Globalisation - Gains, Drivers and Enablers

WACE Economics - Unit 3
Video 1.2
Globalisation
Gains, Drivers and Enablers

Four freedoms of globalisation
© Andrew Tibbitt 2019

Summary of potential gains from global integration
Economic growth Creates opportunities for non-inflationary growth
More efficient use of resources increases aggregate supply
Higher material living
standards
Trade increases consumer and producer surplus and overall welfare.
Growth increases incomes and material living standards
Lower inflation More efficient use of resources based on comparative advantage and
economies of scale. Producers face more competition
Employment Growth normally leads to more jobs and higher paid jobs (subject to
productivity changes and changes to working population).
Escape from poverty Growth in less economically developed economies (LEDC’s) halved the
level of extreme poverty between 1990 and 2010 according to the World
Bank.
Closer international
cooperation
The gains from global integration encourage good international
cooperation, because disputes are costly.
Muliculturalism The four freedoms at the heart of global integration help develop an
awareness and appreciation of other cultures, enriching peoples’ lives.
Security of supply Trade allows countries to import products that they can’t make efficiently
or when domestic production is interrupted.

Gain 1: Sustained economic growth
• Global integration promotes economic growth by increasing
productivity through trade and foreign investment. Both potential
GDP and actual GDP increase.
• Resources can be used more efficiently, and investment can be
increased by finance from overseas.
On the other hand…
The benefits of growth are not shared equally within an economy
(there are winners and losers) and not all countries gain equally
either (the ‘north’ or EDC’s) tend to do better than the ‘south’ or
LEDC’s).

Gain 2: Higher material living standards
• Trade increases total welfare (community surplus) by increasing
consumer surplus (consumers buy more at lower prices) and
producer surplus (producers sell more at higher prices).
• Consumers have access to a broader range of products (familiar
products are found in unfamiliar places, and unfamiliar products in
familiar places) and the quality of products improves.
• The level of the social wage (value of benefits provided by the
government) can increase because higher growth leads to higher
tax revenue and this allows governments to spend more on public
and merit goods, e.g. education, health and transport infrastructure
Growth increases the damage to ‘global commons’ (common access
resources such as the atmosphere, and oceans) and this reduces
living standards.

Gain 3: Lower inflation
Globalisation raises productivity and reduces production costs. This
increases aggregate supply (AS shifts down and to the right).
Inflation falls because:
• Production is concentrated in areas of comparative and
competitive advantage.
• Global value chains allow resources and components to be
produced in the best locations.
• Firms more likely to be in position to gain from economies of scale
• Firms sell into more competitive markets.
• A rise in aggregate demand (and rise in employment) may
increase demand-pull inflationary pressure.
• Economies of scale might become less significant as the size of
businesses rise.

Gain 4: More and better paid employment
• Growth normally leads to more (and better) employment
opportunities.
• Higher aggregate demand increases the demand for workers.
• Workers’ pay can reflect the higher productivity achieved in the
workplace.
But on the other hand…
• Freedom of movement of workers and products mean that wage
rates have to be competitive. The share of GDP going to labour
has fallen relative to the share going to owners of capital.
• Workers need to become more productive (e.g. learn new skills
and adopt new working practices)
• Impact on unemployment depends on rise in working population
and rate of productivity growth.

Gain 5: Escape from poverty
• According to the World Bank, between 1990 and 2010, the
proportion of the global population living in extreme poverty fell by
half. In China, for example, the extreme poverty rate fell from 36%
to 6% and Vietnam moved from being one of the world’s poorest
nations to middle-income status in a single generation.
• While the growth of incomes in ELDC’s provides economic
benefits to economically advanced countries like Australia who can
increase exports (resources, goods and services) to them, the
reduction in poverty should be judged mainly on moral or ethical
grounds.
Overseas development aid has been a target for spending cuts in
countries where fiscal austerity measures have been required.

• Closer economic ties may promote closer political ties, enhancing
security and stability. This is the ‘peace dividend’ from
globalisation. For example, It used to be claimed that no two
countries selling McDonald’s Big Macs had gone to war with each
other.
• Recently, a rise in international tensions and new barriers to trade
and investment have gone hand-in-hand. The direction of
causation is not entirely clear.
Gain 6: The ‘Peace Dividend’
• The rise of support for right wing politicians with populist national
agendas suggest that people feel more secure not having to rely
on other countries and will accept the economic consequences
involved.
• Can you buy a Big Mac in Russia and the Ukraine?

Gain 7: Multiculturalism
• Globalisation allows the sharing of ideas, experiences and
lifestyles.This builds a greater awareness and appreciation of a
broader range of cultures. People can, for example, experience
foods and other products not previously available in their
countries.
• Increased cultural awareness is arguably a good thing in its own
right.
• Some people worry about a loss of national identity and ‘cultural
imperialism’.
• People may feel threatened by changes to the old ways or their
traditional way of life.

Gain 8: Security of supply
Trade allows countries to import products that they may not be able
to produce efficiently themselves (e.g. some food supplies,
electricity and natural resources) so countries can have regular
supplies of products throughout the year.
Specialisation from trade may threaten ‘national security’ if a country
stops producing strategically important products (e.g. food, steel)
and feels that trade may be interrupted or not be fair.

Summary of drivers and enablers of global integration
Desire for economic growth Steady, sustained economic growth is a macroeconomic
objective. GDP growth is a common indicator of economic
performance and high growth allows bragging rights.
Profit motive of multinational
corporations
Multinational companies, driven by the profit motive, undertake
foreign investment to produce products or part-products in more
than one country. Examples: Apple, IKEA, BHP.
Free trade Two country or regional trade agreements by-pass ineffective
WTO negotiations to promote freer trade and investment (e.g.
Trans-Pacific Partnership, Australia-China Trade Agreement)
Foreign investment Foreign investment allows countries to benefit from the savings
of people in other countries. It closes an investment-savings gap.
Communications and
transport technologies
Trade intensity can increase between far-off places. Technology
impacts most aspects of production and consumption (from 3D
printing to on-line shopping)
Growth of human capital Eduction and skills training increases occupational mobility of the
labour force. Workers can do more jobs in more places.
Travel and tourism Travel broadens the mind and makes people aware of different
cultures and practices.

• Most economies include steady sustainable economic growth in
their macroeconomic objectives.
• Global integration increases economic growth by increasing
aggregate demand and aggregate supply.
• It boosts aggregate demand by raising incomes and consumption,
by increasing investment finance and by promoting exports.
• It boosts aggregate supply by allowing a more efficient use of
nations’ scarce resources, allowing producers opportunities to
benefit from economies of scale, increasing competition and
reducing costs of cross-border administration.
Driver 1: Desire for economic growth and higher
living standards

Driver 2: Desire for profits and shareholder value
• Competitive firms can increase profits and shareholder value by
exploiting opportunities provided by global integration.
• By investing and producing in more than one country
multinational corporations can expand operations and produce
products efficiently (e.g. through achieving economies of scale and
increasing access to resources). They may be able to avoid some
tax too.
• By developing global value chains firms can part-produce
products in different locations to take advantage of special local
conditions (e.g. local expertise, local resources and local labour
conditions and regulations)

Enabler 1: Free trade
• Long ago people discovered that economies grow and living
standards improve through trade. Regions or countries that
embraced trade flourished while countries that were closed to
trade stagnated. Trade has played a significant role in the
development of Australia and is a powerful driver of growth.
• Barriers to trade, especially tariffs, have been reduced through
bilateral and regional trade agreements (e.g. Trans-Pacific
Partnership and the Australia-China Free Trade Agreement). This
century, these trade agreements have been more successful in
promoting trade than ‘rounds’ of negotiations conducted by the
World Trade Organisation.
• A number of non-tariffs (or ‘behind the border’) barriers persist,
however. Some countries are able to gain more from trade than
others.

Enabler 2: Foreign investment
Freer movement of capital and finance allows increased access to
the savings of people in other countries. An investment-savings gap
can be financed from overseas without the need to reduce
consumption at home. Foreign investment promotes the transfer of
new ideas, technology and working practices.
• Foreign investment exposes countries to the ‘twin-evils’ of foreign
investment - debt and loss of ownership as a result of the build up
of foreign liabilities.
• It also leads to an outflow of primary incomes (interest, dividends
and retained profits)
• Not all multinational corporations operate in the national interest of
the host country.
• Joint ownership regulations may require multinational producers to
transfer intellectual knowledge to partners (a practice President
Trump considers to involve the theft of intellectual property).

Enabler 3: Technological advance
• Transport and communications technologies allow for quicker,
cheaper and more reliable access to resources and products.
• New technologies improve economic efficiency at every stage of
the production process (e.g. developing just-in-time supply
networks, design, production and marketing).
• New technologies enable the development of global value chains
(part manufacture of products in different locations).
• New technology allows trade intensity to grow between countries in
more distant parts of the world.
• Not all information spread by broadcasting and social media is
accurate.
• In the short-run new technology can lead to structural change and
unemployment.

Enabler 4: Development of human capital
• People who are educated and skilled and have good health are
likely to be relatively productive and relatively mobile (both
occupationally and geographically).
• The development of an effective education and healthcare
infrastructure enables countries to cope with global integration and
structural change.

Enabler 5: Tourism and travel
The ability to travel at affordable prices and witness different
cultures and practices influences the pattern of demand for products
and an awareness of alternative ways of doing things.
The spread of multiculturalism and international awareness can be
considered to be a benefit and an enabler of global integration.

Enabler 6: Economic co-operation
• Closer economic links between countries (e.g. through trade,
investment and travel) may help build closer political ties.
Cooperation may operate at a people or non-government level.
• Broadcasting and social media allows an increased awareness of
global commons issues such as climate change, use of plastics,
deforestation and promote strategies to ensure development is
sustainable.

End of presentation
See Video 1.3 - Problems of globalisation

Globalisation - Gains, Drivers and Enablers

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