Chapter 7 - Globalisation Flashcards
What is globalisation?
The process by which economies have become increasinglly integrated and interdependent
What are the causes of globalisation? 6
1) Trade liberalisation
Decreasing barriers to trade such as tariff barriers as countries have realised the benefits of free trade in promoting growth by exploiting their comparative advantage -> also through the work of the WTO -> trade has increased between countries -> proven by an increase of trade as a % of world GDP
2) Growth of trading blocs
Like EU and ASEAN have either deepened their integration or newly formed promoting more free trade and easier movement of labour between memeber states -> promoting FDI leading to greaster integration between these economies
3) Growth of MNCs
As technology improves -> mobility of capital is easier -> access to world markets is easier -> MNCs can become very large in terms of profitability AND production levels -> MNCs will move and operate in nvarious countries leading to greater interdependance of nations and increased FDI
4) Technological advancements
Internet improvements, software development and transportation improvements -> trade internationally has become much more efficient and viable ->opening up markets and increasing trade
5) Increased mobility of labour and capital
With growth of trading blocs, tax incentives for businesses and workers, the improvement in technology and labour market deregulation -> labour and business mobility has become easier, quicker and cheaper -> FDI has increased dramatically with large businesses of one coutry setting up all aroud the world -> increased migration flows as workers look to maximise their earning potential
6) Fall in transport costs
Due to innovations and greater priovitisation of transport -> shipping or air/road fright has become cheaper and faster promoting more trade -> FDI and migration flows have increased with this imporvement of labour and capital mobility
What are the Pros of Globalisation?
1) Exploitation of comparative advantage
Greater free trade and specialisation -> resources are allocated where countries have the comparative advantage -> allocative efficiency is achieved and with money as a means of excahnge the basic economic problem is solved
2) Large EOS
With access to a larger international market, businesses can grow alot larger and sell to many more consumers around the world -> businesss can exploit technological and pruchasing economies of scale -> lowering averge costs -> higher profitability and potentially lower prices for the consumer
3) Increased competition and lower prices
Competition becomes global -> forcing domestic producers to become more efficient in order to compete -> leading to allocative efficeincy and gains of CS as prices are lower and quantity in the market is higher -> quality will also be higher as firms have to compete on non-price factors in a competitive market -> also DE efficiency to stay ahead of rivals
4) Increased choice for consumers and businesses
Greater sources of raw materials for businesses, greater variety of products for consumers -> lopwer prices, negotiating power with suppliers -> for consumers imporved living standards
5) Higher rates of economic growth
Greater market size and specialisation means higher export potential and revenue generated from exports -> boosting (x-m) -> boosting AD -> unemployment decreases -> increased GDP -> imporvemetns in incomes, living standards ETC ETC
6) Faster rates of technology transfers
Access to new tech is much better -> spread of tech is far greater than under a closed economy -> tech advancements happen quicker -> impoving efficiency and thus profitbality
7) Ability for firms to produce offshore
Offshoring is moving part or all of a businesses production process overseas in countries where costs of production are lowers -> businesses become more profitable accelerating innovation and tech advancements through RnD -> consumers could beenfit from lower prices and a wider range of products -> increased incomes for workers in developing countries
8) Benefits of inward migration
The pace of migration increases -> countries that attract migrant labour benefit from unique skill sets that can fill job vacancies in the economy -> bosotig productivity and productive potential, and tax revenue -> ALSO remmitance incomes benefits developing countries in boosting living standards
What are the cons of globalisation? 7
1) Growing income inequality
HIgher growth may not translate into higher incomes for all -> corrupt governance / dominant industry -> holding back economic development, key macro objective not met
2) Rise in structural unemployment
Many industries go into decline as they struggle to compete internationally where other countries have the comparative advantage and low cost labour benefits -> also through copmanies offshoring to seek competitive advnatage -> both leading to structural unemployment -> PROBLEMS FOR GOV; re-training workers is costly, also from paying higher unemployment benefits and receiving lower tax revenue
3) Trade imbalances
Trade domianted by a few exporting nations, frequent trade imbalances -> few countries having large CA surpluses whilst other have large CA deficits -> increased internatonal debt to fund CA deficits -> as coutreis are more integrated and relaint on one another, a shock affecting once country having an affect on another is much more likely -> ecoonoic crisis can spread quickly and bring down global economy -> reducing incomes and prosperity for all
4) Enviromental costs
With FDI increasing and more of a focus on growth, negative externalities in production have increased; pollution, resource depletion/degredation -> affecting well being and quality of life -> hindering econoimc development in the long term
5) Over-specialisation
As countreis exploit their comparative advantage and do not produce goods where other countreis are more efficint -> can become over-reliant on imports and revenue from production of a narrow range of goods -> if these indutries collapse or go into decline there is no other industry avaiolable where growth and development can still prosper
6) MNCs have too much power
REducing benefits from FDI -> size, tax revenue potential and growth/employment boosting capabilities -> they may influence policy in their favour that may not be in the best interest of the country they are entering
7) Costs of migration
Countries can lose their best, most skilled workers leading to the ‘brain drain effect’ due to higher incomes abroad
-> reduced LR growth rates and productive potential of economy -> also for some coutreis receiving migrasnt labour, wages can be psuhed down due to increased supply
What are the evaluation points for globalisation?
1) Globalisation is only beneficial if there is fully-functioning free trade
There has been a greater spread of subsidies and non-tariff barriers, particularly in agriculture -> to the detriment of developing countries
WTO organisation has been succesful in liberating trade in service and manufacturing industries where developed countries are dominant, but for poorere countries who are reliant on primary sector, much more work is needed to level playing field
2) Role of government is pivotal
Globalisatio can be so powerful in increasing growth rates BUT ONLY IF GOV ENSURE that incomes are equitably redistributed to actually reduce income inequalities.
Must have effective enviromental policy in place in order to circumvent any negative externalities in production
Education schemes must be in place to ensure workers have skills to fill new job vacancies
Gov must encourage diversification to not become overdependant on one sector -> breaking resource curse and preventing over-specialisation
3) How globalisation is managed is crucial to its success
India and china opened up their economies to trade and FDI but REJECTED short term speculative sources of finance that create bubbles and volatility.
South Amerian countries like Argentian opened up their financial markets in this way and were not ready for it, leading to economic crisises
