The Effect of Globalization on the World Economy

Introduction

Globalization, with its wide implications, can be discussed in various perspectives, for example socially, cultural political and economics. Economists define this concept as the unrestricted movement of goods, services, labor and capital crosswise boundaries. World Bank defines globalization as “Freedom and skill of individuals and firms to initiate voluntary economic dealings with residents of other countries” (Milano Vic, B 2002).

Globalization is a procedure of communication and combination among the people, companies, and governments of different nations, a process motivated by international trade and investment and supported by information technology. This process has effects on the environment, culture, political systems, economic development and prosperity, and human physical well-being in civilizations around the world.

Economic globalization is characterized by increased trade and investment, liberalization (free trade), denationalization of public services and de-regulation of many government institutions. Economic globalization is also related with increasing disparities in wealth and power both between nations and between different groups within nations as well as between public and private sectors. Environmental globalization recognizes that an environmental incident or impact that happens in one region or country is not restricted to that area but has the potential to affect the entire world’s health and wellbeing.

Similarly, communicative globalization refers to the rapid growth of communication technologies such as internet, telephone, cellular phone, satellite and so on.Capacity to link people, information and ideas around the global impact on culture, both positively and negatively.

Most economists believe that the opinion that reducing barriers to economic integration have a positive effect on economic growth and poverty reduction. This view is often termed the “openness hypothesis”, which interprets liberal regimes of international transactions as a major cause of higher rates of economic growth and poverty reduction. As the struggle for reducing trade restrictions under the umbrella of the World Trade Organization (WTO) demonstrates, the supposed role of free trade is the most provocative problem. During the last decades, many developing countries have followed a strategy of import substituting industrialization (ISI) with high trade barriers. Proponents of the openness school of thought see the reluctance to reduce tariff and non-tariff trade barriers in these economies as a major impediment to economic growth and poverty reduction.

Globalization is multidimensional and influences all features of life, economic, social, cultural and political. Globalization in tastes is leading to globalization in products and globalization in production and labor markets is leading to increasing outsourcing of parts, components, and services. Determined by the failure of the centralized economies and the success of the market based economic systems and spurred on by the strategic imperatives of the multilaterals such as the World Bank and the International Monetary Fund the drive towards market liberalization has rapidly accelerated the pace of globalization during the past decade. The formation of the World Trade Organization has formalized the trading system and provided, in principle, a structured framework for ensuring a level playing as global well as a mechanism for dispute resolution. Theoretically globalization opens up markets and ensures competition thereby removing inefficiencies and leading to greater growth. The market forces ensure that specialization takes place in areas of comparative advantage. Thus for labor abundant economies this means increased employment as well as growth. Poor countries are generally labor abundant and capital scarce. Thus globalization, in theory, provides an effective means of poverty reduction through enhanced employment of labor.

THE CONSEQUENCE OF GLOBALIZATION

Globalization means different things to different people. Mainly, the general views about globalization can be categorized into three main perspectives that are technological, development, and societal respectively.

THE TECHNOLOGICAL PERSPECTIVE

Today we witness phenomena that no futurist dreamed of half a century ago. It is clearly the availability of cheap, rapid and reliable communications that permits such phenomena, just as this is the key to the integration of the international capital market. With globalization instigating cost effective strategies and technologies channelized big MNCs (Multinational Corporations) to switch operations to cheaper developing countries. Companies like GE Capital Services have been outsourcing in India for simple jobs such as collection of money from delinquent credit card users. British Airways along with other airlines like Swissair have large centers for programming and handling everything from computer messages to air ticket bookings today.

Technology has been the other principal driver of globalization. Advances in information technology, in particular, have dramatically transformed economic life. Information technologies have given all sorts of individual economic actors-consumers, investors, businesses-valuable new tools for identifying and pursuing economic opportunities, including faster and more informed analyses of economic trends around the world, easy transfers of assets, and collaboration with far-flung partners.

Hence, the information and communication technology (ICT), and internet in particular, has been instrumental in integrating, providing potential for bridging time and space, income and knowledge gaps to catalyze the chemical process of globalization. This created a chain reaction of transfer of skilled and semi-skilled IT experts export into US and Europe from the developing countries especially from India and to some extent from Pakistan as well.

The Development Perspective

It touches the heart of dichotomy which today globalization phenomenon faces. It tries to find the clues of the increasing divide between the rich and the poor, the existing cleavage between the haves and have-nots, under the umbrella of one world concept of integrated markets and capital flows. Above all it challenges the greatest protagonists of globalization, the global institutions of World Bank, IMF, and even WTO one hand. The question is not to reap the benefits of globalization, but a greater one, that is how the share these benefits between the developed, developing and least developed countries in an equitable manner.

The Societal Perspective

This includes the condition of human rights, women empowerment, gender sensitization, civic education, status of women in the society, political status becoming more democratic, freedom of speech, rule of law, equal access to resources and level of education.

Globalization is also a key to future environmental changes. Globalization is having a major impact on population migration, population distribution, particularly through accelerating urbanization trends, and growth of mega-cities. These population changes are in turn impacting on security, governance, poverty, health and environmental factors.

In addition to this, the core of the developing world problems is lack of education, which puts restrains for nations and societies alike to reap the benefits offered by globalization genuinely.

The History of Globalization

Globalization is not new, though. For thousands of years, people-and, later, corporations-have been buying from and selling to each other in lands at great distances, such as through the famed Silk Road across Central Asia that connected China and Europe during the Middle Ages. Likewise, for centuries, people and corporations have invested in enterprises in other countries. In fact, many of the features of the current wave of globalization are similar to those prevailing before the outbreak of the First World War in 1914.

But policy and technological developments of the past few decades have spurred increases in cross-border trade, investment, and migration so large that many observers believe the world has entered a qualitatively new phase in its economic development. Since 1950, for example, the volume of world trade has increased by 20 times, and from just 1997 to 1999 flows of foreign investment nearly doubled, from $468 billion to $827 billion. Distinguishing this current wave of globalization from earlier ones, author Thomas Friedman has said that today globalization is “farther, faster, cheaper, and deeper.”

This current wave of globalization has been driven by policies that have opened economies domestically and internationally. In the years since the Second World War, and especially during the past two decades, many governments have adopted free-market economic systems, vastly increasing their own productive potential and creating myriad new opportunities for international trade and investment. Governments also have negotiated dramatic reductions in barriers to commerce and have established international agreements to promote trade in goods, services, and investment. Taking advantage of new opportunities in foreign markets, corporations have built foreign factories and established production and marketing arrangements with foreign partners. A defining feature of globalization, therefore, is an international industrial and financial business structure.

Globalization is deeply controversial, however. Proponents of globalization argue that it allows poor countries and their citizens to develop economically and raise their standards of living, while opponents of globalization claim that the creation of an unfettered international free market has benefited multinational corporations in the Western world at the expense of local enterprises, local cultures, and common people. Resistance to globalization has therefore taken shape both at a popular and at a governmental level as people and governments try to manage the flow of capital, labor, goods, and ideas that constitute the current wave of globalization.

Like many other closed economies, globalization was not a choice but a compulsion for Pakistan (officially, Islamic Republic of Pakistan). Globalization is a process of global economic integration, which includes freedom to market forces and freedom to factors of production. In other words it’s a process of creating a boundary- less world. Interdependence and interconnectedness are the basic pillars of globalization. It eliminates all forms of trade barriers to provide an open market. But globalization as such, shall have impact on cultural, political, legal and technological environment hence, globalization shall be defined as a process of integration of societies of all countries in fact, it is a process towards a new economic order, a monotonous world.

WTO As a Part of Globalization

Globalization is often used to refer to economic globalization, that is, integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology

The World Trade Organization (WTO) is an international organization designed to supervise and liberalize international trade. Therefore the term globalization and WTO are different WTO is just an organization that promotes globalization in trade between various countries however globalization is vast and global trade is just one part of it.

The Positive Aspect of Globalization

Globalization is the new catchphrase in the world economy, dominating the globe since the nineties of the last century. People relied more on the market economy, had more faith in private capital and resources, international organizations started playing a vital role in the development of developing countries. The impact of globalization has been fair enough on the developing economies to a certain extent. Globalization has a positive side as well. Supporters of globalization argue that it is good and beneficial. Some of their arguments are listed below.

Globalization brought along with it varied opportunities for the developing countries.

Globalization gave a fillip for better access to the developed markets.

Due to globalization, technology transfer promised better productivity and thus improved standard of living.

Globalization has created the concept of outsourcing. Work such as software development, customer support, marketing, accounting and insurance is outsourced to developing countries like India. So the company that outsourced the work enjoys the benefit of lower costs because the wages in developing countries is far lower than that of developed countries. The workers in the developing countries get employment. Developing countries get access to the latest technology.

Increased competition forces companies to lower prices. This benefits the end consumers.

Increased media coverage draws the attention of the world to human right violations. This leads to improvement in human rights.

Globalization opens up markets and ensures competition

Removes inefficiencies and leading to greater growth.

Ensures specialization takes place in areas of comparative advantage.

For labor abundant economies this means increased employment as well as growth.

Globalization and Its Impact on Pakistan Economy

Like all other countries, Pakistan has been a part of this globalization process. Pakistan has changed many of its policies regarding its contribution to the international stage. There have been significant changes in Pakistan’s economic and foreign policy, which are all part of the efforts to be a part of the globalization process. A large proportion of the Pakistani population has viewed these changes with growing skepticism. It remains to be seen whether this process of globalization leaves Pakistan better off or not.

The late Mahbubul Haq had very aptly summarized the debate on globalization by observing that “Globalization is no longer an option, it is a fact. Developing countries have either to learn to manage it far more skillfully or simply drowning the global cross currents.”

The sectorial average annual percent growth indicates that Pakistan remained mostly dependent on agriculture, reflecting low skill and technology intensity. In industry, manufacturing and service sectors, it is placed at the bottom in terms of growth rates.

In the case of Pakistan, a large share of the central Government expenditure has been financed by foreign aid. Further, political interference, lack of transparency in public expenditure management and weak institutional capacity have also affected the quality of public expenditure.

In the social sectors, Pakistan compares unfavorably to other countries with similar levels of per capita income. Investment in education and health care sectors will increase the possibility of Pakistan entering a virtuous cycle of high growth and improved living conditions for the population. The big landowner/ feudal domination are quite visible on the economic and political scenes of Punjab and Sindh, NWFP and Baluchistan. The social, cultural and traditional taboos have further restricted the role of women in society, particularly in education and health. Similarly, the mortality rate and total fertility rates are also not favorable.

PAKISTAN’S EXPERIENCE WITH GLOBALIZATION

Pakistan liberalized its economy as part of the structural adjustment conditionality of the IMF program and World Bank lending. Pakistan’s expansion in trade has not been as spectacular as that of some of the fast globalizers. Pakistan’s exports merchandize exports have not kept pace with that of the rest of the world.

Pakistan’s experience with globalization between 1990 and 2002 has not been great. Pakistan’s share in the world merchandize exports has fallen from 0.16 to 0.15. China’s share in world merchandize exports went up from 1.80 to 5.04. Malaysia’s share in world merchandize exports has increased from 0.85 to 1.44.

PAKISTAN’S TRADE SECTOR

While the size of the trade sector relative to GDP has grown from about 28 percent in 1980 to about 31 percent in 2003 it has been subject to large year to year variations.

The trade sector has on an average grown only slightly faster than the growth of the economy. The overall growths of the economy and the social sector development indicators, particularly for the decade of 1990s, do not show any significant gains from the liberalization process. Poverty which was declining till the early 1990s started to increase thereafter till the end of the decade. The increase in the openness of the economy did not translate significantly into any enhancement of growth and subsequent decline in poverty

Pakistan’s trade sector did not grow significantly during the 1990s despite the liberalization because of

• Narrow range of export markets and export products;

• Modest short-term demand responsiveness for major Pakistan export categories;

• Small foreign direct investment in tradable sectors;

• Anti-export bias in the trade policies of Pakistan;

• Inadequate infrastructure in certain potential growth sectors;

• Absence of trade risk mitigation structure to support the entry of new exporters and

• Inadequate development of non-traditional markets

GROWTH RATE OF EXPORTS AND IMPORTS

GLOBALIZATION AND RE-INDUSTRIALIZATION IN PAKISTAN

Originating from free-trade doctrine, some opinions claim that Pakistan, under globalization, should forget about possibilities of a new wave for industrialization altogether. Though controversial, the claim also argues that the East Asian ‘Gang of Four’ days are over, and globalization – meaning flow of foreign direct investment (FDI) and openness – will determine whether the country can industrialize or not. Such arguments also advise that Pakistan should try to attract FDI through the policies of liberalization, deregulation, and privatization. Most importantly, the government has to be cut-to-size and be kept out of markets in the process.

However, on the opposite side, forceful voices originate from at least two quarters, which at a certain level are mutually supportive approaches to long-term economic development. Broadly speaking, one is new institutionalize political economy and the second is new growth and new trade theory

The moral of the story is that industrialization under globalization for long-term economic development is too important an activity to be left to blind forces of FDI and openness.

All three sectors, first (government), second (business), and third (civil society) must work together towards achieving national development objectives and strengthen national institutions. Each sector can contribute a set of competitive advantages.

GDP GROWTH RATE

Pakistan’s experience also shows that in the decade of 1990s, significant trade liberalization was accompanied by a steady decline in the GDP growth rate, from 6.1% in the 1980s to 4.5% in the 1990s. Similarly, wide-ranging policy changes and incentives to encourage foreign investment did not lead to any significant increase in investment, apart from larger investment in the private power sector in the mid-1990s in response to a very attractive incentive package. In fact, overall investment declined from about 19% of the GDP in 1989-90 to only 15% in 1999-2000. Even on the export front, the trade performance has not been satisfactory. Despite substantial reduction in tariff rates, removal of virtually all non-tariff barriers and successive devaluations of the currency (leading to an annual depreciation of about 10% in the exchange rate, from Rs 24 in 1990 to PRs 60 per dollar in 2000), the growth in exports in the 1990s was only 4.5% per annum, compared to 19% in the 1970s and 8.5% in the 1980s.

GROWTH RATES OF GNP PER CAPITA

Real Gross National Product (GNP) per capita is a useful aggregate measure of annual income per person, net of growth in population and prices. Data shows that in 1947 real GNP per capita was PRs. 1,476 which has multiplied three and a half fold to PRs. 5,128 in 2001. In other words, an average Pakistani today commands purchasing power that is three and half times greater than in 1947 [Social Development in Pakistan, Annual Review, 2001] in constant prices of 1980-81.

FOREIGN TRADE AND INVESTMENT LIBERALIZATION

Import liberalization in Pakistan has been a rather gradual process, as exemplified by the gentle downward trend in the average import tariff rate.

The decline in import duties as a revenue source can be seen from the fact that their contribution to total taxes has fallen from 50.4% in 1987-88 to 15.9% in 2000-01 [Social Development in Pakistan, Annual Review, 2001].

CAPITAL FLOWS

FDI involves the long-term interest of one entity resident in one economy in an enterprise resident in an economy other than that of the foreign investor (United Nations Conference on Trade and Development [UNCTA], 1998). FDI had shown a 16 percent growth during the post 1988 decade.

1977-78 to1987-88 1988-89 to1998-99

Growth in FDI

(US $ million) – 16.0

DEGREE OF OPENNESS

The degree of openness has increased; both exports and imports have been contributing factors [Kemal, 2001]. However, the drawback is that the degree of openness has widened the balance of payment deficits, and this problem will continue unless third world country like Pakistan is provided enhanced access to the international market.

DEGREE OF OPENNESS

ƒ˜ AVERAGE TRENDS IN UNEMPLOYMENT

But in-spite of that deficit there is a significant increase in growth rate of output, trade and FDI inflows but the important question is: To what extent increase in these growth have helped the growth of employment in Pakistan?

_______________________________

Years Unemployment

________________________________

1980-90 3.5

1991-95 5.4

1996-2000 6.0

1991-2000 5.7

1999-2000 6.2

2000-2001 1 6.7

_________________________________

Thus, despite increase in growth rate of output, trade and FDI. The unemployment rate, increased from an average of 3.5% during 1981-90 to 5.7% during 1991-2000, went up further to 6.7 percent in 2000-01, official statistics, as presented in the Pakistan Economic Survey (Statistical Supplement) for the year 2000-01, actually report unemployment in 2000-01 to be higher at 7.8 percent. Survey (Statistical Supplement) for the year 2000-01, actually report unemployment in 2000-01 to be higher at 7.8 percent.

The Effect of Globalization on the World Economy

Industrialization required raw materials and industrialized countries could not always supply all of those raw materials themselves. They therefore turned to other countries, including underdeveloped countries, for raw materials. This created a pattern of every increasing globalization. As globalization produced a world economy in the 18th, 19th, and 20th centuries, local economies around the world changed the way they produced and distributed raw materials. They specialized in the things they were best at, imported everything they needed to import, and shared ideas and technology.

Increased trade led to ever increasing network interdependency in the countries of the world. When Britain looked to other countries to satisfy their demand for coal, those countries began to rely on the revenues they could gain by exporting coal. Those countries, in turn, could use those revenues to buy British goods or import raw materials that they need for their own industrialization. As countries traded with each other more regularly and more extensively, they stopped producing them things they could import more cheaply and concentrated on producing the things they made well. In time, individual countries lost their abilities to produce certain goods completely, relying on other countries exclusively to meet that demand.

That process of specialization also had an important effect on the raw materials were produced. As countries specialized, they found that they actually produced more value of goods than they had when they produced many different types of goods. Specialization also meant that countries known to be particularly skilled at producing one or two products became world leaders in the manufacture of those products.

As other countries wanted to branch out into producing and producing those goods, they could use the technology and expertise developed by that country to help them. Even relatively underdeveloped countries often found at least one important commodity they could offer the world. This connected them to the world economy and pulled them away from subsistence agriculture.

As trade between far-flung parts of the world produced a global economy, ideas and technology were exported just as easily as raw materials. As countries had more and more contact with each other, they shared their cultures including their political philosophy. This is how Smith and Marx came to be read all over the world. Globalization meant that people could no longer think only in terms of their local area, they had to consider the outside world as well. Some areas were more receptive to new ideas, but no area could shut out new ideas completely.

Because of globalization, most of the countries of the world no longer concentrated on local markets. Their focus became on regional or even world markets. It also changed the way they produced goods domesticity including which goods they produced at all. Just because a country might have the resources and ability to produce a particular commodity no longer meant that they would necessarily produce it. If someone else in the world could produce it more cheaply and with a higher quality, they might just concentrate on what they were better at producing.