Globalization | Globalization

"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" - Peter Jay 1996

Discuss the economic and social consequences of globalization.

"Rather than lead to economic benefits for all people, economic globalization has brought the planet to the brink of environmental catastrophe, social unrest that is unprecedented, economies of most countries in shambles, an increase in poverty, hunger, landlessness, migration and social dislocation. The experiment may now be called a failure." The International Forum on Globalization (IFG) here outlines the economic and social problems of which they accuse increased globalization of being the primary cause. Peter Jay outlines in his definition the areas that globalization impacts and this essay will proceed to attempt to evaluate the affect of this impact on two main areas. Firstly the economic consequences of increased trade liberalization will be examined in terms of effects on domestic and international markets, and secondly the impact will be examines in terms of affect on social issues such as inequality, poverty eradication and economic growth. These areas are commonly accepted as the most pressing global problems, and it follows that it should be the objective of any internationally endorsed economic system, to resolve these problems.

The anti-globalization war is primarily being fought by international NGO's concerned by the alarming prevalence of poverty and inequality in the world of today, and the perceived failure of globalization to resolve these, as they appear to be worsening as a result of increased international trade liberalizations. In 1960, the per-capita GDP of the richest 20 countries of the world was 15 times that of the poorest 20. This income gap has today grown to more than 30 times Similarly, the number of people living on less than US$ 1 a day, defined as absolute poverty, fell only from 1.3 billion to 1.2 billion over the last decade, and the number of people living on less than US$ 2 a day actually rose from 2.7 billion to 2.8 billion. The critics alarmed by these figures, argue that they are an inevitable result of a reliance on the market force. This they argue gives the rich a free reign to exploit the poor and add to their wealth, as well as draining natural resources from poorer countries whilst destroying their environment. This is justified by the belief that as international trade restrictions are lifted, large multinational corporations will be able to produce their goods anywhere in the world. They will subsequently choose to produce where low-paid domestic workers are most easily exploited due to a lack of labor laws and trade unions, and where they can ignore costly environmental protection acts either because the local government does not recognize them, or chooses to ignore them. This will be the lowest possible production cost to the firm, which will in turn maximize their profits in line with the theory of the firm. The firm however, as Jay makes clear in his definition, is under no obligation to keep these profits in the production country, and is in fact likely to channel savings backs the developed world, leaving the country of production with few benefits from the investment.

Proponents of increased international globalization, such as the World Bank, the WTO and the UN, all recognize the alarming state of world poverty and inequality, and in fact share the concerns of the anti-globalists. They however, do not perceive globalization to be the cause of these worsening conditions, rather they believe it to be the cure. They argue firstly that world poverty and inequality is affected by numerous causes and that no direct link between free trade and worsening poverty or inequality has been established, and further that only through increased free trade can these issues be resolved. Their primary assumption is that of a link between economic growth and improvements in social problems such as poverty and inequality. There is a link between a economic growth and poverty reduction, and they further support the "Trickledown Effect" where by economic growth benefits the poor by allowing some of the proceeds to reach the poor through increased employment due to increased production and investment, as well as through other channels. Critics of this assumption question whether or not savings that arise from increased output will remain in the developing country rather than stray abroad to more stable markets, and whether the investment that ensues will be in appropriate industries, mainly labor over capital-intensive industry. Accepting this assumption however, they primarily rest their beliefs in the economic theory of international comparative advantage as the principal economic growth engine. The theory of comparative advantage in theory encourages a shift in investment to industries in which the country has a relative international advantage in production. As trade opens, the demand for the factors of production that are relatively abundant in the liberalizing country compared to the rest of the world will increase, where as the demand for the factors that are relatively scarce will decrease. It follows that a country should produce the good of which it has the lowest opportunity cost of production. This is consistent with experiences of the US where wages of skilled workers rose and wages of unskilled workers fell over its process of trade liberalization as this reflects the factor endowment of the US. This will focus the investment of a country on competitive exports industries rather than industries that compete badly with cheaper imports; this is the most efficient means of economic growth.

This theory however has many critics, especially when concerned with the viability of applying it to the economies of LDC's. Firstly critics believe that free trade will subject local infant industry to premature competition. Infant industry the argue, requires a time to establish itself domestically before it can be subjected to international competition that has already been allowed to establish itself. The obvious answer to this is that if an industry is unable to compete internationally without initial government protection, it is not an industry in which the country has a comparative advantage. The government should not designate which industry to focus on, the market force should be relied on for this. This reliance on the market force however provides the next basis for criticism, as its founding assumptions include that of perfect information to operate efficiently. Although perhaps a valid assumption in the industrialized world, it can hardly be applied to most developing countries. Not only do many lack a basic infrastructure, but many more are also plagued by dual sector economies that make it impossible an efficient market force impossible. Further, was an LDC to pursue a policy of comparative advantage they would likely find this advantage to be in terms of land or cheap labor? A focused investment in these sectors would result in reliance upon notoriously volatile commodity sectors due to the inelasticity of demand.

Further, the opportunities for demand growth in these sectors are extremely limited due to income elasticity and the protectionist nature of many DC-markets due to strategic self-sufficiency concerns. LDC's would benefit from a more diverse economy in order to ensure the stability vital to sustainable growth.

Despite these valid objections, proponents of increases free trade believe they have data that validates their policies, by showing a link between the openness of trade and growth. As an example, China's liberalization of trade policies increased its per capita income from $1460 in 1980 to $4120 in 1999, and further, where as Americans earned 12.5 times the income of the average Chinese in 1980 this was reduced to 7.4 times in 1999. They emphasize that the poverty numbers anti-globalists produce do not take into account the increase in population, and that in fact the poverty rate in many cases fell considerably over the last decade. Poverty rates fell by approximately 12% in East Asia, which also happens to be the fastest growing region in the world, further validating their link between economic growth and the improved social conditions. This success, along with the benefits derived from comparative advantage, is accredited firstly to increased economies of scale. This follows the principal that the limit to this is always the size of the available market, which in the case of developing countries, is extremely small domestically due to low incomes. Competitive exports however have a potentially huge international market available to them with trade liberalization, increasing the potential benefits of economies of scale tremendously. This can however also act against LDC's, as large multinationals with large domestic as well as foreign markets coupled with more advanced technology, could have potentially greater economies of scale. A greater spread of technology, and an increased availability of capital goods often too expensive to produce domestically for LDC's, are also cited potential benefits of free trade.

Considering all these claims however, anti-globalists are still able to present date countering these claims. South America is frequently referred to as Argentina, Chile, Columbia and Uruguay all liberalized trade at different times during the past 30 years, and the result in each case was an increase in inequality. There are indeed many cases contradicting the claims of those for free trade, but these are all explained by failures in other areas of policy reform. In the case of South America, macroeconomic instability was often to blame. Volatile inflation and exchange rates along with a large fiscal deficit can prompt uncertainty which will severely affect foreign investment, as can a premature capital investment of it causes the country's exchange rate to rise making exports less competitive.

Globalization is clearly a complex field and its impact on social aspects even more so, as there are a multitude of other mitigating factors. The economic theory behind the argument for increased free trade is solid and data tends to validate its claims. Its weakness lies however in it's assumptions that must be taken into account before trade liberalization is pursued. Primarily, it should be assured that an adequate infrastructure is in place to facilitate the market force, along with a stable macroeconomic fiscal and monetary policy. When possible however, liberalization should be pursued as it does provide excellent opportunities for economic growth through larger markets and increased availability of needed imports. The opening stages should however be administered carefully, as initial unemployment and output drops are likely to ensue from the period of reallocation as dictated by the theory of comparative advantage. These are however short-term losses, and will remain small when compared to the long-term gains of increased international trade.