Globalisation And Its Varied Economic Effects

Are the effects of globalisation different for developing and developed economies? Have the benefits of globalisation for a developed economy surpassed the benefits for a developing economy?

Globalisation has made many economies more prosperous, but all economies have been made more vulnerable to economic shocks.Globalisation is the process of the world economy becoming increasingly interconnected and businesses operating worldwide to export and import. Globalisation countries to specialise which is when certain countries produce goods they are better at making whilst other countries produce their preferred goods and they trade to get what they need. This allows for greater prosperity as more will be produced. Each country will usually produce based on what they have a comparative advantage in which is where they have the least opportunity cost in making and in what they have an absolute advantage in which is that they are best at making at the lowest cost. Globalisation offers different advantages to consumers and producers in developing and developed countries as a result of the outsourcing that may occur to less developed countries with lower costs of labour and higher comparative advantages. However generally developed countries have larger macroeconomic benefits from globalisation as they tend to export higher value goods meaning the value of their exports and consequently their balance of payments will be higher than for developing countries.

Globalisation occurs because it is generally much more efficient for countries to produce the goods or services that they can provide most efficiently and with higher quality. For instance, it would be very difficult for Sierra Leone to provide expert legal services to a corporate merger as they do not have enough sufficiently trained lawyers whilst the UK does. By contrast Sierra Leone does have a large worker pool willing to work in factories for lower wages than in the UK. Therefore, it would make sense for the UK to export its legal services while choosing to import its manufactured clothes for instance from Sierra Leone which can make them more cheaply and efficiently. This is due to the comparative advantage that both countries have in their chosen areas. Due to this specialisation of labour the overall world economy will be much more prosperous as more goods and services will be provided at a lower overall cost. While the overall world economy would benefit from this it may hurt the workers in developing countries which may not want to work in low skilled professions or may hurt certain sectors in developed countries who may not have the skills to participate in the new specialised economy.

For consumers in developed countries globalisation is highly beneficial as it will result in them having much higher variety of products and goods to choose from, at a much lower price. This is evidently the case because if goods are produced in countries with a higher absolute advantage they will be made for less with a higher quality. As a result, consumers will have higher living standards while having higher disposable incomes. This will the help governments as they will spend more thereby giving more in tax which can then be re-invested into the economy and the economy will grow in an example of the multiplier effect. This may also be the case for consumers in developing countries who may gain access to goods that before they could not afford. This can be seen across cities in Africa like Kinshasa and Lagos where for the first time most of the population is buying televisions mobile phones. However, this positive effects may become negative at times of supply chain pressures as occurred in the UK after covid. This hurt developed countries especially hard because they have products with more components which must travel more to be made. As a result, the UK experienced cost-push inflation of around 9% throughout 2022 which severely hurt consumers, especially lower-income households. However, despite the occasional spikes in inflation if the global system is strained in the long term it results in consumers across both the developed and developing worlds gaining access to higher quality, lower cost goods that before were only available to the higher socio-economic echelons of society.

However, the impact on workers is much larger as in developed countries globalisation can cause structural unemployment because of the outsourcing of labour. This is because a process central to globalisation is that due to specialisation, developed countries will move away from lower-skilled industries which can be done by workers in developing countries at a much lower cost. This occurred in the 1970s and 80s in the US and UK where manufacturing jobs were increasingly moved to countries like China, Indonesia, and Vietnam. As a result, parts of the north of England were left decimated by the loss of manufacturing jobs. Instead of re-training to find jobs in the new booming service sectors these newly unemployed workers were unable to adjust and have remained structurally unemployed for decades since de-industrialisation. Therefore, although in the 1980s the UK grew due to this specialisation and unemployment dropped in the last half of the decade the north has still not recovered and the south has had to subsidize the north through taxation and government spending which has added strain onto the government. In contrast workers in developing countries have seen enormous benefits. For instance, China, which in 1970 was a predominantly poor agrarian economy has seen an enormous rise in living standards and wages as manufacturing to export became the main focus of the economy. This was because due to globalisation firms such as apple moved production to China which employed Chinese workers in better higher paying jobs than their old farming jobs. As a result, China has been able to raise 800 million people out of poverty over the last 40 years and has consistently has growth rates of 7 or 8% per year due to exporting their goods. Despite this, workers may be exploited in developing countries and may fall into a middle-income trap where they are neither wealthy enough to become fully service led as developed countries not low income enough to receive more manufacturing jobs. According to some observers this is currently happening to China. However, despite the possible issues of exploitation of middle-income trap globalisation is much better for workers in developing countries than developed countries.

Finally, it could be argued that for the macroeconomy and for the MEPOs globalisation benefits developed countries more. This is because developed countries like Germany tend to export goods and services that are more complex and require more expertise to make and build. This means the value of their exports is higher as is the case in Germany which exports many cars and other high-tech equipment and therefore has a 3 percent BOP surplus. This significantly helps the German economy as BOP is one of the components of AD meaning the curve will shift to the right resulting in higher GDP growth as shown on fig1. By contrast developing countries tend not to have the expertise to make high-tech goods like cars domestically and they tend to export raw materials like Kobalt in DRC or clothes like Bangladesh. This means the value of their imports is lower and they may have a worse BOP. Thus means their AD will be less and therefore government tax revenues will drop so the economy overall will do worse in an example of the reverse multiplier effect. Despite this there are numerous examples of countries like the US having large budget deficits whilst countries like China which is developing has a massive surplus. Therefore it is clear that although generally the nature of exports and imports can benefit developed countries disproportionally it is not a rule and many developing countries can defy this rule.

Overall, it is clear that although for the overall global economy globalisation is absolutely beneficial there are different if not unequal consequences for different countries. If the objective for developed countries is purely higher growth, higher supply and lower prices globalisation is highly beneficial, at least in the long term. However, if the objective is to protect certain parts of the economy and certain workers such as sunset industries and manufacturing sector workers as it is often it for politicians who care more about votes than long term growth then globalisation may be less beneficial. Developing countries almost universally are forced to accept globalisation as it is the fastest way to develop and for their consumers and workers to have higher living standards and shown by the examples of China and India. Although the benefits to their macroeconomy may not be as great as for developed countries they still gain overall benefits.