Globalization is one of the 21st century’s most important political topics. You might have heard the term globalization used before, whether in an economics lecture or in a political debate.
As the world grows more connected through the Internet and greater international trade, globalization is becoming more important – and more controversial – than at any other point in history.
In this blog post, we look at the benefits, the downsides, and the interesting realities of globalization. Whether you’re an economics expert or someone with an interest in the future of the world, you’ll gain a well-rounded understanding of the pros and cons of globalization.
If you’d like to gain a deeper understanding of economics and globalization, enroll in our course, Economics Without Boundaries with David McWilliams.
What is globalization?
What exactly is globalization? Simply put, globalization is the process of changing to an integrated world from an isolated one. Globalization can be summed up as a long-term change towards greater international cooperation in economics, politics, idea, cultural values, and the exchange of knowledge.
Globalization has largely been made possible by advances in technology, particularly the Internet. As the world grows more connected, people in all nations achieve a far greater level of interdependence in activities such as trade, communications, travel, and political policy.
It’s easy to assume that globalization is an entirely modern phenomenon driven by inventions like the telegraph or the Internet. In many ways, globalization has been taking place for centuries.
From the Silk Road, which spanned from Europe all the way to East Asia, to the invention of steamships and railroads, humans have engaged in cultural exchange and international trade for centuries.
In the 20th century, this international exchange and trade was made far easier by the invention of airlines and road vehicles. What was once a slow process became a far simpler one. In the late 20th century, the invention of digital communications tools like the Internet made modern globalization a reality.
While globalization covers a wide range of topics, ranging from cultural values and information to economics and international trade, most modern discussion of the pros and cons of globalization is focused on economics and culture.
What are the core features of globalization?
From an economic perspective, globalization has truly changed the world. The core features of globalization are increased free trade between nations, easier movement of capital between borders, and a massive increase in foreign investment.
This has resulted in growth for both small businesses and multinational companies, which can now access new markets across the world. It’s also resulted in increased transport and communication between countries and continents.
What are the key benefits of globalization?
Free trade reduces the barriers that once stood between nations trading freely with one another. When companies in different nations don’t face any barriers to trade in the form of import or export restrictions, they can engage in free trade.
An example of a free trade agreement is the North American Free Trade Agreement (NAFTA), which allows Mexico, Canada, and the United States to exchange products and services without significant import and export restrictions.
Free trade has numerous benefits for economies and consumers. Consumer enjoy a greater choice of goods and services, since foreign companies can easily offer their products for sale. They also benefit from lower overall prices for goods, as a greater variety of goods for sale increases competition and drives prices down.
Manufacturers in countries with free trade agreements also benefit from free trade in the from of a larger export market. Rather than being able to export to just a few countries, exporters can now sell their goods to wholesalers and consumers in a large variety of counties.
Free trade also allows nations and economies to specialize, producing higher quality goods at better prices. If a country, for example, has large oil reserves but little land that’s suitable for farming, it can focus on oil production while importing fresh food from abroad.
Another key benefit of globalization is the free movement of labor. In a globalized world, workers can more easily move from one country to another to market their skills to employers and contribute to the economy.
In many cases, free movement of labor allows economies to fix ‘gaps’ that exist in their labor markets. For example, the United Kingdom has hired nurses from India to fill positions in its public hospitals that were previously empty due to local labor shortages.
Companies can also hire workers in foreign countries to work for them using online tools and telecommunications. Learn more about the theory and decisions behind this in our Business Process Outsourcing course.
The benefits of free movement of labor also work in the other direction. If a country has too few jobs and too many workers, people can easily move to markets in which the job market is better. An excellent example of free movement between countries can be seen in the European Union, particularly the Schengen Area.
What are the downsides of globalization?
While many features of globalization have been beneficial, others have resulted in problems for certain economies and countries. Each of the benefits of globalization, from free trade to the free movement of labor, can also be a downside for specific countries and economies.
One of the biggest downsides of globalization is the harm it can cause to economies at an early stage of development. Free trade forces all countries to compete using an even playing field, which critics claim puts smaller, less developed countries behind their more developed counterparts.
Some economists believe that free trade is only possible if industries in developing countries are allowed to grow under a certain level of economic protection. This is known as the Paradox of Free Trade, and it is a core argument among economists.
Another downside of globalization is the phenomenon known as ‘labor drain.’ Since globalization allows workers to easily move from one country to another, countries with limited job opportunities often find it difficult to encourage skilled workers to stay in their countries.
You can learn more about how labor drain relates to the current economic climate in our course, Capitalism in Crisis: The Global Economic Crisis Explained.
This is particularly problematic in countries with extensive publicly-funded higher education systems. After receiving training in their home countries, many people emigrate and spend their professional career in a more lucrative economy at the expense of their home country.
Globalization can also have a significant negative impact on taxation. Since many companies are able to trade with one country while being based in another, large corporations often exploit tax havens such as Luxembourg, Switzerland, and Hong Kong to avoid paying taxes in the countries where they generate their profits.
This can often hurt consumers in the form of higher taxes on consumer products and property. Since countries often have little control over where big companies register to avoid tax, they are often forced to raise other taxes in order to make up for lost revenues due to corporate tax avoidance.
Many economists and environmentalists have criticized globalization due to its environmental impact. Learn about the environmental effects of globalization in Energy Economics and the Environment.
Finally, globalization has had a cultural impact on many countries that have been subject to large-scale immigration. Many critics of globalization feel that the free movement of labor has resulted in the weakening of specific cultures in favor of greater economic and cultural hegemony.
Understanding economics as a whole
Globalization is an interesting issue that’s drawn many people to the study of trade and economics. Like many other economic processes, globalization has both major advantages and disadvantages for the world as a whole.
At the core of the globalization argument is the concept of the invisible hand of the market, as conceived by Adam Smith. As nations become more connected, markets will self-regulate to maximize their benefits and minimize their downsides.
Learn more about the basic principles of economics in our course, Micro & Macro Economics.
An example of this can be seen in the United States. Because of globalization, most consumers can purchase products ranging from cars to televisions at lower prices than at any point in history. This is because these products are no longer produced in the United States, but in other countries with lower labor costs.
The benefit of this change is lower prices for consumer goods. However, a downside of this development is a reduction in the number of manufacturing jobs available in the United States, as production is outsourced to countries with greater economies of scale and more affordable labor.
This is one of the many pros and cons of globalization, and it illustrates a key value of economics: any decision which has positive effects can also have negative effects.
Learn more about economics and globalization
Would you like to learn more about how the world’s economy functions? Economic developments can have a huge effect on global politics and culture, and learning the theory behind modern economics is a great way to stay informed.
Enroll in our course, The Geography of Globalization, to learn more about how the shift towards a more global economy is changing the world. You may also want to learn about how globalization affects teamwork in international organizations.
Globalization is at the center of modern economics and politics. Stay informed of its positive and negative effects and you’ll be a more informed, capable, and politically astute citizen of the world.