Globalization

Globalization - Economic growth and development

Multinational companies and Globalization

World bank, International Monetary Fund role in Globalization

• To what extent does globalization leads to economic growth and development?

• What is economic growth and development?

• Does economic development leads to social development?

• The role of multinationals in globalization

• The role multilateral institutions on globalization.

• Economic growth refers to the increasing ability of a nation to produce more goods and services.

• Economic development implies that individuals of that nation will be better off and takes into account changes in economic and social structures that will reduce or eliminate poverty

Does Globalization Lead to Economic G & D?

• David Ricardo (1772 – 1823)

70% of people find a living as subsistence farmers

Little surplus and trade

Low level of savings

Little money raised from taxes

Little spending

Few opportunities and economic development

Limited support for local industries

Infrastructure, transport – systems and very basic

Limited industrial develop-ment

Limited agricultural investment

Limited social/health welfare spending

Limited supplies of local money to invest

Aid:

WB, NGOs, EMLDs

Overseas direct investment:

IMF, MNE/ TNC

Trade;

WTO, MNE/TNC

Vicious cycle

Every country seeks to break the vicious cycle into a virtuous cycle

• This can be done by1. Trade – comparative advantage

2. Aid

3. Overseas direct investment- MNC

Comparative Advantage

• A country is said to have a comparative advantage if it can produce the same amount of a particular good at a lower opportunity cost than some other country producing the same good.

Sources of Comparative advantage

• Climate• Labour• Technology• Natural resources• Education

Reason

• All countries have a comparative advantage• All countries gain from specializing in the

sector they have a comparative advantage in• International trade is good

Counter arguments

• International trade may harm new infant industries

• Dumped goods may harm local producers• Foreign based monopolies may be established

in the country and charge high prices

Fallacious Arguments

• To Keep the money at home• To create jobs and decrease unemployment

In short….

• International trade leads to specialization which leads to countries importing goods that they have less comparative advantage in therefore the GNP grows.

Globalization leads to Economic Growth

WTO in charge of trade agreement across the world.

Does economic growth lead to development?

• Development is the process of improving the quality of human lives by

1. Raising peoples’ living levels through relevant economic growth processes

2. Creating conditions conducive to the growth of peoples’ self esteem through the establishment of socio-political and economic systems

3. Increasing people’s freedom by enlarging the range of their choice variable

Todaro and Smith definitions

For Growth to lead to Development, Growth must be accompanied by

and take care of

Reduction in Unemployment

Reduction in Poverty

Reduction in Inequality

Environmental sustainability considerations

Cultural sustainability consideration

• Although globalization may lead to economic growth, it is how the growth is distributed amongst the population that determines the level of development. If it is not distributed well, then the gap between the rich and the poor widens.

The Role of Multinationals in Globalization

• Multi- nationals or Trans-national companies are (MNCs or TNCs) are business with headquarters in one country but with operations in many other countries.

Popular Examples

How big are they?

• Multinational corporations are increasingly seen as excessively big and powerful, and as having dramatically increased in size and power.

• Is it true?

International capital movement(income flows and balance of payments)

• Do they bring in much capital (saving)?• Do they improve the balance of payment?• Do they remit ‘excessive country’? (host country and home

country, symbiotic and parasitic relationships)

• Do the employ transfer pricing and disguise capital outflows?

• Do they establish any linkages to the local company?• Do they generate significant tax revenues?

Displacement of indigenous production

• Do the buy out existing import-competing industries? (asset stripping)

• Do the use their competitive advantages to drive local competitors out of business?

Extent of technology transfer

• Do they keep all R&D in home countries?

• Do they retain monopoly power over their technology?

Appropriateness of technology transfer

• Do they use only capital-intensive technologies?

Do they adapt technology to local factor endowments or leave it unchanged?

Pattern of consumption

• Do they encourage inappropriate patterns of consumption through elite orientation, advertising, and superior marketing techniques?

• Do they increase consumption of their products at the expense of other (perhaps more needed) goods?

Social structure and stratification

• Do the develop allied local groups through higher wage payments, hiring (displacing) the best of the local entrepreneurs and fostering elite loyalty and socialization through pressures for conformity?

• Do they foster alien values, images and lifestyles incompatible with local customs and beliefs?

Income distribution and dualistic development

• Do they contribute to the widening gap between rich and poor?

• Do they exacerbate urban bias and widen urban-rural differences?

The World Bank

• It is an institution that lends money to governments and government agencies for development projects.

• First formed to reconstruct Europe through the marshal-plan after the second world war through grants

• It is criticized for being responsible for rising poverty through its structural adjustment programs.

The structural adjustment program

• The common guiding principles are export led growth, privatization and the efficiency of the free market.

• Requires countries to devalue their currencies against the dollar, lift import and export restrictions.

• Encourage countries to focus on the production and export of primary commodities.

International Monetary Fund• An international financial body that was formed to give loans to

governments with interest.

• International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payment, as well as offering financial and technical assistance

• Know to be mean to ELDCs because of high interest rate on loans

• Know to reshape the economies of beneficiary countries by promoting liberalization and privatization

• To the extent the governments are forced to privatize social bodies like high.

Conclusion

• From an economic point of view, globalization is good if managed properly.

References

• www.rand.org/pubs/testimonies/2005/RAND_CT244.pdf

• www.globalpolicy.org/globaliz/index.htm