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Developments including the rise of vertically specialised trade and the growing internationalisation of production, broader and deeper goods and financial market integration, the extension of international trade to the previously “non-tradeable” services sector, and the spread of international trade and finance to incorporate a growing number of countries suggest that in many respects Australian policymakers are now operating in a “new global economy”.
Are Australian policymakers operating in a new global economy?
About the author
Mark Thirlwell
One of Australia’s leading commentators on the international economy, Mark has been tracking global economic trends since he joined the Bank of England’s International Divisions in 1990 where he worked as part of the Whitehall Economists Subgroup, coordinating the forecasting of major emerging markets across the Bank, Treasury, the FCO and other stakeholders.
An important area of research interest for the Lowy Institute is the emerging debate on whether we are living through a fundamental change in Australian foreign policy and whether this change has been driven by a marked shift in how the world functions.
This paper seeks to provide some background to that debate by asking to what extent Australian policymakers are operating in a “new global economy”. This is a potentially important question since if today’s international economic environment is strikingly different from the one that prevailed in the past, then old policy models and assumptions may no longer apply, and new ways of analysing and dealing with the world may need to be developed.
The paper is divided into six sections. It begins by describing how some commentators have proclaimed the birth of a new global economy, and then relates this claim to the recent experience of rapid international economic integration. The next two sections ask to what extent the current international environment is really “new”, and to what extent it is truly “global”. Section five looks at changes in the international business cycle prompted by recent trends in international integration, and section six offers some conclusions.
On the question of whether there is a new global economy, the paper concedes that to some extent recent economic developments can be described in terms of a re-integration of the international economy following the disintegration caused by the two World Wars. However, the paper goes on to describe some important differences between the nature of economic integration today and in the previous era of global capitalism in 1870-1913. Features such as the rise of vertically specialised trade, the extension of international trade to the previously “non-tradeable” services sector, and the spread of international trade and finance to incorporate a growing number of countries all establish the current international economy as being significantly different from the earlier period. This suggests that in many respects policymakers are facing a new international economic environment.
The paper assesses the “global” nature of the present international economy both in terms of the geographical spread of international economic relations and against the kind of economic relations that would be expected to prevail in a perfectly integrated global economy. Here the balance of evidence suggests that there has been an increase in the geographical span of the international economy, even through trade and financial flows continue to be dominated by the advanced economies. In addition, while the current economic environment is still quite some way from looking like the type of borderless world that would prevail in a completely integrated international economy, there is evidence from goods and asset prices that trade and financial developments have led to a greater degree of integration and continue to do so. In this sense, the international economy is starting to take on a global nature.
Finally, while the paper finds that there is as yet no strong empirical evidence indicating a marked increase in the importance of the international business cycle – no truly “global” business cycle has yet emerged – there are signs that some of the recent changes in the international economy will have important implications for the transmission of economic shocks between countries. Thus the growing internationalisation of production implies that world trade will become more sensitive to shifts in global economic activity, and the increasing importance of vertical specialisation may mean that the international transmission of industry- and product-specific shocks could be much faster than it has been in the past. In addition, the recent growth in financial market integration indicates that crossborder wealth effects may also become increasingly important in the future.
The evidence therefore supports the view that there have been major changes in the nature of the international economy. International economic integration today encompasses more countries and has led to deeper trade and financial market linkages than ever before
