Globalization Is a Trend Which Hurts the Poor and Benefits the Rich - Essay Example

Globalisation is a trend which hurts the poor and benefits the rich Introduction The term globalisation refers to increasing global connectivity, integration and interdependence especially in the areas of economic, social, technological, cultural, political, and ecological spheres. Today, technology is breaking through geographical barriers and distance, integrating the whole world into an interconnected village. Though there are many definitions of globalisation, all usually mention the increasing connectivity of economies and ways of life across the world making the world a real global village. In economics, globalisation refers to the convergence of prices, products, wages, rates of interest and profits towards developed country norms (Ismail, 2003). Theodore (1983) is usually credited with globalization's first use in an economic context. The term globalisation has come become popular since the 1980s. Technological advances have made it easier and quicker to complete international transactions both trade of goods and financial flows. In other words globalisation refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity-village markets, urban industries, or financial centers. There by turning the world into a global village. However, the opportunities provided by globalisation in real sense in not the same for all the countries and hence it has created an economic imbalance. This has resulted in the emergence of groups protesting against globalisation. This paper examines if globalisation has really been a curse for poor countries and a blessing for rich countries. As we examine the recent history it can be found that though globalisation offers wide-ranging opportunities for worldwide development, but it is not systematic in providing it in an evenly manner. It should be noted that some countries are becoming integrated into the global economy or the trends of globalisation more quickly than others. These countries which have been able to integrate are seeing faster growth and reduced poverty. In fact it can be said that the outward-oriented policies resulted in dynamism and greater success to much of East Asia, changing its status from poor countries to rich and prosperous countries. As the standard of living rose in these regions, it was possible to make advancement on democracy and economic issues. It should be noted that the opportunities of globalization comes with risks. For instance, the risks arising from volatile capital movements, the risks of social, economic, and environmental degradation created by poverty, and many more (IMF Staff, 2000). However, the countries which has prospered using globalisation has also had the similar risks, the only difference is that they took this as an opportunity to fight poverty and the others who did not make it, took globalisation as a reason to balm for poverty. The wave of globalization has been accompanied by policies changes that have opened economies domestically and internationally. During the past few decades, many governments adopted free-market economic systems, enormously increasing their own productive potential and creating numerous new opportunities for international trade and investment. In order to promote trade in goods, services and investments, many governmentshave established international agreements and changed their policies that dramatically reduced barriers to commerce. These countries in order to take full advantage of new opportunities in foreign markets have allowed the growth of multinational corporations, built foreign factories and established production and marketing arrangements with foreign partners. As a result these countries have benefited immensely. After the MNCs and the foreign companies, the advancement in technology has been the next most important driver of globalization. Development and advances in information technology, in particular, have significantly transformed the economic status of different countries. Advancement in the information technologies has provided immense opportunity for individual economic players especially the consumers, investors and businesses owners. These are important new tools for identifying and pursuing economic opportunities, including faster and more informed analyses of economic trends around the world, easy transfers of assets, and collaboration with various organisations around the world. The people who oppose globalisation argue that globalisation has been the main reason for enhancing poverty and claim that the creation of an unfettered international free market has benefited multinational corporations in the Western world at the expense of local enterprises, local cultures, and common people. Where as proponents of globalisation argue that it allows poor countries to develop economically and raise their standards of living. Hence resistance to globalization has been a result of people and governments trying to manage the flow of capital, labour, goods, and ideas that make up the current wave of globalization (Silicon Valley, N.D.). Trade reform especially in developing countries may have resulted in the short run to higher unemployment and greater poverty. This may be the result of persistent labour market distortions like the low degree of wage flexibility and imperfect labour mobility across sectors. Opening a country's markets to foreign MNCs, for example, may result in reduction of the market power of domestic firms and increase competitive pressures on them, there by forcing at least some of them out of their business and increase the problem of unemployment. However, if we take the positive aspect of this in the longer run, these countries may become more efficient in using its productive resources and thereby enjoying higher growth rates and lower poverty. Unfortunately those countries looking for a short term benefit may be disappointed with the inability to compete, and the presence of labour market segmentation due to minimum wage legislation or wage-setting behaviour by firms or trade unions, as well as imperfect mobility across sectors, may hamper the reallocation of all categories of labour from the non-tradables sector to the tradables sector that a reduction in tariffs usually entails (Agnor and Aizenman, 1996). Consequently, both unemployment and poverty may rise. If a country is technologically lagging behind and has an initial comparative advantage in "non-dynamic" sectors, openness to trade may result in the reduced growth rate (Matsuyama, 1992). As a matter of fact, exports of many developing countries still continue to consist of raw materials which include even energy and agricultural products and relatively low-technology manufactured goods like textiles. Even though openness to trade and capital flows may help these countries to take full advantage of technologies and production techniques, in a shot run they will have to face the transition period during which globalization may have an adverse effect on growth and poverty. Another disadvantage is by opening an economy to trade, it may discourage domestic research and development activities. For instance, if a country uses the limited number of skilled labour to just manual working in the MNCs, they will lack behind in new innovations which may probably bring in more prosperity. On the other hand, trade liberalization may also result in increasing poverty by reducing the demand for unskilled labour and a deteriorating the wage income distribution. For instance, in a number of countries in Latin America and Asia, openness to trade in the 1980s and 1990s has corresponded with the rising demand of skilled labour and a worsening of wage inequality (Harrison and Hanson, 1999). This phenomenon can be explained in terms of trade liberalization as it has been associated with the introduction of higher-level technology, the use of which requires skilled labour. Globalization and trade liberalization has reduced demand for low- and un-skilled labour, which in turn has resulted in poverty and uneven income distribution. As the wages of skilled labour rose, skewing income distribution also took place simultaneously. Higher technology follows globalization and trade liberalization, which in turn requires highly skilled labour force. The relative demand for the old fashioned unskilled or semi-skilled labour force declines (Winters, 2002). Thus, there are distinct possibilities of globalization hurting the poor. In past few years, financial globalization in many transition and developing economies has taken the form of greater infiltration of the domestic financial system by foreign banks. This form of financial integration has often been a matter of choice than a verdict imposed by the country's situation. In many cases, as a result of financial globalisation there emerged a need to recapitalize domestic banks in the aftermath of a banking crisis (Agnor, 2001). Although there are potentially large benefits associated with greater foreign penetration such as improved quality of financial services, better techniques for credit analysis, and reduced risks of domestic financial instability, which may translate into higher growth rates and lower poverty, there are also adverse effects. Most importantly for the issue at stake, to the extent that foreign penetration is accompanied by a greater concentration of credit flows toward large firms producing tradables, and reduced access to loans by small and medium-size firms which tend to be more labour intensive than larger ones. It may lead to reduced levels of economic activity, lower demand for labour, and probably a greater incidence of poverty. Another channel through which financial openness may have an adverse effect on the poor is the credit market. The key reason for this is that increased instability of world interest rates particularly raises expected intermediation costs and lead domestic financial institutions whose ability to enforce loan contracts is restricted to either increase domestic interest rates or to ration credit to maintain expected profits. This may also be disadvantage in a short run for the poor. If financial openness is tagged along with capital flight, the lower rate of accumulation of domestic capital that may result could be associated with a persistent, adverse effect on growth in the presence of increasing returns driven by externalities in knowledge and capital formation (Song, 1993). Though the issue of the impact of globalization on poverty, domestic income distribution and global income disparities has received a great deal of attention, there are distinct possibilities of globalization hurting the poor, especially in the short-term. The lower the skill level, the greater is the possibility of getting adversely affected by the onward march of globalization. In general it has not hurt the poor segments of populations. On an average the incidence of poverty in the world has declined. At higher levels, globalization leads to a turn down in poverty and the poor sections of the population benefit from it. A number of empirical studies have stressed the non-linearity involved in the advancing globalization on the one hand and domestic poverty and income distribution on the other. In conclusion, it can be said that globalisation can benefit a countries economy in a long run. However there needs to be a good support system in the transition period which is what is creating controversies with respect to globalisation. References Agnor, R.P, and Aizenman, J. (1996) Trade Liberalization and Unemployment, Journal of International Trade and Development, 5 (September 1996), pp 265-86. Agnor, R.P. (2001) Benefits and Costs of International Financial Integration: Theory and Facts, PRE Working Paper No. 2699, the World Bank (November 2001). Forthcoming, The World Economy. Harrison, A. E. (1996) Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries, Journal of Development Economics, 48 (March 1996), 419-47. 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