Essential Economics: Globalization and the British Economy
Topic: Globalization and the British Economy
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Syllabus Snapshot
Students should be aware of the globalisation of the world economy and the consequences for the United Kingdom .
Introduction
Has the current wave of globalization been of net benefit to the British economy? This question invites a “cost-benefit analysis” approach outlining some of the major advantages of globalisation to the UK but at the same time recognising some of the threats and costs that the deeper integration of the global economy can bring.
A few evaluative points to start with
- No immunity: Whether or not the UK has been a beneficiary of globalization it cannot isolate itself from the effects of the growth in international trade, capital flows and trans-national corporate activity. The UK needs to meet the competitive challenges of the next decade, otherwise it risks suffering a fall in economic growth and a decline in our relative living standards. If the economy handles the challenges of globalization well, it has little to fear and much to gain
- Too early to say: It is too early to be very confident about the long term impact of globalization – the current wave still has some distance to travel.
- Look at the bigger picture: The question focuses on consequences for the United Kingdom . Globalization affects individual people and individual businesses in different ways. Anecdotal evidence is not really good enough – we have to look at the broader picture to consider some of the winners and losers.
Arguments supporting the beneficial effects of globalisation on the UK
Here are some broad arguments in favour of globalisation as it has affected the UK
- Sustained economic growth: Over the last twelve years the UK has enjoyed a period of sustained economic growth, rising employment and improving living standards. Our growth has been very close to the trend rate of 2.5% per annum and this is one of the longest sustained growth phases in our post-war history. Rising levels of trade and investment spurred on by the challenges of international competition have contributed to this healthy growth picture
- Lower inflation: Globalisation has brought down the prices of many of the imported goods and services that we need. This has helped to keep the rate of inflation down which ultimately means lower nominal interest rates. Indeed globalisation is a factor that has helped to improve the trade-off between unemployment and inflation
- High inward investment: The UK has remained a favoured venue for inward foreign investment – indeed it has been the leading country for inward FDI flows within the European Union. Our flexible labour markets, competitive product markets, relatively low corporate taxes and other factors have encouraged a huge inflow of inward investment, this has boosted GDP, protected thousands of jobs and helped to finance our growing deficit on the current account of the balance of payments. Foreign investment by UK businesses has helped to build up our stock of overseas assets and now makes an important contribution to our balance of payments through a steady flow of net investment income
- Rising productivity: The expansion of multinational businesses locating in the UK has helped to raise productivity and efficiency in the economy. This provides a platform for building and sustaining a comparative advantage in the areas where the UK still has some world class manufacturing plants and businesses. Inward investment allows for the application of better manufacturing techniques (including Just-in-Time supply strategies and zero-defect manufacturing) and it speeds up the process of applying new technologies and spreading information and technical know-how.
- The terms of trade argument (important) - Due the current wave of globalisation, the terms of trade have moved in the UK ’s favour. For example our economy is moving further and further towards the production and sale of high value manufacturing and high-knowledge services which tend to command in global markets a price higher than the cost of importing cheaper manufactured goods e.g. household products. This switch towards more expensive (higher value) products as the main source of our exports has given a boost to our terms of trade with other countries. Put simply, we can import many of the things that we need fairly cheaply (the strong exchange rate makes this even more attractive) and sell a smaller volume of higher priced products. This provides us with better living standards, the opportunity cost of exporting has moved in our favour
- Labour migration opportunities: Globalization is also being linked with a rising scale of international labour migration – and there are many who see this as a potential benefit for the British economy, not least in reducing the problems of skilled labour shortages in our public services, construction and other industries suffering from scarce workers.
To quote Kaletsky in an article in the Times last year
The things that Britain has always had a comparative advantage in selling to the world — financial services, scientific research, education, entertainment and so on — are rising in price. Because of this shift in relative prices, the British people have effectively enjoyed a large pay increase without having to work any harder.
What of the risks and disadvantages of globalisation for the UK . Opponents of the whole process of globalisation often tend to focus on the impact of this process on jobs and inequality, claiming that globalization is a force driving up the scale of relative poverty. There are also potential risks for the UK as competitive challenges become ever fiercer in nature.
- Lost jobs in manufacturing industry : Globalisation has intensified the problems facing UK manufacturing businesses. In many traditional industrial heartlands, rising import penetration and a switch of manufacturing to lower-cost production centres in South-east Asia and Eastern Europe has caused a fall in output and many thousands of lost jobs. Rising unemployment creates a problem of structural unemployment (occupational immobility of labour) and can worsen the regional economic divide
- Threats to our service industries : This argument is usually applied to the trend towards outsourcing services to low labour cost countries e.g. call-centres to India . Again the argument is about a loss of employment, but also that pressures to out-source may cause businesses to drive down real pay levels in UK service sectors in order to compete more effectively
- A worsening balance of payments deficit . Since 1997 there has been a huge deterioration in the UK ’s trade balances with the rest of the world. The trade surplus for services has grown (£18.3 billion in 2004) but the trade gap in goods has climbed to over £57 billion in 2004. This acts as a drag on economic growth (a trade deficit is a net flow of AD out of the circular flow) and can cost jobs and threaten living standards in the medium term
- Fears about the effect of globalisation and the environmental consequences : E.g. the extent to which the huge growth of international air and sea freight transport, the switch of manufacturing to countries who emit more pollution per capita and the ever rising scale of household and industrial waste leads to enormous external costs and a threat to the long term viability of our scarce environmental resources
- Globalisation and income & wealth inequality: Globalisation is accentuating the great divide between the haves and the have-nots. The real pay of people at the bottom of the pay ladder has barely increased in the last ten years whereas the incomes and accumulated wealth of those in the richest 20% or 40% of the population has increased significantly. To the extent that globalisation erodes the power of trade unions to protect pay and jobs, and causes big structural changes in employment in different industries and regions, it may lead to a worsening of relative poverty. In a world of free capital mobility, do individual governments retain the power to be able to tax businesses at a sufficiently high rate to provide essential public and merit goods and a progressive welfare system?
Generally the argument that globalisation carries more risks than benefits centres around the vulnerability of our economy to greater movements of capital, trade and people – as countries become more inter-dependent, so events and shocks in one country can have contagion effects in other parts of the world because of the many cross-linkages.
To score more than 18/30 on evaluation questions at A2 level, you must attempt a reasoned evaluation on the basis of discussing two or more costs and benefits of globalisation for the UK . The more evidence that you include (or relevant supporting examples) – the better.
Taking things further
If you want to take this issue a little further in your revision, try this small selection of web site
- BBC World Service: http://www.bbc.co.uk/worldservice/programmes/globalisation/
- OECD: http://www.oecdobserver.org/news/categoryfront.php/id/54/Globalisation.html
Macroeconomic Performance of the United Kingdom |
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% change per annum unless stated |
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1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
Real GDP |
2.9 |
3.9 |
2.3 |
1.8 |
2.2 |
3.2 |
Household spending |
4.4 |
4.6 |
2.9 |
3.3 |
2.3 |
3.0 |
Gross capital investment |
1.6 |
3.6 |
2.6 |
2.7 |
2.2 |
6.5 |
Exports |
4.3 |
9.4 |
2.9 |
0.1 |
0.1 |
2.6 |
Imports |
7.9 |
9.1 |
4.9 |
4.1 |
1.3 |
4.7 |
Unemployment (% of labour force) |
6.0 |
5.5 |
5.1 |
5.2 |
5.0 |
4.7 |
Government borrowing (% of GDP) |
1.0 |
3.8 |
0.7 |
-1.7 |
-3.5 |
-3.2 |
Current account of balance of payments (% of GDP) |
-2.7 |
-2.5 |
-2.3 |
-1.7 |
-1.9 |
-2.2 |
Short-term interest rate |
5.4 |
6.1 |
5.0 |
4.0 |
3.7 |
4.6 |
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2004 forecast is from the OECD www.oecd.org |
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| Business Objectives |
| Causes of Unemployment |
| Current Account Deficits |
| Economies of Scale & Scope |
| Globilisation & the UK |
| Manufacturing Industry in the UK |
| Phillips Curve |
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