Costs and benefits of globalisation

Globalisation is a complex and controversial issue. This is a look at some of the main benefits and costs associated with the greater globalisation of the world economy.

Definition of Globalisation The process of increased integration and co-operation of different national economies. It involves national economies becoming increasingly inter-related and integrated.

Globalisation has involved:

• Greater free trade.
• Greater movement of labour / Increased capital flows.
• The growth of multi-national companies.
• Increased integration of global trade cycle.
• Increased communication and improved transport

Summary of costs/benefits

Benefits of globalisation

1. Free trade is a way for countries to exchange goods and resources. 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:

1. Lower prices for consumers
2. Greater choice of goods, e.g food imports enable a more extensive diet.
3. Bigger export markets for domestic manufacturers
4. Economies of scale through being able to specialise in certain goods
5. Greater competition

See: Benefits of Free Trade

2. Free movement of labour

Increased labour migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased opportunities to look for work elsewhere. This process of labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west and eastern wages have quite quickly caught up with the west.

Also, it helps countries with labour shortages fill important posts. For example, the UK needed to recruit nurses from the Far East to fill shortages.

• However, this issue is also quite controversial. Some are concerned that the free movement of labour can cause excess pressure on housing and social services in some countries. Countries like the US have responded to this process by actively trying to prevent migrants from other countries. See also: free movement of labour

3. Increased economies of scale

Production 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. New trade theory suggests that economies of scale can be so large, that the essential thing is countries specialise in something and not try to produce everything themselves.

4. Greater competition

Domestic monopolies used to be protected by a lack of competition. However, globalisation means that firms face greater competition from foreign firms. For example, the arrival of Chinese electric car companies are forcing Western car firms to innovate and try and catch up in the EV race.

5. Increased investment

Globalisation has also enabled increased levels of investment. It has made it easier for countries to attract short-term and long-term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.

6. Reduced Poverty

Globalisation has enabled a significant reduction in global poverty rates, especially in China, S.E.Asia and increasingly in India. Without globalisation, China would have taken much longer to lift so many people out of poverty.

In theory, lifting people out of poverty, also creates new markets and opportunities for western economies. China’s growing middle class have potential high spending power for high end Western brands and goods. So far Chinese economic policy have limited spending and China has ended up with large trade surplus

Costs of globalisation

1. Free trade can harm developing economies

Developing countries often struggle to compete with developed countries, therefore it is argued free trade benefits developed countries more. There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop. However, developing countries are often harmed by tariff protection, that western economies have on agriculture. Paradox of Free Trade

2. Environmental costs

One problem of globalisation is that it has increased the use of non-renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict. However, arguably the problem is not so much globalisation as a failure to set satisfactory environmental standards.

3. Labour drain

Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best-skilled workers, who are attracted by higher wages elsewhere. This can be a problem for developing economies – losing their highly skilled, most innovative workers. A problem known as the brain drain.

4. Less cultural diversity

Globalisation has led to increased economic and cultural hegemony. With globalisation there is arguably less cultural diversity, with the dominance of western brands, American films and the dominance of big tech; however, globalisation also led to more options for people. People may prefer Coca-Cola to local drinks.

5. Tax competition and tax avoidance

Multinational companies like Amazon and Google, can set up offices in countries like Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms who don’t use the same tax avoidance measures.

The greater mobility of capital means that countries have sought to encourage inward investment by offering the lowest corporation tax. (e.g. Ireland offers very low tax rate). This has encouraged lower corporation tax, which leads to higher forms of other tax. (see: Tax competition)

6. Global Financial risk

The increased integration of the global financial system can have negative effects. In 2008, a crisis in the US housing market spread to the rest of the world because so many banks were exposed to US money markets, and when these dried up, all banks suffered a liquidity shortage.

7. Structural Unemployment in West

Globalisation played a key role in the decline of manufacturing employment in the US/UK/Europe. It was cheaper to import goods from China. Therefore, in a short space of time, many people lost their manufacturing jobs, but struggled to retrain and find jobs in new service industries, which were often based on coastal cities. Globalisation led to geographical unemployment with the rust belt, seeing economic decline. Globalisation may increase overall GDP, but not necessarily improve median wages for average workers.

This show the rise in US real GDP from 1979, a period of globalisation, but real median wages grew much more slower. There are other reasons to explain this apart from globalisation, but it does explain why many felt left behind by globalisation.

See also:

• Impact of globalisation
• The winners and losers from globalisation
• The effects of globalisation for developed and developing countries
• What is globalisation?
• What is globalisation? at Guardian

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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