To what extent is a globalised world of economic benefit? The definition of globalisation is that will be used to answer this question will be the classic example used by the European Commission. 'Globalisation can be defined as the process by which markets and production in different countries are becoming increasingly interdependent due to the dynamics of trade in goods and services and flows of capital and technology'. Globalisation can be measured in two ways firstly via the ratio of trade to output over time. The higher the ratio of trade to output will mean the greater the extent of globalisation.
The second way is to measure capital flows through FDI (the amount of foreign investment into a country). Hence the higher the rate of FDI the more globalisation exists. It is true to say that globalisation has been occurring throughout the world for many years, and it is also true to say that globalisation has many different effects depending upon each country. For clarity and ease this essay will deal with two main types of economy that could be affected, firstly well established economies such as the UK and the USA, and secondly with poorer less well established economies such as some in Asia and Eastern Europe.
Globalisation has two main features which are the presence of global brands and global sourcing. Global branding exists where a standard product is available in most world markets, although the price may differ considerably. Coca-cola and McDonalds are the two obvious examples although corporations such as IBM must be remembered. The price may vary not only due to exchange rates and the PPP in each country, but also due to production costs (especially those of labour) differing in each country as does the elasticity of a said good.
The second feature global sourcing which means that goods are no longer manufactured locally, but are manufactured on a worldwide scale and exported to each individual country. Sportswear is often manufactured in South East Asia and distributed worldwide to take advantage of the cheap labour available. The increase in global sourcing can have a considerable effect on more developed countries especially those in Western Europe and the USA. Take the UK, over the last 30 years the employment in the service sector has risen by around 7 million.
Service related industries (especially legal and financial) have become our strongest export worldwide. However manufacturing has seen a huge downturn and has almost halved in the same 30 year period. When we look at the reasons for the rapid change in structure for the UK economy it appears that we have lost so many jobs in the manufacturing based industries because we have lost our comparative advantage in this field. Since the development of IT which has meant increased communication and the ability to separate production and management, corporations can exploit the huge workforce in places such as Asia and Eastern Europe.
Not only is there a bigger workforce (for labour intensive jobs) but because of the lack of Human Rights, protected working conditions and a minimum wage the cost of labour is made even cheaper. Although at first glance it appears that this global sourcing is not beneficial for well developed countries as we have lost jobs in manufacturing industries, this is only a problem in the short term. In the UK we saw a huge degree of unemployment in the 1970's as manufacturing went abroad. However due to high education standards in this country we were able to specialise in service based industries that require these skills.
Therefore we have developed a comparative advantage in this field and our employment has gradually but constantly shifted this way to not only secure a low rate of employment but also to increase our GDP per capita as our workforce are generally working in well paid industries. It is important to note that despite our GDP being high this situation has lead to a North-South divide where the North has still not fully recovered from the loss of manufacturing. The south are earning huge amounts and the standard of living is higher than the less well paid North, furthermore as capital is mobile there is a great amount of regional unemployment.
Comparative advantage will mean that individual economies will develop economies of scale in certain industries; they can therefore keep prices low to the world market and produce more for the world market. As different industries in different countries will be in competition to have corporations invest there, this will cause and increase in efficiency. The extent to which this is beneficial is unclear. Although this increased manufacturing means that developing countries are getting an ever increasing amount of trade and FDI the extent to which this is occurring due to exploitation is debatable.
For example we buy a huge amount of Coa-Coa from South America sources, recent studies have shown that although a great amount of money goes to the counties little is seen by the farmers who grow it. They receive what is considered by any standards a sub-standard wage and have to work prolonged hours in awful conditions. Although low prices are in the benefit of the consumer, the producers must be remembered as they often do not receive the same social security benefits that we are used to in the West.