Potential Benefits and Risks of Deeper Globalization for Guidia - Assignment Example

?Introduction Globalization is considered as one of the most potent forces in the world as the changes brought by it are considered as unprecedented in the entire human history. Economic integration of countries has not only resulted into changes in the economy but at the cultural, social, political as well as technological level also. It has been suggested that the socio-political changes occurred as a result of globalization have changed the societies fundamentally. These changes are considered as so powerful and fundamental that the very fabric of different societies has actually changed. Globalization therefore is considered as multi-disciplinary in nature with its roots in politics, economics, technology, sociology etc. It is however, critical to understand that major emphasis of globalization is through the economic integration where economies integrate with each other through free and unrestricted trade. As a result of this trade, not only technological transfer becomes possible but more foreign direct investment also arrives. As a result of these changes, economic growth can actually quicken. Guidia is a small country with approximately $4000 per capita income with 65% of the population living in urban areas. The existing economic resources of the country include a small gas field, raw materials as well as textiles. For a small country like Guidia, what promise globalization holds? What could be some of the deeper consequences of globalization for a country which has just been advised by IMF/WB to increase globalization? This report will discuss the potential benefits and risks of deeper globalization for Guidia. Globalization It is argued that term globalization has emerged during 1960s however it was during so called roaring nineties that it started to take the serious public attention. Over the period of time, the early literature on globalization however gave it a connotation that globalization is actually westernization vs. the rest including nationalism etc. Post 9/11 scenarios have made this impression much stronger with globalization taking different meanings and assumptions. (Guttal, 2007) It has been argued that globalization has emerged as result of four important and critical changes which have taken place over the period of last 50 years specially. The emergence of rationalism as a major framework for knowledge is considered as the first element which encouraged the development of globalization. Over the period of time, rational decision making has made it more important for nations and societies to actually expand their activities in order to grow and evolve. Capitalism is another important factor which has actually made it mandatory for producers to actually look for new markets to increase their sales volumes. Under capitalist ideology, producers of the goods and services actually attempt to obtain more therefore in pursuit of profits, firms attempt to expand globally. (Scholte, 2002) Technological innovation is another important factor which has resulted into the globalization. Rapid changes in the communication technologies, transport as well as other technologies have allowed better integration of economies across the globe. It is however, important to note that the changes in the way capitalism have progressed and emergence of rational thinking has actually created a social order which has fostered the technological innovation. Technological innovation therefore is considered as the result of capitalist development and rational thinking. Globalization however, gained more momentum with the spread of technological innovation. Supportive regulatory framework has also resulted into the creation and speeding up of globalization also. Supportive regulatory frameworks have actually eased out the entry and exit barriers thus allowing domestic as well as international firms to become more proactive in entering into and maintaining their presence in the global market. Supportive framework however, has been made possible only due to the economic development and rational thinking. It also created the co-dependence of State and globalization on each other as without the active support of State it might not be possible to have favorable regulatory framework. It is relatively difficult to actually describe what globalization is and under what conditions it can provide the desired benefits to any country or society. Over the period of time, globalization has evolved into a multi-disciplinary discipline borrowing from as diverse fields as economics, sociology, politics as well as technology. It has now truly become a diversified subject because of the changes it can bring into different aspects of the society at various levels. Globalization is generally discussed from the perspective of internalization and free flow of economic and financial transactions without actually facing any significant barriers to conduct these transactions. The concept of internationalization also therefore gives globalization a unique feel where world is considered as one with no restrictions on the flow of economic activities while at the same time respecting the individual sovereignty of each country. Free flow of goods and services also suggest that countries with relative competitive advantage over the production of such goods and services shall export them to the countries which do not possess the relative competitive advantage in producing such goods and services. It is also argued that internationalization shall also be viewed from the perspective of having diplomatic relations between countries also. International politics is also viewed from this perspective and as such globalization is considered as nothing more than a collective ideology of global politics and international economy. Another important and related concept is the liberalization as globalization requires liberalization of trade and economics. It is also critical to note that the concept of liberalization can also include economic liberalization, financial, political as well as social liberalization. In order to actually start receiving the benefits of globalization, it is critically important to liberalize trade and financial institutions in order to allow free flow of goods, services and capital across different countries. Liberalization means the removal of self-imposed restrictions whether they are on economics, social or political in nature. It is also important to understand that gradual removal of restrictions often result into the loosening of society’s own values and systems. Generous liberalization results into country being handing over most of its resources to external forces if government and other stakeholders do not take appropriate measures to ensure that the external players actually do not contribute towards the policy making process of the country. Liberalization of the trade specifically has also been linked with the imposition of neo-liberal economic policies as it is argued that globalization can actually serve as one of the most important and potent tools for the imposition of neo-liberal economic agenda across the whole world. Globalization is based upon the notion of free market economies under which every player involved in the exchange is free to make own decisions in best possible manner. Free markets are also believed to be resulting into optimal allocation of resources. The advocates of deeper globalization therefore argue that with increasing globalization countries will actually be able to better utilize their resources and will gain more globalization. Globalization has also been suggested as the natural outcome of technological progress and is believed to be natural and inevitable consequence of the technological progress. Globalization is also believed to bring in positive economic changes and benefits for the economy. It also creates what is considered as the convergence of economics and politics as multi-disciplinary nature of the discipline require convergence across different disciplines makes globalization as one of the preferred methods for bringing in modern changes in any given society. (Polanyi,2002.) Some of the key debates related with the globalization include the debate of whether globalization is civilizing or powerful. Does the opening up of markets to the external players actually make the globalization as a civilization phenomenon or give more power to the external agencies to control the destiny of those societies. The subsequent sections will therefore discuss about the potential benefits and risks of globalization while deliberating upon wide ranging debates presented for and against globalization. Benefits & Gains of Globalization One of the key assumptions behind globalization is that it is based upon the notion of free markets and capitalism. It has been argued that a sophisticated market economy works better than any economic system. With the transition of China towards the capitalism, it has now been clearly established that capitalism, though may be not perfect, but is the only system which can actually deliver the results. (Wolf, 2003). The philosophical foundations of globalization are therefore based upon the capitalist ideology of having free access to markets and let the market determine every exchange taking place in the economy. It also therefore outlines that economy should have no or very minimal role of government in controlling various aspects of economy. One of the key benefits of free market policies and international integration of economies is the fostering of democracy. It has been suggested that competitive markets which often as a result of globalization and better integration are the necessary condition for the fostering of democracy in the country. For a country like Guidia, it is critical therefore that the free markets are allowed to be developed and integrated with the rest of the world. In order to strengthen democracy, allow people to have property rights and develop a sense of altruistic behavior, globalization therefore may result into improvement of the same. (Brady, Kaiser, & Beckfield, 2005) One of the key assumptions behind international trade is the concept of comparative advantage which suggests that States should only produce and export those goods and services in which they have comparative advantage over others i.e. State can actually produce certain goods and services at lower cost as compared to others. Based upon this assumption, States import and export from each other because manufacturing or developing goods and services in which a country does not have a comparative advantage may be more costly to produce in the domestic markets. This phenomenon has also given rise to the international mobility of factors of production and a result of this; larger corporations were actually been able to tap into the unexploited resources. It has been argued that without the active support of the large multi-national corporations, small domestic firms may not be able to completely exploit their economic resources and provide the required economic benefits. (Faulkner & Segal-Horn,2004) The overall benefits of the mutual trade between the countries therefore are considered as a mutually beneficial for the countries. Globalization is therefore the only force which actually ensures that the trade between countries take place without any restrictions so that the mutually benefits of trade as a result of comparative advantage could be enjoyed. According to IMF, the true benefits of globalization were visible during 20th century when there was a rapid rise in the GDP rates across the whole globe. Though this economic progress was uneven and the gap between rich and poor widened however, the rapid economic growth at the global level has started the process of integrating economies. Source:http://www.imf.org/external/np/exr/ib/2000/041200to.htm#chart1b The above graph outlines the changes in the per capita GDP during 20th century and indicates that during 1950s to 1973, global output increased to a great extent suggesting better integration of the economies could actually result into improvement in the GDP. One of the key benefits of globalization is the convergence of developing and developed countries experienced as a result of higher level of economic growth. Countries specially in Asia have allowed globalization forces to take roots in their countries and resultantly have been able to reduce the convergence gap with developed economies. The overall share of developing economies in world trade has increased from 19% to 29% from 1971 to 19911. An increase of on average 0.5% increase per year indicates that globalization has actually improved the economic performance of developing countries and has provided them an opportunity to better integrate themselves with the global economy. Another key benefit of globalization is the flow of foreign direct investment and capital into the country. Over the period of time, developing countries have witnessed a consistent increase of foreign direct investment into the economies. This increase in foreign direct investment and capital movement has resulted into development of infrastructure within the developing economies to sustain higher level of economic growth. (Gupta, 1997). Another important benefit of deeper level of globalization is the transfer of technology from developed countries to developing countries. Risks of Globalization Guidia is a small country with dependence on few economic resources therefore by integrating itself with the global economies it may actually handover the control of its economic activities to external players. Since globalization requires free flow of goods and services across the borders therefore in order to continue to enjoy the support of international firms, Guidia government may have to accommodate the unreasonable demands of the international firms. Capital inflows also require that certain concessions must be provided to the international firms therefore domestic firms may not be able to enjoy same concessions which are given to international firms. The development of export processing zones is also considered as one of the signs as to how developing countries accommodate to the needs of the international firms in order to continue to achieve export led growth and creating jobs for the masses. Globalization therefore increases the reliance of the countries on the export led growth and resultantly, countries often compromise their sovereignty. One of the most important and critical risks of globalization therefore is the lack of independence and sovereignty which countries lose when they actually allow themselves to open up to the world economy. Relative size of international firms as well as their influence on the policy making process of a smaller country like Guidia can actually erode the sovereignty of the country and make government and state more vulnerable to the external shocks. It is therefore critically important to ensure having a balanced outlook towards globalization. The overall process of globalization is often ruled through international agreements such as WTO under which developed as well as developing countries has to comply with those agreements. It has been however, argued that developed countries due to their higher comparative advantage tend to have larger share in international trade taking place with developing countries. Developed countries due to their technological superiority tend to enjoy higher benefits from globalization of trade as compared to poor countries. Further, developing countries like Guidia only export raw materials and have no technological expertise to convert them into finished goods. When such raw materials are exported back to developing countries in the form of finished goods, they are sold at higher prices. As such, developing countries actually pay off more as compared to developed countries which procure raw materials at relatively cheaper prices.( Rodrik, 2006) Some empirical studies have also highlighted on the lack of welfare effect on the States which agree to open themselves to the global trade. Such States therefore face the challenge of either abolishing the welfare policies or stop using globalization as a positive force for change. Developing countries despite losing control on their economic policy making often do not enjoy the welfare benefits which they could otherwise enjoy. Further, large multi-national corporations grow in size to such an extent that they develop the power and influence to manipulate the markets and as such the dependence of countries on such large MNCs increases over the period of time. (Goddard & Dash 2003). The overall returns provided by globalization therefore are very few as it inherently favors few selected stakeholders while at the same create significant problems for the masses. The inequality of the returns of globalization therefore makes it difficult for countries to ensure that wealth is distributed across the whole society in just and equitable manner. Over the period time, the actual flow of goods and services has slowed down and only capital has become globalized in nature. Global investors are on the continuous hunt to find arbitrage opportunities across the whole world and move capital to the locations where the overall probability of earnings higher returns is maximum. Slow growth of flow of goods and services and higher flow of capital creates speculative tendencies within the economies. Due to higher reliance on speculative activities, smaller economies may not be able to sustain themselves against external shocks and slow movement of goods and services into poor countries. It has also been argued that globalization has actually eroded the traditional value systems within the countries also. As a result of rapid globalization new ways of doing things are emerging and old values and cultural norms are being replaced with more Westernized cultural norms and values. Developing and poor countries which, for years, have their own unique cultures and value systems are increasingly been plagued with more modern values.( Prempeh, 2004) These values are however, driven mostly by the values prevailing in countries like USA and globalization is often coincided with the process of McDonaldization. McDonalidzation suggests that American values are fast becoming part of the global society in which traditional values and cultural norms are being replaced. There is a therefore greater emphasis being placed on ensuring that in order to make globalization a positive force of change, it is critical that old values are preserved. Conclusion Globalization is considered as one of the most important and potent forces in the modern world with the power to bring in strong social, political, technological and economic changes across different societies. The forces of globalization has started to emerge on the scene during 20th century however, the overall emphasis on the concept and rapid integration of global economies started to improve during 1990s. It was the period during which technological progresses really shifted in an entirely new way and communication become really easy and fast. Globalization is believed to bring lot of benefits in terms of international trade and flow of foreign direct investment, technology and capital. However, to achieve this, it requires liberalization of trade and economic policies. For a country like Guidia, it is important to allow international firms to make investment and directly compete with the local firms. This may result into loss of economic activity for the local firms as they become relatively less competitive than the international firms. Further, globalization also makes permanent changes at the political, cultural and social level and Westernize the society. Guidia may have to lose control over its sovereignty by allowing more options for international firms to dominate policy making. References Brady, D, Kaiser, M S & Beckfield, Jason 2005, Economic globalization and the Welfare State in affluent democracies, 1975 -2001- American Sociological Review. 70(6) 921-948. Faulkner, D. and Segal-Horn, S. (2004) The economics of international comparative advantage in the modern world. European Business Journal, p.21-31. Goddard, C and Dash (2003). International Political Economy: State-Market Relations in a Changing Global Order. New York. Lynne Rienner Pub. Gupta, S 1997. The Political Economy of Globalization. New York: Springer,. 3. Guttal, S 2007: Globalisation, Development in Practice, 17:4-5, 523-531 Polanyi, K 2002. The Great Transformation. New York : Beacon Press Prempeh, O K 2004, Anti-Globalization Forces, the Politics of Resistance, and Africa: Promises and Perils- Journal of Black Studies 34 (02) 580-598. Rodrik, D. 2006, Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform. Journal of Economic Literature, XLIV p.973–987. Scholte, J 2002 What Is Globalization? The Definitional Issue – Again. CSGR Working Paper. 109 (02) 1-34 Wolf, M. 2003 The Morality of the Market. Foreign Policy, p.47-50. Read More