Globalization: Definition, Brighter and Darker Sides

Globalization is the interdependence and integration of global economy to enhance the worldwide exchange of capital, goods, and services.

Tremendous economic growth and internationalization of business were not possible without globalization.

World economy has witnessed a frequent shift in organizational structure, trade patterns, and culture.

Earlier, countries were confined to its national territory only and restricted to cross-border trading. Now, the scenario has changed entirely as open economy and relaxation in trade barriers have led the free flow of capital, goods, services, human resources, and technologies across nations. This integration of different economics into an international economy through exchange of trade, FDI, and flow of capital is called globalization.

In other words, globalization can be defined as an assimilation of different countries through cross-border exchange of ideas, financial resources, information, and goods and services. This cross-border integration can be social, economic, cultural, or political. Globalization has marked a significant contribution in the Indian economy.

It has played a crucial role in generating employment opportunities with the expansion of markets. Globalization has both positive and negative impacts of economies of different countries. Let us understand the features, advantages, and disadvantages of globalization in detail in the next sections.

Defining Globalization:

Globalization has not only brought only people closer, but has led to integration of ideas, cultures, and values. It has also facilitated the free flow of new inventions and innovations across nations.

Some of the most popular definitions of globalization are as follows:

The United Nations ESCWA defines globalization as, “In an economic context, it refers to the reduction and removal of harries between national borders in order to facilitate the flow of goods, capital, services and labor, although, considerable barriers remain to the flow of labor. Globalization is not a new phenomenon. It began in the late nineteenth century, but its spread slowed during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inward-looking policies pursued by a number of countries in order to protect their respective industries, however, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century….”

Tom G. Palmer of the Cato Institute states, “Globalization is the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result.”

Herman E. Daly argues that most often the terms-internationalization and globalization are used interchangeably but there is a significant formal difference between the two. The term internationalization refers to the importance of international trade, relations, and treaties owing to the (hypothetical) immobility of labor and capital between or among nations.

Thomas L. Friedman has analyzed the impact of the flattening of the world, and argues that globalized trade, outsourcing, supply- chaining and political forces have changed the world permanently, both for better and for worse. He also argues that the pace of globalization is rapid and will continue to make an impact on business organization and practice.

Noam Chomsky argues that the word globalization is also used, in a doctrinal sense, to describe the neoliberal form of economic globalization.

Therefore, on the basis of the aforementioned definitions, we can conclude that globalization is the interdependence and integration of global economy to enhance the worldwide exchange of capital, goods, and services.

Now, a particular product is not necessarily designed, manufactured, and sold in one country. For example, you can drive a Daimler Chrysler car designed in Germany and assembled in Mexico from the components made in the United States and Japan. The interiors of the car can be made from Malaysian rubber and Korean steel.

In addition, you can communicate with a Nokia cell phone, which is designed in Finland and made in China or Korea using the chip sets produced in Taiwan and designed by an Indian software engineer working there. So, all these are possible due to the onset of globalization.

Globalization can be seen through many perspectives, including market and production. The market perspective of globalization refers to the merging of historically distinct, separate, and isolated national markets into a large global marketplace.

Relaxation in trade barriers and adaptation of cultures across nations has made it possible for organizations to sell their standardized products and serve almost same quality in all countries.

For example, consumer products, such as Citibank credit cards, Pepsi Co. soft drinks, Sony PlayStation video games, Apple iPod, and McDonald’s hamburgers, have held the same quality and standards throughout the world.

However, the production perspective refers to the sourcing of raw materials, parts and components, and services from different countries. This helps to gain the advantage of national differences in cost and quality of factors of production, such as labor, energy, land, and capital.

For example, IBM ThinkPad X31 Laptop was designed by the most efficient IBM engineers in the most conducive environment of the United States. Thailand manufactured the computer case, keyboard, and hard drive; South Korea contributed the display screen and memory; Malaysia provided the built-in wireless card: whereas the United States manufactured the microprocessor.

Finally, the laptop was assembled in Mexico and shipped to the United States for sale. This whole process segregates the manufacturing process into various operations and locales these operations in the nations where the respective operations can be performed in the most cost effective way with cheap labor and raw materials. Other very common examples are Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) that have gained advantage of national differences in cost and quality of factors of production.

Brighter Side of Globalization:

Globalization has changed the entire socioeconomic and cultural conditions of the whole world. This tremendous economic growth and internationalization of business were not possible without globalization.

This can be easily understood by considering the following five aspects of globalization:

(a) International Trade:

Refers to the trade between countries. Due to globalization, trade restrictions imposed by several countries were relaxed to a great extent. In export-import of goods, the tariff and non-tariff barriers, such as ad valorem, specific, and revenue tariffs, voluntary export restraints, and subsidies, were reduced by different countries to allow the movement of goods freely across the border.

This reduction in trade barriers has increased trade between nations. It is evident that the trade share of developing countries in the world trade has increased from 19% in 1971 to 29% in 1999.

(b) Financial Integration:

Refers to one of the most crucial positive impact of globalization. Financial integration is defined as a process of closely assimilating financial markets of different economies, which leads to free flow of capital and other financial resources.

Technologies, such as electronic data interchange and electronic fund transfer, are the most significant development of globalization, which have resulted in the integration of financial markets. The inflow of FDI, portfolio investment, and bank credit rose dramatically till the wake of financial crises of late 1990s.

(c) Exchange of Technologies:

Refers to another positive effect of globalization. Globalization facilitates the movement of new and advance technologies from developed nations to developing nations. The advent of new and improved technologies has made the production methods of the developing countries more effective and efficient. For example, mass production of goods and increased economies of scale help developing nations to provide goods at a low and competitive price to the world economy.

(d) Employment Opportunities:

Constitute the major benefit of globalization. Due to globalization, many organizations have shown their interest in investing capital in different countries. Apart from this, organizations have expanded their global reach by establishing new branches and subsidiaries in different countries.

In addition, there is a tremendous growth in segments, such as IT, personal and beauty care, over the years. This has led to remarkable increase in employment opportunities, especially in developing countries. For example, in India, the growth of service industry has opened up new employment opportunities for people.

Due to increase in employment opportunities, individuals move from one country to another mostly in search of better employment opportunities. In return, these individuals bring back foreign currency, which add to the national income of the country they belong.

Darker Side of Globalization:

Globalization is seen as the driving force of internationalization of business in the global context. In the previous sections, we have learned how globalization has contributed in the development of underdeveloped or newly developed economies.

However, globalization also reflects the dark side of its consequences, where unparalleled growth, increasing inequality, deteriorating interests of workers, and diminishing sovereignty of countries are some of the major concerns. Now, let us discuss the negative consequences of globalization in detail.

Unparalleled Economic Growth:

The negative consequence of globalization, which the world has witnessed during the 20^th century, was unparalleled economic growth. During this period, the GDP of countries increased almost up to five times, but the increase was not steady.

However, the most remarkable stretch appeared in the latter half of the century, which was due to rapid trade expansion and financial liberalization. The analysts have divided the 20’h century into four phases on the basis of the uneven growth trends.

These phases are explained as follows:

(a) Phase 1:1900s-1913s:

Refers to the first phase, which is also known as inter-war era. During this phase, most of the nations were against internationalism or globalization. The world economies advocated and strongly favored the ideologies of closed economies, protectionism, and pervasive capital control. Most of the nations imposed restrictions through tariffs and quotas.

(b) Phase 2: 1913s-1950s:

Marks an era when the consequences of policies adopted during phase 1 were echoed in the second phase; that is, between 1913s-1950s. This phase experienced a devastating slowdown in the global economy, and the per capita income growth steeply dropped below 1 %.

(c) Phase 3: 1950s-1973s:

Refers to a period when nations showed a frequent increase in the global per capita income after World War II. This was due to establishment of United Nation Organization (UNO) and WTO, and major amendments in international trade agreements. The world economy increased by 2% because of the change in economic policies and the trade boom in the industrially advanced countries.

(d) Phase 4: 1973s -2000s:

Refers to the fourth phase, which marks a downturn in the economy due to global crises in 1990s. During these years, the economies of the countries, such as Russia, Mexico, Brazil, Indonesia, and Thailand, were most affected due to economic recession.

International Inequality:

International inequality was another major issue that was noted during the 20^th century. According to World Bank, inequality is defined as “the disparity of income and standard of living among nations and their citizens.”

When the process of globalization initiated, the disparity was seen between the rich and poor nations; richer nations were getting richer, while the poorer nations were getting poorer. The gap between rich and poor countries, as well as between rich and poor people within these countries was becoming relatively much wider.

The progress was not uniformly dispersed all over the world. It was found that the richest segments or countries grew up rapidly, showing increase in per capita GDP nearly six-fold during the century.

Deteriorating Workers’ Interest in Advanced Nations:

Today, analysts from developed nations are still in a great dilemma whether the competition from the low-wage economies displaces workers from high-wage jobs and decreases the demand for less-skilled workers.

However, the doubt is quite acceptable because due to the free movement of goods and services, the workers in the advance nations have suffered a lot. Organizations in advance nations have shifted their interest towards the low cost and high profit processes. One of the common examples of such process is outsourcing. Outsourcing has seemingly depleted employment opportunities in advanced countries.

Organizations outsource the work partially or completely from the developing countries because of a huge pool of highly skilled labor available at a very low wage in developing countries. Thus, outsourcing results in loss of job opportunities of the home country workers. This has resulted in chaos among the workers of advance economies.

Financial Crises:

The global crisis of 1990s affected the economies of Mexico, Thailand, Indonesia, Korea, Russia, and Brazil. This became a hot topic for debate whether the financial crises are the inevitable consequence of globalization.

Some economists advocate that economic management is more difficult in today’s scenario due to huge and complex nature of the world economy. Economists have suggested various reasons for the onset of economic crises.

At the national level, since some of the countries have maintained an impressive economic growth, but sometimes they are not fully prepared for the sudden downturn that comes in the international market. This leads to haphazard situation in the domestic market.

In addition, at the international level, some malpractices and mismanagement can also be the cause of crises. Inappropriate risk management, inadequate monitoring of economic development, and lack of sufficient information about international investors and financial institutions were few common malpractices which lead to crises situation.

This is quite evident from global crises that reoccurred in 2008 in which liquidation of Lehman Brothers and sale of Bear Sterns and Merill Lynch were some of the major contributors.

It is a fact that crises would not have developed, if the world was not exposed to the global capital markets. However, without globalization, economies have not witnessed tremendous growth records as they have experienced today.

Loss of National Sovereignty:

Another major concern of globalization is the loss of national sovereignty. Due to integration of world economy, countries are losing their autonomy in pursuit of economic policies. They need to provide relaxations in their international trade policies.

In addition, at certain level, countries should compromise with their domestic objectives and follow international trade laws and conventions proposed by the international institutions, such as WTO and IMF. The diminishing tariff and non-tariff trade barriers to promote uninterrupted flow of goods and services are the common examples.

These barriers were often imposed by the countries to protect their domestic industries. However, international conventions such as UNCTAD, Convention on International Sale of Goods (CISG), and other obligations to remove trade barriers affect the autonomy of some nations.