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MODULE #4

The nature and impacts


of globalization
MODULE #4

KEY FEATURES

Distinctive features of the current process of globalization

• It is widely accepted that the key features of globalization are liberalization of international
trade, the

• It is also widely accepted that this came about through the combined effect of two
underlying factors:

• These developments created the enabling conditions for the onset of globalization. The
effects of new technology have given a distinctive character to the current process of
globalization. The natural barriers of time and space have been vastly reduced.

• The cost of moving information, people, goods and capital across the globe has fallen
dramatically, while global communication

• Another distinctive feature of the current process of globalization relates to what is


conspicuously absent. Unlike earlier episodes of globalization that were characterized by
massive cross-border movements of people, the current process largely excludes this.
While goods, firms and money are largely free to criss-cross borders, people are not.
MODULE #4

Features: TRADE LIBERALIZATION


• World trade has expanded rapidly over the past two decades. Since
1986, it has consistently grown significantly faster than world gross
domestic product (GDP) (figure 1).
Figure 2: Average unweigted tariff rates by region, 1980-1998 (in per cent)

• Throughout the 1970s, trade liberalization within the framework of 70

the General Agreement on Tariffs and Trade (GATT) was modest


66 65 1980-85
1986-90

and gradual. It involved industrialized countries much more than it 60


1991-95

did the developing ones. From the early 1980s onwards, the extent
1996-98
50

of trade liberalization, especially in the developing countries, began 41

to accelerate (figure 2). 40

31 32
29 30 28
30
26 25
25 24 24

• This trade expansion did not occur uniformly across all countries.
21 21
20
20 18
15
14 14
The industrialized countries and a group of 12 developing countries 10
13
9 10
8 9

accounted for the lion’s share. In contrast, the majority of 5

developing countries did not experience significant trade expansion 0


South Asia Latin America East Asia Sub-Saharan Africa Middle East and North Europe and Central Industrialized

(figure 3). Africa Asia Economies

• Many the Least- Developed Countries (LDCs), a group that includes


most of the countries in sub-Saharan Africa, experienced a Figure 3: Distribution of developing countries' manufactures exports,
proportional decline in their share of world markets – despite the total for 1990s (in per cent)
fact that many of these countries had implemented trade
liberalization measures. Remaining
China
13.2%
176 developing
counties and
territories: 25.3 %
Figure 1 : Trade and net FDI inflows as percentage of GDP, 1970-2001 Korea, Rep. of
11.7%
60.0 4.50
Trade imports and exports (in % of GDP), left scale
FDI, net inflows (in % of GDP), right scale 4.00
50.0
3.50 Turkey 1.8%
Indonesia 2.4%
40.0 3.00
Taiwan, Province
India 2.5%
2.50 of China 11.2%
30.0
Brazil 2.8%
2.00

20.0 1.50 Hong Kong, China 3%

1.00 Thailand 4% Singapore


10.0
Malaysia 5% 9.4%
0.50 Mexico 7%
0.0 0.00 Combined share of top 12 countries and territories: 74.67
1970
1971
1972
1973
1974
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1979
1980
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1987
1988
1989
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1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
MODULE #4

Features: FDI
• During the early 1980s, FDI accelerated, both absolutely and as a percentage
of GDP (figures 1 and 4). Since 1980, the policy environment worldwide has
been far more conducive to the growth of FDI. Over the 1990s, the number of Figure 4: Inflows of Foreign Direct Investment, developing countries
countries adopting significant liberalization measures towards FDI increased 1985-2002 (in US$ billions )

steadily (figure 5). Despite the rapid growth of FDI flows to developing 140 Latin America and the Caribbean

countries, investment remains highly concentrated in about ten of these 120


Africa
Asia and the Pacific

countries (figure 6).


Central and Eastern Europe

100

80

• The nature of investments has changed. The information and


communications technology (ICT) revolution and declining transport costs
60

made the growth of far-flung, multi-country based production of goods and 40

services both technically and economically feasible. Coordination and control 20

of these dispersed production systems is easier. Production processes could 0

be unbundled and located across the globe to exploit economic advantages


1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

arising from differences in costs, factor availabilities and the congeniality of


the investment climate. Components and parts can easily be trans-shipped
across the world and assembled at will.
Figure 6: Distribution of FDI inflows to developing countries,
total for 1990s (in per cent)
China
23.7%
Remaining
176 developing
countries and Figure 5: National regulatory changes towards FDI, 1991-2000
territories: 25.3%
160
No. of regulatory changes, more favourable to FDI 147
135 136
140 No. of regulatory changes, less favourable to FDI 131
Venezuela
No. of Countries that introduced changes to their
1.7% 120 investment regime 108 106
101 98
100
Korea Brazil
80
2.1% 8.3% 80
79

Thailand 60
2.2% Chile
2.7% 40
Mexico
Bermuda 8.1% 20 16 16
9 9
6
2.7% Malaysia 2 0 1 2 3
0
4.0%
China, Hong Kong SAR 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Argentina Singapore 7.5%
S ou rce: UNCT AD Han d b ook
of S ta tis tics 2002. 5.6% 6.0%
Combined share of top 12 countries and territories: 74.74
MODULE #4

Features: FINANCIAL FLOWS


• Rapid integration of financial markets is the most dramatic element of globalization over the past two
decades. The Bretton Woods system, created after the Second World War, rested on closed capital
accounts and fixed exchange rates. In contrast to trade and FDI where gradual liberalization had begun,
financial globalization was not on the policy agenda at the time. The world lived with a system of separate
national financial markets.
Figure 7: Outstanding International Bonds, 1982-2002
(all developing countries, US$ Billions )

500
Outstanding nonguaranteed bonds
450
Outstanding public or publicly guaranteed bonds
400

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300

250

200

150

100

50

0
1982

1983

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2001

2002
• This began to change in 1973 but there was no rush to capital account liberalization. Since the late 1980s
there has been a global trend towards financial liberalization. This ranged from relatively simple steps such
as unification of exchange rates and removal of controls over the allocation of credit to full-blown
liberalization of the financial sector, including the opening of capital accounts. The world monetary system
underwent three revolutions all at once: deregulation, internationalization, and innovation.

• The increase in capital flows was greatly boosted by the revolution in ICT. This made possible the improved
and speedier knowledge of foreign markets, the development of “round the world and round the clock”
financial transactions, and the emergence of new financial instruments, especially derivatives.

• Explosive growth in private financial flows from North to South was concentrated in emerging markets with a
greater range of institutions of financial intermediation. These flows consisted of elements such as
investments in the equity markets by investment funds, bank lending to the corporate sector, short-term
speculative flows and lending through the international bond markets (figure 7).
MODULE #4

Features: TECHNOLOGY
Figure 8: Estimates of Internet access, 1997-2002
(millions of Internet users)
700 • The technological revolution underlying globalization turned
knowledge into an important factor of production. The
Africa
Latin America & Caribbean
7.9

knowledge-intensive and high-tech industries are the fastest


600 Asia (excl. Japan)
35.5
Oceania

500
Japan
Europe
6.5
26.2 143.9
growing sectors in the global economy.
US & Canada
4.6 101.6 10.5
400
17.7 57.2

• Successful economic development will eventually require that


9.1
71.3 48.9
300

countries become able to enter and compete in these sectors.


2.8 8.2
11.1 38.0
38.5 166.4
143.9

This implies that they will have to emphasize investments in


6.4
200 27.1
110.8
1.6 6.5

education, training and the diffusion of knowledge.


15.5 77.7

0.9 2.9 16.9 4.8


100 6.8 42.8 156.8 170.2
2.2 137.0
23.7 113.0
11.6 67.5
44.5
0
1997 1998 1999 2000 2001 2002
• There are serious North-South imbalances in access to
knowledge and technology. Almost all the new technology
originates in the North, where most research and development
occurs. This is an important source of the dominance of MNEs
in the global markets, and of their bargaining strength vis-à-vis
Figure9: Cost of Telephone Calls from the US to Selected Countries, developing country governments.
1960-2003 (in constant 1995 US$ per 3 minutes, peak rate)

60
Cost of calls to the UK
• The world has become more interconnected (figures 8 and 9)
50
Cost of calls to Germany with the spread of the Internet, e-mail, low cost international
Cost of calls to Japan
phone services, mobile phones and electronic conferencing.
40

30
• One result is that a vast and rapidly growing stock of
20
information, ranging from science to trivia, can be accessed
from any location in the world connected to the Internet. It can
10
be transmitted and discussed just as easily. At the same time,
0
satellite television and the electronic press have created a
global fourth estate.
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1980

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1998

2000

2002
MODULE #4

Features: INTERLINKS

• Changes in trade, FDI, financial flows and technological diffusion are becoming
part of a new systemic whole, evolving from increasing economic openness and
the growing influence of global market forces. This is a profound change, affecting
the role of the State and behaviour of economic agents.

• Trade and FDI are closely intertwined as the global production system shapes
patterns of trade, especially through the rapid growth of intra-firm trade in
components. The MNEs are now estimated to account for two-thirds of world trade
while intra-firm trade between MNEs and affiliates accounts for about one-third of
world exports.

• Trade in components and intermediate goods has increased. The qualitative


changes in the structure of world trade – specifically trade in components and
intermediate inputs – may be as significant as the quantitative increase in trade.

• Portfolio investments and other financial flows are increasingly important


determinants of the macroeconomic environment that shapes patterns of trade and
investment in the real economy.

• The diffusion of new technology has had a profound effect on comparative


advantage, the competitiveness of enterprises, the demand for labour, work
organization and the nature of the employment contract.
MODULE #4

Features: POLICIES

• A shift has occurred in economic thinking since the 1980s, when industrialized countries
were in stagflation while several developing countries were in a debt crisis. This
prompted a rethink on prevailing economic models in both industrialized and developing
countries.

• One element of the revised thinking in developing countries related to import-substitution


policies which were running out of steam, whereas the export-oriented industrialization
policies of the newly industrializing economies (NIEs) of East Asia were successful.

• Bretton Woods institutions played a pivotal role after the debt crisis of the early 1980s in
redefining industrialization strategies by encouraging liberalization of for trade and FDI.
Some trade unions, CSOs, policy analysts and third world governments argued that the
IFIs imposed excessive conditionality on developing countries, which put them in an
inappropriate policy straitjacket and inflicted heavy social costs.

• The rise of pro-market economic doctrines over the last 20 years played a key role in
laying the foundations for globalization. The collapse of communism in Europe in 1989-
90 was a turning point. At a stroke, it added to the global free market economy an
additional 30 former communist countries with a combined population of 400 million
people.

• To some analysts, the end of the bipolar world also meant the disappearance of any
systemic alternative to the market economy. As a result, free-market globalization took
off in 1990. Coincidentally, this was also the period when the explosive growth of the
Internet occurred, giving a fortuitous technological boost to this process.
MODULE #4

Features: TRADING SYSTEM

• A new round of multilateral trade negotiations launched in 1986 transformed GATT into the
WTO in 1995. The agenda of trade negotiations expanded well beyond reducing tariffs and
other direct barriers to trade. Subjects such as services, intellectual property rights (IPRs),
investment measures and competition policy (the “behind-the-border” issues) were added.

• These issues were seen as impediments to the free flow of goods and services across
borders. So it was essential to harmonize national policies to deepen liberalization of world
trade. This logic may also apply to other aspects of national policy and regulation,
especially when the objective of free trade is extended to encompass fair and sustainable
trade.

• Tensions linger over the desirability of extending “behind-the-border” issues since many
developing countries see Uruguay Round outcomes as being unbalanced. They feel the
deal was unfavourable because of limited market access concessions given by developed
countries in exchange for the high costs of binding themselves to new multilateral trade
rules.
MODULE #4

Features: GLOBAL PRODUCTION


• The emergence of global production systems that drove FDI created new opportunities for
developing countries. Some 65,000 MNEs, with around 850,000 foreign affiliates, are the
key actors behind these production systems. They coordinate global supply chains which
link firms across countries, including local sub-contractors who work outside the formal
factory system and outsource to home workers.

• The growth of global production systems is most pronounced in the high-tech industries
(electronics, semi-conductors, etc.) and in labour intensive consumer goods (textiles,
garments and footwear). They are also significant in the service sector where
technological advances allow software development, financial services and call centres to
be operated from countries around the globe.

• High-tech industries have scored the fastest growth and now constitute the largest single
share of manufactured exports of developing countries. Production of parts and
components is done by subsidiaries of MNEs located in developing countries. Most of the
research and development (R&D) and other technologically sophisticated functions are
carried out in the industrialized countries.

• In labour-intensive consumer industries, MNEs design the product, specify product quality
and outsource production to firms in developing countries. They control the quality and
timing of production, including frequent changes in design and volume. The driving force is
the flexible and timely adjustment to changes in consumer demand with minimal inventory
costs.

• The result is a global “just-in-time” production system. The MNEs control marketing,
branding and logos. Interestingly, these production systems have grown without parallel
development of multilateral rules to govern its key element, FDI. This has given rise to a
number of concerns.
MODULE #4

Features: FINANCIAL MARKETS


• The global financial system has changed. Private financial flows dwarf official flows and
the influence of banks, hedge funds, equity funds and rating agencies has increased
substantially. Rating agencies determine the costs and access to sovereign borrowing.
Stock analysts influence the flow of funds into stock markets while the decisions of hedge
fund managers impact on national currencies.

• Within the logic of perfect markets, the increased influence of private actors should lead to
greater efficiency in worldwide allocation of financial resources while imposing more
market discipline on developing country governments. But financial markets are far from
perfect because of severe problems of information failure and information asymmetries.

• Problems are magnified on global financial markets because international lenders may
have limited and poor information about local borrowers. For example, concerns have
been raised over the operations of hedge funds and rating agencies, and the probity of
some large international investors,

• There are no effective institutions for supervising global financial markets like those at the
national level. The global financial system is plagued by frequent and severe financial
crises, which can be devastating and wipe out years of economic progress. They can also
inflict heavy social costs through increased unemployment and poverty.

• Only a small minority of developing countries are part of global financial system, since
private financial flows are usually concentrated in emerging markets. The vast majority of
developing countries, including almost all the LDCs, receive very little.

• Low-income countries, mostly in sub-Saharan Africa, depend on aid. Their marginalization


from financial markets means they can not mitigate the effects of reduced ODA. As a
result, many such countries are still in the debt trap they fell into in the early 1980s.
REVIEW #4.1

1. What are the key features of globalization?

2. Did trade expansion occur uniformly across countries?

3. Is FDI broadly-based or focused on a few countries?

4. What is the most dramatic element of globalization since the 1980s?

5. Why has knowledge turned into an important factor of production?

6. Is a new systemic whole emerging of trade, FDI, financial flows and technological
diffusion ?

7. How did global production systems create new opportunities?

8. Is there need for institutions to supervise global financial markets?


MODULE #4

IMPACTS: CHIEF CONCERNS

• Globalization should benefit all countries and should raise the welfare of all people. This
implies that it should raise the rate of economic growth in poor countries and reduce world
poverty. It should not increase inequalities or undermine socio-economic security within
countries.

• It is widely accepted that the litmus test for globalization is whether it significantly speeds
up development and the reduction of absolute poverty in the world, and whether it ensures
economic, social and environmental sustainability.

• The social impact of globalization is not confined to poor countries that have been
marginalized from the process. In relatively successful countries, significant social costs
are involved.

• For example, China faces problems of transitional unemployment that are likely to intensify
with the reform of State-owned enterprises. The Asian financial crisis showed that even
countries with exemplary past records of economic performance can suffer heavy social
costs.
MODULE #4

IMPACTS: GROWTH
Figure 10: World GDP per capita growth, 1961-2003 (annual change in per
cent)

5.0
GDP per capita growth

• It is striking that global GDP growth has been slower than in 4.0 Mean per decade
(arithmetic)
previous decades (figure 10) since 1990, the period in which
globalization has been most pronounced. This contrasts with 3.0

predictions of the growth-enhancing impact of globalization. 2.0

• Growth is unevenly distributed among both industrialized and 1.0

developing countries. In terms of per capita income growth, 0.0


only 16 developing countries grew at more than 3 per cent per

2003*
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
annum between 1985 and 2000 (table 1). Some 55 developing -1.0
countries grew at less than 2 per cent per annum, including 23 * Forecast

that suffered negative growth. -2.0

• The income gap between the richest and poorest countries


increased significantly (figure 11). This uneven pattern of Figure 11: GDP per capita in the poorest and the richest countries,
growth is shaping a new global economic geography. 1960-62 and 2000-02 (in constant 1995 US$, simple averages)

35000
32339
20 poorest countries

• The most striking change is the rapid economic growth in China 30000 20 richest countries

over the last two decades, together with a more gradual but 25000
significant improvement in the economic growth performance of
India. These two countries together account for more than one- 20000

third of the world’s population. 15000


11417

10000

5000

212 267
0
1960-62 2000-02
MODULE #4

IMPACTS: UNEVEN BENEFITS


• A larger picture of globalization reveals highly uneven distribution of the benefits among
countries. Industrial countries are well placed to gain substantial benefits from global
production systems and liberalized investment rules. There are new opportunities for
MNEs to increase market power and for investments with higher returns in emerging
markets. Some benefits are partly offset by internal problems of adjustment that could
generate losses for some workers.

• A minority of developing countries have been highly successful in increasing their exports
and in attracting large inflows of FDI. Foremost are the original NIEs of East Asia that are
attaining industrialized country income levels. Some other middle-income countries in
Asia, the EU and Latin America such as Mexico and Chile may also be on track.

• For the most part, these countries had relatively favourable initial conditions such as prior
industrialization, human resource development, transport and communications
infrastructure, and the quality of economic and social institutions. But all have not pursued
the same development strategies. China, India and Vietnam have not followed orthodox
liberalization strategies, while the Republic of Korea relied on strong government
intervention.

• At the other extreme, the exclusion of LDCs, including most of sub-Saharan Africa, from
the benefits of globalization remains a reality. LDCs are trapped in a vicious circle of
interlocking handicaps including poverty and illiteracy, civil strife, geographical
disadvantages, poor governance and inflexible economies largely dependent on a single
commodity. Many are also burdened by high external debt and hard hit by the continuing
decline in the price of primary commodities.

• These problems have been compounded by continuing agricultural protectionism in the


industrialized countries. This restricts market access while subsidized imports undermine
local agricultural production.
MODULE #4

IMPACTS: TRADE & FDI


• There is no simple universally valid prescription on the best approach to trade
liberalization. ILO studies show sharply contrasting impacts among countries. In three
Asian emerging economies, trade growth had a generally favourable effect on employment
and wages in manufacturing. In Latin American countries such as Brazil and Mexico,
employment in manufacturing has either not risen appreciably or has fallen.

• Regarding FDI, a critical precondition for success is the presence of local firms able to
absorb the new technologies and respond to new demands. Also vital are policies to
develop local education, training and technology systems and to build supplier networks
and support institutions.

• The evidence suggests that FDI does increase growth. That should have a positive effect
on employment, but may be negated by strong crowding-out effects on local firms unable
to compete and by the introduction of capital-intensive technology by foreign firms.
Empirical evidence on the employment impact of FDI is sparse and does not permit simple
generalization.

• Cross-border investments can also raise the rate of growth if there are spillover benefits
from the transfer of technology and skills to the local economy. The empirical evidence
reveals mixed outcomes. While countries such as Singapore and Ireland have
experienced strong spillover effects, this has not been true of all countries.

• A full evaluation of the net benefits from FDI will have to include factors such as the impact
of FDI on small and medium sized enterprises and on poor producers; the potential
conflicts of interest between foreign firms and host countries; and the impact of FDI on the
pattern of trade and the balance of payments.
MODULE #4

IMPACTS: FINANCE
• On capital account liberalization, agreement is emerging that growth benefits
are small. The potential benefits of access to financial markets are often
reduced or negated by instability in countries with poorly regulated financial
systems.

• The prominence of short-term speculative capital flows is a basic structural


flaw in the system. Such flows do not contribute to productive investment and
place constraints to development policy.
Figure 12: Average company tax rates in the EU
• In some cases, financial openness has led to misallocation of resources and and OECD, 1996-2003
increased the real cost of capital. The misallocation arises when information
failures lead foreign lenders to finance unsound investments. The real cost of 40

Average tax rates in per


39
capital increases when governments raise interest rates to maintain exchange 38 37.9

rate stability. 37.6 36.8


36
36 36.4

cent
35.6
35.3 EU Member States
34.8 33.7 OECD Member States
• Financial openness limits countercyclical macroeconomic policy because 34 34
32.5
countries have to surrender autonomy over either exchange rate or monetary 32
33
31.7

policy. Maintaining a fixed exchange rate implies forgoing the freedom to fix 30
31.4
30.8

domestic interest rates, while control over the latter can only be regained by 1996 1997 1998 1999 2000 2001 2002 2003

allowing the exchange rate to float. Year Source: KPMG: Corporate Tax Rate Survey, 2003

• Globalization also affects public finances. In the world’s 30 richest countries


the average level of corporate tax fell from 37.6 per cent in 1996 to 30.8 per
cent in 2003 (figure12). Between 1986 and 1998, the top marginal tax rate on
personal income declined in the vast majority of countries, both high- and low-
income, often substantially.

• Changes in tax rates do not necessarily reduce tax revenues since lower tax
rates can also help to reduce tax evasion and increase production incentives.
But tax systems may become less progressive and place more burden on
labour, which is not mobile like companies and rich individuals.
MODULE #4

IMPACTS: EMPLOYMENT
Figure 14: Pre- and post-crisis unemployment in selected
Latin American and Asian Countries (in per cent)
• ILO estimates that world unemployment increased over the last decade to
about 188 million in 2003. Performance varied across regions (figure 13). Pre-crisis 20.5

Unemployment rates increased since 1990 in Latin America, the Caribbean 20.0 Contraction
Post-crisis

and South-East Asia, and in East Asia since 1995.


17.2

15.0 14.4

11.4

• Causes include the financial crisis at the end of the 1990s. In some major
10.7
10.1
9.8
10.0
8.6

countries, unemployment rates declined after the crisis but not to pre-crisis
7.9
7.3 7.4
6.8
5.9 6.1

levels (figure 14). Self-employment, which indicates the informal economy,


5.3 5.4 5.2
4.9
5.0 4.0
3.6 3.7 3.7 3.6

increased in all developing regions, except for East and South-East Asia
2.6 2.6
2.0 2.0

(figure 15). 0.0


Brazil
(1997-2000)
Chile
(1998-2000)
Colombia
(1998-2000)
Mexico (1995-
1996)
Indonesia
(1996-2000)
Korea
(1996-2000)
Malaysia (1996-
2000)
Philippines
(1996-2000)
Thailand (1996-
2000)

• Employment performance was mixed in industrialized countries. Over the


last decade unemployment increased in Japan but sharply declined in some Figure 15: Non-agricultural self-employment, 1980/89 and 1990/2000
European economies and UK. Unemployment fell in the US despite job (in per cent of total non-agricultural employment)

losses in some manufacturing industries.


48
50
1980/1989 44 44

• Income inequality increased in some industrialized countries (figure 16).


1990/2000
40

Earnings increased sharply of the top 1 per cent of income earners in the 32
29
32

US, UK and Canada (figure 17). In the United States, the share of this group
30
26 26

reached 17 per cent of gross income in 2000, a level last seen in the 1920s. 20

13
12

10

• Causes include high compensation paid by MNEs, the development of new


businesses with a global reach and global “superstardom”. 0
World Developed Regions Africa Latin America Asia

Figure 13: Open unemployment rates for various regions of the world,
1990-2002 (in per cent)

Figure 16: Ratio of the 10 per cent highest paid over the 10 per cent lowest paid
20.0
workers, mid-1980s and mid-1990s
1990 17.9 18.0
18.0 1995
2000 5.00
16.0
2002 mid-1980s +11.5 %
14.4 +36.8 %
4.50
13.7 mid-1990s
14.0
+9.0 %
4.00
12.0 +7.3 % +35.1 %
10.5 3.50
9.9 increase in
9.7 ratio
10.0
3.00
8.3 +15.3 %
8.1 7.8 7.6 +3.7 %
8.0 -5.8 %
6.9 2.50
6.5 +4.3 %
6.0 5.8
6.0 5.6 5.6 5.6 2.00
4.7
4.0 4.1 4.0
4.0 3.6 3.6 3.4 3.4 1.50
3.1 3.2 2.9 3.1
2.1 1.00
2.0

0.50
0.0
Latin America & East Asia South East Asia South Asia European Union USA Japan Sub-Saharan Middle East and 0.00
Caribbean Africa North Africa Australia Canada Finland Germany Ireland Italy Sweden United Kingdom United States
MODULE #4

IMPACTS: POVERTY
Figure 18: Income inequality changes in 73 countries, 1960s to 1990
• It is an error to attribute all positive or negative outcomes to globalization.
Domestic structural factors are also critical, including inequality in the
50
income distribution and the quality of governance. The impact of
45
Transitional countries
Developing countries
globalization on poverty is difficult to assess. Most developing countries
40
21 Developed countries have seen greater income inequality but how far globalization can be
35

30
blamed remains an open question (figure 18).
25

20
15 1 • The number of people living in absolute poverty worldwide has declined
15
significantly from 1,237 million in 1990 to 1,100 million in 2000 but most of
10

12
12
7
the improvement was in China and India, which house 38 per cent of the
world’s population. In China alone the number of people living in poverty
5

0
3 2
Countries with rising Countries with stable inequality Countries with declining declined from 361 million to 204 million.
inequality inequality
Of the 73 countries surveyed, Of the 73 countries surveyed, Of the 73 countries surveyed,
59 % of the population were 36 % of the population were 5 % of the population were
living in these countries living in these countries living in these countries
• In sub-Saharan Africa, Europe and Central Asia, and Latin America and
the Caribbean, poverty has increased by 82, 14, and 8 million,
respectively (figure 19). Regional and country-specific factors unrelated to
globalization were key factors.

Figure 19: People living on less than 1 US$/day, 1990 and 2000 (millions) • While reduction is world poverty deserves celebration, it is of little
500
consolation to those outside the few beneficiary countries. Real social
450
1990
466
432 costs may occur even if aggregate indicators of unemployment and
2000 poverty do not deteriorate. Those indicators may mask the increased
“churning” in labour markets and movements in and out of poverty.
400
361
350
323

300

250
241 • Perceptions of the social impacts of globalization are coloured by direct
200
204 experience of job or income losses, regardless of the overall picture. The
mixed pictures of economic performance, employment, inequality and
poverty make it extremely difficult to generalize about the impacts of
150
110
100
57
48
56 globalization. Observed outcomes reflect the combined results of a
50
6
20
5 8 complex of factors of which globalization, however broadly defined, is but
0
China East Asia & Pacific E. Europe & Central Latin America & Middle East & North South Asia Sub-Saharan Africa
one.
(excl. China) Asia Caribbean Africa
MODULE #4

IMPACTS: PEOPLE
Figure 20: Public expenditure on education, 1992-2000
(in per cent of GDP)

2
East Asia & Pacific E. Europe & Central Asia
Latin America & Caribbean Middle East & North Africa
1
South Asia Sub-Saharan Africa
High-income countries
0

1992

1993

1994

1995

1996

1997

1998

1999

2000
• The economic benefits and social costs of globalization are not evenly distributed. People who benefited most were
shareholders, managers, workers or sub-contractors of successful MNEs and competitive national enterprises. Generally,
those with capital and other assets, entrepreneurial ability, education and skills have benefited.

• People in uncompetitive enterprises are adversely affected, including firms protected by trade barriers, subsidized State
enterprises, and less flexible small and medium sized enterprises. Many could not seize new opportunities because they
lacked access to capital, credit and information.

• Increased capital mobility and high unemployment have weakened the bargaining position of workers. Pressures have
increased for labour market flexibility, eroding labour protection and causing concern about the quality of the employment.
That highlights the importance of international action to protect fundamental worker rights in all countries.

• Unskilled and indigenous peoples are particularly vulnerable. Investments in extractive industries, mega-hydroelectric
dams, and plantations have led to massive dislocations, disruption of livelihoods, ecological degradation and violation of
basic human rights.

• Increasing tax competition and a reduced role for the State have led to cuts in government expenditures vital for the poor,
including health, education, social safety nets, agricultural extension services and poverty reduction (figure 20). For
example, of the 680 million children of primary school age in developing countries, 115 million are not in school, 65 million
of them girls. Of the children who start primary school, only one in two complete it.
MODULE #4

IMPACTS: WOMEN

• In many developing countries, the social cost of globalization has fallen disproportionately
on women. Many have been adversely affected both absolutely and in relation to men. For
instance, trade liberalization has allowed the import of subsidized agricultural products and
consumer goods that have wiped out the livelihoods of women producers.

• The increased entry of foreign firms often displaces farming women from their land or out-
competes them for raw materials essential to their productive activities. Women producers
also face formidable barriers to entry into new economic activities generated by
globalization. This is often because of biases, either against women directly or against the
micro- and small enterprise sector in which they predominate.

• For instance, women own less than 2 per cent of land worldwide and receive less than 10
per cent of credit. Women have also been more adversely affected than men during the
increasing number of financial crises generated by globalization and more disadvantaged
by cuts in social protection.

• For many other women with some education and skills, globalization has resulted in an
improvement in their economic and social status. They include the millions of women
workers absorbed into the global production system.

• This wage employment gave them higher incomes than in their previous situations, which
were either intra-family servitude or a penurious and precarious existence in the informal
economy. Wage employment also gave these women greater potential economic
independence and often raised their social status within oppressively patriarchal societies.
MODULE #4

IMPACTS: WIDER EFFECTS


• There are two key wider effects of globalization: increased global awareness and the
growth of illicit cross-border activities.

• For people living in deprived parts of the world, global awareness raises their expectations
and lowers their tolerance of the situation they are in. This is probably a factor in the
spread of democracy and growing demands for political freedoms where these are still
denied. Electorates are better informed which is a boon for the quality of democracy.

• For people in richer countries, the information revolution is helping to forge a sense of
global community and transnational solidarity. That is visible in the growth of global
coalitions of non-State actors around issues of universal concern such as globalization
itself, the environment, human rights, humanitarian aid and labour exploitation.

• The global information revolution has also clearly affected cultures and social values. The
fear is that constant exposure to the images of Western lifestyles and role models could
lead to tensions which would be both culturally and socially divisive.

• The global interconnectivity which facilitates legitimate cross-border economic transactions


also provides the means for illicit cross-border transactions. It has helped to increase tax
evasion, money laundering, trafficking in people, and the sex and drug trades.

• This inadvertent facilitation of cross-border crime is reinforced by the increase in the


economic returns through more lucrative opportunities for arbitraging across markets, e.g.
through off-shore financial centres and tax havens. It is also helped by the slow
development of multilateral arrangements for the detection and suppression of illicit cross-
border activities.
REVIEW # 4.2

1. What are the chief concerns about the impacts of globalization?

2. Why are the benefits of globalization distributed unevenly among countries?

3. Are there are any critical preconditions for success in benefiting from FDI?

4. What are the main findings about financial openness and globalization?

5. Why are there mixed impacts of globalization on employment?

6. Which people have benefited the most from globalization and why?

7. Do the adverse social impacts of globalization fall disproportionately on women in


development countries?

8. How does globalization encourage global awareness and community?