Impact of the Globalization on a More Even Distribution of Economic Activity - Essay Example

To what extent have the processes of globalization resulted in a more even distribution of economic activity across the globe I. Introduction Globalisation concept especially on economic front is never new to the modern civilization as its root dates back to many centuries ago when there was trade between the countries which were far apart geographically. However the processes of economic activities across the globe were at its peak just before the First World War which declined thereafter owing to the recession in the entire world. Again after the year 1980 the world witnessed a new movement for the global economic integration, which has been very rapid due to extensive technological changes in various sectors. The unprecedented technological change in the transport and communication sector making the swift movement of goods and services, human resources and information on knowledge and technology across the globe at a cheaper cost is the main factor which continues to drive the process of this globalization. Secondly, the changing attitude of the people and more liberal government policies contributed to deepen and widen the process of the economic integration by shifting the focus of the planners from national economies to an integrated world economy. This economic globalization occurred trough trade, foreign Direct Investment (FDI) and international transfer of knowledge and technology. With breaking of the trade barriers and changing of the economic policies of the nations across the world make the companies to become transnational by opening up subsidiaries to distribute the business processes throughout the world. Licensing, Franchising has become the trend as much as like directly investing in the cross border activities though more emphasis is being given to the latter. In this paper attempts have been made to analyze the development of economic activities in various regions of the world due to the process of globalization. How the production process was dispersed globally and how it is measured through various indicators has been described in Section-II, while in Section-III analysis have been made regarding the causes of inequality and steps taken to mainstream the process of economic integration into the economic planning of various countries. II. Measuring Globalisation: It is very difficult to measure globalization basing on the movement of production factors. Dispersion of production happens in order to have more access to inputs and so also more access to the external markets. Since there are interdependencies between the factors such as direct investment flows generate exports and movement of knowledge and technology while exports can also generate technology transfers and new inflow of FDI, measuring the extent of globalization becomes a difficult task. However there are some indicators by which one can have a fair idea of extent of globalization. Some of them as cited in the OECD Handbook on Economic Globalisation Indicators are: A. Globalisation through FDI- 1. What is the FDI position (inward and outward) as a share of GDP 2. What is the balance of inflows and outflows of direct investment for a given country 3. What is the propensity to reinvest earnings (earnings/income) from direct investment 4. What is the share of foreign-controlled affiliates in economic output. B. Globalisation through Trade: 1. Share of total exports in GDP. 2. Average of exports in GDP. 3. Share of domestic final demand met by imports. 4. Share of GDP generated by total exports. There are many such indicators mention of which is beyond the purview of this essay. FDI1 is a good measure to know the extent of economic activities across the globe. "To create, acquire or expand a foreign subsidiary, MNEs undertake FDI. The total direct capital owned by non-residents in a given country each year constitutes the stock of FDI" (Navaretti & Venables, 3). As stated earlier that with a propensity of access to market and also access to inputs companies goes for cross border activities or disperses their business processes. Thus countries which have some advantages on accessing the factors of production as well as factors of consumption attract foreign direct investment. One example can be given as that most of the U.K. based companies open up call centers in India because of availability of cheap labour there. The salary of a call center staff of India is much lower than that of his British counterpart. Another glaring example of dispersion of business processes can be given here as 'American Car' for which "30% of car's value goes to Korea for assembly, 17.5% to Japan for components and advanced technology, 7.5% to Germany for design, 4% to Taiwan and Singapore for minor parts, 2.5% to the U.K. for advertising and marketing services and 1.5% to Ireland and Barbados for data processing. Only 37% of the production value is generated in the United States. (WTO 1998 cited by Navaretti and Venables 14)" Thus this clearly signifies the extent of distribution of economic activities across the world in this globalised economy. III. Globalisation Manifested: The economic development across the world has not been symmetric since ages. In spite of breakthrough in technology and policies to improve the economic integration across the world evidences of the disparity between the developed and developing countries are largely noticed. The least developed countries are still far from reaping the benefits of world economic integration. "Far from condemning these countries to continue isolation and poverty, the urgent task of the international community is to help them become better integrated in the world economy, providing assistance to help them build up needed supporting institutions and policies, as well as by continuing to enhance their access to world markets" (Assessing globalization) Table-1: The FDI outflow and inflow from the year 1980 to 2004. UNIT Millions of dollars YEAR 1980 1985 1990 1995 2000 2004 ECONOMY CATEGORY World FDI inflows 55108 57645 207878 341086 1396539 648146 FDI outflows 53743 62193 238681 358177 1239149 730257 Developed economies FDI inflows 46629 42486 172067 218738 1134293 380022 FDI outflows 50407 57911 225965 304559 1092747 637360 Developing economies FDI inflows 8455 15143 35736 117544 253179 233227 FDI outflows 3336 4282 12701 52981 143226 83190 Developed economies: Europe FDI inflows 21569 16542 104304 133693 722762 223400 FDI outflows 24128 31924 138936 174627 866090 309498 EU 25 FDI inflows 21485 15677 97759 129237 696295 216440 FDI outflows 23875 26047 130747 159252 813413 279830 USA FDI inflows 16918 20490 48422 58772 314007 95859 FDI outflows 19230 13388 30982 92074 142626 229294 Developed economies: Asia FDI inflows 287 754 1904 1393 13400 9435 FDI outflows 2382 6548 48223 23451 34895 33988 China FDI inflows 57 1956 3487 37521 40715 60630 FDI outflow --- 629 830 2000 916 1805 Developing economies: Africa FDI inflows 400 2446 2840 5587 9627 18090 FDI outflows 1089 345 689 2942 1573 2824 Developing economies: Asia FDI inflows 442 5329 22614 81099 145725 147545 FDI outflows 1056 2863 10945 42324 81071 69422 FDI outflows 18 14 5 -34 2 1 LDCs FDI inflows 536 445 579 1713 3758 10702 Source: UNCTAD (www.unctad.org/fdistatistics) * Amount of FDI transferred to a country in a year constitutes FDI inflow ** Amount of FDI emerging from a country in a year constitute FDI outflow If one analyse the process of economic globalization it can be very well inferred that mostly the major part of the activities happened in the developed countries only. One can see the Table-1&2 to corroborate this statement. USA has been the largest foreign investor in the world. Most of the FDI in Europe is concentrated in the European Union only which owes to the fact that most of the activities are within the Intra European Union countries only. However the developing nations gradually attracting more of the foreign investment in the past 20 years. "While China has emerged as the largest FDI recipient among all developing countries, there has recently been a resurgence of FDI flows to Africa and Latin America, driven by prospects for greater earnings in the extractive industries"(Trade & Development Report, 2006). Not only in case of FDI but also in trade developing nations particularly Asian countries are far behind the developed economies of the world (Table-2). Table-2: % Share of exports and imports by region and economic grouping Region/ Economic grouping % share (year wise) 1980 1990 1995 2000 2004 World 100 100 100 100 100 Developed economies 65.27 72.04 69.78 65.72 63.07 Developing economies 29.47 24.26 27.61 31.64 33.46 America 14.43 14.92 15.03 16.45 12.51 Europe 42.81 47.15 44.51 40.13 42.64 Asia 6.69 8.56 8.94 7.94 6.73 Source: UNCTAD Handbook of Statistics, 2005 The policies of different countries to participate in the globalised economy also changed to a great extent which is largely evidenced by the formation various trade agreement between the countries and formation of associations to encourage free trade in a particular geographic boundary. For example emergence of European Union, NAFTA, SAPTA, AFTA etc. "The European Union is the world's largest confideration of independent states, established under that name in 1992 by the Treaty on European Union (the Maastricht Treaty). The Union currently has a common single market consisting of a customs union, a single currency managed by the European Central Bank (so far adopted by 12 of the 25 member states), a Common Agricultural Policy, a common trade policy" (http://en.wikipedia.org/wiki/European_Union ) Like European Union, 'North America Free Trade Area' was formed in the year 1994 taking USA, Canada and Mexico as member countries. These countries have delineated the trade policy which enhanced the value of trade within that area and also they have signed many free trade agreement with other countries. In 1995, the SAARC Preferential Trading Arrangement came into existence to promote and sustain mutual trade and concessions within the SAARC countries. " The primary goals of AFTA seek to: Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers; And attract more foreign direct investment to ASEAN" (http://en.wikipedia.org/wiki/ASEAN_Free_Trade_Area) These indeavours across the globe made the nations to come up together for a larger world economy. The FDI inflow to Africa as increased from 17 billion dollar in 2004 to 31 billion dollar in 2005. Many major transnational companies such as CNOOC form China, Petronas from Malyasia and ONGC Videsh from India are increasingly expanding to Africa( WIR-2006). About 18% of the world FDI inflow goes to the south, east and south-east Asia. China and Hong-kong are the two giant economies who attracts much of the FDI inflows coming to the region. The Latin America and Carribean countries are also receiving larger share of the FDI. "In Colombia, petroleum-related FDI soared to $1.2 billion, a 134% rise, and in Ecuador it increased by 72% in the first half of 2005. Investment in the mining industry also expanded. In Colombia, for example, it grew by nearly 60% to $2 billion, in Chile to $1.3 billion, in Peru to $1 billion and in Argentina to $850 million" (WIR-2006). IV. Conclusion: Though the process of economic integration occurring at a faster rate in the developed countries but the same is yet to be achieved at rapid rate in the developing world. As per the Trade and Development Report-2006 "Crucially, what is needed for redressing global imbalances is a responsible multilateral effort, rather than pressure on parts of the developing world. A well-coordinated international macroeconomic approach would considerably improve the chances of the poorer countries to consolidate their recent gains in growth performance. In the absence of such an approach, developing countries should defend their strategically advantageous competitive positions and use the favourable overall environment for investing more and reducing their foreign indebtedness". REFERENCES Kleinert, J. (2001) The role of Multinational Enterprises in Globalisation: An Empirical Overview, Kiel Working Papers No. 1069, Kiel Institute of World Economics Navaretti, G.B & Venables A.J.(2004) Multinational Firms in the World Economy. New Jersey: Princeton University Press. OECD (2005), Measuring Globalisation, OECD Handbook on Economic Globalization Indicators, OECD publishing. UNCTAD (2006), World Investment Report 2006, New York UNCTAD (2006), Trade and Development Report 2006, New York UNCTAD (2005), UNCTAD Handbook of Statistics, New York Wikipedia, European Union, http://en.wikipedia.org/wiki/European_Union (as of Nov. 15, 2006, 18:06 GMT). Wikipedia, ASEAN Free Trade Area, http://en.wikipedia.org/wiki/ASEAN_Free_Trade_Area (as of Nov. 15, 2006, 18:31 GMT) World Bank Briefing Papers, Assessing Globalisation: Key Readings. Available from , [Accessed on 11th November 2006] Read More