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Analysis on Benefits on Developing Countries from Globalization Economically Essay Sample

Analysis on Benefits on Developing Countries from Globalization Economically Pages
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Globalization is defined as the growing economic interdependence of countries worldwide developed by variances of crossborder transactions in goods and services and by the higher mobility of production such as a more rapid and widespread international diffusion of technology (IMF, 2006).

The process of globalisation mostly influence developing countries. There are some driving forces behind economic globalisation which are reduction in transport and communication costs, reduced policy barriers to trade and investment, an increase in availability to gain technology, and the transmit speed across national boundaries. The aspects of economic globalisation are liberalisation of international trade, finance and production activities and growing power of transnational corporations (TNCs) and international financial institutions (Khor, 2000). Globalisation has some functions related to increase in international trade, financial flows and foreign direct investment (FDI) and so on. The essay would discuss globalization economically benefit developing countries through four aspects on both forces and threats.

Main Body

1. Positive Impacts of Globalization on Trade Liberalization

Globalisation can accelerate economic growth and reduce poverty by trade liberalization such as promoting foreign direct investment (FDI) and by fostering competition and macroeconomic stability, thus allowing developing countries to exploit their economies of scale (Bhagwati, 2004 and Loungani, 2005).

FDI plays an important role on promoting economic growth. Besides of benefiting to domestic investments, it assists in innovation and technology transfers, enhances the foreign technology absorptive capacity, promotes international trade integration and international mobility of capital can make more efficient allocation of world savings. Additionally, several other positive externalities linked to FDI, may have significant impact on economic growth because FDI combines productivity gains and technology transfers together, which include the introduction of new processes, managerial skills in the domestic market, employee training, international network of production, and access to markets. (De Mello, 1997)Bhagwati (1978), Balasubramanyam, Salisu and Sapsford (1996) suggest that whether FDI would promote economic growth depends on whether the country adopts an Import Substituting Strategy of Industrialization (ISI) or an Export Promotion Strategy (EP) with. The one adopts an export with promotion strategy would promote economic growth through trade.

Therefore, over past two decades, world FDI has gone up more than two and a half times as fast and daily world foreign exchange turnover roughly four times as fast as world GDP. Figures from UNCTAD indicate that FDI inflows to developing countries increased by 28 times between 1980 and 2000. (World Bank, 2001)

Besides, globalization results in grow competition. Although some fear competition, it still essential to have beneficial effects on increasing production or efficiency. With their implications for increases in production on a worldwide basis, competition and the widening of markets can lead to specialization and the division of labor on market system. Besides, economies of scale and scope can potentially benefit to costs and prices reductions. Other benefits of globalization include the gains from trade in which both parties gain in a mutually beneficial exchange. Additionally, because of the rationalization of production on a global scale and the spread of technology and competitive pressures for continual innovation on a worldwide basis, globalization is also conducive to increased productivity. These beneficial effects of competition stemming from globalization show its potential value also on increased output and higher real wage levels and living standards. Of course, there is the distributional or equity issue to be considered.

2. Constraints on Globalisation on Risk Economies

Obviously, globalization has both positive and negative effects. There are some negative effects that may lead to potential conflicts.

China and India seem similar that had extremely low per capita incomes in 1980. The World Bank shows GDP per capita for India was roughly equal to average of low-income countries, while China was two-thirds as India. But since 1980, both countries have sustained impressively rapid growth. GDP reached more than doubled in India and increased at seven-fold in China. (World Bank, 2002)

Patterns of economic growth for China and India are different by constructing growth accounts. China has explosive growth in its industrial sector aggressively to lower its trade barriers and to attract FDI inflows. while India’s growth started primarily by rapid expansion of service-producing industries rather than low-wage manufacturing. Chow, 1993; Bosworth, 2007) Although China and India are not the dominant force in the world economy, their industrialization has given an unprecedented shock to the world economy. Trade linkages with Asia are transforming patterns of world trade which can be a risk of economic enhanced by globalization.

Besides, globalisation has had a negative impact on countries inequity. Bhagwati states that the benefits do not necessarily trickle down to
alleviate poverty. Krugman & Venables (1995) assert that globalisation has the potential to benefit less-developed nations but non-linear between globalisation and convergence, with initially exacerbating world inequality but then reducing it. For instance, falling transport costs below a threshold need core nations exploit greater economies of scale in manufacturing but to the detriment of manufacturing sectors in peripheral nations resulting in suffering real income declines. Hence, labour demand will fall in peripheral nations and rise in core nations. Peripheral nations will industrialise and are victims suffer further falls in transport costs and increases in trade to encourage economic growth. (Michelle Baddeley, 2006,393)

3. Impacts of Globalisation on increasing wages.

The economy uses more workers and produces more with the same amount of wage expense. The country uses more labor with lower initial labor productivity abroad and domestic workers were kept in order to coordinate the outsourced processes, and pays lower wages. (Bhagwati et al. 2004)

Profit margins are squeezed leading that productivity goes up and price increases are dampened (IMF, 2006, and OECD, 2006). Globalization also facilitates positive technological spillovers, thus speeding up the diffusion of technological innovations. In the global goods and services markets, FDI in low-cost countries drives up competitive pressure and dampen wage claims as production relocates. Besides, the trand that new production technologies increase productivity and reduce production costs would eventually dampen prices. (Flanagan, 2006)

4. Negative Impacts of Globalisation on Enlarging Wage Gap

The globalisation widens class divisions and will exacerbate distributional conflicts. (Cornwall, 2001). To labour market outcomes, globalisation is the main cause for rising inequality about widening gaps between educated and uneducated labours both in terms of wages and unemployment rates (Wood, 1998). Besides, the impacts of globalisation on employment and wages similar to that of skills-biased technological innovation; the demand for skilled labour in less developed countries will rise but for unskilled labour will fall contributing to larger wage gap (Feenstra, 1998). Factor-price convergence in earlier eras of globalisation result in improving conditions for unskilled workers in Europe but deteriorating conditions for poor unskilled worker (Williamson, 1998). So globalization can encourage factor price equalization in case of treat lower relative incomes for low-skilled workers as victims. (Nancy Birdsall, 2005)

Conclusion

The essay has analyzed how economical globalization benefit developing countries on both pros and cons. Therefore, trade liberalisation appears to increase economic growth in both FDI and competition in the long run as well as motivate productivity and increasing wages. However, on the probable situation of economic crisis and inflation, there are also threats to development such as countries development inequity and growing wash gap and so on. Overall, the challenge of globalization will require truly cooperative efforts of the great nations not only developing countries. The joint activity of new political arrangements and institutions could solve global problems in the long run.

References:

the World Bank, World Development Indicators 2001.

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Balasubramanyan, V. N., Salisu, M., & Sapsford, D. (1996). Foreign Direct
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Bhagwati Jagdish,Arvind Panagariya and T.N. Srinivasan, (2004), “The muddles over outsourcing”, Joumai of Economic Perspectives—Volume 18, Number 4—Eall 2004—Pages 93-114

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Loungani Prakash, and Razin Assaf, (2001), “How Beneficial Is Foreign Direct Investment for Developing Countries”, Finance and Development, 38 (2).

IMF. 2006. World Economic Outlook Spring 2006. Chapter III: How Has Globalization Affected Inflation? Washington, D.C.

OECD. 2006. Economic Outlook 79. Box I.5.

World Bank. 2002. World Development Indicators.

Chow, Gregory C. 1993. “Capital Formation and Economic Growth in China.” Quarterly Journal of Economics, August, 108(3): 809–42.

Bosworth, Barry, Susan M. Collins, and Arvind Virmani. 2007. “Sources of Growth in the Indian Economy.” India Policy Forum 3, pp. 1–50.

Krugman, P. & Venables, A. J. (1995) Globalization and the inequality of nations, Quarterly Journal of Economics, 110(4), pp. 857–880.

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Khor, M, 2000. Globalisation and the South: Some critical issues. UNCTAD, Discussion Papers, No 147, April.

Cornwall, J. & Cornwall, W. (2001) Globalisation, the distribution of power, and full employment, in P. Arestis, M. Baddeley & J. McCombie (Eds) What Global Economic Crisis (London: Palgrave Macmillan), pp. 104–121.

Wood, A. (1998) Globalisation and the rise in labour market inequalities, Economic Journal, 108(450), pp. 1463–1482.

Feenstra, R. C. (1998) Integration of trade and disintegration of production in the global economy, Journal of Economic Perspectives, 12(4), pp. 31–50.

Williamson, J. G. (1997) Globalization, labour markets and policy backlash in the past, Journal of Economic Perspectives, 12(4), pp. 51–72.

Loungani, Prakash, 2005. “In defense of globalization,” Journal of International Economics, Elsevier, vol. 66(2), pages 544-548, July.

Michelle Baddeley(2006, P393), International Review of Applied Economics

Flanagan, Robert J., (2006). Globalization and Labor Conditions.Oxford: Oxford University Press

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