According to the Organisation for Economic Co-operation and Development (2001), globalisation is defined as an increasing internationalisation of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries. In simplified terms globalisation is referred to as a means where economies have become increasingly integrated and inter-developed (tutor2u, 2016). Globalisation is important because it has caused a constant increase in capital flows between countries and an increase in trade, thus benefitting economies around the world by creating jobs and boosting economic growth. Globalisation is often represented by firms which sell goods almost everywhere in the world, these firms are known as trans-national corporations (TNCs) for example, Coca-Cola or McDonalds. Globalisation is developed through technological advancements, reduction in trade barriers, TNCs and cheaper transport costs (Lee and Vivarelli, 2006). Globalisation has become increasingly important over time due to the way it increases the inter-connectedness of the world. Technological advancements over the last 20 years including telephones, e-mail, computers and the internet have radically changed the way goods are produced. Over time these changes have enabled faster communication which encourages trade worldwide. Another factor which has contributed to globalisation is the opening up of China and former communist economies which has resulted in these countries becoming more integrated into the world trading systems.
Advantages
An advantage of globalisation is that it increases the world output and wealth, as specialisation and trade result in an increase in economic welfare for everyone. This is because the positive wealth effect is trickling down to a wider population. It is said that globalisation has positively affected the worlds wealth as the number of people living on less than $1.25 a day in the twenty poorest countries, has diminished from 1.94 billion in 1981 to 1.29 billion in 2008 (The World Bank, 2012). Even though this data only shows a moderate change in the poverty levels it clearly shows that globalisation positively impacts developing economies and creates positive wealth effects. One way in which world output can be increased is through outsourcing which occurs when companies move parts of production to less economically developed countries, for example, Nike used to produce their goods in Japan, Taiwan and South Korea. However, as the costs of production continued to rise, they relocated to factories in China, Thailand and Indonesia as minimum wages were lower which incentivised firms to relocate in the long run (Sicat, 2013). These lower costs of production meant that Nike could train and employ more workers than they would have been able to in other countries. Similarly, Apple also outsource their production to China as there is a shortage of skilled workers in the United States and the majority of the components for their products are manufactured in China so logistically, it makes more sense to assemble them in China (Blodget, 2012). By moving production to less economically developed countries it encourages employment levels in the host country consequently, improving their standards of living. However, some disagree and say that globalisation creates inequality (Frankel, 2018) and eventually the boosted output will ultimately lead to more wealth for the richest 20% rather than being dispersed equally.
Another advantage of globalisation is that there is a greater choice for consumers leading to increased consumer welfare. Lower costs and subsequently lower prices are a result of specialisation and economies of scale which also increase consumer welfare. For example, when McDonald’s was first introduced to India they were faced with a dilemma as 80.5% of India is Hindu (Censusindia.gov.in, 2001). Since Hindus believe that the cow is a sacred animal the majority of the nation are vegetarian or do not eat products containing beef. Hence, McDonald’s decided to alter their menu to appeal to the local population and as a result of this, they made a new signature product to replace the Big Mac called the Chicken Maharajah Mac. It enables them to target the Indian market and introduce western foods whilst still making products which would generate sales. McDonald’s opening in India has had a large outreach as they now benefit from more than 320 million customers a year (Kannan, 2014). This element of personalisation for India increases consumer welfare as there is a greater choice of goods for consumers to purchase.
Another significant factor that has contributed to globalisation was the opening up of China to the global economy. By joining the World Trade Organisation in 2001 (Wto.org, 2018), China has increased integration into the world markets and expanded their trading opportunities which has greatly impacted the growth of globalisation. Furthermore, with other former Communist economies becoming more capitalist, there has been further integration into world trading systems.
Moreover, another advantage of globalisation is free trade which is the concept whereby goods and services are traded between countries with the fewest restrictions possible (Investopedia, 2018). It is argued that globalisation and engaging in free trade can help economies accelerate their development. Because protectionist barriers are lowered, economies become open to more free trade with others. Countries that openly trade are reliant on each other for goods and labour. This could suggest that they will try to maintain peace so that they can continue openly trade which creates a spirit of internationalism. For example, organisations like the World Trade Organisation (WTO) promote free trade which encourages the removal of trade barriers between countries. They also settle trade disputes between governments and facilitate trade negotiations (BBC News, 2012). Supporters of the WTO argue that trade liberalisation leads to improvements in economic welfare and an increase in living standards across the world (Wto.org, 2018). Furthermore, the WTO acts as a force to prevent countries from resorting to protectionist policies in times of recession thus allowing imports from other countries. Furthermore, the WTO has been largely successful in reducing tariffs on manufactured goods since 1995. Globalisation also minimises the role of national states as many free market economists argue that government intervention in the economy, such as implementing protectionist policies, interferes with trade and slows down economic growth.
Disadvantages
However, globalisation also has its disadvantages for example, a number of developing countries have seen their debts grow and poverty increase. One possible cause of this is that many multi-national corporations can often eliminate domestic producers in turn, reducing employment and raising prices. Many TNCs take advantage of less developed countries as the TNCs often have more power than the national states which can result in political differences (Capitol Weekly, 2010). The TNCs also often have a monopsony power in setting lower wages which leads to workers in these countries working for very low wages which in turn, does not increase standards of living and can keep them in poverty. Globalisation has also had negative effects on workers’ rights as TNCs often transfer production to lower cost countries as costs of production are cheaper which leads to job losses in the home country. They also take advantage of the looser regulations on workers’ rights which can lead to exploitation. For example, Jaguar Land Rover are cutting 200 jobs and relocating to Slovakia from the UK on top of the 1000 jobs cut earlier in the year (BBC News, 2018). However, this means that there will be structural unemployment in the UK as the workers’ skills may no longer be needed. The labour standards in countries have been found to be positively correlative, e.g. if one country is to cut their labour standards other countries will most likely follow suit (Davies and Vadlamannati, 2013). This has the most effect on less economically developed countries (LEDCs) as they are most likely to have relaxed laws to attract foreign investors.
Additionally, whilst globalisation aims to increase the interconnectedness of countries, it can make individual countries more vulnerable to the spread of economic crises. The Global Financial Crises of 2008 impacted the developing countries the hardest as the amount of foreign direct investment (FDI) decreased (Mariana, 2018). The lack of FDI limited economic growth and jeopardised the millennium development goals. Developing countries fought together to make their voices heard in global economic affairs (Gurtner, 2011).
One major negative external cost of globalisation is environmental degradation. Trade on the basis of comparative advantage means that goods are often manufactured in countries that have poor environmental regulations which are then transported thousands of miles emitting further carbon dioxide emissions. TNCs also move production to these countries due to the lower environmental standards further increasing the damage to the environment. TNCs such as BP, Exxon and Chevron are amongst the 90 companies that have caused two-thirds of the worlds man-made greenhouse gas emissions. It could be said that globalisation is the main contributor to global warming as half of the 90 companies on the list are from around the world with headquarters in 43 countries(Goldenberg, 2013). Containerisation has also resulted in an influx of carbon emissions as shipping now produces 1.12 billion tonnes of CO2 emissions a year compared to 650 million tonnes by the aviation industry (Vidal, 2008). Globalisation has led to China becoming a manufacturing giant, therefore, becoming the highest global emissions producer in the world. Nevertheless, China has now begun to invest heavily in green energy so to offset the high levels of pollution created by their manufacturing industries. China has been said to use the western pattern ‘grow first, clean up later’ (The Economist, 2013).
Another disadvantage of globalisation is that it has resulted in the dramatic increase in the gap between the richest 20% and the poorest 20%. This is because globalisation serves in the interest of the Western world who take advantage of LEDCs for cheap labour and raw materials. There are also no guarantees that inward investments benefit local communities in the developing world as profits are often sent back to the country where the transnational company is based so they have little benefit to the host country. Thus creating a savings and foreign currency gap as the positives of having a factory in an LEDC are not seen in the local population this leads to developing countries having difficulties financing imports, making trade challenging for LEDCs. As TNCs often benefit from economies of scale they may force local companies out of business, and if they find other countries with cheaper operating costs they may close down factories and make locals redundant. For example, Dyson found that by producing their goods in Japan it was good for business, so they cut 800 jobs in the UK and planned to open another manufacturing plant in the Far East (Litterick and Uhlig, 2002). By moving production to the Far East, Dyson were able to cut down production costs by 30% and were able to invest the money into new technology, new markets and launch products to the public quicker. However, this led to an increase in unemployment in the UK and possibly lead to structural employment. Additionally, P&G are shutting down their $300 million Agbara plant in Nigeria which will result in 120 jobs being cut (Ojekunle, 2018). As a result, workers will be out of work as their skills are made redundant because the competition for jobs in a manufacturing plant will increase. As people will want to make their skills be made the most out of. People who are unemployed are less likely to spend money purchasing good which restricts economic growth as there is less money being injected into the circular flow of income.
Conclusion
Ultimately, globalisation has been beneficial to developing countries as it has provided employment and greater choice of goods for consumers, however, it has also been a hinderance because it can bring developing countries to a collapse if a financial crisis was to occur. Firms are also doing the best to try to be as environmentally aware and implementing policies to reduce carbon emissions. Although, research conducted shows that the benefits of globalisation outweigh the negatives globalisation brings to LEDCs as it increases world output and reduces the number of people living in poverty. Globalisation has also helped the UN achieve their Millennium Development Goals which has in turn, improved the standard of millions of people’s lives. We can see that globalisation is very beneficial as the choices available to consumers is boosting trade and business growth in both the developed and developing world.