Main economic case in favour of globalisation
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Published: Mon, 5 Dec 2016
The Organisation for Economic Cooperation and Development (OECD) defined globalisation as,”The geographical dispersion of industrial and service activities” for example, research and development, sourcing of inputs, production and distribution and the cross border networking of companies through joint ventures and the sharing of assets.
According to Bhagwati and Jagdish (2004)economic globalization is the integration of national economies into the international economy throughtrade, for examples such as foreign direct investment, migration, and the technology transfer from one country to another.
Despite, globalization recognised as combination of economic, technological, socio-cultural, political, and biological factors (Sheila, 2004). The term can also refer to the transnational circulation of ideas, languages, orpopular culturethroughacculturation. Economic activity is becoming organised on a global scale giving a new international division of labour, with production, investment patternsand movements and technology transfers all becoming global. In thisstrategy, activities are established in many sites spread over theworld, based on a country’s comparative advantage.
2. Factors that have led to the process of increased globalisation
The rapid effects of globalisation can be linked to the growth of multi-national firms, since products and services have been increasingly internationalised, seen in the development of globalised supply chains. In addition to this, the deregulation of capital markets also makes it easier to achieve acquisitions and mergers. This has resulted in the expansion of the trans-national activities of multi-national firms, and particularly in motor cars, oil, pharmaceuticals, airlines and financial services. There has been an accompanying integration and fusion of national markets, in part through free trade zones such as NAFTA and AFTA, and often reflected in the escalation of foreign direct investment, including in the less developed world. Reference should also be made to ‘cross-border connectivity’ in other words, the development of new information technologies, and the accompanying new ways of buying and selling goods and services.
The process of globalisation is mainly motivated by the desire of corporations to increase profits and by governments’ intent upon tapping into the potential economic and social benefits that come from increased trade in goods, services and the free flow of financial capital. Among the factors, this essay has divided main drivers that accelerated the production and market globalization into two aspects which are static aspects and dynamic aspects.
3. Static trade globalisation
Modern artefact and technological are a static aspects which accelerated global economies. In 1980s, the world communication has experienced a fundamental change in the perception of the world and one of the reaching transformations has been the economic structural changes on the global scale. The fundamental of these changes is seen to lie on the technological information revolution for example the intranet in US army base commercialise to market. The innovation of the new technologies has made many countries to grow and a good example in this case is e-marketing. The change in Technological have reducing the cost of transmitting information in other word new technologies presence death of distance. The internet has allowedinformation and communication technology to flourish for example E-business. Internet communications with branches, suppliers, plants, distributors andcustomers generally do not require a physical presence in another country, while much can be achieved through licensing and franchising. As a result administration costs have fallen as firms from different parts of the globe can trade efficiently and effectively.
3.2. Trade Liberlisation
Another influential factor is the desire to circumvent tariff and non-tariff barriers by regional trading blocs. For example, the World Trade Organisation (WTO), which replaced the former GATT, was set up to help promote free trade by persuading countries to abolish tariffs and other barriers to open markets. The full benefits of trade liberalization are difficult to quantify. Studies evaluating the effects of trade liberalization under the Uruguay Round completed in 1994 estimate that the increase in annual global income could reach US$200 billion once the reduction in tariffs, export subsidies and quotas negotiated are fully implemented. A similarly positive outlook is provided by the Doha Round. With a 50 percent reduction in tariffs, the World Bank model suggests a real income gain for developing countries of US$ 83 billion or 1 percent, and an exports lift of 14.6 percent. High-income countries see a 0.3 percent real income gain of US$ 67 billion and a 2.8 percent increase in exports (Garrett and Goldin and Rodrik, 2003).
3.3. Comparative Advantage
Supporters of the WTO argued that there could be substantial economic welfare gains if there was integration of the world’s economy into a single international market. Based upon Ricardo’s Theory of Comparative Advantage, it was argued that free trade was likely to benefit countries. By allowing each country to specialise in full orpart production would be concentrated in locations which will enjoy the comparative advantage. It was further argued that specialisation in one type of export was likely to improve its quality and perhaps reduce production costs. For example, Belgian chocolates are exported worldwide. Their high quality is due to expert skills that their producers developed, a process known as learning by doing. Their average costs have also been lowered, by the use of specialised labour and capital; through specialised knowledge and research and development and also perhaps through economies of scale.
3.4. Growth of Multi-National Enterprise (MNE)
The growth of multi-national firms has contributed to the rapid increase in globalisation. Firstly, a multi-national firm can bedefined as a company that produces in more than one country. Inpractice, globalisation has involved MNEs because the scale of their investment is such that the sales of the largest MNEs exceed the entire GDP of many countries. Many MNEs have moved their production from the west to developing countries because they want to benefit from that country’s comparative advantage, usually access to much lower labour costs. Due to the low standard of living in many developing economies and lack of government legislation MNEs often locate in areas of high unemployment. Therefore they are likely to benefit from a continuous cheap supply of labour. In theory, this has led to the international division of labour.
National economies have become increasingly integrated, leading to a growth in the number of trading blocs and economic unions. The process has been facilitated by the increased mobility of both physical and financial capital, the latter reflecting the trend towards the abolition of capital controls, the deregulation of financial markets, and the opening up of capital markets in LDCs and in the former Soviet bloc.
4. Dynamic trade of globalisation
The European continent has seen a lot of dramatic changes over the past decades. Two world wars have been fought here and new countries have evolved every decade. With such a dynamic place as Europe one would think that trade would be a significantly contributing factor to the globalization of the continent. Taking this one step further it is most likely that other factors such as trade affinities are believed to facilitate trade flows between the trading parties which in turn have yielded a higher state of globalization.
In order to be able to determine the effects that trade affinities have had on globalization through time one must first start by determining the meaning of the word ‘globalization’. Harris (1993) states in his article Globalization, trade, and income
“To economists globalization is generally thought of as the increasing internationalization of the production, distribution, and marketing of goods and services.” (Harris, 1993, p755).
By taking this one step further one can look at globalization as the term use when define the process, or evolution, of the welfare around the world. Although, Harris argues that the definition of globalization alters between subjects but that its importance remains the same no matter the discussion.
“However one defines globalization it is surely a development that is having a profound impact on the subject of economics as a whole and ought to have on the field of international economics in particular.” (Harris, 1993, p. 756)
To understand and describe globalization it is not enough to concentrate on the static aspect and the primary phenomena. Not less important for the globalization dynamic are the consequences and rebound effects.
4.1. Improve poverty
Poverty reduction has remained the central challenge to majority of the countries especially the developing countries. It is with the help of globalization that majority of the countries have been in a position to reduce their poverty levels. There is great evidence that with the introduction of globalization, it has been in a position to eradicate poverty levels and eventually accelerating growth in most of the countries. It is an important catalytic role in both accelerating growth and also at the same time reducing poverty levels. A good example in this case can be explained by analyzing the developing countries. The developing countries have been in a position to grow out of globalization especially in agriculture sector.
This is because with globalization, it means that there is a common market for goods and services and at the same time there are no restrictions to trade. It means that the developing countries that are not in a position to compete with the already developed countries can now compete well with them since you find that with globalization, it means free trade that is a trade which is free from trade restriction. Most of the developing countries found it hard to trade globally due to the introduction of tariffs which were usually high for the infant industries to meet. They had limited exports since the tariffs which were imposed when exporting these goods and services were high hence leading to the increased costs of production. It is out of the increased costs of production that the infant industries from the developing countries could not realize their competitive advantage hence leading to increased poverty levels to these countries. As a result, the countries which are still undergoing development can now benefit from globalization since it means that they are in a position to export their products freely and hence can compete effectively with the other developed countries. As a result, it means that globalization has done so much in eradicating poverty levels especially in the developing countries (Boswell, and Dimitris, 1997).
4.2. Increase employment
Globalization accelerated growth from opening, an accelerated creation of private companies or MNEs and trade expansion have substantially accelerated the pace of job creation. During 1982-1999, the number of new jobs created in manufacturing and services almost doubled from 1965-1982 (Hauser and OberhÃ¤nsli, 2002).
Source: adopted from Hauser and OberhÃ¤nsli in WTO news creates additional jobs (2002)
According to Eurostat statistic data, in the 17 years from 1982 to 1999, 34 million jobs were created on average every year in manufacturing and services worldwide. From 1991 to 1999, 30.6 million new jobs were created worldwide, slightly less than during the period 1982-1991. This slowdown in job creation is the result of the restructuring of the formerly socialist economies in Europe (CEE/CIS), as the result of earlier mistakes and misallocations during the communist period. Another event was the 1997 Asian crisis that, according to ILO estimates, destroyed approximately 10 million jobs (ILO, 2000). But this latter event came after a period of very high job creation; for the whole period 1991-1999 it is the job losses in Eastern Europe that practically explain the difference, both in absolute and relative terms, in job creation vis-Ã -vis the 1982-1991 period.
Between 1982 and 1999, employment growth was mainly in emerging economies, plus about 80 percent in Latin America and in Africa/Middle East, close to 120% in developing Asia. The very high pace of employment creation in emerging economies has not been a zero-sum game; all regions in the industrialized world participated in the employment gains, both in absolute terms and also relative to total population. The only area with unsatisfactorily low growth in employment was the European Union, but this was clearly not a consequence of globalizationbut of the excessive rigidities that constitute an obstacle to markets’ adjustments.
4.3. Enhanced economic interdependence
The sharp rise in trade has been accompanied by an even faster increase in foreign investment flows, as industries and companies relocate production processes throughout the world. During 1980-1997, world foreign direct investment flows increased at an annual average rate close to 15 percent, almost twice as fast as trade growth and considerably faster than world output. In particular, during the 1993-1998 periods, foreign direct investment (FDI) flows rose at an even faster rate, from US$219 billion to US$692 billion (UN, 2001). Developing countries for long only receivers of FDI – have now also become investors abroad. Trueglobalization does not mean one-way flows, but it means true interdependence.
Economic interdependence can be taken to mean the economic corporation of many countries. Many countries are thought to have increased their economic interdependence. These countries are seen to come together for the trade purposes. A good example in this case can be seen in the formation of NAFTA, WTO, and UNACTAD among other bodies which are said to have increased the production and the market globalization. A good example in this case is NAFTA (North American free Trade association). It is with the formation of NAFTA the member countries have been in a position to expand in growth. This is because it is a free trade association between the member countries whereby there are reduced tariffs to the members of the association. So, the infant industries in these countries can be protected hence leading to their increased production. These countries will be in a position to produce more goods and services and sale them globally hence leading to the growth of the economy. So, it can be argued that the increased economic interdependence has led to the increased production of goods and services and also the globalization market. This is because these countries have made trade agreements so that they can promote trade (Boswell, and Dimitris, 1997).
It is also with the increased economic integration that economies have been in a position to improve on infrastructure. The communication process in this case has been made easy since the communication – travel for these goods are made easy. With a good infrastructure, the production of these goods and services have increased since they can be transported quickly and marketed so quickly. The integrated labour force is also another area which has led to the increased production of goods. This is because the integrated labour ensures that people from other countries can work in a given country as long as they have the skills. As result, more expertise in the production hence lead to the increased production and the globalization market (Boswell, and Dimitris, 1997).
Globalization is one of the areas that led to most economies to improve. A good can be explained by analyzing the developing countries that they have benefited from the technologies developed by the rich countries. Without globalization that most of the developing countries that could not compete effectively with the developed countries are seen to benefit a lot from the issue of globalization. The rich countries are not better off because they have taken prosperity away from the poor ones; rather, the poor countries are better off because, but situation would have further improved had they been better prepared to capture the benefits of globalization. In additional, globalization is seen to have so many advantages in term of social, economical, and political aspects. It is seen to have increased production hence leading to the economic growth of countries especially in the developing countries.
Bhagwati, Jagdish (2004).In Defense of Globalization. Oxford, New York: Oxford University Pres
Boswell, T and Dimitris, S. 1997. “Globalization and International Labor Organizing: A World-system Perspective.”Work and Occupations,24(3), pp.288-308.
Garrett, Michael; Goldin, Ian A.; Rodrik, Dani (2003); “Scenarios International Trade and Doha Development Agenda”; World Economic Forum Annual Meeting Davos January 2003.
Harris, G. R. (1993). Globalization, trade, and income. Retrieved Febuary 7th , 2010 from http://www.jstor.org/sici?sici=00084085(199311)26%3A4%3C755%3AGTAI%3E2.0.CO%3B2-0
Hauser, H and OberhÃ¤nsli, H. (2002). “Globalization creates additional jobs”; in: WTO-News; University St. Gallen February; www.wto-news.ch.
ILO (2000). “World Labour Report 2000. Income security and social protection in a changing world”. Geneva: ILO.
Martin, Will- Winters, Alan (Eds.) (1996). “The Uruguay Round and the Developing Countries”. World Bank and Cambridge University Press. London, U.K.
Sheila L. C (2004).Globalization and Belonging: The Politics of Identity in a Changing World.
United Nations (2001).”World Investment Report 2001: Promoting Linkages”. UNCTAD. New York, U.S.A. and Geneva, Switzerland.
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