The Impacts of Globalization on Developing Countries

How do you typically go through a day? You wake up in the morning and get out of your bed

made in Germany. Then you cook your breakfast with eggs and bacon from a farm 500km

away. After breakfast you go change your clothes, which are made in Bangladesh and

Vietnam. On the way to work you check the weather by your phone which is made in China

and uses British mobile service. Every day, you access to products from all over the world.

One of the reasons for this availability is globalization and free trade. The world shrank from

a size large, before globalization, to a size tiny, after Globalization 3.0 (Thomas L. Friedman,

9-10).

Globalization might be a popular word nowadays but the term has only existed since 1930,

according to the Oxford dictionary (John West). Google Books Ngram Viewer shows the

graph of the occurrence of the word globalization since 1928 and its drastically rise at the end

of 20th century (Google Books Ngram Viewer). It is now a widely-used term and a globally

debated topic due to its positive and negative impacts on both developing and developed

countries, as seen in various books: The Lexus and the Olive Tree (1999) and The World is

Flat: A Brief History of the Twenty-first Century (2005) by Thomas L. Friedman,

Globalization and Its Discontents (2002) and Making Globalization Work (2006) by Joseph

E. Stiglitz, Why Globalization Works (2004) by Martin Wolf, to name a few.

Source:https://books.google.com/ngrams/graph?content=globalization&year_start=1900&year_end=2008&co

rpus=15&smoothing=0&share=&direct_url=t1%3B%2Cglobalization%3B%2Cc0

Globalization is defined as a process by which businesses or other organizations develop

international influence or start operating on an international scale, an evolution of closer

economic integration by way of increased trade, foreign investment, and immigration.

(oxforddictionaries.com, Michael M. Weinstein 2). However, this definition does not depict

globalization to its fullest as globalization is not just an economic process but it is also a

politic and cultural process, affecting every aspect of our lives.

According to Thomas L. Friedman, until now, globalization can be divided into three phases.

Globalization 1.0 era lasted from 1492, when trade was opened between the Old World and

the New World, until around 1800. With the governments leading, this era shrank the world

from a size large to size medium. The second great era, Globalization 2.0, lasted roughly

from 1800 to 2000, shrinking the world from medium to small size. The key agent in this era

is multinational companies. And the following Globalization 3.0 differs distinctly from the

other two eras. It shrinks the world from small to tiny and at the same time flattens the world,

giving every individual the ability to collaborate and compete globally (Thomas L. Friedman,

9-10).
Many international organizations are one of the key factors that have accelerated the rate of

globalization. Several organizations have a global reach, connecting and attempting to unite

the world. The World Trade Organization was founded in 1995 and it includes 160 members

and 24 observer governments. United Nations was founded in 1945 and currently it has 193

Member States (www.un.org). In other words, only 3 countries in the world are not members

of United Nations: Kosovo, Taiwan and the Vatican City. In the region of developing

countries, the amount of intergovernmental organizations also growing. For example,

organizations in Asia include Association of Southeast Asian Nations ASEAN (1967),

Mekong River Commission MRC (1957), East Asia Summit EAS (2005). There is also a

growing number of organizations in Africa: East African Community EAC (1967), Southern

Africa Development Community SADC (1980), Economic Community of West African

States ECOWAS (1975). Last but not least, some organizations in America are Caribbean

Community CARICOM (1973), Community of Latin American and Caribbean States (2011).

Held and McGrew counted more than 6743 intergovernmental organizations (IGOs) and this

number is still increasing.

There is a high correlation between these organizations and globalization. As the number of

intergovernmental organizations grows, political cooperation and communication also

increase. The charter of IGOs includes the regulations and rules that member countries need

to follow. Small countries might benefit from an increase in influence as a member of a

group. It also brings along security benefit as other members in the group will take action

concerning one member’s problems, as some IGOs provide collective security. However, a

country might not always gain from joining an IGO as the benefits are not as great as it

expected. Also membership usually comes along with a partial loss of state sovereignty, and

thus not every country is in favour of this condition (for example, Norway and Switzerland

are not a member of European Union).

Globalization was inevitable, and like it or not, the developing countries had to deal with the

impacts. Some of the impacts can be viewed as development opportunities for developing

countries, especially those countries that apply appropriate economic policies; others might

keep those countries’ economy stagnant. Globalization affects developing countries’

economical, political and cultural aspects.

Economically, globalization could, in theory, promote growth in developing countries. It has

the potential to increase living standard, reduce poverty and even enhance global economic

stability. Firstly, globalization, with technological improvements, encourage immigration,

thus raising living standard by moving workers to a place with higher wages. Short-term

economic gain is found in remittances – money that emigrants earn and send back home in

order to support their family. According to the World Bank, remittances totaled $483 billion

worldwide in 2011, with $351 billion of that money flowing into developing nation (Dilip

Ratha). As an example, Richard H. Adams Jr. finds that in rural Egypt, when household

income includes remittances, the number of poor households decline by 9.8%, and that

remittances account for 14.7% of total income of poor households (Richard Adams, 1645-

69).

One of the reasons for trade expansion has been trade liberalization policy, which is the

reducing trade barriers controlled by governments. Tariffs, import licenses and import quotas

were more relaxe after World War II. Average tariffs dropped from roughly 40 percent to less

than 5 percent in the postwar period. Except for some regulations designed to protect

domestic markets from foreign competitors, overall import barriers has reduced significantly

(Michael M. Weinstein, 28). By lowering tariffs and boosting trades, developing countries

have an opportunity to export their products and also encourage capital flow from foreign

investors. Calomiris, a professor of Financial Institutions Finance and Economic, proves a

significant tendency of a period – the growing willingness of foregin investors to send capital
to low-income countries. According to the World Bank, net foreign direct investment flows

to developing countries grew to a peak of $185 billion in 1999 from $24 billion in 1990, an

eight-fold increase in only a decade. In 2000 and 2001, foreign direct investment net inflows

to developing countries declined, but still remained at $168 billion in 2001 (Michael M.

Weinstein, 49). By accessing to foreign capital, domestic businesses have the ability to

undertake projects they might not have been able to, results in new opportunities for

diversification and profit (Josef Nguyen).

Apart from trade liberalization policy, developing countries also need to choose privatization

and deregulation policy in order to grow. Privatization is the transfer of ownership of

property or businesses from a government to a privately owned entity (Investopedia). It can

bring positive effects like improving efficiency, lacking of political interference and raising

government budget. However, privatization can create a natural monopoly that will try to set

higher prices and exploiting customers. Deregulation policy is the reduction or elimination of

government power in a particular industry, usually enacted to create more competition within

the industry.

Despite the advantages and opportunities that globalization brings, the negative economic

impacts are undeniable and cause serious problems to developing countries. Firstly, financial

crisis has a global impact. The impact of financial crisis 2007-2008 are: (1) with the

exceptions of India and Dhaka, Asian markets were worst hit; (2) but for Peru, Venezuela and

Columbia, Latin American countries were least affected; (3) Africa and Middle East

emerging markets were averagely contaminated with the exceptions of Kenya, Namibia,

Nigeria, Morocco, Dubai, Jordan, Israel, Oman, Saudi Arabia and Lebanon (Simplice A.

Asongu, 11).

Trade liberalization leads to technology advancement in developing countries. This results in

demand for skilled workers and thus, low-skilled workers’ value decreases more. Educational
levels have been increasing but painfully slowly, not enough to satisfy the demand. The gap

between skilled and low-skilled workers grows larger: low-skilled workers get lower wages

as skilled workers get higher wages. Another consequence is the exploitation of labour in

developing countries. Nike, for example use cheap labour in South East Asia, where they can

get away from the tighter enforcement and regulations of USA and Europe. In fact, they have

been exposed for using child labour, as well. Coca Cola for example, have been accused of

intimidating workers around the world, even hiring (often indirectly, through intermediaries)

paramilitaries to intimidate or kill union leaders (Anup Shah).Adidas, as another example,

says it is committed to "ensuring fair labour practices, fair wages and safe working conditions

throughout our global supply chain". However, workers in its Indonesian factories told The

Independent that the audits are farcical. "They're always announced beforehand, so we have

to clean, we have to sweep," said Jamiatun, a union leader at PT Golden Continental. "The

first-aid box is filled, and we're told what to say if the inspector speaks to us. We have to tell

them we're paid the minimum wage, and we mustn't tell them we work overtime at

weekends" (Kathy Marks). Developed countries claim to help the developing countries, but

empirically, most of them are just fish stories.

Foreign investors might bring risk along with the capital: currency depreciation. The lenders

firstly invest money into an emerging market, then become anxious and flee at the first sign

of economic or financial distress. They desperately seek to convert local assets into dollars,

causing the value of the local currency down. The depreciation of the local currency initiates

a destructive wave of bankruptcy. Domestic borrowers—including domestic banks—

scramble to come up with more local currency to repay their dollar denominated foreign

loans. This chain of events has come to be known as the “twin crises”—capital flows out of

countries in financial trouble, like Indonesia, Russia, and Argentina, leading to a collapse of

the country’s exchange rate and its banking system (Michael M. Weinstein, 6). The openness
of emerging markets to international capital flows, combined with a liberalized financial

structure, make them particularly vulnerable to twin crises (Reuven Glick, 1).

Politically, globalization gives developing countries some kind of security through collective

security, which is one type of coalition building strategy in which a group of nations agree

not to attack each other and to defend each other against an attack from one of the others, if

such an attack is made (Colorado.edu). The cooperation between countries and forming of

international organizations discussed above have reduce the likelihood of war and increase

mutual support between member states.

Nevertheless, globalization has entailed a loss of national sovereignty. International

organizations, imposing international agreements, have seized power. So have international

capital markets as they have been deregulated. And there are a variety of indirect ways in

which globalization has impaired the effectiveness of the nation state, including the erosion

of national cultures (Michael M. Weinstein, 235). Ohmae exclaims that globalization

undermines sovereignty, as a result of fundamental changes in the world economy, “nation

states have already lost their role as meaningful unit of participation in the global economy of

today’s borderless world” (Nicolas van de Walle 1998, 29).

Topic surrounding culture and globalization have receive less attention than the connection

between economic, politic and globalization. A reason is that cultural issue are more elusive

and sensitve. Globalization has expand our knowledge about cultures, often time through

international trade in cultural products and services, such as movies and music. It connects

people from all over the world, help them understand the differences and similarity between

each other. Information is shared and international cooperation drastically speeds up

development. Each individual also gains more understanding of other cultures and ethnic

groups, especially those who have the chance to travel abroard. Globalization makes it easier

than ever to live abroad, giving people a chance to experience a different life.
In the contrary, increasing migration in developing countries imply that many potential

workers who could bring new ideas and development to domestic economy has left the

country. Globalization along with migration has create a variety of ethnics within one

country. For example, a survey by the national Institute of Genomic Medicine, Mexico

accounted that Mestizo Mexicans are 59% European, 31% Asian and 10% African (J.K.

Estrada). In Peru, Mestizos compose about 45%, Amerindians constitute 37%, European

descendent constitute 15% and Asian Peruvians constitute 3% of the total population

(Salomon Lerner Febres). This might create conflict with in the country and create an

unstable society.

In conclusion, despite all the drawbacks that globalization brings, its positive results are more

significant. Financial crises that took place on a global scale require a global alignment to

solve the problem. With appropriate policies in accordance with political institutions and the

ability of each countries, developing countries could be better off, not suffering from its

impacts. Some countries have taken the advantage of globalization successfully while others

have been blocked from development due to the inability to endure tough challenge.
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