Impact Of Globalization And Challenges Faced By It Economics Essay

As a term globalisation is defined as the merging of the economies and societies all over the world. Out of the few hundred definitions we are going to see some of the definition concerned with the global economy and business perspective.

It can be defined as “is the closer integration of the countries and peoples of the world …brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders” (Joseph Stiglitz, 2003, pg :22).

Expanding, developing, and speeding up of global interconnectedness is meant as globalisation (Held, 1999).

Globalisation “is a fashionable word to describe trends perceived to be dramatically and relentlessly increasing connections and communications among people regardless of nationality and geography” (Tobin, 1999).

Globalisation trend in the past golden years

First thing that strikes us about globalisation is the sharp expansion of the financial and trade market and the government declining in its power in the past two decades. But globalisation has undergone a series of different stages in the early eras. There are several stages of globalisation according to Alex MacGillivray (2006) which we are going to see in detail in this section.

Iberian Carve up (1490-1815):

During this period the Spain and the Portugal with the support of the Pope started the colonial competition around the world with the long distance trade.

Britannic meridian (1815- 1914):

During this period the British Empire leaded the imperial power which enforced the global gold standard and it created round the world shipping.

Sputnik World (1914-68):

This was period in this decolonization took place which lead the USA and Soviet Union to struggle for the influence in the world. There was a rapid economic growth along this period.

Global Supply Chain (1968-2001):

This was the real golden period of globalisation where the entire world was interconnected by supply-chains, internet and the mobile phones. The global free market was growing rapidly and effectively in this period of globalisation stage.

Thermo Globalisation (2001- till date):

This is the current situation where the countries are united and struggling to prove their best in the competitive global market with the other countries. The global communication system and development in the global trade and commerce is blooming at very rapid rate.

The recent tends of the effects of the Globalisation in the world.

World – GDP – real growth rate (%)

Table1: World GDP rate, (CIA 2010).

Figure 1: World Inflation rate, from 2000 to 2009 (CIA 2010).

The GDP growth of world was increasing from the year 2002 to 2008 due to increase in the globalisation trend. Due to out sourcing of jobs and increasing the choice in the product in the global market the GDP rate of the each country increases. Even though the GDP growth increases overall but when we come to the GDP growth in regards to each and every country the developed countries is higher than the developing countries. The wages paid for the out sourced jobs are less compared to that paid in their own countries.

World – Inflation rate (%)

Table2: World Inflation rate, (CIA 2010).

Figure 2: World Inflation rate, from 2000 to 2009 (CIA 2010).

Due to the increase in the globalisation the inflation rate is decreased drastically and now it is maintained due to increasing global market. The employment rate is increasing due to globalisation are certain parts of the world and they even decrease the employment rates especially in developed countries. All these are described in detail in the further sections of the paper.

CHAPTER 2

Is Globalisation a Good Thing?

There is a heated debate about the true effects of globalisation and if it really is such a good thing. Good or bad, though, there isn’t much argument as to whether or not it is happening. Let’s look at the positives and negatives of globalisation, and you can decide for yourself whether or not it is the best thing for our world.

Positive impact of Globalisation

Globalisation has sea of positive aspects in the development and the improvement of the country’s GDP growth, employment rate and the world market. The paper is going to discuss about the positive factors of globalisation.

The global economic resources are circulated all over the world which increases the economic linkage. The commodity, services, capital and human resources has a free flow between the national boundaries. The free trade between countries are increased. Due to this there is an increase in demand which in turn increases the production sectors. Since there is always a competition in the world market the possibly of inflation is reasonably less and the innovative ideas will increase to meet the competition. The communication among the countries is increases this develops the understanding between nations and we have a cultural interchanges among countries (Burande 2006). There is a greater access to foreign culture in the form of movies, music, food, clothing, and more due to this the global village dream becomes more realistic. We don’t have a single power ruling the world after the increase in globalisation so the focus is segregated among all the countries in the world. The standard of living in the developing countries will increase due to the increase in the flow of money. The developing countries are able use the current technologies without problems associated with the development of the technology. The war between the developed countries is decreases due to equality in power. The developed countries can increase the investment on the developing countries due to increase in the liquidity of capital (Poux 2007). The environmental conditions in developed countries are increased. The countries tend to move towards democratic policies. International trade and tourism increases due to increase in globalisation. Due to free circulation of people from different countries is increased this in turn leads to social benefits. Global environmental problems like cross-boundary pollution, over fishing in oceans, climate changes are solved by discussions. International criminal courts and International justice movements are launched to control the crime. The standards applied globally like the patents, copyright laws and the world trade agreements are increased and standardised. The local consumer products are exported in the global market which in turn increases the GDP growth of the countries. The subsidies for the local businesses are decreased. Free trade zones are formed which has less or no tariff rates.

Challenges faced due to Globalisation

Globalisation has lots of challenges to be faced in the both developed and developing countries. It creates inequality in income and lots of other issues which the paper discusses in this section.

The benefits of globalisation are not universal. The rich are getting richer and the poor are becoming poorer. Due to globalisation the major issue is the outsourcing, which provides jobs population in one country and takes away jibs from other countries which lead many without opportunities.  Europeans lose their jobs as the work is being outsourced to the Asian countries. The cost of labour in the Asian countries is low as compared to other countries. The high rate of profit for the companies, in Asia, has resulted in a pressure on the employed Europeans, who are always under the threat of the business being outsourced. This in turn has led to exploitation of labour. Prisoners and child workers are used to work in inhumane conditions. Safety standards are ignored to produce cheap goods. Earlier people had stable, permanent jobs. Now people live in constant dread of losing their jobs to competition (Lovekar n.d.). Increased job competition has led to reduction in wages and consequently lower standards of living. Local industries are being taken over by foreign multinationals. The increase in prices has reduced the government’s ability to sustain social welfare schemes in developed countries. There is increase in human trafficking. Multinational Companies and corporations which were previously restricted to commercial activities are increasingly influencing political decisions. Large Western-driven organizations such as the International Monetary Fund and the World Bank make it easy for a developing country to obtain a loan. However, a Western-focus is often applied to a non-Western situation, resulting in failed progress. Companies are as opening their counterparts in other countries (Fischer, 2003). This results in transferring the quality of their product to other countries, thereby increasing the chances of depreciation in terms of quality. The threat that the corporate would rule the world is on high, as there is a lot of money invested by them. It is often argued that poor countries are exploited by the richer countries where the work force is taken advantage of and low wages are implemented. Although different cultures from around the world are able to interact, they begin to meld, and the contours and individuality of each begin to fade. Bad aspects of foreign cultures are affecting the local cultures through TV and the Internet. There are experts who believe that Globalisation is the cause for the invasion of communicable diseases and social degeneration in countries. There may be invasive species that could prove devastating in non-native ecosystems. There is little international regulation, an unfortunate fact that could have dire consequences for the safety of people and the environment. Companies have set up industries causing pollution in countries with poor regulation of pollution. Terrorists have access to sophisticated weapons enhancing their ability to inflict damage. Terrorists use the Internet for communicating among themselves.

Comparison between Benefits and Challenges

No.

Benefits of Globalisation

Challenges of Globalisation

1

Economies of countries that engage well with the international economy have consistently grown much faster than those countries that try to protect themselves. Well managed open economies have grown at rates that are on average 2 ½ percentage points higher than the rate of growth in economies closed to the forces of globalisation.

There are social and economic costs to globalisation. Trade liberalisation rewards competitive industries and penalises uncompetitive ones, and it requires participating countries to undertake economic restructuring and reform. While this will bring benefits in the long term, there are dislocation costs to grapple with in the immediate term, and the social costs for those affected are high.

2

Countries which have had faster economic growth have then been able to improve living standards and reduce poverty. India has cut its poverty rate in half in the past two decades. China has reduced the number of rural poor from 250 million in 1978 to 34 million in 1999. Cheaper imports also make a wider range of products accessible to more people and, through competition, can help promote efficiency and productivity.

Some countries have been unable to take advantage of globalisation and their standards of living are dropping further behind the richest countries. The gap in incomes between the 20% of the richest and the poorest countries has grown from 30 to 1 in 1960 to 82 to 1 in 1995.

3

Improved wealth through the economic gains of globalisation has led to improved access to health care and clean water which has increased life expectancy. More than 85 percent of the world’s population can expect to live for at least sixty years (that’s twice as long as the average life expectancy 100 years ago!)

Increased trade and travel have facilitated the spread of human, animal and plant diseases, like HIV/AIDS, SARS and bird flu, across borders. The AIDS crisis has reduced life expectancy in some parts of Africa to less than 33 years and delays in addressing the problems, caused by economic pressures, have exacerbated the situation. Globalisation has also enabled the introduction of cigarettes and tobacco to developing countries, with major adverse health and financial costs associated with that.

4

Increased global income and reduced investment barriers have led to an increase in foreign direct investment which has accelerated growth in many countries. In 1975, total foreign direct investment amounted to US$23 billion while in 2003 it totalled US$575 billion.

The increasing interdependence of countries in a globalised world makes them more vulnerable to economic problems like the Asian financial crisis of the late 1990’s.

5

Improved environmental awareness and accountability has contributed to positive environmental outcomes by encouraging the use of more efficient, less-polluting technologies and facilitating economies’ imports of renewable substitutes for use in place of scarce domestic natural resources.

The environment has been harmed as agricultural, forest, mining and fishing industries exploit inadequate environmental codes and corrupt behaviour in developing countries. Agricultural seed companies are destroying the biodiversity of the planet, and depriving subsistence farmers of their livelihood.

6

Increasing interdependence and global institutions like WTO and World Bank, that manage the settlement of government-to-government disputes, have enabled international political and economic tensions to be resolved on a “rules based” approach, rather than which country has the greatest economic or political power. Importantly it has bolstered peace as countries are unlikely to enter conflict with trading partners and poverty reduction helps reduce the breeding ground for terrorism.

The major economic powers have a major influence in the institutions of globalisation, like the WTO, and this can work against the interests of the developing world. The level of agricultural protection by rich countries has also been estimated to be around five times what they provide in aid to poor countries

7

Improved technology has dramatically reduced costs and prices changing the way the world communicates, learns, does business and treats illnesses. Between 1990 and 1999, adult illiteracy rates in developing countries fell from 35 per cent to 29 per cent.

Trade liberalisation and technological improvements change the economy of a country, destroying traditional agricultural communities and allowing cheap imports of manufactured goods. This can lead to unemployment if not carefully managed, as work in the traditional sectors of the economy becomes scarce and people may not have the appropriate skills for the jobs which may be created.

8

Modern communications and the global spread of information have contributed to the toppling of undemocratic regimes and a growth in liberal democracies around the world.

Modern communications have spread an awareness of the differences between countries, and increased the demand for migration to richer countries. Richer countries have tightened the barriers against migrant workers, xenophobic fears have increased and people smugglers have exploited vulnerable people.

9

The voluntary adoption by global companies of workplace standards for their internationalised production facilities in developing countries has made an important contribution to respect for international labour standards. Wages paid by multinationals in middle- and low-income countries are on average 1.8 to 2.0 times the average wages in those countries.

Globalised competition can force a ‘race to the bottom’ in wage rates and labour standards. It can also foster a ‘brain drain’ of skilled workers, where highly educated and qualified professionals, such as doctors, engineers and IT specialists, migrate to developed countries to benefit from the higher wages and greater career and lifestyle prospects. This creates severe skilled labour shortages in developing countries.

10

International migration has led to greater recognition of diversity and respect for cultural identities which is improving democracy and access to human rights.

Indigenous and national culture and languages can be eroded by the modern globalised culture.

Sources

Source: Aus AID, 2004, http://www.ausaid.gov.au/

Source: The World Bank, 2004, http://www.worldbank.org/

CHAPTER 3

Impact on developed countries

Advantages in Developed Countries:

Diversification: The get diversified into the hi-tech industries due to the Globalisation and improvement in the global market.

Production: The productivity improves due to more demand all over the world in the world market. The need for the product increases which in turn increases the productivity.

Benefits: They become very beneficial since most of their needs are met by the foreign markets which might cost more in the local market.

Disadvantages in Developed Countries:

Losing of Jobs: The jobs are transferred to the poorer countries so that the companies need not pay high wages for the jobs done. This in turn reduces the jobs opportunities in developed countries.

Reduction in taxes: The taxes paid on their products are reduced due to increase the sales in the world market which decreases their welfare benefits.

Difference in rich and poor: The rich becomes higher in their standard of living and the poor remains the same or they might even get down in their standard of living.

Impact on developing countries

Advantages in Developing Countries:

GDP Increase: If the statistics are any indication, GDP of the developing countries have increased twice as much as before.

Per capita Income Increase: The wealth has had a trickling effect on the poor. The average income has increased to thrice as much.

Unemployment is Reduced: This fact is quite evident when you look at countries like India and China.

Education has Increased: Globalisation has been a catalyst to the jobs that require higher skill set. This demand allowed people to gain higher education.

Competition on Even Platform: The companies all around the world are competing on a single global platform. This allows better options to consumers.

Disadvantages in Developing Countries:

Uneven Distribution of Wealth: Wealth is still concentrated in the hands of a few individuals and a common man in a developing country is yet to see any major benefits of Globalisation.

Income Gap between Developed and Developing Countries: Wealth of developed countries continues to grow twice as much as the developing world.

Different Wage Standards for Developing Countries: A technology worker may get more value for his work in a developed country than a worker in a developing country.

Reversal of Globalisation: In future, factors such as war may demand the reversal of the Globalisation (as evident in inter world war years), current process of Globalisation may just be impossible to reverse.

Conclusion

Globalisation has both positive and negative impact on all the countries in the world market. Globalisation has lots of positive impact on developing countries like the increase in the GDP growth, increase in employment rate, diversification of products and services and lots more. On developed countries also it has positive impact like the increase in standard of living, purchase of foreign goods at cheaper rates compare to local market and many more. Even though it has lots of positive impact on each and every economy it has a greater amount of negative impact on the economies. The individualistic cultural and behavioural aspects of the economy are badly getting affected. The best goods produced in a country are exported, for making the maximum profit which in turn gives the local market the next grade or the lower grade products. The employment rates in the developed countries decreases due to outsourcing of the jobs. Even though globalisation is very important and a necessary factor in everyday life the negative impact of it affects certain parts of our own nation. The benefits of it are not equally spread all over the world and within the nations. When it is researched more the challenges caused due to globalisation is more than the benefits of it. But at the same time globalisation is necessary for certain period of each one’s life. So Globalisation is even more effective and more beneficial if all the sectors of the world are considered as one. So this paper can be concluded by saying that globalisation has to overcome all its challenges to make it beneficial and best for the world.

Case Study

Emergence of Globalization in India – History

In early 1990’s Indian economy was in major crisis. It faced major problems such as fiscal deficit was increasing; inflation was high at 17%; foreign currency reserves decreased to $1 billion; NRI’s did not invest in India. When Shri P.V.Narasimha Rao became prime minister of India in 1992, he took measures to make the Indian economy one of the fastest growing economies in the world and implemented the new economic model known as Liberalization, Privatization and Globalization in India (LPG).

Steps taken in LPG Model to Globalize Indian Economy

Some of the steps taken in LPG Model to develop Indian economy were: Firstly, Indian currency was devaluated by 18 to 19% to solve the balance of payment problem. Secondly, to make the LPG model work smooth many of the public sectors were sold to the private sector to increase government cash reserves. Thirdly, allowing FDI in a wide range of sectors such as Insurance (26%), defence industries (26%) etc. Fourthly, quantitative restrictions on imports were removed. Fifthly, the peak customs tariff was reduced from 300% to 30%. Finally, facilities available for foreign investors were open to NRI’s.

Merits of Globalization in Indian Economy

Globalization led to the following developments. They are: Firstly, increase in FDI investments helped in economic reconstruction. Secondly, faster exchange of information, partnering with other nations for joint ventures and cultural interaction helped India to globalise faster. Thirdly, changes in technological development improved Indian Economy. Fourthly, outsourcing jobs to India increased employment opportunities. Finally, opening of international market created more opportunities.

Demerits of Globalization in Indian Economy

Few disadvantages during globalization were: firstly, threat of multinational corporations with immense power ruling the globe. Secondly, colonization for smaller developing nations while undergoing changes. Finally, it can lead to threat of cultural imbalance and spread of communicable diseases.

Contribution of Indian Industries for Development of Indian Economy

The strength of Indian companies is seen in recent times when Indian company’s started expanding their territories and acquisitions globally. Phenomenal growth of information technology provided employment opportunities and drastically changed living standards. Lately realised by most multinational companies that India has immense potential has increased industrial developments in India (Malik, 2009).

For, continuous growth India should pay immediate attention to ensure rapid development in education, health, agriculture and mainly infrastructure so that rural economic developments and industrial developments happen much faster. India still has the problem of poverty. The welfare of a country does not percolate from the top, but should be built upon development from the bottom.

Conclusion

India gained highly from the LPG model as its GDP increased to 8.8% 2010 (Trading Economics, 2010). In respect of market capitalization, India ranks fourth in the world. But even after globalization, condition of agriculture has not improved. The share of agriculture in the GDP is only 17%. The number of landless families has increased and farmers are still committing suicide. But seeing the positive effects of globalization, it can be said that very soon India will overcome these hurdles too and march strongly on its path of development.