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Economic globalization is one of the three main dimensions ofglobalization commonly found in academic literature, with the two others beingpolitical globalization andcultural globalization, as well as the general term of globalization.[1]Economic globalization refers to the widespread international movement of goods, capital, services,technology andinformation. It is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification ofcross-border movement of goods, services,technologies and capital.[2] Economic globalization primarily comprises the globalization of production,finance, markets, technology, organizational regimes, institutions, corporations, and people.[3]
While economic globalization has been expanding since the emergence oftrans-national trade, it has grown at an increased rate due to improvements in the efficiency of long-distance transportation, advances intelecommunication, the importance of information rather than physical capital in the modern economy, and by developments in science and technology.[4] The rate of globalization has also increased under the framework of theGeneral Agreement on Tariffs and Trade and theWorld Trade Organization in which countries gradually cut down trade barriers and opened up their current accounts and capital accounts.[4] This recent boom has been largely supported bydeveloped economies integrating with developing countries throughforeign direct investment, lowering costs of doing business, the reduction oftrade barriers, and in many cases cross-border migration.
Internationalcommodity markets,labor markets, andcapital markets make up the economy and define economic globalization.[5]
Beginning as early as 6500 BCE, people inSyria were trading livestock, tools, and other items. InSumer, an early civilization inMesopotamia, a token system was one of the first forms of commodity money. Labor markets consist of workers, employers, wages, income, supply and demand. Labor markets have been around as long as commodity markets. The first labor markets supplied workers to grow crops and tend livestock for eventual sale in local markets. Capital markets developed in industries that required resources beyond the capabilities of an individual farmer.[6]
World War I disrupted economic globalization, with countries adoptingprotectionist policies and trade barriers, slowing global trade.[7] The 1956 invention ofcontainerized shipping andlarger ship sizes reduced costs, facilitating global trade.[8][9]
Globalization resumed in the1970s as governments highlighted trade benefits. Subsequent technology advancements have accelerated global trade expansion.[10]
The follow-on advances in technology since then have played a pivotal role in the rapid expansion of global trade.[11]
TheGATT/WTO framework, which was initiated in 1947,[12] led participating countries to reduce theirtariff andnon-tariff barriers to trade. Indeed, the idea ofMost Favoured Nation was essential to the GATT.[13][14] In order to accede, governments had to shift their economies fromcentral planning tomarket driven, especially after thefall of the Soviet Union.[15][16]
On 27 October 1986, theLondon Stock Exchange enacted newlyderegulated rules that enabled global interconnection ofmarkets, with an expectation of huge increases in market activity. This event came to be known as theBig Bang.
By the time theWorld Trade Organization was established in 1994 as the baton was passed from the GATT,[12] it had grown to 128 countries, includingCzech Republic,Slovakia andSlovenia. The year 1995 saw the WTO pass theGeneral Agreement on Trade in Services, while the 1998 defeat of theOECD'sMultilateral Agreement on Investment was a hiccup on the route to economic globalization.
Multinational corporations reorganized production to take advantage of these opportunities. Labor-intensive production migrated to areas with lower labor costs,[17] especially China,[18] later followed by other functions as skill levels increased. Networks raised the level of wealth consumption and geographical mobility. This highly dynamic worldwide system had powerful ramifications.[19] TheWorld Trade Organization Ministerial Conference of 1999 and associated1999 Seattle WTO protests were a significant step on the road to economic globalization.[20]
ThePeople's Republic of China (2001) and the last remnants of ex-Soviet bloc countries likeUkraine (2008) andRussia (2012) were admitted much later to the WTO process after painful structural reforms.
TheMultilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting which entered into force on 1 July 2018, is an effort to harmonize tax regimes in order to prevent multi-national firms from taking advantage of loopholes like Ireland'sGreen Jersey BEPS tool.
Anintergovernmental organization orinternational governmental organization (IGO) is an entity created by treaty, involving two or more nations, to work in good faith, on issues of common interest. IGO's strive for peace, security and deal with economic and social questions.[5] Examples include:The United Nations,The World Bank and on a regional level,The North Atlantic Treaty Organization among others.
International non-governmental organizations include charities, non-profit advocacy groups, business associations, and cultural associations. International charitable activities increased after World War II and on the whole NGOs provide more economic aid to developing countries than developed country governments.
Since the 1970s, multinational businesses have increasingly relied onoutsourcing andsubcontracting across vast geographical spaces, due to the global nature ofsupply chains and the production of intermediate products. Firms also engage in inter-firm alliances and rely on foreign research and development. This is in contrast to past periods where firms kept production internalized or within a localized geography. Innovations in communications and transportation technology, as well as greater economic openness and less government intervention have made a shift away from internalization more feasible.[21] Additionally, businesses going global learn the tools to effectively interact withcultural agility; with people of many diverse cultural backgrounds, expanding their market.[22]
International immigrants transfer significant amounts of money throughremittances to lower-income relatives. Communities of immigrants in the destination country often provide new arrivals with information and ideas about how to earn money. In some cases, this has resulted in disproportionately high representation of some ethnic groups in certain industries, especially if economy success encourages more people to move from the source country. Movement of people also spreads technology and aspects of business culture, and moves accumulated financial assets.
Economic growth accelerated and poverty declined globally following the acceleration of globalization.
Per capita GDP growth in the post-1980 globalizers accelerated from 1.4 percent a year in the 1960s and 2.9 percent a year in the 1970s to 3.5 percent in the 1980s and 5.0 percent in the 1990s. This acceleration in growth is even more remarkable given that the rich countries saw steady declines in growth from a high of 4.7 percent in the 1960s to 2.2 percent in the 1990s. Also, the non-globalizing developing countries did much worse than the globalizers, with the former's annual growth rates falling from highs of 3.3 percent during the 1970s to only 1.4 percent during the 1990s. This rapid growth among the globalizers is not simply due to the strong performances of China and India in the 1980s and 1990s—18 out of the 24 globalizers experienced increases in growth, many of them quite substantial."[23]
According to theInternational Monetary Fund, growth benefits of economic globalization are widely shared. While several globalizers have seen an increase in inequality, most notablyChina, this increase in inequality is a result of domestic liberalization, restrictions on internal migration, and agricultural policies, rather than a result of international trade.[23]
Poverty has been reduced as evidenced by a 5.4 percent annual growth in income for the poorest fifth of the population of Malaysia. Even inChina, where inequality continues to be a problem, the poorest fifth of the population saw a 3.8 percent annual growth in income. In several countries, those living below the dollar-per-day poverty threshold declined. InChina, the rate declined from 20 to 15 percent and in Bangladesh the rate dropped from 43 to 36 percent.[citation needed][when?]
Globalizers are narrowing the per capita income gap between the rich and the globalizing nations.China,India, andBangladesh, some of the newly industrialised nations in the world, have greatly narrowed inequality due to their economic expansion.[23]
The global supply chain consists of complex interconnected networks that allow companies to produce handle and distribute various goods and services to the public worldwide.
Corporations manage their supply chain to take advantage of cheaper costs of production. A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service fromsupplier tocustomer. Supply chain activities involve the transformation ofnatural resources,raw materials, and components into a finished product that is delivered to the end customer.[24] Supply chains linkvalue chains.[25] Supply and demand can be very fickle, depending on factors such as the weather, consumer demand, and large orders placed by multinational corporations.[26]
Globalization is sometimes perceived as a cause of a phenomenon called the "race to the bottom" that implies that to minimize cost and increase delivery speed, businesses tend to locate operations in countries with the least stringent environmental and labor regulations. Pressure to do this is increased if competitors lower costs by the same means. This both directly results poor working conditions, low wages, job insecurity, and pollution, but also encourages governments to under-regulate in order to attract jobs and economic investment.[8] However, if business demand is sufficiently high, the labor pool in low-wage countries becomes exhausted (as has happened in China),[6] resulting in higher wages due to competition, and more demand from the public for government protection against exploitation andpollution. From 2003 to 2013, wages inChina andIndia have gone up by around 10–20% a year.[27]
In developing countries with loose labor regulations, there are adverse health consequences from working long hours, and individuals burden themselves from working within vast global supply chains.[28] Women in agriculture, for example, are often asked to work long hours handling chemicals such as pesticides and fertilizers without any protection.[26]
Although both men and women experience shortcomings with health, the final reports stated that women, with thedouble burden of domestic and paid work experience an increased the risk of psychological distress and suboptimal health. Strazdins concluded that negative work-family spillover especially is associated with health problems among both women and men, and negative family-work spillover is related to a poorer health status among women."[29]
It is common for the work lifestyle to bring forth adverse health conditions or even death due to weak safety measure policies. After the tragic collapse of the Rana Plaza factory inBangladesh where over 800 deaths occurred the country has since then made efforts in boosting up their safety policies to better accommodate workers.[30]
In developing countries with loose labor regulations and a large supply of low-skill, low-cost workers, there are risks for mistreatment of some workers, especially women and children.[31] Poor working conditions andsexual harassment are just some of the mistreatment faced by women in the textile supply chain. Marina Prieto-Carrón shows in her research inCentral America that women insweatshops are not even supplied with toilet paper in the bathroom every day. The reason it costs corporations more is because people can not work to their full potential in poor conditions, affecting the global marketplace.[32] Furthermore, whencorporations decide to change manufacturing rates or locations in industries that employ more women, they are often left with no job nor assistance. This kind of sudden reduction or elimination in hours is seen in industries such as thetextile industry and agriculture industry, both of which employ a higher number of women than men.[26] One solution to mistreatment of women in thesupply chain is more involvement from the corporation and trying to regulate theoutsourcing of their product.[31]
Several movements, such as thefair trade movement and theanti-sweatshop movement, claim to promote a more socially just global economy. The fair trade movement works towards improving trade, development and production for disadvantaged producers. The fair trade movement has reached 1.6 billion US dollars in annual sales.[10] The movement works to raise consumer awareness of exploitation of developing countries. Fair trade works under the motto of "trade, not aid", to improve the quality of life for farmers and merchants by participating in direct sales, providing better prices and supporting the community.[11] Meanwhile, the anti-sweatshop movement is to protest the unfair treatment caused by some companies.
Varioustransnational organizations advocate for improved labor standards in developing countries. This includinglabor unions, who are put at a negotiating disadvantage when an employer can relocate or outsource operations to a different country.[33]
Capital flight occurs when assets or money rapidly flow out of a country because of that country's recent increase in unfavorable financial conditions such astaxes,tariffs,labor costs,government debt orcapital controls. This is usually accompanied by a sharp drop in theexchange rate of the affected country or a forceddevaluation for countries living underfixed exchange rates. Currency declines improve theterms of trade, but reduce the monetary value of financial and other assets in the country. This leads to decreases in thepurchasing power of the country's assets.
A 2008 paper published byGlobal Financial Integrity estimated capital flight to be leaving developing countries at the rate of "$850 billion to $1 trillion a year."[34] But capital flight also affects developed countries. A 2009 article inThe Times reported that hundreds of wealthy financiers and entrepreneurs had recently fled theUnited Kingdom in response to recent tax increases, relocating to low tax destinations such asJersey,Guernsey, theIsle of Man and theBritish Virgin Islands.[35] In May 2012 the scale ofGreek capital flight in the wake of the first"undecided" legislative election was estimated at €4 billion a week.[36]
Capital flight can causeliquidity crises in directly affected countries and can cause related difficulties in other countries involved ininternational commerce such as shipping and finance. Asset holders may be forced into distress sales. Borrowers typically face higher loan costs andcollateral requirements, compared to periods of ample liquidity, andunsecured debt is nearly impossible to obtain. Typically, during a liquidity crisis, theinterbank lending market stalls.
While within-country income inequality has increased throughout the globalization period, globally inequality has lessened as developing countries have experienced much more rapid growth.[37] Economic inequality varies between societies, historical periods, economic structures or economic systems, ongoing or past wars, betweengenders, and between differences in individuals' abilities to createwealth.[38] Among thevarious numericalindices for measuring economic inequality, theGini coefficient is most often-cited.
Economic inequality includesequity,equality of outcome and subsequentequality of opportunity. Although earlier studies considered economic inequality as necessary and beneficial,[40] some economists see it as an important social problem.[41] Early studies suggesting that greater equality inhibitseconomic growth did not account for lags between inequality changes and growth changes.[42] Later studies claimed that one of the most robust determinants of sustained economic growth is the level of income inequality.[39]
International inequality is inequality between countries. Income differences between rich and poor countries are very large, although they are changing rapidly. Per capita incomes inChina and India doubled in the prior twenty years, a feat that required 150 years in the US.[43] According to theUnited Nations Human Development Report for 2013, for countries at varying levels of theUN Human Development Index theGNP per capita grew between 2004 and 2013 from 24,806 to 33,391 or 35% (very high human development), 4,269 to 5,428 or 27% (medium) and 1,184 to 1,633 or 38% (low) PPP$, respectively (PPP$ =purchasing power parity measured inUnited States dollars).[44]
Certain demographic changes in the developing world after activeeconomic liberalization and international integration resulted in rising welfare and hence, reduced inequality. According toMartin Wolf, in the developing world as a whole, life expectancy rose by four months each year after 1970 and infant mortality rate declined from 107 per thousand in 1970 to 58 in 2000 due to improvements instandards of living and health conditions. Also, adult literacy in developing countries rose from 53% in 1970 to 74% in 1998 and much lower illiteracy rate among the young guarantees that rates will continue to fall as time passes. Furthermore, the reduction infertility rates in the developing world as a whole from 4.1 births per woman in 1980 to 2.8 in 2000 indicates improved education level of women on fertility, and control of fewer children with more parental attention and investment.[45] Consequentially, more prosperous and educated parents with fewer children have chosen to withdraw their children from the labor force to give them opportunities to be educated at school improving the issue ofchild labor. Thus, despite seemingly unequaldistribution of income within these developing countries, their economic growth and development have brought about improved standards of living and welfare for the population as a whole.
Economic development spurred by international investment or trade can increase localincome inequality as workers with more education and skills can find higher-paying work. This can be mitigated with government funding of education.[6] Another way globalization increases income inequality is by increasing the size of the market available for any particular good or service. This allows the owners of companies that service global markets to reap disproportionately larger profits. This may happen at the expense of local companies that would have otherwise been able to dominate the domestic market, which would have spread profits around to a larger number of owners. On the other hand, globalized stock markets allow more people to invest internationally, and get a share of profits from companies they otherwise could not.
A systematic, and possibly first large-scale, cross-sectoral analysis ofwater,energy andland insecurity in 189 countries that links national and sector consumption to sources showed that countries and sectors are highly exposed to over-exploited, insecure, and degraded such resources. The 2020 study finds that economic globalization has decreased security ofglobal supply chains with most countries exhibiting greater exposure to resourcerisks viainternational trade – mainly from remoteproduction sources – and that diversifying trading partners is unlikely to help nations and sectors to reduce these or to improve their resourceself-sufficiency.[46][47][48][49]
Businesses in developed countries tend to be more highlyautomated, have more sophisticated technology and techniques, and have better national infrastructure. For these reasons and sometimes due toeconomies of scale, they can sometimes out-compete similar businesses in developing countries. This is a substantial issue in international agriculture, where Western farms tend to be large and highly productive due toagricultural machinery, fertilizer, and pesticides; but developing-country farms tend to be smaller and rely heavily on manual labor. Conversely, cheaper manual labor in developing countries allowed workers there to out-compete workers in higher-wage countries for jobs in labor-intensive industries. As the theory ofcompetitive advantage predicts, instead of each country producing all the goods and services it needs domestically, a country's economy tends to specialize in certain areas where it is more productive (though in the long term the differences may be equalized, resulting in a more balanced economy).
Atax haven is a state, country or territory where certaintaxes are levied at a low rate or not at all, which are used by businesses fortax avoidance and tax evasion.[51] Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced taxation. This creates a situation oftax competition among governments. Taxes vary substantially acrossjurisdictions.[52]Sovereign states have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties. The central feature of atax haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.[53] In its December 2008 report on the use of tax havens by American corporations,[54] the U.S.Government Accountability Office regarded the following characteristics as indicative of a tax haven: nil or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as anoffshore financial center.
A 2012 report from theTax Justice Network estimated that between US$21 trillion and $32 trillion is sheltered from taxes in tax havens worldwide.[55] If such hidden offshore assets are considered, many countries with governments nominally in debt would be net creditor nations.[56] However, the tax policy director of theChartered Institute of Taxation expressed skepticism over the accuracy of the figures.[57]Daniel J. Mitchell of the US-basedCato Institute says that the report also assumes, when considering notional lost tax revenue, that 100% of the money deposited offshore is evading payment of tax.[58]
Thetax shelter benefits result in atax incidence disadvantaging the poor.[59] Many tax havens are thought to have connections to "fraud, money laundering and terrorism."[60]Accountants' opinions on the propriety of tax havens have been evolving,[61] as have the opinions of their corporate users,[62] governments,[63][64] and politicians,[65][66] although their use byFortune 500 companies[67] and others remains widespread. Reform proposals centering on theBig Four accountancy firms have been advanced.[68] Some governments appear to be using computerspyware to scrutinize corporations' finances.[69]
Economic globalization may affect culture. Populations may mimic the international flow of capital and labor markets in the form of immigration and the merger of cultures. Foreign resources and economic measures may affect different native cultures and may cause assimilation of a native people.[71] As these populations are exposed to the English language, computers, western music, and North American culture, changes are being noted in shrinking family size, immigration to larger cities, more casual dating practices, and gender roles are transformed.
Yu Xintian noted two contrary trends in culture due to economic globalization.[72] Yu argued that culture and industry not only flow from the developed world to the rest, but trigger an effort to protect local cultures. He notes that economic globalization began after World War II, whereasinternationalization began over a century ago.[73]
George Ritzer wrote about theMcDonaldization of society and how fast food businesses spread throughout theUnited States and the rest of the world, attracting other places to adopt fast food culture.[74] Ritzer describes other businesses such asThe Body Shop, a British cosmetics company, that have copiedMcDonald's business model for expansion and influence. In 2006, 233 of 280 or over 80% of newMcDonald's opened outside the US. In 2007,Japan had 2,828McDonald's locations.[75]
Global media companies export information around the world. This creates a mostly one-way flow of information, and exposure to mostly western products and values. Companies likeCNN,Reuters and theBBC dominate the global airwaves with western points of view. Other media news companies such asQatar'sAl Jazeera network offer a different point of view, but reach and influence fewer people.[76]
"With an estimated 210 million people living outside their country of origin (International Labour Organization [ILO] 2010), international migration has touched the lives of almost everyone in both the sending and receiving countries of theGlobal South and theGlobal North".[77] Because of advances made intechnology, human beings as well as goods are able to move through different countries and regions with relative ease.
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