Introduction
Economic globalization is the increased economic integration and interdependence that goes beyond national, regional, and continental borders. Economic integration occurs through the globalization of production, technology, marketing, labor, and other factors of production. Economic globalization is heavily dependent on Information Communication Technology (ICT). This paper will explore the aspects of globalization in economic terms, preference on international trade by national economies, the Americans and Europeans’ increasing dependency on Asia for production, the pros/cons of outsourcing, and the impact of globalization on the economic recession.
Globalization in Economic Terms
From an economic perspective, Aidukienė and Kazlauskienė (2012) regard globalization as the process of raising the levels of economic interdependence and integration beyond the national borders. Therefore, economic globalization may integrate economies beyond countrywide and local borders by enhancing the exchange of goods, technology, and other services. Although globalization of economies is dependent on a nation’s political, social, and cultural environment, it is heavily dependent on information technology. Rapid developments in information technology reduce the distance between traders across geographical borders, thus making the world a global village.
The major facets of economic globalization include globalization of production, markets, labor, institutions, finance, and technological processes. These processes have continued to grow over the years, although the rapid economic globalization has been witnessed in the last two or three decades. The inception of General Agreement on Tariffs and Trade (GATT) has aided the realization of the modern economic globalization (Napoli, 2014).
In addition, the World Trade Organization (WTO) has made most of the countries in the world reduce their trade tariffs and barriers. Besides, under the intervention of WTO and GATT, many countries began to operate current and capital accounts for purposes of global trade. Today, trade gaps between developing and developed countries have been narrowed through Foreign Direct Investment (FDI) and free migration across national borders.
Economic globalization has intensified the levels of interaction across the globe (Aidukienė & Kazlauskienė, 2012). As a result, there has been an increase in income levels and growth of economies in both developed and developing countries. Through globalization, power balance between developing and developed countries has been narrowed down. The increased level of employment that has been realized through the relocation of production industries in the upcoming countries has raised the living standards of people while at the same time reducing the consumer prices.
Impact of the Forces of Globalization on Economies and National Policymaking
Economic Growth and Reduced Poverty
Economic globalization has positive and negative effects on economies and national policymaking. These effects include economic growth and reduced poverty levels. Bishop, Reinke, and Adams (2009) affirm that economic globalization results in the growth of economies in both developed and developing nations. Per capita Gross Domestic Product of most countries has increased over the years due to economic globalization.
Because of the increased markets, production, technology, capital and finance, and cooperation between international organizations, most of the economies have ended up growing. The shifting of companies from one nation to the other and the relocation of firms into foreign nations also provide employment to the citizens. The availability of jobs implies increased income levels. Higher revenue levels are associated with higher per capita income and hence increased purchasing power (Benería, 2012).
In addition, the shifting of multinational organizations also results in diversification of technology and increased competition for consumers. Such a shift has led to the lowering of prices. Reduced prices of commodities and services also create a room for the underprivileged class to access the items. The increased factors that facilitate globalization have led to a decline in poverty levels (Aidukienė & Kazlauskienė, 2012). For example, globalization factors increased swiftly in 1990s in Malaysia and China. As a result, there was a 5.4% growth in the yearly income levels among the poorest percentile classes in Malaysia and 3.8% in China.
Poverty levels declined in most of the poor countries that embraced economic globalization in 1990s. For example, after embracing globalization, the number of people living below a dollar every day went down from 20% to 15% in China (Mitchener &Yan, 2014).
In addition, economic globalization has reduced the gap between the affluent class and the deprived cohort across international borders. For example, before embracing globalization, countries such as China and India were rated among the poorest in the world. However, globalization has made them economic giants among the developed nations of the world. Globalization also affects policymaking in most of the countries that embrace it (Napoli, 2014). Since economic globalization affects all factors of production, marketing, and international relations between countries, there is a need for the involved countries to enact laws that can guide their relationship. Such laws include environmental degradation policies, trade policies, registration, patent, and labor laws. New policies are enacted to boost businesses affairs among the involved parties.
Increased Presence of Multinational Corporations
The increased interaction between nations has been marked by an increase in the number of multinational corporations that operate in different parts of the world. Multinational corporations result in increased automation (Reinke & Adams, 2009). Therefore, developing countries are exposed to new and better technology. Employees in less automated or non-automated companies within such a country are forced to learn new skills to remain relevant and competitive in the labor market.
Technology increases speed, accuracy, and efficiency of production. Hence, it fuels the growth of local firms. On the other hand, a new technology, for instance automation, may result in job loss by employees who lag behind in embracing it. In addition, automation of multinational corporations may result in unleveled competition between the new and local firms without such technology. Therefore, it is important for countries to enact policies that regulate competition between local firms and international companies. Policies on educating and training the local firms on better technology and access to financial services are also necessary (Mitchener &Yan, 2014). Policies that enhance social justice through fair trade are also enacted to regulate trade where international business has taken roots.
Economic Globalization and Capital Flight
According to Held (2004), economic globalization also results in capital flight. Capital flight in the world markets has been occurring through the flow of money and capital from one country to another due to bad financial factors, for example, the cost of labor, high taxes, government tax, tariffs, and capital controls. In such cases of economic globalization, the country from which capital flows experiences a quick decline in terms of exchange rate and devaluation. In most cases, capital flows from countries that have fixed exchange rates. Because of capital flight, the affected country suffers a declining value with the increased terms of trade. The value of assets in the affected country also declines.
The purchasing power of the affected country’s currency and assets is negatively affected. Both the developed and developing countries are affected by capital flight because of economic globalization. For example, capital flight cases have been recorded in Britain and Jersey due to the high taxes (Mitchener &Yan, 2014). The affected countries also suffer from liquidity crisis, especially in countries that are directly affected by capital flow. In addition, economic activities such as flights and shipping of goods are also negatively affected by capital flight. Borrowers from such countries also face higher costs of loans and/or increased collateral requirements for securing loans.
Economic Globalization and Inequality
One positive effect of economic globalization is that it reduces the level of inequality between the wealthy and underprivileged countries. Global inequality has continued to fade, thanks to globalization (Banerjee & Duflo, 2003). This result has majorly benefitted the developing nations through foreign direct investment. Inequality has prevailed among many nations of the world over the years, owing to variations in economic structures, wars and conflicts, and variations in terms of the ability to generate wealth. As a result, the opportunities that developing nations get for economic development do not equal to those of the developed nations. Globalization of economic has promoted integration and liberalization of economies (Benería & 2012).
It allows a room for improved welfare of the citizenry by bridging the inequality gap between them and their partners. For example, with the increased globalization in the 1970s, life expectancy in the developing nations increased by four months while child mortality reduced by 60%. Globalization of economies improves the living standards of the participants. Through globalization, literacy levels in developing countries have improved, thanks to the education that has been extended even to the marginalized regions. Another positive effect of globalization is the development of tax heavens. Tax havens are nations or territories that levy particular types of taxes at a low rate (Held, 2004).
Such territories may also completely avoid levying the tax. Tax havens have been preferred by companies that want to avoid taxation or cut down heavy taxation in their countries. Companies and individual entities have focused on shifting their operations to such countries. Tax havens result in tax competition among countries as nations compete to have lower tax levels to attract foreign investors. Tax havens also form an environment where companies can be sheltered from the international tax regimes (Zhao, Fogel, Morck & Yeung, 2010). However, tax havens are associated with fraud and terrorism, which disadvantage the poor countries or individuals because of the evident unethical money accumulation strategies.
What is Better for a National Economy
National economies should not just focus on creating and protecting jobs at the home level. They should also focus on the international trade (Coy, Campbell & Kennedy, 2014). The world is moving towards an increased integration and interaction. Therefore, countries that want to gain economic milestones should focus on diversifying their factors of production and trade. Through ICTs, countries of the world can make more profits through better technology, reduced cost of production, and access to more markets. This claim implies that localized economies may not compete with globalised companies (Napoli, 2014). Globalization of the national economies implies the opening of markets for DFIs, which benefit both the governments and people. The populations learn new technologies while the government collects more taxes.
America and Europe’s increasing Dependency on Asia for production
According to Hoen (2014), there has been an increase in dependency on Asia by America and Europe on their industrial production. Every company aims at reducing the cost of production while maintaining high levels of quality. For this reason, companies in America and Europe prefer setting their production firms in India. The cost of labor in India is relatively low in relation to the US and Europe, owing to the high population in India.
The reduced cost of labor translates to a low cost of production. In addition, revamping of the agricultural sector in Asia has also provided a cheaper source of raw materials for foreign industries (Hoen, 2014). When these companies acquire agricultural raw materials, they do not have to transport them overseas for production. The high population in Asia also offers a ready market for the finished products from American and European companies.
Arguments concerning the Pros and Cons of Outsourcing
Outsourcing has both advantages and disadvantages. It involves engaging the services of an agency in accomplishing a certain task, in this case an international company. One of the advantages of outsourcing the services of a foreign company is that such companies have a wide range of exposure and experience of working in different environment (Coy et al., 2014). With the increased exposure, the agencies are likely to manage more challenges and succeed in different environments.
Secondly, foreign agencies are likely to be bound by blind loyalty in terms of guiding the client nation. Since they are out for business, the agencies openly criticize and renounce bad practices while at the same time recommending what works without fear. With such information, an organization can identify its drawbacks and act on them in time. Thirdly, an agency is likely to be more outfitted in terms of equipment, technology, and professionals relative to an in-house service provider. Hence, it becomes possible for the agency to perform better and deliver better results.
On the other hand, outsourcing has its disadvantages. To begin with, such foreign agencies have divided loyalties. Since agencies work for different clients, they face the problem of balancing of loyalties between one client and the other (Hoen, 2014). As a result, foreign agencies offer inadequate services to their clients. Secondly, agencies have less information concerning the client compared to an in-house service provider. Since the outsourced service provider is foreign to the client, the outsourced agencies only rely on the provided information. Firms may not expose their internal problems wholly. Therefore, the outsourced agencies work from a point of inadequate information.
This case implies that some problems remain unresolved at the end of the process. Thirdly, the outsourced agency’s services are limited by the size of the fee. Since agencies are out to make profits, they charge for their services depending on resources that have to be applied in a particular period of work (Banerjee & Duflo, 2003). As a result, companies that pay a small fee may not receive services that equal to what their counterparts get since they pay a larger fee. This disparity implies that the quality of service that is offered to a client is likely to be compromised if the fee is small.
Globalization and the Recession
Globalization predisposes nations of the world to economic recession (Banerjee & Duflo, 2003). Economies of the world are likely to slump with the increased recession in major economic blocks. Globalization increases the level of economic interdependence among countries. This situation implies that the devaluation of currency and assets in one nation can easily be transferred to others. With the economic recession in developed nations, investors in such nations may opt to invest their capital in tax-haven countries. Investments in such countries are protected from both national and international taxation. Transfer of higher value currency from one nation to another that has a lower value currency means an unfavorable competition in the market. Globalization may compromise the strength of assets and currencies of certain nations (Mitchener &Yan, 2014).
The purchasing powers of a particular currency or exchange rates vary widely with the increased globalization. In addition, through direct foreign investment, economic positions of poor nations are compromised. Heavy DFIs end up crippling the local industries in a particular nation. Investments from developed nations that have a stronger currency and asset value cannot compete favorably with local companies. In addition, foreign companies that are involved in DFIs have better technology, experience, and human resource. As a result, they compete better in relation to local industries. In case the government does not enact policies to protect local industries, globalization may end up crippling them.
Zhao et al. (2010) also reveal how globalization influences international lending rates by the World Bank and the Central Banks of various nations. Increased globalization increases the accessibility to loans by many countries. Since different economies have varied levels of economic growth, they also have varied borrowing powers. This claim implies that the developed nations have more borrowing powers relative to developing nations (Zhao et al., 2010). Variations in access to loans imply that the purchasing power in such countries varies. Although both nations may benefit in foreign direct investment, one country may be exploited due to its poverty levels. For example, some nations will prefer investing in lowly developed nations to exploit the available cheap labor and low taxation. As a result, the investors amass wealth, which is forwarded to their mother countries.
Conclusion
Globalization is a common phenomenon in the modern world, especially with the increased adoption of ICT across the globe. Through economic globalization, cross-border trade interactions have overpowered trade barriers and tariffs. As discussed above, globalization has various facets. Globalization has both positive and negative effects. Therefore, it is preferable for national economies to go for the globalization of their economies, as opposed to localization. The paper has realized the advantages and disadvantages of outsourcing. Finally, the study has also realized that globalization predisposes nations of the world to the global recession.
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