Economic Globalization – Pros And Cons
(With Examples)
By Chris Drew (PhD) / October 23, 2022
https://helpfulprofessor.com/economic-globalization-examples-pros-cons/
Economic globalization is one of 8 types of globalization. It refers to
the ways in which global economies have become integrated through
growing business, trade and financial interdependence.
Elements of economic globalization include:
1. Rise of Multinational Corporations
2. Movement of Manufacturing Industries to Developing Nations
3. Growth of Financial Hub Cities in Developed Nations
While we usually refer to modern examples of economic globalization
(as it is more extreme than ever), the globalization of our economies
has been going on for centuries. An example of this is the rise of the
tea trade from India to England facilitated by the East India
Company that was founded in 1600.
There have been both positive and negative effects of the economic
integration of the world’s economies. A positive is increased prosperity
of the world overall. A negative is the widening gap between the rich
and poor.
Economic Globalization
Definition & Simple Explanation
Economic globalization is the element of globalization concerned with
how our economies have become increasingly interconnected. As our
world has become more interconnected (thanks to faster movement of
goods and people as well as high-speed telecommunications),
businesses have made the most of this to engage in cross-border
commerce.
Economic integration includes the integration of:
Goods – Including the production and sale of products and their
parts across international borders.
Services – Including increased movement of labor and the
growth of international service providers such as call centers
moving overseas. This integration sped up toward the second
half of the 20th Century and its growth continues to this day.
Examples Of Economic Globalization
Examples include:
1. Rise of Multinational Corporations
Multinational corporations include Coca-Cola, McDonalds, Amazon
and Google. Globalization of economies has often allowed
multinational corporations to move to offshore tax havens and low-tax
nations to minimize their tax responsibilities to society.
Multinational corporations have existed for centuries. The East India
Company, for example, (established in 1600) used to trade teas and
spices from Asia to Europe.
However, it has become increasingly easy for corporations to conduct
international business thanks to tax treaties to help corporations avoid
double taxation, free trade agreements such as NAFTA, and faster
movement of goods and services.
2. Internationalization of Capital Markets
The growing ease with which companies (and individuals) can move
money overseas has led to international capital markets. In short, this
means companies overseas can fund businesses all around the world.
This was labelled by Arjun Appadurai as ‘financescapes’.
Now, an entrepreneur can get cheap low-repayment funding from
overseas to set up a business venture. Similarly, overseas buyers can
flood a real estate market to buy up houses in international cities like
Vancouver BC or Melbourne Australia. This can inflate housing prices
for locals.
Similarly, Chinese industries have been quite aggressive in buying up
farming land and industries around the world – which has led to some
backlash from locals who feel as if local land should be owned by local
people.
3. Movement of Manufacturing Overseas
The past few decades have seen massive closing-down of
manufacturing industries in developed nations. Those industries have
been moved offshore, such as to Mexico, Vietnam and China, where
labor regulations are sometimes less stringent and wages are lower.
Now, if you look at the label on your clothing or electronics, you’ll often
see a “Made in China” label.
This has allowed us to get cheaper goods, but has led to backlash
from activists who have seen entire industries for blue collar workers
collapse in developed nations. Some could also claim the quality of
the goods may be affected if manufactured in countries with lower
quality standards.
4. Internationally Mobile Labor Forces
White collar jobs in finance, engineering and related industries have
benefited from globalization. Those with in-demand skills can find
work across the world before even stepping on an airplane and travel
internationally for 12- to 36- month stints to conduct work overseas.
This concept of migration for work is not new. New world nations like
the United States are built on movement of people seeking economic
mobility. The major recent change has been the speed and ease with
which this movement can happen for those with in-demand skills.
5. Rise of ‘Hub’ Cities
As the globe’s economies have become increasingly intertwined,
nations have developed expertise in specific industries. This is known
as the development of ‘economies of scale’ and leads to improved
productivity.
One consequence of this is that there are now hub cities around the
world focused on particular industries. London is known as a finance
hub, Los Angeles for technology (see also: technological
globalization), and Seattle for aviation.
6. Worldwide Booms and Busts
A globalized economy means that each economy around the world is
dependant on the success of others. Thus, a recession in one nation
may have a flow-on effect and cause a recession in others. The Great
Depression and the Global Financial Crisis are two examples where
economic problems in one part of the world (such as the United
States) can lead to economic woes all around the world.
Advantages Of Economic Globalization
1. Cheaper Goods
Multinational corporations can move their manufacturing industries
overseas to nations where the cost of production is low.
2. Economies of Scale (Efficiency)
Larger (multi-national) corporations can produce products in bulk. This
can create economies of scale, which means the cost of goods goes
down as the number of goods you produce goes up. For example,
Wal-Mart can often get goods to market a lot cheaper than your local
corner store.
3. Increased Prosperity
Proponents of globalization say that it has increased overall
prosperity in the world. When manufacturing industries move
overseas, those people in those developing nations get jobs and can
be lifted out of relative poverty, while people in the developed world
get cheaper goods. This is the ‘rising tide lifts all boats’ argument.
Critics disagree – and that’s discussed in the ‘disadvantages’ section
below.
4. Cheap Money
Entrepreneurs can get financed from international financiers (such as
Chinese investors) at low interest rates. The large pool of potential
investors in a global market means you can seek out very cheap
money. It forces downward pressure on interest rates and makes it
easier for you to borrow money to start a business.
Disadvantages Of Economic Globalization
1. Loss of Manufacturing Jobs in Developed Nations
Globalization inevitably leads to the movement of industries to achieve
economies of scale. Manufacturing industries have been the biggest
losers in recent decades. The NAFTA agreement, for example, led
many US-based manufacturers to relocate to Mexico.
Widespread political backlash to loss of protected industries is evident
around the world. Detractors argue for a return to nationalist and
protectionist policies. One prime example is Brexit – the exit of the UK
from the European Union – which was in part due to the loss of the
fishing industry during the UK’s participation in the EU trade bloc.
2. Exploitation of Developing Nations
Goods are cheaper to produce in developing nations because they
often have lower wages and worker protections. The cheap goods that
come out the other end – and end up on our doorstep – are often
produced in sweatshops for extremely low wages with few days off,
rest breaks, or safety standards.
Here, there is a debate between the fact developing nations
are asking for these jobs (the countries often have high
unemployment) and the fact we have to be responsible consumers
who don’t exploit nations that do not have worker protections.
3. International Interdependence
Critics of globalization say that it’s led nations to be overly dependent
on international supply chains. This was evident, for example, during
the Covid-19 pandemic, when many developed nations were unable to
produce vaccines. All their vaccine production facilities had moved
overseas for cheaper labor.
Similarly, during war time, all nations need to be able to produce food
and weapons within the nation to sustain them throughout the war.
Many nations are unlikely to be able to do this today.
4. Tax Evasion
The internationalization of the economy has allowed many companies
to move offshore to avoid taxes. Some smaller nations the need tax
revenue offer low-tax incentives for large corporations to move to their
low-tax nations. Larger nations try to match these tax decreases,
creating a global ‘race to the bottom’. The net effect of this is to lower
corporate tax rates worldwide, leaving nations with less tax revenue to
spend on social services.
5. Climate Change and Environmental Impacts
An international economy could have significant bad effects on the
environment. Goods have much greater distance to move, leading to
greater carbon footprints for products. Some may also argue that
products are also lower quality, meaning they get trashed sooner –
leading to greater amounts of landfill. Lastly, multinational companies
can avoid environmental responsibilities by operating in nations with
relaxed environmental laws – again leading to ecological damage.
Conclusion
Economic globalization has been occurring for centuries, but has
grown significantly in recent years thanks to trade liberalization and
increasing speed of communication and travel. We now live in an
integrated global economy that is heavily interdependent.
There are some great advantages of economic globalization such as
cheaper goods, economies of scale, and the spread of valuable
consumer goods around the world. But there are also some significant
downsides also, such as potential for exploitation of labor in
developing nations and the loss of working-class jobs in developed
nations.
