Page 344 - DPOL202_COMPARATIVE_POLITICS_AND_GOVERNMENT_ENGLISH

Unit 14: Globalization

In a global economy, power is the ability of a company to command both tangible and intangible Notes
assets that create customer loyalty, regardless of location. Independent of size or geographic location,
a company can meet global standards and tap into global networks, thrive and act as a world class
thinker, maker and trader, by using its greatest assets: its concepts, competence and connections.
Beneficial Effects

Some economists have a positive outlook regarding the net effects of globalization on economic growth.
These effects have been analyzed over the years by several studies attempting to measure the impact
of globalization on various nations’ economies using variables such as trade, capital flows and their
openness, GDP per capita, foreign direct investment (FDI) and more. These studies examined the
effects of several components of globalization on growth using time series cross sectional data on
trade. FDI and portfolio investment. Although they provide an analysis of individual components of
globalization on economic growth, some of the results are inconclusive or even contradictory. However,
overall, the findings of those studies seem to be supportive of the economists’ positive position,
instead of the one held by the public and non-economist view.
Trade among nations via the use of comparative advantage promotes growth, which is attributed to
a strong correlation between the openness to trade flows and the affect on economic growth and
economic performance. Additionally there is a strong positive relation between capital flows and
their impact on economic growth.
Foreign Direct Investment’s impact on economic growth has had a positive growth effect in wealthy
countries and an increase in trade and FDI, resulting in higher growth rates. Empirical research
examining the effects of several components of globalization on growth, using time series and cross
sectional data on trade, FDI and portfolio investment, found that a country tends to have a lower
degree of globalization if it generates higher revenues from trade taxes. Further evidence indicates
that there is a positive growth-effect in countries that are sufficiently rich, as are most of the developed
nations.
The World Bank reports that integration with global capital markets can lead to disastrous effects,
without sound domestic financial systems in place. Furthermore, globalized countries have lower
increase in government outlays and taxes, and lower levels of corruption in their governments.
One of the potential benefits of globalization is to provide opportunities for reducing macroeconomic
volatility on output and consumption via diversification of risk.
Harmful Effects

Non-economists and the wide public expect the costs associated with globalization to outweigh the
benefits, especially in the short-run. Less wealthy countries from those among the industrialized
nations may not have the same highly-accentuated beneficial effect from globalization as more wealthy
countries, measured by GDP per capita etc. Although free trade increases opportunities for
international trade, it also increases the risk of failure for smaller companies that cannot compete
globally. Additionally, free trade may drive up production and labor costs, including higher wages
for more skilled workforce.
Domestic industries in some countries may be endangered due to comparative or absolute advantage
of other countries in specific industries. Another possible danger and harmful effect is the overuse
and abuse of natural resources to meet new higher demands in the production of goods.
One of the major potential benefits of globalization is to provide opportunities for reducing
macroeconomic volatility on output and consumption via diversification of risk. The overall evidence
of the globalization effect on macroeconomic volatility of output indicates that although direct effects
are ambiguous in theoretical models, financial integration helps in a nation’s production base
diversification, and leads to an increase in specialization of production. However, the specialization
of production, based on the concept of comparative advantage, can also lead to higher volatility in
specific industries within an economy and society of a nation. As time passes, successful companies,
independent of size, will be the ones that are part of the global economy.

LOVELY PROFESSIONAL UNIVERSITY 339