Transcript Extract 5x

Extract 5: Characteristics & Impact of Globalisation
Drawing out the key issues in Extract 5
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Key characteristics of globalisation?
What are the main factors driving globalisation?
What factors affect competitiveness in the global economy?
To what extent is globalisation currently under threat?
Is the Human Development Index an appropriate measure of
measuring gains in development outcomes?
Does globalisation benefit consumers in both developed and
developing countries in the long run?
Why has globalisation created large economic imbalances?
To what extent is rising inequality of income and wealth
damaging for economic growth and development?
Which policies and strategies might be effective in addressing
the issues surrounding globalisation and widening income and
wealth inequality?
Extract 5: Characteristics of Globalisation
Page 12
• Globalisation is a process through which national economies have
become increasingly integrated and inter-dependent.
• It has a number of characteristics, including:
1. Greater trade in goods and services between the world’s economies
2. Greater transfer of financial capital between the world’s economies and
greater FDI
3. Greater transfer of technology and information between the world’s
economies
4. Greater specialization in production, including outsourcing and
offshoring
5. Greater labour migration, both within and between the world’s
economies
6. Development of global brands
7. Inclusion of more economies in the global trading system, including
Central and Eastern European economies, China and other so-called
emerging economies.
Extract 5: Characteristics of Globalisation
Aspect of globalisation
Page 12
Links for further exploration
Transfer of financial capital and great FDI FDI – which countries get the most?
Transfers of technology and information
Guardian article on technology transfer
Outsourcing and offshoring
Is the out-sourcing of jobs in cheaper
overseas countries now reversing?
Labour migration within and between
the world’s economies
Interview with economist Ken Rogoff –
Where will all of the workers go?
Development of global brands
Top global brands in 2014
Interbrand Ranking of Top Global Brands in 2014
Source: Interbrand, http://www.bestglobalbrands.com/2014/ranking/
Distinction between Outsourcing and Offshoring
Outsourcing
Offshoring
“Someone else does the work for
us”
“The work is done overseas”
A UK firm outsources IT and
A UK business sets up a call centre
consumer payments businesses to in Bangalore, India
other firms in the UK
A car manufacturer contracts to
have component parts made
overseas that are then imported
into the UK
A car manufacturer contracts to
have component parts made
overseas that are then imported
into the UK
Advantages and Disadvantages of Offshoring
• Advantages:
• Access to lower unit
costs (productive
efficiency)
• Access to more
specialized suppliers and
services
• Economies of scale from
operating in larger
international markets
• Disadvantages / risks
• Hidden costs associated
with off-shoring
• Risks over uncertain
customer service,
component quality
• Protection of intellectual
property may be weaker
overseas
In November 2013, the Financial Times reported that “one in six UK manufacturers has
brought production back from overseas during the past year or is in the process of doing
so.” They cited increasing wage and shipping costs in countries such as China plus a desire
to bring manufacturing closer to consumer markets.
Reminder of the Importance of Competitiveness
“To ensure its survival in this country and in the global economy, UK manufacturing industry
has become flexible and leaner, focusing on the delivery of quality products” Engineering
Employers’ Federation report (2014)
Energy
costs
Skills &
expertise
Innovation
Competitiveness
Quality
Efficiency
Economic & Social Advantages from Globalisation
1. Trade enhances division of labour as businesses and countries
specialize in areas of comparative / competitive advantage
2. Trade between markets across borders encourages producers and
consumers to reap the benefits of economies of scale
3. Competitive markets reduce monopoly profits and incentivize
businesses to seek cost-reducing innovations and improvements
4. Gains in efficiency should bring about an improvement in
economic growth and higher per capita incomes
5. Globalisation has helped many of the world’s poorest countries to
achieve higher rates of economic growth and reduce the number
of people living in extreme poverty
6. Increased awareness among consumers of economic, social and
political issues and challenges e.g. climate change and inequality
Risks / Disadvantages from Globalisation
1. More inequality / relative poverty leading to political and social
tensions and instability as a backlash.
2. Threats to the Global Commons e.g. threats of irreversible damage to
ecosystems, land degradation, deforestation, loss of bio-diversity and
the fears of a permanent shortage of water
3. Macroeconomic fragility – in an inter-connected world economy,
external shocks in region can rapidly spread to other centres – this can
lead to highly volatile capital movements and swings in trade flows
4. Trade Imbalances: Increasing trade imbalances lead to protectionist
tensions and a move towards managed exchange rates
5. Higher structural unemployment in countries where production has
shifted to lower cost centres
6. Standardization: Critics of globalisation point to less cultural diversity as
giant firms and global brands dominate domestic markets
7. Dominant Global Brands – businesses with dominant brands and
superior technologies may squeeze out local producers
Fig. 5.1 – IMF overview of globalisation
• There is substantial evidence, from countries of different sizes and
different regions, that as countries ‘globalize’ their citizens
experience benefits.
• The percentage of the developing world living in extreme poverty –
defined as living on less than US$1 per day – has been cut in half.
The IMF’s latest reports and briefings on
globalisation can be found here:
www.imf.org/external/np/exr/key/global.htm
Limited Progress in Extreme Poverty Reduction
MENA: Middle East and North Africa
The percentage of people living in extreme poverty has fallen across all regions but
progress in Sub-Saharan Africa has (until recently) been slower. The figure for the region as
a whole remains above 40% although many countries have achieved stronger gains
Causes of Extreme Poverty in Lower Income Countries
Absolute or
extreme poverty
is an inability to
meet basic
needs
Population growing faster than GDP in low income countries
Savings gaps - families unable to save, live on less than $2 per day
Absence of basic government / public services
In many
countries,
significant
progress has
been made in
reducing
absolute poverty
but each year the
Human
Development
Report makes
clear how much
progress remains
to be made
Effects of corruption and fraud at local, regional and national level
High levels of household debt and high interest rates
Damaging effects of civil wars and natural disasters
Low employment / participation rates, vulnerable jobs and poverty
wages. Low rates of female economic activity
Absence of basic property rights
Fig. 5.1 – IMF overview of globalisation
• Regional disparities persist: while poverty fell in East and South
Asia, it rose in sub-Saharan Africa. The United Nations Human
Development Report notes there are still around 1 billion people
surviving on less than US$1 per day and 2.6 billion living on less
than US$2 per day. Poverty headcount ratio at $2 a day (PPP) (% of population)
Access the 2014 edition of the Human Development Report:
http://hdr.undp.org/en/content/human-development-report-2014
The Human Development Index (HDI)
• HDI focuses on longevity, basic education and minimal income
1. Knowledge: First an educational component made up of two
statistics – mean years of schooling and expected years of
schooling
2. Long and healthy life: Second a life expectancy component is
calculated using a minimum value for life expectancy of 25
years and maximum value of 85 years
3. A decent standard of living: The final element is gross
national income (GNI) per capita adjusted to purchasing
power parity standard (PPP)
• GNI (Gross National Income is now used because of growing size
of remittances sent across countries
• Log of income is used in the HDI calculation because income is
instrumental to human development but higher incomes are
assumed to have a declining extra contribution to human
development
Limitations of the Human Development Index (HDI)
1. HDI fails to take account of qualitative factors, such as cultural
identity and political freedoms (human security, gender
opportunities and human rights for example)
2. The GNI per capita figure – and consequently the HDI figure –
takes no account of income distribution. If income is unevenly
distributed, then GNI per capita will be an inaccurate measure of
the monetary well-being of the people. Inequitable development
is not human development
3. Purchasing power parity (PPP) values used to adjust GNI data
change quickly and can be inaccurate or misleading
4. 2010 saw launch of a new Inequality-adjusted HDI, a Gender
Inequality Index and a Multidimensional Poverty Index. The
average loss in the HDI due to inequality is about 23%
Inequality Adjusted Human Development Index (HDI)
Inequality-adjusted HDI
The average loss in the HDI due to
inequality is about 23 percent—
that is, adjusted for inequality, the
global HDI of 0.682 in 2011 would
fall to 0.525
Source: UNDP Human Development
Report, 2014
Gender Inequality Adjusted HDI
Rwanda is an example of a
country that has made significant
progress in addressing gender
inequalities – for example, in
Rwanda, female lawmakers make
up 64 percent of parliament,
outperforming the world average
of one in five
Source: UNDP Human Development
Report, 2014
Africa and Changes in HDI Measures
Some SSA countries
have made substantial
progress in lifting
people out of extreme
poverty and in raising
health and education
outcomes – Ethiopia is
a striking example
Source: African Development Report, 2014
Extract 5: Views of Professor Joseph Stiglitz
• “The current process of globalization is generating unbalanced
outcomes, both between and within countries.”
• “Wealth is being created, but too many countries and people are
not sharing in its benefits.”
Imbalances between countries
Imbalances within countries
Trade imbalances i.e. current
account surpluses and deficits
Rising income and wealth
inequalities
Unbalanced flows of foreign direct
investment between countries
Structural differences in
unemployment rates
Imbalances in access to global
markets, ideas, health & education
Imbalances between rural and
urban areas / different regions
Extract 5: Views of Professor Joseph Stiglitz
• World Commission on the Social Dimensions of Globalisation
found that 59% of the world’s people were living in countries with
growing inequality, with only 5% in countries with declining
inequality.
Note that this report was published in 2004 – and much has changed in the decade since
Measures of inequality
The Gini-Coefficient
The Gini coefficient condenses the entire income
distribution for a country into a single number
between 0 and 1: the higher the number, the
greater the degree of income inequality
Income ratios
The ratio of the income of the richest groups of
the population to the poorest
Explore Further: Professor Joseph Stiglitz
• Here are some links to follow:
• Stiglitz articles in the Guardian:
www.theguardian.com/profile/josephstiglitz
• Stiglitz articles in Project Syndicate: www.projectsyndicate.org/columnist/joseph-e--stiglitz
Stiglitz on the global economy
and inequality (BBC, 2013)
Stiglitz in conversation with
Stephanie Flanders (2013)
Context: Economic Growth and Inequality
In many countries, a period of fast growth can lead to a widening of
inequality of income and wealth – but this is not inevitable!
“Half of one’s income depends on the average income of the
country in which that person was born.”
“8% of humanity takes home 50% of global income; the top
1% alone takes home 15%.”
“The richest 300 people on earth have more wealth than the
poorest 3bn - almost half the world's population.”
“Shared prosperity is defined as “fostering income growth of
the bottom 40% of the population in every country” (World
Bank, 2013).
Picture: Branko Milanovic,
World Bank economist and an
expert on trends in global
income & wealth inequality
“Global inequalities are a lot higher than those within any
country of the world, including Brazil or South Africa, the
Gini-coefficient of the world is estimated at 0.70, while the
one of a country like Brazil is below 0.60.”
Analysis: Some of the Key Causes of Rising Inequality
Tax system in UK is
less progressive
than 20 years ago
Rising real incomes
for most skilled
workers
Market failures in
education &
housing
Root Causes Of
High company
profits and surging
executive pay
Regressive effects
of high inflation
(especially food)
Widening urbanrural income divide
Key Economic and Social Costs of Rising Inequality
Social unrest and civil disobedience
• Strikes and demonstrations over poor pay and conditions
at Fox con in China which produces IPhones and IPads
Self-perpetuating poverty cycle
• Limited access to health care and education
• Volatile incomes, high debts
• Low savings
Misallocation of scarce resources
Capital investment skewed towards preferences of the rich
Low collateral – limits entrepreneurship
Capital flight by the rich
Some Strategies to Promote Inclusive Development
Human Capital Investment
• Improving school enrolment rates
• Improving the quality of teaching
Inclusive Pro-Poor Growth Policies
• Raising incomes for people
• Conditional cash transfers as welfare
• Productivity improvements in rural industries
Micro-Finance
• Small scale loans, gender empowerment
• Micro-insurance to help poorest farmers
Options for Government Spending to Reduce Inequality
Welfare state transfers
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Universal child benefits / unemployment assistance
Public (state) pensions
Conditional welfare transfers
Targeted welfare payments rather than universal subsidies
State-provided services (in-kind benefits)
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Education - reduces inequality of market incomes
Health care - overcoming market failures in health care
Social housing
Wage subsidies
Employment training
Selection of Suggested Questions for Extract 5
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2.
Describe two features of globalisation
Describe two aspects of the measurement of the Human Development
Index
3. Describe two features of the informal economy in many countries
4. Distinguish between financial capital and foreign direct investment
5. Distinguish between off-shoring and out-sourcing
6. Comment on the argument that there has been too little globalisation
rather than too much
7. Comment on the policies that might reduce extreme poverty for
developing countries
8. Comment on the argument that the rise of global brands is damaging
for consumers in developing countries
9. To what extent does globalisation benefit the rich at the expense of the
poor?
10. Discuss the impact of rising income and wealth inequality on economic
growth in developed and developing countries
11. To what extent has globalisation benefitted the UK economy?