The Impact of Globalisation (HSC SSCE Economics): Revision Notes

The Impact of Globalisation

Introduction

Globalisation has fundamentally transformed the world economy. This note examines how globalisation affects economic growth, development, production processes, income distribution and environmental outcomes. While globalisation generally improves economic outcomes, it also creates challenges and risks.

The key impacts include:

• Changes to economic growth rates across different regions
• Shifts in how goods are produced and traded
• Effects on income inequality within countries
• Environmental consequences
• Increased influence of global financial markets
• Greater synchronisation of economic cycles between countries

Economic growth and development

How globalisation affects different economies

Globalisation creates different opportunities for different types of economies. Developing economies can access global markets for their products and benefit from foreign investment and new technologies. High-income economies, particularly through transnational corporations, have found opportunities in global supply chains and service markets.

Global growth acceleration

Evidence suggests globalisation has accelerated global economic growth, though the benefits are unevenly distributed. Global real GDP growth increased from 3.1% per year during the 1980s-1990s to 3.8% from 2000 until the COVID-19 pandemic in 2020.

The fastest-growing economies have been emerging economies like China and India. Advanced economies have experienced slower growth. Since 1990, some emerging and developing economies have been "catching up" to advanced economies, although this pattern does not hold for all countries, particularly when measured by per capita income.

Regional growth patterns

East Asia and Pacific (excluding high-income countries)

This region achieved the world's fastest growth rates, averaging 8.7% per year during the 1990s and 2000s (falling to 7.3% in the 2010s). China's growth was particularly remarkable at 10.4% in the 2000s, demonstrating how industrialisation and globalisation can drive economic expansion. The region grew 7.2% overall in 2021, with China at 8.1% and the rest of the region at 2.6%.

South Asia

This region experienced successful growth averaging 5.7% since 2000. India sustained 6% growth after increasing integration with the global economy, while Bangladesh also achieved 6% growth. The region contracted by 5% in 2020 due to COVID-19 but rebounded with 8% growth in 2021.

Europe and Central Asia

Former socialist economies grew 5.1% in the 2000s and 3.1% in the 2010s. These economies made a generally successful transition to market systems after experiencing severe contraction during the 1990s (-0.9%) due to the difficult transition process. Growth fell below 1% in 2022 because of the war in Ukraine.

Middle East and North Africa

The region experienced strong growth (4.4%) throughout the 1990s and 2000s, including Egypt (4.7%) and Saudi Arabia (3.6%). Higher energy prices during the globalisation era supported this growth compared to the 1980s (0.1%). However, this growth did not resolve high inequality levels in many regional economies. Political instability and declining oil prices reduced average growth to 2% since 2011.

Sub-Saharan Africa

Average growth reached 4% from 2000 to 2021, with strong performance in Ethiopia (8.7%), Mozambique (6%) and Nigeria (5.2%). However, other African countries have been less successful, with some experiencing growth rates so low they see very little improvement in living standards.

Latin America

Strong annual growth occurred in the first decade of the 2000s (3.1%), improving from 2.4% in the 1980s and 1990s. Growth fell back to 1% annually in the 2010s, reflecting weaker commodity prices and political instability. Latin American economies experienced the greatest COVID-19 shock of any region, contracting by 6.5% in 2020.

High-income economies

Advanced economies grew by just 2.1% on average from 1991-2021, slower than the 3.3% recorded during the 1980s. Average annual growth rates were 2.4% in the United States, 1.6% in the European Union and only 0.8% in Japan.

The war in Ukraine – a trillion-dollar inflationary shock

Russia's invasion of Ukraine in February 2022 fundamentally changed the global security and economic environment. The war created major economic consequences beyond the immediate humanitarian crisis:

Interpreting growth trends

The remarkable growth in emerging economies that embraced international trade, foreign investment and transnational corporation participation may indicate that globalisation facilitates higher growth rates. China and India's sustained growth is linked to policies encouraging increased trade and foreign investment.

However, the most globally integrated economies—the advanced economies—have experienced comparatively weak growth over the past two decades, especially since the late 2000s global recession. The 2010s saw prolonged lacklustre growth despite record low interest rates and very low inflation. High indebtedness constrained governments from using fiscal policy to stimulate growth.

Economic development and wellbeing

Globalisation impacts economic development (the wellbeing of individuals and societies) mainly through its link to economic growth. When globalisation lifts growth rates, it also raises income levels and provides more resources for education, health care and environmental programs.

However, globalisation can have negative development consequences if it increases income inequality and accelerates climate change and environmental damage. The slow global response to climate change is likely to widen the gap between growth and development indicators in coming decades, as countries need to allocate more resources to addressing climate change impacts like extreme weather events.

China's role

Any analysis of globalisation's impacts is inevitably dominated by China's rising economic power. China's rise represents a major structural change in the global economy occurring alongside globalisation. Globalisation has contributed to China's extraordinary development speed.

Trade has been central to China's rapid industrialisation, as growth has been led by export-oriented manufacturing. China's growth also accelerates globalisation by deepening trade and financial links among economies. The speed and scale of China's economic expansion dwarfs any other emerging economy.

Human Development Index trends

The Human Development Index (HDI) measures a combination of material living standards, education and health outcomes. Since the 1980s, almost all countries have experienced major improvements in economic development. There is little evidence that globalisation, on balance, contributed negatively to economic development.

Declines in economic development are restricted to a handful of countries experiencing upheaval in transition from planned systems (Russia, Moldova, Tajikistan) or serious political turmoil (Zimbabwe, Democratic Republic of Congo, Afghanistan).

Trade, investment and transnational corporations

Globalisation has resulted in substantial increases in trade flows and foreign investment, reaching a record US$32 trillion in 2022. Transnational corporations (TNCs) play a key role in both trade and investment flows, increasingly dominating business activity worldwide.

Growth of international trade

International trade in goods and services continues to grow at least as fast as global economic growth in most years, now equaling over half of global output. All regions have experienced this trend as technology changes and government policies have fostered trade growth.

Global value chains

An important feature of trade growth during the globalisation era is that goods are produced through multiple stages in different economies through global value chains (or supply chains). Countries engage in "vertical specialisation," focusing on just one or two parts of the production process.

Since the early 1990s, trade through global value chains has increased from less than half to about 80% of total trade.

COVID-19 supply chain disruption

The COVID-19 pandemic caused the most significant disruption to international supply chains of the globalisation era. Before March 2020, there was an assumption that supply chains would continue becoming ever more interconnected.

Foreign Direct Investment

The globalisation of financial markets has increased reliance on foreign sources of finance for investment. More countries now have greater access to overseas funds than ever before. FDI now plays a greater role in generating economic activity in every region.

In 2021, FDI was over nine times higher than in 1990 (though only 69% of its peak level recorded in 2007). Very large increases occurred in high-growth emerging economies that relaxed barriers to foreign investment. However, the benefits have mostly been enjoyed by economies with already favorable economic prospects. Only a trickle of FDI has flowed to the least developed countries (LDCs). The growth of short-term financial flows has had a destabilising impact on many economies.

Transnational corporations

The removal of restrictions on foreign ownership and development of global capital markets have spurred TNC growth. There are now more than 104,000 TNCs. Foreign affiliates of TNCs employ over 83 million people globally. They dominate major industries including motor vehicles, telecommunications and pharmaceuticals.

Performance of TNCs

TNCs generally perform better than domestic firms on indicators including productivity, quantity sold, production size and export market share.

Concerns about TNCs

Another concern is that TNCs do not operate under any one country's laws, so they can move production facilities to countries with weakest laws and artificially structure financial flows to avoid paying taxes. According to the OECD, developing economies are disproportionately affected by tactics TNCs use to avoid US$240 billion in corporate taxes annually. Lower labor standards and environmental protection laws in developing nations can lead to worker exploitation and environmental degradation.

Income inequality

Globalisation impacts income inequalities within countries because, as trade and financial flows grow, it changes economic structures.

How globalisation affects inequality

Trade effects

Increased openness to trade provides more export opportunities, which can raise incomes of trade-exposed or agricultural workers in developing countries. Lower tariffs on imports improve living standards for the poor by reducing goods prices.

In advanced economies, higher trade levels may shift employment towards higher-paid service industries, but may also depress incomes of workers in import-competing sectors. For example, employees in the American motor vehicle industry have seen incomes decline as US car producers compete against cheaper Asian imports.

Financial flow effects

Increased financial flows provide greater employment opportunities and fuel economic growth. However, FDI flows tend to be concentrated in higher skill and higher technology sectors, favoring those already better off. IMF research found that financial globalisation increases income inequality within countries.

Skilled labor mobility effects

Income inequality has increased in many emerging economies because global mobility of skilled labor means highly skilled workers may emigrate to more advanced economies with higher-paying jobs unless they receive higher pay. This contributes to large pay increases for highly skilled workers, while incomes for other workers grow much slower.

Trends in inequality

According to the IMF, income inequality rose by almost 0.45% per year during the three decades up until the mid-2000s, as measured by the Gini index (a common measure of inequality where a higher number indicates higher inequality).

COVID-19 inequality impacts

While COVID-19 impacted advanced economies first, the greatest effects were in emerging economies, whose GDP per capita declined by more than double—6.7%—in 2020. A 2023 IMF report found that emerging economies suffered the worst impacts due to high employment in face-to-face jobs and low social security transfers.

Environmental sustainability

The relationship between globalisation and environmental factors is complex.

Negative environmental impacts

Globalisation can have negative environmental consequences for several reasons. Low-income countries desperate to attract foreign investment and earn higher export revenue may engage in economic behavior that harms the environment:

• Deforestation for paper or woodchip industries
• Depletion of marine life through unsustainable fishing practices
• Water poisoning by mining operations
• Pollution from manufacturing industries
• Carbon dioxide emissions from power plants, contributing to climate change

Additionally, growth in global trade itself increases consumption of non-renewable fuels for transport by air, road, rail and sea.

Climate change as the primary threat

This means nations need to work together to address climate change. A 2022 study by Standard Chartered estimated that globally, beyond what is already planned, an investment of US$95 trillion will be needed to achieve net-zero targets. Developing economies with large debt obligations have limited capacity to make required investments.

International climate agreements

Global efforts to reach agreements on reducing carbon emissions are coordinated by the United Nations Framework Convention on Climate Change (UNFCCC).

Kyoto Protocol (1997)

The 1997 UNFCCC summit produced the Kyoto Protocol on Climate Change, which set carbon emission reduction targets for industrialised countries. The Kyoto Protocol entered into force in 2005 and expired in 2020.

Paris Agreement

The Paris Agreement followed the Kyoto Protocol, aiming to keep "the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels"—the benchmark scientists believe necessary to prevent the most dangerous climate change impacts.

Glasgow Climate Pact (2021)

The 2021 Climate Conference in Glasgow (COP26) produced the Glasgow Climate Pact, ratified by 197 countries. It made progress in several areas and was the first climate deal to commit to reducing coal use.

Climate finance

The 2022 Climate Conference in Sharm, Egypt, called for developed economy parties to replenish the Green Climate Fund to assist developing economies. Although the original goal of mobilising US$100 billion per year by 2020 had not been met, progress was made in establishing a loss and damage fund for low- and middle-income economies facing climate disasters.

High Seas Treaty (2023)

In 2023, United Nations members signed the historic "High Seas Treaty," which agreed to protect the ocean outside national borders (99% of which was previously unprotected).

Positive opportunities from globalisation

Globalisation also offers opportunities to protect the world's environment by forcing individual nations to address their global responsibility for environmental preservation. It makes it possible for preservation costs to be shared and increases scrutiny of transnational corporations' environmental practices.

Globalisation has facilitated the transfer of new technologies to improve energy efficiency and reduce environmental pollution. Over time, globalisation may create international mechanisms to enforce agreements on preventing environmental damage.

However, problems involving global environmental resources, such as fish stocks or climate, have proved difficult to tackle. Progress in making agreements to combat global environmental problems has been slow.

The role of financial markets

The influence of global financial markets on economies has increased substantially during the globalisation era. Driven by global information and communications networks, global financial markets dominate financial flows worldwide. Governments have encouraged their development by removing "capital controls" on finance flows, floating exchange rates and deregulating domestic banking sectors.

Positive impacts of financial markets

Global financial markets can have positive impacts:

• Countries would be unable to conduct international transactions without foreign exchange markets
• Businesses would find it more difficult to access loans or attract investors if confined to domestic financial markets
• Efficient international financial markets should encourage greater transparency of business and government actions
• They should foster economic development

Negative impacts of financial markets

Global financial markets have also produced negative results during the globalisation era. Financial markets shift massive volumes of money around the world every day. If investor sentiment turns against a particular economy, it can result in:

• Collapse in exchange rates
• Economic shock and recession
• Rising unemployment

COVID-19 and Ukraine impacts

The COVID-19 pandemic onset in 2020 and Ukraine invasion in 2022 showed how global financial markets can exacerbate economic volatility. During the pandemic's height, loss of investor confidence saw US$100 billion in investment outflows from emerging economies—twice as big as outflows during the global financial crisis.

The IMF warned in 2023 that uncertainty surrounding these events could lead to large capital outflows from emerging and developing economies, potentially reducing per capita incomes by around 15%.

Reserve currencies

Despite several decades of globalisation, the US dollar remains the dominant reserve currency in global financial markets.

Nearly 60% of global reserves are held in US dollars, and 20% in euro. Reserves are held for various reasons including exchange rate management, debt servicing and addressing economic shocks.

Holding reserves in US dollars has been standard practice for many nations since World War II due to its widespread use and stability. US financial markets are still the largest and most liquid, giving central banks confidence they can access their US dollar reserves when needed. The US dollar is also the most widely used currency in trade, giving governments with US dollar reserves confidence they can use them to import necessary goods.

The international business cycle

The linkages between economies hold both benefits and risks for countries in the global economy.

Benefits of integration

The benefit of integration is that it allows countries to achieve faster economic growth rates by specialising in certain production types and engaging in trade. Countries with higher trade levels also experience faster economic growth. During times when world economic growth is higher, individual economies are likely to benefit from the upturn.

Risks of integration

Closer economic integration also makes economies more exposed to downturns in the international business cycle and developments in their regions.

As trade and financial integration continues to increase, there is likely to be greater synchronisation of the international business cycle, intensifying both downturns and upswings in the global economy.

Need for policy coordination

Greater synchronisation of business cycles between different countries has increased the need for coordinated macroeconomic policies. Following the late 2000s recession, the IMF recommended that countries use their combined budgets to stimulate the world economy by 2% of global GDP.

However, economies generally do not coordinate macroeconomic policies unless in a global crisis, as seen during the COVID-19 pandemic. Governments worldwide announced macroeconomic policies to combat stalling economic activity, with many copying each other's policy approaches.

The COVID-19 pandemic struck when global growth was already weak, making it certain that the first half of the 2020s will be a period of slower growth. Russia's invasion of Ukraine in 2022, which destabilised commodity markets and contributed to a global inflation shock, added further uncertainty around the economic outlook for the 2020s.

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