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Trends in globalisation and the world economy

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Title: Trends in globalisation and the world economy


1
Trends in globalisation and the world economy
  • The Rt. Hon John Redwood MP

2
The current world background
  • We are seeing a huge shift in relative economic
    power thanks to rise of China and India.
    Countries with 2,500 million Asian inhabitants
    are now enjoying fast growth and rising living
    standards. This is exerting a big increase in
    demand on world commodities
  • Coal for power stations.
  • Oil for transport.
  • Grains for animal feedstuffs and for alternative
    fuels.
  • Metals for manufacture.
  • Gold and precious metals for the adornments of
    success
  • Iron ore for steel production.
  • We are witnessing a shift in the terms of trade
    in favour of commodity producers. Commodity
    prices have risen sharply, giving windfall income
    gains to Middle Eastern oil producers, to Russia,
    and to Australia.

3
The current world background
  • At the same time as the surge in Asia is
    underway, the West has become heavily indebted.
    US and British consumers and governments have
    been especially heavy borrowers.
  • The Western banking system made large sums
    available for house purchase and for companies,
    including lending to those who will find it
    difficult to pay the interest.
  • These loans are now widely dispersed around the
    worlds financial system, thanks to
    securitisation and syndication. There is
    currently a crisis of confidence over this
    lending.
  • China has 1.5 trillion of reserves. The Middle
    Eastern countries and Russia are also building
    substantial investment funds from the proceeds of
    higher oil and gas prices.
  • A way has to be found to channel this wealth into
    the Western banks to recapitalise them, and into
    western investments to offset the Western balance
    of payments deficits.
  • China meanwhile is investing heavily in commodity
    production and mineral extraction in Africa.

4
The current world background
  • The likely trends over the next forty years
    include
  • The continuing economic rise of India and China.
  • High commodity prices, coupled with the search
    for substitutes and new technologies by the US
    and the West.
  • The decline of Germany owing to population
    decline, along with much of the continent of
    Europe, and Euroland.
  • Continuing relatively strong performance of the
    Anglosphere amongst the richer countries, based
    on a freer approach to the movement of people,
    capital and ideas.

5
What is globalisation?
  • The increase of goods and services which are
    traded over national borders and between
    continents.
  • The pursuit of specialisation by
    cities/regions/countries that have a relative
    advantage in supplying particular goods and
    services. For example textiles and DVDs from
    China software from the USA financial services
    from the City of London cars from Germany.
  • The manufacture of complex products by making
    components and sub assemblies in different
    countries and continents before final assembly.
    For example vehicles/Airbus planes.
  • The homogenisation of goods and services do we
    all want a MacDonald's washed down with a Coke,
    with a laptop running Microsoft programmes?

6
What is good about globalisation?
  • It delivers higher living standards to more
    people.
  • The more people specialise and trade the higher
    average incomes will be.
  • It spreads best practice and new ideas rapidly.
  • It allows many to enjoy global brands.
  • Large companies can put more money into research,
    innovation, sales, service.
  • It allows more people to live the Hollywood
    dream.
  • Creates the potential for footballers, pop and
    film stars and others to become fabulously rich.

7
What is good about globalisation?
  • Richer is cleaner it is good for the
    environment.
  • It allows poorer countries to develop and cuts
    poverty.
  • Instant news and communications exposes tyrants
    and bad governments to more international
    pressure.
  • If you do not like the products of global
    companies you do not have to buy them.

8
What is bad about globalisation?
  • Some say
  • It is a new form of imperialism led by the United
    States of America.
  • It damages the environment.
  • It accentuates the gap between rich and poor.
  • It leads to exploitation of cheap labour and of
    developing countries.
  • It substitutes material values for more spiritual
    ones.

9
Is there an alternative to globalisation?
  • The main alternative to global capitalism (allied
    to democracy) tried in the twentieth century was
    communism. This too became a global creed.
  • It created a communist world which was poorer,
    dirtier and less free than the west. Many
    communists held global ambitions for their
    ideology. It collapsed in the USSR and Europe at
    the end of the 1980s through a series of popular
    revolts, and is being transformed by capitalist
    economics in China today.
  • Today the critics of globalisation have in mind a
    mixture of more localism, accepting lower incomes
    in return for a gentler, kinder society as they
    see it and a new globalism, based on
    redistribution of income between the west and the
    rest through action by global institutions like
    the World Bank and UN, and increased aid budgets.

10
Is there an alternative to globalisation?
  • Encouraging local action means losing the
    benefits of international specialisation and
    slows down the transmission of new ideas.
  • Higher aid without freer trade can simply line
    the pockets of Third World Dictators and
    discourage poorer countries seeking to improve
    themselves.
  • Unless Government is reformed in the developing
    world many will still be subject to civil war,
    famine and denial of human rights.

11
  • Which model of development works best?

12
Index of Economic Freedom
Source Index of Economic Freedom, Heritage
Foundation, 2008
13
Three models for world development
  • The EU, the US, and China
  • The USA is based on democratic challenge.
  • The EU is based on bureaucratic consensus.
  • China based on political repression allied to
    progressive
  • economic liberalism.
  • The US has lower taxes and more free enterprise.
  • The EU has higher taxes and more Government
    management.
  • China has low taxes and great freedom in lead
    sectors only.

14
Three models for world development
  • The EU, the US, and China
  • The US has lighter regulation.
  • The EU has stronger and wider ranging regulation.
  • China has less regulation in lead sectors allied
    to Government control of the liberalisation
    process.
  • The US allows you to do what the law does not
    stop.
  • The EU allows you to do what they set out in law.
  • China allows you to do what suits those in power.
  • The USA globally engaged.
  • The EU is more introspective.
  • China invites in the best of the world in
    selected areas.

15
The political context The USA
  • The United States has a settled constitution
    based on
  • A unified country following civil war.
  • Separation of powers between executive,
    legislature and judiciary.
  • Stable relationship between Member States and the
    Federal powerful government.
  • It is the most powerful country in world, capable
    of projecting its power
  • The only serious political risk or threat is that
    of terrorism against the worlds superpower.
    There is no likelihood of political instability
    or a major change of the system.

16
The political context The European Union
  • The EU has a troubled and evolving constitution
    set up shortly after the end of World War 2. It
    is now looking very old-fashioned
  • It is a set of divided countries coming together.
  • There is no clear democratic control over
    executive or judiciary a largely impotent
    Parliament with no power to tax or legislate on
    its own.
  • Unstable relationships how many States? And
    what relationship should they have to the central
    government?
  • Little power outside the borders of EU and no
    established way of supporting its foreign policy
    outside the EU area.

17
The political context The European Union
  • There are serious political risks of instability
    as different countries, peoples and parties want
    very different degrees of centralisation and
    government interference in Member States
    affairs.
  • Over the next fifty years, there will be massive
    changes in the relationships and power balances.
  • It is not immune to the risk of terrorism both
    internal and external. There is the risk of
    nationalist movements arising against the EU.

18
The political context China
  • China is a one party state.
  • The main decisions are made by Committee of the
    Political Bureau of the Communist Party.
  • It entered WTO arrangements on the 10th October
    2000.
  • Collective farming is being dismantled. There is
    a rapid movement of people from rural to urban
    areas.
  • It is pursuing the Hong Kong/Singapore model of
    economic
  • development through liberalisation and foreign
    capital allied to an authoritarian political
    system.

19
The rise of China
  • China is currently the worlds fourth largest
    economy at market exchange rates and the second
    largest at purchasing power parity rates.
  • It has a GDP of 10.21 trillion (2006) when
    measured on a purchasing power parity basis and
    3.42 trillion when measured in exchange rate
    terms.
  • China has been the fastest growing major nation
    for the past quarter of a century with an average
    annual GDP growth rate above 10. Her per capita
    income has grown by an average rate of more than
    8 over the last three decades, drastically
    reducing poverty.
  • She is now the worlds third largest trading
    nation after the United States and Germany, and
    as of 2007 has foreign exchange reserves of some
    1.474 trillion.
  • Source International Monetary Fund New York
    Times The Economist and China Daily, 2007

20
The rise of China
  • China accounted for only 3 of world output in
    1980, but according to a 2005 Treasury forecast
    will account for 19 of world output by 2015.
  • This figure is likely to be much higher in light
    of Chinas sustained economic growth over the
    last few years.
  • Whereas the G7 countries (the United States,
    Canada, Germany, France, Italy, Japan, and the
    United Kingdom) accounted for 50 of world output
    in 1980, they will account for only 33 of world
    output by 2015.
  • Source Global Europe Full Employment Europe,
    HM Treasury, October 2005

21
Imbalance of power The EU vs. the USA
  • The EU has a bigger military force in terms of
    numbers of service personnel, but it is very
    poorly armed and ill equipped to move outside the
    European territorial area.
  • The US has a near monopoly of modern troop
    carriers by sea and air, especially when acting
    with the UK as its main ally.

22
Imbalance of power The EU vs. the USA
  • PROJECTED SHARES OF GLOBAL GDP
  • World GDP 2000 2050 Change
  • EU 15 18 10 -44
  • United States 23 26 13
  • Ratio of EU to USA 1.3 2.6
  • Source The EU Economy Review, European
    Commission, 2002

23
Projected global GDP in PPP terms relative to the
United States
Source The World in 2050, PricewaterhouseCooper
s, 2006
24
Population change
  • The US has a dynamic population, growing from
    live births and immigration.
  • The EU, excluding the UK and Ireland, has a
    falling population.
  • Projected Total Population
  • Millions 2005 2050 Change change
  • EU 27 487 472 -15 -3.1
  • USA 299 402 103 34.4
  • China 1,312 1,408 96 7.3

25
Projected Working Age (15-64) Populations
(millions) EU 27 and others
  • Millions 2005 2050 Change Change
  • Ireland 2.3 3.6 1.3 56.5
  • UK 39.7 41.0 1.3 3.3
  • France 39.8 39.6 -0.2 -0.5
  • Netherlands 11.0 10.1 -0.9 -8.2
  • Germany 55.2 41.6 -13.6 -24.6
  • Austria 5.6 4.8 -0.8 -14.3
  • Greece 7.4 5.9 -1.5 -20.3
  • Spain 29.8 24.3 -5.5 -18.5
  • Italy 38.8 29.5 -9.3 -24
  • EU 27 302.7 237.0 -65.7 -21.7
  • USA 200.6 248.3 47.6 23.8
  • Japan 84.8 52.3 -32.5 -38.3
  • Russia 102.3 65.9 -36.4 -35.5
  • Source United Nations, Population Division,
    World Population Prospects The 2006 Revision.

26
Tax burden in EU Countries as a percentage of GDP
  • Country 2003 2004 2005 2006
  • Belgium 44.7 45.0 45.4 44.8
  • Denmark 47.7 48.8 49.7 49.0
  • France 43.1 43.4 44.3 44.5
  • Germany 35.5 34.7 34.7 35.7
  • Italy 41.8 41.1 41.0 42.7
  • Ireland 28.7 30.1 30.5 31.7
  • Netherlands 37.0 37.5 38.2 39.5
  • Spain 34.3 34.8 35.8 36.7
  • Sweden 50.1 50.8 51.1 50.1
  • UK 35.4 36.0 37.2 37.4
  • EU27 N/A 39.2 39.6 N/A

Source Revenue Statistics 1965-2005, 2007, Table
A. 2006 figures are projections only
27
Tax burden in developed countries as a Percentage
of GDP
  • Country 2003 2004 2005 2006
  • Australia 30.7 31.2 30.9 N/A
  • New Zealand 34.4 35.6 36.6 36.5
  • United States 25.7 25.5 26.8 28.2
  • Switzerland 29.4 29.2 30.0 30.1
  • Japan 25.7 26.4 27.4 N/A
  • Korea 25.3 24.6 25.6 26.8
  • OECD Total 35.8 35.9 36.2 N/A
  • OECD America 26.1 26.0 26.7 27.4
  • OECD Pacific 29.0 29.4 30.4 N/A

Source Revenue Statistics 1965-2005, 2007, Table
A. 2006 figures are projections only
28
Tax Burden in Developing Countries as a
Percentage of GDP
  • Figures for the developing countries of Brazil,
    India, China, Russia and Hong Kong are only
    available for 2003.
  • Other estimates of tax burdens in these countries
    vary depending on how they are calculated. The
    general trend indicates that lower tax economies
    achieve faster growth.

Country 2003 Brazil 32.7 India 10.1 Russia
15.0 China 17.1 Hong Kong 10.5
Source Global Competitiveness Yearbook, 2005
29
Increase in China and Indias GDP ( Billions) by
PPP and current prices
Source IMF World Economic Outlook database, 2007
30
GDP growth rate comparisons and estimates China,
the EU, and the USA
  • China USA EU
  • 1996 10.0 3.7 2.0
  • 1997 9.3 4.5 2.7
  • 1998 7.8 4.2 2.9
  • 1999 7.6 4.4 3.0
  • 2000 8.4 3.7 3.9
  • 2001 8.3 0.8 2.1
  • 2002 9.1 1.6 1.4
  • 2003 10.0 2.5 1.5
  • 2004 10.1 3.6 2.7
  • 2005 10.4 3.1 2.0
  • 2006 11.1 2.9 2.9
  • 2007 11.4 2.2 2.6
  • 2008 11.0 1.8 2.4
  • 2009 9.2 3.3 2.4
  • 2010 8.7 3.5 N/A
  • 2011 9.2 3.2 N/A

Source IMF World Economic, October 2007, and
World Economic Outlook Update, January 2008
31
Share of the international financial markets as
a percentage of world activity in 2007
  • UK US Germany
  • Cross border bank lending 20 9 10
  • Foreign equities turnover 58 36 4
  • Foreign exchange dealing 34 17 3
  • International bonds 70 N/A N/A
  • Hedge fund assets 21 66 N/A
  • Initial Public Offerings 15 26 N/A
  • OTC derivatives turnover 43 24 4
  • Securitisation issuance 6 79 1
  • Source International Financial Markets in the
    UK, International Financial Services London,
    November 2007

32
Likely developments The USA
  • Fast growth.
  • Fast technology growth.
  • Economic policy geared to domestic requirements
    of large single market.
  • Interest rates and money growth to facilitate
    growth.
  • Free enterprise competition driven model.

33
Likely developments The EU
  • Population reduction.
  • Slower and lop-sided technology growth influenced
    heavily by government.
  • Economic policy in flux, trying to adapt to the
    different national and regional markets of the
    Euro-land area.
  • Interest rates and money growth that are
    compromises for the different needs of different
    parts of the EU.
  • Government/cartel/regulation driven model in
    certain key sectors, linked to competition driven
    model in other parts.

34
Likely developments China
  • Continued rapid growth in output and per capita
    incomes.
  • Growth of large domestic market for cars,
    household goods and other manufactured products.
  • China accounts for 76 of world exports of
    leather goods, 55 of textiles and 32 of radio,
    TV and communications equipment. These sectors
    will continue to advance.
  • China will now liberalise engineering including
    vehicle manufacture, chemicals and
    pharmaceuticals. These sectors will now grow
    very quickly.
  • China will overtake UK, Germany and Japan and
    become second largest world economy at market
    exchange rates in the next twenty years.

35
Europes declining share of global output
Estimated changes in percentage of global output
Source IMF Consensus Forecast HM Treasury
36
Europes Labour Market Challenge
  • Source Eurostat, OECD At A Glance, and the
    Office of National Statistics 2007

37
Potential new entrants to the European Union
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