Globalisation

By ANIL ARI

      (Winner of 2008 Demetriou Best Essay Prize for Globalisation, English School -Nicosia, Cyprus)


Globalization: definition; economic, environmental, cultural benefits, costs; global economics, glocalisation.


Introduction


This essay is an analysis of the phenomenon of Globalisation. There are three main sections; an explanation of what Globalisation is and the forms it has taken, an analysis of the factors that have contributed to its rise since the early 1980s and an evaluation of the problems it has created.



Definition of Globalisation


Globalisation is not just an economic phenomenon. It also has political, social and cultural dimensions. Even within its economic dimension, there are major differences depending on the scale (e.g. macroeconomic or microeconomic) and the viewpoint (e.g. firms' or consumers', etc.) it is considered from. Therefore, any simple definition of Globalisation is bound to be incomplete. A broad definition that explains what Globalisation itself is and the forms it has taken in all of its dimensions is required.


Globalisation[1] is a process of increasing interconnectedness, integration and interdependence among not just economies but also societies, cultures and political institutions. It has been encouraged by the diminishing importance of geographic distance in cross-border relations in the wake of new technologies. An important effect of it is deterritorialization, whereby the borders between countries lose their significance and can no longer deter trade and communication.


In the economic dimension, Globalisation has taken the form of increasing trade liberalization, formation of world markets and increased international mobility of capital. This has resulted in countries coming together under supra-national trade blocs (e.g. the European Union) and multinational institutions (e.g. the World Trade Organization). Firms have gained the ability to locate their production facilities anywhere (often in the Less Developed Countries [LDCs] which provide cheap labour) and use raw materials, components, capital and technology from anywhere[2]. They can also sell their products and place the profits anywhere. However, the formation of a world market also meant that there is competition from everywhere and firms have grown or merged in order to achieve economies of scale and become more competitive. This resulted in the creation of huge multinational firms[3] and their dominance as global oligopolies in many markets. For the consumers, this led to greater access to products from everywhere and with the rise of the internet, producers from everywhere.


From the political perspective, Globalisation has resulted in a partial loss of sovereignty for states. A state can no longer govern independently of other states and has to abide by the rules of multi-national institutions and multi-lateral agreements, or risk being isolated. Many states have also chosen to unite under trade blocs in order to harvest the benefits of Globalisation fully.


In the cultural dimension, Globalisation has taken place in the form of increased exchange of culture and knowledge between peoples of different countries and the spread of American and Western cultural values throughout the world.


Overall, Globalisation brought about greater mobility of people, goods, capital and ideas due to increased economic, social and cultural integration between countries.



Factors Contributing to the Rise of Globalisation in the Early 1980s


Many people associate Globalisation with the emergence of multinational firms, the formation of trade blocs together with the increased amount of trade, investment (i.e. freer movement of goods and capital) and cultural exchange taking place between nations. However, these are the main effects of Globalisation rather than its causes. Countries did not suddenly start trading more with each other, nor were multinationals created without reason. In order to find out the reasons behind the Globalisation of 1980s, one must analyze the reasons behind these changes.


The fall in transport costs is one of the main factors contributing to Globalisation. Through improvements in technology, more cost efficient ways of travelling were invented over time. As it can be seen in Figure 1[4], this made transportation more affordable for the ordinary citizens, leading to the growth of global service sectors such as tourism and a general exchange of culture through travelling more.


Figure 1



















This general decrease in transport costs also made freighting less expensive, making transport costs over long distances fall which made exported goods cheaper and more competitive, contributing to the growth of international trade. Low transport costs also contributed to the rise of multinationals and the practice of outsourcing as it became less costly to produce goods far away from markets. Although transport costs had started falling before the 1980s, its continuation contributed to the surge of Globalisation after the 1980s with increased significance as it was reinforced by other factors.


A very significant one among these factors was computerization and the increasing use of the internet that took place after the 1980s. The internet made distance a factor of low importance for communication, resulting in increased exchange of knowledge, ideas and culture among people which is a very fundamental part of Globalisation. It also allowed people to view prices of, and order goods and services from all over the world. This contributed to Globalisation and international trade a lot as a single world market with complete price transparency was created for many goods. For multinational firms, the ease of communication provided by the Internet and the possibility of increased co-ordination created by computerization were major contributions. It became much easier to communicate and co-ordinate production between many branches, decreasing the managerial diseconomies of scale the multinational firms had to cope with, making them more profitable and allowing them to expand even more.


Another important factor contributing to Globalisation was the acceptance of neo-classical economic thoughts in many countries. These thoughts stressed the importance of free markets and comparative advantage, claiming that deregulation of markets, privatisations of public monopolies and liberalization of international trade were necessary to achieve these. Many governments acted on these views and opened their economies to the world[5], decreasing the use of protectionist measures like tariffs and deregulating many markets in order to gain efficiency  through free trade. The decreasing use of protectionist measures had the effect of increasing international trade, while the deregulations eased the local restrictions against the foreign ownership of firms (making it easier for multinational firms to locate there or take over a local firm). The international deregulation of the financial markets is especially worthy of attention. It increased the mobility of financial capital significantly, globalising the stock markets and making it easier for investment (including the creation of new branches by multinational firms) to take place.


The general trend of free trade created by the rise of neo-classical thoughts also led to the creation of Free Trade Areas[6] (which would become trade blocs[7]) and multinational institutions like the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO). These all contributed to economic integration of countries and freer trade, but among them the WTO was of great significance due to its role in liberalizing international trade. Created in replacement of the General Agreement on Tariffs and Trade (GATT) during the Uruguay Round[8] in the 1980s, the WTO managed to settle trade disputes and decrease the amount of protectionism by encouraging negotiations among countries and enforcing trade rules[9] established by multilateral agreements with its judicial powers[10].


                      Figure 2





























The contribution made by the WTO and the GATT to free trade and Globalisation through decreasing the amount of protectionism in an increasing number of countries (as shown in Figure 2[11]) is undeniable.


However, no matter how much the already mentioned factors contributed to free trade and deterritorialization, Globalisation would have been incomplete if not for the collapse of the Soviet Union and communism in the end of 1980s. Communist countries were naturally against free markets and free trade with capitalist countries in capitalist terms. They had an inward orientation, aiming to be self sufficient. With the collapse of socialism, these countries, even the ones that still claimed to be 'communist' like China, opened up to free trade and foreign investments, increasing the size of the global market significantly.


With the combined contributions of these factors and events that took place since the 1980s, Globalisation has flourished and reshaped the world in many ways, for better or for worse.



Costs of Globalisation 


   

                                                                                    Table 1

                                                                                   
























This encourages the allowance of bad working conditions in LDCs by rewarding them with foreign investment. It is the same problem with environmental conditions. Multinationals prefer countries where environmental laws are lax enough not to impose any extra costs on them, resulting in LDCs giving environmental concessions in order to attract foreign investment. This problem also exists between the exporters in LDCs, aiming to gain a competitive edge on each other, at the cost of their environment. It appears that Globalisation and free trade have turned environmental externalities into a situation of Prisoner's Dilemma[12], where everyone is worse off.


However, one could say that these problems are due to bad management of Globalisation. Globalisation of Labour (through giving more powers to the International Labour Organisation [ILO] and international alliances of trade unions) could help workers regain their negotiation power against multinational firms and improve working conditions everywhere. For example, at the moment it is very easy for multinationals to shift production to another country in response to strikes or increasing costs of production, making many workers redundant. With the risks of strikes in many branches, they would not dare do that.


Environmental effort could also be globalised with the creation of a World Environmental Organisation[13], encouraging the negotiation of multilateral environmental agreements and punishing those that do not adhere with isolation from trade. However, how compatible such an organisation would be with the WTO and multilateral trade agreements is unclear at best.


Some of the problems caused by multinationals (and thus Globalisation) are harder to solve. Multinationals tend to have a 'Trojan Horse' effect whereby they take over or destroy local competitors using their economies of scale. Governments are often unable to protect local firms due to risks of the multinationals leaving and causing unemployment (or due to corruption) and allegations of dumping[14] from other countries.


Multinationals are also often accused of eroding cultural and traditional values in host countries and replacing them with American and Western values. Considering that they tend to impose similar products and working standards in many countries, the allegations are partly true. However, with the recent trend of Glocalisation[15], they have been making increased use of local traditions in production and appealing to local cultural values with their products. This shows that they have adapted to local cultures and traditions, not the other way around.


Even without the effects of multinationals, Globalisation still affects local cultures negatively through cultural exports like movies and songs from More Developed Countries (MDCs).


Figure 3[16]




                                                                                                                 

                                                                                                         



















A possible solution to this could be through the growth of movie industries in LDCs.


Globalisation has also resulted in increased interdependence among countries due to trade and financial relations. Depressions or exchange rate devaluations in one country directly affect its trading partners due to changes in its demand for imports and the competitiveness of its exports. Due to the deregulation of financial markets (which allowed huge sums of money to be transferred from one market to another in mere seconds, even internationally) Financial Crises also increased in frequency and started to have global impacts. The result was major fluctuations in world markets which only speculators benefited from[17].


Table 2















Figure 5[18]






















Another effect of Globalisation was the formation of Trade Blocs (like the North American Free Trade Agreement [NAFTA] and the European Union [EU]). This has led to greater economic integration among the member countries, creating much trade between them. However it has also led to the 'Trade Diversion' effect as these countries imposed common tariffs against non-members, resulting in the diversion of trade from efficient producers outside the bloc to inefficient producers inside. Historically, this has hurt LDCs most. While there was a general decrease in tariffs and protectionist measures against industrial goods where MDCs have their comparative advantages, protectionist measures remained in place when it came to agricultural products where most LDCs had their comparative advantages. Most LDCs have been unable to enjoy the benefits of Globalisation despite suffering from its costs at full.


Figure 6

                                                                                    Figure 7



























Policies like the CAP and their Trade Diversion effects have resulted in a growing gap between rich and poor nations. It has made the poorest countries even poorer, while making the MDCs even richer.















Conclusion


Globalisation has been reshaping the world faster than ever in the last two decades. It is not just a political event, but rather a milestone in human history which can not be prevented or reversed. Therefore, rather than discussing whether it is welcome or not, one must discuss whether it is being managed decently or not and how to manage it in a better way.


Overall, the increased amount of trade and cultural exchange due to Globalisation has had some benefits in bringing about greater freedom and greater competition and thus efficiency in production. However, Globalisation has imposed its costs as well. It has had negative effects on the environment and basic human rights while also threatening local cultures and widening the gap between the rich and the poor. At its current course, Globalisation can only be self defeating. Over time, more and more countries are likely to form their own trade blocs in order to be self sufficient, resulting in absolute protectionism between regions. Unless regulated, global competition is likely to be unsustainable as well. Firms will tend to grow in order to become more competitive and the result will be a strict global oligarchy.


This course is arguably due to the mismanagement of Globalisation and can be reversed with a number of measures. Firstly, it is necessary that there are global institutions controlling the negative effects of Globalisation such as a World Environmental Organisation as well as those promoting it like the WTO. Labour and institutions protecting its interests must be globalised along with capital to keep multinationals in check. And most importantly, the MDCs must put the world's interests before their own short term interests and deal with the LDCs more fairly. With these changes, it will be easier to use the benefits of Globalisation to increase global living standards and turn Earth into a globe of prosperity and cooperation. i



Notes


[1] 5 The definitions in the 'Globalisation Guide' contributed to the definition of Globalization given in this essay. ('What is Globalisation' http://www.globalisationguide.org/01.html)

[2] 5 The description of the effects of Globalisation on firms was heavily influenced by Peter Jay's description. ("Globalization can be defined as the ability to produce and good or service anywhere in the world using capital, technology and components from anywhere and to sell the output anywhere and place the profits anywhere")

[3] 5 Multinational firms are companies which have operations in two or more countries.

[4] 5 The source of Figure 1 is (IMF and) the U.S Department of Transportation (http://ops.fhwa.dot.gov/freight/freight_analysis/euro_scan/)

[5] 5 Margaret Thatcher's reforms in the United Kingdom are a good example of this.

[6] 5 A free trade area (FTA) is a designated group of countries that have agreed to eliminate protectionist measures on most (if not all) goods between them.

[7] 5 A trade bloc is a large free trade area formed by one or more tax, tariff and trade agreements. A map showing the active trade blocs is available at http://upload.wikimedia.org/wikipedia/en/4/43/ActiveBlocs.PNG

[8] 5The Uruguay Round was a trade negotiation lasting from September 1986 to April 1994 which transformed the General Agreement on Tariffs and Trade (GATT) into the World Trade Organization (WTO)

[9] 5 WTO has established a number of rules against protectionist measures, dumping and discrimination (most-favoured nation clause) in order to enforce fair trading practices.

[10] 5 For example, if a country is accused of increasing tariffs without valid reasons by another country, and is ruled by WTO to be wrong, then the country that has filed the complaint has the right to retaliate.

[11] 5 Figure 2 was on the Australian Department of Foreign Affairs & Trade website (www.dfat.gov.au) -it is not now

[12] 5 Prisoner's Dilemma is a Game Theory scenario that shows how lack of communication and cooperation results in everyone being worse off. In the scenario, two partners in crime are placed in separate rooms at the police station and given a similar deal. If one implicates the other, he may go free while the other receives a life in prison. If neither implicates the other, both are given moderate sentences, and if both implicate the other, the sentences for both are severe. Since they can't communicate, neither will risk a life sentence, and both will want to go free, meaning they'll both get severe sentences rather than moderate sentences. This can be applied to the environmental situation as it is possible for the LDCs to protect their environments and attract multinationals if all of them impose equally strict environmental laws. (More details on Game Theory can be found on www.gametheory.net)

[13] 5 The idea of a World Environmental Organisation was borrowed from the article 'Globalisation, Environment and the World Trade Organization' written by Surjinder Johal (in bibliography -below).

[14] 5 Dumping is the practice of exporting goods below their cost of production. Retaliation against dumping is encouraged by the WTO.

[15] 5 Glocalization is the practice of tailoring a company's goods to suit local customs in different markets around the world.

[16] 5 Figure 3 is from the article 'Trade & Export & Market & Brain Drain' (in bibliography -below).

[17] 5 A good example to this is how the recent sub-prime mortgage crisis affected the world through negative confidence effects, panic in stock markets and the decreased willingness of banks to give credits.

[18] 5 Table 2 and Figures 4, 5, 6, 7 and 8 are from from 'Globalization with a Human Face, Human Development Report' (in bibliography -below).

[19] 5The Common Agricultural Policy (CAP) is a system of European Union agricultural subsidies and programmes.




Bibliography


Economics, 4th Edition, Alain Anderton, Causeway Press, 2006

Global finance: A View from the City, Ian Brinkley, Institute of Directors Convention, November 2007

What is Globalisation?, Mick Brooks, October 2001 (http://www.marxist.com/what-is-globalisation151001-5.htm)

Globalisation, Anthony Giddens, BBC News, (http://news.bbc.co.uk/hi/english/static/events/reith_99/week1/week1.htm)

International Trade and Protection, Barry Harrison, British Economy Survey, Vol. 30, No. 2, Spring 2001

Globalisation, Environment and the World Trade Organization, Surjinder Johal, Economic Review, April 2004

Business without Borders, Nigel Healey, Economic Review, September 1995

The Diseases of Globalization, Jeffrey D. Sachs, Project Syndicate, October 2002

Financial crises: Lessons from history, Steve Schifferes, BBC News, September 2007 (http://news.bbc.co.uk/1/hi/business/6958091.stm)

Essentials of Economics, 3rd Edition, John Sloman, Prentice Hall, Financial Times, Pearson Education, 2004

International Trade and Globalisation, 3rd Edition, Charles Smith, Anforme Limited, 2007

Globalisation, Peter Smith, Economic Review, September 2001

Why Globalisation Fails to Deliver, Mark Weisbrot, the Guardian, 28 July 2002

Center for Trade Policy Studies (http://www.freetrade.org/)

Gender and Health, Collaborative Curriculum Project (http://www.genderandhealth.ca/en/modules/globalization/globalization_what_is-01.jsp)

Globalisation Guide, The Australian Apec Study Centre (http://www.globalisationguide.org/)

Globalization with a Human Face, Human Development Report, United Nations Development Office, United Nations Development Programme, 1999 (http://hdr.undp.org/en/media/hdr_1999_en.pdf, http://hdr.undp.org/en/reports/global/hdr1999/)

South Centre (An Intergovernmental Organization of Developing Countries http://www.southcentre.org/)

Trade & Export & Market & Brain Drain, (http://t21.ca/trade/tp.htm)

Wikipedia, the Online Encyclopedia (http://en.wikipedia.org/wiki/Globalisation, http://en.wikipedia.org/wiki/World_Trade_Organization, http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade, http://en.wikipedia.org/wiki/Uruguay_round, http://en.wikipedia.org/wiki/International_Monetary_Fund, en.wikipedia.org/wiki/Anti-globalization, http://en.wikipedia.org/wiki/Common_Agriculture_Policy)

World Trade Organization (http://www.wto.org, http://www.wto.org/english/res_e/statis_e/statis_e.htm)



About Anil Engin Ari


From a family background of hailed contributions to teaching & education, winner of also other prizes, he plans to read Economics.  5

As it can be deduced from the demonstrations against it, it is quite debatable whether Globalisation is welcome in the form it has taken. Like every economic phenomenon, Globalisation imposes its costs along with its benefits and creates losers along with winners. In many aspects, multinational firms are seen as the flag bearers of Globalisation. This applies when discussing the costs of Globalisation as well, making them a good starting point.


The main problem with multinational firms is that their size makes them unaccountable to anyone other than their stakeholders and aiming for maximum profits, they tend to be socially irresponsible. They are often accused of exploiting workers in Less Developed Countries (LDCs) in order to decrease costs of production. The use of cheap labour is hardly exploitation as those workers would have been employed with lower wages, if not unemployed otherwise. However, wages are not the only component that makes labour cheap. Multinationals tend to locate at countries where they do not have to pay national insurances of workers or provide good

working conditions.

An example of this is the Common Agricultural Policy[19] (CAP) of the European Union, which subsidised ineffective local producers while using protectionist measures against agricultural imports. This did not only prevent LDC exports from getting to the European markets, but also resulted in overproduction and dumping of the surpluses to LDC markets.

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