Loading...

Current Issues of Globalization. Does Globalization Provide us with a Fairer Distribution of Wealth?

by Emanuel Alfranseder (Author) Adam Birnstein (Author) Brano Sedlacek (Author)

Term Paper 2007 11 Pages

Economics - Other

Excerpt

Contents

1. Introduction

2. Globalization and convergence
2.1 Convergence of countries´ GDP
2.1.1 Direct competition by means of migration
2.2. Divergence of individual´s wages

3. Globalization and increase of world´s GDP
3.1 Comparative advantage and trade obstacles
3.2. Correlation of GDP and happiness

References

1. Introduction

One of the most cited buzzwords in the world today is the term “Globalization”. However, the word is used quite liberally to describe a variety of issues. Globalization can be defined as the worldwide integration of economic, cultural, political, religious, and social systems.[1] This demonstrates the vast range the term includes. Globalization is not entirely a new phenomenon. According to Wallerstein and others the process started thousands of years ago and he even regards the small tribes as a step into the current world system.[2] Most commonly, however, the current world system is traced back to the 16th century originating in Europe as a centre. It is not surprising that the term itself only occurred in the 1980ies of the 20th century. The pace of the process somehow began to accelerate and is apparently picking up speed. Consequently, the topic raises a great number of questions which are controversially discussed. This research paper will discuss the following topics of interest: Is the process of globalization providing us a world with a fairer distribution of wealth? Why are there so many people who protest more and more violently against globalization? Is globalization increasing the world´s GDP and if so is that the complete and ultimate goal?This research paper attempts to provide answers to these questions. It is written in the frame of the course “Globalization” at Vilnius University and gives a rather personal opinion about special aspects of globalization.

2. Globalization and convergence

2.1 Convergence of countries´ GDP

Merely regarding pure economic forces the process of Globalization leads to a convergence of countries. Allow me to focus on the theoretical basis first and hereby concentrate on the convergence of salaries. When envisioning a world without political and particularly cultural obstacles it seems logical that all individuals compete with each other. This competition exists simultaneously in a direct and an indirect way.

2.1.1 Direct competition by means of migration

Individuals all over the world compete directly by matters of migration. Wherever higher salaries are paid and a better living standard is available people tend to migrate.[3] As their migration creates an increased supply of labour wages tend to decrease. The country with lower wages loses workforce and therefore the supply decreases and the wages increase. The effects of factor substitution shall be neglected in this analysis, but are consistent with the described process. This leads in the long run to the convergence of salaries. The development is hindered by political, cultural, and above all language obstacles. In the European Union for example there exists an official free labour movement.[4] Nevertheless, labour mobility in the European Union, which is surely the most ambitious current, transnational integration attempt, is still comparatively low.[5] Perfect global labour mobility, if attainable at all, would require a great deal of time and research which this paper does not entail. However, concluding this does not mean that migration does not contribute to the convergence of wages. Migration is reality despite the many existing obstacles which would lead in the long run to a more equal global distribution of wealth between countries.

2.1.2 Indirect competition by means of factor price equalisation

The second, indirect way people of different countries compete which each other is by means of foreign trade. If there is the opportunity of producing cheaper in a different country, production is dislocated. Workers either lose their jobs or are forced to accept lower wages. As a result this leads to lower wages in the developed country. The country receiving the foreign direct investment creates a demand for work, which increases the salaries. This idea including the price of capital is based on Ricardo´s theories which were further elaborated by Ohlin. He explains how the factors capital and labour tend to converge to equilibrium simply by foreign trade. Higher wages derive from a higher endowment with capital in a country. However, the profitability of capital or simply the interest rate in that country will be lower. If the country begins to trade with a country with lower wages and lower source of capital it will specialise in the production of the capital intensive commodity and the other country will export the labour intensive commodities. The equilibrium is achieved by exporting capital into the country with less capital endowment. This allows the country to pay higher wages and interest rates fall whereas wages in the other country will decline and the interest rate rise.[6] Ohlin could not prove that the process would lead to complete factor price equalization. He believed the proof as redundant, because one of the assumptions, no transport costs, will never be fulfilled. Later, Samuelson presented evidence that theoretically the factor price equalization actually works.[7]

Theoretically both processes migration and foreign trade, lead to a convergence of wages. The big difference lies in the assumptions. The convergence through foreign trade requires free mobility of capital and commodities whereas the migration process is much more difficult to realize. Indeed, liberalization in free trade and free movement of capital is already in a rather an advanced state. Contrary, political forces try to prevent the direct competition through wages. Nevertheless, it seems quite inevitable that the process continues towards more equality. However, not all states are currently participating in that development. The reason can be traced back to the political sphere versus the economic one. Sub-Saharan Africa is the best example for that.[8]

2.2. Divergence of individual´s wages

The previous section discussed the inequality between countries not between individuals. First and foremost it has to be stated that Globalization is not a system but a process. The current and predominant economic system in the world is called capitalism. It occurs in many different shapes and never in a pure form. Capitalism in its original, pure shape creates winners and losers.[9] The longer a capitalist system is ruling the greater the disparities between individuals grow. This phenomena inspired Marx and others to build their theories about the decline of capitalism. Marx regarded capitalism as a temporary stage on the way to a new system. Although Marx did not specifically describe the shape of the new system it was clear that he was thinking about a communist system. However, history seems to show that the idea remains utopian and will always be doomed to failure simply because it misjudges human nature.

All current economic systems are a mixture of capitalist and socialist elements. Individual states succeeded in reducing the inequality in their countries by providing a more equal distribution of wealth than pure capitalism would have produced. Governments could model their own capitalist system with exactly that amount of socialist elements the people in the country wanted.[10] In a less globalized world states could influence most of the relevant factors.[11] With the economy being placed at a global level a lot of variables get out of the control of national governments. The guidelines in diminishing unintentional effects of capitalism still exist. However, without a world government or at least a trustworthy global regime in the economic sphere it would be rather impossible to implement them effectively. As an example for an attempt to build such a regime may serve the European Union. The project has been going on for more than 50 years and still faces a lot of difficulties. Understanding whether it is even possible and if so, how long such a process would take at a global level is to be determined. It is certain that it will not happen in the near future and probably not within the current generation.

Emphasis has to be laid on the fact that under the current economic system the economic theory provides the following ideas: The disparity between countries is diminishing and the discrepancy between individuals is growing. The second phenomenon is the reason for protest and riots against Globalization. This brief analysis shows that protestants should rather blame capitalism not Globalization. Globalization just brings the problems of capitalism to a global level at which they are harder to treat.

[...]


[1] Wikipedia.de (2007). I am aware of the problematic quoting Wikipedia. Nevertheless, I take the freedom quoting it here not as an exact scientific source, but as a starting point which I regard appropriate.

[2] cf.: Wallerstein (1974)

[3] cf.: Ravenstein (1885) and Ravenstein (1889). Ravenstein gave a first detailed analysis of migration using census

data. Economic reasons are, however, not the only reason for migration, which already hints at the fact that

migration cannot equalize wages completely.

[4] Currently there is no completely free labour mobility in the European Union, because some countries have taken the opportunity to protect their labour markets against the new member states of the enlargements of 2004 and 2007.

[5] cf.: Olesen and Skak (2001)

[6] cf.: Ohlin (1933)

[7] cf.: Samuelson (1948)

[8] To determine the reasons for the continuing underdevelopment of the regions is difficult. As a matter of fact they do not profit from the Globalization process.

[9] cf.: Marx (1867), Marx said only workers create surplus and as capital owners can exploit workers, competition between themselves forces them to push the exploitation to the limit. Workers´ wages maintain at a minimum level that just allows them to survive ,whereas capital owners become constantly richer. Marx said this will lead to the downfall of capitalism and he might have been right if societies had not found ways to soften the process.

[10] German or Swedish economy may serve as examples. However, their models face increasing difficulties and socialist elements are constantly diminishing.

[11] The system of collecting taxes and paying transfers to poorer individuals and guaranteeing social security is not working properly anymore. Globalization creates greater opportunities to avoid taxes for companies and relatively rich individuals.

Details

Pages
11
Year
2007
ISBN (eBook)
9783668146747
File size
448 KB
Language
English
Catalog Number
v91366
Institution / College
Vilnius University – Economics department
Grade
10
Tags
Globalization Current Issues

Authors

Share

Previous

Title: Current Issues of Globalization. Does Globalization Provide us with a Fairer Distribution of Wealth?