Impact of Globalization in the UK - Research Paper Example

Introduction United Kingdom is considered to be the third largest economy in the world. The state of commercial affairs in the country is massive and financial sector is highly developed. The economic system of the country is free market in nature, where public as well as private sector authorities actively participate in undertaking important economic decisions. However, market competition is always encouraged in the country. The government authority of the nation intervenes in order to rectify situations of market failure. This essay will precisely elaborate the worthwhile role played by U.K. government in determining long-term success of the country. The economy of U.K. has faced several financial crunches since World War II. Figure 1: Economic Crisis in U.K. (Source: GOV, 2014) The above graph shows that the impact generated in U.K. by the recession resulting from crisis in 2008 was the highest (Trading Economics, 2014). Inflation and Unemployment It is claimed by some researchers that financial crisis during 2008 in U.K. and other Western nations was caused primarily due to deregulation of financial markets, that had significantly gained speed in these nations 1980 onwards (Trading Economics, 2014). The policy deregulation had drastically lowered control of the government authorities over financial markets of respective economies. Lower state control in the monetary financial market generated certain market exuberances. The real estate sector investments in these economies were made for speculative purposes, which finally generated the property price bubble. Several banks collapsed due to failure of unproductive investment projects, thereby resulting in the recession in 2008; this was because aggregate money supply in the economy had fallen in these nations. During the recession, as aggregate supply of money in U.K. had fallen, degree of productivity in the economy had declined. Lower level of production of several goods and services had greatly increased the level of unemployment in the country. Figure 2: Unemployment Rate U.K. (Source: Trading Economics, 2014) The above graph shows that rate of unemployment in U.K. had increased during the financial crisis from 2008 (OECD, 2010). Figure 3: U.K. Inflation Rate (Source: Trading Economics, 2014) It can be observed from the above graph that the extent of inflation in U.K. had astonishingly increased during the recession in 2008. This was due to expansionary, monetary as well as fiscal policies adopted by regulating authorities of the country at that point of time (Hirsch, 2008). The authorities had implemented these polices for stimulating the depressed market of U.K. Government Intervention and Macroeconomic Policy In order to maintain welfare of the European economy during recession, its government authorities had adopted expansionary fiscal policies by increasing expenditure in the economy and lowering tax rates so as to enhance employment and output level of the country. Figure 4 in the Appendix shows the way in which fiscal policies attempt to revive an economy from the state of recession. During recession, fiscal authorities of U.K. had considerably increased expenditure in the economy; it was as high as 45% of the total domestic product of the country. It was estimated that during 2011, government of the country had invested a sum of £196bn for financing welfare maximizing programs and unilateral transfers. Figure 5 in the Appendix indicates that U.K. government had primarily made investment in those projects, which involved public good and had long gestation period. Figure 6 in the Appendix shows that aggregate revenue from taxes collected by the government of U.K. during recession had slumped. This proves that government authorities of the country had lowered these rates during the recession. Figure 7 shows that during the recession, government debt of U.K. had increased and the budgetary state had experienced severe deficit. As shown in figure 8, before the economic crisis in 2008, government expenditure was less than revenue; but since the recession, aggregate government expenditure have been higher than its taxable revenue. Hence, from the above analysis, it can be stated that less government control in financial markets had caused the recession in 2008; consequently, post-recession, the government has intervened in the U.K. economy for implementing expansionary stimulating policies. However, it should be noted that these policies have ultimately increased budgetary deficit as well as debt burden of the country. Trade Performance Due to the recession, domestic productivity of U.K. had fallen considerably and this had lowered its trading performance in the international market. As extent of international trade in the country had declined, currency value of the country had slumped by almost 21% in the global market. Figure 4: Share of World Exports (Source: OECD, 2010) The above figure shows that during recession, aggregate exports provided by U.K. in the international market had notably declined and had become lesser than that of other European nations like, Germany. In order to stimulate productivity of the economy, the government of U.K. primarily focussed on implementing policies with an aim to strengthen level of innovation in the nation. It provided special incentives to private multinational corporations for motivating them into investing large sums of money for research and development purposes. The Green Tax Reform was one such policy adopted by the government of U.K. This policy aimed to enhance level of environmental innovation in the country (BIS, 2010). Even so, government authorities also instructed firms to improve over their entrepreneurial activities. This is because such activities could help organizations to effectively benefit from technological or upcoming commercial opportunities in business. It was claimed by researchers in the market that innovation and productivity in U.K. was low because of its poor education system and inferior workforce skills. Therefore, in order to resolve these problems, the government had adopted policies to enhance education system of the nation. Balance of Payment and Exchange Rate The currency used by U.K. is distinctly different from that used by all other nations in the European Monetary Union. In January 2009, during the economic crisis, one pound (currency of U.K) was equivalent to 1.1 Euro (currency value of European Monetary Union). However, it was found that in June 2012, one pound was equivalent to 1.27 Euro. This proves that currency value of U.K. has improved over time since the recession (Pettinger, 2014). This signifies that policies undertaken by fiscal authorities of the country in order to improve productivity after recession have proved to be successful. The value of U.K. currency relative to other nations in the European Union has increased by almost 15% from 2009 to 2012 (GOV, 2014). However, it should be noted that as currency of the economy has appreciated, its exports in the international market have become expensive and imports have become cheaper. The balance of payment shows the difference between exports (X) and imports (M) of a nation (X-M) (BIS, 2010). So, it can be stated that due to currency appreciation, demand for exports of U.K. in the world market has declined and that of imports has increased. Such outcomes have lowered balance of payment surplus, which in turn has substantially arrested economic growth potentiality of the country. Thus, from the above review, it can be suggested that after implementing effective fiscal policies, net productivity of U.K. had increased; but, evaluating exchange rate had lowered its income from international trade. United Kingdom Joining Euro A researcher has claimed that if U.K. joins hands with the European Union, then it would experience several advantages as well as disadvantages (BIS, 2010). The cost of financial borrowing of the country would be low; degree of foreign exchange risk and uncertainty faced would reduce to a large extent; average cost of goods in the market would fall; and prices in the market would become more transparent in nature. All these aspects would generate benefits for U.K. On the other hand, it is believed that there are several challenges that U.K. might face on merging its economy with the European Union. The interest and exchange rates of the country would become rigid and non-flexible. This would further render expansionary policies of the U.K. government ineffective and such policies would no longer assist in lowering upcoming shocks in the economy of U.K. (Abeles, 2001) Conclusion It is true that minimum state interference maximizes net social welfare of any economy. However, the market fails to attain equilibrium in certain circumstances. It is the duty of the government to control these market imperfections. Hence, from the above context, it would be correct to claim that the government of U.K. have substantially contributed towards managing its economy during critical situations. The fiscal policies implemented by the government authorities of U.K. during recession in 2008 were highly lucrative and worthwhile, as they helped to enhance its level of productivity. Even so, state of monetary affairs in the nation is yet to improve. This is because; the country is facing severe problems in international trade balance due to appreciated value of exchange rate (Ingraham, 2000). Reference List Abeles, T. P., 2001. Impact of Globalization. The Impact zation. On the Horizon, 9(2), pp. 2 – 4. BIS, 2010. Innovation and skills. [pdf] BIS. Available at: [Accessed 22 April 2014]. GOV, 2014. Recession and recovery. [online] Available at: [Accessed 22 April 2014]. Hirsch, A, R., 2008. Macroeconomics. Connecticut: Cengage Learning. Ingraham, K. E. S., 2000. The economic costs and benefits to the United Kingdom’s joining the European economic and monetary union. [pdf] Duke University. Available at: [Accessed 22 April 2014]. OECD, 2010. United Kingdom policies for sustainable recovery. Available at: [Accessed 22 April 2014]. Pettinger, T., 2014. The effect of appreciation. [online] Available at: < http://www.economicshelp.org/blog/10050/economics/effects-appreciation/> [Accessed 22 April 2014]. Trading Economics, 2014. United Kingdom indicators. [online] Available at: [Accessed 22 April 2014]. Appendix Figure 5: Stimulating Impact of Expansionary Fiscal Polices (Source: Pettinger, 2014) Figure 6: Fiscal Spending in U.K. (Source: Pettinger, 2014) Figure 7: Taxable Revenue Fall of U.K. during Recession (Source: OECD, 2010) Figure 8: Higher Debt Burden of U.K. Government (Source: OECD, 2010) Figure 9: Revenue less than Expenditure (Source: OECD, 2010) Read More