Disadvantages of Globalization in the World - Essay Example

Running head: To what extent might Globalization be seen as disadvantageous to the world in which we live To what extent might Globalization be seen as disadvantageous to the world in which we live In APA Format Abstract The purpose of this study is to bring to light the disadvantages of globalization and the effects globalization has had on the world economy. The study will make an attempt to throw light upon the current crisis world is going through and also mention how it got spread to all the economies. Globalization has done a world of good to both, the developed countries as well as the developing countries. The phenomenon has advantages and disadvantages. While some of the prominent advantages include, Increased trade between countries, Better opportunities for foreign investors to invest in developing world, Better flexibility to operate anywhere in the world, Increased communication between countries and better media coverage, Reduction of barriers that eventually makes the world a global village and benefits multi-national companies tremendously, Lesser probability of war, Better environment protection etc. There are several severe disadvantages as well and they include: 1. Huge flow of jobs (skilled and non-skilled) to the developing countries from the developed world 2. Higher probability of economic and political unrest between nations. 3. Affects on liquidity and de-growth of one country on all the countries. The first disadvantage that talks about flow of manpower from developing countries to the developed countries is a phenomenon that many developed countries have witnessed. Countries like US, UK, France, Germany, and other developed countries have witnessed a flurry of demands of visas from people from developing countries who want to immigrate to them for better opportunities and lifestyle. Now, this puts pressure on the employment levels and many people might lose their jobs. This specifically applies to the economic situation prevailing now as the unemployment is ruling through the roof and is in vicinity of 10 percent in the US. Another problem is that of the drop in wages and salaries that people in developed countries might have to witness as a consequence of cheap labor entering into their countries. Another big disadvantage of Globalization is the something that the world is witnessing these days. This will be best explained in one of the points to follow. There is a sharp drop in growth of countries with a drop in growth of the Unites States. Also, the countries are facing a sharp liquidity crisis because of the subprime crisis of the US. The subprime crisis started with the subprime lenders lending at higher rates than usual to the borrowers with bad economic history and lesser ability to pay back. The subprime lending functions on the principle of no collateral and higher interests. There debt instruments are then traded and are passed on to other banks or institutions which are ready to take them for the higher interest they get out of them. Effects of the crisis on the US and World Economies and Recent Shutdowns Due to the passing on of the debt instruments some prominent hedge funds have failed to declare their current asset values. The problem has led to a total crunch of liquidity in the US. The markets witnessed BNP Paribas announce that it had frozen 3 of its hedge funds due to evaporation of liquidity, totaling around 1.6 billion pounds. The reason was that, it was not possible for the bank to value units of the funds due to the affect of the US subprime market on them. The funds contained the bundles of subprime loans, the demand for which have fallen drastically over the last few months. Banks around Europe feared a total liquidity crunch as they feared that they might run out of cash to sustain day to day lending. ECB went to the extent of injecting 155 billion pounds to ease the system of. Investors around the world started backing off from the markets fearing the ill effects of over exposure to the mortgage markets. (How the US Subprime Mortgage Crisis Affect Irish Markets) The high liquidity crunch faced by the US has made the Fed cut key interest rates several times over the last one year. The liquidity crunch that the US has witnessed had also done bad to the commodity prices and the willingness of the banks and financial institutions to lend each other or even to the consumers. The Bank of England has also cut rates to 4.5 percent in its latest monetary policy. This would also result in the housing prices falling in the UK as the buyers will not be able to raise mortgage finance and sellers will be forced to cut down their asking prices. The collapse of Bear Sterns has affected their London operations with over 2,000 jobs in London. (Q&A: How will the financial crisis hit us) Another unfortunate incident that took place a few days back was of the 158 year old firm Lehman Brothers filing for chapter 11 bankruptcy due to the credit crunch. Financial institutions around the world have recorded $ 500 billion credit losses and write-downs due to the subprime crisis. At the end of August, the company is believed to have had assets worth $ 600 billion funded with equity of just $ 30 billion. (Lehman Is In Advanced Talks To Sell Key Business) AIG also faced the liquidity crunch due to the crisis and approached the Fed for funds as a temporary measure. American International Group was hit to the tune of $ 18 billion in losses over the last 3 quarters due to the guarantees they wrote on mortgage derivatives. (AIG, Facing Liquidity Crunch, Reaches Out to Regulator). The problem has also had a very deep impact on the equity markets across the globe, that have tumbled down to their lowest levels in as many as 6 years. Dow Jones had plunged to below 8,000 levels for the first time after 2003. The latest story on the crisis is that it has had a very deep impact on the automakers of the US, besides impacting banks and financial institutions. GM, Ford and Chrysler are expecting a $14 billion bailout from the government. The bill is supposed to provide money to the troubled auto industry as they are cash strapped and contemplate bankruptcy. Auto industry in the US supports 3 million jobs and it is very important for the government to do something to save the industry so that matters don't go from bad to worse. With unemployment in the US already crossing 8 percent and the economic activity not indicating improvement, it would be suicidal not to save the auto industry. Earlier the government had made available $750 billion to bail out distressed institutions that have been reporting abysmal earnings quarter on quarter due to write downs they have faced in the property market. The Fed seems determined to stem the subprime problem and is prepared not to stand down until the crisis is fully resolved, but it remains to be seen whether the rescue measures will have any impact on the economy in the medium term, for the short term though, it seems like the crisis will take at-least a couple of years to clear itself. Conclusion Globalization has had very severe effects on all the world economies and even though the crisis originated from the US, it got spread to all the economies of the world and there were sharp corrections in the stock markets around the world. This goes to show how inter-connected the world economies are and what kind of effects they might have on each other. As far as solving the crisis is concerned, lower interest rates is a sure shot way to boost growth and liquidity in the economies and the effects are beginning to show, as the liquidity situation has become better over the weeks. Banks have started lending and the low rate of interest is supposed to boost corporate earnings thereby boosting the overall economy. However, central banks will have to keep an eye on recovery and liquidity because if liquidity is not controlled even when the economies starts picking up, it will result in inflation and the same cycle might get repeated for different reasons. Works cited "AIG, Facing Liquidity Crunch, Reaches Out to Regulator" CNBC.1 April. 2009. http://www.cnbc.com/id/26710104 "How the US Subprime Mortgage Crisis Affect Irish Markets". 24 March. 2009. Irish Mortgage Brokers http://mortgagebrokers.ie/index.phpa=mortgage_article_view&article_id=21 "Lehman Is In Advanced Talks To Sell Key Business". CNBC. 24 March. 2009. http://www.cnbc.com/id/26708143 Read More