Globalisation

Globalisation involves the integration and interaction among companies, individuals as well as various governments. It is founded on the principles of investment and trade and further enhanced by technological information. The entire procedure of globalisation impacts on politics, economic development, culture, and environment all over the world. A more conspicuous achievement of globalisation is the rapid economic growth in the last quarter of the past century in several mid-income developing economies. Since this process was left to thrive unabated, the average global per capita income tripled in the second half of the twentieth century. It is a fact that there are both losers and winners in the globalisation process. This is true at both macro and micro economic levels. The impacts of globalisation on global income disparities, poverty alleviation and domestic income distribution have received a lot of attention from academicians as well as policy bureaucrats. The Poverty Reduction Commitment was observed in the Millennium Development Goals.

One of the prominent Millennium Development Goals is the one which seeks to ensure that by the year 2015, 27% of the population living below the dollar threshold will have been reduced to 14%. In addition, the number of people who suffer from hunger will have been reduced to half of their current population. Globalisation has its positive effects as well as its flip side. It has been realized that globalisation results have had a hurting impact on poor people from various countries. As a matter of fact, the negative impacts of globalisation mostly affect people who have lower levels of skills with regard to this matter.

On average, the number of incidents of poverty in India and China has declined over the years as a result of globalisation. At the onset of globalisation, many people in China and India found themselves being affected negatively since they did not meet the globalisation requirements threshold. As a result, there were rather high rates of unemployment and also, businesses were being closed. All these factors remain constant for the average people in countries which have not been adversely affected by globalisation. Nevertheless, these are exclusive and short term phenomena (Granger, 1981).

The concept of globalisation has drawn the interest of many admirers all over the world. Its significance and relevance extends beyond politicians, economists and policymakers to the general public. As a result, it has acquired a lot of force and meaning. The multifaceted and multidisciplinary nature of globalisation originates from its educational, economic, cultural, financial, environmental, business, technological, political, international security, international relations and national related dimensions. Though diverse in their origins at times, they are mutually reinforced. It is for this reason that globalisation has aroused the curiosity of many academicians. From an academic angle, the term globalisation envisages a process of growing incorporation of national economies through trade in, services and goods, increased global division of labour, migration of human resources, cross border investments and capital flows.

Costs and Benefits of Globalisation

Globalisation in present day scenario is based on a supreme view of the world with efficiently working markets, free movement of capital, technology, and knowledge along with free access to information. Koustas (1999) tackled the globalisation problem by directly pointing to it and disregarding the various economic theories which assert that globalisation leads to social instability. This enables economic financial stability to be achieved in the long run. He stated that there were various ways of getting growth initiated in a sluggish financial system, and that it took a very specific, open-minded and informed undertaking to settle on the real binding limitations in each situation. In addition, guiding principles that conform to these restrictions should be viable politically. This meant that they require to be tailored in order to create a better motivation at the margin without transferring or destroying existing trends.

As soon as the economy starts to show growth, some standard policy recommendations that may be necessary and appropriate to sustain growth could be introduced gradually and carefully. For instance, he felt that both India and China were sliding towards more established policy directions, and suitably so, but that both still relied on quite unconventional procedures to make their preliminary walks out of stagnation. Dickey (1979) argues that as much as there are a number of tribulations associated with globalisation, it can act as a positive force for a change. For example, workers in the Third World nations now have more work-related options than ever before.

Developed, Developing and Under-Developed Nations

Garret (2004) asserts that globalisation has not realized its fruits as predetermined. This failure is attributed to systematic flaws in global trading avenues as well as imperfect competition and limited information. He came up with a number of answers to save globalisation and to make it safe and sensible. To empower the poor, rich nations should stop supporting their agricultural sector financially. Instead, they should make their markets as free zones for imports coming from the Third World countries. He also came up with a lasting option of the creation of a global currency. In addition, he advocated for more breathing space in the international market, which currently favors the industrialized nations, particularly the United States. As a matter of fact, multinational corporations originating from the developed nations have become so powerful that they detriment the under-developed and developing countries’ governments.

 Moreover, globalisation has resulted in tax competition which undermines the ability of the poor nations to provide basic services to their citizens through raising revenues. Thus, under-developed and developing nations are still faced with disadvantages in the long run since the developed nations call the shots. For example, the intellectual protection of property that curtails the ability of poor nations to break even.

Globalisation and Economic Growth

The consequences of globalisation have been deeply analysed with the aforementioned measures. It has been found that a country like Latvia can potentially raise the growth rate of its economy from 5.94 to 7.1 provided that it would be more integrated with the rest of the world, for example, Spain. The given example can also be used in order to show the effects of globalisation on poverty reduction. Therefore, globalisation can be considered as a good thing for the economic growth. According to Easton (2003), countries with relatively open economies experience higher growth rates as a consequence of globalisation. This is particularly true for actual economic integration as in the developed economies there is the absence of restrictions on trade and capital flows. In addition, there is some evidence that cross-border information flows can also be a growth-promoting factor.

The concern that income inequality has become much more widespread over the past 20 years has been widely proclaimed by experts. Despite the prevalent opinion, rising income inequality is not a matter that concerns exclusively the high-income countries. The fast-growing developing countries, such as India and China, have started sharing the worries associated with growing income inequality that presumably accompany the rapid economic growth. Income inequality largely appears to be stable with the advance in time (Engle, 1987).

Feng (2007) states that one of the most important concerns of globalisation is on whether it has or has not played any crucial role in changing the income inequality. Other factors that contribute to the rise of income inequality include the relatively slower growth in the supply of educated workers in comparison to the demand for their services, higher female worker participation rate, the greater competition from low-skilled immigrants, and the increased role of trade unions. The study conducted by Loo (2002) is aimed at determining whether globalisation has any negative impact on the income distribution in Mexico.

Their strategy for answering the given question involved the extensive use of household data to analyse the various changes in the income distribution with regard to Mexico from 1992 to 2002, as well as the degree of economic integration across national, regional and state levels. After that, it was possible to compare the change in income distribution to the change in the level of economic integration across Mexican states. The results of the research suggest that globalisation has not increased income inequality in Mexico. These results have proved to be quite robust across a wide range of econometric specifications as well as some alternative income distribution measurements.

There exists additional evidence that income distribution is more widely dispersed across different social groups in states that are more deeply integrated into the global economy. It is possible to link the stronger economic integration with better job opportunities to the lowly educated women who take a disproportionately large share of the workforce in export-oriented industries. Nelson (1982) made an attempt to differentiate between the effects of foreign investment and trade on relative income shares of high and low deciles using budget surveys in the household. The results indicated that the effect of ingenuousness on revenue sharing depended on the country’s preliminary income level. The wealthy benefit was at the bottom level, but the circumstances changed as earnings levels rose. The global economy had become richer; more internationally incorporated but polarized. This led to an unequal increase in the division between the poor and the rich nations.

Winters (2002) gave a general idea of the development of income disparities in China from 1987 to 2002. They recognized a noteworthy increase of disparities within China’s rural and urban populations. In rural areas, an increase in disparity is mainly related to the unequal role of self-employment income from non-agricultural enterprises and slow growth in income from farming since the mid-1990s to date. In towns, the declining role of entitlements and subsidies as well as the rise in wage disparities and the layoffs during reformation have fueled the growth in disparities. In China, the rural-urban gap is growing faster in interior provinces. Certainly, globalisation has no capacity to involuntarily solve India’s and China’s income disparities, but at the same time economic disparities cannot be solved without it.

Economic Reforms in China and India

It is generally agreed that China’s economy developed quickly due to its association with the global economy in the past few years. The drivers for this quick development have been discussed for years. Some main and important drivers such as the economic reform and admission to the World Trade Organization (WTO) will be described below.

China’s Admission to the World Trade Organization

 It has been proved that globalisation has had some negative impacts on China and India but for a short period of time. As soon as the reform process started taking root in these countries, there were scores of unemployment that resulted in high poverty levels being experienced by the semi-skilled and unskilled labourers. China and India are known to have a higher degree of distortions in the labour market, for instance, unequal labour mobility and a low level of flexibility in wages across geographical regions as well as sectors. These effects made the unskilled and low-skilled labour force vulnerable at the time of reforms in the trade sector.

In addition, globalisation in India and China intensified the rate of competition between local firms and multinationals and since the multinationals had large economies of scale some of the local firms were edged out of the market. As a result, the rates of unemployment intensified as it was difficult for people to move across industries and sectors in both countries. In India, when comparing to China, there are no provisions for reallocation of labor to competitive sectors from uncompetitive ones or to non-tradable from tradable. In addition, in China that is a developed nation, there are more provisions of reequipping unskilled labourers who are just newly recruited when comparing to India.

Globalisation and Inequality: Chinese Perspective

Globalisation effects can be of two folds, positive effects and negative effects. Whether globalisation hurts or benefits people who are in the low income deciles on the distribution of income has become a severe issue in numerous quarters. One of the most prominent drawbacks of globalisation is decreasing the demands of unskilled workers because of high trade liberalization. In China, after the year 2003 the demand for skilled workers has increased tremendously but as a result, the demand for unskilled workers has decreased heavily. According to the skilled workers, their minimum wages were affected a lot due to globalisation. Inequality indeed increased after the globalisation of China.

According to Johansen (1991), poverty and unemployment in China increased due to globalisation and not due to financial crisis like in other countries of the world. 24% of businesses closed due to globalisation in China. China is one of the biggest technological countries in the world and due to globalisation the demand of technological education and technological professionals has been decreased heavily because of high amount of supplies. Inequality in China increased heavily due to globalisation and increasing population. Gross domestic droduct (GDP) of the country as a whole along with its per capita income was affected adversely due to globalisation.

China’s liberalization agenda assisted it in the globalisation of finance and trade. This was of great advantage to its population since the number of persons living below the poverty line reduced remarkably. This country has a middle-class population the size of which was projected at 18 per cent of the entire population in 2001 by the Academy of Social Sciences.  High growth and high globalisation have had a definite impact on the income distribution and poverty in the Republic of China. Unequal natural barriers increased the liberalization of the country. This decreased the demand of manufactured goods in the country.

The Indian Economy

Globalisation wave appeared on the Indian shoreline in 1991. This was much later than in China and other Asian countries such as Singapore, Malaysia and Hong Kong. The monsoon god was virtuous to India in the 1980s. The industrial sector grew faster than before thanks to the inventions brought about by the new technological advances. The agricultural sector established a big boost as well as the service sector. In the upshot, the Indian economy started prospering at a deliberate rate but greatly better than in the 1970s.

Reduction of tariffs and need for opening up the economy was proposed by Rajiv Gandhi’s government in the early 1980s. However, the real backing for globalisation, reduction in protectionism and liberalization came in the late 1980s. In general, 1960 to 1985 was a blustering period which witnessed the stagnation of the Indian economy. In the beginning of the 1990s India felt first shock of globalisation and liberalization. Tariff rates were decreased, import quotas were razed and more foreign direct investment was invited. Two subdivisions of the liberalization program were introduced: Structural and Stabilization. Stabilization was surmised to be of short term and was aimed at declining an aggregate demand and therefore lowering the inflation rate. The structural measures seemed to be long-term and were intended to lower the limitations on domestic business and export promotion. The World Bank (2001) noted these steps showed disposition of policy makers towards the move to market-oriented economy. All in all, these reforms intended to attain stability, reduce the inflationary pressure and liberate the breaks on production and productivity. Policy makers were persuaded that globalisation was what was needed for a faster economic growth.

The growth in the mid 1990s did not entirely correspond to the accelerated growth in the late 1990. Slow growth in the agricultural sector was caused by the sluggishness, but not because of the industrial retardation. In 2004, the Indian economy was officially admitted as the second fastest growing economy in the world after the Chinese economy. The agricultural sector, manufacturing, trade and services sectors grew marvellously. The economy expanded by an average of 5.69 percent annually from 1960 to 2010. GDP growth accelerated to an average of 8.37 percent in 2003 and to 9.82 percent in 2007 (Feng, 2007). With the global crisis, economic growth slowed down to an average of 4.93 percent in 2008 but quickly rebounded with a growth of 9.10 percent and 9.72 percent in 2009 and 2010, respectively (see Figure 1.1).

Figure 1.1

Real GDP Growth in India in percents, 1960-2010

(World Bank Database)

When the Indian government insensibly opened the economy in the early 1990s, a rapid economic growth took place. The government carried out economic reforms and took control over foreign trade. This led to investment being diminished. The Indian trade grew poorly from 1960 to 1980. However, since 1980 onwards trade has been rising significantly. Exports in 2010 were valued at US$180.50 billion. This was 11 percent higher than the level of US$162.61 billion recorded in 2009. Imports in 2010 were valued at US$277.04 billion higher than the level of imports valued at US$249.59 billion in the year 2009. Total trade for the period January-December 2010 was US$457.54 billion against US$412.20 billion within the same period in 2009. According to predictions of the experts, by 2012 India may be ranked third in real GDP, beating the slowly evolving Japan. India is likely to grow much faster than China after 2020. This is partly due to the fact that the Indian population is significantly made up of many youths who were involved in the production sector and its growth rate is higher than China’s population which is made up of the aging bracket. In addition, India has a greater potential, since it has begun its development from a lower stage in comparison to China.

Figure 1.2

Income Inequality: Indian Perspective

Studies reveal that due to globalisation, India has been regarded as among the most developed countries of the world with numerous business opportunities. The cost of doing business in India is very low and this has attracted many investors. The recent development, especially in the information technology sector, has created numerous job opportunities in the country and has increased the middle class population within the country. The Indian government has played a tremendous role in increasing such growth in the country. If the flow of Foreign Direct Investment (FDI) increases with the same momentum, then India would be regarded as among the biggest economies in the world. Apart from the benefits, the factors of income inequality have been increased profoundly in India as well. Indian citizens have moved towards the middle class group from lower middle class group profoundly after the economic downturn due to heavy globalisation. However, this has increased instances of unemployment rates due to the low demand of unskilled workers. Political stability and the high democracy of India were greatly affected by globalisation which not only pressurised the government but also outrageously increased the unemployment rate in the country. Inequality trends increased with the growth of the population which was estimated to be about 1048.6 million people in the year 2003. This approximates 17.9 percent of the world inhabitants. Out of this population, 35 percent live below the country’s poverty line while 34.8% of its residents live below the universal deficiency line of one dollar per day (Feng, 2007).

Inflow of Capital to India and China due to Globalisation

India has emerged as the second most attractive place for the Foreign Direct Investment for the foreign investors after China. China has for a long time possessed a stable, strong, and market-driven economy in which the private companies, especially the multinational corporations and democratic governments, have done a remarkable job. One of the major determinants in attaining a high proportion of the Foreign Direct Investment is the presence of skilled and qualified workforce who can communicate with ease. According to Philips (1988), policy makers and economist forecasters have predicted that Indian rupee will become one of the biggest currencies of the world in the near future. In the last few years, the Indian government has emphasized on research and development which not only gave them a rise in the Foreign Direct Investment inflows but also increased the employment to population ratio alongside the country’s GDP. All economic indicators show positive results from the standpoint of India which is certainly a sigh of relief for the entire country as well.

Indian and Chinese information technology sector has witnessed an outstanding growth as far as Foreign Direct Investment inflow is concerned from the last few years which has not only created numerous jobs within the country but also contributed a lot to the proportion of GDP growth of the country. Electronics and hardware industry have witnessed a steady growth within the last five years. Studies have indicated that Mauritius is the largest investor in India and China having invested about US$ 20billion in the Indian information technology sector between the period ranging from 1991 to 2007 (Feng, 2007).

The United States of America is the second largest investor in India and China with total net investments of US$ 6 billion in different projects set up in the country. During the period from 1991 to 2007, the cumulative Foreign Direct Investment inflows in India reached over US$ 60 billion and the servicing sectors including; information technology and telecommunication sectors, attracted huge amounts of capital in foreign inflows. The Department of Industrial Policy and Promotion released their report in 2007 in which they identified that the top performers as far as attracting Foreign Direct Investment within the country were concerned with the servicing sector and the computer software & hardware sector. On the other hand, globalisation opened new ways of prosperity and economic growth for both of these countries but also increased the problem of inequality.

The Impact of Globalisation on Workers and their Trade Unions

Globalisation has had an immense impact on the trade sector. It affects this sector both positively and negatively. Every worker gains from trade liberation. The opening of world trade markets as well as the shifting of trade barriers has resulted in the growth of goods and services. This in turn has ensured an increase in income and the improvement of lifestyles. Trade unions have prospered in this condition and this has boosted the workers’ morals. All these positive influences are attributed to globalisation. Initially, globalisation of trade entailed the trade of goods. However, this has been diversified with ventures in telecommunication, servicing trade, computer and information technologies and financial services. Globalisation has further led to the development of industries which have provided more employment opportunities. There also exist better-paying jobs.

Nonetheless, the rise of unemployment is related to the impact of globalisation. Technology such as the utilization of computers has pushed the illiterate to the brinks of employment. The haste by which this technology changes to obsolete status results to depletion of materials, alteration of products as well as the need to adopt new products. This has contributed to insecurity among the trade unions and its workers. Employees face the risk of being rendered jobless due to the advancement of technology which forces them to be constantly aware of the changes (King, 1997).

Impact of Globalisation on Co-perations

Co-operations are subjected to habitually fluctuating conditions in the technical, commercial and regulatory sectors which they are engaged in. In order to remain relevant and prosper, they should be flexible to adjust to these changes. It is normally difficult for a confined entity to obtain this degree of flexibility due to limitations imposed by the unchanging nature of its human resource, capital investments, inability to identify and employ appropriate technology and the inability to take risks of change that involves a large customer base. All this can be done by employing a global sourcing arrangement. This can be planned in an advanced effective fashion that enhances flexibility. In the end, transformational objectives that meet the standards of global businesses would be achieved.

The global standardisation enables the company to efficiently and effectively manage its resources. This minimizes the company’s reliance on specific equipments hence cuts down duplicative costs. In addition, standardisation eases global reporting, tracking and analysis of other functions undertaken by the organization (Loo, 2002). This encourages transparency in the co-operation and helps to acknowledge and optimize its daily activities.  Both transparency and scalability augments the efficiency of production and adds value to the co-operation. In the end, the organization is enabled to analyse and attain its global goals.

Impact of Globalisation on Professionals

By altering the structure of what an economy is expected to generate, globalisation has affected the demand for various types of skills, labour and capital.  It has the capacity to push a country’s economy into demanding less labour but more professionals. It attains this by shifting the structure of production away from the labour sector and heading in the direction of professional provisions. The repercussions of this influence are that gross gains of professionals surpass the gross loss encountered by labourers. As a result of this, the national economy experiences gains in trade.  The gross losses incurred by the labourers bring fear to a lot of these workers. This constitutes one reason as to why this fear is utterly coherent to the economic theory hence the fear of globalisation (Winters, 2002).   

Based on the above findings, globalisation, foreign direct investment and human resource development significantly affect the economic growth of every country. Population growth has no significant impact on the economic growth of emerging economies. Individually, only foreign direct investment significantly affects the income inequality of a country. Globalisation, human resource development and population growth do not exert individual effect on income inequality. Globalisation and the selected control variables collectively influence the economic growth and income inequality in a number of countries over a given period of time. There was a significant difference in the economic growth in a number of countries during the period 1960-2010. Furthermore, the average income inequality measured in the terms of the GINI coefficient differs within the countries. Economic growth, income inequality, globalisation and the selected control variables such as foreign direct investment, human resource development and population growth in various countries exhibit long-term equilibrium relationships. Globalisation, foreign direct investment and population growth precede a nation’s economic growth and not the other way round. There is, however, a weak evidence of a Granger-causal relation from the human resource development to economic growth. Globalisation and population growth lead to an income inequality. Nonetheless, there exists strong evidence from foreign direct investment and human resource development that relates to the income inequality.