Economic Globalization: Advantages and Disadvantages - Profolus (2023)

One of the three major dimensions of globalization, alongside political and cultural dimensions, is economic globalization. It represents the process involved in the accelerated cross-border movements of goods, services, information or knowledge, technology, and capital that have resulted in the expansion of global markets and international trade.

Advancements in long-distance transportation, developments in telecommunication, and other advances in science and technology have enabled the integration and interdependence across global economies. The obvious advantage of economic globalization centers on its positive contributions to economic progress across the world.

However, critics have also slammed the entire process of globalization due to its negative impacts and unintended consequences transpiring at the macroeconomic and microeconomic levels. Several studies have also examined the limited benefits of economic globalization due to the global prevalence of poverty and income inequality.

Advantages of Economic Globalization: Positive Contributions in Global Economies

1. Expansion of Global Markets and International Trade

Globalization has integrated most of the economies of the world into a single global economy. Even China has recognized the need to participate in the global markets and international trade after learning from its failures during the early years of Chinese communism and the disastrous outcome of its Great Leap Forward economic program.

Of course, it is important to note that international trade has been existing long before the invention of the word ” economic globalization.” However, due to innovations in transportation, communication, and other facets of science and technology, the economies of nations and states have become increasingly integrated and interdependent, thus lowering trade barriers.

The interdependence of these economies has been evident from the establishments of international organizations such as the European Union and the Eurozone, the Association of Southeast Asian Nations, the Gulf Cooperation Council, the World Trade Organization, the World Bank, and the International Monetary Fund, among others.

Understanding further the role of economic globalization in expanding global markets and international trade requires an appreciation of the roles and responsibilities of international government organizations and international non-government organizations. Note that these institutions are global actors with considerable influence and authority.

To be specific, these global actors are responsible for designing and implementing policies, negotiating and enforcing treaties, developing and deploying strategies, creating benchmarks and standards, and promoting the equitable distribution of capital, among others, needed to fuel global markets and strengthen international trade.

2. Encouraging the Comparative Advantage of Countries

Another specific advantage of economic globalization centers on its role in enabling countries to build and focus on their comparative advantage. British political economist David Ricardo developed the classical theory of comparative advantage in 1817 to explain generally why countries participate in international trade.

Comparative advantage is fundamentally the ability of an economy to produce a particular good or service at a lower opportunity cost than other economies, especially its trading partner. It argues that countries engage in trade with one another by exporting goods or services that they have a relative advantage in. This advantage stems from cost-efficiency.

Nevertheless, with regard to economic globalization, comparative advantage explains that countries can achieve mutual benefit through cooperation and voluntary participation in international trade. This is specifically true for countries with trade agreements. Globalization opens doors for countries to achieve a comparative advantage.

An example would be Country A and Country B entering a trade agreement. Country A is efficient at producing corn, although it also has the capabilities to produce sugar. However, Country B is more efficient at producing sugar and has the resources to produce corn. Both will minimize opportunity costs if they trade corns and sugars instead.

3. Macroeconomic and Microeconomic Benefits

A working paper by Fredrick Erixon of the European Centre for International Political Economy highlighted the specific macroeconomic benefits of economic globalization. His report noted that it has boosted output in the Western economy by enabling businesses to specialize while increasing innovativeness and expanding access to capital.

It has also allowed new businesses to compete with old incumbents, thereby lowering the barriers to entry and evening out the playing field. Because the process has fueled further international trade, the trade sector has increased employment rates through competitive and productive exportation and importation activities of trade participants.

Erixon also discussed the positive microeconomic impacts of globalization. These include reducing high inflation rates while increasing real wages by lowering the cost of consumption, reducing gender-wage discrimination and opening new opportunities for women, improving the management capabilities of businesses, and improving working conditions.

Other economic indicators also provide further insights. A 2001 report from the International Monetary Fund by D. Dollar and A. Kraay mentioned that per capita GDP growth jumped from 1.4 percent a year in the 1960s to 2.9 percent in the 1970s and further to 3.5 percent in the 1980s. Per capita GDP growth was at 5.0 percent in the 1990s.

4. Specific Business Impacts of Economic Globalization

A number of businesses have also benefitted from the integration and interdependence of the global economy. Remember that Erixon explained that emerging firms can relatively compete against bigger and more established ones because economic globalization has opened opportunities for innovating, improving processes, and reaching new markets.

Consider outsourcing as an example. Companies in the West outsourced manufacturing and operational capabilities in other regions of the world. Examples include Nike and Apple, which have outsourced manufacturing in Asian countries, as well as other firms, which have outsourced their business processes in countries such as India and the Philippines.

Globalization has also been instrumental in the creation of multinational companies and the further expansion of businesses to other regional markets. McDonald’s is a prime example. This American fast-food chain has expanded in over 100 countries across more than 35000 outlets through a franchising business model.

Amazon is also another notable example. Note that part of its strategy for its Amazon Web Services is to build and maintain regional databases and servers to maximize its global customer reach for its on-demand cloud computing services and platforms while ensuring minimal server downtime and overall service reliability.

The number of mergers and acquisitions, as well as joint ventures has also grown as economies become more integrated. American technology companies have acquired startups outside their borders. Financial services providers such as banks and insurance companies have either acquired or merged with regional competitors to increase their reach and expand their customer bases.

5. Assistance to Underdeveloped and Developing Countries

Remember that the interdependence of countries and other international actors is evident from the creation of numerous international organizations and consortiums. Without a doubt, another advantage of economic globalization is the creation of institutions aimed at extending assistance to underdeveloped and developed countries.

The World Bank has been providing loans and grants to the governments of low-income to middle-income countries aimed at pursuing capital projects. The United Nations have numerous projects and programs aimed at addressing social problems in impoverished countries including poverty and hunger, as well as low literacy rates.

A 2007 Data from the World Bank showed that it provided a total of USD 113.3 million in loans and grants for supporting businesses and other institutions, another USD 335.4 million for rural development and USD 261.2 million for urban development, USD 1.292 billion for electricity infrastructure, and a total of USD 4.654 billion for road transportation projects.

Several large companies have also extended financial and economic assistance to communities across the world through their corporate social responsibility programs. Microsoft has been partnering with local and international non-governmental organizations to promote inclusive economic opportunity and advance access to technology and related services.

Disadvantages of Economic Globalization: Limitations, Negative Impacts, and Criticisms

1. Limited Economic Benefits in Other Countries

It is true that economic globalization has positive impacts on global economies. However, these benefits seem limited. A 2014 empirical study by P. Samimi and H. S. Jenatabadi that investigated economic growth in the Organization of Islamic Cooperation countries showed that the economic benefit of globalization depends on income level.

Specifics of the findings further revealed that high-income and middle-income benefited the most while low-income countries did not experience significant gains. It is interesting to note that these low-income countries must first reach an appropriate income level before they can receive the supposed economic gains from globalization.

The Trilemma of the Global Economy Theory developed and proposed by Dani Rodrick in his 2000 paper also explains why some countries are not benefitting from economic globalization. The theory states that countries can only have two of the three options available: international economic integration, democracy, and the nation-state.

If a country opts to participate in the global economy, it would need to comply with the policies set by supranational organizations, thereby making it impossible for it to maintain either its democratic status or its sovereignty as a nation-state. Pursuing nation-state and global economic integration would result in its citizens losing decision-making capacity.

An analysis by M. L. Fernández referenced the European Debt Crisis to support the merits of the Trilemma of the Global Economy Theory. He explained that the crisis that affected countries such as Spain and Greece resulted from a dictatorship market in which citizens have lost some level of their democratic rights to meet international economic needs.

Fernández concluded that international economic integration is not complete yet. The dictatorship market has created more inconveniences for several countries. However, he noted that the impacts of economic globalization remain positive albeit limited due to the problems stemming from inconveniences and heterogeneous results.

2. Increases Exposures to Risks from Localized Crises

A look into some of the major events in modern history would reveal numerous instances of economic crises transpiring either at the industrial or global levels. From an industrial level, consider the 2020-2022 Global Chip Shortage as an example, which has affected the consumer electronics and automotive industries, among others.

The shortage is primarily a supply chain problem in which demand for integrated circuits is higher than the supply. The commonly cited causes of the shortage include the global COVID-19 pandemic, the trade war between the United States and China, numerous severe weather incidents, and internal problems in some manufacturers.

An analysis by Goldman Sachs revealed that the shortage has affected more than 169 industries in different sectors across the world. Specific impacts include lower production outputs, increases in manufacturing costs and end-use prices, and significant losses. Nevertheless, the issue demonstrates the offshoot of a globally integrated supply chain.

Global economic crises are also prime examples of risks associated with economic globalization. The 2008 Financial Crisis, which stemmed from housing and subprime mortgage problems in the United States, had impacted businesses and economies with significant exposure to American commercial and investment banks, and other financial institutions.

The Eurozone Debt Crisis, which started around 2008 and 2009, stemmed from excessive borrowing from selected European Union governments and structural problems in some of these countries, as well as exposure from the 2008 Financial Crisis, which began in the United States. The crisis affected the rest of the European Union and other exposed countries.

3. Capital Flight and Brain Drain in Other Countries

The integration of economies has made it easier for investors to access financial markets outside their home countries. Hence, another disadvantage of economic globalization is that it eases the process of capital flight. Note that in economics, capital flight occurs money or assets flow out of a country due to localized or internal economic, as well as sociopolitical issues.

While individual and institutional investors are free to invest their assets in most countries, capital flight has negative consequences. These include the disappearance of wealth in a particular country and the subsequent drop in the exchange rate, thus resulting in the devaluation of the local currency, inflation, and the loss of purchasing power of the citizens.

The economic crisis in Argentina, which transpired in 2001, was partly a result of massive capital flight. Local investors felt the need to channel their assets outside their home country out of fear that their government would default on its external debt, as well as concerns over the artificially low fixed exchange rate and large levels of reserved foreign currency.

Apart from the flight of financial assets from a particular country, another similar phenomenon is human capital flight, which transpires due to the emigration or immigration of individuals from their home countries to foreign countries. These home countries experience a so-called brain drain while the receiving countries can experience a so-called brain gain.

Globalization has made migration easier for individuals. Note that in the Philippines, several white-collar and blue-collar professionals have decided to work in foreign countries due to better career opportunities that provide better salaries. In some situations, the negative effect of human capital flight centers on how it depletes the local labor market.

4. Economic Globalization and Impacts on Sustainability

Remember that one of the notable advantages of economic globalization is that it has been instrumental for businesses to achieve unprecedented economic growth, particularly due to international trade, cross-border exchange of resources and capabilities, and expansion of their local operations and market reach into international markets.

However, as these business organizations strive to sustain the gains they have received from their participation in the global economy, they have also ramped up the need to maximize profitability by increasing productivity and expanding their market reach while lowering the costs and taking into consideration existing competitors and new entrants.

The phenomenon called “race to the bottom” has been considered as an offshoot of globalization. In their attempt to maximize profitability, several businesses establish operations and presence in regions or countries with less stringent environmental regulations. The phenomenon undeniably creates sustainability issues.

Findings from a 2020 cross-sectoral analysis by O. Taherzadeh, M. Bithell, and K. Richards involving 189 countries revealed that economic globalization has affected the security of global supply chains due to the overexploitation of land, water, and energy resources. Countries that participate in international trade exhibit greater exposure to resource risks.

Critics have noted that businesses and economies have exploited naturals resources for short-term gains. Some of the more specific negative environmental impacts of economic globalization include increased emissions, destruction of habitats, illegal deforestation and overfishing in coastal areas, dependence on cash crops, and decreased biodiversity.

FURTHER READINGS AND REFERENCES

• Dollar, D. and Kraay, A. 2011. “Trade, Growth, and Poverty.” Finance & Development: A Quarterly Magazine of the IMF. Available online
• Erixon, F. 2018. The Economic Benefits of Globalization for Business and Consumers. European Centre for International Political Economy. Available online
• Fernández, M. L. 2016. “Challenges of Economic Globalization.” Revista de Relaciones Internacionales, Estrategia y Seguridad. 12(1): 23-50. DOI: 18359/ries.2462
• Ricardo, D. 1817. On The Principles of Political Economy and Taxation. John Murray
• Rodrick, D. 2000. “How Far Will International Economic Integration Go?” Journal of Economic Perspectives. 14(1): 177-186. DOI: 1257/jep.14.1.177
• Samimi, P. and Jenatabadi, H. S. 2014. “Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities.” PLOS One. 9(4): e87824. DOI: 1371/journal.pone.0087824
• Taherzadeh, O., Bithell, M., and Richards, K. 2021. “Water, Energy, and Land Insecurity in Global Supply Chains.” Global Environmental Change. 67: 102158. DOI: 1016/j.gloenvcha.2020.102158