EFFECTS OF GLOBALIZATION ON THE WORLD ECONOMY

The impact of this level of globalization has undoubtedly led to economic growth. In specific terms, the effect of globalization are as follows: 

i) The major effect of globalization is that the global economy is,becoming more integrated day by day. 

ii) The volume of world trade has grown at a faster rate than the volume of world output. 

iii) There has been a trend of lowering the barriers to the free flow of goods, services and capital among countries.

iv) Foreign direct investment has been playing an important role in the global economy.In order to become competitive, company have started investing in overseas operations. 

v) Global operations have led to the emergence of Multilateral Trading Systems.

vi) Imports are penetrating deeper into the world's largest economies as well. 

vii) The growth of world trade, foreign direct investment and imports leds to more foreign competition in the domestic markets. 

viii) In order to compete with the foreign players, domestic firms are required to enable the production and distribution capabilities. 

ix) companies have started looking the wodd as a market for their products. . 

x) Companies have started dispersing their manufacturing, marketing and research facilities around the globe where cost and skill conditions are most favourable. 

xi) Opportunities have been increasing for the firms. 

xii) Innovations have started spreading faster.

MAJOR FORCES OF GLOBALIZATION

Globalization is not a new phenomenon either at the firm level or at the national/world economy level. Around 1880, the process of globalization of the economy and the firm began. This was the recognition of comparative advantage. Many firms went global. They included Ford, Singer, Gillette, National Cash Register, Otis and Western Electronics. This was because of enjoyment of scale of economies due to the advancement of technology. In the interwar period, the thrust of globalization declined. But the post war period witnessed once again tremendous growth of globalization. Let us learn some of the important forces of globalization.

International Trade and Globalization 

International trade has grown substantially over the years. The growth experienced is in the range of 4-10 per cent per annum. In fact, international trade has grown faster than the world economy in recent years. For developing countries, trade is the primary vehicle for realizing the benefits of globalization. Growing trade has contributed to the ongoing shift of some manufacturing and service activities from industrial to developing countries, which further accelerates the process of globalization. The creation of World Trade Organization in 1995 is another step toward creating an environment conducive to the exchange of goods and services. Another significant and more important indicator of globalization is the rate of growth of Gross Domestic Product (GDP) of the world. The world merchandise trade and the world GDP have been steadily growing since 1990. The rate of growth in merchandise exports is faster than the rate of growth in the world GDP. Look at Table 5.1 which shows that world merchandise exports and world GDP have been. Steadily growing till the year 1997. The world merchandise trade has been also growing faster than the world merchandise production... Of course, world merchandise trade, world merchandise production and world GDP have decelerated sharply in the year 1998 due to oil crisis, fall in prices of international trade of goods and services and several other factors.

Trade expansion does not confine to merchandise trade alone. Even international trade in services has grown tremendously. Trade in commercial services continued to be stronger than the merchandise trade throughout the entire 19904 998 period. .

The world merchandise exports, world merchandise. Production, world GDP and international trade in services have Witness substantial growth as a result of the globalization.

International Capital Flows 

Apart from expansion of international trade, the massive capital flows among countries has further strengthened globalization of capital by a large number of countries. The catalyst for globalization in the late eighties and nineties is not international trade, but cross border international finance flows. World inflow and outflow of FDI have been growing significantly. The inflow of FDI has increased from 359 billion dollar in the year 1996 to 644 billion dollars in the year 1998. Likewise the outflow of FDI has also increased from 380 billion dollar to 649 billion dollar. These levels were reached despite the unfavorable conditions in the world economy. FDI flows grew in 1998 by 39% in case of inflows and 37% in case of outflows. This is the highest growth rate attained in FDI since 1987.

On an average, virtually all of the increase in FDI in the year 1998 was concentrated in, developed countries, FDI inflows to and outflows from developed countries reached new heights of 460 billion dollar and 595 billion dollar. In case of developing countries, FDI inflows decreased slightly from 173 billion dollar in 1997 to 166 billion dollar in the year 1998. Most of the FDI is located in the developed world. Although the share of developing countries had been growing steadily until the year 1997, when it reached to 37%. It subsequently declined to 28% in the year 1998 due to the strong performance of the developed countries. The flows to the economies in transition of Central and Eastern Europe remained almost stable. The continuous growth in FDI will further accelerate the process of globalization. Look at Table 5.2 which shows the world FDI inflows and outflows.

Globalization and Technology 

Technological revolutions in transport and communications over the last three centuries, have integrated the world economy. The advances of technology in transport and communication have also brought peoples of the world nearer,

The revolution of technology that has taken place in transport, communication and information is of qualitative difference during the last ten years from that of previous-generation of technology. It is not only integrating but also bringing into existence a common culture, common political system est. It has also led experts like Ohame think that there is not concept of national consumer. Consumer preference can be global and regional.

Technological revolution has been rapidly transforming all productive systems and facilitating the process of globalization. Technology has become one of the most important elements of the competitiveness. In modern production activities, competitiveness entails new, more rapid product innovation, flexible response, greater networking and closely integrated production systems across firms and regions. The leaders of technological change are evolving new strategies in response. Apart from investing heavily in innovation they are moving their technological assets around the world to match them to immobile factors, entering new alliances and reorganizing production relations. This has further facilitated the process of globalization.

At the corporate level also technology is getting globalized. This is at two levels. First technology is being sold in the world market. Although the market of technology is governed by slightly different rules such as relative importance of information, a few sellers and large number of buyers leading to oligopolistic market structure, the market for technology is vibrant. Consequently many countries derive benefits from this. For instance, the US earns substantially from technology trade. The mechanisms of technology sale are outright purchases and technology collaboration agreements. There has been substantial increase in technology collaboration over the last two decades. Second, the globalization of technology is also taking place in establishment of R & D centers. A large number of TNCs are establishing their R & D in various countries thus globalizing their R & D operations.

WHAT IS GLOBALIZATION?

Globalization is the process by which an activity or undertaking becomes worldwide in. scope. It refers to the absence of borders and barriers to trade between nations. Globalization is defined as increased permeability of traditional boundaries of almost every kind, including physical borders such as time and space, nation states and economies, industries and organizations and less tangible borders such as cultural norms. As a consequence of increased global operation, the global economy is becoming more integrated than ever before. This gradual integration leads to the emergence of global village.

UNCTAD defines globalization at the macro level as follows : "The concept of globalization refers to both an increasing flow of goods and services and resources across national borders and to the emergence of complementary set of organizational structure to manage expanding network of international economic activity and transaction: Strictly speaking, a global economy is one where firm and financial institutions operate transnationally, i.e., beyond the confines of national boundaries. In such a world of goods, factors of production and financial assets would be almost perfectly substitutes everywhere and it would no longer be possible to consider nation states as distinct economic identities with autonomous decision making power in the pursuit of national objectives. The public goods that are needed to maintain an open market system, such as secure property rights and stable monetary system would become a global responsibility"

However, he World economy has not reached this level. Although, the nation state is having less control as the forces regulating trade, finance and technology, it has still not given way to a new set of institutions with global responsibility. Hence, the current situation is termed by some as ‘global interdependence’.

BALANCE OF PAYMENTS ADJUSTMENTS

When we discuss import licensing policy or exchange control we assume that the objective of the government is to restrict import so that the domestic import competing industries are given encouragement to expand and replace imported goods. Very often, however, the government’s objective is not so much to promote import substitution (because the country may not even produce the goods that are imported) but to reduce the import bill. This takes us to the concept of the balance of payment. Every country is like a company vis-a-vis the rest of the world and it has to settle accounts with the other countries. The statement of a country's financial transactions with the rest of the world is called the balance of payment statement. You may look at any issue of Economic Survey for India’s balance of payment statement. You have also learnt the balance of payment in Unit 3. To recapitulate, the statement is divided into three parts: the current account, the capital account and the official account, the entries in the current account show values of exports and imports during the financial year. The difference between the value of export and the value of imports (in rupees or dollars) is the balance on trade account. So we have a trade surplus or a trade deficit depending on whether the balance on trade account is positive or negative. There are other entries in the current account, like travel or tourism which are called invisibles. The invisibles are also like exports and imports of goods. When a foreign traveler comes to India and purchases hotel services, it is our invisible export. When our tourists go abroad and do the same thing, it is our invisible import. The balance on invisible trade (export minus import) plus the balance on trade account (trade deficit or surplus) is called the current account balance. Then we come to the capital account of the balance of payment statement. The transactions here are in the nature of capital import or export. If the government of India or an Indian company makes an investment abroad, say by purchasing a financial asset, it is capital export. If the foreigner invests in India it is capital import. The foreign investment may be either direct investment or portfolio investment. If a foreign company comes to India and sets up a factory or a shop to do business directly with the Indian people, it is direct investment. On the other hand, if the foreigner simply invests in shares and bonds floated by Indian companies, it is portfolio investment. There is an element of asymmetry between current account and capital account. In current account imports are items for which we make payments to the foreigners and exports are our receipts from the foreigners. In the capital account import of capital is a receipt item and the export of capital is a payment item. Therefore the balance on capital account is total capital import minus total capital export and a positive balance is a surplus and a negative balance is a deficit.

The total balance, i.e., the balance on current account plus the balance on capital account is called the balance of payment which may show an overall deficit or surplus. A country may have a deficit in the current account but a surplus in the capital account and an overall deficit in the balance of payment. This was precisely the position in India’s balance of payment in the last financial year. A balance of payment deficit simply means that certain payments are due to the foreigners and a surplus means that the foreigners are indebted to us in respect of certain payments. Since a deficit or a surplus needs adjustment, we have an official account showing how this adjustment is made. A BOP deficit may be adjusted by the Reserve Bank of India through sale of foreign currencies released from the foreign exchange reserves, or by borrowing from the International Monetary fund or by foreign aid. A surplus may be adjusted by increasing the foreign exchange reserves. When all these official transactions take place, the grand balance, i.e., balance on current account plus balance on capital account plus balance on official account, becomes zero and this has to happen by the law of accounting.

NON-TARIFF BARRIERS TO TRADE

As mentioned earlier tariff is not the only instrument to restrict trade and give protection to the domestic import competing industry. The non-tariff instruments are numerous. Recently, United States of America has decided to ban import of carpets from India on the ground that child labour is used in the Indian carpet industry to which the human rights activists have serious objections. In the past on many occasions consignments have been returned by USA on the ground that the goods pose health hazards to the citizens of the country. Thus, human rights, damage to environment, health considerations, injury to domestic industries etc, are the excuses offered by the importing country to restrict or prohibit imports. such restrictions are called non-tariff barriers. 

Various non-tariff barriers are imposed by the government to discriminate against imports or in favour of exports. Let us discuss briefly major kinds of non-tariff barriers and their implications for international trade.

Customs classification and valuation: The duty imposed on a particular import good depends on how it is classified in the tariff schedule and how it is valued by the customs authorities. This ambiguity provides customs authorities opportunity for arbitrary classification and determining value of imported goods. Customs authorities usually charge higher duties which may act as a deterrent to trade. 

Subsidies: Subsidies are provided by the government to domestic producers or exporters to stimulate the expansion of such industries. For example tax exemptions, cash disbursements, preferential exchange rates, government contracts with special privileges or some other favorable treatment. Subsidies help companies to be cost competitive. Government provides various types of export assistance to exporters to make the export business more profitable and attractive. 

Local content and Foreign investment performance requirement: Local content regulations are imposed on certain industries to promote import substitution and encourage the domestic producers, According to these regulations certain percentage of inputs used in the manufacture of goods are required to be procured from the domestic suppliers. In the same way, foreign investors are required to export a certain proportion of its output from the domestic country under the foreign investment performance requirement.

Technical Standards and Health Regulations: Many regulations are imposed on imports with respect to safety, health, marking, labeling, packaging and technical standards, quality standards and natural environment. Such regulations pose hardships and create barriers on foreign produced goods. .As a result, some products may freely enter in one country and may be banned in another country. For example Japanese government requires that some import goods be tested in Japan even when they have already been tested in the domestic country. USA prohibits imports of many types of agricultural products on these grounds. 

Government Procurement: According to this policy, government purchases give preference to domestically produced goods. For example, buy American regulation of USA government provide US producers Price advantage on Defense department contracts. 

Restrictions on Services: Non-tariff barriers are imposed to curtail trade in services. For example restrictions are imposed on transportation, banking, insurance, advertising, accounting, law, engineering, construction, franchising, tourism, education, health, business services, etc. on various grounds. 

Besides above restrictions, there may be voluntarily export restraint, anti-dumping restrictions, specific permission requirements, administrative delays and procedures, etc.