How can globalization help developing economies

University of Durham. World Bank. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes.

Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. Table of Contents Expand. What Is Globalization? Components of Globalization. The Impact on Developed Nations.

Beneficial Effects. Harmful Effects. The Bottom Line. Key Takeaways Globalization is a process through which businesses or other organizations create influence, or develop operations around the world.

Developed nations benefit under globalization as businesses compete worldwide, and from the ensuing reorganization in production, international trade, and the integration of financial markets. Some economists argue globalization helps promote economic growth and increased trading between nations; yet, other experts, as well as the general public, generally see the negatives of globalization as outweighing the benefits.

Critics say globalization is detrimental for less wealthy nations, for small companies that can't compete with the bigger firms, and for consumers who face higher production costs and the risks of jobs being outsourced. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. The above conclusion that globalization has not had substantial effects on global inequality may seem paradoxical to some people—there is substantial evidence of growing inequality in many countries, including countries that have vehemently pursued trade liberalization.

You can read more about these within-country trends in our entry on Income Inequality. How can we reconcile these two empirical facts? In a recent article, Elhanan Helpman provides an answer informed by a meta-analysis of the available evidence: factors such as automation, technological changes, and market frictions, have contributed to the rise of inequality more than growth in international trade has.

If this is the case, then why has the view that globalization is bad for the working class captured the political debate in rich countries? Part of the answer has to do with the fact that people are misinformed about the evidence. But another important reason is that, while globalization may not have been the prime cause of growing inequality within many rich countries, it remains true that there are specific groups of people who have not reaped many of the benefits from globalization in recent years.

Daniel Trefler published a paper in showing that the free trade agreement between the US and Canada temporarily increased for about three years the level of unemployment in Canada. Public policies should protect and compensate workers whose earnings are adversely affected by globalization. And as a matter of fact, public policies in rich countries have done this to some degree in the past.

As painful as job losses are for the affected workers, it is thanks to unemployment benefits and other safety-net policies that we do not observe unemployment leading to widespread extreme poverty in rich countries. Has globalization been an engine of economic development? The answer is yes. Globalization has had a positive effect on economic growth, contributing to rising living standards and the reduction of extreme poverty across the world.

The answer is no. The point is that the worldwide historical achievements that we can attribute to globalization are not independent of other factors, including the potential of governments to redistribute resources. Indeed, as the last chart here shows, the process of globalization that we have experienced in the last couple of centuries took place at the same time as governments increased their potential for taxing and redirecting resources through public policies, particularly social transfers.

How much integration in global markets would be optimal? I would be skeptical of anyone who offers a definitive answer. Policies aimed at liberalizing trade, and policies aimed at providing social safety nets, are often advocated by different groups, and it is common for these groups to argue that they are in conflict.

But both economic theory and the empirical evidence from the successful fight against extreme poverty suggests this is a mistake: globalization and social policy should be treated as complements rather than substitutes. In this blog post, we discuss in more detail the evidence behind these claims. The rise of globalization. This lists the logos of programs or partners of NG Education which have provided or contributed the content on this page.

Leveled by. Monday, December 23, Put simply, globalization is the connection of different parts of the world. In economics, globalization can be defined as the process in which businesses, organizations, and countries begin operating on an international scale. Globalization is most often used in an economic context, but it also affects and is affected by politics and culture. In general, globalization has been shown to increase the standard of living in developing countries, but some analysts warn that globalization can have a negative effect on local or emerging economies and individual workers.

A Historical View Globalization is not new. Since the start of civilization, people have traded goods with their neighbors. As cultures advanced, they were able to travel farther afield to trade their own goods for desirable products found elsewhere. For more than 1, years, Europeans traded glass and manufactured goods for Chinese silk and spices, contributing to a global economy in which both Europe and Asia became accustomed to goods from far away.

Following the European exploration of the New World, globalization occurred on a grand scale; the widespread transfer of plants, animals, foods, cultures and ideas became known as the Columbian Exchange.

The Triangular Trade network in which ships carried manufactured goods from Europe to Africa, enslaved Africans to the Americas, and sent raw materials back to Europe is another example of globalization. The resulting spread of slavery demonstrates that globalization can hurt people just as easily as it can connect people. The rate of globalization has increased in recent years, a result of rapid advancements in communication and transportation.

Advances in communication enable businesses to identify opportunities for investment. At the same time, innovations in information technology enable immediate communication and the rapid transfer of financial assets across national borders. Improved fiscal policies within countries and international trade agreements between them also facilitate globalization. Political and economic stability facilitate globalization as well. The relative instability of many African nations is cited by experts as one of the reasons why Africa has not benefited from globalization as much as countries in Asia and Latin America.

Benefits of Globalization Globalization provides businesses with a competitive advantage by allowing them to source raw materials where they are inexpensive. Globalization also gives organizations the opportunity to take advantage of lower labor costs in developing countries, while leveraging the technical expertise and experience of more developed economies. With globalization, different parts of a product may be made in different regions of the world.

Of course, globalization, by expanding employment in labor-intensive manufacturing, has helped to pull many Chinese and Indonesians out of poverty since the mids though not yet as much in India, for various domestic institutional and policy reasons. But it is only one factor among many accounting for the economic advances of the past 25 years.

Those who are dubious of the benefits of globalization point out that poverty has remained stubbornly high in sub-Saharan Africa. Between and the fraction of Africans living below the international poverty line increased from 42 to 47 percent. But this deterioration appears to have less to do with globalization than with unstable or failed political regimes.

If anything, such instability reduced their extent of globalization, as it scared off many foreign investors and traders. Volatile politics amplifies longer-term factors such as geographic isolation, disease, overdependence on a small number of export products, and the slow spread of the Green Revolution [see Can Extreme Poverty Be Eliminated?

Poor people everywhere are handicapped by their lack of access to capital and opportunities to learn new skills. Workers in some developing countries--say, Mexico--are losing their jobs in labor-intensive manufacturing to their counterparts in Asia. At the same time, foreign investment has also brought new jobs.

Overall, the effect appears to be a net improvement. In Mexico, low-wage poverty is declining in the regions that are more involved in the international economy than others--even controlling for the fact that skilled and enterprising people migrate to those regions, improving incomes there independently of what globalization accomplishes. A recent study by Gordon H. Hanson of the University of California, San Diego, which took into account only people born in a particular region thus leaving out migrants , found that during the s average incomes in the Mexican states most affected by globalization increased 10 percent more than those least affected.

In poor Asian economies, such as Bangladesh, Vietnam and Cambodia, large numbers of women now have work in garment export factories. Their wages are low by world standards but much higher than they would earn in alternative occupations. Advocates who worry about exploitative sweatshops have to appreciate the relative improvement in these women's conditions and status. An Oxfam report in quoted Rahana Chaudhuri, a year-old mother working in the garment industry in Bangladesh:.

This job is hard--and we are not treated fairly. The managers do not respect us women. But life is much harder for those working outside.

Back in my village, I would have less money. Outside of the factories, people selling things in the street or carrying bricks on building sites earn less than we do. There are few other options.

Of course, I want better conditions. But for me this job means that my children will have enough to eat and that their lives can improve. They discovered that the average monthly income of workers in garment-export factories was 86 percent above that of other wage workers living in the same slum neighborhoods. Another indication of this relative improvement can be gauged by what happens when such opportunities disappear.

In , anticipating a U. About 10, children went back to school, but the rest ended up in much inferior occupations, including stone breaking and child prostitution. That does not excuse the appalling working conditions in the sweatshops, let alone the cases of forced or unsafe labor, but advocates must recognize the severely limited existing opportunities for the poor and the possible unintended consequences of fair trade policies.

Even when new jobs are better than the old ones, the transition can be wrenching. Most poor countries provide very little effective social protection to help people who have lost their jobs and not yet found new ones. Moreover, vast numbers of the poor work on their own small farms or for household enterprises. The major constraints they usually face are domestic, such as lack of access to credit, poor infrastructure, venal government officials and insecure land rights. Weak states, unaccountable regimes, lopsided wealth distribution, and inept or corrupt politicians and bureaucrats often combine to block out the opportunities for the poor.

Opening markets without relieving these domestic constraints forces people to compete with one hand tied behind their back. The result can be deepened poverty. Conversely, opening the economy to trade and long-term capital flows need not make the poor worse off if appropriate domestic policies and institutions are in place--particularly to help shift production to more marketable goods and help workers enter new jobs.