2 Effects of Globalisation - Benefits and Costs

8/13/2019 2 Effects of Globalisation - Benefits and Costs

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Effects of Globalisation Benefits and Costs

There are hugely diverging viewpoints on the costs and benefits of the current process ofglobalisation.

Employment effects

Concern has been expressed in somequarters that investment and jobs t in theadvanced economies will drain away tothe developing countries. Inevitably somejobs are lost as firms switch their productionto countries with lower unit labour costs. Butpast experiences suggest that all nations inthe globalization process will gainproviding they can find areas of expertiseand competitive advantage as trade is adeterminant of growth and rising livingstandards.

That has not allayed concerns that certain sections of the population in richer countries -notably relatively unskilled workers - will lose as an abundance of low-skilled labour indeveloping countries makes itself available to the world's companies at cheaper costs leading to a fall in the demand for lower skilled workers in industrialised countries. Critics ofglobalisation in some developed countries point to the risks of increasing income equalitiesand greater job insecuritytogether with the threat of structural unemployment in industrieswhere demand for labour falls. Most workers in industry and, especially, manufacturing in richadvanced countries produce goods that could be imported from abroad.

Static and Dynamic Efficiency Gains

For consumers and capitalists, the rapid expansion of global trade and foreign investment is anormally considered good thing. Textbook theory suggests that increased competition fromoverseas leads to improvements in static and dynamic efficiency and gains in welfare.

Trade enhances the division of labour as countries specialise in areas of comparativeadvantage.

Deeper relationships between markets across borders enable producers and consumersto reap the full benefits of economies of scale.

Competitive markets reduce monopoly profit margins and provide incentives forbusinesses to seek cost-reducing innovations and improvements in their products.

The combined effects of these gains in efficiency should be over time animprovement in growth and higher per capita incomes. The OECD Growth Projectfound that a 10 percentage-point increase in trade exposure was associated with a4% rise in income per capita. But these gains represent an average we must alsoconsider the distributional consequences of rising incomes.


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Expansion of Multinational Activity Capital does not always flow in one direction!

Many developing countries are now exporters of capitaland are increasingly willing to usetheir foreign exchange reserves to buy up the rights to mineral deposits in other countries andto engage in merger and takeover activity with long established businesses in the developedworld. Chinas foreign exchange reservestipped over the $2 trillion level in 2009 and manyother emerging market countries and oil and gas exporting nations have accumulated largetrade surpluses that have allowed them to establish sovereign wealth fundsfor investment inoverseas assets.

The main motivations for the rapid expansion of multinational activity are as follows:

o Higher profitsand a stronger position and market access in global markets

o Reduced technological barriers to movement of goods,services and factors ofproduction

o Cost considerations a desire to shift production to countries with lower unit labourcosts

o Forward vertical integration(e.g. establishing production platforms in low costcountries where intermediate products can be made into finished products at lowercost)

o Avoidance of transportation costs and avoidance of tariff and non-tariff barriers

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China's Mountain of Foreign Currency Reserves

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o Extending product life-cyclesby producing and marketing products in new countries

o The urge to merge the financialincentives created by the globalderegulation of capital markets ismaking it easier to achieve acquisitionsand mergers and thereby encouragingthe external growth of a business

The UK economy has seen a huge rise inforeign investment over the last fifteen totwenty years. Some of this has been inportfolio investment (stocks and shares, bondsand property). Direct investment includingcapital investment by foreign businesses hasalso been strong.

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Globalisation and the UK Economy

The UK is a highly open economy. Openness to the global economy can increase the size ofcommercial markets available to domestic producers, encourage the transfer of technologyand knowledge and also permit countries to specialise in those goods and services theyproduce efficiently by exploiting theircomparative advantage.

Thirty years ago, the UK abolished its foreign exchange controls and the major financialmarkets have been subject (until recently) to light-touch regulation. This means that each daythere is a huge amount of trade within our stock markets, the short-term money markets andthe bond markets. Little wonder that the City of London has become a hugely important globalcentre for financial trading.

UK trade continues to take a high and rising percentage of our total national output. Clearly,the globalisation process impacts significantly on the British economy with benefits and costsalong the way:

BENEFITS OF GLOBALISATION FOR THE UK COSTS AND CHALLENGES OFGLOBALISATION FOR THE UK

Opportunities for UK businesses to trade andinvest overseas an injection into the UKcircular flow, investment income helps financecurrent account deficits

Risks of increase in structural unemployment inindustries / regions that lose demand tolower-cost competition from overseas

Access to cheaper goods and services fromemerging market countries leading tohigher real incomes

Globalisation may lead to rising income andwealth inequality (a higher Gini co-efficient) average incomes have risen but so too has the

level of relative poverty

Opportunities to live, study and traveloverseas

Increase in global trade / output has anenvironment effect increased use of non-renewable resources and CO2 emissions growing threats to the global commons

Bigger export markets chance to exploiteconomies of scale

Globalisation of brands perhaps a loss ofcultural diversity

More intense competition drives innovation

and gains in allocative, productive anddynamic efficiency

UK government has less control over the

economy businesses are footloose, economymay become more vulnerable to externalshocks

Britains creative industries have successfullyexploited the opportunities of expandingglobal markets

The surge in inward migration of labour hasbrought economic and social tensions andincreased fiscal costs for the government

Globalisation has lifted hundreds of millionsof people out of absolute poverty around theworld and the emergence of an extra one

billion middle class consumers is a huge

Globalisation contributed to the sharp fall ininterest rates and widening trade imbalancesthat were part of the root cause of the sub-

prime lending boom and bust and the credit
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export opportunity for the UK crunch

Falling cost and rising speed of globalcommunications and transport has helped tobring people closer together

High food and fuel price inflation has hurtlower income families most

Threats and Challenges to Globalisation

The political openness generated by, first, the adoption of outward looking policies by the Chineseunder Deng Xiaoping in the early 1980s and, second, by the fall of the Berlin Wall in 1989 aremassive shocks that have rocked the competitive equilibrium of the world economy through both labourand capital flows.

Source: Stephen King, chief global economist of HSBC, February 2008

Globalisation is not an inevitable process. 2009 marked ayear when global trade contracted for the first time in manyyears and the term de-globalisationstarted to appearfrequently in international economics news coverage.

o The paradox of inequality: Globalisation has beenlinked to a widening of inequalities in income andwealth. The paradox is that globalisation has reducedinequalities between countries but widened incomeand wealth gaps within nations. Evidence for this is arise in the Gini-coefficientfor many developednations and a growing rural urban divide growing

in countries such as China, IndiaandBrazil.

o The return of inflation: In many ways globalisationhas reduced costs and prices for many goods andservices. But the driving down of interest rates caused by a glut of global savingsallied to fast economic growth rates in emerging market countries led in 2007-08 to asurge in the prices of virtually all traded commodities. Food price inflation is theobvious symptom of this and it placed millions of the worlds poorest people at greatrisk.

o Bursting of the financial euphoria / bubbles: A decade or more of strong growth, lowinterest rates, easy credit created the conditions for a boom in share prices and

property valuations in many countries. The bursting of these speculative bubblesprompted the credit crunch and the spreading of contagion from that across the worldin 2008-09.

o Threats to the global commons:Perhaps the biggest long-term threat to globalisationis the impact that rapid growth and development is having on the global environment.The threat of irreversible damage to ecosystems, land degradation, deforestation, lossof bio-diversity and the fears of a permanent shortage of water afflicting millions ofthe most vulnerable people are just some of the vital issues facing policy-makers.

o Huge trade imbalances: World trade has grown over recent years but so too havetrade imbalances. Some countries are running enormous trade and current account

surpluses. Whatever the causes, trade imbalances are creating tensions forglobalisation. There is growing political pressure towards
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(1)Economic nationalism where governments block takeovers and mergers ofdomestic industries and businesses by foreign owned multinationals

(2)Resource nationalism: Where countries protect their own factor resources such asnatural raw materials. And countries with trade surpluses but high levels of importdependency use foreign exchange reserves to buy up the right to import mineralsfrom other countries.

(3)Tradeprotectionismto cut balance of payments deficits and protect output andjobs

(4)Smaller agreements: There has been a shift away from multi-lateral tradetowards bi-lateral trade agreements a process that will be strengthened afterthe collapse of the Doha trade negotiations.

Global Trade Shrinks in 2009

The World Trade Organisation has published a pessimistic short forecast for global trade in 2009predicting that global trade flows will shrink by 9% this year with developed countries such asGermany and Japan feeling the worst effects of the downturn in trade and exchange. Poorer countrieswill see exports fall 2-3%.

The report emphasizes the growing importance of global supply chains which increases the size of thetrade multiplier effect. In a recession the multiplier effect works in reverse and hits those countries

Quarterly Value of World Trade

Expo rt , EXPORTS,F.O.B. Impor ts , IMPORTS,C. I.F.Source: Reuters EcoWin

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where exports are a large percentage of national output. Production for many products is sourcedaround the world so there is a multiplier effect as demand falls sharply overall, trade will fall evenfurther.

Germany is facing a severe recession because of the shrinkage in global trade. Germanysmerchandise exports in 2008, at $1.47 trillion, were slightly larger than Chinas $1.43 trillion. This

meant that Germany retained its position as the worlds leading merchandise exporter. But economistsat Commerzbank forecast that German GDP may shrink by more than 7% this year. 40% of GermanGDP is exported and it is heavily reliant on machine tools and engineering that is leveraged to globalindustrial cycle. Germanys traditional heavy focus on exporting manufactured goods is coming to beseen as an Achilles heel especially given the lack of an alternative source of domestic demand. Japantoo is suffering from a collapse in exports and industrial production

Source: Tutor2u economics blog

The Rise of Sovereign Wealth Funds

Investment funds run by foreign governments, also called sovereign wealth fundshave beenin existence since the 1950s. As a result of high commodity prices and the success of export-

oriented manufacturing economies, countries such as China, Singapore, Dubai, Norway, Libya,Qatar and Abu Dhabi have built up a sizeable surplus of domestic savings over investment.This surplus has been transferred into sovereign wealth funds worth by some estimates over$2.5 trillion today, and controlling more money than hedge fund. According to StandardChartered, sovereign wealth funds will be valued at more than $13.4 trillion in just a decade.

To some people sovereign wealth funds are a threat to global trade partly because of fearsof a protectionist backlash from western governments whose countries are running hugecurrent account deficits on their balance of payments. There are many questions up in the airat the moment.

1. How will the SWFs use their gigantic surpluses?

2. Do they have an incentive to invest strategically perhaps for quasi political reasonsand not simply with the aim of maximising returns?

For example, an investment into another nations telecoms industry might result in a high rateof return and perhaps more importantly, an influx of research and development information.Sovereign wealth funds are already having an important effect on the UK economy.Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar andDubai between them own about a third of the London Stock Exchange. The government ofSingapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund,Dubai International Capital (DIC) has invested money in building stakes in UK companies,including Travelodge and the London Eye.

Many sovereign wealth funds have provided an injection of fresh financial capital for the UKbanking system in the wake of the losses sustained from the sub-prime crisis and the creditcrunch. The banks have needed to recapitalise to repair their balance sheets and improvetheir chances of survival.

Container ships left stranded by downturn in global trade
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The global shipping industry is associated with huge internal economies of scale and where demand istied to the fortunes of industries such as iron ore, oil and coal but also to the world trade cycle. Thingsare looking grim for shipping operators who have bet hundreds of millions of dollars on expanding afleet for which there is now substantially less demand.

Containerisation is an idea which developed from an idea developed by the US entrepreneur MalcolmMcLean. Stackable steel boxes have been at the heart of globalisation. But as the world economyweakens, the global shipping industry is facing a problem of excess capacity. This industry is a goodexample of what can happen when there is a lengthy time lag between changing demand forcontainer vessels, their construction and the new capacity coming on stream. Expensive investments in

new ships which looked a sure fire bet just a couple of years ago are now albatrosses around thenecks of some shipping giants.

Container trade between Asia and Europe is shrinking for the first time in history according to someestimates. Fleet capacity is forecast to expand rapidly by more than 10 per cent per year from 2008 2012 the result of a huge rise in capital investment in new container ships. But annual containergrowth has collapsed due to the downturn and the steep fall in Chinese manufactured exports inparticular. The early signs came from a sharp reduction in shipping costs for dry carriers shipping ironore and coal around the world shown by fluctuations in the Baltic Dry Index.

Now the container shipping industry is witnessing a meltdown in the charges for moving a standard 40foot container the price has fallen by more than 90 per cent. Many operators are cutting services,merging operations and encouraging pilots to slowdown to save fuel. Many of the operating costs of

the shipping industry are fixed container ships operate to fixed timetables in a similar fashion toairlines. So when they are full, the average fixed cost falls, improving the profit margins of containeroperators. Conversely in a falling market the average fixed cost of each container rises. Suddenly theeconomics of smaller dry bulk and container ships looks more attractive.

Source: EconoMax

Globalisation and the African Continent

For many years Africa appeared to have largely missed out from the beneficial effects ofglobalisation. The gap in real per capita incomes between Sub-Saharan Africa and emergingmarket countries grew wider. More recently the region has seen an improvement in her

relative economic position and performance helped in some cases by the strength of globalcommodity prices (many African countries rely on exports of primary products as a key source

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of income and foreign exchange reserves) and a pick-up in foreign direct investment into thecontinent.

Macroeconomic indicators for Sub-Saharan 2007 2008 2009*

GDP at market prices 6.2 4.8 1.0

Private consumption spending 7.1 3.3 0.8Fixed investment 20.5 12.4 -2.6

Exports 4.1 4.7 -3.2

Imports 11.9 6.6 -3.0

Investment (as a % of GDP) 20.9 21.4 22.3

Exports (as a % of GDP) 35.9 39.3 32.4

GDP per capita, current US$ 1079.4 1240.8 1072.5

Real per capita GDP growth 3.8 2.8 -0.9

Source: World Bank Global Economic Prospects, June 2009

*forecastAfrica has yet has not been directly hit by the credit crisis. The major African banks haveinvested little in the problem assets that have brought western financial institutions to theirknees. It has also been helped by the fact that a growing share of output is agriculture fordomestic markets, and is less exposed to declining global markets. Africa is likely toexperience some indirect effects of the global crisis. The global demand for manycommodities, which are at the heart of the export industry in some countries, has fallen. Thisincludes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia. Other exportmarkets have also been hard hit, for instance the Zambian flower exporting industry hassuffered. Falling demand means falling prices. Crude oil is down by about 70% from its peakin July and copper about 66%.

Money sent home by African nationals working abroad (remittances) also looks set to fall. Thismoney sent home is often used to support family income and provide funds for smallbusinesses. In 2007, 13bn was sent home in the form of remittances. The problem in 2009 isthat 75% of all remittances come from employment in Western Europe and the US, areasalready in recession. With a lower level of funds injected into the economy the national incomemultiplier effect will likewise be smaller.

Foreign direct investment into Africa is also set to fall. More than $30bn was injected intoAfrica in 2007 in the form of FDI, nearly the same level as the $39bn received in aid. Fallingcommodity prices are going to make firms less attracted to an FDI projects in Africa (alongwith the inability of firms to access funds for investment, due to poorly functioning credit

markets).

Foreign owned banks with problems in their domestic markets may want to pull funds out ofAfrican banks. This will mean a lower level of loanable funds for the creation of loans for localbusinesses. As with many countries across the globe, the indirect effects of the slowdown maywell be a decline in government revenues for many African administrations.

With a lower level of tax revenues African government may have less flexibility with regardto fiscal policy. Indirect tax revenues account for over a third of all money flowing in Africantreasuries - there is no doubt that once again the African economy is facing uncertain waters.

(Source, adapted from EconoMax April 2009, author Jon Mace)


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China versus America From Currency to Energy

Chinas phenomenal growth over the last 30 years can be put into perspective as its economy hasleapfrogged Germany as the worlds third largest economy after the US and Japan. The initiator ofgrowth in the Chinese economy has been the expansion of its manufacturing base and the exportdemand from the US consumer. Recent data indicates that China has amassed $2 trillion worth of US$reserves through the sale of goods and purchase of US government bonds.

Dollar versus Yuan Catch 22

A lot has been written about the power that China has over the US with its holdings of US dollars.

Ultimately the Central Bank of China Peoples Bank of China could collapse the dollar by selling itssupply of dollars/US Bonds in the foreign exchange market. Indeed, many economists believe thatChinas continuing demand for US dollars is the only thing stopping it from collapsing. However, thefact is China has a stake in the stability of the dollar and if they push too hard to destabilize it theyllerode the value of their own dollar reserves. Essentially the more dollars China acquires the morewealth it has to lose if the dollar crashes in value. Furthermore, a fall in the dollar will reduce thecompetitiveness of Chinas currency in the US, which would damage Chinas economy.

It seems that the two competing powers are too closely tied and too concerned with stability of thedollar to risk taking each other on, but with energy, (especially oil) the winner can take the gainswithout exposure to a corresponding loss

If we move away from the currency market and focus on oil, the US is being outmanoeuvred by China

with respect to energy policy. At present China holds 2% of the worlds oil reserve whilst the US holds3%. The US consumes up to 20 million barrels a day and China is quickly approaching this level anddirectly competing against the US and Europe for prime Middle East oil presently the Middle Eastholds over 70% of the worlds known oil reserves. Therefore, to secure their oil reserves China hasavoided the larger oil producers in the area Saudi Arabia and Iraq as they have strong ties withthe US. Instead Chinese authorities have forged links with Iran and Sudan which on the periphery of themain oil reserves of the Middle East. Also the way they have approached these countries is in the roleof a developer and peacemaker in contrast to the US method which has been seen as an aggressor.

But it is not just the Middle East where the Chinese have been active in securing oil supply see tablebelow. The Chinese authorities put great importance in clinching these deals, to the extent that ChinesePresident Jintao met in person with the leaders of Russia, Brazil, and Venezuela.

Source: EconoMax, Mark Johnston, June 2009

Chinese Imports of Selected Primary Products

Inedible crude materials, except fuelsMineral fuels, lubricants and related materials


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Oil Rich but Chalk and Cheese Norway and Nigeria

Both Norway and Nigeria rank among the top 6 oil exporter revenue earners. However once you takeinto consideration the quality of life and GDP per Capita the figures tell a different story. How canthese countries be at different ends of the economic spectrum when you consider their oil wealth andthe level of output daily?

Norway

Norway is the worlds third-largest exporter of oil (after Saudi Arabia and Russia). It is a country sowealthy that despite having a population of just 4.5 million, it is a major player on the world stage. Oilwas discovered off Norways western coast in 1969, and the country has ridden several busts andbooms. In 1990s Norway declared that all state petroleum income would be put aside in a protectedfund and invested outside the country. But oil can be as much a curse as a blessing. Since 1960sHollands sudden gas wealth pushed up its currency and crippled its manufacturing sector, economistshave been wary of easy money, even coining a term Dutch Disease for its impact on the rest of theeconomy. However, by spending the real return in a controlled manner Norwegians can enjoy their oilwithout ever suffering the diseases symptoms.

The countrys wealth has allowed one of the most generous welfare states in the world. The sick getfree healthcare and up to a year of fully paid leave. When a woman gives birth she can choosebetween taking 10 months off at full pay or a full year at 80% of her salary. Students are not onlyexempt tuition fees, they are eligible for 10,000 in loans each year, nearly a third of which getswritten off upon graduation. Unemployment is at 2.7%, but the country has the highest sick leavefigures in the world and one in four working-age Norwegians gets their main income from the statesocial security system. In the early 1990s Norway declared that all state petroleum revenues would beput aside in a protected fund and invested outside the country.

The countrys wealth has also afforded it a place in the world stage, letting it hit far above its weight.Norwegians have twice voted not to join the EU but nonetheless as it wealth increases so does itsresponsibility. Norway is the leading nation in the provision of foreign aid 0.98% of GDP in 2006,but it hasnt reached its goal of 1%.

Nigeria

Life couldnt really be more different in the African nation of Nigeria. It was a country blessed withenormous sudden wealth as oil gushed out from the Niger Deltas marshy ground in 1956. Oil accountsfor 95% of the countrys export earnings and 80% of its revenue. In 1960 agricultural production suchas palm oil and cacao beans made up nearly all Nigerias exports; today, they barely register astrade items, and Africas most populous country, with 130 million, has gone from being self sufficient infood to importing more than it produces.

A recent UN report shows that the quality of life in Nigeria rates below that of all other major oilexporting countries. Its annual per capita income of $1,400 is less than that of Senegal, which exportsmainly fish and nuts.

Despite its ranking as the worlds sixth largest oil exporter and Africas top producer, Nigeria fallsbehind major oil nations in alleviating poverty. Export sales prop up the economy but the frustration atthe uneven distribution of profits has triggered nearly constant violence in the Niger Delta, withunemployed youth increasingly attacking oil facilities and personnel. Corruption siphons off as much as70% of annual oil revenues; most Nigerians live on less than a dollar a day. Blame for the lack ofdevelopment lies with the multi-national oil firms and the government, partners in onshore operations.

Whilst Norway debates over its embarrassment of riches from oil revenues and how to increase itsforeign aid, Nigeria is a fragile state, beset by risk of armed conflict, epidemic disease, and failedgovernance. Nigerias absurdity is that poverty perseveres as oil flows.

Source: Mark Johnston, EconoMax


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A Third Wave of Outsourcing in the Global Economy

Comparative advantage shows that it isefficient to cut production in those activitieswhere the producer faces a relatively highopportunity cost. That is the idea behindoutsourcing.

A generation ago, firms in the rich worldincreasingly shifted industrial production outinto the developing world. A decade ago,services followed, with numerous backoffice functions shifting from high costlocations to those with lower costs. Now athird wave is gathering pace: rich foodimporters are acquiring vast tracts of poorcountries' farmland to grow their own

supplies. Is this a good thing?Why not encourage countries that exportcapital, but import food, to outsource farm production to countries that need capital, but haveland to spare? Recently, food grown in Ethiopia has been shipped to Saudi Arabia. ButEthiopia is a hungry country that needs a significant amount of food aid. This is the heart ofthe dilemma.

The scale of current land deals is staggering. Sudan will set aside roughly a fifth of thecultivated land in Africas largest country. China secured the right to 2m hectares in Zambiaand will grow palm oil for bio fuel on 2.8m hectares in Congo. Since 2006 the amount of landhanded over globally is equivalent to the whole of Frances agricultural land, or a fifth of all

the farmland in the European Union.Thanks to rising land values and rising commodity prices, farming has been one of the fewsectors to remain attractive during the credit crunch. When private investors put money intocash crops, they tend to boost world trade and international economic activity. But now,governments are investing in staple crops in an attempt to avoid world agricultural marketsaltogether. Why?

Over the last couple of years, food pricessoared and food stocks slumped. This did notparticularly scare importers; most of which(especially oil states) could afford higher

prices. Their problem was the spate of tradebans that grain exporters imposed to keepfood prices from rising at home. The obviousanswer for food importers has been to accessfood directly by finding land (and water)abroad.

The investors promise a lot: new seeds, newmarketing, better jobs, schools, clinics and

roads. Sudans agriculture ministry say investment in farming by Arab states would rise almosttenfold to represent half of all investment in the country. China has set up 11 research stationsin Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less

than India on agricultural R&D. Even without new seed varieties or improved irrigation,

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investment should help farmers. One of the biggest constraints on African farming is simply theinability to borrow money for fertilisers.

But the deals produce losers as well as winners. Host governments usually claim that the landthey are offering for sale or lease is vacant or owned by the state. But empty land oftensupports herders who graze animals, or farmers who have worked it for generations withoutlegal title. Most economists and pressure groups would rather see freer, and fairer, trade inagriculture.

Source: EconoMax, Author Tom White


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De-globalisation

In 2009 the progress of globalisation appeared to come to a halt and go into reverse gear.The world economy suffered its deepest recession for over sixty years and global trade wasset to shrink by more than 10 per cent.De-globalisationbecame a buzz word. There areseveral aspects of de-globalisation that have become apparent:

A steep slowdown in world economic growth followed by a recession

Unemployment worldwide is forecast to rise by around 30m above 2007s level

Sharp fall in global trade in goods and services

A large fall in net private debt and equity flows to developing countries

Worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion

A partial reversal of migrant flows and also remittances from migrant workers

Evidence of a return towards economic nationalism and other forms of protectionismGeographical Seepage in the World Economy

Geographical seepage occurs because of deepened inter-relationships between economies,supply-chains and financial markets across countries. One example is how developingcountries that were really not part of the financial bubble and subsequent crisis of 2007-08are now suffering economically because of the spread of the global downturn.

Seepage is partly due to the changing structure of the world economy arising fromoutsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeedmore and more industrial production takes place in emerging markets. So when demand fornew cars, iPods and other electronic goods dries up from the richer nations the BRIC nationssee a dramatic fall in export growth. And developing nations reliant on exporting commoditiesto advanced economies will suffer from a fall in demand for and price of their output.

Developing countries as a whole are expected to grow by only 1.2% in 2009, after8.1% growth in 2007 and 5.9% growth in 2008

The Ukraine is likely to see her GDP fall by 15% in 2009 because of a collapse in theprice of metals one of its major exports

Remittance flows to developing countries are expected to be $304 billion in 2009,down from an estimated $328 billion in 2008

The global credit crisis has also led to a drying up of capital flowsinto developingcountries - one consequence is that some emerging markets find it really hard to gethold of the bank loans needed to finance their continued expansion. According to theWorld Bank, private capital inflows to developing countries fell to $707 billion in2008, a sharp drop from a peak of $1.2 trillion in 2007 and they are forecast to fallbelow $400bn in 2009.

Both developed and developing countries will be left with huge amounts of spare capacity -the globaloutput gapmight be as high as 8 or 9 per cent in 2010. This matters for theinflationary or deflationary risks facing the world economy as we head into 2010.

Decoupling
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Decouplingis the idea that the emerging market economies can survive and continue to groweven when many of the richest advanced nations are in a recession or slump. Globalisationought to make the business cycles of countries more closely aligned as trade and capital flowsbetween nations become ever more important. But there are grounds for thinking that China,India, Brazil and Russia and other emerging economies can maintain growth momentumindependent of what is happening in the United States, Japan and the European Union. Themain reason is that emerging markets now account for a bigger proportion of global economicactivity. Their share of global GDP is heading towards 25 per cent and their share of globalinvestment spending including house building and infrastructure investment is nearly 30%.

Their share of world trade continues to rise year by year.Chinawas not immune to the global slowdown of 2007-08 but her growth rate stabilised in2009 largely as a result of an enormous fiscal stimuluslaunched by the Chinese government. A4 trillion Yuan ($585bn, 390bn) stimulus programme was introduced in November 2008 andChina has made huge efforts to kick-start domestic demand(consumption and investment) tooffset the decline in her exports.

Suggestions for reading onglobalisation

Articles on globalisation from the Guardian

Articles on the global economy(Guardian)

Can Chinas frugal savers help her economy?(BBC news, July 2009)

Global economic downturn in graphics(BBC news)

Global recession(BBC news special reports)

Globalisation and the wages of highly skilled workers(Economic Journal, July 2008)

Globalisation is a benefit for the UK(Jim ONeill, Telegraph, July 2008)

Goldman Sachs BRIC country analysis(research reports)

World Bank

World Development Movement

Annual percentage change in real national output

Can China and India Decouple Growth from Rich Nations


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World Trade Organisation

Worlds cheapest car goes on sale(BBC news, April 2009)
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2 Effects of Globalisation - Benefits and Costs

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