GLOBALISATION

After centuries of technological progress and advances in international cooperation, the world is more
connected than ever. But how much has the rise of trade and the modern global economy helped or hurt
American businesses, workers, and consumers? Here is a basic guide to the economic side of this broad
and much debated topic, drawn from current research.

Globalisation is the process by which the world is becoming increasingly interconnected as a result
of massively increased trade and cultural exchange or Globalisation is the word used to describe the
growing interdependence of the world’s economies, cultures, and populations, brought about by cross-
border trade in goods and services, technology, and flows of investment, people, and information.
Countries have built economic partnerships to facilitate these movements over many centuries. But the
term gained popularity after the Cold War in the early 1990s, as these cooperative arrangements shaped
modern everyday life. This guide uses the term more narrowly to refer to international trade and
some of the investment flows among advanced economies, mostly focusing on the United States.

The wide-ranging effects of globalization are complex and politically charged. As with major
technological advances, globalization benefits society as a whole, while harming certain groups.
Understanding the relative costs and benefits can pave the way for alleviating problems while sustaining
the wider payoffs.

Why has globalisation increased?

The pace of globalisation has increased for a number of reasons:

1. Developments in IT, transport and communications have accelerated the pace of globalisation
over the past 40 years. The internet has enabled fast and 24/7 global communication, and the use
of containerisation has enabled vast quantities of goods and commodities to be shipped across the
world at extremely low cost.
2. More recently, the rise of social media means that national boundaries have, in many ways
become irrelevant as producers use new forms of communication and marketing, including
micro-marketing, to target international consumers. The widespread use of smartphones has also
enabled global shoppers to have easy access to ‘virtual’ global markets.
 3. The rise of new electronic payments systems,, including e-Wallets, pre-pay and mobile pay, e-
Invoices and mobile pay apps, also facilitate increased global trade.
4. Increasing em>capital mobility has also acted as a stimulus to globalisation. When capital can
move freely from country to country, it is relatively straightforward for firms to locate and invest
abroad, and repatriate profits.
5. The development of complex financial products, such as derivatives, has enabled global credit
markets to grow rapidly.
6. Increased trade which has become increasingly free, following the collapse of communism, which
has opened up many former communist countries to inward investment and global trade. Over
the last 30 years, trade openness, which is defined as the ratio of exports and imports to national
income, has risen from 25% to around 40% for industrialised economies, and from 15% to 60%
for emerging economies.[1].
7. The emergence of footloose multinational and transnational companies (MNCs and TNCs) and
the rise in the significance of global brands such as Microsoft, Apple, Google, Sony, and
McDonalds, has been central to the emergence of globalisation. The drive to reduce tax burdens
and avoid regulation has also meant the establishment of complex international business
structures.

The advantages of globalisation

Globalisation brings a number of potential benefits to international producers and national economies,
including:

1. Providing an incentive for countries to specialise and benefit from the application of the principle
of comparative advantage.
2. Access to larger markets means that firms may experience higher demand for their products, as
well as benefit from economies of scale, which leads to a reduction in average production costs.
3. Globalisation enables worldwide access to sources of cheap raw materials, and this enables firms
to be cost competitive in their own markets and in overseas markets. Seeking out the cheapest
materials from around the world is called global sourcing. Because of cost reductions and
increased revenue, globalisation can generate increased profits for shareholders.
4. Avoidance of regulation by locating production in countries with less strict regulatory regimes,
such as those in many Less Developed Countries (LCDs).
 5. Globalisation has led to increased flows of inward investment between countries, which has
created benefits for recipient countries. These benefits include the sharing of knowledge and
technology between countries.
6. In the long term, increased trade is likely to lead to the creation of more employment in all
countries that are involved.

The disadvantages of globalisation

There are also several potential disadvantages of globalisation, including the following:

1. The over-standardisation of products through global branding is a common criticism of

globalisation. For example, the majority of the world’s computers use Microsoft’s Windows
operating system. Clearly, standardising of computer operating systems and platforms creates
considerable benefits, but critics argue that this leads to a lack of product diversity, as well as
presenting barriers to entry to small, local, producers.
2. Large multinational companies can also suffer from diseconomies of scale, such as difficulties
associated with coordinating the activities of subsidiaries based in several countries.
3. The increased power and influence of multinationals is also seen by many as a considerable
disadvantage of globalisation. For example, large multinational companies can switch their
investments between territories in search of the most favourable regulatory regimes. MNCs can
operate as local monopsonies of labour, and push wages lower than the free market equilibrium.
4. Critics of globalisation also highlight the potential loss of jobs in domestic markets caused by
increased, and in some cases, unfair, free trade. This view certainly accounts for the some of the
rise in nationalist movements in many developed economies, along with the push for
increased protectionism.
5. Globalisation can also increase the pace of deindustrialisation, which is the slow erosion of an
economy’s manufacturing base.
6. Jobs may be lost because of the structural changes arising from globalisation. Structural changes
may lead to structural unemployment and may also widen the gap between rich and poor within
a country.
7. One of the most significant criticisms of globalisation is the increased risk associated with the
interdependence of economies. As countries are increasingly dependent on each other, a negative
economic shock in one country can quickly spread to other countries. For example, a downturn in
car sales in the UK affects the rest of Europe as most cars bought in the UK are imported from the
EU. The Far East crisis of the 1990s was triggered by the collapse of just a few Japanese banks.
 Most recently, the collapse of the US sub-prime housing market triggered a global crisis in the
banking system as banks around the world suffered a fall in the value of their assets and reduced
their lending to each other. This created a liquidity crisis and helped fuel a severe downturn in
the global economy.

Over-specialisation, such as being over-reliant on producing a limited range of goods for the
global market, is a further risk associated with globalisation. A sudden downturn in world
demand for one of these products can plunge an economy into a recession. Many developing
countries suffer by over-specialising in a limited range of products, such as agriculture and
tourism.

8. Globalisation generates winners and losers, and for this reason it is likely to increase inequality,
as richer nations benefit more than poorer ones. The awareness of rising inequality, along with
job losses, has been argued to have contributed to the rise in anti-globalisation movements.
9. Increased trade associated with globalisation has increased pollution and helped contribute to
CO2 emissions and global warming. Trade growth has also accelerated the depletion of non-
renewable resources, such as oil.

The impact of globalisation on the UK economy

The main issues arising from globalisation for the UK are:

Growth

Assuming the UK maintains its competitiveness, globalisation is likely to increase UK growth in the long
term because aggregate demand (AD) is likely to increase through increased exports (X), and aggregate
supply (AS) is likely to increase because of higher levels of investment, both domestic and foreign direct
investment (FDI). However, growth in the short term may become more unstable as the global economy
becomes increasingly interconnected. The recent credit crunch is evidence that unstable growth is a
possible consequence of globalisation. Some economists have also argued that globalisation has increased
the process of deindustrialisation in the developed countries, including the UK.

Employment

Long term, jobs may be destroyed in the manufacturing sector and created in the service sector, hence
creating structural unemployment, which could widen the income gap within countries. The net effect
of the impact on employment depends upon the speed of labour market adjustment, which itself depends
upon mobility and flexibility. Improvements in labour productivity may be needed to close
the productivity gap.

Prices

Increased competition is likely to reduce the price level, for traded manufactures. Because UK firms can
source from around the world costs may be held down, and this may be passed on in terms of reduced
domestic and export prices.

Trade

The volume of both imports and exports is likely to increase, with trade representing an increasing
proportion of GDP. The effect on the balance of payments is uncertain and depends upon relative growth
rates, inflation, competitiveness, and the exchange rate.