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Changes In Global Trade And Financial Flows Economics Essay

Globalisation is the increasing level of economic integration between countries leading to the surfacing of a new market place. Globalisation has resulted in a reduction in trade protection. This is because of the increased interaction between countries has led to the possibility to purchase goods with similar quality to those developed locally, but for a cheaper price. Financial flows throughout the global economy have immensely increased due to more interaction.
– In the early 1970’s industrial development took place in developing countries, so companies moved production oversees, allowing for lower production costs mainly due to cheap labour.
– In 1983 the financial system was de-regulated and the exchange rate was floated. This means that the value of the Australian dollar is determined by the supply and demand of the currency. This led to greater accessibility of Australian firms to world capital markets and reduced exporting costs. But this increased the instability of the exchange rate.
– In the late 1980’s Australian manufacturers were persuaded to export to the international market through tariffs, subsidies, local content schemes and quotas. This was in order for them to survive in the large international market.
– There have been major changes in trade patterns that reflect changes in the global economy. An example is the growth of China being directly related to the demand of raw materials.
The increased volume of trade between countries can also be attributed to advances in technologies and new trade agreements such as the Australia – United States Free Trade Agreement (AUSFTA). Trade growth is also due to the increase in demand of the resources that Australia has high amounts of. The constantly growing Asian economies demand raw materials that Australian companies extract from the land support growth in certain industries. An example of this is the trade between Australia and China. China is in demand of resource commodities in order to expand their infrastructure and support the 8% growth rate.
Explain why globalisation has resulted in a reduction of trade protection Trade protection is a form of regulation that is imposed by a government in order to protect certain industries from cheaper oversees alternatives. Globalisation has resulted in a reduction of trade protection. This is because of increased production possibilities in developing countries that have lower wage rates than developing countries, leading to lower costs and greater profits. The removal of trade barriers can occur because a certain country can:
– Produce a good not available in another country
– Produce a good for a cheaper price than goods produced locally
– Produce a good more efficiently, allowing another country to focus on goods that they can produce efficiently
– Produce a good that is of better quality because of development of technical skills.
However, there are trade protection rules in place in order to protect certain industries and to reduce effects of off shoring on domestic markets. Reasons for protection include:
– Infant Industries: These are industries that are at the beginning of the product lifecycle and have yet to establish themselves in the market. Therefore they have not yet experienced economies of scale (have not produced enough so that the cost of producing is lower in bulk). Because of this it is very difficult for them to compete with large foreign competitors, who take advantage of economies of scale and offer their products at lower prices, domestically. Although this is a reason for protection, if it is not removed at the correct time the industry may become reliant on government protection and never mature. Therefore a balance must be found between protection and allowing domestic industries to mature.
– Dumping: This refers to the selling of goods in export markets for a cheaper price than the cost of production. This creates revenue for the exporters that are dumping, but destroys the market for the importing company as they cannot compete with the cheap prices. Dumping is prohibited because of its potential to destroy industries quickly. Dumping may occur because a company wishes to: Gain market share, to reduce excess stock or to deliberately destroy competitive, domestic producers. Dumping also affects employment levels, because consumers will purchase the cheaper good, as the law of demand states “the lower the price, the more demand there will be”.
– Domestic Employment: Cheap imports reduce the market share of producers because of consumer’s purchasing cheaper products. As a result of this unemployment may occur in a certain industry because they may not compete. There may be structural change in the domestic economy because of this inability to compete. An example of this is in the United States in the 1980’s where consumer’s preferred cheaper Japanese alternatives, therefore employment in the car industry decreased rapidly and the structure of the domestic economy changed to specialisation in the computer industry.
Explain how trading blocs have impacted on protection levels Trading blocs are intergovernmental, multilateral agreements between countries within an area that decrease regulation on each other’s exports. Trading blocs have impacted on levels of protection. Since trading blocs are intergovernmental agreements, there must be deregulation in order to achieve maximum trade efficiency. An increase in the amounts of trading blocs internationally has led to a decrease in protection levels between countries in the trading blocs. An example of a trading bloc that has eliminated all trade barriers between the members is the European Union. This was established in 1993 and, although there is minimum regulation, there remains a common tariff between the members. The reasons that countries would want to join a trading bloc are: Improved growth, increased efficiency through importing cheaper goods and services, increased competition, economies of scale (larger markets due to free trade, investment in production due to increased trade and increased technology.
Explain the consequences of deregulation on financial markets Deregulation of financial markets is where the banks have regulations removed from them. Between the years of 1983 and 1985 the financial system was deregulated by:
– The cessation of interest rate constraints on banks. This allowed banks to, more efficiently, fight for business (in the form of deposits and loans).
– Floating the Australian dollar: This is where the value of the currency is determined by the supply and demand of that certain currency. This changes the cost to import from or export to Australia, because the value of the dollar fluctuates. There is an inverse relation between the value of the dollar and the cost to import/export from/to Australia.
– Granting 40 foreign exchange licenses: This allowed foreign banks to enter the Australian financial system, and was done in order to boost competitiveness in the financial sector. In order to make the Australian banks more competitive, the procedure to set up domestic institutions was made more simple.
The consequences of de-regulation are to do with the effects of speculation on appreciation and depreciation of the currency. When there is speculation that the value of the Australian dollar will rise, more people will purchase when it is still low. This increased demand will then cause the dollar to rise because of the floating exchange rate (as shown above). This in turn will have a negative effect on exports from Australia because the currency is worth more in comparison to others. An example is if the USA are importing goods from Australia with the Australian dollar buying 40 US cents. There will be more exports from Australia at this exchange rate in comparison to when 1 Australian dollar will by 1 US Dollar.
Outline the role of the WTO, IMF and the World Bank in the global Economy The World Trade Organisation is a global establishment that supervises and implements rules controlling global trade. It is at the middle of decreasing
trade protection and barriers. The trade policies that are determined by the WTO and multilateral agreements have expanded world trade; therefore it is seen as a symbol of globalisation. The accomplishment of the WTO in decreasing obstructions to trade and encouraging globalisation can be attributed to a reduction in mainly tariffs and quotas. This is done by:
– Enforcing international agreements and trade rules:
– Controlling trade disputes
– Observing trade policies
– Supervise trade negotiations
While many countries have based their development on export and support globalisation entirely, there are many opponents to globalisation that have hindered the WTO’s protection reduction scheme through protesting. This is known as “the anti-globalisation process” and is undertaken by numerous individuals/organisations because they are opposed to transnational corporations having un-regulated power and specifically because of profit maximisation leading to reducing costs which may lead to a more dangerous work place. The success of the WTO is measured by world trade figures. The amount of merchandise trade exports in 1990 was 14 times bigger than in 1950.
The International Monetary fund is an establishment that has been set up with the intention to help countries finance trade and assist with balance of payments. Its prime intention is to guarantee steadiness of the worldwide financial structure, the system of exchange rates and worldwide payments that allows countries and its people to purchase goods and services from each other. In short it promotes globalisation. This is completed by loaning funds to nations in crisis to aid them in paying debts, imports and stabilising currencies. Examples of nations needing financial aid are Russia in 1998, many countries in Asia in 1998 and Argentina in 2003. The countries that obtain help from the IMF usually have conditions imposed on them. The types of conditions that the IMF imposes include:
– An increase in taxes
– Decreasing financial assistance on food and fuel
– Requiring members to disclose monetary and fiscal policies
Since these reduce the living conditions of the impoverished, the IMF is frequently perceived as supporting global capital at the expense of the poor. It is, in addition, criticised for pushing nations at the beginning of the economic life cycle to open their economies, float their currencies, and reduce manufacturing and trade barriers. Since there are lags, it takes a while for the income levels to rise and demonstrate the benefits of these actions undertaken by the IMF.
The World Bank is built as an organisation for financially supporting long standing expansion scheme for developing nations. The loans that are made towards these developing nations have a very low interest rate and are commonly referred to as soft loans. It not only lends money cheaply to developing nations, but also enforces procedures in order to endorse trade, boost exports and deregulation. An example of this is where some farmers in certain impoverished nations are persuaded to harvest produce for global demand, rather than for neighbouring areas. This may be done in order to boost profits from exports for the entire country. Although this may have a negative impact on local areas because rather than having those supplies used for the locals, they are used, instead for use in exports.
Analyse how the global credit crisis has changed global trade and financial flows The global credit crisis has affected global trade and financial flows within the economy greatly. The following trade statistics show the trade numbers between the years 2005-08.
The trend of the data can be analysed in the following graph.
Results taken from World Trade Organisation website:
From the results above it can be seen that between the years 2004 and 2008 there was a drastic decrease in the export and import numbers internationally from 10.5% to -12%. This was due to the effects of the Global Credit Crisis. This will be shown below
The global credit crisis began having major impacts in 2007, and still has major impacts on most economies in 2010. The global credit crisis began in the 1980s, where gigantic companies produced mechanical goods. At the end of the decade these firms identified that much more money could be made by investing into the financial industry. An example of a company that took part in this exercise was GE, who by the 90’s, was making 10 times more money in investment, than in the production of goods. Due to the amount of cheap loans available, they borrowed much and became in debt. This money was then used to “invest in financial bubbles”. At first hefty profits were made, and many companies followed suit and by 2005 there was 14 so much money invested in speculation, that in value it equalled 14 times the value of the American economy. Debt began being offered to low income earners to in order to make more money and they could not pay it off. This had an incredible impact on the rest of the world, showing the theory that “when America sneezes, everybody catches a cold”. Australia was one of the less affected countries due to its link with China.
The global credit crisis had a large effect on global trade and financial flows. They include:
– Less demand for goods and services: Since there was far less demand, the price of elastic goods and service will go down, translating into less production, leading to greater unemployment. From this unemployment, there will be less household income therefore less goods and services will be bought. It was like a never ending circle.
– Less availability of credit: After the banks had gone bankrupt, there was no body to lend money to consumers, meaning spending was minimal.
– Rapidly decreasing Gross Domestic Product
-Australia has developed a foreign debt of almost $A500 billion from borrowing money in order to fix the extended account deficit.
– There have been major changes in trade patterns that reflect the changes in the global economy. The rapid growth of China and the export of their manufactured goods, have led to a massive increase of raw materials demanded of certain countries like Australia. Results show that in 2003 the exports from Australia to China were triple what they were in 1990. This ever growing link between Asia and Australia has such a large importance that one of the objectives of ASEAN (Association of South East Asian Nations) is to have Australia join so that free trade can occur between them. In conclusion it can be said that the structure and target of Australian trade is greatly affected by the trends of the global economy.

Impact of the financial crisis globally and in Mauritius

Like almost all economies worldwide, the Mauritian economy has not been spared form the effect of the global financial crisis and subsequently to the recent European crisis. The former is considered to be the worst financial crisis since the Great Depression of the 1930s. This was mainly due to the falling home prices in the United State which consequently spread to all other major economies and those which are dependent on the US economy. The Global Financial Crisis has led to the crisis of public debt in the Eurozone starting with Greece at the end of 2009. Due to the linkage of member countries in the Eurozone and the use of a single currency, the crisis faced by Greece started to spread to other member countries and this became known as the Eurozone crisis. It is obvious that although the measures that would be analyzed have had great effectiveness on mitigating the impact of the two crises, it has not been inevitable to prevent them from affecting the key sectors of the Mauritian economy. One reason is because of its openness and financial integration to the world economy and the other being the fact that Mauritius has longed been and is still very Eurocentric.
The Global Financial Crisis (2007-2009) – Its Origin and Impact on the World Economy The Global Financial Crisis started when home prices began to fall dramatically in the US Real Estate market at the end of 2006. One of the reasons for the falling prices is because of the housing bubble which peaked in approximately 2005-2006. As a result people who have taken home loans started to default on their repayments as they find it cheaper to buy a house rather than to continue paying for the home loan. Due to the financial linkage and the globalization process, the declining home prices started to spread to other countries. More and more foreclosures and defaults led to banks’ financial position to deteriorate rapidly around the world. Investors worldwide started to lose confidence in the US economy and other major economies of the Eurozone. As such stock markets were deeply affected leading to huge loses for investors. Consumption, which is the main component of aggregate demand for many countries and US, started to decline which resulted in many quarters of negative growth in the US and other major economies.
The financial crisis led to a prolonged worldwide recession in 2008. Governments and Central Banks were forced to take necessary actions to fix the crisis. Capital injection and interest rate cuts were common to help borrowers to repay their loans. The low consumer confidence and investors’ confidence in the world economy resulted in many firms and financial institutions filed for bankruptcy such as the collapse of Lehman Brothers. Stimulus packages were implemented in many countries to help boosting economic activity. These stimulus packages helped companies which employ thousands of workers not to file for bankruptcy so as not to increase unemployment, for example, the US government agreed to help giant car companies Ford and Crysler in order to prevent them from closing down and laying down workers.
The Global Financial Crisis did not only affected rich countries but also emerging economies and developing countries. Countries like Brazil, Russia, India, China (BRIC) and many other emerging economies experienced significantly high economic growth prior to the crisis but with the global economic downturn they had seen a slowdown in their level of economic activity.
The Impact of the Global Financial Crisis on the Mauritian Economy With the impact of the Global Financial Crisis on the world economy and the deterioration of banks’ financial position, investors in Mauritius started to react in September 2008 by massively selling their shares. Not surprisingly, companies whose prices declined the most were those in the banking and financial sector such as the Mauritius Commercial Bank (MCB) and the State Bank of Mauritius (SBM). As a result, the SEMDEX, the share price index of shares quoted on the Official Market of the Stock Exchange of Mauritius, started to decline to its lowest level. This indicated the level of pessimism among investors in the Mauritian economy.
The Global Financial Crisis affected all key sectors of the Mauritian economy, such as the textile industry, the tourism industry, the sugar industry, the financial services sector, and the construction industry. This was mainly due to the trade liberalization of Mauritius to the world economy. As such, even though Mauritius is not related to the origin of the financial crisis, the effects of the crisis crossed the Mauritian border uninvited. This is the danger of globalization on small states like Mauritius.
Among all the sectors of the Mauritian economy, the textile and tourism was most affected. Many firms closed down. Low level of tourist arrivals, due to the increasing level of unemployment in key markets, affected the tourism industry deeply. The construction industry experienced a slowdown in its economic activity. Foreign Direct Investment fell significantly during the crisis. Finally, during the same period the sugar industry had to undertake reforms because of the end of the European Union Sugar Protocol in 2006. Rising unemployment was not inevitable and the economic growth rate was declining.
However, it should be noted that Mauritius did not register negative output growth during the global economic downturn. Measures by the government and the Bank of Mauritius successfully prevented the Mauritian economy from entering into a recession.
Policy measures taken to mitigate the Impact of the Global Financial Crisis on the Mauritian Economy. Since the beginning of the Global Financial Crisis and its impact on the Mauritian economy there has been huge policy coordination between the government and the Bank of Mauritius (BOM). Keynesianism was on the rise and expansionary monetary policies were followed. The government adopted expansionary fiscal policies to boost productivity.
The BOM followed the same policy actions as other Central Banks worldwide, easing monetary policies. In the last quarter of 2008, through its Monetary Policy Committee (MPC), the BOM decided to slash the Key Repo rate by 150 basis points and the Cash Reserve Ratio (CRR) was brought down from 6 percent to 5 percent, thus freeing some Rs2.5 Billion for commercial banks to be able to increase loans to the private sector and in turn increasing the level of economic activity.
On the government side, although the economic growth projection was still positive at 5.5 percent for the year ending 2008, expansionary fiscal policies were adopted. The budget deficit was increased but for the benefit of increased productivity. Like the BOM, the government also followed the same course of actions taken by other countries to fight the global financial crisis. An Additional Stimulus Package (ASP) equivalent to 3.8 percent of Gross Domestic Product (GDP) or Rs6 Billion was put in place.
The ASP was aimed at expanding the airport of Mauritius and to create six funds that would make Mauritius more resilient and thus limiting the impact of the Global Financial Crisis on the Mauritian Economy. These Funds include:
The Maurice Ile Durable (MID) Fund.
Food Security Fund.
The Human Resource, Knowledge, and Arts Development Fund.
The Local Infrastructure Fund.
The Social Housing Development Fund.
The Manufacturing Adjustment and SME Development Fund.
The Implementation of the Additional Stimulus Package in its effort to fight the Global Financial Crisis. The six funds created under the ASP are detailed below:
The MID Fund would include a solar water heater scheme, energy saving lamps, replacing street lighting lamps, mobilize foreign expertise for sustainable development support for a wind farm project, and financing the Waste Energy Project. All these schemes would help in building the vision of a Green Mauritius and protect the Mauritian Economy from high price volatility for non-renewable energy.
Under the Food Security Fund land would be prepared and provided with irrigation facilities for small farmers. The land resource mobilization would result in the production of some 5000 tons of additional food commodities between 2009 and 2011. The aim of this fund is to increase the food supply for the population and reduce the dependence on imported food supplies.
The Human Resource, Knowledge, and Arts Development Fund would make provisions for scholarships to needy students. A Student Loan Guarantee Scheme and the construction of new campuses for tertiary education are also financed under this fund. The aim of this fund is to provide education for all children and help in eradicating poverty and also to widen the circle of opportunities.
The Local Infrastructure Fund would provide resources in a wide range of areas including multi-purpose complexes, fish landing stations, market fairs, waterfront, crematorium, and tartan track. The aim of this fund is to improve areas where people visit regularly and increase security for the people.
The Social Housing Development Fund would include the rehabilitation of NHDC estates and infrastructures for social housing and support for affordable housing to bring down the cost of mortgage. This fund would help more people to own a home.
The Manufacturing Adjustment and SME Development Fund would facilitate the work undertaken by the Enterprise Mauritius, SEHDA, and the National Women Entrepreneur Council.
Another important scheme that was created under the ASP was the Mechanism for Transitional Support to the Private Sector (MTSP). This mechanism makes provision for a Financial Rescue Package (FRP) to help enterprises in financial difficulties. The MTSP covered all sizes of enterprises whether small, medium, or large. The facilities favored enterprises which have used all available financial tools provided by banks and other financial institutions and still cannot overcome their financial distress. It also applies to those where banks and other financial institutions do not agree to help them.
The 2009 budget also aimed at making provision for a range of actions in light of the global economic crisis. The National Empowerment Foundation (NEF) was created from this budget. Its main aim was to fight the remnants of poverty in Mauritius and the eradication of poverty. The NEF also put an obligation on large companies to give at least 2 percent of their operating profit as Corporate Social Responsibility (CSR). The NEF enhanced its efforts on re-skilling, retraining, and returning retrenched workers to productive employment.
The Euro Crisis (2010) – Its Origin and Impact on the Eurozone economies. The Global Financial Crisis of 2007-2009 forced many countries to seek help to restructure their economies, especially the Eurozone economies. After the financial crisis another problem was emerged, the public debt or sovereign debt crisis which later became known as the Eurozone Crisis. It started with Greece at the end of 2009 and then spread to other Eurozone member countries such as Ireland, Spain, Portugal, Italy, and Germany. A sovereign debt arises when a country issue government bonds denominated in its own currencies but sold to investors abroad. The problem with Greece was that the cost of financing the debt became so large that the International Monetary Fund (IMF) and the European Central Bank (ECB) agreed on a €110 Billion loan for Greece. Soon after other countries started to have the same problem as Greece and bail outs was necessary. Ireland has also been bailed out with €85 Billion. However, these loans are conditional on the implementation of harsh austerity measures. Austerity measures being cuts in government spending and increased taxes.
One of the main impact of the Euro Crisis was the depreciation of the Euro vis-à-vis other currencies. There was high financial instability in Eurozone economies which consequently led to uncertainty and falling investors’ confidence. On 9 May 2010 the 27 member states of the European Union agreed to create the European Financial Stability Facility (EFSF), a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to Eurozone states in difficulty.
The Impact of the Eurozone Crisis on the Mauritian Economy. Mauritius is highly dependent on the Eurozone and it is obvious that a depreciating Euro would have serious consequences on the economy. The crisis impacted on all key sectors of the Mauritian economy including export, financial services industry, domestic oriented industries, and other emerging sectors.
Most of our exports are billed in Euro while most imports are in US dollars term. Since the beginning of 2010, the Euro has depreciated by around 8 percent while the US dollar has appreciated by around 3 percent against the rupee. Therefore, it is clear that exports revenues are declining while costs are rising for local firms. This is very crucial for domestic firms and this present a threat for their survival and consequently employment.
The Central Statistical Office (CSO) downgraded the real GDP forecast for 2010 from 4.6 percent to 4.2 percent after the unfolding of the Euro Crisis. Furthermore, the CSO predicted an unemployment rate of 7.5 percent in 2010 from 7.3 percent in 2009. On the other hand, the inflation rate was declining.
Analysts expect the austerity measures to impact negatively on the growth performance of Eurozone economies. This can result in a drop in demand for our exports and lower tourist arrivals. Moreover, some analysts believe that the Eurozone crisis will last for 5 to 7 years.
Policy Response to the Eurozone Crisis and to limit its impact on the Mauritian Economy. The Mauritian economy is faced with a depreciating Euro which is having serious consequences in terms of low tourist arrivals and low demand for our exports. Furthermore, the Euro crisis is expected to last for 5 to 7 years. There is therefore a compelling need to restructure the Mauritian economy and to diversify from the Eurozone countries to other emerging countries such as the BRIC.
Below is an extract from “Facing the Eurozone Crisis and Restructuring for Long Term Resilience” which was presented by the Vice Prime Minister and Finance Minister, Pravind Jugnauth in 2010.
“Thus, The seven pillars of our response to the euro crisis and to the larger challenge of global economic rebalancing are:
Industry and enterprise restructuring
Supporting the creation of new financing instrument
Fast re-skilling and re-employment of retrenched workers, with a focus on retrenched women workers
Acceleration of public infrastructure
Protecting consumers
Modernizing regulations to improve competitiveness
In order to implement all of the seven policies response mentioned above, many measures was taken, these includes:
The implementation of an Economic Restructuring and Competitiveness Programme (ERCP). This will support firms in the export sectors, especially the textile and clothing industry to help them overcome their financial difficulties.
Support for the SMEs to help them better manages their finance and thus being resilient to external shocks.
Supporting small planters in the sugar industry which are squeezed between reform into the sugar industry and a depreciating Euro.
Help to restructure the tourism sector in diversifying into non-euro based markets.
Help the retrenched workers by providing them support and ensuring their re-employment.
Ensuring that consumers can benefit in the depreciating Euro.
Restructuring the public sector enterprises.
Accelerate public infrastructure projects that are vital to the economic restructuring.
Improving competitiveness by reviewing the regulatory framework.
Setting up a committee to endure the proper implementation of the policy response package and ensure its effectiveness.
Mobilizing the necessary resources to finance the package.
The Mechanism for Transitional Support to the Private sector (MTSP) which was put in place to help firms in difficulties during the Global Financial Crisis was replaced by the ERCP. The ERCP is much more than a financial rescue package. The main features and process of the ERCP is outlined in the next section.
The Economic Restructuring and Competitiveness Package The main processes of the ERCP are as follows:
A diagnosis will be carried on the company applying for support under the ERCP to determine its viability.
If the company is found viable, it will be granted all support under the ERCP provided that it takes a serious commitment to restructure and deleverage.
An Independent Financial Analyst will be drawn to prepare a restructuring plan for the company.
The restructuring plan will include market diversification, product improvement, efficiency, and productivity.
If the restructuring process requires the laying off of workers, a retrenchment plan should be submitted to the ERCP and the Support Unit for Re-employment of Employees (SURE) for approval.
The deleverage plan will define actions the company needs to take to bring down its gearing ratio to the benchmark established by the ERCP committee.
Inefficient, poorly managed, highly geared companies will not be granted support under the ERCP.
Measures were also taken by the BOM to manage the euro/rupee exchange rate. The Key Repo rate was cut by 100 basis points to 4.75 percent on the 27th September 2010.
Conclusion Up to now the Mauritian economy has demonstrated a considerable degree of resilience to external shocks. The Global Financial Crisis of 2007-2009 was the worst economic downturn since the Great Depression of the 1930s and it has dampened the world economy significantly. Mauritius being a small emerging economy was also hit by Global Financial Crisis due to its openness n financial integration to the world economy. However, policy coordination by the government and the Bank of Mauritius in adopting expansionary fiscal and monetary policies has prevented the Global Financial Crisis from damaging the economy further. The effects of the Eurozone crisis on the Mauritian economy were also very high. These were inevitable since Mauritius has always had high dependence of its exports such as tourism, textile and sugar on markets in Europe but the policy response such as reducing the Key Repo rate to 4.75 percent by the BOM and the implementation of the ERCP by the government will ensure that the Mauritian economy has a long term resilience to external shocks