Integrating the world economy
Definition
Globalisation: the increasing integration and interdependence of national economies into a single world economy through flows of goods, services, capital, labour and technology.
Interdependence: the way economies come to rely on one another, so a shock in one country can spread to others.
Transnational corporation (TNC): a firm that owns or controls production in more than one country.
- It operates through cross-border flows of goods and services, capital, labour and technology.
- It is a broad process, so reducing it to rising trade alone misses much of what is happening.
Key Idea
- Globalisation links economies through trade, investment, migration and the spread of technology.
- It makes national economies more interdependent, so a shock in one can spread to others.
- It has advanced rapidly in recent decades but is neither new nor inevitable.
Characteristics of globalisation
- Trade in goods and services has risen faster than world output, raising trade as a share of GDP.
- Foreign direct investment and short-term capital flows move more freely across borders.
- Migration of workers between countries has increased.
- Transnational corporations spread production across global supply chains.
- Technology, information and ideas diffuse quickly between economies.
Example
- An iPhone is designed in the United States, uses chips from Taiwan and South Korea, and is assembled in China, a single product drawing on many economies.
- Capital can move between financial centres such as London and New York in seconds.
- Firms locate each stage of production wherever unit costs are lowest.
Example
- Openness is often measured as (exports + imports) as a share of GDP; take the UK with exports of about £850bn, imports of about £900bn and GDP of about £2,700bn.
- Trade is worth about 65% of GDP, confirming the UK is a highly open, globalised economy.
Causes of globalisation
Definition
Foreign direct investment (FDI): investment by a firm to acquire or build productive assets in another country.
Technology transfer: the spread of production methods, know-how and equipment from one economy to another.
Transfer pricing: the practice of setting the prices on trades between a TNC's own subsidiaries so as to shift profits to low-tax countries.
- Trade liberalisation through the WTO and regional agreements has lowered tariffs and quotas, so trade flows more freely.
- Liberalisation of capital markets has removed many controls on cross-border finance.
- Containerisation and cheaper transport have cut the cost of shipping goods across the world.
- Advances in information and communication technology have slashed the cost of coordinating across borders.
- The growth of transnational corporations has spread production and investment worldwide.
- Political change, such as China's entry to the WTO in 2001 and the opening of the former Soviet bloc, added vast new markets and workers.
Note
- These causes reinforce one another, so globalisation has tended to accelerate over time.
- Cheaper transport and communication make liberalised trade and investment easier to exploit.
- Governments can also slow or reverse the process through protectionism, so it is not guaranteed to continue.
Benefits of globalisation
- Access to world markets and investment can raise economic growth and living standards.
- Larger markets let firms exploit economies of scale, which lowers average costs and prices for consumers.
- Consumers gain wider choice and cheaper imported goods.
- Technology transfer and inward investment can bring jobs and skills to developing economies.
- Greater competition can raise efficiency and spur innovation.
Example
- After joining the WTO in 2001, China integrated into global supply chains and export markets.
- Rising exports and inward FDI fuelled rapid growth that lifted hundreds of millions out of extreme poverty.
- The same shift displaced manufacturing jobs in the United States and Europe, so the gains and losses fell on different groups.
Costs of globalisation
- Domestic industries that cannot compete may decline, causing structural unemployment.
- Income inequality can widen within countries as the gains flow unevenly to owners and skilled workers.
- Workers in low-cost locations may face poor pay and conditions.
- Transfer pricing by transnational corporations can erode national tax revenue.
- Rising production and transport can increase environmental damage and carbon emissions.
- Closer integration transmits shocks quickly, so a crisis in one economy can spread worldwide, as in the 2008 global financial crisis.
Note
- The benefits and costs fall unevenly across countries, producers, consumers and workers.
- So globalisation creates winners and losers rather than one uniform effect.
Evaluation: good or bad?
- In favour: it can raise growth, lower prices, transfer technology and help lift millions out of poverty.
- Against: it can cause job losses, widen inequality, encourage exploitation and harm the environment.
- The balance depends on the country, the group affected and whether governments support those who lose out.
- On balance it tends to raise total world output, but whether it improves welfare depends on how the gains are distributed and managed.
Exam technique
- Define globalisation across trade, investment, migration and technology rather than trade alone.
- For consequences, separate benefits from costs and say who gains and who loses.
- Support points with a named case such as China's WTO entry.
- Reach a supported judgement rather than a blanket verdict.
Common Mistake
- Do not describe globalisation as simply more trade, since it also covers investment, migration and technology.
- Do not assume it is uniformly good or bad, because it creates winners and losers.
Self review
- What is globalisation?
- State three characteristics and three causes of globalisation.
- How can globalisation widen inequality within a country?
- Explain one benefit and one cost of globalisation for a developing economy.
- Why is a blanket verdict on globalisation inappropriate?
