International business environment - Essay Example

? International Business Environment Introduction The term globalization can be used to depict a process that results in mutual satisfaction of international economic relations as man-made and natural barriers fall. The process grew strength in the early 19990s. Globalization offer opportunities that entail effective resource allocation and so higher per capita incomes. Faster integration to the system can be promoted by new methods and ways of production driven by change in technology. Globalization has made it easier to divide production into several sub-processes, so labor-intensive sections of the production process could be gotten from abroad. This atomization made international trade in intermediate goods a growing substantial feature of international trade. Discussion The rapid change in international demand and supply conditions has besides bringing economies together, made relations more composite: Over the past 25 years, international has grown by 6.5 % per year, substantially exceeding growth in world economic output, just like international capital inflows and outflows did. Another issue that has made international trade complex is the weight of the upcoming markets in the world economy has become substantially more prominent. Although globalization entails various dimensions, it usually refers to economic ties and processes. Economic globalization pertains the expansion of production, consumption, trade, savings, and investment made to markets beyond regional and national ones. For countries that are developing, the risk of growing inequality linked with active participation in the global economy attributed to institutional weaknesses relating to being poor (Prasad 2003, p.4). This paper tries to bring out a fair view of globalization; pointing out the benefits and risks that globalization has for countries that are developing. The paper looks at the evidence and controversies that can be used against and in favor of globalization and also the policy options and prospects. It also tries to assist Palomia by looking at its economy and reporting the risks and benefits of globalization. Gains from globalization Benefits from Globalization can lead to advances, in efficiency and gains, in economic wellbeing. Trade improves division of labor as countries that specialize in a given field gains comparative advantage over the rest. This is a very vital part of economic empowerment as a country like Palomia may have the advantage on something over the others. Deeper relationships and penetration of international markets will enable and encourage and motivate consumers and producers to reap the benefits of economies of scale. The competitive international market will also reduce profits of monopolies. This incentivizes businesses to seek innovations that are cost efficient and advances what they sell. Gains in efficiency also should bring advancement in economic growth and so resulting in higher per capita incomes. This could be good prospects for developing nations as it is able to make more money to stir more growth. Globalization also has assisted many poor countries in the world achieve higher growth rates and minimize the number of citizens living in absolute poverty. For consumers, globalization or international trade expands the range of good services available. The rate at which goods and services get innovated is also encouraging making the trade dynamic. The participation of countries that are still developing in the process of globalization can allow them better apply their comparative advantages. This making them bring in advanced technologies, management experience and foreign capital. It is also prosperous for eliminating monopolistic characteristics and toughening market competition (Bigman 2002, p.10). Risks involved in globalization While providing more growth opportunities for countries that are still growing, the globalization process also poses enormous risks. To begin with, economic globalization has indeed expanded instead of reducing the gap between the North and South. According to modern research, the number of developing countries that have gained from globalization is smaller than 20. The deviation of per capita income between the poorest country and richest country has grown from 35 times in 1960 to the current 80 times. In the year 1960, the value of international trade of the poorest 46 countries could only account for 1.4% of the world total international trade value. Towards the end of 1990, this quotient had reduced to about 0.6% and went down further to a negligible o.4% in the year 1995. The trade deficit in average for countries that are still growing in 1990’s grew by 3% as compared with that in 1970s. Over 80% of the total capital was flowing among Western European, US and East Asian countries. With the exception of bilateral financial aids and donations, most of the countries that are still developing could not draw in any capital (UNCTAD & Expert Meeting 2005, p.12) Economically, globalization has also exposed developing countries to risks of getting injured by unfavorable external factors. Under economic conditions that are open, the conflict between the actualization of external economic balance and that of internal economic balance is a great restraint on the macroeconomic policies of countries that are developing. This weakens their capacity of macroeconomic regulation and control. With continuous invention of financial instruments, speedy enlargement of financial assets and the trend resulting in privatization of international capital, a large amount of international floating capital has resulted in enormous impacts on the safety of the economy and financial stability of developing nations. According to some information provided by the international monetary fund (IMF), the value of bank loans that are short-term in nature flowing through capital markets, international financial markets in 1997 amounted to US dollar 7,200 billion. These estimates equals to about a quarter of the total world output. Huge amount of international capitals floating may result in bubble economies and chaotic variation of foreign exchange rates. They can also undermine the monetary sovereignty of a nation and bring along destruction of its monetary policy. The “self-fulfilling mechanism” and the ‘sheep-flocking effect’ of monetary situation existing in international financial markets will further toughen the injury suffered by developing nations. Although international financial crisis erupts all over the world, most of them can be attributed to defects in economic systems and structures (UNCTAD & Expert Meeting 2005, p.13). Trade liberalization; trade liberalization causes economies to be more competitive; therefore, it is likely to minimize imbalance rents to insiders. The conclusion of import substitution programs and has likely been the biggest single element in reducing the erosive effects of rent-seeking and corruption in most parts of the world. Trade liberalization also creates new jobs that are labor intensive in manufacturing and agriculture – improving the incomes; for example, of the poor rural regions. It also implies low cost imports, cutting the real costs of expenditure for the poor urban regions; unlike the rich class, spend most of their earned income for consumption (Stallings 2001, p.18). Recent evidence has shown that trade liberalization can lead to rising wage and salary gaps between the learned and unlearned, not only in the developed countries but also in the developing countries. Between the year 1991 and 1995 wage and salary gaps grew for 6 of 7 countries of Latin America. With the exception of Costa Rica, which had literate and education levels are comparatively high. Evidently, the combination of technological changes with the globalization of markets is growing demand for wage premium, and skilled labor faster than the training or educational system is providing skilled and trainable workers. In Latin America, education levels have been rising, but slowly. With the dispersion of education, though becoming better slowly it is still highly unequal, implying that many of modern day workers have less than 4 years of completed schooling (Roy 2005, p.32). In short, the consequences of trade liberalization on inequality bets on the extent to which a nations’ comparative advantage lies in the job-using manufactured or agricultural exports. It also depends with the extent to which education level has been growing and is already widely shared. In Costa Rica, with good quality education and a high quotient of the poor involved in small-scale coffee production, trade liberalization has had balancing effects. In Mexico, where rural poor engage in food production and education and training levels are still low and unevenly shared, income grew worse between the year 1986 and 1996 for every mark of the income dispersion except the richest or well off, where it gained by 15%. Regrettably, Mexico is credibly more distinctive than Costa Rica. For the whole region, though trade liberalization is probable to increase average incomes, it is also possible to increase inequality, at least in the foreseeable future. This is because training and education efforts have fell back and also that the comparative advantage of the region is in capital-intensiveness instead of job-creating natural resource-founded production (Roy 2005, p.32). Privatization - Privatization of utilities (telecommunications, water and power) has been beneficial news for the lower marks of the income distribution all across the developing nations. This is because it has impressively improved access to services. Before privatization, utilities that could be publicly managed could be complex insolvent financially; therefore, their services get distributed equally. The wealthy had access to resources like water at very low cost designed for the poor. The poor, on the other hand, paid unit costs more times to purchase water from private trucks. It could be necessary; therefore, that privatization poses great risks of focusing wealth unless done very well and with the full accompaniment of the law. In small economies with confined competition and high involvement of economic and political power, even privatization of firms that are in significant settings with more strength and transparent market rules would face the discipline of competition. This as a result, can end up locking in instead of getting rid of private privileges (Clark et al 2003, p.23). In recent research carried out in Latin America, responders consented by three to one to the universal statement “a free market is best”. In Colombia, Uruguay, Argentina, Peru and Panama, less than half were in favor of the idea that privatization had been good; evidently, because of the far-flung perception that the extravagant costs of newly privatized services show the absence of real competition. Russia is indeed the most extreme instance of the danger that corruption will taint the privatization process. It is therefore, important to recognize the political risks related to the privatization process. This is because it ends up catalyzing rather than diffusing initial imbalance of wealth and privileges. The risks of privatization come up because transitional and developing economies like Palomia could be handicapped by comparatively weak institutions, absence of well-established rules governing transparency. Another risk is that not only is there high concentrations of political and economic power but also an eminent correlation between the two areas of power. These conditions combine to make it hard indeed to handle the privatization process in a way that is not unbalancing (Collier & Dollar, 2002). Financial liberalization; from another point of view there exists little doubt or question that low and middle income earners and small-medium sized businesses were the largest losers in the late 1980s with the subdued banking systems of Latin America. Controls and regulations on interest rates cut down their access to any credit facility at all, and state-run credit allocation considered small enterprises only on paper. Similar systems almost surely punished the middle and low class individuals in Africa. In the foreseeable future, elimination of financial defense and the raised competition of a modern day and liberalized financial sector of the economy will raise access to credit facilities for small businesses and raise the repay to the banking deposits which can be the main vehicle for small savers. The reward for small enterprises in turn is likely to create more good jobs and raise wages and salaries for the working poor (Clark et al 2003, p.24). In the short run, financial liberalization could be mostly inclined to assist those individuals who already have assets. This raises the focus of wealth which braces up in the medium term an eminent concentration of income. Basically, liberalization increases the possible returns to more risky and new tool. It also fits those who have the ability to access information and the comparatively lower transaction costs that education and well-informed fellows provide. In Latin America, with repeated rounds of currency devaluation and inflation over the last few decades, the ability of those individuals with more financial assets to relocate them abroad has been especially not equalizing. This is normally while collecting corporate and bank debt that could be made social and finally repaid by taxpayers (Hamilton 2009, p. 8). In Mexico between the year 1986 and 1996 minor savers who kept their assets in the banks savings accounts lost around 50%, while those invested in equity tools got more gains. Those who relocated their assets into dollar-indexed instruments or dollar before the year 1994- 1995, devaluation did good of all in terms and conditions of local purchasing power. The recent financial situation has pointed out how unpredictability associated with world capital markets can combine the problem of destructive imbalance in nations. For example, high capital inflows generate inflationary forces and hurt manufactured exports and labor intensive agriculture, particularly but not only under fixed exchange rate system. In Latin America and Asia, Gini coefficients of imbalance increased throughout the flourishing years of eminent inflows in capital in the mid-1990s. This could be attributed to capital inflows and high bank lending rates fueling demand for inelastic assets that are short term in nature such as land and stocks, favoring the rich. In both regions, the poor or lower class gained less during the flourishing years and then again lost more with the recession. During the recession, with the absence of capital, the high and extravagant interest rates whether it could be fixed or floating, nations get pressured to impose to guard their currencies. This as a result, injured small capital hungered enterprises and their low-wage and salaried employees most, and again reduced employment rate in general (Wells et al 2001, p.6). In Latin America, the high rate of interest environs also tends to favor net savers and injure small debtors, with a regressive effect; this has surely been the impact in countries like Mexico and Brazil. Research has pointed out the extra regressive effects of the financial cost of bank bailouts in developing nations, just because the redistributive effect of public debt tends or inclines on the negative side. With the fact that public debt entails a transfer from taxpayers to investors, this may negatively impact on the financial cost of public debt hurting the economy. To worsen the situation Latin America’s historically inflation-blight economies, though this is evidently much today, the poor class held cash. The problems in new markets entered by developing countries like Palomia could be enormous. This is because world market players question their commitment to financial uprightness at the time of any daze; therefore, they get pressured into tight monetary and fiscal policies, to re-establish market confidence. At the specific moment when they face recession, they would preferably employ counter-cyclical monetary and fiscal measures in order to stimulate their economies. The non-indulgence policies that the world capital market demands of growing markets are exactly the contrary to what developed economies can afford to implement. Comparatively automatic Keynesian stabilizers such as unemployment insurance improved the presence of food stamps, and programs of public works employment. These get recognized to be some of the ingredients of modern day effective social safety net. Moreover, it could now be known that the consequences of bankruptcy and unemployment on the half of the population which is poor can be permanent. In a country like Mexico rise in child labor force involvement and reduced registration in schools during the 1995 downswing have not been reversed. Likewise, a fall in employment opportunities for new labor force newcomers can have long-lasting effects on income-earning and job possibility potential for the affected age group (Westerfield 2004, p.9). Conclusion In conclusion, developing countries like Palomia face numerous risks that globalization and the market changes that reflect and strengthen their consolidation into the global economy. This will worsen imbalance at least in the short run, and increase the political costs of imbalance and the social tensions related to it. The risks are potentially to greatest in the next coming decade or so. This is because they go through the difficult transition to even more competitive, economic systems with more complex access to the assets. Particularly education, which ensure market opportunities are equal. During that transition, more stress on managing and minimizing imbalance, on making the market game nearly as fair as possible. Still in the short run, this would reduce the risks associated with protectionist and populist backlash. A backlash could be a shame, as in a contrary, it would weaken the benefits that more globally and open integrated economies and polities can carry out to everyone in the developing world. References List Bigman, D. (2002). Globalization and the developing countries emerging strategies for rural development and poverty alleviation, Wallingford, Oxon, UK, CABI Pub. in association with the International Service for National Agricultural Research. p.10 Clark, et al. Globalization and the Poor: Exploitation or Equalizer?New York, NY [u.a., 2003. Print. pp.22-25. Collier, P., & Dollar, D. (2002). Globalization, growth, and poverty building an inclusive world economy. Washington, DC, World Bank. Hamilton, S. M., & Wood, W. (2009). Globalization. Edina, Minn, ABDO Pub. Co. Prasad, E. (2003). Effects of financial globalization on developing countries: some empirical evidence, Washington, D.C., International Monetary Fund. p.4 Roy, S. (2005). Globalisation, ICT and developing nations: challenges in the information age. Thousand Oaks, Calif, SAGE. p.32. Stallings, B. (2001). Globalization and liberalization: the impact on developing countries. Santiago, UN, ECLAC, Economic Development Division. p.18 UNCTAD, & Expert Meeting on the impact of FDI on development (2005: GENEVA). (2005). Globalization of R&D and developing countries: proceedings of the Expert Meeting, Geneva, 24-26 January 2005, New York, United Nations. p.12-13 Wells, G. J et al. (2001). Globalization. Huntington, N.Y., Novinka Books. p.6 Westerfield, R. E. (2004). Current issues in globalization. New York, Nova Science Publ. p.9. Read More