Effects of Financial Globalization on Developing Countries - Literature review Example

The term globalisation broadly refers to the process by which countries become increasingly integrated globally over time. It is a phenomenon that is characterised by advancement in technology and increased mobility of persons, capital, goods and even pollution across borders. Over the past few decades, the concept of globalisation has taken the centre stage among other hotly-debated topics in the international economics. Various scholars have given differing views regarding the impact of globalisation. Some have conjectured that globalisation has led to increased wealth for developing states at the expense of the developing ones. In their opinion, there has been an imbalance in the distribution of the costs of globalisation between the developed and the developing nations, with the poor states bearing the heaviest burden. Other writers differ from this view and connote that as a result of globalisation, the gap in the distribution of income derived from international trade has become less skewed between the developed and developing countries. This paper covers the views of various scholars who reason in favour of and in opposition to the process of globalisation in regard to its impact on distribution benefits among the developed and the developing states, while giving specific focus on the economy and the environment. Finally, the paper concludes that globalisation benefits the developed nations at the expense of the developing ones. Various scholars strongly support the idea that globalisation has led to economic inequality. For instance, Nayar (2006, p. 8), Acharyya, (2005, p. 2) and Prasad (2003, p. 65), are of the viewpoint that globalisation has led to an increased freeing up of the produce from the low-income into high-income countries at low prices, leading to an increase in income inequality between the rich and the poor countries. According to Nayar (2006, p. 8), this has been made worse by the fact that most developing countries have to export primary products to developed nations, which are unprocessed and of low quality and thus, attract low prices. For instance, Acharyya, (2005, p. 2) finds that African countries largely export primary agricultural products such as coffee, cotton, seafood, banana and tropical wood in unprocessed form to European countries. Moreover, whatever little growth in exports of medium technology products that has been realised by a few of the developing states, has largely been driven by the outsourcing of crucial production activities by foreign multinationals. Acharyya gives an example of India which has been outsourcing software services rather than developing their own software packages (Acharyya, 2005, p. 1). This activity has led to increased exports for India but has failed to generate any flow-through effect to the rest of the economy in terms of overall productivity level. However, some scholars have taken stances to the contrary and suggested that globalisation has led to an increase in wealth both in the developed and the developing countries. This is the position held by Bigman (2007, p. 88) and Baldwin and Winters (2008) and they explain that developing states are able to fight because they are a part of the international system. Kemeny (2009, p. 104), disagrees with this argument and offers two changes associated with globalisation that work to the advantage of the developing countries. According to Kemeny, the developed nations are vacating some areas of production with advancement in technology which are filled by the developing states. Kemeny gives an example of development in information technology in India and China in 1980s and 1990s. Further, Kemeny opines that the role of human resources has emerged to be more important in international trade than the distribution of natural resources. Hence, he puts forward that in recent times there has been an increase in the specialisation of production in developing countries. Though this argument might be correct, it fails to be convincing enough to contest the idea of skewed distribution of wealth, as proposed by Nayar, Acharyya and Prasad. Rangarajan (2006, p. 5) offers a strong argument in relation to the impact of globalisation, which he believes has led to an increase in inequality between the developed and the developing countries. According to Rangarajan, globalisation emphasises efficiency and hence, benefits usually accrue to countries which are favourably endowed with efficient modes of production. Developed countries have a head start over the developing countries by far and are largely capital intensive in their production. They also have a technological base which is both wide and sophisticated. Contrary to that, developing states rely more on labour intensive means of production, which are less efficient. Consequently, while international trade is meant to benefit all nations globally, much of the benefits flow to the rich countries. The argument offered by Kemeny is rather weak. This is due to the fact that there is a huge gap even in the area of human resources between the developed and the developing countries and hence, much of the benefits of globalisation accrue to the developed states as Rangarajan (2006, p. 5) proposes. As noted earlier, there has been a disproportional distribution of the costs of globalisation, with developing countries bearing the biggest burden. Some scholars have paid attention to the impact of globalisation on the environment in both the developed and the developing nations. Lucas (2007, p. 13), notes that there are much higher regulatory costs for polluting activity in developed states compared to the developing countries. As a result, pollution intensive industries in developed countries have a tendency to migrate to the developing countries where weaker environmental regulations give them a chance to thrive. According to Lucas (2007, p. 13), this explains the fact that the number of polluting industries has been increasing at a high rate in developing states recently. Further, Dinda, (2009, p. 5), Sachs (2009, p. 10) and Gillespie and Lellaive (2007, p. 38) note that developed countries are increasingly gaining in terms of environmental quality from international trade while the developing states are increasingly losing. Birundha (2008, p. 5) also supports this view and gives the useful example of India where in 2000 the amount of harmful emissions that foreign industries released into the environment amounted to 51% of all emissions. Other writers give different views. Antweiler et al (2001) and Liddle (2001) for instance point out that globalisation has led to innovation in technology that reduces pollution, especially in the developed countries. As such, they suggest that developing nations are increasingly relying on technological transfer from the developed countries and hence, benefiting from globalisation. Whilst these arguments may be correct, they fail to clearly show the distribution of environmental pollution between the developed states and the developing ones. They do not give consideration to the fact that the number of foreign polluting in industries in low-income countries and from the rich states has been growing significantly as Lucas (2007, p. 13) demonstrates. In conclusion, globalisation has led to skewed/uneven distribution of economic benefits from international trade between the developed and the developing countries. As noted by different scholars, the developed nations take the lion’s share of benefits at the expense of the developing states. Further, after a critical consideration of the various arguments advanced by different writers, we can argue that developing nations bear the heaviest burden of the costs of globalisation, especially those related to environmental pollution. Therefore, it is not misplaced to argue that the process of globalisation benefits developed countries at the expense of the developing ones. References Acharyya, R 2005, Product standards, exports and employment: An analytical study, Springer, New York Antweiler, W, Copeland, BR & Taylor, MS 2001, ‘Is Free Trade Good for the Environment?’ American Economic Review, vol 91 Issue 4, pp. 877 – 908. Baldwin, RE & Winters, LA 2008, Challenges to Globalization: Analyzing the Economics, University of Chicago Press. Bigman, D 2007, Globalization and the least developed countries: Potentials and pitfalls, CABI, Massachusetts. Birundha, VD 2009, ‘Globalization of Indian Economy and its Impact on Environment,’ viewed 01 November 2011, Gillespie, B & Lellaive, X 2007, “Innovation, globalization and the environment,” OECD Observer, No. 261. Dinda, S 2009, ‘Globalization and Environment: Can Pollution Haven Hypothesis Alone Explain the impact of Globalization on Environment?’ viewed 01 November 2011, Kemeny, T 2009, International technology gaps in the age of globalization, ProQuest, Los Angeles. Lucas, MS 2007, “Critical essay: Does Globalization Cause Inequity among Rich and Poor Nations?” viewed 01 November 2011, Liddle, B 2001, “Free trade and the environment-development system”, Ecological Economics, No. 39, pp. 21 – 36. Nayar, BR 2006, India’s globalization: Evaluating economic consequences, East-Western Centre, Washington. Prasad, E 2003, Effects of financial globalization on developing countries: Some empirical evidence, International Monetary Fund, Washington DC. Rangarajan, C 2006, Responding to globalization: India’s answer, Economic Advisory Council of India, New Delhi. Sachs, J 2009, ‘Globalization in the era of environmental crisis,’ United Nations Conference on Trade and Development, Trade and Development Board, Fifty-sixth session UNCTAD Geneva, 15 September 2009, viewed 01 November 2011, Read More