F585 Globalisation Essay Notes

8/18/2019 F585 Globalisation Essay Notes

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F585 Globalisation essay

Discuss whether the impacts of globalisation have been largely

benecial to developing economies

In the past there have been two similar questions to this, the mark schemes and

case studies of which would be helpful to read.

Jan 10 – Discuss the impact of globalisation on developing economies.


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- Primary product dependency and declining terms of trade trapping developing countries ina low level of economic development and giving rise to balance of payments problems.

- Globalisation does not bring signicant benets to developing economies because of the

lack of access to developed economy markets as a result of continued eistence of tari!s

and subsidies of domestic producers " this is most often argued in the contet of

agricultural trade- #ompetition between developing economies to attract $%I results in a lack of social

protection, such as minimum wage laws and keeps wages low- &he benets accrue mainly to consumers in the developed world and '(#s originating

from such economies- &emporary gains in employment only, especially where foreign rms are footloose

- Inappropriate technology introduced to developing economies- )nvironmental costs arising from poor regulation of the activities of foreign investors- *imits to the benets of trade created by continued dominance of intra regional and intra

industry trade rather than inter- &he etent to which economic growth generated by increased trade and $%I results in

greater human development- Increased eposure to eternal economic shock created by a greater dependence on

develo ed econom markets


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APT Question and Mark scheme:

3. Discuss the extent to which globalisation benefits developed countries at the expense ofdeveloping countries. (20 marks)

JAN


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• Level ! "and 3! #$%&20 marks' for a reasoned judgement on the extent to which globalisationbenefits the developed world at the expense of the developing world. This judgement will followlogically from a balanced analytical discussion, and an appropriate use of the stimulus material.

• Level ! "and 2! #$&$ marks' for a developed and balanced discussion which recognises theadvantages and disadvantages of globalisation for developed and developing countries, basedon appropriate use of the stimulus material.

• Level ! "and $! #$$&$ marks' for a basic discussion which recognises the advantages anddisadvantages of globalisation, with undeveloped analytical support and limited use of thestimulus material.

• Level 3! #&$0 marks' for a one-sided or unbalanced analysis of the advantages anddisadvantages of globalisation, in the context of developed and developing countries.Explicit use must be made of the economist’s toolkit of concepts and theories, and throughexplanation of cause and conseuence.

• Level 2! #3& marks' for application of knowledge and understanding of the advantages anddisadvantages of globalisation, in the context of developed and developing countries.

• Level $! #$&2 marks' for knowledge and understanding of globalisation.

!lobalisation is defined as the process through which national economies have become increasingly

integrated and inter-dependent. The word integrated implies ever growing links between nationaleconomies whilst the word inter-dependent implies each country in the global economy is increasinglyreliant on the rest of the world as a source of imports and a market for exports.

"s featured in much of the stimulus material, globalisation manifests itself in increased specialisationand trade, transfers of technology, information and capital, greater labour migration across nationalboundaries, the inclusion of more countries in the world trading system, and the continued rise of multinational corporations and creation of global brands such as "pple, #oca #ola and $c%onalds.

&ut, globalisation is very controversial. $any authorities on the subject see it as inevitable anddesirable for all economies, whilst other experts argue that it is harmful especially to developingeconomies. 'n Extract ( we read a summary of the two sides of the controversy) the '$* statementrepresents the liberal economic orthodoxy, whereas +rofessor oseph tiglit represents the radical

view that globalisation is harmful to the developing world. &oth these points of view will be analysedand a reasoned conclusion will be drawn.

The '$* view is that globalisation benefits the citiens of the world in both developed and developingcountries. /rthodox trade theory, in the form of 0icardo’s theory of comparative advantage,demonstrates that 1subject to certain conditions2 specialisation and trade which reflects comparativeadvantage is mutually beneficial. Therefore, the elimination of trade barriers will ensure that tradedoes flow along lines dictated to an increasing extent by comparative advantage and, with eachcountry specialising in those forms of production for which they are best suited, then world output willbe increased, thus raising the standards of living for people throughout the world. +rotective barriersto trade 1such as tariffs and uotas2 will reduce world output and, therefore, the living standards of people throughout the world. $oreover, protective measures prop up inefficient producers and reducethe amount of competition in the market. This reduces consumer choice and results in higher prices.

3e can also argue that barriers reduce the transfer of capital and technology to countries in need of investment and new technology, further reducing world output, and undermining dynamic changes incomparative advantage which inevitably occur.

The '$* argues that globalisation has opened up the economies of the world and, as a result, thepercentage of people in developing countries living on less than 45 per day has been halved. "dmittedly, globalisation has not eliminated absolute poverty 1especially as 45 per day is a very lowbenchmark to set as a measure of absolute poverty2, but the argument is that globalisation doesreduce world poverty. 'n essence, the '$* case relies on arguments in favour of the trickle downprocess to raise living standards, a process particularly relevant in developing countries. This meansthat the fruits of an increase in national !%+ are enjoyed first by a minority employed in the modernsector of the economy, but as those people spend their increased income then the benefits willeventually trickle down to the poorer people, including those employed in the significant traditional

sector of a developing economy. The '$* and the 67, in its 8uman %evelopment 0eport, insist thatglobalisation does reduce poverty by trickle down and that the main threat to poverty elimination lies


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in misguided measures to prevent the process of globalisation. 'ndeed the '$* goes on to point out -in *ig. (.5 - that developing countries have most to gain from globalisation.

3hilst accepting many of the arguments in the orthodox economic case, there is the radical, anti-globalisation case which, in Extract (, is represented by a passage from oseph tiglit’s critiue of globalisation. 8e argues that globalisation increases the economic welfare of some people at the

expense of that of others, even within developed countries. 'n particular, he argues that it particularlybenefits people in developed economies at the expense of people in developing economies. Thereare a number of points that should be made to explain and analyse the tiglit view.

*irstly, it is a misreading of orthodox trade theory 10icardo’s theory of comparative advantage2 toassume that specialisation and trade along the lines of comparative advantage is always mutuallybeneficial. Trade theory does allow for situations in which the benefits are one sided 1ie one partybenefits at the expense of the other2. $utuality of benefit only applies if the ratio of exchange lieswithin the two opportunity cost ratios.

econdly, the +rebisch inger 8ypothesis demonstrates that countries exporting primary produce,many of which are developing economies, face declining terms of trade in the long run. This isbecause of low income elasticity for primary products such as food. 8ence, a rise in output reduces

prices with the result that these countries have to export more of their products merely to buy thesame uantity of imports as before. The problem is compounded if the price of manufactured goodsis rising. Therefore, there is a danger of developing countries being trapped in a low level of development. The +rebisch inger 8ypothesis has been used by developing countries to justifyprotection 1eg the adoption of an import substitution industrialisation strategy2.

" third argument that supports the radical anti-globalisation view is that trade is increasinglydominated by large multinational corporations based in developed countries. These corporationsexploit their monopolistic power, raise consumer prices, and add to their abnormal profits by exploitinglabour 1especially in developing countries2. The abnormal profits accrue in the developed worldleaving the developing countries in relative poverty. 'n addition, a growing proportion of world trade isintra-regional trade. *or instance, 95: of the trade of E6 countries is intra-E6 trade. 3e can acceptthat this is partly the result of trade creation within a trading bloc, but some part of this is the result of

trade diversion, which means that the E6 consumers and businesses tend to buy from internalsources rather than from outside the 6nion, where goods and services may be better value for money.

*inally, the process of trickle down should be considered. The pro-globalisation case is that thebenefits will trickle down to the poorest people in the poorest countries. &ut this ignores the fact thatthe higher wages in the modern sector of developing economies are often spent on imported goods1and often the high incomes are enjoyed by ;ex-pat’ worker from abroad2. 'f this is the case, then themultiplier impact of the new modern sector through more traditional sectors, is more limited than mightotherwise be expected, and the fruits of development do not trickle down. 'n a sense, this is thedifference between the '$* view and the tiglit view) the '$* argues that trickle has not beenallowed to complete the process of poverty reduction, whereas the anti-globalisation case that thereare forces in the global economy that prevent the benefits trickling down, so that the rich get richer atthe expense of the poor.

'n theory, there is a strong case for tempering globalisation as it negatively affects the developingworld. 'n the long run it is undoubtedly true that increased specialisation and trade along the linesdictated by comparative advantage is beneficial, but people in developing countries are not enjoyingthe benefits of the globalisation process. The '$* might argue that the process needs to be givenmore time to succeed, but the counter argument is that this is little comfort to the poor of thedeveloping world, especially when the forces that prevent benefits trickling down are taken intoconsideration.

Notes from arry


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Theme ! - Globalisation will help raise living standards if the %) +%eveloping

)conomy gains eport led growth and so gains # and specialises where it has

the greatest eciency " high grades will develop this theme eplaining the many

gains from )/I " productive eciency from competition, economies of scale,

foreign earnings etc. lso focusing on # and the creation of new #s " but this

depends on overcoming obstacles and often on e!ective government thatcreates infrastructure, rule of law etc. and a good business environment with ta

incentives for new investment in new industries including attracting $%I. 'ight

not be e!ective0take a long time to work0benet a few in a few local areas but

destroy traditional industries, and most may not get 1obs and so may not gain.

Theme " " $%I, students study my $%I hand-out. $%I brings essential capital,

shifting 2 to the right, brings foreign skills, technology and currency, and avoids

the problem of shortage of capital and management skills in a poor country.

3owever there is the dominance of the local economy by large '(#s, they may

spend little locally, have capital intensive processes and employ or train few

locals.

Theme # - )/I might not succeed if the '%#s +more developed country place

trade barriers against %)s eports. rgue the harm caused but then say

increasingly the bigger %)s can negotiate barriers down through combining as a

bloc within the 4&/. lso it may be sensible to trade within a regional free trade

5one, within frica, 2outh )ast sia or *atin merica. &his way they gain the

benets of trade, but static from # and dynamic as they develop new #s and

move upmarket and diversify.

Theme $ - Globalisation may lead to damage from heavy migration, as people

leave to settle in the '%#s. &his can cause a heavy capital loss as skilled people

leaving in their early 67s represent all the investment in bringing them up andeducating them. &hey are desperately needed, especially doctors, nurses,

entrepreneurs etc. 3owever we could argue migration can bring benets if these

people could not get 1obs anyway, or they send back high remittances or go

home with skills etc.

Theme 5 - %ependency. country may end up specialising in a few

commodities, basically supplying a narrow range of food and raw materials for

the rich nations. &his may trap them in low prices0unstable prices and sales with

terrible losses and problems in deep downturns. &his instability hits 1obs, eport

earnings, ta revenues etc. lso the instability of % that follows makes it very

dicult to establish local industries. &he wrong type of )/I or $%I can make acountry too dependent on the global economy with its booms and slumps and

even worse trap it at this basic, low level of #. &he crucial thing is to

industrialise and diversify so they start to move upmarket to produce high value

eports and increase productivity and investment. /nly in this way can the

country hope to gain form globalisation, and this depends on luck and e!ective

governments following good policies that help diversication and

industrialisation.

Other themes may be found in the stimulus material and a good student will

develop them, but above relate my themes above and others to the material.

good conclusion must be present, one that points out that it depends on what

type of globalisation, depends on e!ective governments and policies. 2tiglit5 is


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pessimistic as so many people have failed to gain, on the other hand hundreds of

millions have been drawn out of absolute poverty by the rise of globalisation in

the last 87 years, it all depends whether the masses of poor people gain much

more than some lose through the rapid and uncertain changes that globalisation

brings.

Notes on Globalisation

9&he whole pace of business is moving faster. Globalisation is forcing companies

to do things in new ways: " ;ill Gates

Advantages of Globalisation

1) Free Trade

This means countries can specialise in producing goods where they have a comparative

advantage (this means they can produce goods at a lower opportunity cost). When countries

specialise there will be several gains from trade:

Greater competition

Wider choice of goods

Bigger eport mar!ets for domestic manufacturers

2) Free movement of labour

"ncreased labour migration gives advantages to both wor!ers and recipient countries:

"ncreased opportunities to loo! for wor! elsewhere

#educe geographical ine$uality. This has been $uite effective in the %&'

with many %astern %uropean wor!ers migrating west.

ew more efficient management styles can be created

%valuation:

*owever +obs in advanced economies may drain away to developing countries as firms

switch their production to countries with comparative advantage ,oreover s!illed wor!ers in developing economies may drain away to advanced

economies with the incentive of higher pay

3) Increased Investment

Globalisation has made it easier for countries to attract short term and long term

investment. "nvestment by multinational companies can play a big role in improving

the economies of developing countries.

Benefit to investors - *igher returns

Benefit to recipient - %conomic growth


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4) Greater Competition

% omestic monopolies used to be protected by lac! of competition.

% *owever' globalisation means that firms face greater competition from foreign firms.

Therefore' / inefficiency falls' and it encourages dynamic efficiency (innovation)

5) Increased Economies of Scale

% 0roduction is increasingly specialised.

% Globalisation enables goods to be produced in different parts of the world.

% This greater specialisation enables lower average costs and lower prices for

consumers.

isadvantages of Globalisation

1) Costs of interdependence

Globalisation has meant that trade between countries has increased' which has also meant that

interdependence has increased.

The disadvantage of this is that issues arising in one country are more li!ely to spread to

other countries.

1or eample' if a recession hits the &2A' then the impacts of recession are li!ely to hit the

&.3. *ow4

#ecession results in lower foreign direct investment (1")

5ower investment 6 lower or even a fall in growth

A sustained period of lower rate of growth 6 recession

A ma+or eample of this was the financial crash of 7889

%valuation: This means that due to globalisation' the macro economic performance of the

&.3. depends on the performance of countries that trade with the &.3.

2) Infant Industr! "r#ument

1ree Trade can harm developing economies. ,any developing economies have a comparative

advantage in producing primary products.

*owever' in the long term producing these goods have certain disadvantages:

5ow income elasticity of demand. As incomes rise' demand for primary products increases

only slowly. Therefore relying on primary products limits economic development.


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0rice volatility

0rimary products have a volatile price because supply and demand are inelastic.

"n this case' it is good to diversify the economy which developing economies struggle to do.

3) Ta$ competition and Ta$ "voidance

,ultinational companies li!e Amaon and Apple' have set up offices in countries such as

"reland and 5uembourg with very low rates of corporation ta.

This means they pay very little ta in the countries where they do most of their business.

Governments are then compelled to increase taes on ;AT and income ta.

This hurts the domestic population as well as domestic business owners.

4) Environmental costs

#apid growth and development have long lasting impacts on the environment:

amage to ecosystems

5and degradation

eforestation

"n


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F585 Globalisation Essay Notes