Pros and Cons of Globalization

“Globalization: Understanding the Pros and Cons”

Literature Review

The concept of globalization is no longer new. It has been completely understood and discussed by theorists, researchers, practitioners, educators etc. Notwithstanding the popularity of this concept, there are still a number of areas to explore about globalization. Recent discussions on globalization involve arguments about its existence, its importance today in comparison with the past, the change in the concept of nation and citizenship due to globalization, the importance of globalization as opposed to regionalism and localism. In addition a crucial debate is continuously rising on weighing the positive and negative impacts of globalization and exploring the people who are directly or indirectly influenced by the changes brought in by this concept.

Globalization is a comprehensive study, covering a wide range of important issues including economic, social, political, cultural, religious and moral issues, etc. The definition of globalization is also defined in the light of all these perspectives. James Rosenau, a political scientist, defines it as “a label currently in vogue for people, activities, norms, ideas, goods, services and currencies that are increasingly confined to a particular geographical space and its local and established practices” (1997, p.360).

Most researchers focused on the economic impacts of globalization. It is undoubtedly clear that globalization has impacted the overall economic situation of the current world. However, the social, political and other areas also require attention as globalization has affected the policies, education, culture and overall social structure of the states. Globalization’s economic aspects are not limited to its effects on the micro-environment, but have affected macro-level markets. The microeconomic effects refer to the technological advancements and the impact at individual firm levels, whereas, the macroeconomic effects involve the collaborative analysis of markets for business purposes (Oman, 1994).

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All countries experience some positive and some negative influences of more and more integration in the world economy.

The list of positive aspects of globalization includes excessive external financing availability. This excess amount of finance is helpful especially for the developing countries. The excess availability of excess finance from external sources is evidenced by the IMF, Direction of Trade Statistics Yearbook and World Bank, Global Development Finance, 1999. For instance the increase in capital flows is observed in the East Asia Pacific from 15.8 in 1980 to 36.3 1997. Similarly, an increasing trend of capital flows has been observed in Eastern Europe and Latin America. The percentages of this increase varied from region to region. The availability of external finance helped in releasing the constraints on foreign exchange that reduced and somehow suppressed growth and development in 1980s. The availability of foreign direct investments that were included in the new funds cannot be ignored. The concept of foreign direct investments is encouraged by the governments of the developing states. Foreign Direct Investments are encouraged because they improve the capital accumulation process and help the country develop with a faster pace in the present and thereby, affirm its success and prosperity on economic grounds in the upcoming years. Globalization does not only provide direct advantages to the countries influenced by it but also indirectly helps them in improving the overall working and living standards. The emergence and increased Foreign Direct investments can be perceived as a direct advantage that globalization brought in but the large number of benefits that are now accessible due to the availability of foreign direct investments can be viewed as indirect advantages of this concept. Globalization has encouraged the interest of foreign companies in developing and expanding their businesses in countries other than their native state. The expansion of their businesses does not only make the products and services available in the foreign countries but also provide them with the thought and insight of new technologies, strategies and plans. The foreign investors also aim to introduce new technologies in other countries. This helps the recipient country increase productivity, efficiency and competitiveness and encourages growth in the developing countries. New technologies, which are financially impossible to be attained by developing countries, are accessible through Foreign Direct investments and they may be more profitable for the country’s businesses than the technology used locally for ages. Maxfield argues that the rise in capital markets (specifically those institutional investors dealing in bonds and stocks) can comparably be more consistent with democracy and transparent government than people normally assumed (Maxfield 1999). Undeniably, this argument does contain a logical aspect that capital markets can in fact support democracy by demolishing oligopolistic corporate arrangements in developing nations. Another logical view of this argument is the fact that the demand for further knowledge and information on the call of foreign investors and International Monetary Fund may help building transparency on public and private sectors.

Although the positive influences of globalization carry great importance, the negative impacts must also be considered. Without keeping the negative points in mind, no country, organization or individual can make the most of an available opportunity. There has to be a balance between the positive and negative outcomes to take full advantage of any opportunity. The issues that arise as a result of globalization include some grave and noticeable impacts. For the developed countries, the negativity of these problems is manageable as they have excess support, technology, funds, education and tactical plans. However, the developing countries suffer the most as they do not have enough resources to immediately tackle the problems that may arise. The problems that may be difficult for the developing nations to be resolved include those that are resulted because of new trade and capital flows and the manner in which they hit the economy and society of such countries. The emergence and increase of heterogeneity and polarization on national and regional levels is one of the important problems associated with globalization. This problem is not limited to the grounds of firms, countries and regions only but also exists between the groups of workers. Some possess more abilities and skills to take benefits of the opportunities that are presented by globalization while the others either lack skills, abilities, resources or guidance. This results in a situation where conflicts may arise on social and political grounds and further in the opposition of globalization approach.

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The increase in capital flows that were discussed as being advantageous also resulted in the creation of new problems for the governments in the management of their economies. Macroeconomic issues are also observed in 1990s. The capital inflows also result in creating a problem that is the overvaluation of exchange rates. This overvaluation causes a reduction in competitiveness and in intense situations, causes foreign exchange crises. The instability of capital flows also result in the magnification of the normally pro-cyclical nature of macroeconomic policy that may also end up creating crises. A strong financial supervision is required to prevent the banking crises that may further worsen foreign exchange crises. In such circumstances, to improve the situation there is a need to bring necessary changes in domestic policies as well as changes in the international policies. The emphasis on the alteration of policies can further be identified by the statement of an excellent analyst of globalization as he states : “Openness to the world economy can be the source of many economic benefits…. However, these are only potential benefits that can only be fully realized when the complementary policies and institutions are in place at home ” (Rodrik, 1999, p. 1; see also Rodrik, 1997).

Many theoretical and empirical studies have been carried out to examine the relationship of globalization and labor market trends. However, it is unusual but true that a relatively smaller number of econometric studies are available to examine if globalization has some influence over the income inequality in most of the countries including the developing and the developed ones. More emphasis can be observed on the economic effects of globalization ignoring the significant impact of globalization over social and political conditions of the countries. Most of the studies focus on the changes in trade flows, capital flows, FDI, capital accounts etc. ignoring the social, cultural and political aspects. The study of Dreher and Gaston (2007) provides that globalization resulted in de-unionization of Organization for Economic Co-operation and Development (OECD) member countries through social integration. The political and social integration are greatly ignored while searching for evidence on inequality in the economics research. For instance, a state may either end up reducing taxes as a result of unavailability of limitations on capital mobility or propose subsidies to focus on investment. The similar the cultures of the countries are the simpler it is to exchange information. Reduced taxes further end up lowering the social standards and this is one of the social aspects that prove that globalization can be an important concept in understanding income inequality. In contrast, if we focus on the political integration concept it is apparent that it may revolutionize the concept of race-to-the-bottom concept brought about by economic globalization (Dreher 2006). Hence we may conclude that economic and political globalization work in contrary to each other. The economic globalization increases inequality whereas political globalization tends to decrease it.

To understand the relationship between income inequality and globalization Axel Dreher and Noel Gaston carried out a research and observed that globalization has worsened the situation. The results of their study showed a devastating result on income inequality among OECD countries. They also observed that the less-developed countries have had a little impact on the inequality fractions. Their study also revealed that increased democracy did not result in low income inequality but there are more facts to prove the contrary that is it contributes in increasing income inequality (Dreher & Gaston 2008). More evidences and researches are required to further clarify the impact of globalization on the less centralized governments and the policies adopted by them.

Researchers have also been struggling to find out the proximity between globalization and growth. Many studies have been carried out to understand and analyze this relationship. Chanda (2005) analyzed the index of capital account openness and observed that developing countries are more open to the affects of globalization. On the other hand, Rodrik (1998) showed that capital account openness does not have any influence on growth. Knowing the limitations of cross-sectional analysis, the study of Dollar and Kraay (2001) is considered to produce a more valid judgment as it uses panel data. Their study revealed that Foreign Direct investment increased the growth rates. In the evidence of this statement greenway et al. provides the same results and affirms the existence of a strong relationship between these two elements. Edison et al.(2002) also provided a detailed examination of numerous financial integration indicators and growth and explained that no strong or healthy relationship exists between the two elements. However, Dreher (2006) gathered and analyzed the available literature on the relationship between globalization and growth and provided with the result that “globalization is good for growth”(Dreher 2006 p. 1105)

The continuously increasing connection between people around the globe has been observed since 1080s. Easy transport facilities and reduced transportation expenses along with the cheap transmission of information from one place to the other have helped the world cover and reduce distance barriers. In addition Foreign Direct Investment, immigration, technology transfers and easy capital flows between countries are also observed to be increasing. Most of the states are showing their interest in understanding the impact of globalization on employment opportunities and income distribution. People have different views on globalization’s effects.  The group of optimists place more emphasis on the increasing trend of trade and economical development. They further link the increasing trend of trade with overall growth and make a claim that growth is in favour of the poor as it provides them with more job opportunities and reduction of poverty. On the other hand the group of pessimist claims that globalization generates unconstructive counter effects on the earlier confined divisions. They also argue that globalization increases marginalization of all divisions of the global economy and also gives rise to inter-country income in equality. The conflicting views about globalization between these two groups also involved the arguments about the changing trends of poverty rate. Optimist argues that globalization has helped in reducing poverty pointing towards the decreased poverty global poverty rates in the last two decades. Whereas the opposing group argues against this claim by concluding that this reduction in poverty is because of statistical artefacts and rapid development of china. They also claim that absolute poverty has shown an increasing trend in a number of developing countries and relative poverty has increased in most of the states. From the above debate it is not difficult to conclude that globalization has a broader range of topics that require attention and more research. The range of these topics not only involves political, economic, development and financial issues, but also affects the world’s social, cultural and environmental conditions. The social effects of globalization include availability of opportunities for the reduction of poverty, employment rights and obligation, environmental issue, religious concern and so on.

As the Heckscher-Ohlin theorem suggests, trade and Foreign Direct Investments must keep in consideration and concentrate on the availability of excess labour in developing countries and must take proper actions to incorporate these as assets for the trade and development of the organizations and countries. This theorem is based on the idea that labour intensive work processes can help achieving specialization through repetition of processes and cheap availability of labour can attract more investors towards the growth of trade via this technique, hence, creating more jobs and employment opportunities for available labour resources. The recent researchers conclude contrary results to this approach by creating evidences that increase in trade does not essentially constitute a more positive result in respect of employment opportunities especially in the developing countries. The standardized production processes or similar production procedures across different states result in either multiple equilibria (Grossman & Helpman, 1991) or dissimilar and inconsistent job movements in the evolutionary ‘catching-up-models’ (Fagerberg, 1994; Montobbio & Rampa, 2005). Also, Kathuria (2001) suggests considering the effect of the increase in total-factor-productivity in the developing countries due to globalization in comparison to the direct labour saving effect of the traded in equipments, machinery and other technological advancements (Kathuria, 2001). Hence, we cannot relate the employment opportunities to increased productivity and overall profitability with considering the factors and effects of other strategies available. The cheap availability of labour due to globalization cannot reduce the importance of technologies in the modern world. The access to recent technologies has also grown since the 1980s and must be considered as a helpful effect of globalization for organizations. Putting it in other words, the research suggests that the ultimate employment effect of rising trade is reliant on the relationship between productivity development and output growth. Globalization has brought in the existence and extensive popularity for the concept of import and export of goods, services and products. The increase in exports is beneficial not only for the organizations but also for the countries bringing in more capital and popularity of the brand. Whereas, imports may create negative impact on the local business and in the long run may result in redundancy. People, who are the eventual consumers of a product or service, opt for cheaply available imported stuff rather than the local. Moreover, the repetition of work for labour may increase their productivity more than the output budgeted. The production constraints like limited capital, finance and/or demand can put the organization under pressure and they will be left with no other option than reducing their staff (Reddy, 2004).

Setting aside the debate of trade, in considering the effects of Foreign Direct Investment, one may conclude easily that FDIs do not only bring in capital, strengthen the development process, create more jobs but also provide additional services to the people (Lall, 2004). Still, the negative side of FDIs cannot be ignored. The permanent close down of many businesses due to extreme competition and lack of technology and capital availability in local firms reduce jobs and increases unemployment. The FDIs also opt for Mergers and Acquisition reducing the overall employment opportunities. Hence, the concluding statement about globalization and its effects on a particular country or group of countries depends on the resulting effect by weighing positive and negative influences of globalization (Aitken and Harrison, 1999). The research conducted by Lee and Vivarelli concludes that the effect of trade and FDI on employment is largely dependent on the state and sector that is under consideration and the HO theorem is inconsistent in most of the cases.

Globalization has resulted in producing easy access to products and services for the consumers who had problems in accessing this stuff before the spread of this concept (Evenett, 1999). In order to achieve greater sales, profits and brand name, imported material and foreign investors produce such a pricing model that attracts more customers and breaks the customer chain of local businesses. The increasingly globalized world has also helped the poorer countries and those with food shortages with increased availability of food supplies (Mander & Goldsmith, 1996). The consumers who were earlier bound to purchase expensive products and supplies in limited resources due to local monopolistic market are not able to attain cheaper imported material as a substitute (Graham & Krugman, 1991). Gaunt (2002) provides evidence that poverty rates around the globe on individual and country basis has been reduced as a consequence of globalization.

Estimates from experts reveal that approximately 30 to 40 percent of the global population has taken some advantage from the increasingly globalized economy. On the other hand, no such progress has been shown by the remaining population (Valaskakis, 1998). However, globalization is often blamed for increasing the gap between the skilled and unskilled, financially sound and financially disabled, educated and uneducated, experienced and inexperienced, technologically knowledgeable and those who are unaware of modern technologies. Increasing competition has resulted in increasing this gap, whereas, increased competition has led the organizations to improve their performances and have made things better for the consumers (Frank & Cook, 1995).

Labour conditions, after globalization, have also changed dramatically. Organizations are taking more interest in giving proper education and training to their employees. Some researchers also indicate that increasing competition in the world market has emphasized on the need of developing a better and more effective educational and learning environment. Workers are the advantaged group in this competitive area (Mander & Goldsmith, 1996). Some argue that globalization has resulted in exerting a downward pressure on salaries, pensions and other benefits. Also, it has resulted in reducing and further eliminating the effects of powers that were previously possessed by unions (Lawrence 1995; Krishnan, 1996). However, others argue that globalization does not have any remarkable effect on labour conditions and salary systems (Krugman, 1994).

The impact of globalization on culture has also been discussed and researched by writers in an efficient way. Globalization has brought in many new changes, advancements and eases for people. It provides new information, reports and ideas to transmit from one person to the other. However, the increasing diverse population in countries has also posed a threat to their local security. People are now facing problems of terrorism and disruption due to uncivilized population merging from their native places to other countries. The religious conflicts are one of the crucial topics that result in the disruption of law and order situation in countries. People having different backgrounds and perceptions may create devastating circumstances not only for themselves but also for the local residents. The extremely diverse population is difficult to manage as people cannot be grouped at large due to different point of views and conflicts on matters.  The residency problems are also troubling the governments in managing people. Lack of food, education and guidance for the foreigners are not only affecting their own lives but native residents are also affected by their acts.

In conclusion it can be said that globalization has far reaching effects both positive and negative. These effects influence individual businesses and countries ‘ national and global lives. The positive effects of globalization are of immense importance and are integrated in today’s world with such a tendency that it is not possible pull out its effects. The negative effects are harming the society, culture, environment and economic conditions of the world economies but it is not possible to eliminate this concept for the good of people. Somehow it has become inseparable part of our lives. Governments and local authorities, however, can take steps to learn lessons or eliminate the negative effects of globalization. In addition more comprehensive and improved laws and regulations may help generating an equality based, unbiased and socially sound environment for the people in today’s diverse world.

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