Discussion of the Neoliberal approach to Globalisation

Globalisation is the process by which the world’s economies are becoming more closely integrated, either through the encouragement and expansion of free trade, or through the integration of financial markets in practises such as currency trading and FPI. This integration has been able to develop rapidly over the last century due to the worldwide adoption of a neoliberal standard of free trade policies and financial deregulation, combined with the technological advancements in transport and communication. This has allowed firms to spread the many stages of production to geographically diverse areas, and therefore benefit from the reduction in production costs, and expansion of potential consumer market. The expansion in market size to international proportions has led to the increase in business competition and incentive to innovate, whilst allowing firms to access huge of economies of scale. These benefits have also lifted many of the poorest nations into prosperity, through the increase in per capita incomes of developing economies involved in globalisation. However, the term globalisation has now become stigmatised with connotations of the exploitation of developing nations, and asymmetric distribution of benefits, with the richest nations prospering, whilst certain poorer nations being left behind. As such, globalisation has been criticised for the cause of the increase in inequality in developing nations, the catalyst for retaliatory protectionist measures, and the source of structural employment in developed nations.   

Globalisation could be seen as beneficial to economies through its micro impact on businesses within a country. For instance, if a firm is able to utilise foreign low-cost labour, then this pushes down the cost of production for said good, hence the outward shift in the supply curve leads to a subsequent expansion in demand, and increase in consumer welfare, as consumers can derive the same utility for a reduced price. Certain businesses can grow from “national champions” to international market dominance, such as the Finnish firm Nokia in the 2000s. In 2007, Nokia held a 49.4% market share (Gartner Analysts) of the mobile phone market. This international dominance was only possible as the firm was able to take advantage of the international economies of scale, and utilise foreign consumer markets and foreign factors of production. The monopolistic position of Nokia was beneficial to Finnish economic growth, as The Economist predicts that the firm contributed a quarter of Finnish growth from 1998 to 2007. Globalisation allowed Nokia to access foreign factors of production, and hence utilise economies of scale and reduction in cost of production per unit, allowing the business to grow larger than it would have been able to under protectionist measures, and thus contribute more greatly to the country’s GDP and reduction in unemployment (economy produces closer to the PPF) , both of which are important factors for short term economic growth.

Moreover, the integration of markets can have important impacts for encouraging innovation. If a domestic business is forced to compete on the international market, then this means that it must compete with a greater number of firms for the lowest cost of production in order to maximise profits. Hence, firms are constantly incentivised to innovate and invest in reducing the cost of production. Any supernormal profits would be invested towards R and D, which means that the market as a whole would become more dynamically efficient. Also, because the firm must compete on the international market, consumers are able to purchase from a greater number of firms, hence there is a reduction in the possibility of a monopoly from forming. A monopoly may be seen as disadvantageous to the market, as it opens the possibility of consumer exploitation, as well as reducing allocative efficiency. Therefore, globalisation increases the dynamic efficiency of a market through introducing the incentive to innovate, whilst reducing the possibility of an allocatively inefficient monopolistic market from forming.

TNCs

Indeed, often globalisation can have significant impacts for the poorest of nations. TNCs are companies that base certain stages of production overseas. If a nation becomes more open to globalisation and trade, then TNCs become more incentivised to base their stages of production in said country. Often, developing nations benefit from low-cost labour. This means that for a firm that is involved with a labour intensive production processes, such as clothes production, then it is imperative for the firm to base their production in an economy that has low costs of labour. Hence, TNCs invest heavily in these developing nations, building infrastructure and factories, in turn reducing unemployment and contributing to supply side productivity enhancing measures. As well as benefiting economic growth, globalisation can also aid economic development. Todaro defined one of his objectives of economic development as the increase in incomes per capita. 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 over time.” This means that globalisation (“trade exposure”) can benefit a nation’s economic development through increasing incomes per capita, hence reducing extreme poverty.

Furthermore, globalisation is defined as the integration of economies, and therefore this includes the integration of labour between countries. Often, free trade agreements can lead to freedom of migration, such as in the EU trade agreement. Hence, labour is free to move from areas of high supply of labour, to areas of high demand for labour. This can improve the efficiency of production, as labour with certain skill sets will migrate to areas in demand of said skills, hence specialisation of production can occur. For instance, a skilled accountant may migrate to London, which specialises in financial services. Therefore, the UK becomes more productively efficient in its specialised sector, hence the sector has a greater contribution towards GDP, and thus the economy may experience short term economic growth. Inversely however, labour migration may result in “brain drains” in developing nations, as skilled workers migrate to already developed countries, which is disadvantageous for the developing nation’s long run growth prospects as the AS curve would shift inwards with a reduction in labour skill set. Similarly, this may create a shortage of labour within the developing country, which would cause an expansion in the wage rate, and subsequently the country would become less internationally competitive for exports.

Globalisation is also associated with many disadvantages. A TNC’s injection of FDI into a foreign nation may prove fruitless if there are underlying socio-economic problems within that nation. For instance, if a TNC were to build a factory in a developing nation, despite the injection into the economy, the reduction in unemployment, the increase to income per capita etc. , the nation still may not see long run economic growth/development. Regardless of the size of FDI into an economy, globalisation will not always produce benefits if the lay of the land is not suited towards economic growth. Take Nigeria as an example. Any profit from the investment that is not lost to corruption will be distributed among a small group of elite, and from here there is no guarantee that the rewards of profit will be “trickled down.” This means that the injection will only act to increase inequality and foster corruption. As shown in the Arab Spring, this can often result in civil unrest, which can have vast social implications that may put off investment in the future (I is components of AD, therefore a reduction in I will reduce SR economic growth).  Hence, if institutions are extractive and not suited to long run economic growth, then regardless of globalisation’s provision of FDI, the nation will not experience the true benefits of globalisation.

globalisaiton 3

Furthermore, often globalisation can lead to great trade imbalances. In 2016, the US had a trade deficit of $502 billion. The fact that a country may move from a trade surplus to deficit acts as significant incentive for nationalist policy making, as often the retaliation to globalisation is nationalist protectionism. An example of the dangers of globalisation leading to nationalism can be seen in America in the 1930s. If history does indeed repeat itself, then the Smoot-Hawley Tariff Act of 1930 is a menacing indicator of the consequences of anti-globalisation economic policies. The 1930 bill raised tariffs on over 20,000 US imports, in order to discourage economic leakages and encourage domestic industry. However, the Smoot-Hawley Tariff soon became dubbed as the Act that “intensified nationalism all over the world” (Lamont, T of J.P Morgan, 1930), and thrust America once more into isolationism. Foreign countries responded to American protectionism with their own tariffs aimed at American exports. In 1930 Canadian Prime Minister Mackenzie King imposed extra duties on American goods, whilst actually simultaneously cutting import tariffs for British Empire exports. By 1934, as many other developed economies followed suit, international trade had fallen by 66%, and the worldwide retaliation against American import tariffs meant that American export value fell from $5.2 billion to $1.7 billion per year. This example highlights the danger of trade imbalances. America shifted from a trade surplus to deficit, and consequently retaliated with overly-nationalist protectionist measures that had vast negative implications for the American export market. If a natural consequence of unregulated globalisation is trade imbalances, and trade imbalances lead to retaliatory nationalist measures, then surely this is suggestive of the dangers of unregulated globalisation for economic growth in the first place.

Moreover, globalisation can have costs for developed nations’ employment. If firms choose to relocate their production from a developed nation to developing, in order to derive profits from reduced costs of labour, then this means that the original nation will no longer have demand for said labour. Hence, the nation is left with a generation of workers who cannot use their skills in other labour markets. For instance, in Britain when it became cheaper to import foreign cars rather than use domestic production lines in the in the late 1970s and early 1980s, it is estimated that the top 15 employers in Coventry cut their combined workforce by almost half. This created structural unemployment, and due to the professional immobility of car factory workers, many workers were unable to use their skills in other sectors, hence manufacturing unemployment grew, which meant that the economy became less productive (shift away from PPF), hence long run economic growth became less likely. This example shows how globalisation and the opening up of an economy to trade can have negative impacts in terms of domestic production and employment.

However, the overall effectiveness of globalisation on an economy depends on a number of factors. For instance, an IMF injection into a developing nation may not be beneficial (regardless of size) if the economy is unable to effectively distribute the results of the injection. Therefore, the success of an injection of FDI into a developing economy depends on whether the receiving economy has institutions that promote innovation and distribute the rewards of economic growth. If the developing nation is experiencing structural economic mismanagement, then regardless of the potential benefits of globalisation, an injection of FDI will prove to be fruitless.

Also, the benefits of financial globalisation depend on the degree of regulation placed on said financial markets. Globalisation’s neoliberal foundation has meant that financial market have become increasingly deregulated. However, if financial markets are minimally regulated, then this leaves the potential for bullish investors to exploit weak currencies, and contribute towards volatility within the FOREX. For instance, following the burst of the Thai real estate bubble in 1996, Wall Street investors panicked and sold Thai shares, which led to the crash of the Thai stock market, the plummet of the Baht, and the ultimate crash of the entire Thai economy (triggering the 1997 Asian Crisis). If the financial market had been regulated to a greater degree, then such a rush to sell all Thai shares may not have taken place, which would have given the Thai government time to reassure confidence in the stock market, which may have reduced the overall impact of such a run on the stock market.

In addition, the impact of globalisation on developing nations also depends on the degree of regulation placed on the TNC’s actions in foreign countries. Often, globalisation is connotated with the images of the exploitation of low-cost labour overseas, with poor working conditions and few workers rights. Hence, the social impact of globalisation largely depends on the legal obligation of the TNC to provide their workers with adequate working conditions, trade union rights etc. , otherwise TNC’s are able to exploit low-cost labour purely for profits. This can be seen in the 2011 scandal involving a worker’s suicide at an alleged Chinese sweatshop involved in making Disney toys. As seen, if TNCs are not properly regulated, regardless of the economic benefits of utilising low-cost labour, the social impact of globalisation when left unchecked can be tragic. The incentive to relocate to developing nations also comes from the released legislation culture within these nations, such as lower environmental taxes, therefore allowing TNCs to take advantage of otherwise illegal environmental practices.

globalisation cartoon

To conclude, I believe that the benefits of neoliberal globalisation outweigh the costs. Globalisation is a reflection of Ricardo’s Law of Comparative Advantage, which states that even if a nation has the absolute advantage in terms of production of every good over another nation, the fact that the second nation will have the comparative advantage in production of one good means that it will be mutually beneficial for each country to specialise and trade with the other, rather than try to produce the whole spectrum of consumer goods. Hence, globalisation encourages this specialisation and fosters this free trade, such that now manufacturing has become a “global industry.” However, despite the economic benefits, the unregulated nature of globalisation means that it can result in unintended social repercussions. Globalisation can lead to the dilution of national identity, and destruction of the environment as collateral to economic growth. Currently, firms have no obligation to act “morally.” Hence, ideally globalisation must take place under strict regulation that minimises these negative consequences, even if this is at the cost of profits. However, each country is subject to their own idiosyncrasies and individual elements that makes such a standard regulation impossible – no one international policy on the regulation of globalisation will fit every country’s needs. Therefore, ultimately economists are encouraging nations to adopt a new type of globalisation, which aims to empower each nation to develop and trade in their own way, in order to minimise the collateral social impact of globalisation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s