Costs of Globalisation

Costs of Globalisation

1. Environment: Due to increased trade and the increased demand for non-renewable resources, the extraction of these resources and the increased negative production externalities (spill over effects) has had negative effects on the environment. Also, because of the increased integration of markets, firms are becoming more competitive and therefore becoming less accountable for their spill over on the economies in order to maintain that competitiveness. Globalisation has also accelerated the depletion of non-renewable resources. Examples include increased air freight causing air pollution. However, rich countries such as the UK and Sweden use some of the benefits of globalisation to reverse environmental degradation.

2. Income Distribution: The rich are getting richer and the poor are getting poorer. This is because rich nations receive most of the benefits of globalisation than the poorer nations. Structural unemployment also contributes to income inequalities and due to the opening of world markets, low skill wages are depressed due to the increased supply of labour in those areas. For example with the USA and immigration from latin american countries like Mexico. There is especially increased income inequalities between the developed countries and LEDCs.

3. Prices: Higher national incomes has lead to increasing demands. This is especially bad if the LRAS curve of the economy is inelastic causing demand pull inflationary pressures on price levels. However, accessibility of markets has increased and excessive demand can be matched by increased imports.

4. Employment: Due to the practice of comparative advantage, certain industries are becoming redundant and others excelling in certain countries. For example in the UK. The manufacturing industry suffered due to its lack of competitiveness and this created structural unemployment, simultaneously, the service sector boomed, creating jobs in this sector.

   • This widens the income gap and the labour productivity gap as more are unemployed, resulting in a higher Gini co-efficient. Average incomes have risen but relative poverty has increased as well. However, this depends on the mobility of labour and the flexibility. Also, many of the workers made redundant in the manufacturing sectors in the UK have found jobs in other European countries due to the free movement of labour within the EU.

5. Increased Risk of Dependency: Globalisation has empowered the theory of comparative advantage and specialisation. This is beneficial to countries, however, this increases interdependency of countries on each other. Therefore in the scenario that there are shocks on one or more economies of the world, those dependent on those economies will suffer by a cut off of supplies. However, governments have engaged in protectionist policies to help protect countries from over dependencies in essentials.

6. Loss of Sovereignty and Culture: Globalisation weakens countries' cultures as foreign cultures are introduced globally and some becoming more dominant than the local cultures. Sovereignty is also reduced due to MNCs that override governments and their regulations. They are therefore less able to make decisions on their own without intervention and as much power as they would have had had there not been this type of integration.

7. TNCs might engage in tax avoidance policies so causing reduction in tax revenues for governments

8. Evaluation: Benefits of Globalisation

   • Increased world output increases consumer choice and therefore makes demand more elastic. It therefore improves living standards because consumer surplus is increased.
   • Globalisation encourages the practice of comparative advantage and therefore increases the international competitiveness of countries as well as efficiency and limits market failures because countries will allocate their resources efficiently.
   • Reduction in absolute poverty in LDCs due to factors such as increased employment opportunities and consumer surplus allowing the lower end of the income earning population to get access to necessities to improve their quality of life. However relatively they may still be considered in poverty and it is difficult to determine what defines absolute poverty.
   • Increased economies of scale since large firms have access to larger markets and can use modern technology and techniques.
   • There is technology transfers since there is more perfect knowledge between different markets. MNCs for example aid in the transfers of technologies and ideas. This improves the efficiencies of economies since competition is increased and the incentive to use improved technology in order to remain competitive. Also there is more intense competition, which drives gains in allocatiive, productive and dynamic efficiency
   • Increased tax revenues because of increasing national income; business profits and household incomes.
   • Globalisation creates opportunities for UK businesses to trade and invest overseas. This injects money into the circular flow of income and adds to investment income received helping reduce the current account deficits.
   • The UK benefits because there are opportunities for people to live and work overseas, however reducing the labour supply in the UK if there is net emigration. Can also reduce unemployment.

9. Factors threatening to hold back globalisation

   • Rapid growth can cause inflationary pressure on price level if LRAS is at or close to full employment. This then makes exports more expensive and limits the extent to which the country can exploit its comparative advantage.
   • Trade barriers and protectionist barriers also hold back and limit trade, therefore holding back globalisation.
   • Lack of technology and the know how.
   • Trading Blocs
   • Lack of resources
   • Huge trade imbalances; these create tensions for globalisation.
     • Economic Nationalisation; governments prevent foreign owned multinationals taking over domestic industries
     • Resource Nationalisation; countries protect their own resources such as raw materials.
     • Trade protectionism to cut balance of payments deficits and protect output and jobs
     • Shifts from multi-lateral trade to bi-lateral trade (smaller trade agreements)
   • Strong currency

10. UK Government has less control over the economy; businesses are footloose, economy may become vulnerable to external shocks, e.g. fluctuations in markets which the UK is dependent on such as the oil industry.

11. The surge of inward migration is costing the government more in terms of fiscal costs such as health care spending, however this means more tax revenue for the government provided that they all work and are not unemployed.