The Global Economy

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The rise of technology has allowed our environment to be characterized as a global one. “The global economy gave business the ability to market products and services all over the globe. It has also allowed them to develop partnerships and alliances throughout the world, which has become essential for success in today’s business.”^[1] Prior to Globalization, the United States dominated the global economy. In recent years, however, the U.S. share of the global economy has shrunk to approximately 25% and will continue that trend as the economies of many Newly industrialized countries continue to pick up steam.

Advantages

There are numerous advantages to the shift to a global economy. A major one being the possibility to increase benefits from economies of scale. The breaking down of global barriers allows companies to benefit from the largest and cheapest workforces, raw materials and technology. For example, “many North American publishers actually write and produce much of their software in countries such as India.”^[1] Other advantages that companies benefit from include: the opportunity for smaller companies to expand globally quicker, having more choices when recruiting a workforce and lastly the opportunity to target a larger customer base (which translates to greater earning potential). A global economy would also help in promoting international cooperation and peace. If countries are dependent upon one another's economic success then armed conflict would be less likely. For instance, both India and Pakistan possess nuclear capabilities and are oftentimes in dispute over land territory such as Kashmir. It is likely that these two countries will not enter into nuclear combat for the severe negative effects on their economies. Essentially it would be mutually assured destruction (MAD) on a financial level.

Disadvantages

One disadvantage of a global economy is the increased need for transportation due to less local production. Increased transportation leads to increased emissions of greenhouse gases.

Another disadvantage of a shift towards a global economy is the argued loss of domestic jobs. Certain labour-intensive industries (like textile and even parts of the software development industry) tend to shift their production from developed countries to developing countries where wages are lower. This shift, it is argued, not only increases the unemployment rate in the developed countries, but in some cases leads to exploitation of third world workers, in particular, children. In contrast, many economists believe that the loss of domestic jobs is a temporary state, which will be offset by other industries if the barriers of trade are kept low.

Other disadvantages include: increased instability as was seen during the Asian crisis; the inability to create globally uniform regulations and legislation, which leads to phenomena like tax havens.

Economies of Scale

Economies of scale represent a particularly important source of increasing returns. Economies of Scale are unit cost reductions associated with a large scale of output.^[2] In many cases international trade results in a country specializing in the production of a certain good, and if economies of scale results, then the output of that good expands and therefore the unit cost will decrease. To fully realize the benefits of economies of scale, the good in that area must be a substantial proportion of the total world demand. This is because in many cases the world market is only able to support a limited number of firms in a certain country. The world market determines their level of support by the product demand and also by the number of other countries in the world that are producing the same product. A recent example of this would be the EU banana dispute and the European Union has been forced by the WTO to decrease their levels of subsidies going to their former colonies. By decreasing the EU funding the WTO is trying to create a more level playing field for the rest of the banana growing regions so that true economies of scale can emerge.

The Global Economy

This increase in globalization has created many new opportunities, such as niche markets, and requires everyone to keep up with globalization in order to stay competitive. As David Shane points out in his article entitled "Youth must learn skills to succeed in Global Economy", “Technology and trade separate the economy into two camps -- those with the skills to participate in the global economy and those who lack them.” Shane indicates that advances in technology are giving developing countries the ability to compete directly with developed countries in terms of education and skills. With the ever increasing Global Economy and widespread use of the internet, people and businesses are realizing that they are often competing with people around the world for contracts and business deals.

The Global Economy has created an environment in which many large corporations are becoming transnational firms. This trend has developed in to a worldwide ‘race-to-the-bottom’ where companies are so focused on staying competitive that they often outsource production to developing countries with the lowest labour, environmental and economic standards.^[3][4] While these business practices allow companies to save money, leading to larger returns for investors and more affordable products for their clients, while at the same time balancing the world economy, it also serves as a motivation for governments in developing nations to keep their legislation lax when it comes to labour and environmental laws. These transnational corporations often lobby their government in order to gain access into these developing countries. Still, many developed countries have protectionist policies that do not enable developing countries to export their goods into developed markets. Trade barriers more often hamper economic development in the Global South, as compared to the North. New technologies like the internet may speed up the reduction of trade barriers. The expanding Global Economy and the reduction of trade barriers will create harder competition for the previously protected companies in developing countries, but maybe also new possibilities in Global markets for new emerging companies like Haier (China) and the Tata Group (India).^[5] In 2006 the global economy continued to expand so that most individual, corporate and government borrowers are making good on their obligations, which in turn has kept financial markets in clover.^[6]

Notes and references

See also

• World economy
• Globalization

External links

• "The global economy: organization, governance, and development", by Gary Gereffi
• "The ABCs of the Global Economy" from Dollars & Sense Magazine