Posted on 2 Comments

What is Economic Globalisation?

Economic Globalisation involves the global expansion of international capitalism, free markets and the increase in international trade, a process which has accelerated since the 1950s. Nearly every country on earth now imports and exports more from and to other countries than it did immediately after World War Two, and even ex-communist countries are now part of the global capitalist economy. Britain for example imports around 60% of its food, with only 40% of the food supply being grown in Britain, and if you take a look around any class room, or any living room, and you will probably find that the majority of products were imported from somewhere else.

Some of the key features of economic globalisation include:

The emergence of global Commodity chains – manufacturing is increasingly globalised as there are more worldwide networks extending from the raw material to the final consumer. The least profitable aspects of production – actually making physical products, tend to be done in poorer, peripheral countries, whereas the more profitable aspects, related to branding and marketing, tend to be done in the richer, developed, core countries.

The role of Transnational Corporations (TNCs) is particularly important – these are companies that produce goods in more than one country, and they are oriented to global markets and global products, many are household names such as McDonald’s, Coca Cola and Nike. The biggest TNCs have annual revenues which are greater than the economic output of middle-income countries. Apple, for example, generates more income than Finland does every year, and many oil companies such as Shell and Exxon-Mobile generate revenue several times that of the poorer countries they extract from.

TNC logos

The global economy is Post Industrial – as a result it is increasingly ‘weightless’ (Quah 1999) – products are much more likely to be information based/ electronic, such as computer software, films and music or information services rather than actual tangible, physical goods such as food, clothing or cars.

The electronic economy underpins globalisation – Banks, corporations, fund managers and individuals are able to shift huge funds across boarders instantaneously at the click of a mouse. Transfers of vast amounts of capital can trigger economic crises.

global electronic economy

 

Advertisements
Posted on Leave a comment

Outline and explain two reasons why trade does not always promote development (10)

One reason is that poorer countries tend to export low-value primary products such as agricultural goods, while richer countries export higher value goods.

Frank (1971) argues this is a legacy of colonialism during which rich countries made their colonies specialize in exporting one primary product such as sugar or cotton back to the ‘mother land’. After independence, developing societies were over-dependent on exporting these primary commodities, which typically have a very low market-value.

Examples include The Ivory Coast in West Africa – 33% dependent on cocoa beans; Kenya (in East Africa) which is about 30% dependent on two primary products – tea and cut flowers.

This type of trade does not necessarily promote development because the declining value of such commodities means developing nations need to export more and more every year just to stay in the same place. This has been described as ‘running up the downward escalator’.

____

A second reason why trade doesn’t work for development is that the global capitalist system depends on inequality

Emanuel Wallerstein argued that the world capitalist system is characterised by an international division of labour consisting of a structured set of relations between three types of capitalist zone:

    • The core, or developed countries control world trade and exploit the rest of the world.
    • The semi-peripheral zone includes countries like China or Brazil – which manufacture produces
  • The peripheral countries at the bottom, mainly in Africa, which provide the raw materials such as cash crops to the core and semi periphery.

Companies in the core countries need to keep prices of end-products as low as possible in order keep up demand, so they pay as little as possible for the raw materials and manufacturing. In short, the development of the west in terms of cheap, consumer goods depends on the poverty of the periphery and relative poverty of semi-periphery.

However, this may not always prevent trade working for development – countries can be upwardly or downwardly mobile in the world system. Many countries, such as the BRIC nations have moved up from being peripheral countries to semi-peripheral countries, and some (e.g. South Korea) can now be regarded as core countries.

_____

Thirdly, a lack of regulation at both global and national levels means that workers have few protections in developing countries and thus don’t benefit from trade.

Many workers are exploited with low wages in sweat shops, which means workers don’t earn enough money to pay for social development such as education or health; Bangladesh is a good example of a country in which poor health and safety regulations result in high deaths.

Other Corporations such as Shell extracting oil in Nigeria burn gas flares and have leaky oil pipes which destroys the environment and leads to women miscarrying, which actually pushes the development of some areas backwards.

Dependency Theory argues that Nation States compete in a ‘race to the bottom’ to attract Transnational Corporations (and extract materials/ produce goods to trade) through having the least regulations.

Posted on 2 Comments

Arguments for Trade as a Strategy for Development

‘Free’ trade* refers to the relative absence of government interference in the affairs of private businesses and the consumers who buy their products. Free trade depends on free trade agreements.

Free Trade agreements are policies established between countries and private businesses which make it relatively easy for companies to produce and sell goods in more than one country, so the ‘free’ in free trade means the freedom of businesses from the restrictive power of government.

Free trade.jpg
Free Trade – It’s about keeping goods circulating, and services of course!

Governments can restrict free trade across international boarders by doing the following:

  1. Imposing tariffs – which are taxes that nations impose on imports. Tariffs increase the cost of goods, and make it harder for companies to sell their goods abroad. (Quotas are similar but blunter instrument than tariffs, they are simply a limit which governments put on the number or value of imports they will accept from certain countries in any given time period)
  2. Subsidizing domestic industries – which are government hand-outs or tax breaks on domestic companies – if a government does this, then it makes domestic goods cheaper and foreign goods relatively more expensive – it’s effectively the opposite of tariffs.
  3. Imposing high taxes on profits – which reduces incentives for private companies to invest and produce goods.
  4. Having too many regulations – which require that companies pay workers minimum wages, do health and safety assessments, and take care of the environment.

It follows that Free trade agreements tend to focus on:

  1. Eliminating tariffs and quotas
  2. Eliminating government subsidies
  3. lowering taxes on profits
  4. Reducing regulation and protection.

Free trade opens up foreign markets and lowers barriers for foreign companies that otherwise might not be able to compete against local businesses. Without free trade agreements, there would probably be less trading between countries.

The idea of free trade goes back a long way

One of the most well- known historic proponents of free trade was Adam Smith. In his 1776 book The Wealth of Nations Smith argued that the ‘invisible hand’ of the free-market would ensure that producers produced what consumers wanted as efficiently as possible.

David Ricardo expanded on Smith’s ideas arguing that countries tended to have a comparative advantage in providing different goods and services and should do what they do better and cheaper than other countries, and in this way everyone benefits. For example, the U.K. climate is well-suited to growing apples, but not sugar-cane, and vie-versa for Jamaica, so it makes sense that two countries specialize in each crop and trade, rather than trying to grow everything themselves.

Modernisation Theory and Neoliberalism both argue that developing countries need to increase their share of world trade (export and import more) in order to develop, and both recognize that most developing countries have enormous potential to increase exports, given that they have a two important ‘competitive advantages’ over the West –an abundance of natural resources, which the West no longer has, and abundance of cheap labour.

However, the two theories have very different ideas about how poor countries should increase trade – modernization theory prefers aid to encourage trade, whereas neoliberalism is suspicious of aid, believing that poor countries should move straight to opening up the markets to attract TNC investment.

Modernisation Theory

Modernisation theory argues that increasing trade with other countries is a crucial part of ‘climbing the ladder of development’.

Initially, in phase two, or ‘the pre-conditions for take-off’, developing countries themselves have very low levels of capital and expertise, and so they require aid from the West, in the form of capital investment and western advice, which could help countries establish an industrial base, for example.

In the ‘take off’ phase (phase three) of Rostow’s model, countries will start to manufacture goods for export to other countries, and the ‘drive to maturity’ phase (phase four) sees earnings from exports reinvested in public infrastructure such as education, which results in a higher skilled workforce and further integration into the global economy.

After 60 years, the ‘age of high mass consumption’ should have been attained which means that countries are equal trading partners in the global market place.

Neoliberalism

Reid-Henry (2012) argues that neoliberalists see global free-trade markets as both the means and desired end for development.

Neoliberal development policy argues that developing countries need to create a ‘business-friendly’ environment in order to encourage inward investment from wealthy individuals and Transnational Corporations.

Reid-Henry suggests there are four key organizing principles of neoliberal policy:

  1. The governments of developing countries are expected to pull down all barriers to Western investment
  2. Workers in the developing world are expected to work hard and cheaply for Transnational Corporations
  3. Public services need to be privatized
  4. Social life should be organized around the profit motive.

Many developing countries have actually set up huge Export Processing Zones, or Free Trade Zones In order to attract TNCs developing countries have set up. These are special areas in that country, typically close to ports, which offer incentives for Transnational Corporations to invest, including tax breaks, low wages, and lax health and safety legislation.

In Neoliberal theory, corporations will help a country develop by providing jobs and training. The money earned will be spent on goods and services at home and abroad creating more money to invest and (limited) tax revenue for further development.

Evaluations 

It is true that there is an obvious relationship between trade and economic growth. The world’s top five countries, ranked by GDP, export (and thus profit from) 40% of the world’s goods. Meanwhile, the bottom 50 GDP countries export less than 1% of the world’s goods.

However, dependency theorists argue that ‘free-trade’ has historically brought more benefits to wealthy countries and corporations compared to developing countries.

Further Reading:

What is Free Trade? – quite a useful intro blurb from study.com

The case for free trade is as strong as ever – Bloomberg View, March 2016

IMF study warns free trade seen as benefiting only a fortunate few – Guardian article, 2016.

The impact of free trade agreements on the economies of developing countries – DFID 2015 – based on a ‘rapid assessment’ of 144 studies of FTAs between developed and developing countries, this recent report concludes that (a) in most cases the evidence isn’t strong enough to say what the effects of free trade are and (b) where the evidence is strong enough, it’s mixed.

*The reason I typically parenthesize the ‘free’ in ‘free trade’ is that for free trade to happen effectively it actually requires a substantial legal framework, which requires government and a legal system to which all parties agree – the most obvious aspect of which is the protection of private property – which basically says that if you make a profit, you can keep it, rather than having someone come and simply take it off you.