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, effectively reducing barriers between countries.
Benefits of globalisation
1. Free trade 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:
- Lower prices for consumers
- Greater choice of goods, e.g food imports enable a more extensive diet.
- Bigger export markets for domestic manufacturers
- Economies of scale through being able to specialise in certain goods
- Greater competition
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.
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 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.
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.
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.
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.
4. Less cultural diversity
Globalisation has led to increased economic and cultural hegemony. With globalisation there is arguably less cultural diversity; however, it is also led to more options for some people.
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 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)