Today’s world economies have been transformed to a more global outlook through the liberalization of markets and technological shifts, making the world more or less a global village. According to Thai, Rahm and Coggburn (2007, p.2) globalization involves progressive economic growth that goes beyond geographical boundaries fueled by liberalization of international trade and investment policies. However, Held and McGrew (2003, p.68) describe globalization as a process that involves transformation of social relations and transactions, generating interregional networks of interactions, and exercise of power. In a broader scope, globalization involves political interdependence and interconnectedness in trade and cultural exchange and communication.
Over the years, globalization has had mixed effects on international political economy with some notable benefits in the ease of access to goods and services and resources mobility. However, there have been protests that unchecked globalization deprives the poor nations off their resources leading to a wider gap between the developed and developing nations. Economic integration to some extent tends to erode political sovereignty of nations with global institutions exercising the control of the economic activities (Gupta, 1997 p.3).
Technological advancement has also contributed immensely to the liberalization of markets creating efficiencies in production and communication. However, economic globalization has been the major contributor to the widespread migration of people seeking greener pastures in foreign markets. Since the World War 1 of 1914, the globalization has reached unseen levels.
Brief history of globalization
The genesis of globalization dates back to the second half of the nineteenth century and pre-World War I of 1914. This period saw a more rapid growth in poor countries than capital rich countries due to spread of capitalism and flow of capital. The freedom of trade enhanced rapid growth of export of raw materials and labor mobility from less developed countries of Asia, Africa and Latin America, as well as capital flow from mostly developed nations who moved in to exploit the emerging markets (Bairoch & Kozul-Wright: 1996). However, the trend halted abruptly due to emergence of war in 1914 as nations fought for political and military supremacy.
Effect of free trade on poor nations
Positive Effects of free trade
The free trade is forms of trading that entrench to enhance fair and equitable prosperity of nations. In the pre-world War I globalization, free trade contributed a lot in transforming poor nations by allowing freedom of flow of goods and services, and unrestricted flow of capital from the developed countries. Since the 1914, globalization has been growing rapidly especially in the latter years of the twentieth century, thanks to technology which has led to efficiency of markets and production. This growth is to a great extent being linked to freedom of trade necessitated by improved transportation and communication.
One straight benefit of free trade to the poor countries is the free flow of capital, labor and goods and services. Developed nations have been in the forefront in spreading their investments to the global market creating jobs and market for raw materials for the poor countries. According to Gupta (1997:30) economic prosperity of developing countries is assured by liberalization which entails free trade, capital and labor mobility and open markets. Moreover, some of the Far East Asia countries such as china, Korea and Indonesia have been able to reap favourably from this kind of liberalization to their current status of emerging markets, although they were unable to match European countries that they were in free trade together during the period before 1914.
Current free trade is more universal than that pre-1914 era leading to more liberalized global competition. Poor countries predominantly oriented to exports are likely to gain from global competition, with free trade ensuring liberalization of prices in international trade. This competition ensures the exporting economies strive to maximize productivity through efficient allocation of scarce resources with limited government intervention (Onyemelukwe, 2005, p.21).
Moreover, the current globalization has led to proliferation of liberalized production chain with the output having a more global appeal, a scenario that has enabled most of the Asian economies to flourish in the global market.
Since the 1914, globalization has taken the shape of specialization which when combined with free trade enables a player in the global market to gain competitive advantage. The element of specialization brings about division of labor which enhances productivity, an important aspect to gaining local competitive advantage and benefits arising thereof like economies of scale. In fact, free trade has facilitated companies enjoying economies of scale to gain competitive advantage in the global market. Poor countries have had their share on this front by provision of mostly commodities they are comparatively advantaged with, like agricultural produce and minerals.
The comparative advantage will have a more fulfilling benefit under free trade than under controlled trade due to balanced price ratio of commodities. In other words, a capital intensive producer will buy commendations from a labor intensive producer, and in the process creating efficient utilization of the scarce resources and even distribution of incomes. However, practical situations have shown that poor countries export raw materials to developed countries in exchange of manufactured goods. To counter the challenges associated with comparative advantage, most countries opting for free trade have liberalized their trade by eliminating non-tariff barriers to trade and reduced import tariffs (Gupta, 1997, p.331).
Globalization of trade has seen developed economies providing debt relief, technological grants, capital gain through foreign direct investments and open market policies. All these directly or indirectly increase per capita income, labor mobility and literacy. This free market mechanism has enabled many former poor nations to experience substantial growth. Indeed, Todora and Smith (2008, p.114) points out that “international free trade is the engine of growth that propelled development of the currently economically advanced nations in the nineteenth and early twentieth century.” In addition, due to the rapid growth of globalization, unforeseen exploitation has been looming necessitating creation and intervention of trade regulatory bodies like the World Trade Organization (WTO), International Monetary Fund (IMF) and the World Bank.
Negative effects of free trade
Despite the benefits of globalization on economic development, liberalization of trade tends to be detrimental to the development of the poor countries. One school of thought suggests that free movement of goods and services allows developed countries to sell expensive consumable products to poor countries and in turn buy low cost raw materials from these poor countries creating an imbalance of trade and widening the gap between the rich and the poor nations (Shah, 2009).
Although some nations, especially Asian countries have achieved economic growth through liberalization, African countries have become poorer under this free market with increased political instability, unemployment, poverty, and environmental degradation. According to Gupta (1997:105), although the poor countries provide higher returns to capital due to high interest rates, political risks and production inefficiency turn the investors away leading to financial and economic stress. This production inefficiency makes real capital flow to move from the poor countries to the developed countries rather than the opposite, thus widening the gap between the rich and the poor nations further.
There has been a fight for supremacy in the global political scene with developed nations brokering corporate power though influence on the poor countries’ economies. This has taken the shape of direct financial investments with sophisticated technology that tends to deny people gainful employment by applying capital intensive systems to otherwise labor intensive operations.
Freedom of trade has generated a gap between the poor and the rich in terms of protectionism whereby the developed will aim to be protectionists while forcing the third worlds nations to liberalize their markets. According to Shah (2009) some developed countries will offer subsidies to their producers with a bid to destroy export market for the poor nations and sometimes abuse of labor rights by offering unbalanced wages between the equally qualified workers from either nations. This means that the rich nations can access the markets of the poor countries with ease while the poor countries will have restrictions or barriers in accessing the markets of the rich nations. This mode of protecting the rich and opening the markets for the poor has seen many wealthy nations dumping substandard goods to the poor nations posing serious environmental threats
Although free markets have accelerated the spread of skills and uplifted literacy levels especially in the poor nations, the net benefit remains with the wealthy nations through a process called brain drain. Unfair competition in the job market has seen most skilled professionals from poor countries especially in Africa and Asia being lured by the transnational corporations who wield substantial economic powers.
Although Gupta (1997, p.103) calls for the poor countries to imitate the western technology, the long term effect has been the disintegration of societies in the poor nations as they seek social conformity brought about by uneven playing ground in global market. In addition, the policies of the free trade advocates like the WTO, IMF and World Bank are too weak to offer amicable solution on this exploitation.
Globalization of finance in international economic instability
Positive effects of finance liberalization
The period after the 1914 has seen a rapid technological advancement which has brought with it the globalization of finance. Currently, the financial market is more real-time with more improved and reliable financial instruments. According to Greenspan (1997) efficiency and effectiveness of the financial firms’ risk management has been propelled by information and communication Technology. Such efficiency in risk management has necessitated the development of sophisticated financial instruments which have enhanced flow of trade and investment. Unlike the period before 1914, when financial markets were not well developed, contemporary financial markets have been more interdependent such that an effect in one country financial market will certainly affect other financial markets in the global matrix.
The effect of globalization of finance is spread of investments worldwide creating a room for risk dispersion and possible allocation of world scarce capital resources. In addition, the expansive investment has enhanced labor mobility and expansive movement of goods and services. However, the rapid growth in investments and financial markets has necessitated the availability of financial intermediation in the form of forex trade to mitigate the investors’ risks. According to Greenspan (1997) modern financial market enables investors to match risks with their business strategies and invest across borders using low-cost capital formation thus enhancing international trade and economic stability.
The period before 1914 financial market relied on the gold flow and gold reserves to make monetary and fiscal policies which tended to be unstable. Currently, Central Banks have been mandated to enforce monetary and fiscal policies in a bid to counter the effects of monetary and financial instabilities. The complication comes about when governments have to contend the rising cases of unstable macroeconomics and rising inflation. Macroeconomic issues like world price control, interest rate changes and inflationary trends remain the primary solution to the economic stability of nations.
The liberalized markets have experienced drastic changes in financial settlements. The world has moved from the hard currency era to plastic money and electronic transfer system. This has made it easy to conduct business in a global arena without having to make unnecessary movements. The market trend has gone a notch higher to online trading necessitated by the efficiency of information technology. The automated financial market has enabled governments to embrace e-government and e-commerce with settlements between nations being done instantly. Thus the economic and social standards of the interdependent nations are addressed instantly. However, there seems to be imbalanced especially on the side of poor nations who are not well capital endowed to fully integrate modern technology.
Globalization of finance has seen the increased dominance in use of more powerful currencies that tend to dictate the global market trend. Fluctuation in the exchange rate of these currencies affects the prices of goods in the global market and the also interferes with economic activities of many interdependent nations. For instance, many developing countries have their debts in foreign currency and any adjustment in the exchange rate interferes with their balance sheet.
Negative effects of finance liberalization
However, despite the gains of real-time financial settlements, globalization of finance has been associated with proliferation of economic instability especially in the speculative financial industry given the volatility of financial instruments valuations and exchange rates. For instance, the financial crisis of 1997-1998 that left many people in Asia and Latin America jobless and languishing in poverty resulted from the speculative flows associated with fluctuation in international asset values and exchange rates to the detriment of the speculators (Rupert and Solomon, 2005, p.71).
In the current state of globalization of finance, the world has become so integrated with financial markets playing the role of mediation in the global goods and services market. The effect of this is that, financial crisis in one nation affects entirely almost all the other nations. Indeed, the current credit crunch that started with the American financial market has almost affected the entire world creating unforeseen economic downturns especially in the less stable economies of Africa and Asia.
Gangopadhyay and Chatterji (2005, p.53) suggest that policies to regulate capital movements should be put in place to prevent financial instability from turning to financial crisis. However, Greenspan (1997) disagrees, saying that, capital control will result to moving backwards with liberalization of financial markets, and therefore calls for sound public policies to ensure financial stability in the capital markets.
These negative effects of financial globalization led to the creation of regulatory authorities like the IMF and World Bank to control the markets and support nations experiencing economic downturns, in the areas of public expenditure, tax controls and interest rate controls (Held and McGrew, 2003 p.478).
Globalization is therefore has had its implication in the global society both positively and negatively. The impact of globalization on transforming pre-1914 underdeveloped nations to their current status can not be gainsaid. With free trade dictating the shape of today’s global market, many poor nations have been able to transform their economies through global market competition and accessibility of capital flows from wealthy nations.
However, the impact of free trade seems to be negative to some extent, with many poor nations remaining poorer due to exploitation by transnational corporations of the rich nations. Therefore, controlled or regulated free trade is essential in order to create a level playground for all nations. Financial liberalization has enhanced growth of global financial market with technology playing a key role in ensuring real-time trade.
International trade has become more real-time with financial settlements occurring instantly upon conclusion of the transaction. The effects on the capital market has seen corporate competition taking a more global outlook and changes in foreign exchange rates having a significant effect on many nations’ economies. However, financial globalization has been blamed for the economic instability of many nations thus a call for regulatory framework to curb financial crisis like the ones witnessed in the recent past.
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