Globalisation and Economic Development

- Economic growth - refers to the increase in the production of G/S within an economy over a period of time

- Measured by

1. Real GDP: adjusted for inflation to reflect actual growth for an eco
2. Real GDP/capita: divides GDP by population to show average income levels

- Economic development - refers to the improvement in a country’s overall standard of living, including income, education, healthcare and QOL

- Measured by

1. HDI: combines life expectancy, education and income
2. Gini coefficient: measures income inequality
3. Multidimensional poverty index: assesses poverty beyond just income

Distribution of income and wealth in the global economy

Evidence of closing income gaps

1. The percentage of people now living in extreme poverty has declined with around 9% population living below US$2.15 per day in 2023, compared to 43.8% in 1981
2. The under-five mortality rate has been reduced by around 55% between 1990 and 2022
3. The global primary school net enrolment rate increased from 81 to 90% between 1996 and 2018
4. Life expectancy for those born in countries with low human development increased from 50 to 62 between 1990 and 2022

Evidence of worsening income gaps

1. An estimated 712m people live in ‘extreme poverty’, subsisting on less US$2.15 per day in 2023, with around 90m people in poverty because of the impact of the covid-19 crisis.
2. Around ⅔ of this population lives in Sub-Saharan Africa (risen since 1990)
3. Over 1.5b people live without access to basic sanitation and around 700m have no access to electricity
4. Estimated 5m children under 5yo died in 2022 - inequality contributes to the death of at least 1 person/4 seconds
5. Estimated 108m refugees and forcibly displaced people, who fled their homes because of violence of persecution
6. Around 14b covid vaccines were administered globally, and low income nations account for 9% of population but only 2% of doses

Differences in income and eco growth

1. Most popular method to compare living standards is GNI (gross national income) - sum of value added by all resident producers + receipts of primary income from foreign sources, measuring the ability of a nation’s citizens to satisfy their material wants
2. A limitation is the ER used, as by using USD we can make inaccurate comparisons about the living standards of developing countries → economists usually make an adjustment using purchasing power parity (PPP) before comparing GNI levels between countries
3. Low income ecos make 9% of population but less than 1% global income, high income ecos make up 1.2b people out of 8b people but hold 50% global income
4. High income regions globally enjoy 5x income of low income regions
5. Almost all nations have had eco growth as a result of higher GDP, but the reduction of income inequality is happening very slowly globally
6. Another dimension to global inequality is the unequal distribution of global wealth

Categories of eco development in the global economy

Reasons for differences between nations

Global reasons for differences

Global trade system

Several features of the global trade system reinforces inequality instead of reducing it

1. Wealthy countries protect their domestic ag sector because it isn’t competitive with ag producers in developing countries → nations that export commodities are affected by high protectionism in the agricultural sector as ag support has fallen 20% in the OECD since 1990s
2. Regional trading blocs like USMCA exclude poorer nations from gaining access to global consumer markets, impacting poor countries due to trade diversion
3. The benefits of FTAs are often not accessible to developing nations due to the substantial cost in implementing international agreements and lodging appeals against other nations’ protectionism

Global financial architecture

Although deregulated global financial markets create development opportunities by enabling free flow of funds, it can also worsen inequality

1. Since 2000s, developing ecos receive ⅔ FDI flows, but faster growing emerging ecos like China, Brazil, India and Russia benefited the most, with LDCs receiving only 2.3% FDIs in 2023
2. Short term financial inflows favour more prosperous emerging ecos that offer higher ROIs for currency and stock markets → exposed to volatility as a result and can set eco development years back in crises while speculators move to other nations
3. International financial rules haven’t kept pace with the globalisation of the economy and in some areas have tolerated loopholes that make wealthy countries richer (e.g. corporate tax avoidance costs developing ecos majority of 240b annually)

Global aid and assistance

The small scale efforts made by developed countries to address inequality is generally insufficient

1. The total level of development aid by high income ecos reached 224b in 2023 but this was half the amount of promised by them since the 1970s (0.7% GNI) and 5 members of OECD met the target
2. Critics of the aid policies of developed ecos argue that a significant proportion of assistance is ‘phantom aid’ - funds that don’t improve lives of the poor (1/6th is paid to consultants in the donor country, 11% is debt servicing and 5% is admin → doesn’t aid poverty)
3. Significant proportion of aid is ‘tied aid’ - aid that must be spent on overpriced/unnecessary G/S that are produced in the donor country (e.g. when USA provides food support, it gets them to buy American crops rather than develop their own, making it more expensive)
4. If foreign aid is granted without appropriate governance mechanisms/not to developing domestic industries, it can be wasted or have bad effects as the money can be misused (e.g. war)

Global technology flows

Tech has the capacity to contribute to closing gaps in living standards but can also worsen them

1. New tech can be adopted quicker in economies w/ better infrastructure, education and good tech already → rich get richer and poor get poorer → 93% of high income ecos’ population has internet while only 27% of low income ecos’ population have it
2. As world became more reliant on digital markets and tech, gaps in developing countries’ access to tech worsens inequality
3. New techs are geared to the needs of high-income ecos because they choose the priority areas of scientific research → they deal with health issues of aging people in advanced ecos rather than infectious diseases in low income ecos amongst younger people

Domestic reasons for differences

Natural resources (land)

1. Important inputs for production like energy supplies, agricultural land, water and minerals
2. Ecos with an abundance of these are more likely to develop compared to ones without it (e.g. oil rich countries in middle east exploit natural resources and grow faster than neighbours)
3. However, these nations can be too reliant on exports, having narrow export bases and overvalued ERs, and drops in global commodity prices causes significant impacts on them

Labour supply and quantity

1. High income ecos have expensive labor which is highly educated and skilled labor resources while low income is the opposite (low edu, low health standards, low productivity and high population)
2. Lower quality of labour leads to worse production and hence less export opportunities, lowering eco development opportunities for these nations
3. Barriers to girls’ access to education in developing countries leads to lower workforce participation

Access to capital and indebtedness

1. Difficulty in gaining access to capital for investment leads to lower growth rates and living standards
2. Low income levels and bad financial systems provide little opportunity for savings and investment
3. Microfinance organisations in many developing ecos provide small loans to help poorest people in the world to manage farms or start businesses

Entrepreneurial culture

1. A country’s history and social institutions impact economic success, as strong civil society institutions, cultural disapproval of corruption, respect for law and aspirations towards work and enterprise support economic growth and development

High levels of inequality

1. Large gaps in distribution of income are a common characteristic of developing countries, as it leads to higher poverty rates and leads to lower eco growth opportunities

Exposure to climate change impacts

1. Another factor that influences inequality between countries is exposure to climate change
2. Extreme weather events harm crop yields while rising sea levels puts coasts at risk, taking large portions of the govt budget
3. Natural disasters reduce opportunities to access resources, also lowering growth in some nations → low income ecos already have minimal resources to address climate change

Impacts of Globalisation

Economic growth and development -

1. GDP growth has increased from 3.1%/yr in 80s to 3.8% from 2000 until pandemic
2. Convergence - many emerging economies have caught up with advanced economies
3. East Asia Pacific region - 8.7%/yr in 2000s, 7.3% in ‘10s & China grew 10.4% in 2000s and 7.7% in ‘10s → region grew by 3.4% in ‘22 (impact of covid) → more stats in booklet
4. India grew 6.5%/yr from 2000 to pandemic and most other mid income ecos were 3-4%
5. Advanced ecos only rose 2%/yr in 1990-2020 (more exposed to financial crises, shifting production overseas benefits other ecos more than adv, adv eco are already developed, not much to grow)
6. Remarkable growth of dev ecos indicates more integrated nations and better living standards → improved edu and healthcare

Income inequality -

1. Production shifted to cheaper labor countries → demand for high-skilled workers increases, raising their wage and neglecting lower-skill workers → brain drain
2. Domestic firms have to face international competition, low skilled workers and firms may get driven out by better exports → rising income inequality as only competitive firms will survive, which all have high pay
3. Globalisation increases adoption of tech which can displace low skill workers
4. Advanced economies still have more control over high value industries and assets
5. Overall gini coefficient fell to 0.67 (lowest since 1870s) due to rapid growth of emerging ecos

Trade, investment and TNCs -

1. Trade flows hit 66tr and FDI hit 49tr in 2023, both growing rapidly
2. Goods produced in supply chains through vertical specialisation where nations focus on 1-2 parts of production process account for 80% of global trade now → significantly disrupted during covid raising prices due to transport delays
3. International conflicts altered export paths and worsened supply chains more, raising inflation
4. Most FDI flows go to developed ecos, contributing to worse income inequality and short term financial flows can cause unstable economies due to speculative behaviour
5. TNCs have grown significantly and aid world eco through more output and employment but they can exploit labour and environment in developing ecos + they don’t benefit local suppliers much

Enviro sustainability -

1. Pollution Haven Hypothesis - foreign investment from high income economies can be attracted to developing economies which have less strict enviro regulations and costs of productions are lower as methods harm the environment (e.g. unsustainable fishing, deforestation)
2. Estimated 95tr to hit net 0 emissions globally
3. COP28 had 700m fund for dev ecos to deal with climate change, but estimated 400b/year is required → ‘23 conference ended with decision to phase out fossil fuels
4. Paris agreement + UN also aiming to reduce global carbon emissions and climate change impacts

Financial markets -

1. Positives: Liquidity, capital allocation, cross border integration, diversification and support of infant industries, economic growth
2. Downsides: investor preference can lead to shift in exchange rate → economic shocks → recessions and unemployment (shown during GFC)

International business cycle -

1. Faster eco growth in int business cycle as specialisation of production occurs (comp adv theory) + trade increases - improved living standards as a result
2. Greater synchronisation of economies but can lead to financial contagion in crises
3. Higher need of coordinating macroeconomic policies reduces individual choices of nations as they have to consider others as well