Topic 4: Impact of Globalization on the Standard of Living

1. GLOBAL ECONOMIC ISSUES
Topic 4: Impact of Globalization on
the Standard of Living
By: MADDY.KALEEM

2. AGENDA
 Variations in the Standard of Living
 Income and Quality of Life Indicators
 Difference between Growth and Development
 Reasons for Difference between Nations
 Types of Economies in the Globalized World
 Impacts of Globalization
By: MADDY.KALEEM

3. VARIATIONS IN THE STANDARD OF L
IVING
 Despite the advances over the past century, there are har
sh inequalities between wealthy and poor countries:
 1.4 billion people live in extreme poverty on less than US1
.25/day.
 Richest 5% of people in the world earn 165x the in
come of the poorest 5%.
 30,000 children die each day from poverty‐related pre
ventable diseases.
 However, living standards have been improving in both de
veloping and developed nations.
 Between 1982 -2005 those living in extreme poverty fell from
52% to 25%.
 Life expectancy in developing nations from 56 to 67 ye
ars between 1970 and 2007.
 Primary education completion rate increased in de
veloping countries to 85% in 2007.
By: MADDY.KALEEM

4. INCOME AND QUALITY OF LIFE
INDICATORS
 The most popular method to compare living st
andards between nations is to compare inc
ome as it measures the ability of citizens to sa
tisfy their needs.
 Gross National Income (GNI) is the sum of val
ue added by all resident producers in an econ
omy plus receipts of primary income from foreig
n sources.
 Real GNI is calculated by accounting for the ef
fects of inflation.
By: MADDY.KALEEM

5.  The size of the population and rate of population
growth vary between countries and allowances ca
n be made by dividing the real GNI of each coun
try by its population – GNI per capita.
 Human Development Index (HDI):An alternative
to the GNI is the HDI to measure economic de
velopment.
 It takes into account:
 Life expectancy at birth: Indicative of the hea
lth and nutrition standards of a country.
 Levels of education attainment: HDI measures adult
literacy and ratio of people that have completed pri
mary, secondary and tertiary education.
 GDP per capita: Used as a measure of a decent st
andard of living and is essential in determining acce
ss that people have to goods and services
INCOME AND QUALITY OF LIFE
INDICATORS
By: MADDY.KALEEM

6. DIFFERENCE BETWEEN GROWTH AND
DEVELOPMENT
 Economic growth is simply a percentage i
ncrease in GDP/capita.
 Economic development is broad measure of
welfare in a nation that includes:
 indicators of health,
 education,
 environmental quality, and
 material living standards.
By: MADDY.KALEEM

7. REASONS FOR DIFFERENCES B
ETWEEN NATIONS
 Global Factors:
 Global Trade System: Some features of the global trade sy
stem reinforce rather than reduce global inequalities
 Western economies protect their domestic agriculture sector
because it is not competitive with producers in developing nat
ions.
 Developing countries experience high levels of global pr
otectionism in the agricultural sector .
 Expanding regional trade blocs such as the EU and NAFTA
exclude poorer nations from access to these lucrative ma
rkets.
 This has an enormous impact on poor countries.
 High ‐ income nations have resisted making concessions on
issues that would provide great benefit to developing countries
such as at the Doha Round.
 They can then use regional and bilateral agreements to ga
in access to markets where developing nations cannot barg
ain as a group.
By: MADDY.KALEEM

8.  Benefits of free trade agreements are not always available to de
veloping nations due to the high costs of administration and the c
omplexity of the WTOs procedures.
 Global Financial Architecture:
 Long term international flows of investment heavily favour deve
loped countries.
 High income economies received around 2/3 of all FDI in 2007
 Short term financial flows often favour those “emerging markets” that
offer better returns for speculators however these areas also experie
nce the greatest economic volatility which can set back economic
development decades while speculators move onto other markets.
 The IMF is criticised that its structural adjustment policies serv
e the interests of high income economies.
 As a result of greater access to financial markets, many developing
countries have massive foreign debt burdens irresponsible
lending practises by rich ‐ country financial institutions.
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

9.  Global Aid and Assistance:
 The total level of development aid provided by high in
come economies was only 0.3% of GWP in 2008.
 This level is well below the goal of 0.7% of GDP that hi
gh income economies have been committed to.
 There is also a risk that high income economies may cu
t aid to help pay off the deficits caused by the GFC.
 Critics claim that the majority of the aid given is “phantom
aid” – aid that does not improve the lives of the poor.
 Money is spent on paying for “technical cooperation” (c
onsultants) as well as being wasted on administration cost
s.
 The distribution of aid usually represents strategic and mil
itary considerations rather than the need of the world’s
poorest countries.
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

10.  Global Technology Flows:
 High income economies choose the priority area
s of scientific research and development.
 Much of this technology deals with the health pr
oblems of an ageing population in rich cou
ntries and little to do with poor nations whose
health risks involve common infectious diseases.
 Developing nations find it difficult to gain acc
ess to new technology.
 IP rights restrict the benefits of technological
transfer to poor nations because they cannot pay
developed country prices for the technology.
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

11.  Domestic Factors:
 Economic Resources:
 Natural resources: are important inputs for the production of high
er ‐ value added manufactured goods and services.
 Economies that have an abundant and reliable supply of cheap nat
ural resources have better opportunities for economic devel
opment than those who do not.
 Abundance of natural resources may also be a negative which can h
amper a country’s economic development if it leads to an overvalued
exchange rate, narrow export base and becoming over reliant on a
small number of industries to drive economic growth.
 Labour supply and quality: Labour is an important factor in beco
ming the most important input to the production process.
 High income economies tend to have highly educated and skilled la
bour resources whereas low income nations are characterised by high
population growth, poor education levels and low health standar
ds which reduces the quality of labour.
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

12.  Access to capital and indebtedness: Difficulty in gaini
ng access to capital for investment and develo
pment in low income nations also contributes to lowered
living standards.
 Low levels of savings are largely a result of low income le
vels and this creates a self ‐ perpetuating cycle of low
investment levels and slow expansion.
 Enterprises in countries with high levels of foreign deb
t often find it difficult to gain access to funds.
 Entrepreneurial culture: Evidence suggests that a cou
ntry’s history and social institutions can impact on its
economic success such as the values of individual
responsibility, enterprise, wealth creation and a strong wor
k ethic.
 These values can assists the industrialisation process towa
rds sustainable economic development
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

13.  Institutional factors: Institutional factors in indivi
dual economies can have influences for busines
ses.
 Political instability, corruption, and law of law
enforcement tend to undermine investor co
nfidence who will be reluctant to undertake risks
if they business interests are threatened
by inadequate structure for resolving legal dis
putes.
REASONS FOR DIFFERENCES B
ETWEEN NATIONS
By: MADDY.KALEEM

14. TYPES OF ECONOMIES IN THE GLOBALIZED
WORLD
 Developing Economies:
 These countries suffer from low income levels, we
ak human resources and have only experienced limit
ed industrialisation.
 A large number of people live in absolute poverty (l
ess than US1.25/day).
 High levels of income inequality.
 Dependence on agricultural production for income, e
mployment and trade.
 Reliance on foreign aid and development assistance
 Low levels of labour productivity, industrialisation,
technological innovation and infrastructure dev
elopment.
 Weak political and economic institutions.
By: MADDY.KALEEM

15.  Newly Industrialised Countries (NICs):
 Economies experiencing rapid economic change and i
n transition from being developing economies to high‐
income economies.
 NICs have been the fastest growing group of econo
mies pursuing growth through export led
development and encouraging large inward flows of F
DI.
 Transition Economies:
 Were socialist economies prior to the collapse of s
ocialism.
 These economies have attempted and extraordinary
transformation from centrally planned economies to
market economies.
TYPES OF ECONOMIES IN THE GLOBALIZED
WORLD
By: MADDY.KALEEM

16.  Reforms include privatisation of state own enterpri
ses, financial market liberalisation and shift
towards western‐style economic and political insti
tutions.
 High‐Income Economies:
 Countries with high levels of economic develop
ment and close economic ties with each other as
well as liberal ‐ democratic political and
economic institutions.
 High ‐
income countries have a GNI per capita about U
S$11, 906.
 Includes 27/30 of the OECD countries.
TYPES OF ECONOMIES IN THE GLOBALIZED
WORLD
By: MADDY.KALEEM

17. IMPACTS OF GLOBALISATION
 INTERNATIONAL CONVERGENCE
 Globalisation appears to be contributing to a co
nvergence in living standards.
 Over the last few decades, developing e
conomies have been “catching up” to developed
high ‐income economies.
 Transition economies are now growing faster an
d economic growth in the first wave of NIE’s
has slowed now that living standards in
those countries have risen to similar levels as fo
r high income economies.
By: MADDY.KALEEM

18.  ECONOMIC GROWTH ,
DEVELOPMENT AND THE QUALITY OF LIFE
 Globalisation is said to offer the nations of the world the
opportunity to experience economic growth and develo
pment and to improve the quality of life for their
citizens however, not all countries have benefitted equally
from globalisation.
 The “winners” from globalisation are those countries that ha
ve embraced international trade, foreign investment and th
e participation of TNC’s however some features of
globalisation have had negative impacts on the global ec
onomy.
 For example, countries in Africa have suffered negative gro
wth due to high levels of foreign indebtedness.
 If globalisation raises economic growth and therefore raise
s income levels then this can have a positive effect.
 If however, the distribution of income is uneven then this
will have a negative effect on the quality of life.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

19.  TRADE, INVESTMENT AND TRANSNATIONAL CORPORATIONS
 The process of globalisation has resulted in substantial increases in
the size of tradeflows and foreign investment.
 Because of the key role played by TNC’s in trade and investment
flows, they are increasingly dominating business activity around the
world.
 Due to the nature of the global economy, there can be multiple int
ernational trade transactions in the process of manufacturing a good.
 The globalisation of financial markets has seen an increased reli
ance on foreign sources of finance for investment.
 FDI is now playing a greater role in creating more economic act
ivity around the world.
 However, the flow is FDI funds are usually targeted at those cou
ntries with favourable economic prospects and only a trickle to
those LDC’s (Least Developed Countries).
 A major criticism of TNC’s is that because they do not operate under t
he laws of one country, they can move production facilities to co
untries with weak government regulations.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

20.  DISTRIBUTION OF INCOME AND WEALTH
 Globalisation has resulted in increased world income a
nd wealth but the distribution of this increase has b
een very unequal.
 A number of countries have gained very little or eve
n nothing from globalisation.
 Even though increased FDI flows fuel economic gr
owth, they tend to be focused on the higher skill
ed and technology sectors favouring those who
are already better off, increasing inequality.
 Globalisation has increased openness to trade which pr
ovides more export opportunities raising the inco
me of agricultural workers in developing countri
es.
 A lower tariff on imports reduces the prices of go
ods and improves living standards.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

21.  ENVIRONMENTAL CONSEQUENCES
 Globalisation can have a negative impact on th
e environment.
 Developing countries may engage in economic b
ehaviour that is detrimental to the envi
ronment to attract foreign investors.
 Globalisation also offers the chance to protect th
e world’s environment from harm by forcing coun
tries to own up to their environmental responsi
bilities.
 It makes the costs of preservation able to be s
hared and facilitates the transfer of env
ironmentally friendly technology.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

22.  FINANCIAL MARKETS
 Financial markets shift large amounts of mon
ey very quickly and this can sometimes have d
evastating effects when a sudden loss in
confidence arises.
 The exchange rate can collage leading to a s
hock in the economy, recession, rising un
employment and increased poverty.
 The financial markets behave in unpredictable
ways and this can pose a large threat to the gl
obal economy like a “giant wrecking ball”.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

23.  THE INTERNATIONAL BUSINESS CYCLE
 Close linkages between economies hold both benefits a
nd risks:
 Benefits: achieve faster rates of growth by specialisation an
d engaging in trade.
 Risks: exposed to downturns in the international bus
iness cycles and developments in the region.
 IMPLICATIONS FOR GOVERNMENT ECONOMIC POLIC
IES
 Globalisation has led to greater similarity of economic poli
cies around the world.
 The Washington Consensus outlines market‐friendly poli
cies:
 Fiscal discipline
 Redirection of public expenditure towards education, he
alth and infrastructure investment.
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM

24.  Tax reform broadening the tax base and cutting mar
ginal tax rates
 Interest rates determined by market forces and are
positive but moderate
 Competitive exchange rates
 Trade liberalism
 Openness to foreign direct investment
 Privatisation of state enterprises
 Deregulation: such as those that impede entry or re
strict competition except for those justified on safety, e
nvironmental and consumer protection ground.
 Legal security for property rights
IMPACTS OF GLOBALISATION
By: MADDY.KALEEM