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The sub-prime mortgage crisis which originated in the United States of America in late 2007 and 2008 not only toppled the US economy ; but it created a sort of ripple effect around the world economy which was accompanied by the soaring high inflation rates around the globe. So this global credit crisis was analyzed upon and thorough research named many culprits for this situation. Among the many reasons cited, the repeal of Glass – Steagall Act was the one that actually was substantial enough to be blamed upon for the crisis.
The Glass – Steagall Act was introduced after The Great Depression and its main agenda was to separate commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter.
However, some experts and economists of various countries claimed that Globalization might also have played a major role in the recent surge in inflation and the sub – prime mortgage crisis.
So in the following pages we will study in detail about globalization and its advantages and disadvantages and try to find out if those claims have any weight in them.
Globalization is defined as the integration of countries into world economy or the global market. Such integration involves removal of all trade barriers between countries. It is the process of internationalization of products, markets, technologies, capital, human resources, information and cultures. Globalization refers to the free flow of goods and services, capital, technology and labour among different countries.
The main features of Globalization:
1. Globalization involves expansion of business operations throughout the world.
2. It leads to integration of individual countries of the world into one global market thereby erasing differences between domestic markets and foreign markets.
3. It creates interdependency between nations.
4. Buying and selling of goods and services takes place from to/any country in the world.
5. Manufacturing and marketing facilities are set up anywhere in the world n the basis of their feasibility and viability rather than on national considerations.
6. Products are planned and developed for the world market.
7. Factors of production like raw materials, labour, finance, technology and managerial skills are sourced from the entire globe.
8. Corporate strategies, organizational structures, managerial practices have a global orientation. The entire globe is viewed as a single market.
9. Globalization does not take place overnight. It proceeds gradually through several stages of internationalization.
Essential Conditions for Globalization
In order to smoothen the process of globalization, the following are necessary:
1. Removal of quotas and tariffs.
2. Liberalization of Government rules and regulations.
3. Freedom to business and industry.
4. Removal of bureaucratic formalities and procedures.
5. Adequate infrastructure.
6. Competition on the basis of quality, price, delivery, and customer service.
7. Autonomy to public sector undertakings.
8. Incentives for research and development.
9. Administrative and Government support to industry.
10. Development of money markets and capital markets.
Indicators of Globalization
The level of globalization of a country can be judged from the following:
1. Share of foreign trade in national income.
2. Foreign investment as a proportion of total investment in the country.
3. International investments income flows as a proportion of the total transactions in the economy.
4. Foreign exchange transactions as a proportion of the total value of transactions in the economy.
5. International tourism traffic as a proportion of total population of the country.
6. Emigrant and immigrant population as a proportion of total population in the country.
7. Share of foreign remittances.
8. Value of credits and debits to Balance of Payments as a proportion of total national income.
9. The share of domestic output of foreign multinationals and foreign output of domestic multinationals in the country’s national income.
Advantages of Globalization
1. Wider Markets
Globalization offers larger markets to domestic producers. Domestic firms can export their surplus output. They can understand the nature of foreign markets through direct and indirect marketing channels. Domestic firms can realize higher prices from foreign markets. Global operations help to improve public image which is helpful in attracting better talent.
2. Rapid Industrialization
Globalization helps in the free flow of capital and technology between countries. Global firms can acquire finance at lower cost of capital. Free flows of capital and technology from advanced countries help the developing countries to boost up their industrialization. Industrialization of developing countries leads to balanced development of all the countries.
3. Greater Specialization
Globalization enables the domestic firms to specialize in areas where they enjoy competitive or comparative advantage. By focusing on the functions or products of their core competence domestic firms can compete successfully in the international markets. Specialization also helps to save resources and promote exports of the country.
4. Competitive Gains
Globalization increase competition for domestic firms through imports and multinational corporations. Domestic firms learn about new products, new technologies and new management systems. They are under pressure to increase efficiency, introduce innovations and reduce costs. The domestic entrepreneurs who fail to learn from their foreign rivals suffer in the long run.
5. Higher Production
Globalization leads to spread up o manufacturing facilities in different countries. Firms with worldwide contacts can outsource funds, technology, distribution and other functions from anywhere in the world. They can negotiate subcontracting to remain focused on areas of their core competence. International outsourcing and subcontracting help to improve operational efficiency and o reduce costs.
6. Price Stabilization
Globalization can reduce price differences between countries. Free trade and international competition help to equalize price levels in international markets. Countries with a high degree of globalization can attract greater foreign investment which supplements domestic funds, brings in foreign and improves balance of payments.
7. Increase in Employment and Income
Globalization creates job opportunities in developing countries and the incomes of people increases due to increased industrialization.
8. Higher Standards of Living
Lower prices, better quality and higher incomes help to enhance consumption and living standards of people particularly in developing countries. Moreover, increased economic development enables the governments of these countries to provide better welfare facilities like education, health, sanitation, etc. There is all round increase in welfare and prosperity of public.
9. International Economic Cooperation
Globalization improves economic cooperation between nations in the form of trade agreements, international treaties, standardization of commercial procedures, avoidance of double taxation, intellectual property protection and so on. International cooperation also helps countries to harmonize their macroeconomic policies for their mutual benefit.
10. World Peace
Globalization promotes cultural exchange and mutual understanding among different nations. International cooperation and brotherhood contribute to peace and prosperity in the world.
Disadvantages of Globalization
Globalization increases interdependence between nations of the world. As a result, economic sovereignty and control over the domestic economy are reduced. There is a danger of foreign economic dominance over the developing economies.
2. Threat to Domestic Industry
Globalization leads to the establishment of manufacturing and marketing facilities by multinationals n developing countries. The domestic firms in these countries fail to face the onslaught of multinationals. As a result they sell out to foreign firms. Cheap imports from china and other countries also kill domestic business particularly in the small sector. Availability of high quality foreign products reduces the demand for domestic products and domestic production is eroded.
Globalization leads to restructuring of industry. Technology upgradation and focus on areas of comparative advantage create unemployment and underemployment among low skilled workers. As a result income inequality, poverty and social unrest may increase.
4. Drain of Basic Resources
Globalization results in exploitation of natural resources and basic raw materials in developing countries. These countries are often the sellers of agricultural and other inputs and buyers of finished products. Talented human resources are also transferred to developed nations which offer better remuneration and career prospects. Economic underdevelopment of poor countries is the result of exploitative character of international trade.
5. Technological Dependence
Globalization offers readymade foreign technology which scuttles domestic research and development. Foreign technologies are available at a high cost and often are not adaptable to local conditions. Developing countries become technologically dependent on developed countries.
6. Alien Culture
Globalization promotes consumption patterns and lifestyles which are inconsistent with the local culture and values. It may lead to shift in the industrialization pattern contrary to the national priorities.
Now after looking at Globalization from both supportive and contradicting point of view; we can now take a stand on whether the claims against globalization are sustainable or not.
Based on the above points, we can firmly say that globalization is not responsible fully for the global economic situations alone. It might have played a part in the crisis, but it did not start the fire.
The one reason which can be held responsible for the mishap is the repeal of Glass – Steagall Act. The claims that globalization is the culprit are true but only to little extent. The sub – prime mortgage crisis spread around the globe because of globalization and as a result, led to a sharp surge in the inflation rates.
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