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:
- Rise of Multinational Corporations
- Movement of Manufacturing Industries to Developing Nations
- 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.
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
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 globalisation. 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.
> See Also: Political Globalization
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.
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.
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