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Year : 2013 Views: 1207 Submitted By : Neha Verma On 19th February, 2013

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(a) What do you mean by globaization? Discuss the effects of globalization on the world economy.

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By Shahnawaz Ali


Globalisation: The dictionary definition of globalization means a process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications”.

Globalisation is the process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange. Globalisation has increased the production of goods and services. The biggest companies are no longer national firms but multinational corporations with subsidiaries in many countries.

Globalisation has been taking place for hundereds of years, but has speeded up enormously over the last half century.

Globalisation has resulted in:

Increased international trade

A company operating in more than one country

Greater dependence on the global economy

Freer movement of capital, goods and services.

Globalisation is perhaps best thought of as a process that results in some significant

changes for markets and businesses to address: for example

• An expansion of trade in goods and service between countries.

• An increase in transfers of financial capital across national boundaries including foreign direct investment (FDI) by multi-national companies and the investments by sovereign wealth funds.

• The internationalization of products and services and the development of global brands.

• Shifts in production and consumption – e.g. the expansion of outsourcing and offshoring of production and support services.

• Increased levels of labour migration

• The entry of countries into the global trading system including China and

the former countries of the Soviet bloc.

A key result of globalization is the increasing inter-dependence of economies. For


• Most of the World’s countries are dependent on each other for their macroeconomic health.

• Many of the newly industrializing countries are winning a growing share of world trade and their economies are growing faster than in richer developed nations.

• All countries have been affected by the credit crunch and decline in world trade, but many emerging market countries have slowed down rather than fall into a full-blown recession.

Effects of Globalisation on the World Economy:

“Globalisation” is understood here to mean major increases in worldwide trade and exchanges in an increasingly open, integrated, and borderless international economy. There has been remarkable growth in such trade and exchanges, not only in traditional international trade in goods and services, but also in exchanges of currencies, in capital movements, in technology transfer, in people moving through international travel and migration, and in international flow of information and ideas. One measure of the extent of globalization is the volume of international financial transactions, with over $ 1.2 trillion flowing through New York currency markets each day, and with the volume of daily international stock market transactions exceeding this enormous amount.

Globalisation has involved greater openness in the international economy, an integration of markets on a worldwide basis, and a movement toward a borderless world, all of which have led to increases in global flows. There are several sources of globalization over the last several decades. Globalization has had significant impacts on all economies of the world, with manifold effects. It affects their production of goods and services. It also affects the employment of labour and other inputs into the production process. In addition, it affects investment, both in physical capital and in human capital. It affects technology and results in the diffusion of technology from initiating nations to other nations. It also has major effects on efficiency, productivity and competitiveness. Several impacts of globalization on national economies deserve particular mention. One is the growth of foreign direct investment (FDI) at a prodigious rate, one that is much greater than the growth in world trade. Such investment plays a key role in technology transfer, in industrial restructuring and in the formation of global enterprises, all of which have major impacts at the national level. A second is the impact of globalization on tehnologicla innovation. New technologies, have been a factor in globalization, but globalization and the spur of competition have also stimulated further advances in technology and speeded up its diffusion within nations through foreign direct investment. A third is the growth of trade in services, including financial, legal, managerial, and information services and intangibles of all types that have become mainstays of international commerce. In 1970, less than a third of foreign direct investment related to the export of services, but today that has risen to half and it is expected to rise even further, making intellectual capital the most important commodity on world markets. As a result of the growth of services, but today that has risen to half and it is expected to rise even further, making intellectual capital the most important commodity on world markets. As a result of the growth of services both nationally and internationally, some have called this “the age of competence”, underscoring the importance of lifelong education and training and the investment in human capital in every national economy.

The benefits of globalization stemming from competition: Globalisation has led to growing competition on a global basis. While some fear competition, there are many beneficial effects of competition that can increase production or efficiency. Competition and the widening of markets can lead to specialization and the division of labour, as discussed by Adam Smith and other classical economists writing on the benefits of a market system. Specialisation and the division of labour, with their implications for increases in production, now exist not just in a nation but also on a worldwide basis. Other beneficial effects include the economies of scale and scope that can potentially lead to reductions in costs and prices and are conducive to continuing economic growth. Other benefits of gobalisation include the gains from trade in both parties gain in a mutually beneficial exchange, where the parties can be individuals, firms and other organization, nations, trade blocs, continents or other entities. Globalisation can also result in increased productivity as a result of the rationalization of production on a global scale.

Globalisation involves not only benefits, but also has costs or potential problems that some critics see as great perils. These costs could lead to conflicts of various types, whether at the regional, national or international level. One such cost or problem is that of who gains from its potential benefits. There can be substantial equity problems in the distribution of the gains from globalization and among individuals, organization, nations, and regions. Indeed, many of the gains have been going to the rich nations or individuals, creating greater inequalities and leading to potential conflicts nationally and internationally. Some have suggested the possibility of convergence of incomes globally based on the observation that the poor nations are growing at a faster rate than rich nations. The reality, however, is that a small group of nations, the “tiger economies” of East Asia, have been growing at a rapid rates, while the least developed nations of Africa, Asia, and South and Central America have been growing at a slower rate than the rich nations. These poor nations are thus becoming increasingly marginalized. The result has not been a convergence but rather a divergence or polarization of income worldwide, with a rapid-growth economies joining the rich nations, but with the poor nations slipping even further behind. This growing disparity leads to disaffection and possibly even international conflicts as poor nations seek to join the club of rich nations and have-not nations struggle with the have nations for their share of world output. This issue of distribution is a major challenge in the process of the globalization of the world economy.

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