Economic globalization is one of the three main dimensions of globalization commonly found in academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization.
Economic globalization refers to the widespread international movement of goods, capital, services, technology and information. It is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital. Economic globalization primarily comprises the globalization of production, finance, markets, technology, organizational regimes, institutions, corporations, and people.James et al., vols. 1–4 (2007)
While economic globalization has been expanding since the emergence of trans-national trade, it has grown at an increased rate due to improvements in the efficiency of long-distance transportation, advances in telecommunication, the importance of information rather than physical capital in the modern economy, and by developments in science and technology. The rate of globalization has also increased under the framework of the General Agreement on Tariffs and Trade and the World Trade Organization in which countries gradually cut down trade barriers and opened up their current accounts and capital accounts. This recent boom has been largely supported by developed economies integrating with developing countries through foreign direct investment, lowering costs of doing business, the reduction of trade barriers, and in many cases cross-border migration.
Evolution of globalization
History
International commercial markets, labor markets, and capital markets make up the economy and define economic globalization.
Beginning as early as 6500 BCE, people in Syria were trading livestock, tools, and other items. In Sumer, an early civilization in Mesopotamia, a token system was one of the first forms of commodity money. Labor markets consist of workers, employers, wages, income, supply and demand. Labor markets have been around as long as commodity markets. The first labor markets supplied workers to grow crops and tend livestock for eventual sale in local markets. Capital markets developed in industries that required resources beyond the capabilities of an individual farmer.
In the 16th century, trade was dominated by European powers, although it remained limited. Exports and imports never exceeded 10% of global GDP at the time and trade volume grew at less than 1% annually. The Industrial Revolution in the 19th century introduced steamships, railways and the telegraph, bringing trade and foreign direct investment to historic highs. By the start of the 20th century, exports accounted for 14% of global GDP at the time.
Technology World War I disrupted economic globalization, with countries adopting protectionist policies and trade barriers, slowing global trade. The 1956 invention of containerized shipping and larger ship sizes reduced costs, facilitating global trade.
Globalization resumed in the 1970s as governments highlighted trade benefits. Subsequent technology advancements have accelerated global trade expansion.
The follow-on advances in technology since then have played a pivotal role in the rapid expansion of global trade.
Policy and government
The GATT/WTO framework, which was initiated in 1947, led participating countries to reduce their tariff and non-tariff barriers to trade. Indeed, the idea of Most Favoured Nation was essential to the GATT. To accede, governments had to shift their economies from central planning to market driven, especially after the fall of the Soviet Union.
On 27 October 1986 the London Stock Exchange enacted newly deregulated rules that enabled global interconnection of financial markets, with an expectation of huge increases in market activity. This event came to be known as the Big Bang.
By the time the World Trade Organization was established in 1994 as the baton was passed from the GATT, it had grown to 128 countries, including Czech Republic, Slovakia and Slovenia. The year 1995 saw the WTO pass the General Agreement on Trade in Services, while the 1998 defeat of the OECD's Multilateral Agreement on Investment was a hiccup on the route to economic globalization.
Multinational corporations reorganized production to take advantage of these opportunities. Labor-intensive production migrated to areas with lower labor costs, especially China, later followed by other functions as skill levels increased. Networks raised the level of wealth consumption and geographical mobility. This highly dynamic worldwide system had powerful ramifications. The World Trade Organization Ministerial Conference of 1999 and associated 1999 Seattle WTO protests were a significant step on the road to economic globalization.
The People's Republic of China (2001) and the last remnants of ex-Soviet bloc countries like Ukraine (2008) and Russia (2012) were admitted much later to the WTO process after painful structural reforms.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting which entered into force on 1 July 2018, is an effort to harmonize tax regimes to prevent multi-national firms from taking advantage of loopholes like Ireland's Green Jersey BEPS tool.
Global agents
International governmental organizations
An intergovernmental organization or international governmental organization (IGO) is an entity created by treaty, involving two or more nations, to work in good faith, on issues of common interest. IGO's strive for peace, security and deal with economic and social questions. Examples include: The United Nations, The World Bank and on a regional level, The North Atlantic Treaty Organization among others.
International non-governmental organizations (NGOs)
International non-governmental organizations include charities, non-profit advocacy groups, trade associations, and cultural organizations. International charitable activities increased after World War II and on the whole NGOs provide more economic aid to developing countries than developed country governments.
Businesses
Since the 1970s, multinational businesses have increasingly relied on outsourcing and subcontracting across vast geographical spaces, due to the global nature of supply chains and the production of intermediate products. Firms also engage in inter-firm alliances and rely on foreign research and development. This is in contrast to past periods where firms kept production internalized or within a localized geography. Innovations in communications and transportation technology, as well as greater economic openness and less government intervention have made a shift away from internalization more feasible. Additionally, businesses going global learn the tools to effectively interact with cultural agility; with people of many diverse cultural backgrounds, expanding their market.
Immigrants
International immigrants transfer significant amounts of money through remittances to lower-income relatives. Communities of immigrants in the destination country often provide new arrivals with information and ideas about how to earn money. In some cases, this has resulted in disproportionately high representation of some ethnic groups in certain industries, especially if economic success encourages more people to move from the source country. Movement of people also spreads technology and aspects of business cultures, and moves accumulated financial assets.
Impact
Economic growth and poverty reduction
Economic growth accelerated and poverty declined globally following the acceleration of globalization.
According to the International Monetary Fund, growth benefits of economic globalization are widely shared. While several globalizers have seen an increase in inequality, most notably China, this increase in inequality is a result of domestic liberalization, restrictions on internal migration, and agricultural policies, rather than a result of international trade.
Poverty has been reduced as evidenced by a 5.4 percent annual growth in income for the poorest fifth of the population of Malaysia. Even in China, where inequality continues to be a problem, the poorest fifth of the population saw a 3.8 percent annual growth in income. In several countries, those living below the dollar-per-day poverty threshold declined. In China, the rate declined from 20 to 15 percent and in Bangladesh the rate dropped from 43 to 36 percent.
Globalizers are narrowing the per capita income gap between the rich and the globalizing nations. China, India, and Bangladesh, some of the newly industrialised nations in the world, have greatly narrowed inequality due to their economic expansion.
Global supply chain
The global supply chain consists of complex interconnected networks that allow companies to produce handle and distribute various goods and services to the public worldwide.
Corporations manage their supply chain to take advantage of cheaper costs of production. A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. Supply chains link value chains. Supply and demand can be very fickle, depending on factors such as the weather, consumer demand, and large orders placed by multinational corporations.
Labor conditions and environment
Race to the bottom
Globalization is sometimes perceived as a cause of a phenomenon called the "race to the bottom" that implies that to minimize cost and increase delivery speed, businesses tend to locate operations in countries with the least stringent environmental and labor regulations. Pressure to do this is increased if competitors lower costs by the same means. This both directly results poor working conditions, low wages, job insecurity, and pollution, but also encourages governments to under-regulate to attract jobs and economic investment.Olney, W. W. (2013). "A race to the bottom? Employment protection and foreign direct investment." Journal of International Economics, 91(2), 191–203. However, if business demand is sufficiently high, the labor pool in low-wage countries becomes exhausted (as has happened in China), resulting in higher wages due to competition, and more demand from the public for government protection against exploitation and pollution. From 2003 to 2013, wages in China and India have gone up by around 10–20% a year.
Health risks
In developing countries with loose labor regulations, there are adverse health consequences from working long hours, and individuals burden themselves from working within vast global supply chains.Pang, Tikki, and G. Emmanuel Guindon. "Globalization and Risks to Health." EMBO Reports. Women in agriculture, for example, are often asked to work long hours handling chemicals such as pesticides and fertilizers without any protection.
Although both men and women experience shortcomings with health, the final reports stated that women, with the double burden of domestic and paid work experience an increased the risk of psychological distress and suboptimal health. Strazdins concluded that negative work-family spillover especially is associated with health problems among both women and men, and negative family-work spillover is related to a poorer health status among women."