumping occurs when a company from one nation sells its products in another nation below the price it would charge in its own country. The other price is usually below the production costs. Companies will do this in an effort to increase market share in the foreign market or even to drive out competition when the competitors cannot compete at the lower dumping price. Dumping accusations are always confrontational. One nation accuses the other of dumping a product, and the other nation denies it. Dumping is usually only determined and resolved by a third party, the World Trade Organization. The General Agreement on Trade and Tariffs includes an antidumping agreement. When a company of a nation is accused of dumping, it has to plead its case before the WTO. The WTO will determine if dumping occurred. If not, the nation is exonerated. If so, the aggrieved nation has the right to levy tariffs on the products on which the dumping occurred. It is interesting that this is the only time when the WTO considers tariffs justified.

Trade Protectionism Another set of issues that creates controversies are the different forms of trade protection, which we addressed in detail in chapter 4. However,

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because they are always controversial, we felt compelled to acknowledge them here. Regardless of which trade protection tool is implemented, they are going to create controversy and debate. For those who believe in total free trade, no form of protectionism is legitimate. If one believes in some form of “fair” trade, then there are times when a protectionist measure might be warranted. There are a few in today’s world who believe in absolutely no trade at all. In this instance, a nation does not export or import, as they believe they have the resources domestically produce all they need within their own borders. As a result, they believe in total protectionism. Regardless of which one of these three protectionist policies a nation or government leader adheres to, it is sure to be debated and controversial. In today’s current political environment, this controversy has been quite predominant in many countries of the global economy. Trade wars, discussed earlier, are often the result of two or more nations not agreeing on free or freer trade, and, as a result, the level of trade protectionism increases. Trade wars only have least cost losers. There are no winners.

Cartels and Controlling Global Trade In a domestic economy, several companies might talk among themselves in an effort to limit supply, resulting in increased prices and higher profits. This is known as collusion, and the companies banding together is called a cartel. Companies create cartels in an attempt to control the market, thereby controlling supply and prices. We do not see cartels in the United States because they are illegal. When companies try this in the United States, the result is often significant fines by the U.S. government, and often the companies’ leaders may go to prison. Cartels are not, however, illegal in other parts of the world. Countries may also use cartels to control a market in the global economy. If a resource is a nation’s major commodity on the world market, they may combine their efforts with other countries whose major resource is the same and attempt to control the market. The most famous attempt at controlling a market (and succeeding at times) is the Organization for Petroleum Exporting Countries, most commonly known as OPEC. For cartels to be successful, they need a few market characteristics. One, the nations involved in the cartel must possess the majority of the resource. Two, their commodity must not have a close substitute. As the world moves toward cleaner energies and less use of oil, this makes the OPEC cartel position somewhat vulnerable. It will be interesting to watch how OPEC moves in the future as the world continues its quest for cleaner, cheaper, and renewable energy sources.



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Outsourcing and Offshoring In the last decade or so, one of the major controversies has been the efforts of companies to reduce costs by sending part or all their production to other countries. Companies claim they need to do so to remain competitive, while the opposition (mostly labor unions) claims that companies want to not pay union wages and to eliminate domestic jobs in the process. While the point-counterpoint arguments have both merits and drawbacks, it is important as economically educated citizens to be sure we have our understanding of the terms correct. Outsourcing occurs when a company subcontracts with an outside firm to perform a job that could be done in-house. Notice what is missing in this definition. Outsourcing can occur with both domestic companies and foreign companies. Companies that are not a car-producing company produce many parts on a car. For example, two of the major U.S. car companies, Ford and General Motors, outsource many segments of the car-producing operation to other domestic firms. Outsourcing itself is not the issue. Thousands of U.S. jobs exist because of domestic outsourcing. Generally at issue is the act of offshoring. Offshoring is when a company sends part of its production process to another country. The debate intensifies when a company offshores a part of its production process at the expense of domestic jobs. Offshoring can be beneficial for companies to both reduce costs and be competitive. It can also be detrimental to the overall economy if it costs domestic jobs. Offshoring is a form of outsourcing. This is where much of the confusion comes in for the general public. The media and those opposed to offshoring usually do not refer to “offshoring” but rather use the more general term “outsourcing.” Offshoring is outsourcing, but outsourcing is not necessarily offshoring. Until the media changes its terminology and correctly refers to offshoring as offshoring and not outsourcing, the confusion will, unfortunately, remain.

Environmental and Labor Standards These two issues do not need to go together, but in the debates and controversies over trade agreements, they usually end up being linked. One reason is that they both have similar politically strong and vocal specialinterest groups backing them. Everyone wants a clean environment, and everyone wants labor to be safe and absent of child labor. On the surface, they appear no-brainers until the discussions involve the global economy’s developing nations. Developing nations can have quite a different perspective on these two issues. For many citizens of a developing nation, daily survival is most

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important priority. While clean water and air can improve their way of life, they think more in microeconomic and personal terms than macroeconomic terms or holistically as a nation. The same is true with child labor. In many of these nations, education is not an option for some children, who need to work for both them and their family to survive. Insisting on imposing external environmental and child-labor standards on a developing nation causes an instant controversy and debate. Developing nations are not against these standards. It is a matter of priority and ability.

A Negative Trade Balance—Good or Bad The last two controversies we are going to discuss—negative trade balance and intellectual property—could also be in our final chapter on future issues. We chose to include them here because the controversies surrounding them are both current in today’s global economy. Remember that in chapter 5, we explored measuring a nation’s participation in the global economy. One of those measures was the difference between what a nation exports out of the country minus the imports that come into the country. The trade balance can be equal, positive (trade surplus), or negative (trade deficit). In the United States, we regularly have negative trade balance (i.e., import more than we export). There has been a growing trend by political leaders in the U.S. and several other nations who think a negative trade balance indicates that there is something wrong with the nation’s trade policy and that it must be corrected with new trade deals or protectionist measures. The controversy arises because other politicians and economists see the trade imbalance as a long-term problem. They view the negative trade balance as not necessarily bad and protectionist measures unnecessary. This controversy has a long way to go before it will be settled, if ever.

Intellectual Property The final controversy we are going explore is the controversy over intellectual property. As with negative trade balance, it has been going on for some time and appears to not have an end in sight. Much of the early controversy centered on intellectual property piracy—the stealing of intellectual works without compensation, permission, or credit. China is the nation that has been most accused of intellectual piracy. They deny the piracy, and consequently the controversy continues. The WTO created the Agreement on Trade Related Aspects of Intellectual Property Rights, as discussed in chapter 8. Remember that many



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different types of products are included in discussions and controversies around intellectual property rights. Intellectual property includes everything from films, books, music, art, and software, and it also includes clothes, different types of food, and even plants. As the world becomes more computerized and automated, discussions and differences of opinion will continue to arise.

NOTES   1. Joe Myers, “The world’s free trade areas—and all you need to know about them,” World Economic Forum, May 6, 2016, https://www.weforum.org/agenda /2016/05/world-free-trade-areas-everything-you-need-to-know/.   2. David Barboza, “China Says Abusive Child Labor Ring Is Exposed,” New York Times, May 2008, https://www.nytimes.com/2008/05/01/world/asia/01china .html.   3. Maria Bellos Fisher, “Toxic Toys: Tips for Choosing Safe Toys for Kids,” Parent Map, February 2012, https://www.parentmap.com/article/toxic-toys.  4. It was estimated that Zimbabwe’s inflation rate reached 250,000,000 percent in 2008! Only after abandoning the Zimbabwean Kwatcha and adopting the U.S. dollar did their inflation rate subside. In 2019, after returning to a new Zimbabwean currency, it had already reignited to 98 percent. Without responsible monetary policy, the form of currency is inconsequential.

10 The Influencers of the Global Economy

The idea of a global economy is relatively new. If you remember, back in the introduction we discussed in detail the evolution of the global economy from the earliest of civilizations. We consider that the global economy began in earnest around the time of Marco Polo and his journeys to China and call this the first era of the global economy. Marco Polo made his journey in the thirteenth century (1200s). Considering how many thousands of years the world has been around and humans have existed on the earth, eight hundred years is not that long. When you delete the periods during that time when the global economy did not exist, the time of a global economy is even shorter. During those some eight hundred years, many people were instrumental in the evolution of the global economy. Some of them we discussed in detail in the introduction. We do not want to repeat ourselves. It is important, however, that as we explore the individuals whose contributions to history made the global economy grow and expand in breadth and depth, we mention them here. We will are going to make a quick review of some of the people important to the global economy. Most of this chapter will focus on the modern (since the 1700s) economists and political leaders whose insights and contributions to economics and politics provided the background for today’s global economy.

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EARLY EXPLORERS Marco Polo The first true era of the global economy began with Marco Polo and his brother Niccilo. Marco and his brother made their travels to China during the late 1200s. They were from Venice during a time when the city-state was the main political unit. They became friends and confidants of China’s Great Khan. Marco was a writer and documented much of their travels. His Travels of Marco Polo was a best seller in Europe. Many, however, considered it fictional. History has been much kinder to the stories, and the brothers are considered by many to be the first known global travelers.

Mercantilist Explorers The introduction mentions a few of these explorers of the thirteenth, fourteenth, and fifteenth centuries. While these explorers were sent off on behalf of the European kings and queens for riches and wealth, they also found many new routes to known lands and many unknown lands. Many of these are going to be familiar to you. Some may not. Prince Henry the Navigator was the first to consider a new sea route to China around Africa for Portugal. We highlight him in the introduction. Bartholomew Dias followed Prince Henry’s idea and was the first to sail around southern Africa (the Cape of Good Hope). He also sailed for Portugal. Vasco da Gama completed Prince Henry’s dream and reached India by sailing around Africa at the end of the fifteenth century. He also sailed for Portugal. During the fifteenth and parts of the sixteenth century, Portugal was the most powerful nation on earth. Christopher Columbus, for the Spanish king and queen, was sure that he could sail due west to reach India, under the theory that the world is not flat. We know where his journey ended—in the islands of the Caribbean and an entirely new land for the Europeans. Hernando De Soto conquered and claimed much of South America for the Europeans. Amerigo Vespucci discovered the land of what is now Florida in search of the Fountain of Youth. America is named after him. Ferdinand Magellan died during the journey, but he is thought to be the first European to sail around the world. Vikings, as well as other groups like them, explored what is now northern Canada and may have come as far south as the current New England of the United States.



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These are only a representative few of the many European explorers who came to their new world. Of course, this world was not new to the natives. In search of gold and wealth, the Europeans were not to be denied. That is another story for another venture. Needless to say, all the consequences were not good ones.

ECONOMISTS1 Two economists who laid the economic foundations for the global economy are featured here.

Adam Smith No conversation that includes economists of history would be complete without at least some mention of Adam Smith. He is, after all, considered the father of modern economics. The global economy changed forever in both thought and deed with his publication of An Inquiry into Nature and Causes of the Wealth of Nations in 1776. His writings on the benefits of trade along with his antimercantilist stance and critique of mercantilism in the Wealth of Nations changed the way that nations and individuals thought about trade. Regarding the global economy, arguably his greatest contributions were the ideas of absolute advantage, specialization, and division of labor. Popular writing of Adam Smith relative to the global economy is An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell, 1776. Duflo and Banerjee, wife and husband, were awarded the 2019 Nobel Prize in Economics.

David Ricardo Following up on Adam Smith’s idea of absolute advantage, Ricardo introduced the idea the all countries, big and small, rich and poor, could participate in a global economy. His concept of comparative advantage was based on the idea that if nations focus on comparing their opportunity costs of production, they will find that they can both benefit by doing (producing) what they do best and trading for those items where their opportunity costs are higher. While Smith was accurately promoting do what one does best, Ricardo was went further by comparing costs of production. In this way, all nations could gain from trade. Now the global economy had an economic foundation on which all nations could participate. Popular writing of David Ricardo relative to the global economy is On the Principles of Political Economy and Taxation. London: John Murray, 1817.

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Here are some modern economists whose new ideas expanded our understanding of the global economy.

Paul Krugman In 2008, Paul Krugman was awarded the Nobel Prize in Economics for his work on international trade. His work enhanced the earlier efforts of Ricardo on comparative advantage. His ideas further explained how nations could benefit from trade even when comparative advantage is not so obvious. His work furthered the case for free trade and a global economy. Krugman also served in positions with the World Bank, International Monetary Fund, and the United Nations. Popular writings of Paul Krugman on the global economy include the following: • • •

Krugman, Paul. “Does the New Trade Theory Require a New Trade Policy?” The World Economy 15 (1992): 423–42. Krugman, Paul. “Increasing Returns, Monopolistic Competition, and International Trade.” Journal of International Economics 9 (1979): 469–79. Krugman, Paul. Rethinking International Trade. Cambridge, MA: MIT Press, 1990.

Joseph Stiglitz Stiglitz has become known as the antiorganizations economist. Labeling him “antiorganizations” might be a bit strong. His more recent works have been attempts to reshape key international organizations, the World Bank and the International Monetary Fund. Stiglitz served as a vice president of the World Bank. He left when he considered their work to be out of step with more modern economic and trade theories. Stiglitz has the rare honor of being recognized with two Nobel prizes. He was awarded the Nobel Prize in Economics in 2001. Later in 2007, he was awarded the Nobel Peace Prize for his work on climate change. Popular writings of Joseph Stiglitz on the global economy include the following: • • • •

Stiglitz, Joseph. Freefall: America, Free Markets, and the Sinking of the World Economy. New York: Norton, 2010. Stiglitz, Joseph. Globalization and Its Discontents. New York: Norton, 2002. Stiglitz, Joseph. Making Globalization Work. New York: Norton, 2006. Stiglitz, Joseph. The Roaring Nineties. New York: Norton, 2003.



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Lester Thurow Economist Lester Thurow is best known as a noncapitalist global economist. Thurow’s writings were quite popular with those who believed capitalism was not the positive-sum theory that would help all nations. Thurow believed that a zero-sum theory was necessary if the world was to avoid a stagnant global economy. For Thurow, a zero-sum theory was using taxes and taxation policy to redistribute income from an economy’s winners to the losers; that is, a zero sum result. For developed nations like the United States, the government needed to be more involved to create a national economic policy that would help businesses compete in the global economy. Popular writings of Lester Thurow on the global economy include the following: • •

Thurow, Lester. Head to Head: The Coming Economic Battle among Japan, Europe, and America. New York: Morrow, 1992. Thurow, Lester. The Zero-Sum Society: Distribution and the Possibilities for Economic Change. New York: Basic, 1980.

Paul Collier Collier is considered one of the world’s key experts in economic and global development of developing countries. He worked at the World Bank with the Development Research Group before heading the Center for the Study of African Economies at St. Antony’s College of Oxford University. Collier has been especially interested in the impact of civil wars and foreign aid on the economic growth of Africa’s developing nations. Many of these impoverished nations want to be participants in the global economy. He focuses on the influence of their public policies on the poverty of the nations and ability to be global partners. He has consulted and been advisors to many nations, Prime Minister Tony Blair, and the United Nations. Collier’s writings have been very popular and influential in creating the global view of what he calls “the bottom billion.” He was awarded the Commander of the Order of the British Empire in 2008 for his contributions to global economic growth. Popular writings of Paul Collier on the global economy include the following: • •

Collier, Paul. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done about It. Oxford: Oxford University Press, 2008. Collier, Paul. Labour and Poverty in Rural Tanzania: Ujamaa and Rural Development in the United Republic of Tanzania. Oxford: Oxford University Press, 1991.

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Collier, Paul. The Plundered Planet: Why We Must, and How We Can, Manage Nature for Global Prosperity. Oxford: Oxford University Press, 2010. Collier, Paul. Wars, Guns, and Votes: Democracy in Dangerous Places. New York: HarperCollins, 2009.

William Easterly Easterly is also one of the most influential development economists today. As with many economists, he worked as a research economist at the World Bank. He also spent time at the Center for Global Development and the Institute for International Economics. Like Collier, most of his career has focused on the developing world in Africa. He also has been involved in nation development in Latin America. Easterly is often quite critical of how governments of developed nations, the World Bank, and the IMF have treated developing nations. He argues that the organizations enter a nation to help but are naive about the culture, the people, or the local economies, politics, or policies. According to Easterly, these organizations often create the wrong incentives that lead to contradictory outcomes. Easterly believes that properly incentivized markets can do more for a developing nation than the policies imposed by foreign aid or international organizations. In areas such as health and education, he believes the local markets will ultimately lead to more desired outcomes. His books have been very influential in popularizing this idea. Popular writings of William Easterly on the global economy include the following: • •

Easterly, William. The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Boston: MIT Press, 2001. Easterly, William. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. London: Penguin, 2006.

Jagdish Bhagwati Bhagwati is one of the most influential Indian economists. Much of his work has focused on the economy of India. He has been especially involved with the positive impact of offshoring on the nation’s economy. Many credit his work for the economic transformation of India. Bhagwati promotes offshoring as a key factor in free global trade. Focusing primarily on offshoring to India by companies from the United States,



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he promotes free trade and compares it to utilizing comparative advantage for a better world. By implementing offshoring, in the long run, all nations are better off, and the global economy grows as a result. Throughout his career, he has been a staunch supporter of free trade for a better global economy. He is founder of the Journal of International Economics. Popular writings of Jagdish Bhagwati on the global economy include the following: • • • • • • • • •

Bhagwati, Jagdish. Free Trade Today. Princeton, NJ: Princeton University Press, 2002. Bhagwati, Jagdish. In Defense of Globalization. Oxford: Oxford University Press, 2004. Bhagwati, Jagdish. India in Transition: Freeing the Economy. New York: Oxford University Press, 1993. Bhagwati, Jagdish. India: Planning for Industrialization: Industrialization and Trade Policies since 1951. Oxford: Oxford University Press, 1970. Bhagwati, Jagdish. Protectionism. Cambridge, MA: MIT Press, 1988. Bhagwati, Jagdish. A Stream of Windows: Unsettling Reflections on Trade, Immigration, and Democracy. Cambridge, MA: MIT Press, 1998. Bhagwati, Jagdish. Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Oxford: Oxford University Press, 2008. Bhagwati, Jagdish. The World Trading System at Risk. Princeton, NJ: Princeton University Press, 1991. Bhagwati, Jagdish, and Alan Blinder. Offshoring of American Jobs: What Response from U.S. Economic Policy? Edited by Benjamin M. Friedman. Cambridge, MA: MIT Press, 2009.

Esther Duflo French by birth and U.S. trained as a development economist, Esther Duflo focuses on the microeconomic issues of developing countries. Most of her work was through the MIT Jameel Poverty Action Lab, or J-PAL, a research laboratory she founded and directed. Her research emphasized finding the causes of poverty and their solutions. She is most noted for her unique academic approach to economic development research. Duflo pioneered the use of randomized control trials, as they do in medicine, to research the causes and cures of poverty. Using randomized control trials, she studied education, finance, and

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health issues in developing nations. Two topics she was most noted for was her work on malnutrition and microfinance. Microfinance is the financing of relatively small loans to begin mostly home-based-type cottage businesses, such as sewing or cooking. The borrowers pay off the loan in small payments to the lender. During the process, they learn money management and business skills. Duflo and her colleague Abhijit Banerjee coined the term “reluctant entrepreneur” because most would rather work in a factory. Popular writing of Ester Duflo on the global economy include Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Public Affairs, 2011.

Emily Oster Oster is a premier development economist who focuses on diseases in the developing nations. Early in her career, she studied hepatitis and other social diseases. This led her to further research on HIV in Africa. Her questioning of current knowledge and further research led to using public policy as a tool against HIV-AIDS. At the time of her research, most nations only advocated a single approach, such as abstinence. Oster observed single approaches to HIV in countries that also had low mortality due to malaria or experienced high maternal mortality and concluded that such approaches were not successful. She proposed a multitargeted public policy approach to address HIV-AIDS. Popular writing of Emily Oster on the global economy include “Sexually Transmitted Infections, Sexual Behavior, and the HIV/AIDS Epidemic.” Quarterly Journal of Economics 120, no. 2 (May 2005): 467–515.

Jeffrey Sachs Sachs is best known as a political economist. While a professor at Harvard, he consulted with and worked for several nations during financial crises. He is also known for his prolific writings on reducing poverty and promoting a global perspective to the environment. Sachs is one of the few economists whose books are popular with the general audience. While at Harvard, he was invited to Bolivia to study and make recommendations on their hyperinflation. Sachs promoted to the Bolivians a concept known as “shock therapy.” Shock therapy had three key components. The first was fiscal restraint. The government needed to tighten their budgets and only spend the money they received. The second key was monetary restraint. They needed to immediately stop printing money. The third key was to receive debt forgiveness from those nations with whom



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Bolivia owed money. While Sachs was not the inventor of shock therapy, he was one of the most successful economists to implement it and be successful. Popular writings of Jeffrey Sachs on the global economy include the following: • • •

Sachs, Jeffrey. Common Wealth. New York: Penguin, 2008. Sachs, Jeffrey. The End of Poverty. New York: Penguin, 2005. Sachs, Jeffrey. The Price of Civilization. New York: Random House, 2011.

Hernando De Soto De Soto is a Peruvian economist who is one of the most known economists in the developing nations. According to De Soto, for any individual in order to rise out of poverty, the most important elements are individual property rights and a capitalist economic institution. For De Soto, these two ideas go together and are lacking in virtually all developing countries. In 1981, he formed the Institute for Liberty and Democracy (ILD) in Lima, Peru, to research, write, speak, and promote these two key ideas. For De Soto and ILD, the key for a developing nation to embrace capitalism was to make business ownership and entrepreneurship accessible for every citizen. Their research revealed there was more to it than accessibility. Between authoritarian governments where property rights did not exist and corruption of government officials, new business startups or obtaining property were all but impossible for the average developing nation citizen. De Soto and ILD have worked to promote property rights and entrepreneurship with many developing nations to change their current situation. De Soto has won many awards for his work with developing nations. He was identified as one of the most influential Latin Americans of the twentieth century. In 2004, he was named by Time magazine as one of the top one hundred most influential people in the world. He has been honored with awards in the United States, Canada, Switzerland, and the United Kingdom. Popular writings of Hernando De Soto on the global economy include the following: • •

De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000. De Soto, Hernando. The Other Path: The Economic Answer to Terrorism. New York: Basic Books, 1987.

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Douglass North Douglass North was the 1993 recipient of the Nobel Prize in Economics for his work in economic history and institutional economics. It is this latter topic that has been applied to describe how the global economy functions best. As an institutional economist, North studied the importance of institutions such as property rights and decision-making to economic growth. He submitted that how individuals and economies made decisions based on their beliefs, ideas, and even prejudices had an important role in an economy’s ability to grow. Without the proper incentives and beliefs in institutions such as property rights, some economies were bound to stagnate, and growth would be limited, if able to grow at all. North’s work became the foundation for assessing cultural and social norms’ impact on the economy of a society. According to North, proper efficient economic institutions were a must for an economy to grow. If a society did not change its culture, it could not change its economy. Popular writings of Douglass North on institutions and the global economy include the following: • •

North, Douglass. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press, 1990. North, Douglass. Understanding the Process of Economic Change. Princeton, NJ: Princeton University Press, 2005.

TRANSFORMATIONAL LEADERS OF THE GLOBAL ECONOMY Two countries whose transformation toward markets and increased influence in the global economy, that generated most of the news are India and China. One reason is the size of their populations. As two of the most populated nations in the world, their participation in the global economy as potential consumers and markets is extraordinarily large. The flip side is the potential for producers and companies from around the world to enter their markets. The second reason is the current poor economic health of the populations as a whole. The potential increases in the standard of living for both countries would reduce global poverty significantly. While many were, and still are, involved in these transformations, there are two who stand out as their pioneers. Manmohan Singh for India and Deng Xiaoping for China are credited as the philosophical influences who turned these two economically restrictive nations into major global economy participants.



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India Manmohan Singh An economist who became a politician best describes Manmohan Singh. Singh was credited as one of the Indian economist who initiated the transition of India’s economy from socialist to market driven capitalism. As an economist virtually his entire career, Singh was devoted to public service as a governmental civil servant. He held many positions within the Indian government, ranging from being an economic adviser in the Commerce Ministry, to minister of finance, to the ultimate position, prime minister of India in 2004. As finance minister and prime minister, Singh was devoted to the ideals of privatization of the public sector. He was successful in attracting foreign direct investment to India. He is credited with eliminating the Licence Raj, a very restrictive system of regulations and many licenses needed to conduct business or own property in India. As an economist, Singh was a strong supporter of open markets and the global economy. This was reflected in many of his economic policies as prime minister that promoted India’s participation as a global partner. Popular writing of Manmohan Singh on the global economy include India’s Export Trends and Prospects for Self-Sustained Growth. Oxford: Clarendon Press, 1964.

China Deng Xiaoping For Deng Xiaoping, the transformation from socialist to capitalist was a long one. As a young Chinese of the Chinese Communist Revolution, he was trained and educated in all things communist. He was an advisor to Chairman Mao Zedong during the civil war that led to the communists coming to power in 1949. He was an integral and trusted leader of Mao’s new government. In the 1960s, Mao took away all his power, and Xiaoping became a common laborer of the government. He eventually returned to Mao’s good graces and returned to party leadership. When Mao Zedong died, Xiaoping was named his successor. As the new Chinese leader, he immediately began to transform China’s economy. He modernized industry, science, agriculture, and technology sectors of the economy. Gradually he restored some private incentives and pushed for China to be a global economy participant. His transitions were slow and methodical. He encouraged some entrepreneurship and privatized parts of the agricultural community, allowing farmers to sell a

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portion of their crops at market prices. He created state-owned companies to compete in the global-market-oriented economy. As a communist leader, he maintained a state-owned, state-planned portion of the economy. He did, however, begin to open Chinese markets at the margin. He once described his efforts as a socialist market economy with Chinese characteristics. To read more about Deng Xiaoping, check out the following: • • •

Deng Xiaoping. Selected Works of Deng Xiaoping: 1975–1982. Baltimore, MD: University Press of the Pacific, 2001. Marti, Michael E. China and the Legacy of Deng Xiaoping: From Communist Revolution to Capitalist Evolution. Dulles, VA: Brasseys, 2002. Stewart, Whitney. Deng Xiaoping: Leader in a Changing China. Minneapolis, MN: Lerner Publications, 2001.

ORGANIZATIONAL LEADERS WHO SHAPE THE GLOBAL ECONOMY International Monetary Fund Managing Director, Christine Lagarde Christine Lagarde became the first woman to lead the International Monetary Fund as its managing director. Prior to joining the IMF, she was France’s minister of finance. In her role as chair of the G20 Group, she gained international acclaim with her handling of the financial crisis. During the financial crisis, Lagarde’s past background of international law and finance gave her the expertise to address international monetary policies and to institute more stringent financial regulation and governance. These qualities were instrumental in her selection as IMF’s managing director in 2011. In 2016, Lagarde was reelected by the IMF Executive Board to a second five-year term. Traditionally the managing director of the IMF is from Europe. Ascending to the leadership role of the IMF, however, was not easy for Lagarde. First, her background was in law, whereas previous leaders’ backgrounds were in economics. Second, at the time, many of the developing nations wanted the new head of the IMF to be from a developing nation. She campaigned in several of those nations to earn their support. Lagarde has upheld her promise to the developing nations. They are more involved in the efforts of the IMF than in the past. They are also a group of nations to which she devotes much of her energies as managing director. The European debt crisis and global financial encounters have also been challenges for her. Lagarde is also chair of the European Bank for



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Reconstruction and Development’s board of governors. She also holds a board position with the European Investment Bank and the InterAmerican Development Bank. In 2016, Forbes listed Lagarde as the sixth most powerful woman in the world.

World Bank Group President, David R. Malpass The newest member of the global economy leadership is David Malpass, president of the World Bank. Malpass was approved as the World Bank’s thirteenth president in April 2019. As tradition prevails, the president of the World Bank comes from the United States. Prior to his appointment, Malpass was U.S. undersecretary of the treasury for international affairs. In this role, he represented the United States at international meetings including the G-7, the G-20, the annual joint meeting between the World Bank and IMF, and the Organization for Economic Cooperation and Development. Even before coming to the World Bank, Malpass promoted increased capital for both the International Bank for Reconstruction and Development and the International Finance Corporation, two agencies of the World Bank Group now under his direction. He advocated for efficient capital (money) use as a tool to increase living standards in developing countries. Malpass is an ardent promoter of transparency in financial reporting. Both the World Bank Group and the IMF adopted the Debt Transparency Initiative to achieve the transparency Malpass believes can help reduce both the frequency and the severity of debt crises that might arise in the future.

United Nations President of the General Assembly, Maria Fernando Espinosa Garcés In 2018, the United Nations elected the fourth woman to hold the position of General Assembly president. Officially Garcés is president of the seventy-third session of the United Nations General Assembly. Previously the foreign minister from Ecuador, she represented Ecuador at many international conferences, ranging in topics from climate change to gender equality to multilateral cooperation. Of special note, Garcés is the first woman appointed as the permanent representative of Ecuador to the United Nations. She was instrumental in

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the United Nations’ efforts to create and promote the Millennium Development Goals to improve the lives and standard of living for the world’s underserved population in the developing nations.

Bank of International Settlements General Manager, Agustín Carstens Carstens was a member of the BIS’s board of governors from 2011 to 2017. Prior to his time at the BIS, Carstens was the Bank of Mexico governor and served with the IMF. During his tenure at the IMF, he chaired their International Monetary and Financial Committee and later served the IMF as its executive director in 1999 and 2000. At the time when Christine Lagarde was appointed managing director of the IMF, it was Carstens who was actually considered the front-runner for the position. A Mexican native, he holds two graduate degrees from the University of Chicago.

TWO CENTRAL BANKERS WHOSE LEADERSHIP INFLUENCES THE GLOBAL ECONOMY Central banks play a vital role in a nation’s ability to participate in the global economy. Two are especially important, due to the currency stability necessary for the global economy to grow: the European Central Bank and United States Federal Reserve System. In chapter 7, we discussed the importance of central banks to the global economy. We also highlighted several beyond these two. Arguably, however, the two most influential central bankers are those of the ECB and the Fed.

European Central Bank2 President, Mario Draghi Mario Draghi became president of the European Central Bank in 2011, succeeding Jean-Claude Trichet. Draghi is an economist by training, earning his degree at Massachusetts Institute of Technology (MIT). While at MIT, he worked with Nobel Laureates Robert Solow and Franco Modigliani. Prior to joining the ECB, Draghi was governor of the Bank of Italy. Draghi served the World Bank as its Italian director. He also served the Organization of Economic Cooperation and Development, chairing their European Economic and Financial Committee. Add to this experience his



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time with the Bank of International Settlements and ECB itself, and Draghi was ready for the ECB presidency when the opportunity came in 2011. As ECB president, Draghi is now the most important monetarist in Europe and one of the most important in the world. He was immediately confronted with a financial crisis not experienced since the Great Depression of the 1930s. His immediate actions were applauded by some and criticized by others. Every action by Draghi and the ECB was watched not only in Europe but also around the world. The health of the euro was as necessary as the health of the U.S. dollar. Draghi was also confronted with the default of loans by Greece, a member of the European Monetary Zone. As with every decision by a global leader, his actions were both applauded as correct or criticized that they would lead to further trouble. As of this writing, the jury is still out on Greece. Between the Draghi and the ECB’s actions as well as those of the U.S. Federal Reserve, the financial crisis came to an end. Judgment on the ECB’s decisions is still being debated. One thing is certain: whether the ECB made the right decisions in the past and whether they will make the right decisions in the future, one person will get the credit or the blame. That is the person leading the European Central Bank, and for now, that is Draghi. To read more about Draghi, you will find the following resource helpful: “Mario Draghi.” European Central Bank, accessed September 2012, http:// www.ecb.int/ecb/orga/decisions/html/cvdraghi.en.html.

Federal Reserve System Chair of the Board of Governors, Jerome H. Powell When Jerome Powell was nominated by President Trump and approved by the U.S. Senate in 2018, he joined an illustrious list of previous chairs. He replaced Janet Yellen, who was chair when Mr. Trump was elected president. President Trump chose Mr. Powell over renominating Yellen for a second term. Yellen replaced Ben Bernanke during the presidential term of Barack Obama. President George H. Bush had nominated Ben Bernanke, who served two terms as chair after succeeding Alan Greenspan, the longest-serving chair, with five terms extending from 1987 to 2006. In our previous biography on Mario Draghi, we discussed his role during the financial crisis. While Draghi was dealing with the crisis from Europe, it was Ben Bernanke who was sitting in the Fed chair’s seat during the crisis. As one can see from the recent past, the Fed chair has been more precarious than the similar position at the ECB.

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Powell began his own fourteen-year term as a Fed governor in 2014, after being nominated to complete an unexpired term in 2012. Powell’s background is law, and he joined the Fed’s board from the private sector, where he focused his efforts on federal and state fiscal policies. Many now consider Powell to be the most powerful monetarist in the world. The monetary policy decisions he champions for the Fed have global impact. As chair, he is also chair of the Federal Open Market Committee (FOMC). Between the board of governors and the FOMC, their decisions have direct influence on the health of the U.S. dollar, which has a direct influence on the health of the global economy. The importance of their decisions extends far beyond U.S. borders. Anyone in the world holding dollars or U.S. Treasuries has a stake in the decisions of Powell and the Fed’s board. It is important that they have the ability to make those decisions in an environment free from political influence. The writers of the Federal Reserve Act of 1913 understood that very well. For our modern global economy, that may be more important than ever. To read more about Powell, you will find the following resource helpful: “Jerome H. Powell, Chair.” Board of Governors of the Federal Reserve System, accessed July 7, 2019, https://www.federalreserve.gov/aboutthefed /bios/board/powell.htm.

NOTES   1. We could go on for many pages about the all these great individuals and their many contributions to the world of economics. For our purposes, we are going to keep our focus on their contribution to the global economy. If you would like to read more about their lives and other contributions, we suggest you go to David A. Dieterle, ed., Economic Thinkers: A Biographical Encyclopedia (Santa Barbara, CA: Greenwood Press, 2014).   2. At the time of this writing, Christine Lagarde had just been nominated as the next president of the European Central Bank. You can read about Lagarde as the current head of the IMF.

Conclusion: The Future of the Global Economy

We began our journey looking behind us at the history of the global economy, and then we explored many aspects of today’s global economy. The global economy of the past was stagnant for most of its history. At a few points in history, it woke up and expanded. Today it is in constant change, as nations change their roles and relationships with other nations. In the future, that change will most likely only be faster and broader, with consequences that we may not even be able to recognize today. It is time to pull out our crystal ball and take a look into the future.

POLITICS AND CULTURE’S ROLE IN THE GLOBAL ECONOMY For all the bravado of economists, economic systems do not operate in a vacuum. Along with political and cultural influences, economic systems make-up only one-third of how consumers, producers, and other players in a global economy act and interact with each other.

Economic Systems and the Design of the Global Economy To gain a full understanding and appreciation of the global economy’s complexities now and in the future, it is important for us to take a step back and review a one of our earlier discussions. In chapter 2, we explored the interdependence among our economic, political, and civic spheres. Remember that dictators demand complete control in all areas of life. Without it they cannot “dictate”—that is, control every aspect of everyone’s life. 127

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An economy based on market interactions does not permit the degree of control necessary for a dictator. The late Nobel Laureate Milton Friedman was noted for stating that capitalism will eventually lead to democracy. In South America, this scenario has played out on several occasions throughout history.

State Capitalism—the New Political/Economic System In chapter 2, we discussed the combination of a Dictator-CapitalismNo Personal Freedom nation, using China as our example. China has succeeded to now with this combination through the development of what is being called “state capitalism.” Many believe state capitalism could be the economic system of the future. The unique feature of state capitalism is that the state has ownership of the resources and companies. Under the old socialist state, the companies would be subsidized and controlled by the state. With state capitalism, however, these companies must successfully compete alongside privately owned companies in the marketplace in order to remain operational. So far, China seems to have created the right balance of state-owned companies with private capitalism in order to successfully both the benefits of a capitalist marketplace and the benefit of maintaining one-party rule. Today’s global economy is forcing other countries to reassess their current communist, socialist political/economic structure. Vietnam and Cuba appear to be opening their economies at the margins while still maintaining one-party rule. Globally, Cuba has to deal with the 1962 U.S. embargo, but within Cuba, there have been increased market-oriented initiatives even though the government is still one-party (communist) rule. Cuba will be an interesting case study to follow in the future. Other nations are still clinging to their old ways. This is especially true of North Korea, Zimbabwe, and Venezuela. As the economy continues to become more global, it will be interesting to see whether this will force changes on them politically or economically. The primary essence of democratic capitalism is that in the long run, capitalism can only succeed through a democratic government and civic rights. All three countries have shown cracks in their systems. We will keep watching to see if they will be able to retain their current status.

REGIONS OF THE WORLD Sub-Saharan Africa Into the future, the region of the world that potentially will receive the most attention is Africa, specifically sub-Saharan Africa. Based on UN



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figures, that is 46 nations of the world potentially banding together to form one economic body. We discussed earlier their organizing as the African Union. Based on the resources available to them, if sub-Saharan Africa can organize effectively going forward, they have the potential to economically rival any region of the world, including China and India. Several of these nations are also discussing the use of a single currency.

Asia Today all eyes are on the various economic activities of Asia. It is not just China, Japan, or South Korea anymore. There is significant economic activity in Thailand, Singapore, Malaysia, and Vietnam. These nations have become known as the Asian Tigers, as their economic competitiveness has grown. In the same way that some jobs from the United States moved to Mexico, many Chinese jobs moved to Vietnam or Thailand. We cannot discuss the future global economy and Asia without also discussing India. India continues its trend toward becoming a major economic participant in the global economy. India will continue to be plagued by its population size and extreme poverty.

South America The one region of the world where “turmoil” seems to be its middle name is the continent of South America. The twelve nations and three territories that make up South America are as diverse in their cultures and standard of living as the Africa nations. At this point in time, the African nations seem to be better coordinated and better planned for the future than their South American counterparts. South American’s ability to participate in the global economy seems to be dependent on their different nations’ political landscape. Except for a few nations (Brazil, Argentina, Chile), most of the South America nations seem to be vulnerable to extreme shifts in political philosophies. As South American political philosophies shift, so do economic philosophies. Currently Venezuela is a prime example of this shift. Roughly fifty years ago, Venezuela was the fourth-wealthiest nation in the world. Today it is one of the poorest. The difference is the change in political philosophy, which changed economic philosophy. South American nations seem to have more than their share of military junta and dictator takeovers of the government. As we discussed earlier, the two philosophies seemed to be more interdependent in South America than other regions of the world.

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Addressing Extreme Poverty in China and Asia China, India, and the sub-Saharan African nations will need to address the extreme poverty that exists in their countries. Such wide income disparities create a problem, and they will continue to do so into the future.

Europe Historically, the continent of Europe has been a friend of the United States economically, politically, and in many ways culturally. Much of U.S. culture has its origins in Europe. Primarily through the Marshall Plan, the United States assisted Europe’s rebuilding efforts following World War II. Strategically, the United States and Europe comprise the North Atlantic Treaty Organization (NATO), an alliance of nations that binds them together that an attack against one nation is an attack against all nations. During his presidency, Donald Trump has questioned the validity and worthiness of this relationship. He has claimed that the United States supports NATO more than other nations and that this should change. On the surface, these types of discussions between the United States and other NATO members are more political than economic. Looking forward, however, one needs to ask whether changes in these political and strategic relationships will ultimately spill over into changes in the economic relationships regarding trade among the NATO nations.

GLOBAL ECONOMY AND THE WORLD’S RESOURCES To have goods and services, an economy needs resources (land, labor, and capital). As the global economy expands and standards of living improve globally, more goods and services are going to be desired. This also means that more resources are going to be needed to produce those goods and services. To look in the future of the world’s resources, we need to explore three areas: changing labor market, new natural resources, and potential future alternative sources.

Labor Market in a Global Economy The global economy may have its greatest impact on labor and labor markets. As trade barriers disappear through trade agreements and more nations participate in the global economy, the labor market may experience the most drastic change. Through improved resource allocation, education, and specialization, nations will depend on each other for labor specialties.



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As this expansion of labor occurs, several significant changes will be very important and impact you directly. One, the world is your labor market. Some of you will find yourselves with careers in other countries. You will live and work in a world very different from the one you now know. The other distinct possibility is that the company or career you choose will be directly linked to another global company or nation. You may still live in the United States, but your career and work will take you to many places of the world. The world will definitely be your oyster. This is also true for every young person from every other nation on the planet. They, too, will have opportunities worldwide. For you, that means additional competition for the jobs of the world. You will have to compete with young people from Asia, Europe, and every other continent on the planet (except for maybe Antarctica) along with those from North America. The labor market of the future will place an even greater significance on education. Much of manufacturing is becoming a white-collar industry. The manufacturing job your grandparent had with a high school education will now need someone with knowledge of computers, robotics, and technology. Higher-level knowledge, thinking, and communication skills will be necessary just to be considered for an assembly line position. Trades will require education in trade schools and specialized training. A college fouryear or graduate degree may not be necessary, but postsecondary training is, and will continue to be, an absolute for the future global economy.

Natural Resource Discovery Natural resources are any resource that comes from or under the ground or water. Throughout history, the United States has been blessed with an abundance of almost every kind of natural resource necessary for the production of goods and services and an improved standard of living. These included fertile soil for different types of growing plants and animals, fresh water, forests, and oil, gas, and fossil fuels. As we needed more or other resources, we were able to obtain them rather easily through trade. Some of these natural resources are finite. Once we use them up, they will be gone forever. The combination of gained knowledge and technology, however, has changed the perception of some resources. Fracking has prolonged the life and use of oil reserves. Individual transferable quotas (ITQs) have altered some types of commercial fishing to protect certain species. Soil use and crop rotation have protected and enriched certain crops. Human ingenuity and innovation continue to make better use of even our finite resources and to keep others from becoming extinct. The future of our natural resources is often a topic of current debates. One debate relates to the quantity of natural resources still available for

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ultimate use. The other argues about the quality of the natural resources, such as debates over air or water quality, for future consumption and use. Far from being settled, these are the debates you and your generation will continue to discuss in order to determine future economic and political policies.

Alternative Sources An alternative (no pun intended) to discovery of new resources is the development and ultimate implementation of alternative sources replacing the fossil fuels. Development of water- and solar power continues to improve and become more cost-effective for commercial and home use. The use of natural gas and electric to fuel our cars grows in efficiency and cost-effectiveness. These are just a couple examples in which the global economy is changing to meet its growing needs. It is highly likely that some of you will have careers in further developing and refining alternative sources of energy for the future global economy.

THE FUTURE OF GLOBAL TRADE Countries That Do Not Trade When countries do not trade, they cannot specialize and benefit from their comparative advantage with other countries. They have to produce all their goods and services using only the resources within their borders. This scenario leaves them isolated from the rest of the world and strictly limits their ability and potential for economic growth. Economists use the term autarky to describe a country that does not trade. For many sub-Saharan African countries, growth was a long time coming because they did not trade. As the new countries gained their independence from Britain, France, or the Dutch, the new African leaders feared that trade would lead them back to colonial times and they would lose their new independence. The new countries bordered themselves up, isolating themselves from the world. With time, they opened their borders, and now sub-Saharan Africa is one of the fastest growing regions of the world. As the global economy expands to include more and more nations, fewer and fewer nations will be able to practice autarky and survive.

A Protectionist Global Economy The sub-Saharan African countries closed themselves off voluntarily. There are times when other countries decide to not trade with a country.



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Voluntary decisions to not trade with a country are called a “sanction.” Sanctions are generally instituted against another country for political reasons. The intent is to isolate the country being sanctioned and therefore limit their economic abilities so that they will ultimately capitulate on a political issue. Sanctions have been imposed many times throughout history. Research has shown they are usually not very successful.

Potential Future Protectionist Policies Economic Populism Increased dissatisfaction with the current status quo throughout the global economy has increased the popularity of economic populism and protectionism in many nations, both developed and developing. Economic populist politicians promise jobs, lower prices, and restricting imports. Once elected they fulfill their campaign promises by increased government spending, creating large deficits. They cover the deficits by printing more money. While economic populist policies are often promising in the short-run, in the long-run economic populism has led to capital flight, real wage decreases, currency devaluations, and inflation. It will be fascinating to watch if history repeats itself in these nations where economic populism has emerged as a dominant economic/political philosophy.

Global Dependence on Oil Your future world is moving away from its dependence on oil. Providing subsidies to specific companies in specific industries is the same as protecting them from foreign competition. In an attempt to speed up the transition, some governments are trying to pick winners and losers in the race for alternative, sustainable, and cleaner sources of energy. At the same time, the oil-rich nations will be trying to keep the world oil dependent as long as possible. It will be an interesting tug-of-war between the two sides for energy dominance.

Terrorism, Piracy, and the Global Economy Another issue that appears not to be going away is terrorism and piracy. With oil dependence, piracy on the high seas is an issue. Most of us are familiar with the fictionalized Pirates of the Caribbean Disney movie franchise. There are, unfortunately, the real pirates of the Strait of Hormuz. The Strait of Hormuz is the oil tankers passageway from the Middle East oil-producing nations to the oil-consuming nations. The pirating of

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oil tankers could have a direct impact on the oil industry. If the supply of oil is drastically reduced, the price of oil and the products from oil, such as gasoline, could rise significantly. A second scenario is that the oil companies will be forced to increase security, which will also raise the costs of producing oil based products and prices for the consumer.

United States-Mexico-Canada Agreement The governments of the United States, Mexico, and Canada agreed to the USMCA in 2018. It is supposed to replace the current North American Free Trade Agreement, which is now over twenty years old. What the future holds for USMCA is still very much in question. Around the time that the USMCA was being agreed to by the governments, the U.S. Congress was changing from a Republican-controlled House of Representatives to a Democratic-controlled House. Politics will now play an even more significant role in the USMCA’s future. As with most trade agreements, there are winners and losers. Supposedly some of the winners included U.S. farmers, businesses, and workers. Its improved origin-of-content standards should benefit that U.S. automobile labor. There are new intellectual property protections along with digital trade, anticorruption, and regulation policies. The agriculture and agribusiness sections of the USMCA are to benefit farmers and ranchers. As mentioned, the future of USMCA is still quite uncertain. The best case scenario is for USMCA to have total support of Congress and be approved in total. The worst case scenario is for the USMCA to be rejected in total by the U.S. House. As with most trade agreements, the final version of USMCA will likely be a compromise version.

Trans-Pacific Partnership Another area that is very important to the future of the global economy is the developments occurring in Asia and the Pacific. When the United States pulled out of the TPP conversation, it opened a wide range of speculations, one of which was whether China would step in as the foundational nation for the trade pact. This would give China a stronger foothold in their relationships with the other Asian economies and most likely diminish the U.S. role.

Future Tariffs or Tariff Wars The current U.S. administration is showing the many uses for tariffs and reasons why a nation may impose tariffs on their imports. The



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problem has been, and always will be, that tariffs have two sides. It is important to acknowledge that tariffs have always been a tool of governments and will continue be in the future. What will be interesting to follow in the future is the extent that some nations, the United States included, will use tariffs in the belief that they are helping their domestic economy at the expense of the global economy.

GLOBAL ECONOMY AND THE WORLD’S CURRENCIES Money and the Global Economy In chapter 6, we discussed money and currencies, exchange rates, and the global economy. We are not going to repeat ourselves here. It is important, however, to think about the currencies of the future global economy and a few of the issues that might surround them.

Currency Wars At the top of the list of potential global currency problems are currency wars. A currency war most certainly a war. The weapons in a currency war are not guns and battleships but the manipulation of a nation’s currency by another nation. Nations especially vulnerable to a currency war are those nations whose economy is based on a fixed exchange rate (chapter 6) or who are highly indebted to other nations. China is a nation that is both vulnerable to a currency war and has the ability to start a currency war. It is vulnerable because it has a fixed exchange rate. Having a currency whose value is fixed to the U.S. dollar makes China a potential currency war target of the United States. The United States could alter the value of the dollar to such an extent that the value of the Chinese renminbi would change so much that it could potentially destroy China’s domestic economy. There would be U.S. domestic issues as well as the dollar value changed, but they would be considered a small sacrifice to destroy the enemy, as is the goal in war. There is another side to the currency war strategy in which the roles are reversed. In this scenario, China has the United States at a distinct advantage. China holds approximately a little over $1 trillion of U.S. Treasury bonds, notes, and bills. While this is not a significant portion of the U.S. federal government’s $21 trillion debt, it is significant enough that if China chose, they could destroy the value of the U.S. dollar. If a currency war broke out between the United States and China, one of China’s first moves would be to cash out of all its U.S. obligations. This means that the United States would have to pay China more than $1 trillion. These are dollars not currently in circulation. The United States

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would be forced to print money and add $1 trillion to the amount of dollars in the global economy. As the supply of dollars increases, the value decreases, and hyperinflation would potentially result. In this scenario, China potentially wins the war. Now that we have painted these two dismal pictures of currency wars, a final note of reality. The reality that either case will happen is quite remote. In both scenarios, the damage to each domestic economy would be substantial. At this time, because of the interdependence of the two nations, neither China nor the United States are willing to risk the uncertain outcomes of a currency war.

Potential Future Single Currency Areas West Africa One area of the world most people would not think about having a single currency would be Africa. The countries of West Africa, however, have had those very conversations and actually began having them in 1999. As we are gazing into the future, it is worth noting that these discussions are back on track. A single currency is in the works for the fifteen countries of the Economic Community of West African States (ECOWAS)1 for 2020. The early discussions of this single currency coincided with the launch and implementation of the euro and the European Monetary Zone. This was not unusual, as other regions of the world were also contemplating the single currency idea. Since then, however, given issues that have arisen with the euro and the Eurozone, many of the discussions have also silenced. Whether this single currency will ever be a reality will be interesting to watch. If it is launched and does meet with some success, the next interesting step will be to observe if other regions, especially in Africa, will adopt single currencies.

North American Monetary Union When single currency regions are discussed, the idea of a North American single currency is usually included. Since the beginning of the North American Free Trade Agreement in 1994, there has been the debate of a possible single currency. These discussions have usually occurred in the ivory towers of academia or in books. There has not been any official discussions, nor are any planned or anticipated. For starters, the United States is not going to give up its place in the global economy in which the dollar is the world’s reserve currency. If a single North American currency were to happen, it would most likely, under current conditions, be the U.S. dollar. Mexico would most likely benefit from a single currency. Canada, however, would probably have difficulty



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accepting the U.S. dollar as their currency. The three countries can agree on trade. Whether or not they could agree to have a single currency is a discussion that will be left for the ivory towers and academic think tanks.

Global Reserve Currencies The odds of a global currency are very, very slim. As the global economy continues to expand and more nations become active participants, the role of reserve currencies will also become greater. Nations with fixed exchange rates are going to demand anchor and reserve currencies whose stable value they can rely on. Currently there are four main reserve currencies: U.S. dollar, EU euro, British pound, and Japanese yen. Of these, the U.S. dollar is the number one reserve currency. The United States is still the largest consumer market in the global economy. Nations whose companies want to do business in U.S. markets need to have dollars available. The world market for oil is priced in dollars. The U.S. dollar is almost as important outside the United States as it is in the United States. The dollar’s status as the number one reserve currency is vital to both our domestic currency as well as the global economy. We will discuss this more a bit later. One currency that does not get the respect its nation believes it deserves is the Chinese renminbi. As China continues to become a more dominant participant in the global economy, they are promoting the renminbi as the next reserve currency. Some movement on this front has occurred, when the International Monetary Fund made the decision in 2016 to include the Chinese yuan in its basket of currencies that set the value of their Special Drawing Rights.2 The role of the renminbi in the global economy will most likely be a future issue as the global economy expands and China’s role does too.

GLOBAL BANKING AND FINANCE Several innovations and expanded use of existing instruments are changing the way nations and individuals in developing nations are financing their futures. How these finance innovations will impact the future global economy will be of great interest to many individuals, economic and political leaders, and national governments.

Sovereign Wealth Funds (SWF) While not necessarily a new concept, more nations are creating sovereign wealth funds to invest national monies in other parts of the world. Sovereign wealth funds are actually the savings accounts of nations in

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which they set national monies aside for investing and financial emergencies. Sources of these funds include budget surpluses, funds received from privatization activity, or certain capital flows into the country. SWFs are currently being used by nations for various purposes. One is to deflect the possibly of a financial crisis. Several nations, such as Singapore, avoided a financial crisis by using funds from their sovereign wealth fund. A second purpose of the funds is to invest in other parts of the world. Several SWFs hold U.S. Treasuries as a way to stabilize their funds. These funds can also be used by nations for development of their own infrastructure.

Development Banks Other nations are banding together to create regional development banks. These are not banks in the normal banking definition. The banks are owned and operated by the member nations. The mission of a development bank is to support the development within each of the member nations. The activities of the development banks are varied yet similar. Most development bank initiatives focus on improving the agricultural development in rural areas of the nations. A major initiative of agricultural development is the creation of irrigation systems so that farmers are less dependent on the weather. A second major initiative of development banks includes roads, bridges, water, and sanitation throughout the nation. Finally, development banks devote resources to the improvement of human capital of the nation. This may arguably be the most important for a nation’s future. Development banks focus on improvements in education and health care and on creating an environment conducive to entrepreneurship and business creation. Development banks could be a very important variable in the future development of developing nations.

Microfinance in Developing Nations In many of the world’s nations, access to financial assistance for the poor to start businesses or other ventures has been unattainable. The third innovation of global finance is truly a new innovation. Microfinance institutions serve the poor people in a nation, providing a wide array of financial assistance. These institutions serve as banks (financial intermediaries) for a nation’s poorest population. They make loans, take deposits for repaying loans, and help with other financial products, such as insurance. Microfinance institutions make microloans so that the nation’s poor can start businesses. A major difference of the microfinance institution is



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that collateral is not required for the loan. In lieu of collateral, the borrowers are assigned peer groups. Most of the borrowers are women wishing to begin a home business. They also provide support with classes and counseling in business, personal finance, and basic skills. As the use of microfinance institutions grows throughout the developing world, this just may be the catalyst for over a billion people to lift themselves out of poverty. Of course, there are also downsides, the main one being those who use these institutions to take advantage of the poor. Regardless, it will be interesting to watch the impact of these institutions on the future of developing nations.

Source Funding Given the vast use of the internet now and into the future, this method of funding projects needed to be at least mentioned. Source funding is an open source funding strategy currently being used by individuals and companies to generate revenue. It will be interesting to watch if nations gravitate to this type of finance and funding as individuals have done. On one side of the argument is, why not? On the other is, why? Most governments have various other sources to pursue that are much more likely to achieve their financial aims in the long run. Yet it is one more source to keep on our watch in the future.

Export-Import Bank of the United States There is one finance institution that overlaps this section and our final section on the United States. The Export-Import Bank of the United States was created in 1934 as part of President Roosevelt’s New Deal efforts in order to create jobs in exporting industries. The bank continues today in two capacities. One is to help U.S. companies fund exports more than might be possible through regular banking channels. The other is to serve as a lender of last resort for foreign companies who desire to buy U.S. goods but need banking assistance. The first helps create more U.S. jobs, and the latter provides U.S. consumers with more products than would be possible otherwise. It appears to be a good deal for everyone. Yet, the Ex-Im Bank continues to fight for its political life. The federal government funds the Ex-Im Bank. Many politicians and policy leaders do not like taxpayer money being used to fund foreign companies who might not pay, leaving the taxpayer to cover the unpaid loan. Others contend that it funds projects outside its mission, like bridges and roads in foreign countries. The bank will most likely continue to be a political topic and one to watch in the future.

140 Conclusion

THE UNITED STATES AND THE GLOBAL ECONOMY As we conclude our journey, it seems only appropriate that we spend some time discussing the future role of the United States. Regardless of any metric one might use today, the U.S. economy is still the dominant domestic economy in the global economy. With two-thirds of our GDP being consumer spending, we are the market that the companies of the world want to be part of. The U.S. economy, however, has its challenges if that role is going to be maintained in the future.

Nationalism—Modern Mercantilism Potentially the most comprehensive challenge to the U.S. position in the global economy is the current general attitude toward a nationalist focused economy or modern form of mercantilism. This nationalist view retreats back to the days prior to Adam Smith when individual market transactions were insignificant to the perceived nation’s economic needs. Then it was kings and queens making economic decisions for the populace where today it is presidents and prime ministers. Remember that modern mercantilism is the central focus on exports and a limited focus of imports, even to the point of discouraging imports. Limiting imports through protectionist measures shrinks the global economy’s impact on the domestic economy. The net impact of protectionist measures is almost always negative. The domestic economy loses consumer goods, so there is less competition and higher prices. The inputs of production cost more, and the higher costs are passed on to consumers in higher prices. The protectionist measure that may help one part of the economy certainly will hurt another part, as foreign nations retaliate with their own protectionist measures. As stated previously, the current tariff wars have no winners, just least losers. If the United States, and other nations as well, limit access to the global economy, they miss out on new innovations, opportunities for entrepreneurs, and expanding their consumer markets. As the dominant market, the United States wants the global economy to be as fair and open as possible. It needs to protect itself from nations who try to take advantage of the U.S. dominance and willingness to be open to all. A nation must guard against being too nationalist in one’s approach.

Future of the Dollar as a Reserve and Anchor Currency Earlier we discussed the significance of the U.S. dollar as a reserve and anchor currency in the global economy. What few people understand is



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the significance that it also plays in the U.S. domestic economy. The Federal Reserve responds to the level of economic activity in the United States through the buying and selling of U.S. Treasuries. When the U.S. economy is weak, the Fed buys more U.S. Treasuries, which increases the level of U.S. dollars and lowers U.S. interest rates. If the U.S. dollar were not as necessary outside United States as it is today, all the new dollars would be trapped within the U.S. domestic economy. That would ultimately lead to inflation and then to higher interest rates and higher prices for resources and consumer products. The new dollars do, however, have an escape from the domestic economy: use by foreign companies or foreign central banks as anchor and reserve currencies. This helps keep U.S. interest rates lower than they would be otherwise and, with it, enables sustainable economic activity. Some nations, China being the most vocal, have spoken out for the U.S. dollar to no longer be the dominant world’s reserve currency. It is important for the United States to maintain the dollar’s role in the global economy. Losing this global role could significantly alter and limit how the Fed conducts monetary policy in response to the U.S. domestic economy. This leads to one more potential future issue for the United States. This is beyond the scope of our global economy journey, but it will be critical for the Federal Reserve to maintain its independence as the nation’s central bank. If the Fed were ever to become responsive to a branch of government, most likely Congress, monetary decisions would become more political than economic. Throughout history, political monetary decisions have proven disastrous for the domestic economy. It is your future economy. Protect it.

FINAL WORD Throughout the chapter, we discussed several future issues of the global economy. We explored both current and potential future issues of world regions, trade, and currencies. Now, we need to address one more question, which refers to the age-old global relationship between trade and war. The idea that trading partners promote peace and not war is credited to French political economist Frédéric Bastiat. It is claimed that he stated, “If goods don’t cross borders, soldiers will.”3 Will a fully integrated global economy prevent war? The global economy has benefits and costs. We have identified, discussed, and explored many of them throughout our journey. This debate is arguably the most important of them all. If Bastiat’s statement is true, the ramifications for a world of peace are immense. This reason alone is enough for many to claim the need for a global economy.

142 Conclusion

The global economy will not be the end all of wars. Most likely there will always be some leader in the world who desires more power and control. There will be those whose want for power will necessitate the need for nations to be ready to defend themselves against such aggressors. Nations must be prepared to defend their borders, property, and citizens. A global economy free of protectionism and economic hostilities can be one weapon against global terror and dictators.4 Through technology and better and faster means of travel, you are closer to your seven billion, and growing, global neighbors with each passing year than at any time in the history of mankind. The need to work, play, and communicate with each other peacefully is more important now than ever. If a vibrant global economy gives us that chance for global peace, it is important to make every effort for the global economy to be all-inclusive. Every nation on the planet needs the opportunity to be a free, open, and active participant in your global economy of tomorrow. Make it one of your goals to work for that future.

NOTES   1. The fifteen nations of ECOWAS are Benin, Burkina Faso, Cabo Verde, Cote D’Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo.   2. Reuters, “China’s Yuan Just Joined an Elite Club of International Monetary Fund Reserve Currencies,” Fortune, October 2, 2016, https://fortune.com/2016 /10/02/china-yuan-imf-currencies/.   3. Julian Adorney, “Want Peace? Promote Free Trade,” Foundation for Economic Education, October 15, 2013, https://fee.org/articles/want-peace-promote -free-trade/.   4. An interesting book on this is Hernando De Soto’s The Other Path: The Invisible Revolution in the Third World (New York: Harper & Row, 1990). In it, De Soto explains how free markets and capitalism, as opposed to military aggression, can be a way out for Peru’s poor.

Questions for Further Exploration

INTRODUCTION: HISTORY OF THE GLOBAL ECONOMY 1. The global economy is continually changing and evolving. How do you think the global economy will evolve in the future? 2. The early global economy took shape with the early Egyptians, Greeks, and Romans. Do you notice any similarities between the global economy then and now? 3. The explorers were sent out to discover and conquer new lands for their riches. Why was this so important for the mercantilist economic system? 4. How did Adam Smith forever change the global economy and the way we view trade? 5. With each industrial revolution, significant changes occur to the global economy. What changes do you think are going to happen with the next major industrial revolution? 6. John Maynard Keynes was considered one of the most influential people of the twentieth century. Like Adam Smith before him, he changed the way people looked at the global economy. What were the major ways in which he changed our economic way of thinking? 7. Which part of the world do you believe will have the next major influence on changing the global economy? Defend your answer.

CHRONOLOGY 1. Why were Marco Polo’s accomplishments so important to the evolution of the global economy? 143

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2. During the 1400s and 1500s, many explorers set out from Europe to explore new lands. Why was it so important for kings and queens to pay for these very dangerous voyages? 3. What made the writings of Adam Smith and David Ricardo so significant to the expanding global trade? 4. What made the Smoot-Hawley Tariff (Tariff Act of 1930) so dangerous to the global economy? Could the same dangers be relevant again? 5. Name two significant twentieth-century events that greatly expanded the number of nations and potential for an expanding global economy.

CHAPTER 1: ECONOMIC RULES OF THE GLOBAL ECONOMY 1. Of the five core economic principles of every economy, which one do you believe to be the most important and why? 2. Think back to a decision you made only to realize it had unintended consequences. How did your decision work out for you? 3. Name the last decision you made in which you were responding to an incentive. 4. Besides our examples, can you identify other nations whose economic system is more clearly defined as a command economic system? A market economic system? 5. Why are private property and property rights so important for a market economy to function efficiently and create economic growth?

CHAPTER 2: GLOBAL ECONOMY, POLITICS, AND CULTURE 1. Which component of society do you believe is more important: economic, political, or cultural? Why? 2. Given what you learned in chapter 2, when a political leader become a dictator, what can you predict will occur economically and culturally? 3. Politicians often want to control a nation’s economic institutions. Given the societal paradigms, why or why not this is a good idea for society? 4. Design your own society. Choose one option from each of the societal components, and defend why your selection is the best option for a nation.



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CHAPTER 3: GAINS FROM TRADE 1. What did you collect? Did you trade one of your items for another you valued more highly? If so, how did you feel after the trade? Did you believe your collection was wealthier? How did your trading partner feel? 2. Name a skill in which you believe you have an absolute advantage over another individual. 3. Have you practiced comparative advantage? If so, recall the situation and identify the reason you allowed someone else to do something you could have done. 4. Identify a product we import with another nation even though we may have absolute advantage in producing it ourselves. (You may have to use an outside source to identify the product.)

CHAPTER 4: PROTECTIONISM AND STANDARDS 1. What is the difference between free trade and fair trade? 2. Economists are more likely to favor free trade, while politicians are more inclined to favor fair trade. Take and defend a position supporting the economists or the politicians. 3. When an economic sanction is necessary, which do you believe to be the most effective? Why is your choice more effective than other options? 4. Should countries have the right and ability to protect their economy from other countries dumping their imported products into the domestic economy? Support your response. 5. Who wins a trade war and why? 6. How do developed and developing nations use tariffs differently?

CHAPTER 5: MEASURING THE GLOBAL ECONOMY Spend some time exploring the Bureau of Economic Analysis website at www.bea.gov. 1. What is your first impression of the work done at the BEA? 2. Go to the “Working at the BEA” section of the website. What might interest you in working at the BEA? 3. The balance of payments shows how connected a nation is in the global economy. Can a nation be too global in nature? Defend your position.

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4. Are trade deficits always bad for a domestic economy? Why or why not? 5. Go to the CIA World Factbook at https://www.cia.gov/library/publica tions/the-world-factbook/. Select two countries. Compare their balance of trade and then compare their percentage of global trade to their GDP (exports + imports/GDP). Which country has the higher standard of living?

CHAPTER 6: GLOBAL FINANCIAL SYSTEMS: EXCHANGE RATES AND EXCHANGE RATE SYSTEMS 1. A stable currency is imperative for a nation to participate in the global economy. Why is this statement true? 2. If a nation experiences hyperinflation, what happens to the exchange rate relative to the world’s reserve currencies? 3. Why it is important for China to have flexible exchange rate? 4. Why does China not want to move to a more flexible exchange rate system? 5. Give examples of the difference between the forward market and the spot market for currency exchange. 6. Why did the gold standard go out of favor with the global leaders following World War II? 7. Explain the events leading up to when President Nixon closed the gold window and essentially ended the era of the gold standard.

CHAPTER 7: THE ORGANIZATIONS THAT INFLUENCE THE GLOBAL ECONOMY 1. Which of the several international organizations discussed do you believe has the greater impact on the global economy? Defend your choice. 2. If you had to prioritize the Sustainable Development Goals, in what order would you place their importance and why? 3. There are many critics of the IMF and World Bank. Take the position of a critic and state your case about why they have outlived their usefulness. 4. Should Special Drawing Rights replace the U.S. dollar as the world’s number one reserve currency? Defend your position. 5. How are the roles of the Federal Reserve System and European Central Bank different?



Questions for Further Exploration 147

CHAPTER 8: INTERNATIONAL RULES, TRADE AGREEMENTS, AND TRADE UNIONS 1. If you were asked to create a global economic police, what would be your top priority? Why? 2. Defend the IMF’s right to place conditions on nations before granting them assistance. 3. Ten key items were listed as the Washington Consensus. Choose one and defend its being on the list to assist nations in financial crisis. 4. Protecting intellectual property is going to be much more important in the future. Suggest some ways in which this might be more enforceable. 5. Africa is poised to be a major global partner in the future. What is needed by African nations to make this a reality? What are the obstacles that could prevent their future global ascendency?

CHAPTER 9: MAJOR CONTROVERSIES OF THE GLOBAL ECONOMY 1. Of the controversies discussed in the chapter, which one do you believe is the most important for the future of the global economy? 2. Throughout our journey, we have made reference to the hyperinflation issues of Zimbabwe and Venezuela. Identify several recommendations that these countries could implement to avoid a repeat financial crisis. 3. Controversies are a part of life. As you have read, this also includes nations and the global economy. Consider the many facets of the global economy we have explored throughout our journey. Is there a controversy beyond the horizon that you believe will need the world’s attention that we may not have?

CHAPTER 10: THE INFLUENCERS OF THE GLOBAL ECONOMY 1. Which contemporary economist do you believe had the greatest impact on today’s global economy? Why? 2. China and India are growing and becoming dominant economic players in the global economy. How does the work of Douglass North explain how either of them might ultimately stop growing and not become the dominant economy most believe they will become?

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3. Which of the early explorers do you find most interesting and why? 4. Joseph Stiglitz has been quite critical of the World Bank and IMF. Using his arguments, or those of others, either defend their modern existence or explain why they should be dismantled and replaced. 5. Of all the individuals highlighted in this chapter, choose one and read an additional biography of their life. Notice how many of them were also influential in areas besides the global economy.

CONCLUSION: THE FUTURE OF THE GLOBAL ECONOMY 1. Are sanctions imposed for a political result or an economic result? Defend your position. 2. What are the necessary components for politics, culture, and economics for a nation to fully participate in the global economy? 3. How do the characteristics of state capitalism and socialism differ? 4. Which region of the world do you believe will be the most significant growth region in the future and why? 5. Why would one global currency be a good act? Why would it be a bad act?

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CHAPTER 3: GAINS FROM TRADE Adam Smith Works. “The Pin Factory.” Liberty Fund. Accessed August 26, 2019. https://www.adamsmithworks.org/pin_factory.html. O’Connor, David E. “Absolute Advantage.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David Dieterle, 1–3. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Comparative Advantage.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 61–3. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “International Trade.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 201–3. Santa Barbara, CA: Greenwood, 2017. Ricardo, David. On the Principles of Political Economy and Taxation. London: John Murray, 1817. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Vol. 1. London: W. Strahan and T. Cadell, 1776. Talwar, Daniel S. “Free Trade Area.” In Economics: The Definitive ­Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 135–8. Santa Barbara, CA: Greenwood, 2017.

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CHAPTER 4: PROTECTIONISM AND STANDARDS Amadeo, Kimberly. “Government Subsidies.” The Balance. Accessed January 17, 2019. https://www.thebalance.com/government-subsidies -definition-farm-oil-export-etc-3305788. Dieterle, David A. “Protectionism.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 268–9. Santa Barbara, CA: Greenwood, 2017. Isom, Heather. “Tariffs.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 311–3. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Embargo.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 100–2. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Voluntary Quotas.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 342–4. Santa Barbara, CA: Greenwood, 2017. Ripley, Tracy L. “Infant Industry.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 151–2. Santa Barbara, CA: Greenwood, 2017. Swanson, Ana. “Trump to Impose Sweeping Steel and Aluminum Tariffs.” New York Times, March 1, 2018. Accessed June 27, 2019. https:// www.nytimes.com/2018/03/01/business/trump-tariffs.html. Trupiano, John. “Mancur Olson.” In Economic Thinkers: A Biographical Encyclopedia, edited by David A. Dieterle, 289–91. Santa Barbara, CA: Greenwood, 2013. Whitacre, Xavier. “Subsidies.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 303–4. Santa Barbara, CA: Greenwood, 2017.

CHAPTER 5: MEASURING THE GLOBAL ECONOMY Barbee, Alan. “Current Account.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 71–2. Santa Barbara, CA: Greenwood, 2017. Barbee, Alan. “Financial Account.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 121–2. Santa Barbara, CA: Greenwood, 2017. Bureau of Economic Analysis: U.S. Department of Commerce. Accessed February 14, 2019. https://bea.gov. CIA World Factbook. Accessed August 28, 2019. https://www.cia.gov /library/publications/the-world-factbook/.

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CIA World Factbook. “Venezuela.” Accessed February 14, 2019. https:// www.cia.gov/library/publications/the-world-factbook/geos/ve.html. Cousino, Kimberly. “Foreign Trade versus. Foreign Investment.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 132–3. Santa Barbara, CA: Greenwood, 2017. Kuehn, Nicole. “Trade, Measures of.” In Economics: The Definitive ­Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 324–6. Santa Barbara, CA: Greenwood, 2017. Major, Lauren. “Capital Account.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 51–2. Santa Barbara, CA: Greenwood, 2017. Moore, John. “Balance of Payments.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 23–5. Santa Barbara, CA: Greenwood, 2017. Moore, John. “Balance of Trade.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 25–7. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Exports.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 117–20. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Foreign Direct Investment.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 127–9. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Imports.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 169–70. Santa Barbara, CA: Greenwood, 2017. “U.S. International Transactions, Third Quarter, 2018.” Bureau of Economic Analysis. Accessed February 14, 2019. https://www.bea.gov /system/files/2018-12/trans318.pdf. Williams, Adrian. “Foreign Portfolio Investment.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 131–2. Santa Barbara, CA: Greenwood, 2017.

CHAPTER 6: GLOBAL FINANCIAL SYSTEMS: EXCHANGE RATES AND EXCHANGE RATE SYSTEMS “Banco Central de Venezuela.” Accessed August 30, 2019. http://www.bcv .org.ve/.

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CHAPTER 7: THE ORGANIZATIONS THAT INFLUENCE THE GLOBAL ECONOMY “About.” European Central Bank. Accessed July 2, 2019. https://www.ecb .europa.eu/ecb/html/index.en.html. “About UNCTAD.” United Nations Conference on Trade and Development. Accessed July 2, 2019. https://unctad.org/en/Pages/aboutus .aspx. “About UNCTADstat.” UNCTADstat. Accessed July 2, 2019. https:// unctadstat.unctad.org/EN/About.html. “About UNCTAD Statistics.” UNCTAD. Accessed July 2, 2019. https:// unctad.org/en/Pages/Statistics/About-UNCTAD-Statistics.aspx. “Bank of Japan.” Central Banks. Accessed July 2, 2019. http://www.centralbanksguide.com/bank+of+j. “BIS Member Central Banks.” BIS. Accessed July 2, 2019. https://www.bis .org/about/member_cb.htm. Dieterle, David A. “European Central Bank.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 107–8. Santa Barbara, CA: Greenwood, 2017. Dieterle, David A., and Kenneth Maly. “United Nations Conference on Trade and Development.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 339–40. Santa Barbara, CA: Greenwood, 2017. “Doha Round.” World Trade Organization. Accessed July 2, 2019. https:// www.wto.org/english/tratop_e/dda_e/dda_e.htm. Eichengreen, Barry. “Global imbalances and the lessons of Bretton Woods.” Economie Internationale 4 (2004): 39–50. Eschrich, Steven J. “Central Banks.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 1: Foundations of Economics, edited by David A. Dieterle, 69–71. Santa Barbara, CA: Greenwood, 2017. “Financial Statements.” BIS. Accessed July 2, 2019. https://www.bis.org /banking/balsheet.htm.

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CHAPTER 8: INTERNATIONAL RULES, TRADE AGREEMENTS, AND TRADE UNIONS “About the African Union.” African Union. Accessed July 3, 2019. https:// au.int/en/overview. Dieterle, David A. “North American Free Trade Agreement.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 243–5. Santa Barbara, CA: Greenwood, 2017. Dieterle, David A., and Carter Friedt. “BRICS: Brazil, Russia, India, China, and South Africa.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 43–4. Santa Barbara, CA: Greenwood, 2017.

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CHAPTER 9: MAJOR CONTROVERSIES OF THE GLOBAL ECONOMY Amadeo, Kimberly. “Trans-Pacific Partnership Summary, Pros and Cons.” The Balance. Updated March 11, 2019. Accessed August 30, 2019. https://www.thebalance.com/what-is-the-trans-pacific-partner ship-3305581. Barboza, David. “China Says Abusive Child Labor Ring Is Exposed.” New York Times, May 1, 2008. Accessed August 30, 2019. https://www .nytimes.com/2008/05/01/world/asia/01china.html. Cousino, Kimberly. “International Cartels and Monopolies.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 180–2. Santa Barbara, CA: Greenwood, 2017. Fisher, Maria Bellos. “Toxic Toys: Tips for Choosing Safe Toys for Kids.” Parent Map. February 24, 2012. Accessed August 30, 2019. https:// www.parentmap.com/article/toxic-toys. Gustafson, Kathryn Lloyd. “Offshoring.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 248–50. Santa Barbara, CA: Greenwood, 2017. Gustafson, Kathryn Lloyd. “Outsourcing.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 259. Santa Barbara, CA: Greenwood, 2017. Johnson, Dale. “Post-Washington Consensus.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 265–7. Santa Barbara, CA: Greenwood, 2017. Myers, Joe. “The World’s Free Trade Areas—and All You Need to Know about Them.” World Economic Forum. May 6, 2016. Accessed August 30, 2019. https://www.weforum.org/agenda/2016/05/world -free-trade-areas-everything-you-need-to-know/. “Top Ten Famous African Dictators Designated as Worst of All Time.” Answers Africa. Accessed July 4, 2019. https://answersafrica.com /worst-dictators-africa.html.

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CHAPTER 10: THE INFLUENCERS OF THE GLOBAL ECONOMY Banerjee, Abhijit V., and Esther Duflo. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Public Affairs, 2011. Bhagwati, Jagdish. Free Trade Today. Princeton, NJ: Princeton University Press, 2002. Bhagwati, Jagdish. In Defense of Globalization. Oxford: Oxford University Press, 2004. Bhagwati, Jagdish. Protectionism. Cambridge, MA: MIT Press, 1988. Bhagwati, Jagdish. Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Oxford: Oxford University Press, 2008. “C. Peter McColough Series on International Economics: Challenges and Opportunities for the World Economy and the IMF.” Council on Foreign Relations. July 26, 2011. Accessed July 9, 2019. http://www .cfr.org/international-finance/challenges-opportunities-world -economy-imf/p25546. Collier, Paul. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done about It. Oxford: Oxford University Press, 2008. Collier, Paul. The Plundered Planet: Why We Must, and How We Can, Manage Nature for Global Prosperity. Oxford: Oxford University Press, 2010. Collier, Paul. Wars, Guns, and Votes: Democracy in Dangerous Places. New York: HarperCollins, 2009. Deng Rong. Deng Xiaoping and the Cultural Revolution: A Daughter Recalls the Critical Years. New York: Doubleday, 2005. Deng Xiaoping. Selected Works of Deng Xiaoping: 1975–1982. Baltimore, MD: University Press of the Pacific, 2001. De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000. De Soto, Hernando. The Other Path: The Economic Answer to Terrorism. New York: Basic Books, 1987.

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CONCLUSION: THE FUTURE OF THE GLOBAL ECONOMY “About the African Union.” African Union. Accessed July 10, 2019. https:// au.int/en/overview. Adorney, Julian. “Want Peace? Promote Free Trade.” Foundation for Economic Education. October 15, 2013. Accessed July 10, 2019. https:// fee.org/articles/want-peace-promote-free-trade/. Caporal, Jack. “From NAFTA to USMCA: What’s New and What’s Next?” Center for Strategic and International Studies. October 3, 2018. Accessed July 10, 2019. https://www.csis.org/analysis/nafta-usmca -whats-new-and-whats-next. De Soto, Hernando. The Other Path: The Invisible Revolution in the Third World. New York: Harper & Row, 1990. Dieterle, David A. “Export-Import Bank of the United States.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 116–7. Santa Barbara, CA: Greenwood, 2017.

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Dieterle, David A., and Kerry Hritz. “State Capitalism.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 296–8. Santa Barbara, CA: Greenwood, 2017. Dieterle, David A., and Kenneth Maly. “North American Development Bank.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 242–3. Santa Barbara, CA: Greenwood, 2017. Dieterle, David A., and Collin Tipton. “Asian Tigers.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 17–8. Santa Barbara, CA: Greenwood, 2017. Drum, Lauren. “Monetary Unions.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 236–7. Santa Barbara, CA: Greenwood, 2017. Ebeling, Richard M. “Mises Daily Articles: Can Free Trade Really Prevent War?” Mises Institute. March 18, 2002. Accessed July 10, 2019. https://mises.org/library/can-free-trade-really-prevent-war. Kuehn, Nicole. “Single Currency Area.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 285–6. Santa Barbara, CA: Greenwood, 2017. Liedong, Tahiru Azaaviele. “Could West Africa Introduce a Single Currency?” CNN: The Conversation. August 8, 2017. Accessed July 10, 2019. https://www.cnn.com/2017/08/08/africa/single-currency-west -africa/index.html. “Member States.” Economic Community of West African States (ECOWAS). Accessed July 10, 2019. http://www.ecowas.int /member-states/. Mooney, Loren. “Matthew O. Jackson: Can Trade Prevent War? A New Network Model Suggests That International Trade Alliances Are Considerably More Effective than Military Ones at Keeping the Peace” Stanford Business. May 28, 2014. Accessed July 10, 2019. https://www.gsb.stanford.edu/insights/matthew-o-jackson-can -trade-prevent-war. Moore, John. “Currency Wars.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 69–71. Santa Barbara, CA: Greenwood, 2017. “North American Free Trade Agreement (NAFTA).” Office of the U.S. Trade Representative. Accessed July 10, 2019. https://ustr.gov /trade-agreements/free-trade-agreements/north-american-free -trade-agreement-nafta.

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O’Connor, David E. “African Development Bank Group.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 3–5. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Asian Development Bank.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 15–7. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Deng Xiaoping.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 79–80. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Inter-American Development Bank.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 174–6. Santa Barbara, CA: Greenwood, 2017. O’Connor, David E. “Microfinance Institutions.” In Economics: The Definitive Encyclopedia from Theory to Practice, Volume 4: Global Economics, edited by David A. Dieterle, 233–4. Santa Barbara, CA: Greenwood, 2017. Reuters. “China’s Yuan Just Joined an Elite Club of International Monetary Fund Reserve Currencies.” Fortune, October 2, 2016. Accessed July 10, 2019. https://fortune.com/2016/10/02/china-yuan-imf-currencies/.

ADDITIONAL GLOBAL ECONOMY RESOURCES OF INTEREST Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Publisher, 2012. Norberg, Johan. Progress: Ten Reasons to Look Forward to the Future. London: Oneworld Publications, 2017. Novak, Michael. The Spirit of Democratic Capitalism. New York: Simon & Schuster, 1982. Rickards, James. Currency Wars: The Making of the Next Global Crisis. New York: Portfolio/Penguin, 2012. Rivoli, Pietra. Travels of a T-Shirt in a Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade. Hoboken, NJ: John Wiley & Sons, 2009. Rosling, Hans, Ola Rosling, and Anna Rosling Ronnlund. Factfulness: Ten Reasons We’re Wrong About the World—and Why Things Are Better Than You Think. New York: Flatiron Books, 2018. Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle for the World Economy. New York: Free Press, 2002.

Index

Aboriginal tribes, 7 Absolute advantage, 17–21, 113, 145 Addis Ababa, 93 African Continental Free Trade Area (ACFTA), 93 African Free Trade Agreement, 93–94 African Union (AU), xliv, 92–94 Age of Discovery. See Age of Exploration Age of Exploration, xxi–xxii, xxxviii, 18 Agenda 2063, 93 Alexander the Great, xxxviii Amin, Id, 92 An Inquiry into the Nature and Causes of the Wealth of Nations (Adam Smith), xxiv, 17, 113 Anchor currency, xxvii, xxx, 49–50, 53, 63, 71, 73, 103, 137, 140–141 Anglo-Iranian Oil Co., xlii–xliii Anglo-Persian Oil Co., xli–xlii Anti-Dumping Agreement, 85 Appreciation, currency, 45, 53–54 Association of Southeast Asian Nations, 94 Australia, xlvi, 7, 10, 90, 101 Austria, xlv Autarky, 132 Axis, xxvi, xlii, 62

Babylon, xvi, xxxvii. See also Mesopotamia Bahrain, 90 Baht, 63, 104 Balance of payments, 33–40, 64. See also Capital account; Current account; Financial account Balance of trade, 34, 38, 40–41, 54, 108 Banerjee, Abhijit, 118 Bank of England, 72–73 Bank of International Settlements (BIS), 60–61, 124–125 Bank of Japan, 70, 73 Barre, Siad, 92 Bastiat, Frédéric, 141 Belgium, xliii, 91 Benin, xliii, 142 Bernanke, Ben, 125 Bhagwati, Jagdish, 116–117 Bilateral investment treaties (BIT), 90–91 Bilateral trade agreements, 88, 90 Black market, 51 Board of Governors: Federal Reserve System, 70–71, 73, 125; IMF European Bank for Reconstruction and Development, 123 Bolivar, Venezuelan, 51 Bolivia, 118–119 Botswana, xliv 169

170 Index

Brazil, 15, 129 Bretton Woods Agreement, xxx, 65, 84 Bretton Woods Conference, xxvi, xxviii, xxx, xlii, 49, 62, 65, 78, 83–85, 98. See also General Agreement on Tariffs and Trade (GATT); International Bank for Reconstruction and Development; United Nations; World Bank Brexit, xxxiv, xlvi, 52. See also European Union; Great Britain BRICS, 94. See also Brazil; China; India; Russia; South Africa British pound, 47, 50, 52, 61, 73, 137. See also Bank of England Brunei, 101 Buddhism, xxxviii Bulgaria, xlv, 52 Bureau of Economic Analysis, 33, 38, 40. See also Department of Commerce Burkina Faso, xliii, 142 Burmah Oil Company, xl Bush, George H. W., 89 Byelorussia, xxxii Cabot, John, xxii, xxxix Cameroon, xliii Canada, xxxiv, xlv, xlvi, 10, 90, 112, 119, 136. See also North American Free Trade Agreement (NAFTA); Trans-Pacific Partnership (TPP); United States-Mexico-Canada Agreement (USMCA) Canada-U.S. Free Trade Agreement (CUSFTA), 88 Capital account, 34, 37–40. See also Balance of payments; Current account; Financial account Capital resources, 3, 8 Capitalism, xxxv, 12–14, 104, 119, 128. See also Market economic system, State capitalism Carry trade, 73 Carstens, Agustín, 124 Cartels, 106

Castro, Fidel, xliii Cathay. See China, ancient history of Central African Republic, xliii Central American Free Trade Agreement (CAFTA), 88–90 Central Intelligence Agency (CIA), 42 Chad, xliii Chavez, Caesar, 104 Child labor, 29–30, 70, 107–109 Chile, xviii, xlvi, 90, 129 China: age of exploration, xxi, xxxviii– xxxix; ancient history of, xvi–xx, xxxv, xxxviii, 112; modern economy, xxxiii–xxxv, 9, 10, 13, 36, 50, 102– 103, 121, 128, 129, 134–137, 141; poverty in, 130; and trade, 41, 90, 100–101, 108, 134; twentieth century, xxix, xlii–xlv. See also People’s Bank of China (PBC); Polo, Marco; Xiaoping, Deng; Yuan, Chinese Clinton, Bill, 89 Cold War, xxvi, xxix, xxxi–xxxii, xliii–xliv Collection of Laws for Electronic Access (CLEA), 83 Collier, Paul, x, 115–116 Colombia, 90 Columbus, Christopher, xxii, xxxix, 112 Command economy, 7–10, 12–14, 57, 81, 115. See also Marx, Karl; Socialism Commanding heights, 81 Commodities, 2, 58 Communism, 13 Communist Manifesto, The (Karl Marx), xl. See also Marx, Karl Comparative advantage, xxxvi, xl, 18–21, 113–114, 117, 132. See also Ricardo, David Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), 102. See also Trans-Pacific Partnership (TPP) Congo, xxxvi, xliii, 7 Corn Laws, xl



Costa Rica, 51, 90 Cote d’Ivoire, xliii, 142 Crawling peg exchange rate system, 48 Croatia, xlvi Crony capitalism, 104 Cuba, xliii, 9, 36, 84, 98, 128 Currency. See Anchor currency; Appreciation, currency; British pound; Currency manipulator; Currency wars; Depreciation, currency; Euro; Global reserve currencies; Renminbi; Reserve currencies; Single currency areas; Yen, Japanese; Yuan, Chinese Currency manipulator, 100 Currency wars, 135–136 Current account, 34–35, 37–39. See also Balance of payments; Capital account; Financial account Cyprus, xlv Czechia, xlv Czechoslovakia, xxxii da Gama, Vasco, xxi, xxxix, 112 de Soto, Hernando (economist), 142 de Soto, Hernando (explorer), xxii, 112, 119 Denmark, xliv–xlv, 52 Department of Commerce, 33, 40. See also Bureau of Economic Analysis Depreciation, currency, 45, 51, 53–54 Devaluation, 53–54, 62, 133 Development banks, 138 Dias, Bartholomew, 112 Dirty float, 50. See also Managed float Division of labor, xxiv, 2, 17–18, 113 Doha Round. See General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO) Dollarization, 51–52 Dominican Republic, xxxiv, 89–90. See also Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), 89–90

Index 171

Draghi, Mario, 124–125 du Champlain, Samuel, xxxiv Duflo, Esther, 117 Dumping, 27, 85, 105 East Germany, xxxiii, xlii, xlv Easterly, William, 116 Economic Community of West African States, 94, 136 Economic populism, 133 Economic rent, 28–29 Economic systems. See Capitalism; Command economy; Market economic system; Mixed economy; Socialism; State capitalism; Traditional economy Egypt, 15 Egyptians, ancient, xvi, xxxvii El Salvador, 52, 90 Embargo, xxxi, xliii, xliv, 23, 25, 128. See also Protectionism Emergency Tariff of 1921, xli Engels, Friedrich, xl Equatorial Guinea, xxxvi, xliv Estonia, xlv Euro, xxxiii, xxxiv, xlv, 48, 52, 71–72, 125. See also Anchor currency; European Central Bank; Flexible exchange rate system; Global reserve currencies European Central Bank, 52, 71–72, 92, 124–125 European Coal and Steel Community, xliii European Commission, 56, 91 European Common Market, xxxii, xxxiii, xliii, 92 European Economic Community, xliii, 91. See also European Common Market European Monetary Union, 52. See also European Monetary Zone European Monetary Zone (EMZ), xxxiii, xlv, 52, 71, 125, 136 European Union, xxxii–xxxiv, xliii–xlvi, 14, 24, 41, 52, 91–92

172 Index

Exchange rate systems. See Dirty float; Fixed exchange rate system; Flexible exchange rate system; Managed float Exchange rates, 43–48. See also Appreciation, currency; Depreciation, currency; Forward exchange rate; Spot exchange rate Export-Import Bank of the United States, 139 Exports. See Balance of trade; Current account; Export-Import Bank of the United States; Mercantilism; Nationalism; Trade deficit; Trade surplus; Trans-Pacific Partnership; United States-China Trade Agreement Federal Open Market Committee (FOMC), 126 Federal Republic of Germany, xlii–xlv. See also West Germany Federal Reserve Bank of New York, 61 Federal Reserve System (Fed), 70, 125–126 Financial account, 35–39. See also Balance of payments; Capital account; Current account Financial crises, 52–53, 103 Finland, xlv Fiscal deficits, 81 Fiscal policy, 72, 118 Five-Year Plan, xliii Fixed exchange rate system, xxx, 48–49, 53, 102–103 Flexible exchange rate system, xxvii, 45, 50, 53, 81 Fordney-McCumber Act, xli Foreign direct investment, 35–36, 58, 81 Foreign portfolio investment, 35–36 Forward exchange rate, 45 Forward market, 45 Four freedoms, xxxii Four Modernizations, xxxv Fourteen Points, xli Fracking, 131

France, xxiv, xxix, xxxix, xliii, 91–92, 122, 132 Free trade zone, 71 French Revolution, xl Friedman, Milton, 128 G-7, 123 G-20, 123 Gambia, xliv, 142 Garcés, Maria Fernando Espinosa, 123 General Agreement on Tariffs and Trade (GATT), xlii, 67, 83–85, 105 Geneva, 58, 69–70, 87 Geneva I (GATT Round), 84 Genghis Khan, xxxviii Germany, xxvi, xxxii, xliii–xlv, 55, 61, 84, 91 Ghana, xliii, 142 Glasnost, xxxi, xxxvi, xliv Global reserve currencies, 137 Gold reserves, xxx, 48–49, 64 Gold Standard, xxvii, xxx, 48 Gorbachev, Mikael, xxxi–xxxii, xliv Great Britain: modern economy, xxxiii–xxxiv, xxxvi, xlvi, 10; twentieth century, xxvi–xxvii, xxxix, xlii–xliii, xlv. See also Bank of England; Brexit; Pound sterling Great Leap Forward, xliii Greece, xvii, xliv, 63, 125 Greeks, Ancient, xvii, xxxvii Gross Domestic Product (GDP), 40, 60, 81, 140 Guatemala, 90 Guinea, xxxvi, xliii, 92, 142 Hague, The, 87 Harding, Warren, xli Hitler, Adolf, xxvi, xlii HIV-AIDS, 118 Honduras, 90 Hong Kong, xlv, 10, 14, 60 Household Responsibility System, xxxv Human resources, 2, 131–132 Hungary, xxxii, xlv



Hyperinflation, xlii, 51, 55, 104–105, 118, 136 IMF conditionality, 63, 79 Imports. See Balance of trade; Current account; Export-Import Bank of the United States; Tariffs; Trade deficit; Trade surplus; Trans-Pacific Partnership (TPP); United StatesChina Trade Agreement Incentives, xliv, 4–6, 9, 11, 116, 120, 121 India: Age of Discovery, xxi–xxii, xxxix, 112; early history of, xvi– xviii, xx, xxxviii; modern economy, 10, 95, 129–130; twentieth century, xlii. See also Bhagwati, Jagdish; Singh, Manmohan Individual transferable quotas (ITQs), 131 Indus River Valley, xvi Industrial Revolution, xxiv–xxv, xl, 18 Infant industry, 26 Inflation, xxx–xxxi, 50–51, 55, 103, 104, 141. See also Hyperinflation Information economy, 58 Institute for Liberty and Democracy (ILD), 119. See also de Soto, Hernando Intellectual property rights, 26, 30, 69, 82, 108–109, 134. See also TradeRelated Aspects of Intellectual Property Rights; World Intellectual Property Organization (WIPO) Interest rates, 36, 73, 141. See also Interest rates, nominal Interest rates, nominal, 81 Intermediation, financial, 53 International Bank for Reconstruction and Development (IRBD), xxvii, xlii, 65–67, 123. See also World Bank International Centre for Settlement of Investment Disputes, 65. See also World Bank Group International Court of Justice, 87. See also United Nations

Index 173

International Development Association (IDA), 65. See also World Bank Group International Finance Corporation (IFC), 65. See also World Bank Group International Labor Organization, 30, 60, 69–70 International Monetary Fund (IMF): creation of, xxviii, 61–62; critics of, 81–82; role of, 64, 78–82. See also IMF conditionality; Lagarde, Christine; Special Drawing Rights (SDRs) International Trade Organization (ITO), xxxviii Ireland, xliv Israel, xxxi, 90 Italy, xxvi, xliii, 84, 91, 124 Jamestown, xxxix Japan: modern economy, xxxiv, xlvi, 10, 14, 24, 129; trade of, 90, 98, 101; twentieth century, xxvi–xxvii, xlii, 65, 84. See also Bank of Japan; Yen, Japanese Jordan, 90 Kayango tribes, 7 Kenya, xliii, xliv Keynes, John Maynard, xxvi–xxviii Korean War, xliii Krugman, Paul, 114 Labor, xxii, xxiv, xxv, 2, 130–131. See also Child labor; Human resources Lagarde, Christine, 122, 124, 126 Latin America, 116, 119, 136 Latvia, xlv League of Nations, xli Least developed countries (LDCs), 59 Lender of last resort, 78–79, 82, 139 Lesotho, xliv Lithuania, xlv Logic of collective action, 29 Luxembourg, xliii, 91

174 Index

Madagascar, xliii Maduro, Nicholas, 104 Magellan, Ferdinand, xxii, xxxix, 112 Malaria, 118 Malawi, xliv Malaysia, xxxiv, xlvi, 90, 101, 129 Mali, xliii Malpass, David R., 123 Malta, xlv Managed float, 50. See also Dirty float Market economic system (market economy), 5, 8–10, 12, 14, 21, 57. See also Capitalism Marx, Karl, xl Mauritania, xliii Mbuti Pygmies, 7 Mercantilism, xviii, xxii–xxiv, 18, 113, 140 Mesopotamia, xxxvii Mexico: history of, xvii; modern economy, xxxiv, xlvi, 30, 136; twentieth century, xlv. See also Carstens, Agustin; Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); North American Free Trade Agreement (NAFTA); Trans-Pacific Partnership (TPP); United StatesMexico-Canada Agreement Mexico City, 60 Microfinance, 118, 138–139 Mixed economy, 9–10 Modern mercantilism. See Nationalism Monetary policy, 70–74, 104, 118, 125–126. See also Bank of England; Bank of Japan; European Central Bank; Federal Reserve System (Fed); People’s Bank of China (PBC) Monetary unions, 52 Morocco, 90 Most-favored nation (MFN), 68, 84 Mugabe, Robert, 104 Mulroney, Brian, 89 Multilateral agreements, 88, 91

Multilateral Investment Guarantee Agency. See World Bank Group Nationalism, 140 Natural resources, xxxiii, 2, 130–132 Netherlands, xxxi, xliii, 87, 91–92 New Zealand, xlvi, 90, 101 Nicaragua, 90 Nixon, Richard, xxx, 49 Nobel Peace Prize, 92, 114 Nobel Prize in Economics, 114, 120 North, Douglass, 120 North American Free Trade Agreement (NAFTA), xxxiv, xlv, 27, 88–90, 98–99, 102. See also Canada; Mexico; United States-MexicoCanada Agreement (USMCA) North Atlantic Treaty Organization (NATO), 130 North Korea, xliii, 9, 14, 128 Obama, Barak, 90, 101, 125 Offshoring, 107, 116–117 Oil, xxx–xxxi, xxxiii, xl–xliv, 2, 13, 105–106, 131, 133–134, 137 Olson, Mancur, 29. See also Logic of collective action Oman, 90 On the Principles of Political Economy and Taxation (David Ricardo), 113 Opportunity costs, xl, 3–4, 18–21, 113 Organization for Economic Cooperation and Development (OECD), 60 Organization of African Unity (OAU), 92–93 Organization of Petroleum Exporting Countries (OPEC), xliv, 106. See also Cartels Oster, Emily, x, 118 Ottoman Empire, xxxviii Outsourcing, 107 Pakistan, xvi, xxix, xlii Panama, xxii, 51, 90 Par value, xxvii

Index 175

Pearl Harbor, xlii Pegged exchange rate system, 48–50. See also Anchor currency; Fixed exchange rate system People’s Bank of China, 74–75. See also China Perestroika, xxxi, xxxvi, xliv Perot, Ross, 89 Peru, xviii, xlvi, 90, 101, 119. See also de Soto, Hernando Pizarro, Juan, xxii Poland, xvii, xxxi, xlii, xliv, xlv, 52 Polo, Marco, xviii–xxi, xxxvii, 111–112 Populism. See Economic populism; Modern mercantilism; Nationalism Portugal, xxi, xxxi, xxxix, xliv, 92, 112 Pound sterling, xxxiii, 70, 73 Powell, Jerome H., 125–126 Prince Henry the Navigator, xxi, xxxix, 112 Private ownership, 8–9, 128 Private property, 8 Privatization, 121, 138 Property rights, 5–6, 9, 11, 14, 21, 81, 120. See also Intellectual property rights; Trade-Related Aspects of Intellectual Property Rights (TRIPS) Protectionism, 23, 84, 106. See also Embargo; Quotas; Subsidies; Tariffs Purchasing power parity (PPP), 55–56 Quebec City, xxxix Quota subscriptions, xxvii, 64 Quotas, 24–25, 68, 81, 94. See also Individual transferable quotas (ITQs); Protectionism Raleigh, Sir Walter, xxii Reagan, Ronald, xxxii, xxxvi Regional trade agreements, 88, 98 Regional unions, 91. See also African Union; European Union Renminbi, 61, 74–75, 103, 135, 137. See also People’s Bank of China; Yuan, Chinese Republic of Ireland. See Ireland

Republic of Sudan, xlvi Reserve assets, 36, 39–40 Reserve currencies, 137 Revaluation, 54 Ricardo, David, xxv, xxxvi, xl, 18, 113. See also Comparative advantage Roman Empire, xvii, xxxviii Romania, xxxii, xlv Rule of law, 5–6, 81 Russia, xxxii, xlv Sachs, Jeffrey, 118–119 Salina de Gortari, Carlos, 89 Sanctions, economic, 23, 26–29, 68, 86, 133. See also Embargo; Protectionism; Quotas; Tariffs Scarcity, 2–3 Schengen Agreement, xxxiii, xlv Scotland, xlvi Senegal, xliii, 142 Seven Years War, xxxix Shanghai Stock Exchange, xlv Shock therapy, 118–119 Silk Road, xix–xx, xxxviii Singapore, xxxiv, xlvi, 10, 14, 90, 101, 129 Singh, Manmohan, 120–121 Single currency areas, 52, 136 Single European Act, xliv Single Market Treaty, xxxiii Single monetary zone (region), 52, 136 Sixteenth Amendment, 24, 27 Slovakia, xlv Slovenia, xlv Smith, Adam, xxiii–xxv, xl, 17–18, 19, 113. See also Absolute advantage; An Inquiry into the Nature and Causes of the Wealth of Nations Smoot-Hawley Tariff Act, xli, 27, 28, 61. See also Tariff Act of 1930 Socialism, 8, 12–14, 92. See also Command economy; Economic systems Solar power, 132 Source funding, 139 South Africa, xxxi, xxxix, xliii

176 Index

South America, xvii, 52, 104, 112, 128, 129 South Korea, xxxiv, xliii, 73, 90, 129 South Sudan, xlvi Sovereign, 78, 94 Sovereign wealth funds, 137–138 Soviet Union, xxvi, xxix, xxxi–xxxii, xlii–xlv, 62 Special Drawing Rights (SDR), xxvii, 40, 61, 64, 75 Specialization, 2, 17–18, 113, 130 Spot exchange rate, 45 State capitalism, 128 Stiglitz, Joseph, 114 Sub-Saharan Africa, 14, 128–130, 132 Subsidies, 25. See also Protectionism Sustainable Development Goals, 58–59 Sweden, xlv, 52 Switzerland, xxxiii, 58, 60, 70, 87, 119 Tanzania, xliii, 115 Tariff Act of 1930. See Smoot-Hawley Tariff Act Tariff wars, 134–135 Tariffs: definition of, 23–24; history of, xli; purposes of, 25–26, 62, 68; as revenue, 24. See also General Agreement on Tariffs and Trade (GATT); Protectionism; Sanctions, economic; Tariff wars; Trans-Pacific Partnership (TPP) Thailand, xxxiv, 63, 103–104, 129 Theocracy, 13 Thurow, Lester, 115 Togo, xliii, 142 Touré, Sékou, 92 Trade, measurement of. See Balance of trade; Trade, net; Trade deficit; Trade surplus Trade, net, 38, 40, 41 Trade, voluntary, 6, 8 Trade agreements. See African Free Trade Agreement; Dominican Republic-Central America Free Trade Agreement (CAFTA); North American Free Trade Agreement

(NAFTA); Trans-Pacific Partnership; United States-China Trade Agreement; United StatesMexico-Canada Agreement (USMCA) Trade associations. See Association of Southeast Asian Nations; Economic Community of West African States Trade deficit, 41, 63 Trade-Related Aspects of Intellectual Property Rights (TRIPS), 83. See also Intellectual Property Rights Trade surplus, 41 Trade war, 28, 106, 134 Traditional economy, 7 Trans-Pacific Partnership (TPP), xlvi, 90, 101, 134. See also Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Treaty of Paris (1763), xxxix Trump, Donald, xlvi, 26, 90, 101, 102, 125, 130 Ukraine, xxxii, xlv UN Commission on International Trade Law, 86 UN Convention on the Law of the Sea, 87 United Kingdom. See Great Britain United Nations, xxvi, xlii, 85–88. See also International Court of Justice; United Nations Conference on Trade and Development (UNCTAD); World Intellectual Property Organization (WIPO) United Nations Conference on Trade and Development (UNCTAD), 58–59 United States-China Trade Agreement, 100 United States-Mexico-Canada Agreement (USMCA), 99, 134 Uruguay Round, 69, 83–84. See also General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO)

Index 177

Venezuela, 9, 14, 36, 55, 104–105, 128, 129 Vespucci, Amerigo, xxii, 112 Vietnam, xxxiv, xlvi, 101, 128, 129 Vikings, xxii, 112 Washington Consensus, 81–82 Water power, 132 West African Single Monetary Zone, 52 West Germany, xxxii, xlii–xlv. See also Federal Republic of Germany White, Harry Dexter, xxvi Wilson, Woodrow, xli World Bank, xxvii, 42, 65–66, 98, 114–116 World Bank Group, 60, 66–67, 123– 124. See also International Centre for Settlement of Investment Disputes; International Development Association (IDA); International Finance Corporation (IFC) World Court. See International Court of Justice

World Intellectual Property Organization (WIPO), 83, 87–88 World Trade Organization (WTO), xlv, 27, 67–69, 78, 82–85, 86, 105. See also General Agreement on Tariffs and Trade (GATT) World War I, xxv, xli, xlii, 61, 69, 84, 86, 98 World War II, xxvi, xxix, 48–49, 58, 60, 62, 91, 98 Xiaoping, Deng, xxxv, xliv, 100, 121–122 Yellen, Janet, 70, 125 Yen, Japanese, 50, 73, 137. See also Bank of Japan; Japan Yuan, Chinese, 50, 61, 74, 103. See also China; Renminbi Yugoslavia, xxxii Zambia, xliv Zedong, Mao, xxix, 74, 121 Zimbabwe, 51

About the Author Dr. David A. Dieterle is professor of economics in the Finance and Economics Department at Walsh College and director of the Center for Economic Education. Dr. Dieterle served as president and chief academic officer of the Michigan Council on Economic Education (MCEE) from 1999 to September 2015. A National Teaching Fellow of the Foundation for Teaching Economics, Dr. Dieterle specializes in economic education, global economics, and economic analysis. He has received several teaching and writing honors. Dr. Dieterle is the editor of Economic Thinkers: A Biographical Encyclopedia (Greenwood Press, 2013), coeditor with Kathleen Simmons of Government and the Economy: An Encyclopedia (Greenwood Press, 2014), and editor of Economics: The Definitive Encyclopedia from Theory to Practice (Greenwood Press, 2017). Booklist.com, the review arm of the American Library Association, listed Economics: The Definitive Encyclopedia from Theory to Practice as one of the Top Ten Reference Books for 2018. Recently he authored Business and Economics Series: Taxation (Greenwood Press, 2019). Dr. Dieterle was a coauthor of Social Studies in Our Nation’s High Schools: A National Random Survey of Social Studies Teachers’ Professional Opinions, Values, and Classroom Practices (The Center for Survey Research and Analysis, University of Connecticut, 2009). Dr. Dieterle has authored publications that appeared in Social Education and Newspaper in Education educational sources for the Chicago Tribune and Detroit Free Press.

180

About the Author

Dr. Dieterle has consulted with the Michigan, Illinois, and Nebraska departments of education and many organizations throughout his career, including Junior Achievement, Goodwill Industries of Northern Michigan, and Economics for the Clergy. He has presented over sixty workshops and conference presentations nationally and internationally. Dr. Dieterle presented a series of lectures and workshops to educators in Zambia, Malawi, and Puerto Rico. He presented papers to both the Zambia Ministry of Education and Malawi Ministry of Education proposing the inclusion of economic and entrepreneurship education in their national teacher preparation programs. Dr. Dieterle taught elementary and middle school in Michigan Public Schools for eleven years. He received degrees from Central Michigan Uni­ versity, Purdue University, and a doctorate from Michigan State University. He resides in Michigan and loves to boast about his seven grandchildren and two great grandchildren.