Overview

The course addresses the opportunities created by the emergence of a global economy and proposes strategies for managing the risks associated with globalization. The course focuses on the opportunities and threats created by the flow of goods, services, and international capital across countries. International trade and capital flows can significantly affect countries’ development efforts and provide clear investment opportunities for businesses.

During the 1990s and early 2000s, the world witnessed an explosion in trade and capital flows at the global level. This explosive growth, especially in emerging markets, has been fueled by changes in world politics (e.g., the end of the Cold War, the collapse of the Soviet Union, the shifting political climate in China, and political changes in Latin America and Asia) falling restrictions and advances in technology. The resulting ability to retain or outsource various subsets of production stages within firm and country boundaries fueled the fragmentation of production and the emergence of global value chains. A key driver of this phenomenon is the cross-border production, investment, and trade in final and intermediate goods led by Multinational Corporations (MNCs). Foreign direct investment (FDI) became the dominant source of foreign private capital for many emerging markets, promising additional productivity gains for recipient countries.

Gains from globalization, and technology, more generally, can have different allocations and distributive effects. After decades of increasing global economic integration, the world faces the risk of fragmentation. The cases in the module study how changes in the economic, social, and political environments can challenge previously institutional structures creating new opportunities and risks.

Educational Objectives

The course has been designed to give students an appreciation of the critical role of institutions and policies in affecting patterns of international trade, services, and capital flows and the abilities of government to manage them effectively. The course is tied together by two broad themes: (1) the determinants and effects of globalization and (2) policy-makers management of the effects of globalization. The cases approach these themes by exploring institutional detail in the deep local context, exposing students to key recent events that have shaped the way economists think about these subjects. The course encourages students to consider fundamental characteristics of the international trade and financial system: effects of trade, capital flows, why cycles in international capital flows recur, and how sovereign debt and domestic debt differ from each other in their contracts, explicit and implicit, and their enforcement.

The course also teaches students key insights from the field of international economics. First, economists have conventionally viewed trade policy preferences as being driven by whether openness to trade aligns with one's economic self-interest, by concerns about the impact of trade on broader society, or by one's socio-political identity. Second, trade in goods is different from trade in financial assets: a financial transaction inherently involves a commitment to pay at a later date. Financial transactions are therefore fundamentally affected by problems of asymmetric information and the risk that the contract will not be enforced, and both problems are exacerbated at the international level. Third, International financial flows are affected by two additional macroeconomic risks that are absent within countries: sovereign risk and the use of different currencies. International capital flows imply additional policy challenges for countries as policy-makers face a difficult trade-off among three objectives: monetary policy autonomy, a stable fixed exchange rate, and free capital mobility. Research has demonstrated that local conditions—political objectives, financial markets, firms, and institutions—decisively influence the operation of these basic macroeconomic logics in actual practice. As a whole, the course emphasizes the importance of domestic institutions for effective macroeconomic policy-making, capacious regulations, credible policy commitment, and attracting and using foreign direct investment efficiently.

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