2. Regional development in a global society
This chapter sketches the global framework in which local and regional decisions by people, firms and
governments are made.
2.1 introduction
The mercantile system entails the idea of combining export with the highest possible level of self-
sufficiency. The global trade system was seen as a zero-sum game: one country’s loss was another
country’s gain, and the sum of all gains and losses was zero.
2.2 the founding fathers of classical economics and globalization
Smith: absolute advantage – i.e. the absolute cost difference for producing the same product.
- used to analyse the idea that trade allows production to be organized more efficiently across space
(table 2.1 and 2.2, p25).
two underlying reasons for an absolute advantage:
1. Natural advantage: the availability to a scarce natural resource, a particular climate or
geographic feature.
2. Acquired advantage: producing certain goods may acquire particular knowledge, skills or
infrastructure.
And thanks to international trade, consumers can either spend less than they would if they were to
buy their goods domestically only, or they can buy more for the same amount of money.
Ricardo: built on Smith’s idea -> comparative advantage (difference in productivity).
- even if one country has absolute advantage, trade with another country can still be beneficial as the
two countries specialize in the one they are most productive.
- to know who has comparative advantage, you calculate the opportunity cost. (e.g. how many cars
can you produce for each bicycle). The product with the lowest opportunity cost is the most efficient,
so both parties will specialize in that product. That results in residual money from the production the
other party is going to do, so that will sum up (total money that can be spend on the specialized
product). -> this will make it efficient to trade.
Smith: ‘the invisible hand’
metaphor for the interplay between self-interest, market forces and the law of supply and demand.
Together, these three mechanisms create economic stability.
- if the demand for product Y rises, the price goes up and more of it will be produced, and vice versa.
the economy thus has the ability to self-regulate by adjusting its production levels.
Important about these models: regions will only specialize in activities in which they have a
comparative advantage IF transport costs are low enough (limiting trade barriers). Because if the
transport costs are too high, it may be more efficient to produce domestically.
2.3 drivers of globalization
Strategic reasons for why firms choose to engage in foreign production (Dunning):
1. Resource seeking – firms engaging to acquire resources, in the form of materials or labour, at
relatively lower costs.
2. Market seeking – firms desire to access foreign demand markets.
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, 3. Efficiency seeking – firms aim to achieve improved efficiency through the scope or scale of
the value chain activities and costs of production.
4. Strategic asset seeking – specified knowledge assets and attempts to reduce competitor’s
comparative advantages.
OLI advantages: a framework for understanding the ownership, internalization and location
advantages firms face.
Friedman: the drivers of globalization (the flatteners).
2.4 globalization: different perspectives
Four overarching perspectives on globalization:
1. Hyperglobalist – positive interpretation
“globalization is irreversible”
- usually considered positive since the allocation of resources through the market and free
trade provide the most efficient allocation of the means of production.
2. Hyperglobalist – negative interpretation
negative effects of hyperglobalism: the distribution of income and the climate.
3. Sceptic
“globalization is overstated”
- different forms of distance (geographical, cultural, economic, historic) are still important and
the world is far from globalized.
o Hyperglobalist and sceptics are opposites
4. Transformationalist
sees globalization as a very profound process but stresses the fact that nation-states do have
possibilities to influence it.
2.5 the market: an essential mechanism?
With the ideas of Ricardo and Smith: competitiveness became more important.
Neoliberalism builds on the idea of homo economicus and brings to the foreground the importance
of personal gain as a driver for an effective and efficient organization of the economy -> privatization
and monetarization were key ideas in sectors in which governments tried to create markets. (rise of
private capital and fall of public capital, p.36)
Neoliberalism also comes with the tension between individual gain and collective benefit.
Another implication of going neoliberal is the financialization of markets: free financial markets
(capital should flow freely) to let the market work effectively.
The market mechanism, while important, can derail, leading to unwanted monopolies, concentration
of power, and inequalities of income and opportunities.
2.6 outcomes of globalization
Globalization goes parallel with improving global welfare. But we also see a concentration of wealth
in fewer hands – increased differences in the world.
- the elephant curve (p39) shows the winners and losers of globalization – the big winners are China
and India.
2.7 the end of globalization?
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