Globalization is a process of integration of regional economies and cultures into a global network of trade. In most cases the term globalization refers to economic globalization. Nations integrate into the international market in terms of technology, trade, capital flows or investments. Economic globalization refers to the increase in national interdependence of economies through an increment in international trade.
This is the process of promoting economic integration between economies of different countries with the aim of establishing a global market (Joseph, 2003 p4). Through economic integration, nations get a wider access to the world economy and their dependence on local resources is reduced. It can be in the form of Free Trade Agreement (FTA) or world trade organization (WTO). Economic integration makes international trade easier through the removal of trade barriers and tariffs. This can be through protection of investors in order to promote their capital investments. With economic integration, good and services, labour and capital find their way in the country where they are being put into maximum use.
This results in economic growth and development. Increase in the mobility of factors of production faces some negative challenges especially because of the economic pressures in the global market. Today, the global economy has increased to significant levels and all this have been facilitated by trade agreements. Several factors influence globalization which includes: socio cultural, technological, economic, and political factors. Globalization can also be used to refer to the national movement of culture, languages, and ideas. This paper looks into the history of globalization, international trade and finance and gives the merits and demerits of globalization
History of Globalization
It is believed that globalization was initiated by Andre Gunder Frank who was an economist connected to the dependency ratio. He argued that, globalization had been in existence since the third millennium B.C. this was the time when Sumer traded with Indus Valley. Globalization was later recognized in the Hellenistic Age when the urban centres became commercial. During this time, trade was embraced and many nations started trading together. Another significant stage was the Islamic Golden Age when the Muslim nations traded with the Jewish. Most of the Muslim countries specialized in the cultivation of cotton and sugar (Bordo, Taylor & Williamson, 2005:1-8).
Modern globalization was evident in the 19th century. There was industrial revolution which utilized economies of scale to produce low priced household goods. Population grew rapidly and the cost of living became low. With the start of the world war one, modern globalization began to break and some economies believed that the financial forces that were as a result of globalization had led to the emergence of the war. In early 1930s, there was a great depression which affected the economies of many countries especially the ones which had embraced globalization (Michie, 2003:60).
In early 20th century multinational corporations were established in Europe and United States which led to an expansion of the global market. Many scientific inventions were discovered which facilitated developments in products, technology, and science. In the mid 2000s, most of the industrialized nations went through a recession period which affected globalization. Recent statistics show that the world is going through a period of deglobalization and about 45 percent of wealth has been shattered by financial crises. China is the largest global exporter followed by German.
After the Second World War, politicians engaged themselves in vigorous planning which were aimed at breaking trade hindrances and to promote interdependence which in turn reduces the possibility of future wars. They established the Bretton Woods Conference for laying down international commerce framework. They also established other international institution with the responsibility of supervising the globalization process.
Some of these institutions were the World Bank and international monetary fund (IMF). Technology and industrialization have played a crucial role in facilitating globalization. Trade negotiations and cost have significantly reduced since the establishment of General Agreement on Tariffs and Trade (GATT). Another international trade organization known as World Trade Organization (WTO) was also established to work together with GATT for the promotion of free trade. Free trade promotion includes: reduction of tariffs, transportation costs, capital controls, subsidies and appreciation of intellectual property. Some of the international agreement made by GATT was the removal of barriers to trade such as tariffs (Martin 2005 p 157).
A key element in globalization is growth in the international trade sometimes referred to as world trade. This is facilitated by the elimination barriers to trade such as tariffs. International trade is the exchange of goods, services or capital between different countries. It has been in existence many years ago although much of its significance has been recognized recently. It has developed economically, politically and socially with many countries becoming traders. International trade plays a very important role in ensuring continuity of globalization. It has benefited nations with variety of options to choose from which they would not have accessed without it.
Barriers exist which put restriction to international trade. These trade barriers are governmental policies or regulations. The government may impose some restriction which bars the importation or exportation of goods or services from certain countries. On the other hand there are trade regulations defined in different nations which restrict trade with specific goods and services. Trade barriers take many forms including but not limited to import licenses, quotas, subsidies, tariffs and non tariffs barriers, and embargoes. Most of the trade barriers use the same principle; they impose some cost on trade so as to raise the prices of the goods in question (Jason, 2006).
Barriers to trade reduce the economic importance among countries and should therefore be abolished. Free trade agreement removes most of these trade barriers except the ones they deem necessary for the nation’s security. Examples of such agreements are North American Free Trade Agreement (NAFTA), European Union (EU), South Asia Free Trade Agreement (SAFTA), Union of South American Nations and European Free Trade Association.
Free trade is a policy in trade that enables countries or traders to transact without government interference. Traders benefit from the trade of goods and services in accordance to their comparative advantage. In a market with free trade, the prices of goods and services are determined by the forces of demand and supply; this differentiates free trade from other trade policies where prices are determined by other forces such as the government.
International finance is a branch of economics that deals with exchange rates and foreign investment and their effect on international trade. It also looks into international capital flows, deficits in trade and international projects. International finance can be said to be a branch in international economics that studies the currency changes, and the future of international trade. In recent years, the international financial market has been experiencing increases brought about by globalization.
In early 1990s, the international capital flows changed from 2 to 6 % of world gross domestic product and later increased to 14.8% of gross domestic product in 2006. Nations with advanced economies have benefited from these increments and some from the developed countries have benefited from financial integration.
Foreign Exchange and Monetary Policy
The foreign exchange market is a worldwide financial market that is used in trading currencies. It aids international trade by allowing businesses to change their currencies into a foreign currency. Two exchange rates are used in the financial market; the fixed exchange rate and floating exchange rate. Fixed exchange rate is also referred to us the pegged exchange rate. In this exchange rate the value of one currency is set in line with another currency or can be pegged to another value for example gold.
A pegged exchange rate is used for the purpose of stabilizing a country’s currency. It’s more common in nations with a growing economy. Countries using fixed exchange rates face limitations in using their monetary policy for macroeconomic stability. It only assist in achieving the short-run macroeconomic policies but cannot be relied for the long term. This is because if a country experiences a trade deficit it becomes very difficult to counteract it under the fixed rate as opposed to the floating rate. As at 2005, the only major economy that was using the fixed exchange rate was the China’s republic.
A floating exchange rate is determined by the forces of demand and supply in the international market. The value of a currency is determined by the foreign exchange market and is referred to as a floating currency. A floating exchange rate is preferred to the fixed because of its ability to adjust automatically in times of deficits in balance of payment. However, for a developing country a floating currency may not help in stabilizing the macroeconomic policy. The floating exchange rate can be used to achieve macro economic policies both in the short run and in the long run because of its response to changes in the foreign exchange. It ensures stability in macroeconomic policies of the trading countries (Goldin, Reinert, & World Bank 2007).
The international monetary fund (IMF) is an international organization that supervises the international financial market by examining the macroeconomic policies of member countries. The objective of IMF is to stabilize foreign exchange rates and enforce liberalized economic policies in countries for loan purposes. On the other hand, the world bank is an international financial institution that offers loans, aids or grants to countries in need. It was established for the purpose of eradicating poverty in poor nations (Bhagwati, 2004:204).
Labour and Globalization
Elliott (2003), in his article said that globalization and labour are complements to each other in raising the living standards in the whole world. None of them can work effectively without the other. Improvement in working standards can only occur in the presence of expanding global markets. He observed that it is the work of the international labour organization (ILO) and world trade organization (WTO) to address the issues related to labour in the context of globalization.
Citizens from countries which have formed trade agreement are free to travel to any member country, choose where to work and or where to reside without encountering any problems. There are various immigration programs within the member countries such as programs of foreign work, acquiring of citizenship and how citizenship can be inherited. Most of these programs can help one to obtain citizenship while others are just short term programs for the purpose of tourism or employment (Nelson, 2000:20).
Current Global Policies
World trade organization (WTO) was established in 1995 for the purpose of overseeing the international trade. It replaced the General Agreement on Tariffs and Trade which was in force since 1947. It regulates trade between the trading countries and forms a basis for negations and formation of trade agreements. It resolves dispute between the trading nations by ensuring their compliance to the WTO‘s agreement.
These agreements are usually signed by the representatives of the different countries whereas the parliament ratifies them. In 2001, a trade negotiation called Doha Development Agenda was launched for the purpose of enhancing poor countries participation. This has received disagreement from countries which rely on the export of agricultural products in a bid to protect their farmers from heavy imports. At the moment the future of this Agenda is not clear (Langmore 1998).
The United Nations conference on trade and development (UNCTAD) issued a press release in September 1997. As par the press release since early 1980, the world economy has been going through high integration rates through market forces and at the same time, economic and social disparities among nations are on the increase (Shniad 2). UNCTAD documented that the world economy has been experiencing a decrease in the growth rates and on the other hand the levels of inequalities are becoming visible. Inequalities are threats to integration and can lead to backward economic movements. Although women put much effort in their education as compared to their male counter parts, they always face discrimination in terms of employment (Anon. “From remarks at an UNCTAD conference in February 2000, in Johan Norberg” 2003).
They are assumed incapable of performing the same duties as men. Even with the same type of employment, they are discriminated against in terms of salaries and the wage disparities continue to rise (Michie 2003 60). On the other hand, there are still large and visible gaps between the rich and the poor. The rich continue to accumulate wealth while there are people in the same republic who continue to suffer in terms of food and medical care. According to UNCTAD, economic integration is not directly related to growth and development. And at the same time it does not mean that inequality can be reduced by growth and development (Shniad, 1997:4).
Benefits of Globalization
There is some evidence from both small and large countries of the benefit of globalization. As nations come together citizens benefit in the access to a wide variety of goods and services, increased employment opportunities and improvements in health and standards of living. In a period of about twenty years a big number of countries have entered into global economies leading to a reduction in the number of people living in poverty (Schulte 2000). International trade has become easy and countries can trade from any nation of their choice. Many trade unions have been set up for example the European Union which accrues a lot of benefits to its members.
Citizens from member countries can travel to any country of their choice provided that it’s a member of the union. They get chance of securing job places in any member country and can choose where to reside in. On the other hand, nations benefit from free trade and financial assistance.
Globalization has brought about economic integration which has promoted corporation among nations. Nations can seek help or assistance from other international countries in times of difficulties. Nations which were not able to venture into the international market because of trade restrictions have been able to do so with free trade. International trade has also helped nations in realization of its potential which they tend to specialize in the global markets. Some nations are well known for the production of petroleum products while others are popular for the production of agricultural products such as coffee and tea.
With globalization, information can be shared and dispersed easily among nations. Innovators get a platform for borrowing ideas to assist them in their inventions. This can be from previous records where they are able to analyze them and extract the useful ones (IMF staff 2008).
Although globalization has had many benefits, it has not been able to encompass all sectors. Many nations continue to experience regional disparities. Poverty rates are still high in sub-Sahara Africa although there has been a fall in its rates in South and East Asia. Statistics from the United Nations (UN) shows that about one billion people live on less than one dollar per day and about 2.6 billion live on less than two dollars. It is believed that this has been as a result of too little globalization. If globalization is increased, some of these problems can be eliminated (Linda, 2001).
The benefits of globalization come along with some risks associated with it. These are a result of capital movements among nations. IMF employs policies from time to time that help nations manage some of these risks. It offers technical assistance in some of the macroeconomic policies, the exchange rate, and financial sector.
Today, almost all nations depend on the global economy. Governments are finding it difficult to respond to their domestic issues as they are used to do. There have been many trade agreements that influence the performance of member countries and which put restrictions in the use of their monetary policies. These governments have to rely on the international monetary fund for regulations.
Poor nations are becoming poorer day in day out because of the low comparative advantage they have in the international trade. They have to rely on the World Bank for aids and grants for development. To curb this, the Doha Development Agenda was launched but it has yet to be accepted. Unless it is accepted, the poor nationals will continue to suffer at the expense of the rich nations which have developed economies and comparative advantage in terms of trade.
As economies expand and trade with each other coupled with the improved technology, the world is becoming a global village. The enhanced transport and communication networks are the foundations of globalization. All over the world, economies are joining hands to develop an economic political or social block as they prepare to play a role in the global environment. International trade is one of the ways in which economies from many nations exchange their social and economic benefits. It is the exchange of goods, services or capital between different countries. It has been in existence many years ago although much of its significance has been recognized recently.
It has developed economically, politically, and socially with many countries becoming traders. International trade plays a very important role in ensuring continuity of globalization. International trade has been facilitated by the removal of trade barriers such as tariffs. Removal of trade barriers ensures that nations are able to trade in a free trade market. Free trade is a policy in trade that enables countries or traders to transact without government interference. Traders benefit from the trade of goods and services in accordance to their comparative advantage.
Another important aspect in globalization is international finance. This is a branch of economics that deals with exchange rates and foreign investment and their effect on international trade. It also looks into international capital flows, deficits in trade and international projects. Globalization has many benefits accrued to the trading countries. These benefits include: the access to a wide variety of goods and services, increased employment opportunities and improvements in health and standards of living. In a period of about twenty years a big number of countries have entered into global economies leading to a reduction in the number of people living in poverty.
Although globalization has had many benefits, it has not been able to encompass all sectors. Many nations continue to experience regional disparities. Poverty rates are still high in sub-Sahara Africa although there has been a fall in its rates in South and East Asia. Statistics from the United Nations (UN) shows that about one billion people live on less than one dollar per day and about 2.6 billion live on less than two dollars. It is believed that this has been as a result of too little globalization. If globalization is increased, some of these problems can be eliminated.
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