Cue, Karen Pearl G.

October 21, 2015

GLOBALIZATION AND WORLD ECONOMY

Globalization, we hear this term quite a while. What is Globalization? According to Cambridge
dictionary, it is the development of closer economic, cultural, and political relations among all the
countries of the world as a result of travel and communication becoming easy. It is also a situation in
which available goods and services, or social and cultural influences, gradually become similar in all parts
of the world 1. How did globalization come about? Why is it necessary and what are its benefits?

Globalization has become the buzzword of the last two decades. The sudden increase in the
exchange of knowledge, trade and capital around the world, driven by technological innovation, from
the internet to shipping containers, thrust the term into the limelight. Some see globalization as a good
thing. According to Amartya Sen, a Nobel-Prize winning economist, globalization has enriched the
world scientifically and culturally, and benefited many people economically as well. The United Nations
has even predicted that the forces of globalization may have the power to eradicate poverty in the
21st century. Others disagree. Globalization has been attacked by critics of free market economics, like
the economists Joseph Stiglitz and Ha-Joon Chang, for perpetuating inequality in the world rather than
reducing it. Some agree that they may have a point. The International Monetary Fund admitted in 2007
that inequality levels may have been increased by the introduction of new technology and the investment
of foreign capital in developing countries. Others, in developed nations, distrust globalization as well.
They fear that it often allows employers to move jobs away to cheaper places. However, economic
historians reckon the question of whether the benefits of globalization outweigh the downsides is more
complicated than this. For them, the answer depends on when you say the process of globalization started.
But why does it matter whether globalization started 20, 200, or even 2,000 years ago? Their answer is
that it is impossible to say how much of a good thing a process is in history without first defining for
how long it has been going on.

Early economists would certainly have been familiar with the general concept that markets and
people around the world were becoming more integrated over time. Although Adam Smith himself never
used the word, globalization is a key theme in the Wealth of Nations. His description of economic
development has as its underlying principle the integration of markets over time. As the division of labor
enables output to expand, the search for specialization expands trade, and gradually, brings communities
from disparate parts of the world together. The trend is nearly as old as civilization. Primitive divisions of
labor, between hunters and shepherds, grew as villages and trading networks expanded to include
wider specializations. Eventually armourers to craft bows and arrows, carpenters to build houses, and
seamstress to make clothing all appeared as specialist artisans, trading their wares for food produced by
the hunters and shepherds. As villages, towns, countries and continents started trading goods that they
were efficient at making for ones they were not, markets became more integrated, as specialization and
trade increased. This process that Smith describes starts to sound rather like globalization, even if it was
more limited in geographical area than what most people think of the term today. Smith had a particular
example in mind when he talked about market integration between continents: Europe and America. The
discovery of Native Americans by European traders enabled a new division of labor between the two
continents. He mentions as an example, that the native Americans, who specialized in hunting, traded
animal skins for blankets, fire-arms, and brandy made thousands of miles away in the old world.

1
http://dictionary.cambridge.org/us/dictionary/english/globalization
 Globalization has not always been a one-way process. There is evidence that there was also
market disintegration (or deglobalization) in periods as varied as the Dark Ages, the seventeenth century,
and the interwar period in the twentieth. And there is some evidence that globalization has retreated in the
current crisis since 2007. But it is clear that globalization is not simply a process that started in the last
two decades or even the last two centuries. It has a history that stretches thousands of years, starting with
Smiths primitive hunter-gatherers trading with the next village, and eventually developing into the
globally interconnected societies of today. Whether you think globalization is a good thing or not, it
appears to be an essential element of the economic history of mankind. 2

What is world economy? It is the economy of the world, considered as an international exchange
of goods and services.3 Since the emergence of globalization, it has vastly affected the balance of the
world economy. According to United Nations Conference on Trade and Development globalization has
shifted the balance in the world economy in various ways such as global trade trends, global capital flow
trends and migration and migrants remittances.

Since the Second World War, global merchandise trade has generally grown faster than global
income, but the global crisis has left its mark on trade dynamics: Recovery in global trade remains
unfinished and uneven, while the trend toward greater trade openness of economies came to a halt. The
global crisis and uneven trade recovery have reinforced the ongoing shift in balance in the world
economy, featuring the relative decline of developed countries and rise of developing countries. The
shifting global balance is also visible in the changing distribution of exports by destination, marked by the
rising importance of trade among developing countries. While developing countries as a whole have
become the key driving force behind global trade dynamics in the 2000s, performance varies considerably
between regions and countries. Commodity price developments since 2002 came along with sizeable
changes to terms of trade.

Global capital flows have grown even faster than global trade. While the share of relatively more
stable foreign direct investment has increased since the 1990s, private capital flows have proved both
highly cyclical and spectacularly fickle over and over again. In many developing countries, financial
openness has increased significantly in terms of both capital flows and cross-border holdings, raising
countries exposure to external financial shocks correspondingly. While widely turning towards defensive
macroeconomic policies in response to the emerging market crises of the late 1990s and keeping their
own house in order, especially financially integrated developing countries at large were caught up brutally
in the global crisis of 20082009.

While far less advanced than trade and financial integration, migration flows and the cultural
intermingling of populations too has increased in many countries and regions. Rising migration flows
have come along with a marked increase in the role of private remittances. Remittances have become an
important source of foreign exchange earnings for many developing and transition economies.
Remittances may serve to support various developmental ends. The global crisis had an immediate and
sizeable impact on migration flows and migrant remittances. 4

As discussed in the previous paragraphs, globalization has widely affected the world economy. It
has four positive impacts that we can derived from such occurrence.

Globalization brought about more efficient markets. Efficient markets should be what every
economy strives for. Essentially, the sign of an efficient market is where there is an equilibrium between
2
http://www.economist.com/blogs/freeexchange/2013/09/economic-history-1
3
http://www.macmillandictionary.com/us/dictionary/american/world-economy
4
http://dgff.unctad.org/chapter1/1.html
what buyers are willing to pay for a good or service and what sellers are willing to sell for a good or
service.
If you can improve the way you produce a good or service by doing things such as outsourcing certain
processes or buying from an overseas supplier that offers discounts, you can then afford to lower your
selling price which results in increased demand and affordability.
Even if businesses dont lower prices, they can make additional profits and then reallocate that excess
profit into doing things like increasing wages, taking on more investments or even creating more
expansion projects.

Globalization has increased competition. Anytime that you have multiple producers competing
for a hold of the economy, thats a good sign for consumers, as the quality of goods and services often
goes up as a result.
When businesses started to venture across international borders, what they often did was introduce a new
standard into the global marketplace. Consumers then had more options to choose from.
With more competitors to fight over market share, each company has to constantly look to improve their
goods or services or create more value for their customers.
This means better products and sometimes lower prices, which is always a good thing for buyers.

Globalization has stabilized security. When your economy depends largely on another countrys
economy, it is hard to imagine either one of the countries attacking the other. In a weird sort of way,
globalization helped heighten world security.
Although this may seem kind of twisted since there is so much violence that still goes on in the world, the
fact remains that globalization has halted many conflicts that could have turned ugly if their countrys
financial health didnt depend on the other.5

Globalization has brought more wealth equality throughout the world. Although many Americans
contend that their standard of living has gone down because of globalization, the flip side to this is that
hundreds of thousands of people around the world now have jobs, have started their own businesses and
can provide comfort for their families.

From sticks and stones, to bartering, to having monetary currency, to electronic transfer, we can
see that globalization has enhanced our world economy, and with globalization, world economy can
achieve and improve to even greater heights.

5
http://www.kstatecollegian.com/2013/05/07/4-positive-impacts-of-globalization-on-world-
economy/