Welcome to Developments in the Global Economy: Causes and Effects of Globalisation!

Hello future economist! This chapter is incredibly important because globalisation isn't just an abstract concept—it shapes the jobs available to us, the prices we pay, and the future of our planet. Don't worry if this topic feels large; we will break down the 'why' and the 'so what' of global integration step-by-step.
By the end of these notes, you will be able to confidently explain the forces driving the world economy closer and evaluate the consequences this has had on different nations and people. Let's dive in!

Quick Prerequisite: What is Globalisation?

Globalisation is the increasing interconnectedness and interdependence of countries, driven by the expansion of international trade, financial flows, and the movement of labour and technology. In simple terms, the world is becoming one large, interconnected market.

Section 1: The Causes (Drivers) of Globalisation

Why is the world integrating faster now than 50 years ago? Four main forces are pushing countries closer together. Think of them as engines powering the globalisation train.

1. Trade Liberalisation and the Reduction of Protectionism

The greatest push factor has been governments choosing to lower barriers to trade.

  • Protectionism refers to policies (like taxes or quotas) that restrict international trade to protect domestic industries. Trade liberalisation is the removal of these barriers.
  • International Agreements: Organisations like the World Trade Organisation (WTO) have successfully promoted global free trade agreements, forcing member nations to reduce tariffs (taxes on imports) and quotas (limits on import quantity).
  • Analogy: Imagine a busy road between two towns. Tariffs are like tolls, and quotas are like roadblocks. Trade liberalisation removes these obstacles, making it cheaper and faster for goods to move between towns (countries).

Key Takeaway: When it becomes cheaper and easier to sell goods abroad, firms naturally start thinking globally.

2. Rapid Technological Change

Technology has dramatically shrunk the economic distance between countries. This applies across two key areas:

A. Transport Technology:

  • The invention and improvement of containerisation (standardised shipping containers) and efficient jet freight have massively reduced shipping costs and time.
  • Lower costs mean that a product made thousands of miles away can be sold competitively next door.

B. Information and Communication Technology (ICT):

  • The internet, email, and mobile communication have enabled businesses to communicate instantly and cheaply with customers, suppliers, and factories across the globe.
  • This facilitates the growth of global supply chains—a company can design a phone in the USA, source components from Korea, assemble it in China, and sell it in Europe.

Did you know? The cost of transmitting information across the Atlantic Ocean has fallen by over 99% since the 1930s due to technology!

3. Deregulation of Financial Markets and Capital Flows

In the late 20th century, many countries removed controls on how much money could leave or enter their economy (known as capital controls).

  • Financial Deregulation: This made it easy for banks and investors to move huge amounts of money (capital) instantly across borders to seek the highest returns.
  • This movement of funds, known as Foreign Direct Investment (FDI), allows firms to build factories or buy companies in other nations, directly linking economies together.
4. Growth and Strategies of Multinational Corporations (TNCs/MNCs)

Multinational Corporations (MNCs), or Transnational Corporations (TNCs), are firms that operate in several countries. They are not just passive participants in globalisation; they actively drive it.

  • TNCs look for the cheapest and most efficient place to locate different parts of their operations (e.g., cheap labour, access to resources, favourable tax laws). This strategy is called offshoring.
  • By setting up subsidiaries (branch companies) in different nations, TNCs integrate these nations into their global production networks, increasing trade volume and financial flows.

✓ Memory Aid for Causes: TRaC F
Technology (Transport & ICT)
Regulation (Reduced Protectionism)
and
Capital Flows (Financial Deregulation)
Firms (TNCs/MNCs)

Section 2: The Effects and Consequences of Globalisation

Globalisation is a double-edged sword. While it has led to incredible economic advancement, it has also created new challenges related to inequality and sustainability. A good economist must consider both the benefits and the costs.

1. Positive Economic Effects

A. Increased Specialisation and Economic Growth:

  • Globalisation allows countries to focus production on goods and services where they have a Comparative Advantage (where they can produce at a lower opportunity cost).
  • This specialisation leads to greater efficiency and higher output, driving global economic growth and higher living standards overall.

B. Lower Prices for Consumers:

  • Increased competition from foreign producers forces domestic firms to keep prices down and innovate.
  • Firms can benefit from economies of scale (producing goods in massive volumes for the world market), which reduces the average cost of production, passed on as lower prices to consumers.

C. Greater Investment and Technology Transfer:

  • FDI from TNCs brings needed capital, creates jobs in the host country, and often transfers valuable management skills and advanced technology, aiding economic development in less developed nations.
2. Impact on Employment and Structural Change

Globalisation shifts the structure of employment within countries.

  • Developed Economies (HICs): Often see the decline of traditional manufacturing sectors (as TNCs offshore these jobs for cheaper labour) but the growth of highly skilled service sectors (e.g., finance, tech, R&D). This causes structural unemployment for lower-skilled workers who lose manufacturing jobs.
  • Developing Economies (LICs/MICs): See rapid growth in manufacturing employment as TNCs set up factories. This moves people from subsistence agriculture into formal wage-earning employment, aiding development.

Common Mistake to Avoid: Globalisation doesn't just mean fewer jobs in HICs; it means a *different* mix of jobs—more high-skill and low-skill service jobs, fewer middle-skill manufacturing jobs.

3. Negative Economic and Social Effects

A. Rising Inequality WITHIN Countries:

  • Globalisation primarily benefits highly skilled workers (who can manage global supply chains or work in advanced tech).
  • Unskilled workers in developed nations face wage competition from cheaper labour abroad, depressing their wages. This creates a widening gap between the rich and the poor within a country.

B. Trade Imbalances and Vulnerability:

  • If a country imports significantly more than it exports, it runs a persistent trade deficit, which can create financial instability.
  • Highly globalised economies are also more vulnerable to external shocks (e.g., a recession in one major trading partner quickly spreads globally).

C. Exploitation of Labour and Tax Avoidance:

  • In the pursuit of low costs, TNCs sometimes operate in countries with lax labour laws, leading to poor working conditions or low wages (often referred to as the "race to the bottom" in labour standards).
  • TNCs also use complex tax planning to shift profits to low-tax jurisdictions, reducing the tax revenue available for public services in the countries where they actually operate.
4. Environmental Consequences

The link between globalisation and the environment is overwhelmingly negative:

  • Increased Carbon Emissions: Global supply chains necessitate massive transport across oceans (shipping) and continents (air freight), increasing the consumption of fossil fuels and contributing to climate change.
  • Resource Depletion: Rapid economic growth in emerging markets, fuelled by global demand, places significant strain on global resources (e.g., water, rare earth minerals).
  • Weakened Standards: The "race to the bottom" can extend to environmental regulations. Governments desperate for FDI might lower environmental standards to attract TNCs, leading to increased pollution in developing nations.

Quick Review Box: The Globalisation Balance Sheet

Benefits (+) Costs (-)
Increased global output (GDP) Increased inequality within developed nations
Lower consumer prices and greater choice Structural unemployment in developed nations
FDI and technology transfer to developing nations Increased environmental damage (transport, pollution)
Greater efficiency due to specialisation Risk of financial instability and tax avoidance

✓ Key Takeaway: Globalisation provides great benefits for efficiency and overall wealth, but economists must critically evaluate who receives those benefits and what costs (social, environmental) are incurred to achieve them. This evaluation is essential for achieving the higher analysis marks in your exams!