Economic globalization

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Economic globalization is the increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, service, technology, and capital.^[1] Whereas globalization is centered on the rapid development of science and technology and increasing cross-border division of labor,^[2] economic globalization is propelled by the rapid growing significance of information in all types of productive activities and marketization, and the advance of science and technologies.^[3] Depending on the paradigm, economic globalization can be viewed as either a positive or a negative phenomenon.

Economic globalization comprises the globalization of production, markets, competition, technology, and corporations and industries.^[1] While economic globalization has been occurring for the last several hundred years (since the emergence of trans-national trade), it has begun to occur at an increased rate over the last 20–30 years under the framework of General Agreement on Tariffs and Trade and World Trade Organization which made countries to gradually cut down trade barriers and open up their current accounts and capital accounts.^[3] This recent boom has been largely accounted by developed economies integrating with less developed economies, by means of foreign direct investment, the reduction of trade barriers, and in many cases cross border immigration.

It can be argued that economic globalization may or may not be an irreversible trend. There are several significant effects of economic globalization. There is statistical evidence for positive financial effects as well as proposals that there is a power imbalance between developing and developed countries in the global economy. Furthermore, economic globalization has an impact on world cultures.

History

International commodity markets, labor markets, and capital markets make up the economy and define economic globalization.^[4] Beginning as early as 4000 BC, people were trading livestock, tools, and other items as a means of money. People residing in Sumer, an early civilization in Mesopotamia, came up with a token system that was seen as one of the first forms of commodity money.^[5] Labor markets consist of workers, employers, wages, income, supply, and demand. Labor markets have been around as long as commodity markets. Labor markets grew out of commodity markets because labor was needed to grow the crops and tend to the livestock. The growth of commodity and labor markets grew into a capital market where companies and governments handle longstanding funds.^[6] The process of this blending of markets in the economy took thousands of years to become what it is today.

By the early 1900s, it was rare to come across a town that was not influenced by foreign markets—whether it be in labor, prices, or any other policy of business.^[7] With advances in ship building technology and the inventions of the railroad and telephone, communication with other parts of the country and world was readily available. Towns were no longer limited to what they alone could produce and what the next two towns over would trade with them. People everywhere had the accessibility and resources to obtain goods from the other side of the world. However, these great advances in economic globalization were disrupted by World War I.^[8] Most of the global economic powers constructed protectionist economic policies and introduced trade barriers that slowed economic growth to the eventual point of stagnation which can be seen as a precursor to the Great Depression in the late 1920s.^[9] This caused a slowing of world-wide trade and even led to other countries introducing immigration caps.^[8] Globalization of the economy didn’t fully resume until the 1970s.^[10] Today, advances in technology and computer networks, both as a way of sending and receiving information, have led to a worldwide globalization of the economy.^[11]

There are three suggested factors that accelerated economic globalization, and they are advancement of science and technology, market oriented economic reforms and finally contributions by multinational corporations.^[12]

A reduction of transportation and communication costs is what initiated globalization economies around the world, and this was possible mainly due to the advancement of science and technology. Ocean shipping costs half, airfreight costs 1/6th, and telecommunications costs 1% of what it did cost in the 1930s. This improvement has facilitated and encouraged international trade and investment. Under the GATT and WTO framework, many countries have cut down their tariff and non-tariff barriers. Along with this external influence, governments within its borders have shifted its economies from central planned economies to market economies. These internal reforms have provided commonalities among different world economies and thus helped integrate as a whole.^[13] multinational corporations that expand their businesses worldwide organize production and allocate resources all over the world. Not only are multinational corporations responsible for international financial transactions, but also for workforce distributions. By setting up branch offices, factories, and even outsourcing its services, MNCs are contributing to economic globalization.

The invention of shipping containers in 1956 helped advance the globalization of commerce.^[14][15]

Irreversibility

According to China's prominent economist Gao Shanguan, economic globalization is an irreversible trend due to the fact that the world markets are in great need of science and information technologies. With the growing demands of science and technology, Shanquan states that with world markets take on an "increasing cross-border division of labor" that works its way down to every facet of globalized markets from both developed and developing nations.^[16]

Nevertheless, Princeton University professor Robert Gilpin argues that though economic globalization seems to be irreversible, nations' various economic policies have suppressed the impetus for their own economies to move forward, which he states has been shown in the past, thus debunking Shanquan's theory of economic globalization as a primarily irreversible phenomena.^[17] Further, in his recent book entitled Globalization: Power, Authority, and Legitimacy in Late Modernity, Antonio L. Rappa agrees with Gilpin's argument of economic globalization as being reversible and references International Studies professor Peter J. Katzenstein accessing that due to the symbiotic nature of globalization and regionalism, so does the conflict between economic regionalism and multiculturalism.^[18]

Effects

Positive effects: economic growth and reduction of poverty

There are at least three positive financial effects of economic globalization. "Per capita GDP growth in the post-1980 globalizers accelerated from 1.4 percent a year in the 1960s and 2.9 percent a year in the 1970s to 3.5 percent in the 1980s and 5.0 percent in the 1990s. This acceleration in growth is even more remarkable given that the rich countries saw steady declines in growth from a high of 4.7 percent in the 1960s to 2.2 percent in the 1990s. Also, the non-globalizing developing countries did much worse than the globalizers, with the former's annual growth rates falling from highs of 3.3 percent during the 1970s to only 1.4 percent during the 1990s. This rapid growth among the globalizers is not simply due to the strong performances of China and India in the 1980s and 1990s—18 out of the 24 globalizers experienced increases in growth, many of them quite substantial."^[19]

Growth Rate of Real GDP per capita

Despite concerns about the inequality gap between developed and developing nations, there is no evidence to suggest that inequality increases as international trade increases.^{[citation needed]} Rather, growth benefits of economic globalization are widely shared. While several globalizers have seen an increase in inequality, most notably China, this increase in inequality is a result of domestic liberalization, restrictions on internal migration, and agricultural policies, rather than a result of international trade.^[19]

Economic globalization also has helped to decrease poverty around the world. Poverty has been reduced as evidenced by a 5.4 percent annual growth in income for the poorest fifth of the population of Malaysia. Even in China, where inequality continues to be a problem, the poorest fifth of the population saw a 3.8 percent annual growth in income. In several countries, those living below the dollar-per-day poverty threshold declined. In China, the rate declined from 20 to 15 percent and in Bangladesh the rate dropped from 43 to 36 percent.^[19]

The final positive effect to be mentioned is the narrowing gap between the rich and the poor. Evidence suggests that the growth of globalizers, in relation to rich countries, suggests that globalizers are narrowing the per capita income gap between the rich and the globalizing nations. China, India, and Bangladesh, who were among the poorest countries in the world twenty years ago, have greatly influenced the narrowing of worldwide inequality due to their economic expansion.^[19]

Negative effects

The Economic Commission for Latin America and the Caribbean (ECLAC) has proposed an agenda to support conditions for developing countries to improve their standing in the global economy.^[20] Economists have theories on how to combat the disadvantages faced by developing countries. However, the advantaged countries continue to control the economic agenda. In order to rectify the social injustice dilemma, international economic institutions (such as the World Bank and the International Monetary Fund) must give voice to developing countries.^[21] A solution is to issue global rules that protect developing countries. It is still difficult for leaders of developing nations to influence these global rules.^[22]

In his article, Gao Shangquan elaborates this point saying that economic globalization has in fact expanded rather than reduced the gap between the North and South. He is referring to some UN report in 1999, in order to show that the number of developing countries that have benefited from economic globalization is smaller than 20, that the average trade deficit of developing countries in 1990’s increased by 3% as compared with that in 1970s, and that over 80% of the capital is flowing among US, Western European and East Asian countries.^[23]

The influx of international corporations not only brings positive advantages regarding global financial transactions. Some may emphasize that the multinational corporations may raise education levels as well as the financial health in developing countries, but that only applies to the long term effects of economic globalization. In the short term, poor countries will become poorer and unemployment rates may soar. Automation in the manufacturing and agricultural sectors always follows the appearance of multinational corporations. This lessens the need for unskilled and uneducated workers thus raising unemployment levels. Also, in the developing countries where this phenomenon occurs, infrastructure to re educate these unskilled workers are not properly established which means a redirection of the government’s focus from social services to education.^[24]

In order to create better economic relations globally, international lending agencies must work with developing countries to change how and where credit is concentrated as well as work towards accelerating financial development in developing countries.^[25] There is a need for social respect for all persons worldwide. The Economic Commission of Latin America and the Caribbean suggests that in order to ensure such social respect, the United Nations should expand its agenda to work more rigorously with international lending agencies. Despite their title, international lending agencies tend to be nation-based. The ECLAC suggests that international lending agencies should expand to be more inclusive of all nations and they propose that there is a need for universal competitiveness. Key factors in achieving universal competition is the spread of knowledge at the State level through education, training and technological advancements.^[26] Economist, Jagdish Bhagwati, also suggests that programs to help developing countries adjust to the global economy would be beneficial for international economic relations.^[27]

Several movements, such as the fair trade movement and the anti-sweatshop movement, have worked towards promoting a more socially just global economy. The fair trade movement has played a significant role in alleviating exploitation due to economic globalization. For example, fair trade sales account for 1.6 billion US dollars each year.^[28] The fair trade movement works towards improving trade, development and production for disadvantages producers. Furthermore, the movement works to raise consumer awareness of exploitation of developing countries. Fair trade works under the motto of "trade, not aid", to improve the quality of life for farmers and merchants by participating in direct sales, providing better prices and supporting the community.^[29]

Capital flight

The Argentine economic crisis of 2001 caused in a currency devaluation and capital flight which resulted in a sharp drop in imports.

Capital flight occurs when assets or money rapidly flow out of a country because of that country's recent increase in taxes, tariffs, labor costs, or other unfavorable financial conditions such as government debt defaulting, which disturb investors. This leads to a sometimes very rapid disappearance of wealth, and is usually accompanied by a sharp drop in the exchange rate of the affected country, leading in turn to depreciation in a variable currency exchange rate regime, or a forced devaluation under fixed exchange rates. This can be particularly damaging when the capital belongs to the people of the affected country, because not only are the citizens now burdened by the loss of faith in the economy and devaluation of their currency, but probably also their assets have lost much of their nominal value. This leads to dramatic decreases in the purchasing power of the country's assets and makes it increasingly expensive to import goods.

A 2008 paper published by Global Financial Integrity estimated capital flight, also called illicit financial flows to be "out of developing countries are some $850 billion to $1 trillion a year."^[30] But capital flight affects developing countries, too. A 2009 article in The Times reported that hundreds of wealthy financiers and entrepreneurs had recently fled the United Kingdom in response to recent tax increases, and had relocated in low tax destinations such as Jersey, Guernsey, the Isle of Man, and the British Virgin Islands.^[31] In May 2012 the scale of Greek capital flight in the wake of the first "undecided" legislative election was estimated at €4 billion a week^[32] and later that month the Spanish Central Bank revealed €97 billion in capital flight from the Spanish economy for the first quarter of 2012.^[33]

Capital flight can cause liquidity crises in the affected countries from which capital is flowing, the countries in which investors are trying to liquidate their assets, and other countries involved in international commerce such as shipping and finance. Market participants in need of cash find it hard to locate potential trading partners to sell their assets. This may result either due to limited market participation or because of a decrease in cash held by financial market participants. Thus asset holders may be forced to sell their assets at a price below the long term fundamental price. Borrowers typically face higher loan costs and collateral requirements, compared to periods of ample liquidity, and unsecured debt is nearly impossible to obtain. Typically, during a liquidity crisis, the interbank lending market does not function smoothly either.

Inequality

Increasing international commerce with high barriers to entry, corporate consolidation, tax havens and other methods of tax avoidance, and political corruption have all caused increases in income inequality and wealth concentration: the increasingly unequal distribution of economic assets (wealth) and income within or between global populations, countries, and individuals. Economic inequality varies between societies, historical periods, economic structures or systems (for example, capitalism or socialism), ongoing or past wars, between genders, and between differences in individuals' abilities to create wealth.^[34] There are various numerical indices for measuring economic inequality. A prominent one is the Gini coefficient, but there are also many other methods.

Of the factors influencing the duration of economic growth in both developed and developing countries, income equality has a more beneficial impact than trade openness, sound political institutions, and foreign investment.^[2]

Economic inequality affects equity, equality of outcome, and equality of opportunity. Although earlier studies considered economic inequality as necessary and beneficial,^[35] it has more recently come to be seen as a growing social problem.^[36] Early studies suggesting that greater equality inhibits economic growth have been shown to be flawed because they did not account for the many years it can take inequality changes to manifest in growth changes.^[37] In fact, one of the most robust and important determinants of sustained economic growth is the level of income inequality.^[38]

International inequality is inequality between countries. Economic differences between rich and poor countries are very large. According to the United Nations Human Development Report for 2004, the GDP per capita in countries with high, medium and low human development (a classification based on the UN Human Development Index) was 24,806, 4,269 and 1,184 PPP$, respectively (PPP$ = purchasing power parity measured in United States dollars).^[39]

Positive effects of globalization on reducing inequality

There has been a rapid economic growth in Asia after embracing market orientation based economic policies that encourages private property rights, free enterprise and competition. In particular, in East Asian developing countries, GDP per head rose at 5.9% a year from 1975 to 2001 (according to 2003 Human Development Report^[40] of UNDP). Like this, the British economic journalist Martin Wolf says that incomes of poor developing countries, with more than half the world’s population, grew substantially faster than those of the world’s richest countries that remained relatively stable in its growth, leading to reduced international inequality and the incidence of poverty.

Certain demographic changes in the developing world after active economic liberalization and international integration resulted in rising welfare and hence, reduced inequality. According to Wolf, in the developing world as a whole, life expectancy rose by four months each year after 1970 and infant mortality rate declined from 107 per thousand in 1970 to 58 in 2000 due to improvements in standards of living and health conditions. Also, adult literacy in developing countries rose from 53% in 1970 to 74% in 1998 and much lower illiteracy rate among the young guarantees that rates will continue to fall as time passes. Furthermore, the reduction in fertility rate in the developing world as a whole from 4.1 births per woman in 1980 to 2.8 in 2000 indicates improved education level of women on fertility, and control of fewer children with more parental attention and investment.^[41] Consequentially, more prosperous and educated parents with fewer children have chosen to withdraw their children from the labor force to give them opportunities to be educated at school improving the issue of child labor. Thus, despite seemingly unequal distribution of income within these developing countries, their economic growth and development have brought about improved standards of living and welfare for the population as a whole.

Tax havens

The ratio of German assets in tax havens in relation to the total German GDP.^[1] The "Big 7" shown are Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland.

A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all, which are used by businesses for tax avoidance and tax evasion.^[42] Individuals and/or corporate entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.^[43] States that are sovereign or self-governing under international law have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties. The central feature of a tax haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.^[44] In its December 2008 report on the use of tax havens by American corporations,^[45] the U.S. Government Accountability Office was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of it: nil or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.

A 2012 report from the Tax Justice Network estimated that between USD $21 trillion and $32 trillion is sheltered from taxes in unreported tax havens worldwide. If such wealth earns 3% annually and such capital gains were taxed at 30%, it would generate between $190 billion and $280 billion in tax revenues, more than any other tax shelters.^[46] If such hidden offshore assets are considered, many countries with governments nominally in debt are shown to be net creditor nations.^[47] However, the tax policy director of the Chartered Institute of Taxation expressed skepticism over the accuracy of the figures.^[48] Daniel J. Mitchell of the US-based Cato Institute says that the report also assumes, when considering notional lost tax revenue, that 100% money deposited offshore is evading payment of tax.^[49]

Tax havens have been criticized because they often result in the accumulation of idle cash^[50] which is expensive and inefficient for companies to repatriate.^[51] The tax shelter benefits result in a tax incidence disadvantaging the poor.^[52] Many tax havens are thought to have connections to "fraud, money laundering and terrorism."^[53] While investigations of illegal tax haven abuse have been ongoing, there have been few convictions.^[54][55] Lobbying pertaining to tax havens and associated transfer pricing has also been criticized.^[56] Accountants' opinions on the propriety of tax havens have been evolving,^[57] as have the opinions of their corporate users,^[58] governments,^[59][60] and politicians,^[61][62] although their use by Fortune 500 companies^[63] and others remains widespread.^[64] Reform proposals centering on the Big Four accountancy firms have been advanced.^[65] Some governments appear to be using computer spyware to scrutinize some corporations' finances.^[66]

Austerity

Red: U.S. corporate profits after tax. Blue: U.S. nonresidential business investment, both as fractions of GDP, 1989-2012. Wealth concentration of corporate profits in global tax havens due to tax avoidance spurred by imposition of austerity measures can stall investment, inhibiting further growth.^[3]

Governments sometimes impose austerity policies to reduce budget deficits during adverse economic conditions. These can include spending cuts, tax increases, or a mixture of the two.^[67][68][69] Austerity policies demonstrate governments' liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure.

The economic effects of austerity are unclear, due to its wide and non-specific definition, the limited historic sample of natural experiments and the potential conflation with the effects of other events which tend to precede austerity, such as recessions and financial crises. In macroeconomics, reducing government spending generally increases unemployment. This increases safety net spending and reduces tax revenues, to some extent. Government spending contributes to gross domestic product (GDP), so the debt-to-GDP ratio which signifies liquidity may not immediately improve. Short-term deficit spending particularly contributes to GDP growth when consumers and businesses are unwilling or unable to spend.^[70] Under the theory of expansionary fiscal contraction (EFC), a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion.^[71] Since 2011, the International Monetary Fund has issued cautionary guidance against austerity measures imposed without regard to underlying economic fundamentals^[72][73][74] and many commentators have suggested that austerity measures have indeed been misguided and harmful to the economies where they have been imposed.^[75][76][77]

Effects on world cultures

Economic globalization may have various strong impacts on different world cultures. Populations may mimic the international flow of capital and labor markets in the form of immigration and the merger of cultures. Foreign resources and economic measures may impact different native cultures and may cause assimilation of a native people.^[78] Researchers are now studying the effects of economic globalization on the youth in various world populations such as Arab, South American, South East-Asian, Caribbean, and African populations. As these populations are exposed to the English language, computers, western music, and North American culture, changes are being noted in shrinking family size, immigration to larger cities, more casual dating practices, and gender roles are transformed.

Yu Xintian wrote in a cultural impact study that there were two contrary trends in culture due to economic globalization.^[79] Xintian argues that culture and industry not only flows from the west while affecting people, but he says there is also a cultural nationalization or an effect of localization that wishes to promote and protect individual cultures. He also points out that economic globalization began after WWII, whereas internationalization began over a century ago and is something completely different.^[80]

George Ritzer wrote about the McDonaldization of society and how fast food businesses spread throughout the United States and the rest of the world, forcing world populations to adopt fast food culture.^[81] In this book, Ritzer also writes about how other businesses have copied the McDonalds Corporation's business model for expansion and influence. In 2006, 233 of 280 or over 80% of the new McDonalds opened were overseas. In 2007, Japan had 2,828 McDonalds locations and serves as just one example of the globalized effect of international corporations. The Body Shop, a British ecologically conscious cosmetic company, represents the process of McDonaldization working in all directions.^[82] Various countries export their own versions of McDonaldization but have the same influences in standardizing world culture.

Global media news companies export information through news, radio, and internet. This creates a mostly one-way flow of information, and exposure of mostly western products and values. Companies like CNN, Reuters, and the BBC dominate the global airwaves while having a particular western point of view. Other media news companies such as Al Jazeera may offer a different point of view, but have a far smaller audience and thus effect fewer people in influence.^[83]

Migration

“With an estimated 210 million people living outside their country of origin (International Labour Organization [ILO] 2010), international migration has touched the lives of almost everyone in both the sending and receiving countries of the Global South and the Global North”.^[84] Because of advances made in technology, human beings as well as goods are able to move through different countries and regions with relative ease. The origins of globalization can be traced as far back as colonialism and it is what provided the blueprint for the economic globalization that is seen today. “The geography of contemporary globalization is related closely to the history of colonialism and imperialism even if this is not usually made explicit in globalization theory”.^[85] Colonialism created lines between tribes and various societies in different parts of the world and it is because of this that some people leave their predetermined countries of citizenship to work in a neighboring country. “Globalization theories have, by and large, neglected race and ethnicity in their accounts of the making of the new global order”.^[85] “International migrants facilitate globalization processes by linking together disparate peoples and places into an increasingly single, shared global political-economic context (Glick Schiller, Basch and Szanton Black 1995; Portes, Guarnizo and Landolt 1999)”.^[86] Those who are not separated from their families still have a desire to migrate because “knowledge of living standards and social conditions across countries has become increasingly more available, especially through travel; both the real and symbolic reduction of time and distance have created powerful incentives for people to move”.^[84] This impacts women the most because “from a gender perspective, we have witnessed the feminization of most migration flows, especially since the 1990s, with profound transformations in the structure of families and gender roles in the international division of labor”.^[84] Another reason for individuals to migrate is to make more money “according to UNDP estimates, in 1970 the average income of countries in the highest 25 percent GDP group was 23 times higher than that of the lowest 25 percent group; this figure increased to 29 times by 2010 (UNDP 2010: 42), thus increasing the economic incentive to migrate”.^[87]

See also

Notes