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Globalisation - Gains, Risks & Disadvantages

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

China stimulates innovation in the West

Apple’s iPhone and iPad were both designed and prototyped in California and then produced in China. Chinese manufacturing competition is increasingly capturing low-skill production while simultaneously fostering high-skill innovation in the West.

About 15 percent of technical change in Europe in the past decade can be attributed directly to competition from Chinese imports, an annual benefit of almost €10 billion to European economies. Firms have responded to the threat of Chinese imports by increasing their productivity—adopting better IT, boosting R&D spending, and increasing patenting.

Source: Von Reenan & Bloom. LSE

Gains from Globalisation

Globalisation can lead to improvements in efficiency and gains in economic welfare.

Trade enhances the division of labour as countries specialise in areas of comparative advantage

Deeper relationships between markets across borders enable and encourage producers and consumers to reap the benefits of economies of scale

Competitive markets reduce monopoly profits and incentivize businesses to seek cost-reducing innovations and improvements in what they sell

Gains in efficiency should bring about an improvement in economic growth and higher per capita incomes. The OECD Growth Project found that a 10 percentage-point increase in trade exposure for a country was associated with a 4% rise in income per capita

Globalisation has helped many of the world’s poorest countries to achieve higher rates of growth and reduce the number of people living in extreme poverty

For consumers globalisation increases choice when buying goods and services and there are gains from a rapid pace of innovation driving dynamic efficiency benefits

Risks and Disadvantages from Globalisation

Globalisation is not an inevitable process and there are risks and costs:

  1. Inequality: Globalisation has been linked to rising inequalities in income and wealth. Evidence for this is a rise in the Gini-coefficient and a growing rural–urban divide in countries such as China, India and Brazil.
  2. Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of the world’s poorest people at great risk.
  3. Macroeconomic instability: A decade or more of strong growth, low interest rates, easy credit in developed countries created a boom in share prices and property valuations. The bursting of speculative bubbles prompted the credit crunch and the contagion from that across the world in from 2008 onwards. This had negative effects on poorer & vulnerable nations.
  4. In 2007-08, financial crises generated in developed countries quickly spread affecting the poorest and most distant nations, which saw weaker demand and lower prices for their exports, higher volatility in capital flows and commodity prices, and lower remittances.
  5. Threats to the Global Commons: A major long-term threat to globalisation is the impact that rapid growth and development is having on the environment. Threats of irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water are afflicting millions of the most vulnerable people are vital issues.
  6. Trade Imbalances: Trade has grown but so too have trade imbalances. Some countries are running enormous trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies.
  7. Unemployment: Concern has been expressed by some that investment and jobs in advanced economies will drain away to developing countries. Inevitably some jobs are lost as firms switch their production to countries with lower unit labour costs. This can lead to higher levels of structural unemployment and put huge pressure on government budgets causing rising fiscal deficits.
  8. Standardization: Some critics of globalisation point to a loss of economic and cultural diversity as giant firms and global brands come to dominate domestic markets in many countries.

Sovereign Wealth Funds (SWF)

Investment funds run by foreign governments, also called ‘sovereign wealth funds’ have been in existence since the 1950’s. As a result of high commodity prices and the success of export-oriented economies, China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have all built up a sizeable surplus of domestic savings over investment.

Now some other countries with large reserves of oil and gas are considering setting up their own funds – in August 2012, Tanzania announced it is to set up a sovereign wealth fund. Not all have been successful. Nigeria’s has operated an Excess Crude Account the surpluses from which have been largely used to pay off existing international debts.

China established its official sovereign wealth fund China Investment Corp (CIC) five years ago with the aim of earning high returns by investing abroad the dollars China earns from its exports. In January 2012, CIC’s $410bn sovereign wealth fund, bought an 8.68 per cent stake in Thames Water, the water network that serves London. It also has investment stakes in France’s GDF Suez, Canada’s Sunshine Oil sands and Trinidad and Tobago’s Atlantic Liquid Natural Gas Company.

Sovereign wealth funds are already having an important effect on the UK economy. Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye.

Many sovereign wealth funds have provided an injection of fresh capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to re-capitalize to repair their balance sheets, improve their chances of survival and provide a stronger platform for a recovery in lending to businesses and individuals who need loans.

Geographical Seepage in the World Economy

Geographical seepage occurs because of inter-relationships between economies, supply-chains and financial markets

One example is how developing countries that were really not part of the financial bubble and subsequent crisis of 2007-08 have suffered economically because of the global downturn.

Seepage is partly due to the changing structure of the world economy arising from outsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth. And developing nations reliant on exporting commodities to advanced economies will suffer from a fall in demand for and price of their output.

The global credit crisis led to a partial drying up of capital flows into developing countries - one consequence is that some emerging markets find it really hard to get hold of the bank loans needed to finance their continued expansion.

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