Globalisation

The causes and characteristics of globalisation

The characteristics of globalisation

Economic globalisation is the process involving the integration and resulting interdependence of markets, industries and countries.

Globalisation has several dimensions, and involves the economic, social, cultural, and political relationships between countries.

The economic dimension of globalisation can be summarised as:

Globalisation means firms can produce goods and services anywhere in the world using resources from anywhere, sell them to consumers located anywhere, and keep their profits anywhere they choose.

Factors contributing to globalisation in the last 50 years.

This process of globalisation accelerated towards the end of the 20th Century because of the following ‘drivers’:

  1. Developments in communication and the use of standardised information technology – e.g. common ‘trading’ platforms (such as euronext), video conferencing – now including Zoom, Teams, and others. Firms can integrate their global operations and sync up their supply chains.
  2. 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.
  3. Increased trade openness and the drive for free trade 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.
  4. Increasingly integrated financial markets (capital, money, and insurance 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.
  5. Financial deregulation has led to an increase in Foreign Direct Investment (FDI), which is a significant part of the globalisation process. FDI has enabled many developing countries to improve their infrastructure, healthcare, and education systems and, as a result, join the economic trading system (though this has not been without cost – see later).
  6. Increased specialisation, which has led to the greater exploitation of economies of scale and lower costs, enabling global firms to exploit their comparative advantage.
  7. The integration into the global trading system of previously ‘closed’ centrally planned economies based on communism - including China and Russia (though Russia has, of course, disengaged in recent years.)
  8. The growth of powerful multinationals (MNCs) and transnationals (global companies with no particular location for its HQ) has meant a rise in global brands which are recognised across the world.

As a result of these processes, globalisation has meant:

  1. Trade now flows more freely and at lower cost.
  2. Countries have clustered together to form regional trading blocs (RTBs) to gain the benefits of free trade while protecting themselves from cheap imports.
  3. Finance flows more freely.
  4. Power has shifted away from national governments to regional blocs, and to increasingly powerful multinational companies (or corporations). Recent deglobalisation has reversed some of this.
  5. The manufacture of many goods has also shifted - from the 'older' industrialised economies to the newly industrialised and emerging economies.

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

Consequences of globalisation - benefits

Economic growth

It is argued that globalisation increases global growth (and growth for both less developed and more developed countries) in several ways:

Real capital can be accumulated as a result of increased trade, and also following knowledge transfer and technology transfer which accompany trade. Economic growth relies on both real and human capital accumulation and the increased mobility of both capital and labor has undoubtedly contributed to global growth. Of course, the benefits of growth have not necessarily been evenly distributed.

Growth can occur as a result of increases in the scale of production as firms sell to larger global markets. This, again, stimulates the accumulation of capital and improvements in efficiency. This has benefited newly industrialised and emerging economies.

Reduced barriers to trade lower the costs of trade and can stimulate export-led growth in both more and less developed countries.

The removal of tariffs can also generate welfare gains as it creates new trade and trade opportunities.

Removing tariffs and the effect on growth

Lower inflation

Perhaps the most significant potential benefit of globalisation is that costs may be kept in check which, in turn, may keep prices down and reduce inflation. Given that globalisation leads to increased global production and supply with more competition, prices may be driven down in those industries where globalisation has had the greatest impact (such as manufactured goods). Globalisation may break down domestic monopolies, which also helps control prices.

Evidence suggests that globalisation has reduced inflationary pressure as goods move quickly between producing and consuming countries. According to the OECD, inflation fell 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.

Of course, lower production costs from globalisation do not necessarily mean lower prices. Despite outsourcing production to low-cost mega-factories in China, Apple and many other global companies continue to increase prices by more than inflation. Typically, global producers source from the lowest-cost economies and sell to markets in developed and emerging economies – thereby keeping costs low and revenue high.

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 increased, some workers have suffered as a result of global competition (see below).

The rising impact of AI, which could be seen as a bi-product of globalisation, may well halt the employment gains from globalisation, or at least alter the pattern of future employment.

Technology and skills transfer

As mentioned, countries involved in the global trading system can benefit from knowledge and technology transfer. This appears to be largely to the benefit of the least developed 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 in the older industrialised economies is likely as low-cost economies gain increased global market share. In The China Syndrome, MIT economist David Autor highlights the likely negative impact on American jobs 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

Globalisation encourages producers to specialise and can mean that countries may become over-dependent on a single good or service, or a limited range of products. This increases the risks of harm from economic shocks over which they have no control. For example, the financial crisis of 2008 – 2010 resulted in a much sharper recession in those countries that specialised in financial services.

Costs of migration

While increased labour migration is a feature of globalisation it is not, on its own, a cost of globalisation. Labour migration can bring considerable benefits - especially in terms of knowledge transfer, importing skills that are in short supply, and improved productivity. In addition, many migrants remit money to their ‘home’ country, which is often a significant source of income.

However, rapid and uncontrolled migration can put pressure on local infrastructure, on education and health services, and on housing. Also, while low wages are a benefit to producers, it can be argued that increased migration suppresses wages for existing employees. In addition, migrant workers may move into the hidden economy, with a consequential loss of tax revenue to the government.

There is also evidence that, while not the primary cause of infectious disease, migration can help spread of disease, including during the early stages of 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.

Youtube video on inequality

The ‘distribution’ of inequality can also vary within an economy (not just between different economies). For example, individuals working in ‘outward looking’ industries in developing countries (typically in ‘new’ manufacturing or the emerging service sector based in urban areas) are likely to do much better in terms of income than those employed in ‘inward looking’ sectors, such as primary industries located in rural areas and ‘older’ manufacturing industries.

Negative externalities

Globalisation has increase international trading and led to a rise in transportation externalities, including air and sea pollution, and those resulting from manufacturing and consumption.

Power of multinationals

Globalisation has been accompanied by a rise in powerful brands associated with multinational companies who may manufacture in one part of the world, have their headquarters in another location, and sell all around the world. While free trade has enabled multinationals to flourish, the companies themselves have played a central role in the globalisation process itself.

The combined revenue of just three of the world's largest multinationals - Amazon, Apple and Microsoft - exceeds the combined national incomes of Thailand, Vietnam, Sri Lanka, Ghana, Costa Rica, Cuba and Tanzania (at around $820 billion - 2020 [1]). Multinationals can exert considerable influence in terms of where they choose to produce and locate, and how best to lower their tax burdens.

It also means that they are relatively 'footloose' and can re-locate in search of lower costs. This may influence national governments' tax and minimum wage policy and regulatory regime, and make it more favourable for the multinationals to remain.

Many of these multinationals are also monopsonists in the regions or cities where the choose to locate, and have the ability to suppress local wages.

Tariffs and their effect on economic growth

Here, the monopsonist need only pay wage rate W2, and employ Ql quantity of labour.

The rise of multinational companies is an increasing cause of concern for many as a result of their lack of transparency and accountability, and in terms of their ability to undertake tax avoidance through transfer pricing schemes.

Insecure employment

Employment in both developed and developing economies may be more insecure as a result of globalisation, with jobs more likely to be part-time than full time, temporary rather than permanent, and with more on zero-hours contracts (in developed countries) and perhaps even no contracts in less developed economies as local firms strive to keep costs as low as possible to attract and retain MNCs.

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 an 'America first' stance, and a decoupling of the world's two largest economies - America and China. In Europe, Brexit has pushed the UK towards decoupling from the EU.

The recent Covid pandemic has also increased awareness that countries 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. Industries where deglobalisation is most likely include those associated with concerns over food and fuel security. The recent gas shortage across Europe is an indication of the risks associated with over-reliance on the global energy trading system and of not developing alternative and sustainable sources of energy.

[1] Sources: Forbes, Microsoft, Businessofapps, and Worldometers



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