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F585 Globalisation essay

Discuss whether the impacts of globalisation have been largely


beneficial to developing economies

In the past there have been two similar questions to this, the mark schemes and
case studies of which would be helpful to read.

Jan 10 Discuss the impact of globalisation on developing economies.

Primary product dependency and declining terms of trade trapping developing countries in
a low level of economic development and giving rise to balance of payments problems.
Globalisation does not bring significant benefits to developing economies because of the
lack of access to developed economy markets as a result of continued existence of tariffs
and subsidies of domestic producers this is most often argued in the context of
agricultural trade
Competition between developing economies to attract FDI results in a lack of social
protection, such as minimum wage laws and keeps wages low
The benefits accrue mainly to consumers in the developed world and MNCs originating
from such economies
Temporary gains in employment only, especially where foreign firms are footloose
Inappropriate technology introduced to developing economies
Environmental costs arising from poor regulation of the activities of foreign investors
Limits to the benefits of trade created by continued dominance of intra regional and intra
industry trade rather than inter
The extent to which economic growth generated by increased trade and FDI results in
greater human development
Increased exposure to external economic shock created by a greater dependence on
developed economy markets

JAN

APT Question and Mark scheme:


3. Discuss the extent to which globalisation benefits developed countries at the expense of
developing countries.
(20 marks)

Level 4: Band 3: [18-20 marks] for a reasoned judgement on the extent to which globalisation
benefits the developed world at the expense of the developing world. This judgement will follow
logically from a balanced analytical discussion, and an appropriate use of the stimulus material.
Level 4: Band 2: [15-17 marks] for a developed and balanced discussion which recognises the
advantages and disadvantages of globalisation for developed and developing countries, based
on appropriate use of the stimulus material.
Level 4: Band 1: [11-14 marks] for a basic discussion which recognises the advantages and
disadvantages of globalisation, with undeveloped analytical support and limited use of the
stimulus material.
Level 3: [5-10 marks] for a one-sided or unbalanced analysis of the advantages and
disadvantages of globalisation, in the context of developed and developing countries.
Explicit use must be made of the economists toolkit of concepts and theories, and through
explanation of cause and consequence.
Level 2: [3-4 marks] for application of knowledge and understanding of the advantages and
disadvantages of globalisation, in the context of developed and developing countries.
Level 1: [1-2 marks] for knowledge and understanding of globalisation.

Globalisation is defined as the process through which national economies have become increasingly
integrated and inter-dependent. The word integrated implies ever growing links between national
economies whilst the word inter-dependent implies each country in the global economy is increasingly
reliant on the rest of the world as a source of imports and a market for exports.
As featured in much of the stimulus material, globalisation manifests itself in increased specialisation
and trade, transfers of technology, information and capital, greater labour migration across national
boundaries, the inclusion of more countries in the world trading system, and the continued rise of
multinational corporations and creation of global brands such as Apple, Coca Cola and McDonalds.
But, globalisation is very controversial. Many authorities on the subject see it as inevitable and
desirable for all economies, whilst other experts argue that it is harmful especially to developing
economies. In Extract 5 we read a summary of the two sides of the controversy: the IMF statement
represents the liberal economic orthodoxy, whereas Professor Joseph Stiglitz represents the radical
view that globalisation is harmful to the developing world. Both these points of view will be analysed
and a reasoned conclusion will be drawn.
The IMF view is that globalisation benefits the citizens of the world in both developed and developing
countries. Orthodox trade theory, in the form of Ricardos theory of comparative advantage,
demonstrates that (subject to certain conditions) specialisation and trade which reflects comparative
advantage is mutually beneficial. Therefore, the elimination of trade barriers will ensure that trade
does flow along lines dictated to an increasing extent by comparative advantage and, with each
country specialising in those forms of production for which they are best suited, then world output will
be increased, thus raising the standards of living for people throughout the world. Protective barriers
to trade (such as tariffs and quotas) will reduce world output and, therefore, the living standards of
people throughout the world. Moreover, protective measures prop up inefficient producers and reduce
the amount of competition in the market. This reduces consumer choice and results in higher prices.
We can also argue that barriers reduce the transfer of capital and technology to countries in need of
investment and new technology, further reducing world output, and undermining dynamic changes in
comparative advantage which inevitably occur.
The IMF argues that globalisation has opened up the economies of the world and, as a result, the
percentage of people in developing countries living on less than $1 per day has been halved.
Admittedly, globalisation has not eliminated absolute poverty (especially as $1 per day is a very low
benchmark to set as a measure of absolute poverty), but the argument is that globalisation does
reduce world poverty. In essence, the IMF case relies on arguments in favour of the trickle down
process to raise living standards, a process particularly relevant in developing countries. This means
that the fruits of an increase in national GDP are enjoyed first by a minority employed in the modern
sector of the economy, but as those people spend their increased income then the benefits will
eventually trickle down to the poorer people, including those employed in the significant traditional
sector of a developing economy. The IMF and the UN, in its Human Development Report, insist that
globalisation does reduce poverty by trickle down and that the main threat to poverty elimination lies

in misguided measures to prevent the process of globalisation. Indeed the IMF goes on to point out in Fig. 5.1 - that developing countries have most to gain from globalisation.
Whilst accepting many of the arguments in the orthodox economic case, there is the radical, antiglobalisation case which, in Extract 5, is represented by a passage from Joseph Stiglitzs critique of
globalisation. He argues that globalisation increases the economic welfare of some people at the
expense of that of others, even within developed countries. In particular, he argues that it particularly
benefits people in developed economies at the expense of people in developing economies. There
are a number of points that should be made to explain and analyse the Stiglitz view.
Firstly, it is a misreading of orthodox trade theory (Ricardos theory of comparative advantage) to
assume that specialisation and trade along the lines of comparative advantage is always mutually
beneficial. Trade theory does allow for situations in which the benefits are one sided (ie one party
benefits at the expense of the other). Mutuality of benefit only applies if the ratio of exchange lies
within the two opportunity cost ratios.
Secondly, the Prebisch Singer Hypothesis demonstrates that countries exporting primary produce,
many of which are developing economies, face declining terms of trade in the long run. This is
because of low income elasticity for primary products such as food. Hence, a rise in output reduces
prices with the result that these countries have to export more of their products merely to buy the
same quantity of imports as before. The problem is compounded if the price of manufactured goods
is rising. Therefore, there is a danger of developing countries being trapped in a low level of
development. The Prebisch Singer Hypothesis has been used by developing countries to justify
protection (eg the adoption of an import substitution industrialisation strategy).
A third argument that supports the radical anti-globalisation view is that trade is increasingly
dominated by large multinational corporations based in developed countries. These corporations
exploit their monopolistic power, raise consumer prices, and add to their abnormal profits by exploiting
labour (especially in developing countries). The abnormal profits accrue in the developed world
leaving the developing countries in relative poverty. In addition, a growing proportion of world trade is
intra-regional trade. For instance, 71% of the trade of EU countries is intra-EU trade. We can accept
that this is partly the result of trade creation within a trading bloc, but some part of this is the result of
trade diversion, which means that the EU consumers and businesses tend to buy from internal
sources rather than from outside the Union, where goods and services may be better value for money.
Finally, the process of trickle down should be considered. The pro-globalisation case is that the
benefits will trickle down to the poorest people in the poorest countries. But this ignores the fact that
the higher wages in the modern sector of developing economies are often spent on imported goods
(and often the high incomes are enjoyed by ex-pat worker from abroad). If this is the case, then the
multiplier impact of the new modern sector through more traditional sectors, is more limited than might
otherwise be expected, and the fruits of development do not trickle down. In a sense, this is the
difference between the IMF view and the Stiglitz view: the IMF argues that trickle has not been
allowed to complete the process of poverty reduction, whereas the anti-globalisation case that there
are forces in the global economy that prevent the benefits trickling down, so that the rich get richer at
the expense of the poor.
In theory, there is a strong case for tempering globalisation as it negatively affects the developing
world. In the long run it is undoubtedly true that increased specialisation and trade along the lines
dictated by comparative advantage is beneficial, but people in developing countries are not enjoying
the benefits of the globalisation process. The IMF might argue that the process needs to be given
more time to succeed, but the counter argument is that this is little comfort to the poor of the
developing world, especially when the forces that prevent benefits trickling down are taken into
consideration.

Notes from Barry

Theme 1 - Globalisation will help raise living standards if the DE (Developing


Economy) gains export led growth and so gains CA and specialises where it has
the greatest efficiency high grades will develop this theme explaining the many
gains from EOI productive efficiency from competition, economies of scale,
foreign earnings etc. Also focusing on CA and the creation of new CAs but this
depends on overcoming obstacles and often on effective government that
creates infrastructure, rule of law etc. and a good business environment with tax
incentives for new investment in new industries including attracting FDI. Might
not be effective/take a long time to work/benefit a few in a few local areas but
destroy traditional industries, and most may not get jobs and so may not gain.
Theme 2 FDI, students study my FDI hand-out. FDI brings essential capital,
shifting AS to the right, brings foreign skills, technology and currency, and avoids
the problem of shortage of capital and management skills in a poor country.
However there is the dominance of the local economy by large MNCs, they may
spend little locally, have capital intensive processes and employ or train few
locals.
Theme 3 - EOI might not succeed if the MDCs (more developed country) place
trade barriers against DEs exports. Argue the harm caused but then say
increasingly the bigger DEs can negotiate barriers down through combining as a
bloc within the WTO. Also it may be sensible to trade within a regional free trade
zone, within Africa, South East Asia or Latin America. This way they gain the
benefits of trade, but static from CA and dynamic as they develop new CAs and
move upmarket and diversify.
Theme 4 - Globalisation may lead to damage from heavy migration, as people
leave to settle in the MDCs. This can cause a heavy capital loss as skilled people
leaving in their early 20s represent all the investment in bringing them up and
educating them. They are desperately needed, especially doctors, nurses,
entrepreneurs etc. However we could argue migration can bring benefits if these
people could not get jobs anyway, or they send back high remittances or go
home with skills etc.
Theme 5 - Dependency. A country may end up specialising in a few
commodities, basically supplying a narrow range of food and raw materials for
the rich nations. This may trap them in low prices/unstable prices and sales with
terrible losses and problems in deep downturns. This instability hits jobs, export
earnings, tax revenues etc. Also the instability of AD that follows makes it very
difficult to establish local industries. The wrong type of EOI or FDI can make a
country too dependent on the global economy with its booms and slumps and
even worse trap it at this basic, low level of CA. The crucial thing is to
industrialise and diversify so they start to move upmarket to produce high value
exports and increase productivity and investment. Only in this way can the
country hope to gain form globalisation, and this depends on luck and effective
governments
following
good
policies
that
help
diversification
and
industrialisation.
Other themes may be found in the stimulus material and a good student will
develop them, but above relate my themes above and others to the material.
A good conclusion must be present, one that points out that it depends on what
type of globalisation, depends on effective governments and policies. Stiglitz is

pessimistic as so many people have failed to gain, on the other hand hundreds of
millions have been drawn out of absolute poverty by the rise of globalisation in
the last 30 years, it all depends whether the masses of poor people gain much
more than some lose through the rapid and uncertain changes that globalisation
brings.

Notes on Globalisation
The whole pace of business is moving faster. Globalisation is forcing companies
to do things in new ways Bill Gates

Advantages of Globalisation
1) Free Trade
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:
Greater competition
Wider choice of goods
Bigger export markets for domestic manufacturers
2) Free movement of labour
Increased labour migration gives advantages to both workers and recipient countries:
Increased opportunities to look for work elsewhere
Reduce geographical inequality. This has been quite effective in the EU,
with many Eastern European workers migrating west.
New / more efficient management styles can be created
Evaluation:
However jobs in advanced economies may drain away to developing countries as firms
switch their production to countries with comparative advantage
Moreover skilled workers in developing economies may drain away to advanced
economies with the incentive of higher pay
3) Increased Investment
Globalisation 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.
Benefit to investors Higher returns
Benefit to recipient Economic growth

4) Greater Competition
-

Domestic monopolies used to be protected by lack of competition.


However, globalisation means that firms face greater competition from foreign firms.
Therefore, X inefficiency falls, and it encourages dynamic efficiency (innovation)

5) 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.

Disadvantages of Globalisation
1) Costs of interdependence
Globalisation has meant that trade between countries has increased, which has also meant that
interdependence has increased.
The disadvantage of this is that issues arising in one country are more likely to spread to
other countries.
For example, if a recession hits the USA, then the impacts of recession are likely to hit the
U.K. How?
Recession results in lower foreign direct investment (FDI)
Lower investment = lower or even a fall in growth
A sustained period of lower rate of growth = recession
A major example of this was the financial crash of 2008
Evaluation: This means that due to globalisation, the macro economic performance of the
U.K. depends on the performance of countries that trade with the U.K.
2) Infant Industry Argument
Free Trade can harm developing economies. Many developing economies have a comparative
advantage in producing primary products.
However, in the long term producing these goods have certain disadvantages:
Low income elasticity of demand. As incomes rise, demand for primary products increases
only slowly. Therefore relying on primary products limits economic development.

Price volatility
Primary products have a volatile price because supply and demand are inelastic.
In this case, it is good to diversify the economy which developing economies struggle to do.
3) Tax competition and Tax Avoidance
Multinational companies like Amazon and Apple, have set up offices in countries such as
Ireland and Luxembourg with very low rates of corporation tax.
This means they pay very little tax in the countries where they do most of their business.
Governments are then compelled to increase taxes on VAT and income tax.
This hurts the domestic population as well as domestic business owners.
4) Environmental costs
Rapid growth and development have long lasting impacts on the environment:
Damage to ecosystems
Land degradation
Deforestation
In China regions such as Bejing, are currently suffering the environmental costs of
globalisation. However, globalisation helps to control environmental damage, thanks to
international agreements like the Kyoto protocol, which established pollution permits.
5) Controversial activities of multinationals
Many people regard the activities of multinational corporations as un-ethical. For example in
countries such as Indonesia, companies exploit the lack of regulation by offering very low
wages, dangerous working conditions and long hours.
Evaluation:
However it is often argued by multinationals that living standards in developing countries
would be lower without the investment in capital provided by the company.
6) Labour (brain) 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.

7) Less Cultural Diversity


-

Globalisation has led to increased economic and cultural hegemony.


With globalization there is arguably less cultural diversity, however it is also led to
more options for some people.