ABSTRACT
Introduction The wave of globalization is one of the most important phenomena in contemporary capitalism. This globalization has been accompanied by a wave of neoliberalism. According to Bresser-Pereira, neoliberalism is the reaction that occurred in the 1980s; in this new ideology, instead of the state the market should coordinate the economy (Bresser-Pereira, 2010: 28). The discourse on neoliberalism also involves the attempt to promote economic growth through market-oriented structural reforms that are based on orthodox macroeconomic theories and policies such as deregulation to enhance market mechanisms. As globalization means the process of achieving market interdependence, it is fair to say that it is encouraged by the neoliberal discourse. Globalization has had a dual impact on the national economy, as Weiss (2003) indicated. It may be viewed as both a constraint and an enabler of the economic, institutional, and political spheres in national economies. She identified the constraints from capital mobility and international agreement and the enabling face caused by demand from social protection and pressure for innovation, which are mostly political aspects. Economic aspects also matter. Not only has globalization enabled national economies to realize economic growth (stagnation) through the expansion (contraction) of international trade, it has also constrained national economies by way of posing limits on trade deficits and pressure from international financial markets, and involved severe cost price competition in trade. Moreover, capital flight is a more likely outcome when an economy records an external deficit-GDP ratio that is regarded as eventually being unsustainable (e.g. the Asian financial crisis in the late 1990s and the crisis in Argentina). As Andrews’ (1994) second image reversed suggests, international capital mobility can be seen as exogenous and as a structural factor that national economies cannot easily control, and which systematically constrains state behaviour by rewarding some actions and punishing others. These constraints play an important role in establishing the international economic structure and the macroeconomic performance of national economies. For example, deepening international trade with severe competition has made countries more interdependent. Accelerated by financialization that has been led by
deregulation in financial markets, the volume of trade and the occurrence of international capital flight have increased rapidly, at least until the financial crisis of 2008. One of the causes of the financial crisis was increasing capital flows that were not compatible with balance-of-payments constraints (BOPC). That is, when an economy reaches an external deficit-GDP ratio that will eventually be unsustainable, financial markets become nervous and international capital flies easily from such an economy to another. Consequently, the value of the currency and the stock price in the economy fluctuate substantially, and the economy goes into panic. Thus, in the era of globalization, the increasing trade deficit and capital flow are potential factors that may cause an economic crisis in the long run. In other words, an ever-growing deficit is unsustainable because of pressure from the international financial market. This indicates the importance of maintaining the BOPC condition so that an economy will not eventually become involved in a crisis caused by international capital flight. Applying Andrews’ (1994) terms, international capital mobility constrains a national economy by rewarding BOPC and punishing an ever-growing deficit. However, it is not easy for a national economy to constantly maintain the BOPC condition because a trade balance is not automatically achieved by a market adjustment, and various factors affect the dynamics of exports and imports. For instance, the economic activity levels measured by the GDP in a foreign country are one of the determinants of the exports of a domestic country, whereas the home country’s GDP is one of the determinants of its imports. The qualities and attractiveness of the commodities that each economy produces also determine the performance of exports and imports. In addition to these non-price factors, the price competitiveness of firms in each economy matters as its determinants, and their role has become more important in the era of globalization. The trade commodity price, therefore the real exchange rate, does not work to recover the trade balance in a manner that the mainstream economics supposes. Even when there is a trade deficit, it is not always true that the real exchange rate does not change to bring a trade balance. This is because pricing is normally affected by the international competition, wage, productivity, and bargaining for income distribution between labour and capital in national economies. Thus, the distributional factors inevitably concern pricing behaviour in each economy. As a result, they determine the dynamics of the real exchange rate, and consequently, the dynamics of exports and imports are not independent of these factors. Thus, the performance of the national economy is concerned with many constraints both domestically and internationally (Figure 11.1). It is necessary for an economy to maintain the BOPC so as not to be the target of an international capital attack, but the BOPC is also affected by domestic distributional conditions. In the era of globalization, the international cost price competition also concerns pricing behaviour, and thus severe competition may prevent equitable income distribution between capital and labour in an economy. Finally, sustainable economic growth is a necessary condition for maintaining the employment of labour.
