Globalization is a process of interaction and integration among the people, companies, and

governments of different nations, a process driven by international trade and investment and
aided by information technology. This process has effects on the environment, on culture, on
political systems, on economic development and prosperity, and on human physical well-beingin
societies around the world.

Globalization is not new, though. For thousands of years, people—and, later, corporations—have
been buying from and selling to each other in lands at great distances, such as through the famed
Silk Road across Central Asia that connected China and Europe during the Middle Ages.
Likewise, for centuries, people and corporations have invested in enterprises in other countries.
In fact, many of the features of the current wave of globalization are similar to those prevailing
before the outbreak of the First World War in 1914.

But policy and technological developments of the past few decades have spurred increases in
cross-border trade, investment, and migration so large that many observers believe the world has
entered a qualitatively new phase in its economic development. Since 1950, for example, the
volume of world trade has increased by 20 times, and from just 1997 to 1999 flows of foreign
investment nearly doubled, from $468 billion to $827 billion. Distinguishing this current wave of
globalization from earlier ones, author Thomas Friedman has said that today globalization is
“farther, faster, cheaper, and deeper.”

This current wave of globalization has been driven by policies that have opened economies
domestically and internationally. In the years since the Second World War, and especially during
the past two decades, many governments have adopted free-market economic systems, vastly
increasing their own productive potential and creating myriad new opportunities for international
trade and investment. Governments also have negotiated dramatic reductions in barriers to
commerce and have established international agreements to promote trade in goods, services,
and investment. Taking advantage of new opportunities in foreign markets, corporations have
built foreign factories and established production and marketing arrangements with foreign
partners. A defining feature of globalization, therefore, is an international industrial and financial
business structure.

Technology has been the other principal driver of globalization. Advances in information
technology, in particular, have dramatically transformed economic life. Information technologies
have given all sorts of individual economic actors—consumers, investors, businesses—valuable
new tools for identifying and pursuing economic opportunities, including faster and more informed
analyses of economic trends around the world, easy transfers of assets, and collaboration with
far-flung partners.

Globalization is deeply controversial, however. Proponents of globalization argue that it allows

poor countries and their citizens to develop economically and raise their standards of living, while
opponents of globalization claim that the creation of an unfettered international free market has
benefited multinational corporations in the Western world at the expense of local enterprises, local
cultures, and common people. Resistance to globalization has therefore taken shape both at a
popular and at a governmental level as people and governments try to manage the flow of capital,
labor, goods, and ideas that constitute the current wave of globalization.

To find the right balance between benefits and costs associated with globalization, citizens of all
nations need to understand how globalization works and the policy choices facing them and their
societies. Globalization101.org tries to provide an accurate analysis of the issues and
controversies regarding globalization, without the slogans or ideological biases generally found in
discussions of the topics. We welcome you to our website.

https://www.globalization101.org/what-is-globalization/

Globalization is the spread of products, technology, information, and jobs across national
borders and cultures. In economic terms, it describes an interdependence of nations around the
globe fostered through free trade.

On the upside, it can raise the standard of living in poor and less developed countries by
providing job opportunity, modernization, and improved access to goods and services. On the
downside, it can destroy job opportunities in more developed and high-wage countries as the
production of goods moves across borders.

Globalization motives are idealistic, as well as opportunistic, but the development of a global
free market has benefited large corporations based in the Western world. Its impact remains
mixed for workers, cultures, and small businesses around the globe, in both developed and
emerging nations.

Volume 75%

1:39
Globalization

Globalization Explained
Corporations gain a competitive advantage on multiple fronts through globalization. They can
reduce operating costs by manufacturing abroad. They can buy raw materials more cheaply
because of the reduction or removal of tariffs. Most of all, they gain access to millions of new
consumers.

Globalization is a social, cultural, political, and legal phenomenon.

 Socially, it leads to greater interaction among various populations.

 Culturally, globalization represents the exchange of ideas, values, and artistic
expression among cultures.
 Globalization also represents a trend toward the development of single world culture.
 Politically, globalization has shifted attention to intergovernmental organizations like
the United Nations (UN) and the World Trade Organization(WTO).
 Legally, globalization has altered how international law is created and enforced.

KEY TAKEAWAYS
 Globalization has sped up to an unprecedented pace since the 1990s, with public policy
changes and communications technology innovations cited as the two main driving
factors.
 China and India are among the foremost examples of nations that have benefited from
globalization.
  One clear result of globalization is that an economic downturn in one country can create
a domino effect through its trade partners.

The History of Globalization

Globalization is not a new concept. Traders traveled vast distances in ancient times to buy
commodities that were rare and expensive for sale in their homelands. The Industrial
Revolution brought advances in transportation and communication in the 19th century that
eased trade across borders.

The think tank, Peterson Institute for International Economics (PIIE), states globalization stalled
after World War I and nations' movements toward protectionism as they launched import taxes
to more closely guard their industries in the aftermath of the conflict. This trend continued
through the Great Depression and World War II until the U.S. took on an instrumental role in
reviving international trade.

Globalization has since sped up to an unprecedented pace, with public policy changes and
communications technology innovations cited as the two main driving factors.

One of the critical steps in the path to globalization came with the North American Free Trade
Agreement (NAFTA), signed in 1993. One of NAFTA's many effects was to give American auto
manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they
could save on the costs of labor. As of February 2019, the NAFTA agreement was due to be
terminated, and a new trade agreement negotiated by the U.S., Mexico, and Canada was
pending approval by the U.S. Congress.

Governments worldwide have integrated a free market economic system through fiscal
policies and trade agreements over the last 20 years. The core of most trade agreements is the
removal or reduction of tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in
many nations. Governments now focus on removing barriers to trade and promoting
international commerce.

Globalization Advantages
Proponents of globalization believe it allows developing countries to catch up to industrialized
nations through increased manufacturing, diversification, economic expansion, and
improvements in standards of living.

Outsourcing by companies brings jobs and technology to developing countries. Trade initiatives
increase cross-border trading by removing supply-side and trade-related constraints.

Globalization has advanced social justice on an international scale, and advocates report that it
has focused attention on human rights worldwide.

Disadvantages of Globalization
One clear result of globalization is that an economic downturn in one country can create a
domino effect through its trade partners. For example, the 2008 financial crisis had a severe
impact on Portugal, Ireland, Greece, and Spain. All these countries were members of the
European Union, which had to step in to bail out debt-laden nations, which were thereafter
known by the acronym PIGS.
Globalization detractors argue that it has created a concentration of wealth and power in the
hands of a small corporate elite which can gobble up smaller competitors around the globe.

Globalization has become a polarizing issue in the U.S. with the disappearance of entire
industries to new locations abroad. It's seen as a major factor in the economic squeeze on
the middle class.

For better and worse, globalization has also increased homogenization. Starbucks, Nike,
and Gap Inc. dominate commercial space in many nations. The sheer size and reach of the
U.S. have made the cultural exchange among nations largely a one-sided affair.

Real World Examples of Globalization

A car manufacturer based in Japan can manufacture auto parts in several developing countries,
ship the parts to another country for assembly, then sell the finished cars to any nation.

China and India are among the foremost examples of nations that have benefited from
globalization, but there are many smaller players and newer entrants. Indonesia, Cambodia,
and Vietnam are among fast-growing global players in Asia.

Ghana and Ethiopia had the fastest-growing African economies in the world in 2018, according
to a World Bank report.

https://www.investopedia.com/terms/g/globalization.asp

Globalization has become a familiar enough word, the meaning of which has been discussed by
others before me during this conference. Let me nonetheless outline briefly what I understand
by the term. I shall then go on to consider what has caused it. The bulk of my paper is devoted
to discussing what we know, and what we do not know, about its consequences. I will conclude
by considering what policy reactions seem to be called for.

THE CONCEPT
It is the world economy which we think of as being globalized. We mean that the whole of the
world is increasingly behaving as though it were a part of a single market, with interdependent
production, consuming similar goods, and responding to the same impulses. Globalization is
manifested in the growth of world trade as a proportion of output (the ratio of world imports to
gross world product, GWP, has grown from some 7% in 1938 to about 10% in 1970 to over 18%
in 1996). It is reflected in the explosion of foreign direct investment (FDI): FDI in developing
countries has increased from $2.2 billion in 1970 to $154 billion in 1997. It has resulted also in
national capital markets becoming increasingly integrated, to the point where some $1.3 trillion
per day crosses the foreign exchange markets of the world, of which less than 2% is directly
attributable to trade transactions.

While they cannot be measured with the same ease, some other features of globalization are
perhaps even more interesting. An increasing share of consumption consists of goods that are
available from the same companies almost anywhere in the world. The technology that is used
to produce these goods is increasingly standardized and invariant to the location of production.
Above all, ideas have increasingly become the common property of the whole of humanity.
This was brought home to me vividly by a conference that I attended four years ago, where we
discussed the evolution of economic thought around the world during the half-century since
World War Two (Coats 1997). We debated whether the increasing degree of convergence in
economic thinking and technique, and the disappearance of national schools of economic
thought, could more aptly be described as the internationalization, the homogenization, or the
Americanization of economics. My own bottom line was that economics had indeed been largely
internationalized, that it had been substantially homogenized, but only to a limited extent
Americanized, for non-American economists continue to make central contributions to economic
thought, as the Nobel Committee recognized by its award to Amartya Sen a few weeks before
this conference took place. Incidentally, the nicest summary of the change in economic thinking
over the period was offered by the Indian participant in that conference, who remarked that his
graduate students used to return from Cambridge, England focusing on the inadequacies of the
Invisible Hand, while now they return from Cambridge Mass. focusing on the inadequacies of
the Visible Hand! In the same vein, one of the more telling criticisms of my phrase "the
Washington Consensus" was that the (substantial though certainly incomplete) consensus on
economic policy extends far beyond Washington.

However, there are areas where globalization is incomplete, even in the economic sphere. In
particular, migration is very far from being free. Highly skilled professionals have a relatively
high degree of mobility, but those without skills often face obstacles in migrating to higher-wage
countries. Despite the difficulties, substantial proportions of the labour forces of some countries
are in fact working abroad: for example, around 10% of the Sri Lankan labour force is now
abroad.

Moreover, globalization is much less of a reality in other fields than it is in the economic one.
Culture still displays strong national, and even regional and local, variations. While English is
clearly in the process of emerging to be a common world language, at least as a second
language, minority languages are making something of a comeback, at least in developed
countries. Sport is still very different around the world: the Americans have still not learnt to play
cricket, and most of the rest of us have still not learned to understand what they see in baseball.
Although the nation state is far less dominant than it used to be, with significant powers being
devolved both downwards to regional and local authorities and upwards to international and in
Europe to supranational institutions (and although "interfering in the internal affairs of another
state" is less frowned on than formerly), politics is still organized primarily on the basis of nation-
states.

CAUSES
What explains this globalization? It is certainly not attributable to conquest, the source of most
previous historical episodes where a single economic system has held sway over a vast
geographical terrain. The source lies instead in the development of technology. The costs of
transport, of travel, and above all the costs of communicating information have fallen
dramatically in the postwar period, almost entirely because of the progress of technology. A 3-
minute telephone call from the USA to Britain cost $12 in 1946, whereas today it can cost as
little as 48 cents, despite the fact that consumer prices have multiplied by over eight times in the
intervening period. The first computers were lumbering away with piles of punched cards in the
early postwar years, and telegrams provided the only rapid means of written communication.
There was no fax or internet or e-mail or world-wide web, no PCs or satellites or cell-phones.
Today we witness phenomena that no futurist dreamed of half a century ago, such as Indians
with medical degrees residing in Bangalore who earn a living by acting as secretaries to
American doctors by transcribing their tapes overnight.
It is clearly the availability of cheap, rapid and reliable communications that permits such
phenomena, just as this is the key to the integration of the international capital market. I
presume the same factor is important in nurturing the growth of multinational corporations, since
it is this which enables them to exploit their intellectual property efficiently in a variety of
locations without losing the ability to maintain control from head office. But in this context I
would surmise that other factors are also at work, such as the spread of consumer knowledge
about what is available that comes from travel and from advertising, itself encouraged by the
communications revolution and its children like CNN. The reduction in transport costs is also a
key factor underlying the growth in trade.

Of course, it needed a reasonably peaceful world to induce economic agents to exploit the
opportunities for globalization presented by technological progress. But the technological basis
for the phenomenon of globalization implies that, barring an end to the "Pax Americana" or else
extremely vigorous conscious actions to reverse the process, globalization is here to stay.

CONSEQUENCES
Globalization certainly permits an increase in the level of global output. Whether as a result of
the old Heckscher-Ohlin theory of the basis of comparative advantage as lying in different factor
abundance in different countries, or as a result of the new trade theories that explain trade by
increasing returns to scale, trade will increase world output.[2] Likewise FDI brings the best
technology, and other forms of intellectual capital, to countries that would otherwise have to
make do without it, or else invest substantial resources in reinventing the wheel for themselves.
It may also bring products that would otherwise be unavailable to the countries where the
investment occurs, which presumably increases the quality, and therefore the value, of world
output. And international capital flows can transfer savings from countries where the marginal
product of capital is low to those where it is high, which again increases world output.

Globalization must be expected to influence the distribution of income as well as its level. So far
as the distribution of income between countries is concerned, standard theory would lead one to
expect that all countries will benefit. Economists have long preached that trade is mutually
beneficial, and most of us believe that the experience of widespread growth alongside rapidly
growing trade in the postwar period serves to substantiate that. Similarly most FDI goes where a
multinational has intellectual capital that can contribute something to the local economy, and is
therefore likely to be mutually beneficial to investor and recipient. And a flow of capital that
finances a real investment is again likely to benefit both parties, since the yield on the
investment is expected to be higher than the rate of interest the borrower has to pay, while that
rate of interest is also likely to be higher than the lender could expect at home since otherwise
there would have been no incentive to send it abroad. Loose talk about free trade making the
rich countries richer and poor countries poorer finds no support in economic analysis. Nor is
there any reason for supposing that the North benefits itself at the expense of the South by
imposing import restrictions like non-tariff barriers or agricultural subsidies: standard theory says
that, while this does indeed impoverish the South, the public in the North also suffers, and it
loses more than the producers gain. This suggests that a promising strategy for eliminating such
barriers is to seek a coalition with Northern consumers, rather than to engage in North-bashing
which will simply alienate potential Northern allies.[3]

The effects on domestic income distribution are less clear. Standard theory says that trade will
tend to hurt unskilled labour in rich countries and to help it in poor ones, since the poor countries
will be able to export-labour-intensive goods like garments to rich countries, thus increasing the
demand for unskilled labour in the poor countries and decreasing it in the rich ones. That is,
within rich countries, there is a good analytical reason for arguing that trade will tend to make
the rich richer and the poor poorer. There has in recent years been a lively debate among
economists in the developed countries as to whether the increase in imports of labour-intensive
goods has been a major factor in causing the fall in the relative (and sometimes absolute)
wages of the unskilled in these countries: the majority of economists seem to have concluded
that it is a contributory factor, but that the major part of the explanation lies instead in the skill-
intensive form of technological progress (Cline 1997).

It seems more difficult to doubt that exports of labour-intensive goods have been a factor that
has done something to increase the demand for unskilled labour, and therefore to equalize the
income distribution, in the exporting countries like Sri Lanka. Hence I find it betrays a sad lack of
concern with the prospects of the poor to hear, as I have during this conference, garment
exports being denigrated as likely in some unexplained way to bring negative impacts. On the
other hand, some of the effects of the communications revolution must surely have had a
disequalizing effect on income distribution in these countries: think of the Indian doctors who are
acting as secretaries to American doctors rather than treating Indian patients, thereby earning
more for themselves and also tending to pull up the pay of other doctors in India, who are
relatively affluent by Indian standards. Similarly, differential mobility of skilled versus unskilled
labour tends to pull up the salaries of the skilled in developing countries toward world levels,
thereby leaving less for the immobile poor. The same result will occur if the owners of highly-
mobile capital are able to evade taxes by investing abroad, and also if governments are induced
to avoid imposing high tax rates on internationally mobile capital, or on those who might be
prompted to emigrate, in the hope of keeping these factors at home. Thus the net effect of
globalization on income distribution within developing countries seems to me distinctly
ambiguous.

What impact is globalization likely to have on the long-term possibilities of economic growth in
developing countries? My vision of the growth process is that it takes off when the elite in a
developing country comes to understand the opportunities of applying world-class technologies
within their country, and introduces institutional arrangements that permit individual pursuit of
self-interest to serve, in general, the social good. Once that happens the country is able to grow
at a rapid rate, unless some political accident obstructs the process, until it catches up with
best-practice technology, and therefore attains the living standards of the developed countries.
Globalization is tending to make the technologies and the knowledge for this process to occur
more readily available, and therefore to enable the process to be telescoped in time. (Singapore
may be a small country, but there is no previous case in history of any country that did not enjoy
massive resource discoveries going from stark poverty to affluence in under 30 years.)

But it is surely also true that globalization is bringing new dangers. The virulence of the East
Asian crisis was primarily a result of countries exposing themselves to the full force of the
international capital market before they had built up an unquestioned reputation for being able
as well as willing to service their debts come what may, which meant that when investors
became concerned about their potential vulnerability as a result of the Thai crisis there were no
other investors willing to step in and provide stabilizing speculation even after exchange rates
and interest rates had clearly overshot. Of course, one can argue that this increased
vulnerability to external shocks has to be weighed against a decreased vulnerability to internal
shocks: think how much more Bangladesh would have suffered this year (1998) if the
international community had not provided aid to partially offset the cost of the floods, let alone
how much more hunger, or even starvation, there would have been had Bangladesh been
unable to import additional rice. But this does not justify dismissing the increased dangers from
external shocks. Moreover, I might note that Professor Indraratna offered you a much longer
and more imaginative list of dangers than I have here identified, which looks beyond narrow
economic questions and considers the role of globalization in spreading such unsavoury
phenomena as drugs, the sex trade, crime, and terrorism.

POLICY ISSUES
If I am right in arguing that globalization stems from technological developments rather than
policy choices, trying to reverse it would be rather like playing at King Canute. It would be more
productive to seek to maximize the benefits it offers and minimize the risks it creates. Let me
discuss what I see that involving, while restricting myself to the narrow economic questions.

It will be clear from what was said above that I see little reason to doubt that the citizens of a
developing country can expect to benefit from being open to trade and FDI. This gives them the
advantages of being able to make relatively good use of their abundant unskilled labour and
being able to access world-level technology. However, if they rely simply on exploiting unskilled
labour, they will never be able to advance far beyond the living standards of their poorest
competitors, who will be exporting similar goods. In order to raise living standards progressively
over time, it is at least as important to raise educational standards as it is in a relatively closed
economy. To a first approximation, one may summarize the policy advice of how to prosper in a
global economy as: give one's citizens a relevant set of skills through education, and then let
them get on with the job of producing whatever is useful to the world economy.

However, a second approximation requires one to recognize also the increased risks of full
exposure to the world economy. Are there ways of reducing those risks? I am convinced that
there is at least one important dimension in which prudence suggests that developing countries
are well-advised to limit their integration in the world economy, and that concerns the
liberalization of short-term capital flows. If one asks what distinguishes those countries that
suffered contagion from the East Asian crisis from those that escaped it, the answer seems to
me very clear: that the victims were those that had built up a substantial stock of short-term
dollar-denominated debt as a result of having established capital account convertibility, while
those who escaped catastrophe were those that had been cautious in liberalizing their capital
accounts at the short end. Since there is no persuasive analytical reason or empirical evidence
(Rodrik 1998) for believing that freedom of short-term capital flows is a significant factor in
contributing to economic growth, let alone distributional equity, I conclude that prudence
suggests seeking to postpone rather than accelerate this particular bit of liberalization.

Furthermore, one needs to ask whether there are mechanisms that can protect individuals when
risks to the economy actually materialize. The recent experience in East Asia is again
instructive: the World Bank has put a lot of effort into a crash course in developing social safety
nets in the countries that fell victim to the crisis in the past year. I am sure that many of you will
recall that in the past the Bank has been critical of Sri Lanka for having put too many resources
into too wide a safety net, but I do not see any contradiction: the Bank was concerned that Sri
Lanka was trying to provide a safety net more expensive than the economy could afford, and so
indiscriminate that it eroded incentives. Those considerations need to be taken into account, but
at the same time, as Dani Rodrik's (1997) work has emphasized, an open economy has a
particularly compelling need for an adequate social safety net. I hope that you will find some
reassurance that the Bank is not unmindful of the concerns that motivated your generous
welfare policies by the fact that we have recently been so active in promoting the cause of social
safety nets in East Asia.
Is there any way of ameliorating the potential negative effect on income distribution through
increased possibilities of tax evasion and a consequential incentive to limit taxes on mobile
factors that I discussed above? One can certainly envisage such measures, although they will
require extensive international agreements, in the form of tax-information sharing and potential
withholding of taxes on income earned by foreigners. It is my hope that such issues will become
a part of the future agenda for international negotiation. A globalized world is going to have to
deal with a broader policy agenda than simply liberalization if the outcome is to be reasonably
equitable.

CONCLUDING REMARKS
I have argued that globalization has a technological base and is therefore here to stay. Sensible
policy involves asking how one can get the most out of it while limiting the risks that it brings.
The answers on the economic level, I have suggested, involve educating citizens with relevant
skills and opening up to trade and FDI while maintaining controls on short-term capital flows,
constructing an appropriate social safety net, and seeking international actions to reverse
erosion of the tax base.

REFERENCES
Cline, William R. (1997), Trade and Income Distribution (Washington: Institute for International
Economics).

Coats, A.W. (1997), The Post-1945 Internationalization of Economics (Durham, N.C. and
London: Duke University Press).

Rodrik, Dani (1997), Has Globalization Gone Too Far? (Washington: Institute for International
Economics).

____ (1998), "Who Needs Capital Account Convertibility?", in Essays in International

Finance no. 207 (Princeton: International Finance Section).

https://www.piie.com/commentary/speeches-papers/globalization-concept-causes-and-
consequences