The global economy is in the midst of a radical transformation, with far-reaching and fundamental changes in technology, production, and trading patterns. Faster information flows and falling transport costs are breaking down geographical barriers to economic activity. The boundary between what can and cannot be traded is being steadily eroded, and the global market is encompassing ever-greater numbers of goods and services.
Treasury: Long-term global economic challenges and opportunities for the UK, December 2004

What is Globalisation?

Globalization is an issue that rouses strong emotions among people. The first step in understanding the topic is to define what it means. We are hampered by the reality that there is no one single agreed definition – indeed the term globalisation is used in slightly different ways in different contexts by various writers and commentators. What is common to all usages is an attempt to explain, analyse and evaluate the rapid increase in cross-border (trans-national) business that has take place over the last 10/15 years.

Trends in global trade and output
% change per annum unless stated
	1980-89	1990-99	2000-04
Global GDP growth	3.3	3.2	3.8
World trade growth in goods and services	4.5	6.5	6.2
World trade (% of GDP)	19	21	25

The OECD defines globalization as

Globalisation is essentially a process of deeper international economic integration that involves:

1. A rapid expansion of international trade in goods and services between countries.
2. A huge increase in the value of transfers of financial capital across national boundaries including the expansion of foreign direct investment (FDI) by trans-national companies.
3. The internationalization of products and services by large firms.
4. Shifts in production and consumption from country to country – for example the rapid expansion of out-sourcing of production.

All merchandise products	Trade	Production
Average % change per annum
1950-63	7.7	5.2
1963-73	9.0	6.1
1973-90	3.8	2.7
1990-04	5.7	2.5
Manufactured goods
	Trade	Production
1950-63	8.6	6.6
1963-73	11.3	7.4
1973-90	5.5	3.1
1990-04	6.3	2.6

 

The data table above drawn from statistics published by the World Trade Organization shows how the annual growth in merchandise trade (trade in manufactures, agricultural products, fuels and mining products) has consistently out-paced the growth of output. This means that trade as a share of output in the global economy has continued to increase – marking an increase in trade integration within the world economic system.

Another way of describing globalisation is to describe it as a process of making the world economy more interdependent. The expansion of trade in goods and services, the huge increase in flows of financial capital across national boundaries and the significant increase in multinational economic activity means that most of the world’s economies are increasingly dependent on each other for their macroeconomic health.

Shares in world exports	1991	2006	Change 1991-2006
Canada	3.4	3.4	-0.1
France	6.2	4.0	-2.1
Germany	10.8	8.6	-2.2
Italy	4.9	3.5	-1.4
Japan	8.0	5.0	-2.9
United Kingdom	5.5	4.4	-1.1
United States	13.7	10.1	-3.6
Non-OECD Asia inc China	11.5	19.3	7.8
Latin America	2.6	3.0	0.4
Source: OECD World Economic Outlook, June 2006

 

For example, a deflationary monetary or fiscal policy introduced in one country which leads to changes in AD inevitably affects the ability of other countries to export to that economy. Consider for example a decision by the Federal Reserve Bank in the United States to raise their interest rates in response to the threat of a rise in inflation. This could conceivably have important feedback effects throughout the international economy. The rate of growth of the US economy is likely to slow and this will then have an effect on the strength of demand from US consumers for overseas products.

Secondly, changes in the structure of company taxation and personal taxation from country to country tends to influence flows of investment and have feedback effects in the long term on national income, employment and wealth.

Trends in global capital flows
	1989	1999	2003
Stock of Foreign Direct Investment (% of GDP)	8.0	16.0	22.1
Foreign assets (% of GDP)	62.6	139.6	186.1
Source: International Monetary Fund

Different Waves of Globalisation

Globalisation is not new! Indeed there have seen several previous waves of globalisation. Nick Stern, Chief Economist of the World Bank has identified three major stages of globalization:

• Wave One: Began around 1870 and ended with the descent into global protectionism during the interwar period of the 1920s and 1930s. This period involved rapid growth in international trade driven by economic policies that sought to liberalize flows of goods and people, and by emerging technology, which reduced transport costs. This first wave started the pattern which persisted for over a century of developing countries specializing in primary commodities which they export to the developed countries in return for manufactures. During this wave of globalisation, the level of world trade (defined by the ratio of world exports to GDP) increased from 2 per cent of GDP in 1800 to 10 per cent in 1870, 17 per cent in 1900 and 21 per cent in 1913.
• Wave Two: After 1945, there was a second wave of globalization built on a surge in world trade and reconstruction of the world economy. The rapid expansion of trade was supported by the establishment of new international economic institutions. The International Monetary Fund (IMF) was created in 1944 to promote a stable monetary system and so provide a sound basis for multilateral trade, and the World Bank (founded as the International Bank for Reconstruction and Development) to help restore economic activity in the devastated countries of Europe and Asia. Their aim was to promote lasting multilateral economic co-operation between nations. The General Agreement on Tariffs and Trade (GATT) signed in 1947 provided a framework for progressive mutual reduction in import tariffs.
• Wave Three: The current wave of globalisation which is demonstrated for example by a sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between counties and trade in goods and services
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Main Motivations and Drivers for Globalisation

As the well respected commentator Hamish McRae has argued, “Business is the main driver of globalization!” The process of globalisation is motivated largely by the desire of multinational corporations to increase profits and also by the motivation of individual national governments to tap into the wider macroeconomic and social benefits that come from greater trade in goods, services and the free flow of financial capital. 

Among the main drivers of globalisation are the following:

• Improvements in transportation including containerisation – the reduced cost of shipping different goods and services around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and adds to the process where markets are increasingly similar and genuinely contestable in an international sense.
• Technological change – reducing massively the cost of transmitting and communicating information - sometimes known as “the death of distance” – this is an enormous factor behind the growth of trade in knowledge products using internet technology. Advances in transport technology have lowered the costs, increased the speed and reliability of transporting goods and people – extending the geographical reach of firms by making new and growing markets accessible on a cost-effective basis.
• De-regulation of global financial markets: The process of deregulation has included the abolition of capital controls in many countries. The opening up of capital markets in developed and developing countries facilitates foreign direct investment and encourages the freer flow of money across national boundaries
• Differences in tax systems: The desire of multi-national corporations to benefit from lower labour costs and other favourable factor endowments abroad and therefore develop and exploit fresh comparative advantages in production
• Avoidance of import protection: Many businesses are influenced by a desire to circumvent tariff and non-tariff barriers erected by regional trading blocs – to give themselves more competitive access to fast-growing economies such as those in the emerging markets and in eastern Europe
• Economies of scale: Many economists believe that there has been an increase in the estimated minimum efficient scale associated with particular industries. This is linked to technological changes, innovation and invention in many different markets. If the MES is rising this means that the domestic market may be regarded as too small to satisfy the selling needs of these industries.  Overseas sales become essential.

Globalization no longer necessarily requires a business to own a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. For instance, economic activity can be shifted abroad by the processes of licensing and franchising which only needs information and finance to cross borders. And increasingly we are seeing many examples of joint-ventures between businesses in different countries – e.g. businesses working together in research and development projects.