Introduction
Globalisation has become an immense economic, political, social, and cultural force throughout the world[1]. To what extent this has impacted on the various spheres of the globe has been the focus for much debate. Debate addressing its characteristics, merits, and pitfalls has proved inconclusive in the formation of a universally accepted theory as to what Globalisation is. It is the purpose of this essay to focus discussion on Globalisation’s relationship with living standards within a world economy context, whilst also introducing policy issues that look to underpin nations’ cross-border activities.
Globalisation
In order to form a discussion as to the capabilities of Globalisation, a concise definition must be established. It may be seen to represent;
“The flow of information, goods, and capital across political and economic boundaries” (Walt, 2000)[2]
As the definition implies, this trend is not new. People have always carried information, goods and capital across countries. What is new is its scale and pace. Economically, it can be characterised by three inter-dependent themes;
1. Economic transformation: financial volatility, marginalisation, and labour insecurity
2. New trade regimes: winners and losers
3. A growing poverty gap: between developed and developing countries
There are two major ways in which the process of Globalisation can effect individual economies[3] through;
International Trade Liberalisation
Financial Markets
As long as nations trade with one another, it is assumed that the domestic economic actions of one nation will have implications for those which trade with it, the idea being that Country A’s imports are Country B’s exports. Each day, some .8 trillion of assets are traded across foreign exchanges[4]. Foreign direct investment in 2001 represented 21% of the World’s GDP compared to only 6% in 1982[5], highlighting the close inter-relationship of nation’s economic affairs.
Benefits of Trade
Reasons for international trade are really only an extension of the reasons for trade within a nation[6]. There exist two fundamental drivers for undertaking trade[7];
Because they are different. Countries can benefit from their differences by reaching arrangements in which each trades the goods and services it produces well.
For economies of scale in production. If each country produces only a limited range of goods, it can produce each of these goods at a larger scale, hence, more efficiently than if it tried to produce everything it needed.
In the real world, patterns of international trade reflect the interaction of both these motives[8] and stimulates growth that provides the resources necessary for raising living standards.
To describe pattern and effects of trade between two countries is simple, however, analysis has shown that even the simplest of trade models can offer important significance on real world issues[9]. The Ricardian approach shows trade is driven by a country seeking to specialise in its ‘Comparative Advantage’. That is to say, a country has a comparative advantage over another in the production of a good if it produces it at a lower opportunity cost[10]. Differences in comparative costs is examined by the Heckscher-Ohlin theorem that illustrates these variances occurring through differences in factor endowments, stating a country has a comparative advantage in those goods that are intensive in its relatively abundant factor. Comparative advantage suggests that when labour abundant countries export labour intensive goods like clothing, and import its scarce factor products, national income should rise and the distribution of income shift in favour of its labour.
International trade has been growing as a proportion of countries’ national income for many years (See Figures below). Maximising the opportunities for international trade is in an open economy’s best economic interests[11]. This harmonised global form of economic trading allows developing countries to generate the capital necessary to work towards alleviating the problems of low living standards – in theory. Those countries with the highest levels of integration in the World economy have witnessed the fastest growth in living standards[12]. Studies show that 24 developing countries who increased their integration over two decades ending in the late 1990s achieved higher growth in incomes, longer life expectancy and better schooling[13]. These countries, home to some 3 billion people, enjoyed an average 5% growth rate in income per-capita in the 1990s compared to 2% in ‘High Income’ countries. Many of these countries – such as China, India, and Hungary – have adopted domestic policies that enable people to take advantage of global markets, subsequently, increasing their share of trade in national GDPs. The key implications for open-economy countries has been an average per-capita wage increase with declining poverty levels.[14]
Integration with the Global Economy;
International Trade in Goods
% of GDP
1990
2001
East Asia & Pacific
47
61
Europe & Central Asia
..
65.9
Latin America & Carib.
23.3
37.6
Middle East & N. Africa
48.1
45.4
South Asia
16.5
23.4
Sub-Saharan Africa
42.3
56
Source: 2003 World Development Indicators
Global Economic Liberalisation – The ‘Haves’ and ‘Have-Nots’
Although there is no universal approach to categorising a country’s developed status[15], for this paper’s purposes the World’s economies can be divided into three categories[16];
1. Low Income
2. Middle Income
3. High Income
Attempting to explain why there perpetually exists differences in nations’ wealth is an age old economic problem[17]. 85% of the World’s population lives in developing countries yet only earns 21% of the World’s income (see Table 1, below, for population and GNI per capita statistics). Average per-capita GNP in the richest economies is 63 times that of the average in the poorest developing countries.
Table 1;
Low Income Population = 2,495,033,000
GNI per-capita of Low Income Countries = 0
High Income Population = 964,739,000
GNI per-capita of High Income Countries = ,310
Source: World Bank, 2003
Why then does there exist this widening gap between developed and developing nations in an environment of Globalisation, a trend which epitomises free trade and neo-classical theories which teach us of eventual ‘Factor Price Equalisation’ amongst trading nations[18]? As theory explains, if trade is free, if capital can move to countries offering the highest returns, and if knowledge itself moves across political borders, then there is no reason for international income differences to persist in the long term. This, however, is not the case in all parts of the globe. Real wages in most African countries have fallen by 50-60% since the early 1980s and in Mexico, Costa Rica and Bolivia average wages have fallen by a third since 1980[19].
How then can these countries partake in Globalisation and its economic benefits? Low income countries must establish and define what it is that they have – or what the nearest thing is that they may develop into – a comparative advantage with which to internationally trade, as suggested by Ricardo[20]. Compared with industrialised economies, most developing countries are poor in factors of production essential to modern industry: capital and skilled labour. The relative scarcity of these factors contributes to low levels of per-capita income and often prevents developing countries from realising economies of scale. Some argue, however, that it is the international trade that restricts potential growth in low income nation’s living standards[21]. However, Krugman (2003)[22] rejects that trade exploits a country if its workers receive much lower wages than workers in other nations by stating that if discussing free trade the point is not to ask whether low wage workers deserve to be paid more but to ask whether they are worse off for exporting goods based on low wages than they would be if they refused to enter into such trade. Standard economics argues that those workers are better off than they would be if globalisation had not taken place[23] (see ‘Real Wages’ table below).
As they develop, countries’ policies towards trade typically go through various stages[24];
1. Primary Outward-looking Stage
2. Secondary Inward-looking Stage
3. Secondary Outward-looking Stage
The first of these stages is usually associated with ‘Import Substituting Industrialisation’[25], usually through tariffs that distort domestic markets, pushing up prices faced by consumers and insulating inefficient sectors from competition[26]. This penalises foreign producers and encourages the inefficient allocation of resources both domestically and globally[27]. Competitive domestic markets are a necessary condition for improving developing countries’ rate of growth[28].
Those countries in the third stage of trade policy have experienced rapid growth through means of pursuing a policy of export-orientated industrialisation, as witnessed in East Asia until the late 1990s. These countries have benefited from Globalisation through abandoning import substitution policies and opening themselves up to liberalised international trading[29]. However, trade liberalisation does not automatically imply a growth in living standards. It will have little benefit if the domestic policy environment is inadequate. Sub-Saharan Africa life expectancy has declined from 50 to 46 years since 1990, yet manufacturer’s exports as a percent of total exports has increased from approximately 20% to 33% representing a rise in economic growth and a decline in one of the key indicators of living standards[30].
The Future
In order to fully realise the potential of Globalisation nations must open their borders to trade liberalisation required to generate the capital necessary for the promotion of citizen welfare. Al-Hamed (2003)[31] suggests to benefit from economic liberalisation, nations must adopt the following 3-point plan;
1. Improve their productive capacity and encourage the emergence of more competitive financial markets.
2. Accountability, transparency and fair competition should become the ruling principles in the nation’s economy.
3. Investment should be made in labour intensive activities.
These measures require good economic governance and international cooperation if they are to benefit nations’ living standards. Discussions regarding the nature and magnitude of problems they may face will lead to the improvement of the policy making process[32], as seen in regional trading blocks such as NAFTA and the European Union. A study published by the European Commission[33] concluded that an ambitious package of liberalisation could boost World prosperity by nearly 0 billion per annum[34].
Conclusion
Globalisation may be regarded as both an opportunity and as a threat to the raising of living standards in all parts of the World economy. In order for developing countries to benefit from the capabilities Globalisation possesses in its ability to raise living standards, nations must look to adopt an open-economy based on export production in order to raise their domestic budgetary climate to a level that can facilitate the cultural and social policy framework required to promote living standards.
[1] Noury, A.J. (2003), ‘Globalisation’s Assault on Native Peoples’. See the Progress Report at http://www.oneworld.net/article/view/
[2] Walt, G. (2000), ‘Globalisation and Health’, A People’s Health Assembly Issue Paper. See http://phmovement.org/pubs/issuepapers/walt.html
[3] Sloman, J. (2003), ‘Economics (5th ed.)’. Prentice Hall, London
[4] Krugman, P. & Obstfeld, M. (2003), ‘International Economics – Theory and Policy (6th ed.). Pearson Education International.
[5] See ‘World Development Indicators Database’ at http://www.worldbank.org
[6] Sloman, see Footnote 4, above.
[7] Krugman, see Footnote 6, above.
[8] Caves, R., Frankel, A. and Jones, R (2002), ‘World Trade and Payments – An Introduction (9th ed.). Addison Wesley
[9] Krugman, see Footnote 6, above.
[10] Sloman, see Footnote 4, above.
[11] See ‘UK Trade and Investment’ at the DTI website; http://www.dti.gov.uk/ewt/trade.htm
[12] DTI, see Footnote 13, above.
[13] See ‘OECD Data Profiles’ at the World Bank website; http://devdata.worldbank.org/external/CPProfile.asp
[14] World Development Indicators, see Footnote 7, above.
[15] Sloman, see Footnote 4, above.
[16] See ‘Data and Statistics’ at the World Bank (see Footnote 15, above).
[17] Caves et al, see Footnote 10, above.
[18] See Krugman (Footnote 6, above) for deeper analysis of Factor Price Equalisation.
[19] Data taken from ‘Globalisation: the end of the age of imperialism?’ article found at; http://www.struggle.ws/ws99/imperialism58.html
[20] Sloman, see Footnote 4, above.
[21] De Belder, B. (2003), ‘Globalisation: a fate that can be fought!’. People’s Health Movement website: http://phmovement.org/pubs/issuepapers/belder.html
[22] Krugman, see Footnote 6, above.
[23] See also ‘Pauper Labour Argument’ (Footnote 6, above).
[24] Sloman, see Footnote 4, above.
[25] ‘Import Substituting Industrialisation’: situation in which a country adopts a policy (usually through imposing tariffs) of restricting imports of manufactured goods and uses the foreign exchange saved to build up domestic substitute industries.
[26] DTI, see Footnote 13, above.
[27] An example of this is that developed nations give billion in aid to developing nations compared to 0 billion in domestic agriculture subsidies and 0 billion on defence expenditure (Source www.oneworld.net)
[28] Sloman, see Footnote 4, above.
[29] Caves et al, see Footnote 10, above.
[30] See ‘World Development Indicators’, Footnote 7, above.
[31] Al-Hamed, A. (2003), ‘Globalisation: challenges and responses in the Arab world’. http://www.gdnet.org/cf/search/display.cfm
[32] Krugman, see Footnote 6, above.
[33] Cited by the DTI, see Footnote 13, above.
[34] Cited by the DTI, see Footnote 13, above.
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