- Explain the factors that have led to the process of increased globalisation in recent years (40 marks)
The process of globalisation is mainly motivated by the desire of corporations to increase profits and by governments intent upon tapping into the potential economic and social benefits that come from increased trade in goods, services and the free flow of financial capital. Among the main drivers are the following:
Technological change- reducing the cost of transmitting information (sometimes known as the death of distance). The internet has allowed information and communication technology to flourish. Internet communications with branches, suppliers, plants, distributors and customers generally do not require a physical presence in another country, while much can be achieved through licensing and franchising. As a result administration costs have fallen as firms from different parts of the globe can trade efficiently and effectively.
Another influential factor is the desire to circumvent tariff and non-tariff barriers by regional trading blocs. For example, the World Trade Organisation (WTO), which replaced the former GATT, was set up to help promote free trade by persuading countries to abolish tariffs and other barriers to open markets.
Supporters of the WTO argued that there could be substantial economic welfare gains if there was integration of the world’s economy into a single international market. Based upon Ricardo’s Theory of Comparative Advantage, it was argued that free trade was likely to benefit countries. By allowing each country to specialise in full or part production would be concentrated in locations which enjoy comparative advantage. It was further argued that specialisation in one type of export was likely to improve its quality and perhaps reduce production costs. For example, Belgian chocolates are exported worldwide. Their high quality is due to expert skills that their producers developed, a process known as learning by doing. Their average costs have also been lowered, by the use of specialised labour and capital; through specialised knowledge and research and development and also perhaps through economies of scale.
Another potential advantage is particularly relevant for countries which have previously shut out foreign imports. Not only have their consumers been deprived of choice, but their producers, owing to the lack of international competition, may lack the drive to achieve productive efficiency and may have exploited monopoly positions in their home market.
However, the arguments against the abolition of trade and tariff barriers put forward are that the rich countries have tended to maintain protectionist policies (for example, the long delay in the agreed phasing out of the Multifibre Agreement, which makes it difficult for less developed countries to export textiles to the EU), and that poorer countries do not have the type of manufacturing infrastructure and economies of scale to enjoy the benefits of free trade.
The growth of multi-national firms has contributed to the rapid increase in globalisation. Firstly, a multi-national firm can be defined as a company that produces in more than one country. In practice, globalisation has involved MNCs because the scale of their investment is such that the sales of the largest MNCs exceed the entire GDP of many countries. Many MNCs have moved their production from the west to developing countries because they want to benefit from that country’s comparative advantage, usually access to much lower labour costs. Due to the low standard of living in many developing economies and lack of government legislation MNCs often locate in areas of high unemployment. Therefore they are likely to benefit from a continuous cheap supply of labour. In theory, this has led to the international division of labour.
National economies have become increasingly integrated, leading to a growth in the number of trading blocs and economic unions. The process has been facilitated by the increased mobility of both physical and financial capital, the latter reflecting the trend towards the abolition of capital controls, the deregulation of financial markets, and the opening up of capital markets in LDCs and in the former Soviet bloc.
Is the deregulation of financial markets a valid argument? I’m not sure how to phrase it. (Done!)
- Outline the main economic implications of globalisation for the U.K economy (40 marks)
The long term impact of the globalisation process is likely to cause further changes to the pattern of trade in goods and services. There will be many economic implications which will decide where Britain’s comparative advantage will lie in the increasingly competitive global economy.
In the U.K, there has been an increased pattern of global outsourcing. For example: Dyson moving to Malaysia, Zurich Financial Services opening a call centre in India and Marks and Spencer sourcing its garments in Asia. The main economic implication is that there has been a significant increase in structural unemployment. However, it must be said that the particular group of people whom have been affected are the unskilled and single-skilled workers usually in social classes C2, D and E. The rise in international unemployment can have various economic implications on the U.K economy. The main cost to society is the output which is lost. This is the opportunity cost of unemployment. The output is lost for all time. Even if unemployment later falls the lost output can never be regained. People will enjoy fewer goods and services than they could have consumed with higher unemployment. Unemployment depresses incomes and thereby deprives the government of both direct and indirect tax revenue. Whilst government revenue will fall as unemployment rises, it will have to increase its spending on unemployment related benefits, which reduces its scope for spending on essential public services.
There has also been a trend of rising import penetration from relatively cheaper manufactured products produced overseas – e.g. textiles, steel and semi-conductors. The increase in imports (due to reduction in tariff barriers, improved transportation etc) and the relative decrease in exports will and has led to various economic implications for the country’s balance of payments; the manufacturing (and thus visibles) deficit has been increasing for five years. In the U.K, real incomes have been rising for the active population. In addition, according to official statistics, when real incomes are rising, consumers in Britain demand more goods made abroad compared to domestically produced goods. Therefore, firms have to respond to this demand which directly affects the current account in the balance of payments. There is a worsening of the trade deficit (i.e. visible/invisible imports exceed visible/invisible exports) which can lead to problems such as a fall in the trend level of economic growth.
The two economic implications I described above can adversely affect aggregate demand and supply in the U.K. This is shown in the diagram below:
The current wave of globalisation places increasingly heavy emphasis on human capital as a factor determining long run economic growth. The U.K has probably lost forever its comparative advantage in producing relatively low value added manufacturing products, whereas the global demand for high value added manufacturing products and high skilled services remains strong. This will require substantial improvements in the skills and the flexibility of the workforce.
There is also the impact of globalisation on the British Government. Some economists believe that globalisation will reduce the ability of governments to levy business/corporate taxes because firms can move their production to countries offering the lowest tax base.
Nevertheless, the increase in globalisation can be seen to be positively affecting the British economy. There has been rapid expansion of trade flows in the last 10 years between developed industrialised countries, particularly in the same trading bloc. This therefore has benefited consumers as they are able to access a greater variety of products from around the world.
The CBI Policy statement on Manufacturing and Globalisation (March 2000) stated that,
‘We should no longer try to compete in international markets on the basis of low cost, low value added manufacturing, but rather through innovative, high technology products and processes.’
U.K firms have obviously and increasingly fulfilled the criteria above as there has been a rapid growth of trade in high value knowledge based services, while U.K transnational companies have established a global trading platform in markets where they have a significant position. Therefore it can be said the U.K holds a relatively stronger position in international trade in the service sector, particularly in financial services, where overseas earnings are at a record level.
In addition to this, there has been high levels of foreign direct investment (both inwards and outwards). The U.K economy is a favoured venue for overseas direct investment. Many factors explain this trend; however improvements in the supply side performance of the economy seems to be an influential factor.
There has been a long-term structural deficit in goods, widening to over 33 billion pounds in 2001; however the U.K still remains a net exporter of oil, though the supply may run out by the middle of the current decade. In addition to this, the U.K still retains a comparative advantage in goods such as chemicals. Nevertheless, overall, due to the process of globalisation the U.K has seen an absolute fall in manufacturing employment, to below 4 millions, which has led to unemployment mainly of unskilled workers. Many workers have been forced to re-train and work in the service or ‘hi-tech’ sectors.
However, innovation, productivity, technological processes and capital investment have allowed U.K firms to compete with other firms on a global scale in. Therefore it can be said that globalisation will intensify the present need for the British economy to become more competitive in price and non price terms.
