Globalization of the World Economy

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GLOBALIZATION OF THE WORLD ECONOMY

AND RUSSIA’S PLACE IN IT

Prof. V. Perskaya, Doctor of Science (Economics)

Introduction.

Processes developing in the world economy between the end of the 20th and beginning of the 21st century (in the real sector, communications, trade, flow of direct or portfolio investments as well as in the world financial system) determine the transformation of the world economic system into an integrated organism – the world economy with a capacity for self-development, self-reproduction and sustainability. The world economic space is developing into a common business area when geographic location of productive forces, sectoral structure of investments, output or sales represent not only a certain level of internationalization of reproduction process but its more advanced phase – globalization. And international economic agents implementing all forms of international interaction and taking a realistic view of the economic situation must not only take into consideration specific character of the world economy development but also enjoy benefits offered by globalization. Particular attention is to be paid to cyclic character of the world economic development, which in the age of globalization is increasingly governing cycles of national economies’ growth, especially those of industrially advanced or new industrialized countries (high openness, developed stock market, dependence on economy foreign-trade component).

Integrity of the world economy existence and advancement implies cooperation on a fairly sustainable level. It is based on international and national (in the framework of nation-states) production of material and spiritual values, their distribution and consumption. In other words, in the context of globalization, the world economy is based on increasing interdependence and complementarity of individual national economies.

The extent of such interdependence is determined by the development of barter transactions, including sectors of services and trade in intellectual property rights, free migration of labor resources, including highly intellectual manpower, free floating of capital, speedup of communication between national economies and economic agents (subject to interaction transparency) as well as establishment of a uniform legal framework of state and interstate regulation. A common objective of the world economy as a system is a consistent long-term development aimed at satisfying human needs implemented on the level of each nation-state. International public or private law regulating economic and political relations between nation-states, economic clusters, legal entities, and private individuals set the basis for the establishment of legal environment. Compliance with convention-based or conventional rules is ensured by both nation-states and collective forms of control over international law observance usually represented by a various international organizations. Those rules are clarified and revised in line with current needs of the world economy development.

Modern world economy is a result of evolution, whose outcomes may be summarized as follows:

a. The world economy has becomemonotype in the wake of disintegration of the socialist system (state functioning on the basis of a market model of economic activities, with predominant private ownership of capital goods).

b. The economic progress is guided and assessed not only by indicators of level, structure or dynamic development of production and consumption but rather by the participation rate of a country in the international division of labor and resources available. Thus, index of competitiveness of the national production turns an essential element.

c. Economic relations are built solely on principles of partners’ economic interests in interaction and realization of these interests.

d. The significance of integration impact is growing to ensure the highest economic effect, whereupon a tendency to a voluntary transfer of a portion of regulatory functions of one nation-state to interstate (in exceptional cases, supranational) dimension.

e. In contemporary international economic relations, the role of contradictions as the mainspring of the world economy progressive development is somewhat changing: cold war gives place to a tough struggle for sales markets among essential world economy centers, among oligopolies or TNCs in the framework of the world economy based on a large-scale internationalization of reproduction process in general.

Therefore, the world economy has become quite uniform in terms of methods of economic activities. It has set conditions for transformation of the world economy into a qualitatively new state – globalization phase of development.

Development of globalization processes in the world economy has a transformational impact on international economic relations (Box 1), forms of their implementation and regulation of the world economic system development.

Globalization Process and New Tasks of World Economy.

Globalization is an objective (regardless of will or wish of world economy agents) process developing in time and space, which one can study empirically from many angles and in many spheres. Globalization not only characterizes manifestation of external interrelationship of the development of nations and peoples, enhancement of international regionalization process (implying both strengthening of interaction and regional cooperation in all spheres of human life and increasing significance of individual regions of the world in terms of putting in place diverse forms of cultural, social, economic, ecological or any other partnership), but also sets real conditions aimed first of all at developing economic interaction. New factors in globalization process include both transnationalization of borders for goods or services transactions or in case of labor migration and emergence of a global ecological awareness of danger related to continuation of arms race, production of technologies or weapons of mass destruction, impoverishment of natural environment and depletion of natural resources as well as appearance of new spheres of interstate regulation for the sake of assuring future of the mankind. A new phenomenon is transcirculation of technological cultures of reproduction process on the basis of intensified internationalization of the latter, growth in number and power of so-called new “transnational actors”: economic agents, various institutes or partnership agreements. Finally, increase in economic concentration that withstands international competition transcending national borders, which, in its turn, assumes a more complicated character is also a new phenomenon. At the same time, the above-mentioned distinctions of globalization as a process encompassing all spheres of human life indicate the sphere of international responsibility for the mankind security in a quite different way, imposing a different perception of the role and place of the whole arsenal of political, diplomatic, and economic measures of interaction among states and nations in the process of regulation of international relations. Therefore, globalization process is objective, and its roots lie in dialectics of the development of human society, with dominant economic component. Internationalization of reproduction process as a whole makes the basis for world economy globalization (Box 2). Globalization has nothing in common with imperial politics whose distinctive feature is coercive methods of implementation (military or terrorist actions, annexation of territories, etc.). Economic expansion as the mainspring of internationalization process acts as just a tool for involving into economic life. Globalization embodies trends that over centuries have regulated development of the world economic system based on commodity production, whose immanent qualities include: free demand and supply, freedom and democratization of business development process, competition of commodity producers bringing about economic inequality and social injustice.

Present-day stage of globalization is based on a voluntary acceptance by all countries of an arising system of organization of commodity production, but at the same time it shows inability of a number of states to build their societies on democratic principles and establish an efficient economic system. Welfare gap between the “Rich North” and “Poor South”, unevenness of territorial development are of the same nature as inequality in the property status in general, and this nature is not associated with globalization. Globalization requires transformation of nation-states’ functions to make them efficient states, which in the event of cost optimization (in terms of minimization) are able to ensure sustained economic growth, full realization of specific potential of each individual, ensure protection and restoration of nation’s ecological environment, tackling at the same time tasks related to elimination of disparities in territorial development and integrity, and territorial unity. A nation-state is capable to perform functions related to ensuring efficient and humane functioning of any society or any economy. It is its role to identify an optimum correlation of all forms of ownership relying on both established national and ethnic traditions and defining a short- and medium-term development strategy.

Globalization implies change of the world economic development paradigms: from arms race and confrontation of the two socio-economic systems during the cold-war period to the shaping of a multi-polar international community whose priorities include:

sustainable dynamic development aimed at a gradual reduction of peoples’ differentiation in terms of property status, assurance of wider access to knowledge and information space, adjustment of territorial development levels and elimination of disparities in economic confrontation “Rich North and Poor South”;

creation of opportunities for the full realization of specific potential of individuals in each country on the basis of democratization of the life of society but with due regard for national and historic heritage and nations’ cultural and religious mentality;

assurance of restoration and maintenance of ecological environment as basic factor for human survival on the planet;

inadmissibility of appearance and prevention of any exercise of politics leading to conflicts with utilization of military technologies and means of war, including terrorism as a method to combat dissent or impose religious fanaticism.

Transformations in the World Economy.

Priority growth rates of manufacturing industry. Only in the period between 1956 and 2000, the world manufacturing output has grown by 8.2 times, mining industries by 3.4 times, and agriculture threefold. This dynamic development made an impact on reproduction process pattern in terms of, firstly, boosting a tendency towards vertical and horizontal diversification, raising levels of specialization and cooperation, changing structure of the international division of labor – in production sharing, thus gradually ousting inter-industry trade and replacing it by intra-industrial one – through increasing the level of internationalization of reproduction process as a whole and involving in it practically all countries of the world by enhancing interdependence of national economies.

Substantial improvement of international transport infrastructure for account of developing new generations of aviation, road, water or railway transports as well as buildup of international pipeline network. Carriage of freight and passengers have not only accelerated but also became substantially cheaper. So, in 1930, an average cost of one man/mile of air carriage amounted to 68 cents; in 1950 it was 30 cents and in 1990 – 11 cents (in terms of dollar rate in 1990). Between 1920 and 1980, actual cost of sea transportation has decreased by about three-fourth due to containerization while total merchant marine tonnage increased by over 6.4 times in the period between 1950 and 1999. All this shows speedup of communicability among countries, “rapprochement in space” of national economies.

Information revolution resulting in radical changes in telecommunications. Growth of the Internet “worldwide web” is based on cheaper prices for electronics and reduction in cost of information provider services. The price of a personal computer and its peripheral equipment went down by 1869 times between 1960 and 2000[1]. According to expert judgement, amount of information through the Internet is doubling every 100 days and increases by about 7 times throughout a year.[2] Due to the functioning of sophisticated telecommunication and information technologies, including broadcast Earth satellites, a global “cyberspace” has been actually set up that is characterized by information flows rapidly and easily transcending obstacles and state borders. These are information technologies that in our days act as one of accelerators of the world economy globalization process, but at the same time substantially exacerbating competitive confrontation of technical-and-economic potentials of world economy agents (Box 3).

Rapid development of transnational corporations and transnational banks - world economy agents - has not only intensified international flows of commodities, services, intellectual property rights but also determined their new qualitative content - expansion of intra-corporate exchange. According to experts judgement, it varies between 35 and 45 percent of the total TNC-produced aggregate product[3]. The economy of the countries both capital exporters and investment recipients (mainly direct investments) becomes more deeply integrated in the world economy whereas national reproduction process more internationalized (Box 4). Specific national interests of each state have priority in regulation of the economy. TNC-related lobbying of interests in the industrially developed countries are confronted with resolute opposition of trade unions, various non-government organizations or associations. Transnationalization of the economy as a stage of future common global economy has not yet come into existence. TNCs and TNBs only facilitate and intensify the process of internationalization of reproduction in the framework of the world economy through its vertical and horizontal diversification.

Worldwide circulation of new production or management technologies consistent with new productive and technological standards of organization of production implemented mainly on TNS basis. Factors of price or non-price competition[4] determine expedience of transfer of either one phase or the entire production cycle to those countries where costs and transaction costs are lower but qualification skills of manpower potential make it possible to use transferred technologies and assure relevant standard of production. The recipient countries, in their turn, on the basis of progressive development of economic activities of their national economic agents, also transfer productions that have already become theirs across national borders. Therefore, the world sees a consistent circulation of more advanced technologies replacing old ones. Transfer of technologies is being implemented also through extension of patent-and-license-related trade[5], direct foreign investments and also on the basis of development of international strategic alliances[6]. In case of creating alliances where most principal stakeholders are TNCs the primary objective is either new generation of output or reduction of production costs related to high-technology products for account of inter-firm production cooperation. General Electric (USA) or Toshiba (Japan) may be examples of producing new generation gas turbines; Daimler-Benz (FRG) or Nissan-Motor (Japan) of cooperation in automobile production, etc. The characteristic feature is that to the extent of scientific and technological capacity building in new industrialized countries, their companies will get involved in strategic alliances system. For instance, in computer technologies, a research-and-technical cooperation that united American firms Sun, IBM and South-Korean Samsung in a strategic alliance developed extensively. As a result, we witness a kind of enhancement of interdependence in terms of scientific and technological advancement in the framework of global economy, and global economic space becomes more technologically interrelated.

Qualitative changes in the development of the international loan market are determined by, firstly, expansion of foreign trade activities of TNCs and other world market participants, secondly, by a growing need to accelerate credit resources turnover and facilitate access thereto in any point of the world economy.

It is these factors that have determined supranational capital markets on the basis of offshore zones, for example, market in Euro currencies (foreign currencies vis-a-vis the country where a bank is located). Between 1964 and mid-1990s, the Euro currencies market size increased from $20 billion to $6 trillion; currently, worldwide daily foreign exchange transactions turnover amounts to about $1,5 trillion, which exceeds nearly 10 times volumes required for servicing the world turnover of commodities and aggregate foreign exchange reserves of all countries in the world. All this has substantially enhanced the process of international linkage of loan capital: for instance, in 1971, foreign assets of national banks all over the world as deposits amounted to $208 billion, in 1990 to $6,791 billion, in 1995 already to $8 trillion. The Euro currencies market encourages increase in trans-border transactions volume as the pace of converting growth rate of transnationalization of financial system is higher that that of the international reproduction process since its internationalization requires that the world financial system become more flexible and mobile. However, none of the countries declines responsibility or will to exercise control over correctness of financial operations, transparency of financial flows, and maintaining stability of the world financial system functioning (Box 5).

Data related to involvement of national economies into world-wide economic relations makes out the case for progressive internationalization of reproduction process in the world economy. Relation between foreign trade turnover and GDP serves as such general indicator, and foreign trade turnover may include export or import of services or may not. Therefore, certainly taking into account faster growth of services in the present-day world economy, their correlation with GDP seems also necessary. So, the share of world-wide foreign trade turnover rose from 16 percent in 1950 to 37 percent in 2000, and if we further add up export and import of services, the level of involvement accounted for 44 percent in 2000. It is proved empirically that open export-oriented national economies are advancing substantially faster than those basing their foreign economic policy on autarchy, on a self-contained home market. The above-mentioned data on transformational shifts in the development in globalization period also shows deliberate implementation of the policy of progressive liberalization by nation-states (removal of unreasonable barriers on the way of factors of production movement) subject to promotion of transparency of economic activity and assurance of predictability of ways of development.

Regionalization of the World Economy.

World economy sub-systems include regional and local clusters and groupings that comprise nation-states linked by trade, political, social, and cultural contacts. Regionalization of integration-based cooperation means introduction of a variety of cooperation forms and polishing of regulation tools that are more adaptable to ethnos mentality, its social and psychological determinants and traditions. And then in such local clusters, the process of coordination of interests and approaches to addressing issues, firstly, takes much less time, and secondly, may be more focused on needs of a specific nation-state or people.

If in the last century the establishment of Organizations, Unions or Associations in different countries and regions was geared toward comprehensive involvement of an increasing number of member-states to enhance significance of their decisions for the international community (so-called political weight), regionalization based on economic pre-conditions allows working out decisions meeting interests of member-countries, simplifies the process of economic space liberalization without detriment to national economies and without impeding implementation of national programs for social and economic development. At the same time, within such regional integrated groups, “screens” for increasing their influence owing to the involvement of other adjoining countries to consolidate political influence in the region are to be put in place. One should also have in mind that the process of regional integration relies on economic potential of the leader-state having de facto influence on the economy of the countries from its territorial setting. One can identify two groups of the so-called leaders – of the first and second order. Regional leaders of the first order include countries making a dominating influence on the economic situation in an individual region. They may be territorially located in the very center of a potential regional cluster or adjoined only by some part of the border. Leader of the second order is, on the one hand, a state closely connected with the leader of the world order[7] but making a substantial impact of regional cluster economy (both institutionally formalized or without any fixed contractual basis) but always located within a given area. Usually, the impact made by the state on other countries is assessed by the extent of expansion of its foreign economic policy, which finds its most representative expression in terms of: