4.2.6.1 Globalisation

• Globalisation involves the free movement of capital (eg. FDI), labour, goods and services and the exchange of human capital and technology
• Globalisation exploits comparative advantage
• Globalisation encourages specialisation and increase output and world GDP
• Globalisation helps reduce absolute poverty which is one o the UN's Sustainable Development Goals
• Globalisation means specialisation which allows firms to benefit from economies of scale
• Increased competition leads to lower prices and increased consumer welfare
• The law of diminishing returns occurs because there are limits on how much extra inputs can be used without increasing marginal product
• Economies of scale are when average costs fall as output increases due to spreading fixed costs over more units produced
• Globalization

  A process in which national economies and countries have become increasingly integrated and interdependent
• Globalization (OECD definition)

  The geographic dispersion of industrial and service activities (e.g. R&D, sourcing, production, distribution) and the cross-border networking of companies (e.g. joint ventures, sharing of assets)
• Aspects of globalization

  • Increasing trade to GDP ratios
  • Increased capital flows across borders
  • Increased FDI, especially to emerging countries
  • Rise in global brands, including from emerging nations
  • Deeper specialization of labor
  • Emergence of vertical supply chains
  • Increased labor migration within and between countries
  • Greater connectivity between people and businesses (e.g. mobile networks, WiFi)
• Gains from globalization

  • Encourages specialization and trade based on comparative advantage
  • Increases competition and contestability of markets, incentivizing cost-reducing innovations
  • Has contributed to a substantial fall in absolute poverty worldwide
  • Potential gains from free movement of labor between countries
  • Promotes dynamic efficiency gains from diffusion of ideas, skills, and technologies
  • Allows developing countries to overcome domestic savings gaps by borrowing
  • Increases global awareness of issues and systemic risks/opportunities
  • May prompt better government and labor protection
• In 2016, 12.7% of the world's population (over 800 million people) lived at or below the $1.90 per day extreme poverty level, down from 37% in 1990 and 44% in 1981
• Globalization has contributed

  To one of the biggest falls in absolute and extreme poverty the world has ever seen
• Criticisms of globalization from the perspective of different economists

  • Rising inequality and relative poverty

  2. Environmental damage and climate change

  3. Increased volatility and systemic risk

  4. Trade imbalances and protectionism

  5. Structural unemployment

  6. Threat to local cultural diversity

  7. Exploitative working conditions and tax avoidance by multinationals
• Globalization

  A process by which countries become more integrated and interconnected
• Globalization has brought down the level of absolute poverty


  But the level of relative poverty has gone up in many countries
• Globalization and the rise of industrial processes


  Has potentially led to or fast-forwarded climate change and damage to global common resources
• Increased interconnectedness due to globalization

  Has led to greater potential for external shocks to rapidly spread, increasing volatility and systemic risk
• Globalization has led to an increase in the volume and value of trade


  But also increasing trade imbalances between countries and regions
• Globalization has caused a shift of production to lower-cost countries


  Leading to structural unemployment in some countries
• The rise of global brands due to globalization

  Is threatening local cultural diversity
• Multinationals have faced criticism for exploitative working conditions, tax avoidance, and failure to address environmental issues
• Joseph Stiglitz: 'The current process of globalization is generating unbalanced outcomes both between and within countries'
• Global imbalances

  Imbalances in trade, foreign direct investment, and access to markets, ideas, and essential services between and within countries
• Globalisation could lead to the global tragedy of the commons
• With globalisation, dominant global brands, with economies of scale, my squeeze out local producers
• Globalisation could lead to macro economic fragility has the world is more inter connected, so external shocks can spread rapidly eg. supply chain shocks
• Globalisation could cause higher structural unemployment where producers have moved to countries that have cheaper labour