IELTS writing Economics – Globalisation of Economics

 

What caused globalisation?

 

Tejvan Pettinger

 

Globalisation is not a new phenomena. The world economy has become increasingly interdependent for a long time. However, in recent decades the process of globalisation has accelerated; this is due to a variety of factors, but important ones include improved trade, increased labour and capital mobility and improved technology.

 

Main reasons that have caused globalisation

 

Improved transport, making global travel easier. For example, there has been a rapid growth in air-travel, enabling greater movement of people and goods across the globe.

 

Containerisation. From 1970, there was a rapid adoption of the steel transport container. This reduced the costs of inter-modal transport, making trade cheaper and more efficient.

 

Improved technology which makes it easier to communicate and share information around the world. E.g. internet. For example, to work on improvements on this website, I will go to a global online community, like elance.com. There people from any country can bid for the right to provide a service. It means that I can often find people to do a job relatively cheaply because labour costs are relatively lower in the Indian sub-continent.

 

Growth of multinational companies with a global presence in many different economies.

 

Growth global trading blocks which have reduced national barriers. (e.g. European Union, NAFTA, ASEAN)Reduced tariff barriers encouraging global trade. Often this has occurred through the support of the WTO.

 

Firms exploiting gains from economies of scale to gain increased specialisation. This is an important feature of new trade theory.

 

Growth of global media.

 

Global trade cycle. Economic growth is global in nature. This means countries are increasingly interconnected. (e.g. recession in one country affects global trade and invariably causes an economic downturn in major trading partners.)

 

Financial system increasingly global in nature. When US banks suffered losses due to sub-prime mortgage crisis, it affected all major banks in other countries who had bought financial derivatives from US banks and mortgage companies.

 

Improved mobility of capital.  In past few decades there has been a general reduction in capital barriers, making it easier for capital to flow between different economies. This has increased the ability for firms to receive finance. It has also increased the global interconnectedness of global financial markets.

Increased mobility of labour. People are more willing to move between different countries in search for work. Global trade remittances now play a large role in transfers from developed countries to developing countries.

 

In evaluation I would make the following points:

 

It is hard to precisely define globalisation there are different interpretations about what we actually mean, therefore, there are differing factors that explain it.

Improved technology is undoubtedly very influential in helping globalisation; without technologies such as the internet and global communication it would not have been possible to witness the increased interdependence of companies and countries.

Increased free trade is important. However, there are various trade barriers still in existence and this has not stopped the growth of globalisation.

Could there be a backlash against globalisation as people look for local alternatives to multinational products? I think this is unlikely as people prefer the security of buying established brand names.

 

Essay: Does Globalisation benefit both developed and developing countries?

Globalisation involves the increased integration of national economies. It means a reduction in barriers of trade and investment between different economies.

 

The benefits of globalisation are related to the benefits of free trade.

 

  1. Consumers will have a wider choice of goods, and prices are likely to be lower. Globalisation has been an important factor in the falling price of manufactured goods.

 

2.Globalisation gives an opportunity for domestic firms to export a wider market. Export led growth has been an important factor in increasing economic welfare in Asian countries.

 

  1. Globalisation enables increased specialisation of production. This specialisation enables firms to benefit from economies of scale. This leads to lower average costs and increased efficiency.

 

  1. Globalisation causes increased competition between different firms and countries. This puts pressure on firms to be increasingly efficient and offer better products for consumers.

 

  1. Increased Inward Investment. The process of globalisation has encouraged firms to invest in other countries. For example, many firms are relocating call centres to countries like India, where wage costs are lower. This inward investment benefits developing countries because it creates employment, growth and foreign exchange. Some foreign companies are criticised for exploiting cheap labour. But often the wages are higher than otherwise.

 

 

 

 

Problems of Globalisation

 

  1. Developing Countries May Struggle to compete.

 

If a developing country wishes to develop a new manufacturing industry, it may face higher costs than advanced industries in the west, who will benefit from years of experience and economies of scale. To develop an industry it may be necessary to have protection from cheap imports; this gives the firm chance to develop and gain economies of scale.

 

  1. Globalisation keeps Developing countries producing primary products. Developing countries may have a comparative advantage in primary products, however, this offers little scope for economic growth. Primary products have a low income elasticity of demand. Therefore, with economic growth demand for products increases only slowly. Primary products often have volatile prices, this can cause the economy to be subject to fluctuations in income

 

  1. Multi national Companies may be able to force out local retailers, leading to less choice for consumers and less cultural diversity.

 

  1. Movement of Labour. globalisation enables workers to move easily around. however, this may cause the highest skilled workers of developing countries to leave for better paid jobs in developed countries.

 

 

Additional Material

 

Globalisation

Globalisation refers to the integration of markets in the global economy, leading to the increased interconnectedness of national economies.  Markets where globalisation is particularly common include financial markets, such as capital markets, money and credit markets, and insurance markets, commodity markets, including markets for oil, coffee, tin, and gold, and product markets, such as markets for motor vehicles and consumer electronics. The globalisation of sport and entertainment is also a feature of the late 20th and early 21st centuries.

 

 

Why has globalisation increased?

 

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

 

Developments in ICT, transport and communications have accelerated the pace of globalisation over the past 30 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.

 

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.

 

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.

 

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.

 

The development of complex financial products, such as derivatives,, has enabled global credit markets to grow rapidly.

 

Increased em>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].

 

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:

 

Providing an incentive for countries to specialise and benefit from the application of the principle of comparative advantage.

 

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.

 

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.

 

Avoidance of regulation by locating production in countries with less strict regulatory regimes, such as those in many Less Developed Countries (LCDs).

 

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.

 

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:

 

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.

 

Large multinational companies can also suffer from diseconomies of scale, such as difficulties associated with coordinating the activities of subsidiaries based in several countries.

 

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.

 

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.

 

Globalisation can also increase the pace of deindustrialisation, which is the slow erosion of an economy’s manufacturing base.

 

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.

 

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.

 

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.

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.

 

 

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