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GLOBALIZATION 13

Abstract

Globalization is a term that has been used to refer to define theincreasing trade openness amongst states. It also explains theincreased foreign direct investment especially in developingcountries not forgetting the consequences this has brought in thepast and recently. This paper explains the history, types, aspectsand globalization in developed countries. The study topic fits intothe process of economic globalization as it looks at theglobalization of labor in terms of employment, globalization ofproduction and income in the light of income inequality withindeveloping countries and globalization and poverty alleviation.

The main findings of this paper reveal interesting findingsusing the Heckscherohlin predictions. Globalization and labor doesnot necessarily mean that it promotes employment. It also means thatglobalization is not automatically assured when trade and FDI areincreased. Other main findings

i) include the above mentioned labor and employment effects

ii)Increasing trade and FDI does not cause income inequality indeveloping countries

iii) Economic growth is fostered by increasing trade and absolutepoverty alleviation (Frankel, 2000).

The most powerful forces that have shaped the post war world isglobalization. Globalization, which is characterized by factors likeinternational integration and trade, has significantly affected theglobe. Both developed and developing countries have been affected bythe globalization move making it very critical to economic progress.International trade has particularly become increasingly imperativein the past five decades as international flows become significant inthe past three decades asserts Frankel (2000). The world economy hasbecome increasingly integrated and connected since the 80’senhancing globalization impressively. Since the 19thcentury, major revolutionary breakthroughs have taken place makingglobalization not a new phenomenon in the globe. The impact ofglobalization has been felt massively (Lee and Vivarelli, 2006).

Globalization is a term that has been used to refer to define theincreasing trade openness amongst states. It also explains theincreased foreign direct investment especially in developingcountries not forgetting the consequences this has brought in thepast and recently. It is almost impossible to define the termglobalization concisely due to the large concepts it holds. At times,the term comprehensively defines increased trade and liberalizationof policies, transportation cost reduction and technology transfer. Astandard definition of globalization does not exist. Current debateson globalizations are clouded by divided opinions on the topic withharsh divisions amongst supporters and opposers of globalization.Since the debate on globalization appears quiet confused, this paperwill select applied approaches that have contributed to globalizationfocusing on developing countries with a purpose of gaining deeperunderstanding of this topic.

There are many aspects of globalization including distance that willbe reviewed in the literature section. Frankel (2000) in his researchon globalization of the economy argues that globalization is a goodthing generally not just because of the economic growth it brings butalso due to the non- economic benefits it has. This paper will focuson globalization in developing countries despite the fact that anincredible amount of literature exists on other states.

The adopted methodology for this study will be economic payingspecial attention to applied approaches of globalization. Theliterature review section will be divided into subsections withsubtitles to guide the reader on the relevant topics. After a briefexplanation of globalization, the aspects of globalization followedby an expansion on globalization’s impact in developed countriesand finally a conclusion and policy implication section that sums upthe ideas conclusively.

Specific global phenomenon

The global phenomenon that this study will focus on is globalizationof labor in developed countries. The scope of the study is the socialconsequences of globalization that sets a suitable background to helpunderstand how domestic employment, income inequality and povertyreduction. Social consequences of globalization fits into the processof economic globalization through specific aspects that will beoutlined in the general framework of this paper.

Research questions

  • To investigate globalization in developed countries

  • To investigate globalization on labor and employment in developed countries

  • To derive possible social consequences of globalization in DC’s

General framework

The general framework of the paper is useful in providing acomprehensive discussion of globalization’s impact in the world. Itis also useful in addressing the research questions from the existingliterature on local employment and income distribution. Reviewingincome of developed states and globalization as an imperative factorin poverty alleviation will also be reviewed. The framework will alsohelp derive national and international policy implications and policymaking.

Literature review

History of globalization

Globalization evolution has been steady and impressive. Judging bythe globalization standard of the 1900, a similar trend appears tothat of the 20th century with the most revolutionarybreakthrough being in transport and communication. The freight ratesfor example significantly fell during the 19th century asthe monetary stability environment was provided by the gold standardasserts Frankel (2000). As a result of the rapid growth of trade,international differences in commodity prices dramatically narrowed.The period of 1914-1944 saw the world take a great step back fromeconomic globalization. The causes of that retrogression were firstworld war, isolationist sentiments, economic depression, monetaryinstability during the interwar period, increased tariffs and tradebarriers such as the adoption of the Smoot-Hawley tariff in 1930 bythe US congress and the 1940 communist bloc rise. Those barriers werecreated by states contrasting factors like technology that reducebarriers.

The world was more fragmented as of 1945 than it was in 1914 duringwar. The victorious states were determined to avoid the mistake madeduring the first world war in the future rather they would promoteeconomic integration largely to advance long term political goalsthrough globalization. The US led the way through reducing tradebarriers and making gold convertible dollars available. It took morethan two and a half decades for the US to reach the same level ofglobalization as it had experienced before war. With all those eventsunfolding in history, an important lesson learnt is that nothing isinevitable about the globalization process. For it to prevail, worldleaders must make wise choices that benefit instead of causing harm.

Types of globalization

Globalization can be classified as international and domestic withthe global type involving states in mostly developed states ordeveloped and developing states while domestic globalization involveslocal states that neighbor each other geographically. Additionallythere exists three types of globalization which are namely economic,political and cultural. Economic globalization is the most commonform of globalization whereby states are termed as dependent on eachother influencing each other.

Economic globalization promotes rich states to invest in poor stateswith an aim of advancing or making better the other state. Theeconomic process of globalization involves transfer of economicresources from one country to another.

Political globalization involves efforts to make the world appear asone system under one government. Some of the notable efforts towardsthat move are seen in the United Nations and league of nations. Otherregional organizations following suit in uniting the world are theEU, APEC, ASEAN and WTO. Member states of such states remain loyaland are obligated to commitments that make trade successful.According to political globalization, the world as one system is saidto be easier to govern and safer promoting interaction, understandingand experiencing less conflicts.

Cultural globalization is about culture awareness as a commodity. Itinvolves exchange of cultures across the globe through literature,books, films, movies, clothes, food and beliefs. Culture flows fromthe north to south mostly, towns to cities and villages. Theglobalization of culture is facilitated by factors like technologyand information revolution in this digital era.

Aspects of globalization

Many aspects such as distance, colonial factors, free trade areas,common country and currencies characterize globalization. Distance isan important factor not for physical shipping purposes only but theeffect of informational barriers that are observed to decrease withhistorical, cultural, political and linguistic proximity.Historically people had to travel for miles and days to relaymessages or deliver trade goods. Through globalization distance hasbeen minimized to a large extent saving fuel and transport costs aswell as communication bills. Though face to face contact is importantfor negotiation and information exchange purposes, distance issignificantly reduced with globalization and improved technology likeskype.

Globalization has reduced distance greatly through technology makingit possible for countries to relate across borders. Distance also isimportant for data analysis and pricing of goods in differentlocations as it affects the relative prices of goods. The relativeprice of goods for example is affected by distance with regard to howclose states are to each other. Geographical variables such aslandlocked countries have statistically significant effects onglobalization. Landlocked states are less likely to engage in lesstrade as compared to two adjacent states. Factors like languagebarrier impede on trade. According to Frankel (2000), two countriesthat speak the same language are 50% more likely to trade with eachother as compared to those that do not share a common language. Inthe European Union for example, the multitude of languages is one ofthe main challenges to economic integration. Colonial factors as wellcontribute to facilitating or hindering globalization amongst states.Colonial empires for example in developed countries are 2-4 timesmore likely to trade than those who do not share past colonialinteractions.

Military factors affect bilateral trade with trade being higher incountries which are allies and lower is states that are actualadversaries. If two countries are at war for example they are lesslikely to trade. Free trade areas are important in the process ofglobalization as they are responsible for reducing regional tradingtariffs within countries. Political links affect trade policies whilecommon countries enjoy benefits like common languages. Currenciesplay a critical role in globalization as exchange rate fluctuationsare said to affect the law of pricing globally. Having understood theaspect of globalization we will narrow down to look at developedcountries and the social impact of globalization on them.

Globalization and labor/employment

Labor and employment as a result of globalization offer jobs andcreate opportunities for many citizens. When globalization opens uptrade it creates opportunities for more jobs to be created throughForeign direct investment. According to Lee and Vivarelli (2006),trade and FDI trigger specialization trend of domestic laborintensive activities. Globalization and labor are termed to go handin hand in developing states. However, that is not always the case aswe will see in the review of literature below. Globalization bringsabout expansion of local employment opportunities through the growthof local industries and firms. According to researchers, the increaseproductivity in employment sectors and creation of firms is a benefitthat developed countries enjoy. Direct labor leads to direct savingof imported technologies and sets a platform for employment.

If the productivity growth exceeds the output growth it becomesdetrimental to job creation. Domestic sectors like publicadministration, the agriculture sector, and non traded service canlead to labor sinking often implying underemployment or hiddenunemployment in the informal labor sector (Fosu, 2004).With regard toFDI inflows, developing countries are able to open opportunities forforeign capital through generating jobs and job creation withinsuppliers and retailers. The multinational firms lead to possiblereduction of employees following FDI associations operations throughmerger and acquisitions.

The theoretical point of view on the overall employment impact isuncertain. No specific literature offers a clear conclusion on therole that globalization plays on employment. It is thereforeimperative to collect data on the relationships of employment, laborand globalization. Past studies reveals that FDI liberalization hasbeen good for labor in most countries except the transition EasternEurope states. According to Ghose (2003), increased trade and FDI hasbeen relevant in some newly industrialized states in themanufacturing sector of employment. For such states, the growth oftrade in manufactured products implies a large positive effect onemployment in the manufacturing industry. More evidence on trade andFDI in the manufacturing industry at the national level reveals acontrasted picture as a result of globalization. The employmenteffects of trade liberalization is mixed in successfully integratingDCs appearing negative in Latin America and positive in Asian states.

A review of the theoretical evidence leads to a conclusion onglobalization and employment impact mixed up with different findings.Globalization does not appear to always benefit employment asexpected for most states within DC while in some sectors is appearsto increase employment. Gros (2004) argues that, the impact ofemployment is unpredictable a priori as the best results seem to bewithin non -globalizing developed states as a result of laborunproductivity.

Globalization within country income equality

Stolper-Samuelson’s is another theory that is used to predicttrade and FDI. It explains income and low skilled labor in DCsimplying an increased demand for domestic labor (Gros, 2004). Thisdecreases within income inequality and country wage dispersionequalizing the effect in newly industrialized states. The theory isvalid and a great way of explaining the cones of diversification.

The theory explains how countries with unskilled labour abundanceand capital are in the same cone with another state which has anabundance of skilled labor and capital in the same cone. Theunskilled intensive model explains how developed countries are skillintensive in the labor market transferring production from themselvesto developing states through import/export trade relationships.Outsourcing production is the best example of this model wherebyunskilled labor is used to benefit both states.

FDI wheels new technologies and is useful in helping upgrade localfirms because of the pressures they experience from foreign firms.Innovation overflows from foreign to local firms through thedemonstration effects, vertical spillovers, labor turnover andspinoff and competition effect all of which are necessary forcompetitive pressures amongst foreign firms. Additionally , embodyingtechnological innovation is important as it plays the critical roleof contributing to capital upgrade and economic growth of DC’s (Leeand Vivarelli (2006).

Globalization normally goes hand in hand with policies from marketsand reforms that globalize in domestic markets of laborliberalization or privatizing previously owned state forms.

Globalization and poverty alleviation

One of the greatest benefits of globalization that each state wouldlook forward to is alleviating poverty. Poverty hinders progress andmakes it impossible for states to progress economically. It is anenemy of progression and has been said to reduce with globalization.Globalization is meant to be economically beneficial as far asalleviating and reducing poverty was concerned. Given the neutralityin terms of the income distribution impact poverty reduction can beachieved through globalization. Most developed countries didexperience significant reduction of poverty levels and fastglobalization to states like China. However the same happenedconversely in developing countries making the support of views ondecreasing global inequality relevant. Critics of globalization showthe regression on developing states is a result of exceptionalChinese growth and relative poverty.

Theoretically, the only channel that globalization affects is notonly economic growth but poverty levels as discussed some critics.Globalization deeply influences labor productivity implying higherlabor wages and job losses elsewhere (Ghose, 2003). Data collectedfrom 120 DC’s revealed that globalization can help reduce povertylines,

  • Absolute poverty has been reduced through trade openness as measured by people living below the poverty line

  • Financial liberalization is another factor that seems detrimental to poverty alleviation

  • Relative poverty measured has no relationship with trade or foreign direct investment

Conclusion

Globalization is a great move towards economic integration as theworld has become increasingly significant with respect to trade andfinance. Globalization is a term that has been used to refer todefine the increasing trade openness amongst states. It also explainsthe increased foreign direct investment especially in developingcountries not forgetting the consequences this has brought in thepast and recently. Though globalization affects both developing anddeveloped countries, a focus was drawn on developing states whichseem to have benefited from globalization as compared to developingstates.

The implications of globalizations in countries have been feltdeeply as the aspects of globalization continue to prevail.Globalization is no longer a new phenomenon and remains influentialto many states. The main findings of this paper reveal thatglobalization is not what it appears to be. Many assumptions madesuch as employment increase resulting from globalization are notapplicable to all developing states. Meaning creation of jobs or thedecrease in inequality do not apply and are not automatically assuredwhen trade and FDI are increased. Other main findings

i) include the above mentioned labor and employment effects whichwill be seen in different areas of labor, employment and povertyalleviation. In some regions, globalization has managed to promoteemployment like in the manufacturing industry though conclusiveresults are not evident.

ii)Increasing trade and FDI appears not to be the major culprit ofincreasing income inequality though evidence reveals otherwise.

iii) Economic growth is fostered by increasing trade, globalizationis irrelevant if trade does not take place and ensure that economicgrowth takes place.

iv) Economic growth is promoted by globalization and povertyalleviation. With economic growth states are likely to experiencegrowth and alleviate poverty.

Globalization has promoted economic growth to some extent indeveloped states and is a good thing. However, it is recommended thatdeveloped states help developing state find a balance in economicgrowth and come past the poverty line.

References

Frankel, J. (2000). Globalization of the economy, Workingpaper, National bureau of economic research, Massachusetts,Cambridge, retrieved from http://www.nber.org/papers/w7858.pdf

Fosu, A. (2004), The Social Impact of Globalization: The Scopefor National Policies, in Lee, E. and M. Vivarelli (eds.),Understanding Globalization, Employment and Poverty Reduction,Palgrave Macmillan, New York, pp. 327-48.

Ghose, A. K. (2003), Jobs and Incomes in a GlobalizingWorld, International Labour Office,

Gros, J.B. (2004), ‘Labour Demand of Developing Countries in aDecade of Globalization: A Statistical Insight, ‘in Lee, E. and M.Vivarelli (eds.), Understanding Globalization, Employment andPoverty Reduction, Palgrave Macmillan, New York, pp. 107-39.

Lee, E. and Vivarelli, M. (2006). The social impact ofglobalization in the developing countries, IZA DPNo. 1925,Catholic university, Germany retrieved from http://ftp.iza.org/dp1925.pdf

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