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Global aspects of finance and labour

This tutorial was written by
Ken Edge
Head Teacher Social Science
Cardiff High School

Outcomes
Overview
Content
Review exercises
More

Outcomes

HSC Topic: The Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 31-33. The specific outcomes for this tutorial are:

H1	demonstrates understanding of economic terms, concepts and relationships
H3	explains the role of markets within the global economy
H7	evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H8	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts.

Being up to date and aware of contemporary issues

Students of Economics should be aware of contemporary economic issues. Currently, the global economy is experiencing a financial crisis. This financial crisis has resulted in a reduced flow of credit and lending for businesses internationally. It has also led to a dramatic fall in the value of shares traded on the stockmarket. This fall in share prices has reduced people's wealth and income. This has in turn led to a fall in consumer spending. The financial crisis has also led to a fall in asset prices like housing. This fall has also reduced the income of consumers, also further reducing consumer spending and increasing unemployment.

The International Monetary Fund (IMF) expects world Gross Domestic Product to fall by 1.2% in 2010.

Overview

This tutorial will enable students to apply their knowledge and economic skills to analyse statistical information and case studies to assess the economic impact of globalisation on finance and labour.

Content

Finance
Risk management techniques

The growth of international financial flows has played a very important role in the process of globalisation.

Financial flows have expanded substantially since the deregulation of financial controls in the 1970s and 1980s. The growth in foreign currency markets, flows of foreign capital, banking interest rates and overseas investments are part of the process of globalisation and have long played a role in shaping business cycles.

With deregulation came the development of the global village where time, space, and international borders have disappeared allowing financial dealers to use new technologies to obtain up-to-date information in money markets from London to Jakarta and from Tokyo to New York.

International corporations and investors wanting to remove the risks in global trading and investment, especially in the area relating to international currency movements contributed to the development of what is known as the derivative markets.

A derivative is a tradeable security whose value is derived from the actual or expected future price of some asset such as a commodity, for example agricultural products, metals, and petroleum, a security or currency.

Derivatives can be used as a hedge, (that is to reduce risk), or for speculation.

Derivatives include:
1. Futures contracts
  
  Futures contracts are legally binding agreements, to buy or sell a commodity or financial instrument sometime in the future.
  
  Futures contracts are standardised according to the quality, quantity, delivery time and location for each commodity.
  
  Both domestic and international traders use these contracts to protect themselves from unfavourable movements in prices.
2. Forward contracts
  
  Forward contracts are contracts in which a seller agrees to deliver a specific commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and tailor-made between two parties.
  
  They are not standardised according to the quality, quantity, and delivery time and location for each commodity.
  
  Forward contracts on currencies are the most commonly used derivative security.
3. Collatoralised Debt Obligations (CDO's)
  
  These are the financial instruments that lead to the global financial crisis. The crisis started in the United States. A number of US investment banks such as Lehman Brothers, Bear Stearns and other banks provided sub prime loans to house buyers. However, these buyers could not pay back their loans. The loans were parcelled up to make a very large loan (for say 100,00 home mortgages). These loans were then divided up and sold to investors for a high interest rate. The investment banks then made commissions and fees on these loans. Eventually when the home buyers could not pay back their loans banks could not pay the investors their interest rate. The loans were worth nothing. Some $4 trillion worth of these loans were sold to investors, who lost their money. This tipped the financial system into crisis.
  
  You can watch a video of CDO's on youtube at: http://www.youtube.com/watch?v=XjoJ9UF2hqg&feature=SeriesPlayList&p=945E4F0ED131E4D1
4. Options
  
  A contract giving the holder the right but not the obligation to trade in a commodity, a share, or currency on some future date at a certain price.
  
  There are a variety of option types including put options (the right to sell) and call options (the right to buy).
  
  Options are traded on the Australian Stock Exchange and may be investigated on the Australian Stock Exchange web site www.asx.com.au
5. Swaps
  
  These can take the form of an interest rate, currency and even commodity swaps
  
  A currency swap is an agreement to exchange a certain amount of money e. g. AUS$100 million now for Japanese Yen and to reverse the exchange in two months.
  
  The Reserve Bank of Australia (RBA 1999) used a currency swap to cover the shortage of cash in the economy during the Telstra 2 float in October 1999.
Labour
Some facts

Workers move between countries to find better employment opportunities.
- Most labour migration occurs between developing countries.
- The international movement of labour has been growing since the 1960s.
- About 2.3% of the world population live outside their country of birth and 1.5% of the world’s workforce works in countries other than those of its citizenship.
Shrinking time, shrinking space, disappearing borders-but for whom?

The collapse of space, time and borders may be creating a global village, but not everyone can be a citizen. The global, professional elite, can move freely around the world, but billions of other workers find it impossible.

Highly skilled labour travels the global village with Internet access in nearly every country. The highly educated are increasingly online and in touch around the world.

Between 2000 and 2008 the global economy grew strongly. Most economies had a shortage of workers, especially skilled workers. In Australia, the Australian government developed three programs to increase the supply of workers:
1. Developed a special visa 457 to allow skilled workers to work in Australia for a short time in areas like construction and manufacturing;
2. Increased the number of skilled migrants in areas of high demand for workers such as accounting and services;
3. Developed a special program for Pacific Islanders such as Tongans to work in Australia in unskilled work areas such as fruit picking, which attracted few Australian workers.
Generally, immigrants with skills in computing technologies are in high demand. In the European Union alone, 50 000 information technology jobs went unfilled because of lack of adequate skills. The United States was also offering a special visa to professional immigrants to keep high-tech industries staffed.

Unskilled labour, by contrast, runs up against barriers. As a result of the increasingly tight immigration restrictions in many richer countries against unskilled labour, many families are divided, creating tensions between countries and social unrest.

A good example is in the United States. There are an estimated four million undocumented migrants, people without correct documentation to travel abroad.

Lacking correct papers, illegal immigrants face not only discrimination but also denial of human rights. Many end up in activities that are dirty, dangerous and demeaning.

Trafficking of illegal immigrants is a booming business, involving over four million people and generating an estimated US$7 billion a year.

In both poor and rich countries economic and corporate restructuring has often meant greater incomes but has also resulted in greater employment insecurity.

The pressures of global competition have forced many countries to adopt more flexible labour policies and reduce social protection for their workers.

Review exercises

Exercise 1

Job cuts hit Asia hardest

The global recession of 2008/2009 has had a major impact on employment in China and is now impacting in Japan also. In China the manufacturing work force is largely drawn from the rural agricultural parts of China. People from the country migrate to the cities and manufacturing areas in search of manufacturing jobs. The global recession has caused manufacturing exports to decline. Some commentators estimate that approximately 30 million Chinese workers lost their manufacturing employment by 2009. Many returned to their farms and rural communities. The Chinese government is anxious to provide jobs for these unemployed workers. The government developed a stimulus package to spend 900 billion dollars to promote construction and building infrastructure such as roads, rails and ports to ease the unemployment.

In Japan exports also fell very heavily in the great recession. For the first time in its history the world's most profitable and efficient car producer Toyota made a loss. Exports of electrical goods made in Japan and sold in the United States fell heavily. In Japan, Japanese firms try really hard not to fire workers and make them unemployed so many manufacturers reduced the working week and the hours of work to save jobs. . Even though Japan has a culture of firms providing jobs for life Japanese unemployment rose rapidly in 2009.

“The down turn in global economic activity and the recession in the major economies in 2001 have had far reaching impacts on the global labour force.”

Explain this statement using the information from the case study. Answer

Exercise 2

Case Study: Jobs lost as shoe brand heads for China

The impact of the downturn in world economic activity back in 2001 was seen in Australia. One of Australia’s last shoe manufacturers, Windsor Smith (Victoria), was forced to reduce its workforce due to the negative economic climate of the time.

The company also made the decision in 2001 to manufacture their year their women’s brand, Lipstick, in China rather than Australia. The management indicated that cheaper costs were the main reason for the decision to look overseas to produce more detailed and specialised stitching not available in Australia. In China workers employed in the shoe industry worked up to 15 hours per day, seven days a week, for about AUS$100 a month.

Exercise 3

After the success of the Australian Hockey teams during the 2000 Olympics, Daniel’s Hockey Supplies Ltd is going global. The company’s bank manager has indicated that there are number of risks involved when trading in global markets.

On the 1.10.2001, an export sale of $US$50 000 was made to Germany by Daniel’s Hockey Supplies Ltd. The existing exchange rate was A$1 = US$0.50. A net profit of A$10,000 was expected to occur on total sales of $A100 000. The payment date is 10.10.2001.

On the 10/10/20xx the exchange rate had appreciated to A$1 = US$0.52.

Calculate the value of the US$50 000 export contract at the new exchange rate. Answer
Describe one appropriate method that the company could use to reduce the financial risks in global trading. Answer

Exercise 4

Factor equalisation

Economist have described a process called factor equalisation. This means that factors of production such as labour tend to migrate to from one country to another. This means that factors of production tend to settle at the same cost and price during international trade.

The best known example of factor equalisation is labour. Low cost wages and employment tend to travel to low wage countries and high cost wages and employment tend to travel to high wage economies.

When the production of manufactured goods is outsourced to Vietnam and China part of the reason is that labour is cheaper in these lower wage economies. Producing in China reduces labout costs. As a result the price of production falls and Australian importers can make greater profit or lower prices if they move manufacturing from Australia to China or Vietnam. In this way low wage employment moves to low wage economies. This is especially so for unskilled work. Unions often call this process the race to the bottom.

However, the process is reversed for high wage employment. High wage work such being a doctor, lawyer or accountant is paid much more in high wage economies such as Australia than low wage economies such as Vietnam and China. As a result many doctors, lawyers and accountant seek to emigrate from low wage economies to high wage economies such as Australia. Australia knows this and offers skilled migration to doctors, from example from all over Asia and Africa. Many immigrate to Australia, moving high wage jobs and employment to high wage economies.

Describe factor equalisation
Identify how factor equalisation causes a race to the bottom in terms of low wage employment in low wage economies.
Explain why high wage employment migrates to high wage economies.

Australian Stock Exchange web site has very detailed information on options trading.

The Sydney Futures Exchange has a very good section on how to trade on the futures market.

The Chicago Board of Trade web site has an excellent glossary and information relating to futures trading.

Community Aid Abroad’s Nike Watch Campaign web page has some good press releases on the operation of the company in China, Vietnam and Indonesia.

Sydney Morning Herald web site.

Search the archives for articles relating to the corporate collapses of One Tel and Ansett Airlines. Research the impact of the corporate failure on the workforce and how recent labour market reforms in Australia may have contributed to the problem.