What is economic globalization?

Economic Globalization refers to the mobility of people, capital, technology, goods, and services internationally. It is also about how integrated countries are in the global economy. It refers to how interdependent different countries and regions have become across the world.

In the eighteen hundreds in the world economy generally, people and capital crossed borders with ease, but not goods. In this century, people do not cross borders easily, but technologies, capital, and goods do.

The digital age has facilitated the rise of remote work and virtual services, which allow human capital to contribute economically across borders without physical relocation.

Rapid expansion

Over the past two to three decades, under the framework of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization, economic globalization has been expanding at a much faster pace. Countries have rapidly been cutting down trade barriers and opening up their current accounts and capital accounts.

Economic Globalization Car Industry
When you buy a Toyota car, its parts have probably been produced in several different countries. Toyota is one of hundreds of companies with globalized operations.

This rapid increase in pace has occurred mainly with advanced economies integrating with emerging ones. They have done this by means of foreign direct investment and some cross-border immigration. They have also reduced trade barriers.

In some regions of the world, such as the European Union, a large area almost the size of a continent has opened up to the free movement of capital, labor, goods and services. The North American Free Trade Agreement (NAFTA) opened up the free movement of goods and services, but not labor.

Cuba and North Korea are among the most autarkic (self-sufficient) and isolated nations on the planet. The two countries are the last bastions of the Soviet economic model.

Economic globalization linked to greater wealth and inequality

While becoming more integrated into the global economy tends to bring increased wealth to a nation, globalization is commonly linked to greater inequality.

According to the United Nations:

“Economic globalization refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. It reflects the continuing expansion and mutual integration of market frontiers, and is an irreversible trend for the economic development in the whole world at the turn of the millennium.”

Economic development, apart from GDP growth, also includes improvements in literacy, life expectancy, and people’s well-being.

Does globalization cause wealth inequality
The big debate: ‘Does globalization bring inequality, or is it just coincidence?’ (Data Source: The Atlantic)

Advances in science and technology

The United Nations says the fast globalization of the world’s economies over recent decades is mainly due to the rapid development of science and technologies. They have created an environment in which the market economic system can spread across frontiers.

For example, the Internet and electronic communications today mean that businesses can employ workers from virtually anywhere in the world, and can trade in several countries at the same time without having to physically open up branches there.

Thanks to scientific and technological progress, transportation and communication costs today are just a fraction of what they used to be. Compared to 1930, current shipping costs are today about 50% cheaper, airfreight costs are now just 1/6 of what they were 85 years ago, while communication costs are just 1% of what they were.

With what it used to cost to buy a computer in 1960 (in today’s dollars), you could buy 125 of them by 1990, and four times that number by 1998. All these advances in science, technology and communications have helped drive economic globalization.

The Internet and electronic communications have allowed advanced economies to outsource many of their jobs offshore. In the US, Canada, and EU, millions of jobs have been transferred abroad. Call center positions, especially, have gone overseas. These jobs have gone mainly to India, the Caribbean, and other English-speaking emerging economies.

The economic systems that exist in the world today are much more complex than in ancient times, when humans survived by hunting and subsistence farming.

Globalization of the automotive industry

Today, the automotive industry has companies producing vehicle parts and then assembling them in several countries. Most current parts production, assembly and vehicle sales take place in integrated regions.

These car production regions include MERCOSUR in Latin America, ASEAN in Asia, and NAFTA in North America. The also include the European Union and CIS for the former Soviet Bloc countries.

Within those regions, certain countries stand out – in China, Brazil, Mexico, Russia and India, car production and assembly have increased dramatically over the past 20 years.

The city of Detroit in the United States is still synonymous with auto manufacturing. America’s ‘Big Three,’ i.e., Ford, General Motors and Chrysler, are still based there. However, the expansion in those three companies’ operations have occurred outside the city, and mainly abroad.

Patrice Hill wrote in the Washington Times in August 2013:

“The ‘Big Three’ long ago moved some of the biggest chunks of their production, jobs and plants to places as near as Ohio and Ontario and as far away as China, Brazil and Russia. Without the plentiful factory jobs and incomes that once made Detroit a wealthy and teeming metropolis, the city steadily deteriorated into a hollow shell of vacant buildings and weed-covered lots. Last month, it became the largest American city ever to declare bankruptcy.”

Does globalization bring more inequality?

As the world has become more economically globalized, so has the income and wealth inequality within countries. Some people believe globalization is the cause – this has so far been difficult to prove.

They argue that if companies have access to the whole world market, and most of those companies are located in a few countries – the US, EU and Japan – they will suck money out of the whole world in much greater quantities than if they sold just within their own markets.

The counter-argument is that globalization brings well-paid jobs (compared to local pay rates) to emerging economies. A Ford factory worker in Mexico earns more and has better workplace conditions than he would as a farm laborer.

When looking at inequality between nations, however, globalization has coincided with more equality between the advanced and emerging economies. The rich countries today represent a smaller percentage of global GDP compared to twenty or thirty years ago.

Wealth inequality is not only a problem within emerging and low-income nations – it is also increasing in the advanced economies.

Janet Yellen, who is currently the US Secretary of the Treasury, and formerly headed the Federal Reserve System of the United States (America’s central bank), said in a speech at the Conference on Economic Opportunity and Inequality at the Federal Reserve Bank of Boston in October 2013 that wealth inequality in the US has widened since 1990.

Ms. Yellen added that there are still opportunities in the country to bridge the wealth and income gap.

Building on this, initiatives focused on financial education and technological access are increasingly viewed as vital tools to empower individuals and promote more equitable economic participation in the globalized market.

Moreover, the emergence of global digital platforms has opened new pathways for entrepreneurship, enabling even small-scale producers to reach international markets and contribute to the diversification of economic globalization.

Two Videos

These two YouTube videos come from our sister channel, Marketing Business Network or MBN. They explain what the terms “Economic Globalization” and “Global Economy” mean using easy-to-understand language and examples:

  • What is Economic Globalization?

  • What is the Global Economy?