Globalisation Revision

Globalisation Revision

Globalisation is the process by which the world's economies are becoming more integrated.

What has led to the rise of Globalisation?

Improvements in transport - the development of container shipping reduced the cost of shipping dramatically and made it feasible and easier for firms to transport goods across the world. Containers allow more goods to be put on a ship (this is being exacerbated by the development of larger ships) and are also easier to unpack at dockyards (before container ships goods had to be carried off by hand!) meaning automation can occur and therefore there are less expensive labour costs.

Communication technology - Improved communication mean designs, research and information can be easily sent across the world quickly and cheaply.

Growth of Multinational Corporations - such corporations benefit from globalisation (economies of scale, cheaper resources and labour) and hence may try to increase it.

Reduced trading barriers - The work of GATT and the WTO have led to reduced trading barriers making it easier for firms to produce in one country and then export it to its location of consumption. Reduced trading barriers includes tariffs, quotas and non-tariff barriers like particular specifications on imports. This has also improved through trading blocs between countries, although some may argue that some blocs prevent global efforts to reduce trade barriers.

Reduction in capital controls - It is easier to transfer money internationally due to the removal of capital controls (limits on the amount of money that can enter and exit a country) in the 1980s. This makes it easier for firms to locate themselves (or parts of themselves) abroad whilst still repatriating profits.

Derivatives and Complex Financial Instruments - Such derivatives and financial instruments have allowed firms (and countries) to borrow to finance large growth and turn themselves into multinational corporations.

Pros	Cons
Free Trade - There are economic gains to be made from countries specialising in the production of products in which they have a comparative advantage in.	Environmental concerns - transportation requires fossil fuels which will eventually be depleted and are non-renewable. Using such fossil fuels releases harmful chemical emissions like CO2 which can damage the ozone. Countries may also lower their environmental standards in order to attract MNCs and FDI.
Efficiency Gains - There are gains to be had in productive efficiency from producing in countries which have a comparative advantage and have a lesser opportunity cost to produce in. There are also allocative efficiency gains if the product is available to more people. This may occur as the product can be produced and therefore sold cheaply (although this may not necessarily be the case) and because it is available in more markets.	Protectionism - Some countries may impose tariffs, quotas or strict regulations in order to hamper free trade and protect their own industries. With firms off-shoring governments may be lobbied in to introducing these tariffs in order to protect domestic industries. Such restrictions impose a dead-weight loss to society as well as to reduce consumer surplus whilst increasing producer surplus and in the case of tariffs, raise money (tax revenue) for the government.
Redistribute income to less-developed countries - Developed countries invest in less developed countries which results in more jobs for the poor which could take them out of poverty, or at least to take them out of unemployment. Investment may also increase human capital which will allow these citizens to get better jobs and increases the creative industries which may result in higher wages for citizens. However it could be argued that a brain drain may occur, where talented workers move abroad to more developed countries, therefore providing no benefit for their country of origin (it could also be argued that this may not be true if the workers send money back home to support their families).	Unemployment - There are also concerns in developed countries that the rise of globalisation has resulted in higher unemployment in these developed countries. Structural unemployment may arise from freer trade and globalisation. However it could be argued that jobs are created from the extra world output that is produced.
Lead to economic growth in less developed economies - The effects of increased FDI and as a result employment in less developed economies helps these economies grow and prosper. The initial FDI permits investment in capital stock which the country could use in the future to produce more goods to sell and earn money. It also provides employment for people who then pay taxes to the government who could increase spending on education and other beneficial policies.	Corruption - Globalisation may not provide tangible benefits to poor citizens if the tax money a country earns is spent or stolen by corrupt officials and politicians. Equally it may be spent on programs which don't benefit the poor.
Infrastructure - Globalisation leads to an improvement in the infrastructure of a country, such as its roads, electrical provisions, sewage, pipelines, factories as well as human capital as already mentioned. Such infrastructure will be present in the country even if MNCs leave and FDI dries up. However the government may need to invest further to ensure that the quality of this infrastructure is sufficient. MNCs may also only provide infrastructure in certain parts of a country and it may be down to the government to ensure that infrastructure is paralleled throughout the country to ensure fair distribution.	'Raping' of natural resources - Some people may argue that MNCs rape a country of its natural resources such as minerals and commodities without paying a fair price and then exiting the country with no benefits for the vast majority of people. Although, there may be some benefits of increased infrastructure, such as roads and ports which are required to transport these commodities.
Taxation - It could be argued that MNCs presence in LDCs lead to greater tax revenue for the LDC (which it can obviously use to finance numerous projects and improve the standard of living for its citizens). it could also be argued that LDCs may have to offer tax breaks in order to attract MNCs. Globalisation has meant that MNCs can operate anywhere in the world and seeing as their aim is to maximise profits they are likely to not want to pay high taxes. Therefore countries which have low tax rates are more competitive and may therefore attract MNC investment. This may lead other countries to have to also reduce tax rates in order to attract investment. Lower tax revenues means the government has less money to spend on its citizens and may result in it running a public sector deficit.	Time Lag - There is a time lag between producing a good and it arriving in shops. It may take in excess of 3 weeks for a good to be transported across the world, this doesn't include the time for production. The fragmentation of the supply process across the world has meant it takes longer for a product to be produced as different components have to be assembled and sent from different regions of the world. This time lag may mean it is hard for firms to react to changing habits in demand (particularly in the fashion and technology sectors). Some also argue that it is harder to innovate if the product isn't made on the same site as the development.
Higher Profits - Globalisation has opened up many more markets for firms to sell their goods in, this means they have more demand and therefore may be able to make larger profits. This is accentuated by lower costs which may come about due to economies of scale as well as cheaper labour and resources in some LDCs.	Benefits the Rich - Although some people are brought out of poverty through jobs created by MNCs and FDI it is also believed that the rich benefit more than the poor and so globalisation isn't effective in redistributing world income.
	Increased barriers to entry - the rise and dominance of large multinational corporations has meant that there are increased barriers to entry for new firms, and markets which MNCs operate in may be considered monopolies or oligopolies, this has its pit-fulls (see monopoly section for more). The problem is made worse by increasing economies of scale as a result of globalisation which make small firms redundant and again increase barriers to entry but economies of scale do have their benefits, for example it is more productively efficient to have a large firm utilising economies of scale, than many firms which cant use them.
	Diseconomies of Scale - There are economies of scale to be had from globalisation but it may also result in diseconomies of scale. This may be due to large administration and communication costs (trying to manage production across the globe) as well as costly delays and errors in the supply chain.
	Spread of Economic Shocks - Globalisation has meant that the World's countries have become more interdependent and connected. Therefore a recession or an economic shock in one country will have knock on affects around the Globe. If one country is in a recession then it is likely to import less which may affect aggregate demand in other countries.
	Over-reliance - If a country becomes overly reliant on an MNC (some MNCs are larger than the GDP of the countries in which they operate), specialising in a good or trade with a particular country then it may be adversely affected by a change in the business cycle. For example Nokia used to represent 40% of Finland's exports, the near-collapse of Nokia as a phone provider has detrimentally affected Finland due to its dependence on this MNC.

Although from the table above there appears to be more cons than pros to globalisation it doesn't take into effect the actual cost of each point. Therefore it has to be judged based on a cost benefit analysis. Also even if globalisation does have more cons than pros it is unlikely to stop due to the dominance of MNCs who promote globalisation in order to increase their monopoly power and profits.