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Globalization of the World Economy

1. Introduction

Globalization is the process of interaction and integration among individuals,


non-governmental organizations and governments worldwide. The fast globalization process
correlated with the end of the twentieth century and the first part of the twenty-first century is
attributed to the rising of neoliberalism and the fall of the communist market system. As a
complex phenomenon, globalization is considered a form of capitalist expansion that brings
the integration of local and national economies into an international, universal, almost
unregulated market. Globalization has flourished due to advances in transportation and
communication, making goods easier to move from one part of the world to the other.
Globalization doesn’t limit itself to the economic markets but has an immeasurable impact on
the everyday lifestyle of individuals. The differences between the way people all over the
world dress, think or do politics are smaller and smaller due to the influence of western
culture. Adidas and Nike brands are a cultural phenomenon in eastern Europe even if they are
german or an american brand usually produced in Asia. People think in terms of global
warming, income inequality, gender parity or economic growth, all imposed in the public
agenda by western scholars. States such as Romania or Russia have at their core a french
constitutional model, laws and a multi-party system. Thus, we can confidently assume that
globalization is primarily an economic process that's associated with social and cultural
aspects. All those factors have provided many opportunities and major challenges to the
nations and people of the world. This essay focuses on what causes globalization, major ways
in which the globalized economy shaped the world we live in and reiterates the most
important advantages and disadvantages.

2. Why nations trade

At the core of globalization is acknowledged to be international trade. Trade has created


strong bonds between individuals and states due to international specialization in producing
goods and services for which they have a comparative advantage in relation with other states
and prefer to engage in trade for other goods instead of producing themselves. States and
individuals import goods and services from abroad for several reasons. Imports may be of
better quality, cheaper, more easily available or more appealing than locally produced goods.
That’s why americans still buy japanese or european cars even if Ford and Chevrolet are
well-established brands in the States. But In other instances, no local alternatives exist,
making importing is crucial. This is best shown in the case of Japan, which has no oil
reserves of its own, but it is the world’s fourth-largest consumer of oil or the European Union
that imports almost 50% of its oil from non-EU countries. Without international trade and the
`black blood,` those countries can’t stand on their own. But with trade, they perform excellent
economically. The key to understand international trade and globalization are the division of
labour and specialization. When applied internationally, the division of labour describes that
countries produce a modest range of goods or services, depending on country size, and may
contribute with a small part to finished products sold in global markets. The same process
that happens in a factory. International specialization is the phenomenon when countries
prefer to use their resources to produce just a range of products in high volume. This mass
production allows a surplus of goods to be produced at competitive prices, which can
compete with other producers internationally. Countries that specialize are likely to become
more efficient over time, partly because a country’s producers will become larger, will
develop know-how, train workers and exploit economies of scale. Faced by large global
markets, firms are encouraged and pressured to adopt mass production and develop new
technology. This can provide a country with a price and non-price advantage over less
specialized countries, making it increasingly competitive and increasing its chances of
exporting in the future. But at the same time, the specialized country must import the
necessary goods and services that it doesn’t produce. Due to globalization, they will import
from other countries that have also specialized and produced surpluses of their own. When all
this process is not obstructed by international tariffs, regulations, quotas, or any other
political intervention, it will self-impose and grow year by year like a massive cobweb.
Globalization happens because it brings huge advantages to individuals. It encourages each
country to specialize in what it produces best using the least amount of resources, it leads to
efficient production, promotes economic growth, lowers prices of goods and services and
makes them more affordable especially for lower-income households. Larger markets enable
companies to reach more and more customers, which brings a higher return on the fixed costs
of doing business, like building factories or conducting research, decreasing the average cost
of innovation and development. Technology firms have taken special advantage of their
innovations this way. Competition from abroad drives firms to improve their products and
make consumers better-off with better products and more choices as a result. Expanded trade
spurs the spread of technology, innovation, and the communication of ideas. That’s why
international trade grew by almost 35 times between 1980 and 2010.

3. Globalization causes

A. Development of technology - In transportation, larger cargo ships and modern trail


networks meant that the cost of transporting goods between countries can decrease by
a large margin, cargo planes meant faster delivery of goods, improvements in
infrastructure meant better transportation routes for trucks. All those improvements
were reinforced by economies of scale, if a business is shipping more, it has a better
cost per item when operating on a larger scale. A second major technological
improvement was in the availability of cheap, rapid and reliable communication, such
as emails, videoconferences, international calls etc., that facilitate the integration of
the international markets. Businesspeople and employees can interact with each other
in a reliable way. Multinational corporations exploit their intellectual property
efficiently in a variety of locations without losing the ability to maintain control from
head office.

B. Freedom of trade and global cooperation - The neoliberal establishment built a global
economic order governed by mutually accepted rules and overseen by multilateral
institutions. countries and multinational corporations could cooperate to promote
economic growth and prevent economic disputes from escalating into larger conflicts.
The institutions established include organisations like the World Trade Organisation,
which promotes free trade between countries and help to remove barriers between
countries, United Nations, which seeks to prevent conflicts and implement global
security norms and offer assistance during humanitarian crisis, The International
Monetary Fund, which stabilises the international economy and help countries facing
debt crisis, The World Bank, which provides loans and policy advice, NATO, creating
a security alliance and many other organisations or free trade partnerships such as The
common European market, ASEAN, NAFTA.

C. Labour availability and skills - countries such as India or Romania, have lower labour
costs and also high skill levels making it easier to relocate a part of technical
assistance and IT departments. Labour-intensive industries can take advantage and
move the production part of their business to less economic development countries in
order to take advantage of cheaper labour costs and reduced legal restrictions. The
second factor is immigration and international employment, a modern company can
recruit employees from many countries who request smaller wages. there are more
than 200 million people in the world who live in a country other than the one in which
they were born, nearly 60 percent of them are in rich countries.

D. Capital movement. In the modern era, capital moves freely across national
boundaries. Financial or portfolio capital (bank loans and bonds) generally move to
nations and markets where interest rates are higher, and foreign direct investments in
plants and firms flow to nations where expected profits are higher. This leads to the
more efficient use of capital and generally benefits both lenders and borrowers.
[Salvatore, 2013]. Between 1980 and 2016 The global stock of Foreign direct
investment grew from 0.7 to 25 trillion US dollars.

4. How globalization shapes the world

A. Globalization forces businesses to compete and to adopt different strategies in order to


fulfil interests of both the individual and the community as a whole. Bringing reorganization
at the international, national and sub-national levels. Specifically, it brings the reorganization
of production, international trade and the adaption to new demands. The globalized economy
is expected to adapt faster to new needs in the economy such as the need to sustainable
transportation, sustainable food and other consumer goods. The world is innovating in a fast
pace to electric or nitrogen cars, safe genetically modified crops, 3D printing, artificial
intelligence and other technologies that can improve the lives of humankind.
B. Decline in poverty globally
Globalization has helped decrease inequality between the poorest and richest individuals in
the world. The percentage of the global population living in absolute poverty fell from over
80% in 1800 to 20% by 2015 [H. Rosling, 2018], from 1.9 billion in 1990 to 0.73 billion in
2015 [World Bank], even if the world population has increased exponentially. This
phenomenon happened partly due to relocations of factories from the developed world to the
developing world. In 2020, the vast amount of people living in extreme poverty are in the
african continent because international enterprises avoid investing due to political instability.
This broader trend is improving the every-day life of millions of people and increasing their
income, but at the same time, because of that, the world pollution rises at a swiftly pace.

C. Globalization brings wider inequality


Within many countries inequality is rising [R. Eatwell and M Goodwin, 2018]. Just in the
US, globalization has contributed marginally to rising US wage inequality, putting this factor
at 10 to 20 percent, because technology is reducing demand for certain low- and middle-wage
workers and increasing demand for high-skilled, better paid workers and because the
international displacement of jobs to other countries, reducing the demand for low-skilled
labour. The Gini coefficient of the world, which measures the relative degree of inequality,
per capita GDP increased from 0.44 in 1960 to 0.55 in 1989 [UNIDO, 1996]. Almost in the
same span, between 1960 and 1990, the gap between per capita incomes of the richest and
poorest countries increased from a ratio of 30 : 1 to a ratio of 60 : 1. by 1997 it reached a ratio
of 74 : 1 [UNIDO, 1999]. At the country level, measures of income inequality are on an
ascending trend almost everywhere. This applies both to developed countries as well as to
developing countries or countries in transition. In the US, e.g., an average CEO made 41
times the wage of the average manufacturing worker in 1970. By 1997, it reached the ratio of
326 : 1[Magarinos, 1999]. In the developed world, many people feel alienated and threatened
about losing their place in the society and worrying for the future. A lot of those people
started to back political parties with a populist approach to politics, which support
protectionism and are against immigration and are against the neoliberal establishment.

D. Globalization impacts the environment


The massive development of transport that has been the engine of globalization is also
causing serious environmental externalities such as greenhouse gas emissions, global
warming or air pollution. In the meantime, global economic growth and industrial progress
are both the driving force and the major consequences of globalization. They also have
serious environmental consequences as they contribute by a large margin to the depletion of
natural resources, to deforestation and to the destruction of ecosystems, leading to a loss of
biodiversity. The worldwide distribution of goods is also creating an enormous garbage
problem, especially on what concerns plastic, because plastic is such a persistent material, the
ecological, economic and eco-toxicological effects of plastic pollution are all long-term. Air
pollution may cause illnesses such as severe lung diseases or asthma and slowly deteriorate
the wellbeing of people living in the proximity of industrial areas. The biggest problem
caused by intense industrialization and globalization is considered to be climate change.
Without laborious measures to contain the rising global temperatures, the global atmosphere
is expected to heat up by a few degrees, causing massive disruption such as melting the ice
caps leading to increased sea levels, to harsh climatic phenomena, to desertification and many
other disastrous effects.

5. Conclusion

Globalization is not simply an intensification of global interconnectedness brought by market


forces and technological change. Rather, it is a worldview shaped by capital and political
influences that aspires to establish a global economical and political system in line with the
interests of capital and investors. Capitalism, as a market-oriented system, has a globalizing
tendency. Globalization is more than just free trade, it represents a new phase of capitalism
that is more universal, more unchallenged, more pure, and more wild, than ever before.
Global capitalism is harder to regulate and forces states to cooperate between each other.
After the recent financial crises, states recognized the importance of the role of the state in
protecting and correcting markets, but also found out that they have to cooperate in order to
regulate the international market. Climate change, worker rights and economic stability can
be reached only working multilaterally. There also has been a growing realization that
unfettered financial flows, especially from advanced countries to emerging markets, can
create dangerous instability. Yet despite notable setbacks and shaken confidence, the
advocacy for globalization remains strong.
References:

1. ”Globalization: the rise and fall of an idea that swept the world” by Nikil Saval
https://www.theguardian.com/world/2017/jul/14/globalisation-the-rise-and-fall-of-an-idea-tha
t-swept-the-world
2. What Is Globalization?And How Has the Global Economy Shaped the United States?
https://www.piie.com/microsites/globalization/what-is-globalization
3. Globalization: The Concept, Causes, and Consequences by ​John Williamson
https://www.piie.com/commentary/speeches-papers/globalization-concept-causes-and
-consequences
4. Globalisation by BBC ​https://www.bbc.co.uk/bitesize/guides/zxpn2p3/revision/1
5. ​Beauchamp, Zach (14 December 2014). ​"The world's victory over extreme poverty,
in one chart"
6. Hans Rosling​, Ola Rosling, Anna Rosling Rönnlund (2018), ”Factfulness”
7. R. Eatwell and M. Goodwin (2018) ‘National Populism: The Revolt Against Liberal
Democracy`
8. United Nations Industrial Development Organization (UNIDO) annual report 1996
9. United Nations Industrial Development Organization (UNIDO) annual report 1999
10. Carlos Magarinos, Opening statement of the Director-General at the 8th General
Conference of UNIDO 1999.
11. Mankiw, N., G. (2003) Macroeconomics, Fifth Edition, Worth Publishers, New York
12. Blanchard, O. (2013), Macroeconomics, Pearson
13. Dominick Salvatore (2013) International Economics
14. Fredrik Erixon (2018) The Economic Benefits of Globalization for Business and
Consumers
15. The Impact of Globalization on Economic Growth
https://www.thebalance.com/globalization-and-its-impact-on-economic-growth-19788
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