Globalization, Social Contract and Financial Crisis

This article discusses the impact of globalization on the social contract and the potential for financial crisis. It explores the policies that governments can implement to prevent or minimize financial crises and maintain the social contract.

Running head: GLOBALIZATION, SOCIAL CONTRACT AND FINANCIAL CRISIS
Globalization, Social Contract and Financial Crisis
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1GLOBALIZATION, SOCIAL CONTRACT AND FINANCIAL CRISIS
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................4
Answer 4....................................................................................................................................5

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Answer 1
Less developed countries are deprived of resources or the tool to utilize the available
resources by using them efficiently. The main reason for this is the lack of sufficient capital
in the economy. Hence, to boost the resource utilization government infuses capital in the
economy and allows inflow of capital and take liberalized monetary policies that may lead to
the financial crisis (Grabel). It is necessary for the country to formulate policies carefully
along with assessing their future effects. It should either avoid a financial crisis or at least
counter the effects of the crisis. The three policies that the government should implement to
prevent or minimize financial crisis are strengthening of the financial system by making the
domestic banks strong with the implementation of policies that maintains the competitive
behaviour in the banking system and providing guarantee on deposits such that flow of
lending remains uninterrupted. Excessive consumerism should be controlled as it would raise
the inflation rate over time and cause economic unrest in the long run by negatively
influencing the future expectation of firms and consumers of the country. Thus, tax on
purchase can be imposed such that demand-pull inflation can be avoided. Implementing the
policy of fixed exchange rate a less developed country is able to minimize instability in the
economy (Born et al.). Price fluctuations will be less under the fixed exchange rate system.
There will be price discipline in the economy, and thus inflation will remain in control, it will
be easier to speculate currency market and the incidence of debt financing will be low under
this policy. Thus, chances of high inflation will be lower and there will be controlled money
flow between countries. Hence, the above mentioned policies, namely, banking support and
regulation, tax on excessive purchase and the fixed exchange rate, will help a less developed
country to prevent the occurrence of the financial crisis.

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Answer 2
Globalization and social contract are two different phenomena of the economy, but
both are equally important and connected. Globalization policies do affect the social contract
of a country. The concept of the social contract came when individuals of a country
depending on the government for several services that cannot be generated by themseves and
for that the government formulate policies and socially develop the country. The services
under social contract include education, health, employment and transfer payments. Keith
Banting argued that with the advent of globalization, the social contract of countries would
deprive and there may be convergence to a lower income group of countries. Globalization
increases the capital inflow in a country. To completely utilize the opportunity of capital
inflow to achieve economic growth, government took policies such as privatization of
government enterprise, freeing up trade and a low tariff on imports. All these policies
compromise with the social contract. The privatization of government enterprises leads to
decline in public services and exploitation of the citizens in the market. Apart from this
deprivation in education and health due to cut in public spending caused due to capital deficit
(Banting). Tariffs cut on import increases the competition for domestic manufacturers and
thus lose market and suffer from market adversities. Therefore, the citizens and domestic
market manufacturers might suffer from vulnerability due to loss of protection and thereby
might lose trust in government and its policies. There will be internal unrest due to this break
in the social contract. The main reasons that break the social contract are unemployment due
to an increase in job cuts from privatization (Rhodes). More is the number of unemployed
people more will the unrest caused by the domestic protest. It will, therefore, increase the
burden of the country and thus, the country move to a lower economic condition. Hence,

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instead of development, globalization may bring economic disturbance for a break of the
social contract.
Answer 3
Globalization opens a country's economy to the outer world economy entirely. Thus,
such openness will spread the market of the economy to such extent that if not regulated
properly, the economy of the country will shatter as privatization and unlimited capital inflow
will completely demolish the domestic economy (Ries). It is where the function of the
government requires. Participation in globalization is necessary for every country if that
country cannot produce everything it needs. However, the negatives that globalization brings
should be tackled efficiently with suitable policies. The main role of the government is to
formulate monetary and fiscal policies and regulate the market through government
interventions. The policies that government should take to maintain the social contract and
reap the benefits of globalization are a regulated tariff on imports, the limit on Foreign Direct
Investment, a patent on products, encouraging start-ups, increasing government spending in
education and health and other public services. Regulation on import goods is required to
protect the domestic thus tariff policy is relevant in this case. Capital inflow in the form of
Foreign Direct Investments will lead to the privatization of the enterprises, and that should be
regulated by limiting FDI share in the enterprise such that there will be less instance of
unemployment due to structural changes. Increasing government spending on public services
would help to maintain the social contract and thus, any possibility of future unrest can be
avoided. Domestic manufacturers can be protected by providing information regarding the
foreign products that would make the competition fairer. The government can invest in
Research and Development of the country such that innovations will take place, and domestic
manufacturers can be better off. Subsidy and tax credit n export-oriented product will lead to
more employment and revenue for the country, which can be used to maintain the social

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contract by improving public services(Menshchikova and Aleksey). Therefore, counter-
balancing policies should be taken for globalization.
Answer 4
The globalization has three waves in total since its advent. The first wave started in
1860 and lasted until 1914. The technological innovation that occurred in the field of
transport has enabled international trade and sharing of factors among the countries
(Kunnanatt). However, the first phase was limited to Europe and North America. Great
Britain was the leading economy, and free trade system started in this period with
participation of Great Britain and France. Great Britain expanded its power over other
countries by colonialism. World trade increased exponentially during this phase of
globalization and trade in Europe increased by about 40% in total, and emigration was free.
The second wave of globalization started in 1944 and lasted until 1971. The leading country
in this phase was the USA. The technological developments that fuelled this phase had been
air transport and communication devices that connected the whole world in one thread were
television and communication satellites (Shibayama). Unlike the first phase, this phase is free
from colonialism and heavy warmongering. The countries were involved in a cold war. On
the other hand, with regulation, the trade was characterised by a decline in import tariffs
allowing more inflow of foreign products at the cost of domestic manufactures. There were
regulations in migration of labours from between countries. The third phase of globalization
started in1989 and is still going on. The primary driver of this phase is computers, the internet
and the introduction of mobile phones. In contrary to the previous two phases of
globalization, the third one is dominated by multiple countries, namely USA, China and
European Union countries. Most of the countries that did not participate in the previous two
phases have taken free trade policies and actively participating in globalization (Berry). The

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free capital movement has again featured in this phase as the first one. Political migration is
present, and labour migration is regulated.

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References
Banting, Keith G. The internationalization of the social contract. Queen's University, 1997.
Berry, Craig. "Globalisation and ideology in Britain: Neoliberalism, free trade and the global
economy." (2013).
Born, Benjamin, Falko Juessen, and Gernot J. Müller. "Exchange rate regimes and fiscal
multipliers." Journal of Economic Dynamics and Control 37.2 (2013): 446-465.
Grabel, Ilene. "Capital controls in a time of crisis." Financial Liberalisation. Palgrave
Macmillan, Cham, 2016. 177-223.
Kunnanatt, James Thomas. "Globalization and developing countries: A global participation
model." Economics, Management, and Financial Markets 8.4 (2013): 42-58.
Menshchikova, Vera I., and Aleksey V. Sayapin. "Model of innovation-oriented state
economic policy." European Research Studies 19.1 (2016): 189.
Rhodes, Martin. The future of European welfare: a new social contract?. Springer, 2016.
Ries, Christine P. Capital Controls in Emerging Economies. Routledge, 2018.
Shibayama, Keita. "The Second Globalization, the Second Tragedy?." Beyond Global
Capitalism. Springer, Tokyo, 2015. 53-65.