Globalisation

Last updated: Mar 13, 2021

Economic globalisation is the process through which markets, industries and countries have become increasingly integrated across the global economy. Globalisation has several dimensions, including economic, social, cultural and political relationships between countries.

This process accelerated towards the end of the 20th Century because of a number of factors, or ‘drivers’ including:

  • Developments in communication and the use of standardised information technology.
  • Developments in transportation making it easier and cheaper to ship goods between countries. This includes the use of containers to transport goods, and the application of just-in-time (JIT) strategies to streamline production flows and supply chains, making it more possible to produce at a large scale without holding large stocks.
  • Increased trade openness following the gradual reduction in trade barriers resulting from increased membership of GATT (General Agreement on Tariffs and Trade) and, later, the WTO (World Trade Organisation). Reducing trade barriers reduces trade frictions and encourages trade.
  • Increasingly integrated capital and money markets since the 1980s, making it easier for firms to obtain finance and to spread some of the risks associated with international trade. This phenomenon is often referred to as financial globalisation.
  • Financial deregulation has led to an increase in Foreign Direct Investment (FDI), which is a significant part of the globalisation process. FDI has enabled developing countries to improve their infrastructure, healthcare, and education systems and, as a result, join the economic trading system.
  • Increased specialisation, which has led to the greater exploitation of economies of scale and lower costs, enabling global firms to exploit their comparative advantage.
  • The integration of former (and remaining) communist countries in the global trading system, including China and Russia.

The 20 most globalised economies

Source: KOF Globalisation Index

Gygli, Savina, Florian Haelg, Niklas Potrafke and Jan-​Egbert Sturm (2019): The KOF Globalisation Index – Revisited, Review of International Organizations,14(3), 543-​574

Benefits of globalisation

Economic growth

It is argued that globalisation increases global growth in several ways. Firstly, capital can be accumulated as a product of increased trade, and following knowledge and technology transfer. Secondly, growth can occur as a result of the increased scale of production as firms sell to larger markets.

Free trade also reduces barriers to trade and eliminates some of the costs associated with protectionism.

The removal of tariffs can generate welfare gains and create new trade and trade opportunities.

Removing tariffs and the effect on growth

Lower inflation

Perhaps the most significant beneficial effect of globalisation is that real prices are likely to be driven down. Given that globalisation is likely to lead to a net increase in global production and trade, global supply is likely to increase which will drive down prices in those industries where globalisation has had the greatest impact.

Globalisation has reduced inflationary pressure as goods move quickly between producing and consuming countries. According to the OECD, inflation from above 10% in the early 1980s to around 2% over the decade from 1995-2005. Globalisation has also seen a reduction in the variability of inflation between countries.

Employment gains

Increased global trade is also likely to increase total employment in the global economy (although this benefit is unevenly spread.) Indeed, while net jobs may have increases, some workers have suffered as a result of global competition (see below).

Technology and skills transfer

Countries involved in the global trading system can benefit from information and technology transfer. This appears to be largely to the benefit of low-income economies. Both neoclassical growth theory and endogenous growth theory suggest that poverty in developing economies can be largely attributed to a lack of technology, which impacts negatively on capital accumulation, and the acquisition of knowledge.

The costs of globalisation

Structural unemployment

Structural unemployment is likely as low-cost economies gain increased global market share. In The China Syndrome, MIT economist David Autor warns of the significant impact on some American workers of the rise in imports from China following its entry into the World Trade Organization in 2001.

Since 1990, US trade with low wage countries has grown dramatically, with China accounting for 92% of this growth.

Loss of diversity

The globalisation process has led to the increasing standardisation of goods which, while reducing costs, is often seen as leading to an erosion of national culture, the disappearance of unique local products, and a loss of diversity.

Increased risks

As a result of the need to specialise it is possible that countries become over-dependent on a single or limited range of products. This increases the risks of suffering from an economic shock. The financial crisis of 2008 – 2010 resulted in a much sharper recession in those countries that specialised in financial services.

Costs of migration

Increased labour migration is not, on its own, a cost of globalisation given that migration can bring with it a decreased pressure on wage inflation, the benefits of knowledge transfer, and importing skills that are in short supply. In addition, many migrants remit money to their ‘home’ country. However, rapid migration can put pressure on local infrastructure and education and health services. There is also clear evidence that although not the primary cause of infectious disease, migration can help the spread of diseases, including the recent coronavirus pandemic.

Inequality

While the consensus view is that globalisation has increased the economic welfare of its participants is it accepted that an increase in the degree of global inequality has followed globalisation - especially since the net impact of globalisation can vary considerably.

Negative externalities

Globalisation has increase international trading and led to a rise in air and sea pollution.

Power of multi-nationals

Globalisation has seen a rise in powerful brands associated with multi-national companies. Many of these multi-nationals are also monopsonists with the ability to suppress local wages.

Tariffs and the effect on growth

Here, the monopsonist need only pay wage rate W2, and employ Ql quantity of labour. The rise of multi and trans national companies is a cause of concern for some in terms of a lack of transparency and accountability, and in terms of tax avoidance.

Deglobalisation

Deglobalisation involves a deliberate reversal of globalisation. With deglobalisation countries attempt to become more independent, and self-sufficient, leading to a reduction in interdependence.

The trigger for this was the financial crisis of 2008-2010 and the ensuing global recession. Countries started to look inwards and adopt a more protectionist stance. US trade policy shifted towards and 'America first' stance, and a decoupling of the world's two largest economies - America and China, and in Europe, Brexit has pushed the UK towards decoupling from the EU.

The recent Covid crisis has also increased awareness that country's need to be less reliant on imports of medical supplies, as well as having a real and possibly long lasting effect on trade, travel and tourism.


Trade balance

What is the balance of trade?.

Trade balance
Tariffs

How do I use the tariff diagram?

Tariffs
Supply-side policy

How effective is supply-side policy?

Supply-side policy

facebook link logo twitter link logo email link logo whatsapp link logo gmail link logo google classroom link logo