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Colour Coded Approach to A2 Macro Exam Skills – Globalisa;on Ques;on
Assess the view that the main cause of globalisa4on is the increased significance of transna;onal companies (20)
Knowledge Applica;on
Analysis Evalua;on
Assess the view that the main cause of globalisa4on is the increased significance of transna;onal companies (20)
Globalisa;on is a process of deeper integra;on and inter-‐dependence between countries evidenced by rising trade-‐to-‐GDP ra;os, cross-‐border capital flows and labour migra;on. TNCs base their manufacturing, assembly, research and retail opera;ons in numerous countries. Many TNCs have become synonymous with globalisa;on such as Apple, Wal-‐Mart, Google and Samsung. Google has offices in more than 60 countries and the leading 500 TNCs account for nearly 70% of world trade. TNCs are a key driver of globalisa;on because they have been re-‐loca;ng manufacturing to countries with rela;vely lower unit labour costs in order to increase their total profits and returns for shareholders. For example VW, Nissan and General Motors all have bases in Mexico which helps this country to build a compara;ve advantage in making vehicles within NAFTA. However inward investment from overseas TNCs has met with resistance par;cularly when manufacturing plants displace workers from domes;c businesses and cause structural unemployment. In addi;on, anger over dangerous working condi;ons and low ‘poverty’ wages has also caused a backlash and led to calls for greater controls on TNC ac;vity. For example, in 2013, the Rana Plaza garment factory collapsed in Bangladesh killing over 1100 workers implica;ng clothing companies such as H&M, Primark and Gap.
Knowledge Applica;on
Analysis Evalua;on
Assess the view that the main cause of globalisa4on is the increased significance of transna;onal companies (20)
Knowledge Applica;on
Analysis Evalua;on
Costs, Prices
Costs, Prices
LRAC (high labour cost)
LRAC (low labour cost)
LRMC
LRMC
AR
MR
P1
AC1
Profit
Q1 Q2
P2
Analysis diagram shows increased total profits from moving manufacturing to a lower unit cost country e.g. where wages rela4ve to produc4vity are lower or where the other costs of doing businesses are cheaper
AC2
Assess the view that the main cause of globalisa4on is the increased significance of transna;onal companies (20)
Another feature of the growing significance of transna;onal companies in a globalizing world is the rise of TNCs from emerging and developing countries. For example, China Mobile has become one of the top ten consumer brands in the world; Alibaba has expanded rapidly to be the biggest global online retailer. The Tata Group conglomerate has made significant investments in Western economies and Chinese car-‐maker Geely purchased Swedish firm Volvo. One of the main mo;va;ons here was to acquire the technologies and intellectual property to fast forward their expansion plans as China moves through the middle-‐income stage. However one might argue that this would not have happened as quickly without other key causes of globalisa;on, for example a fall in import tariffs and fewer non-‐tariff barriers are another feature of globalisa;on. As barriers to trade and capital have come down, so opportuni;es for trade crea;on of goods and services and financial capital have grown. Many TNCs choose countries where opera;ng costs are low ease of doing business is good but they also to aim to get close to fast-‐growing consumer markets. Samsung’s investment in Vietnam is mo;vated by both factors.
Knowledge Applica;on
Analysis Evalua;on
Assess the view that the main cause of globalisa4on is the increased significance of transna;onal companies (20)
Globalisa;on is a process caused by a number of factors. One of these is containeriza;on. The costs of ocean shipping have come down, due to containeriza;on, bulk shipping such as offered by Danish TNC Maersk and other produc;on efficiencies. The lower cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and makes markets more contestable in an interna;onal sense. Technological change has also been important reducing the cost of transmidng and communica;ng informa;on – some;mes known as “the death of distance.” This has been a key factor behind trade in knowledge products using web technology. Lower tariffs, containeriza;on and rapid technology spillovers have also in numerous ways benefihed TNCs who have the financial resources to take full advantage. However one could argue that they have also increased the opportuni;es for smaller non-‐TNCs to compete on more of a level playing field than giant businesses with a global footprint. Some economists regard localiza;on and regionaliza;on as star;ng to take over from globalisa;on as a key trend for the future. For example the share of intra-‐regional trade among Asian countries has climbed from 48% in 2001 to 52% in 2011.
Knowledge Applica;on
Analysis Evalua;on
To what extent do the costs of globalisa;on outweigh the benefits (30)
Globalisa;on is not inevitable. The fall-‐out from the financial crisis of 2007-‐09 saw a reduc;on of 12% in world trade which has recovered only slowly. One reason has been opposi;on to some of the economic and social costs from globalisa;on. For example globalisa;on has contributed towards higher inequality. A paradox of globalisa;on is that whilst inequality has fallen between countries, income & wealth gaps within many countries have grown. Increasing inequality can damage economic growth by leading to a loss of spending power among millions of poorer households and a skewing of capital investment towards the preferences of the rich. In addi;on, high rates of tax avoidance by companies and individuals deprives governments of the tax revenues needed to finance essen;al public & merit goods. However a counter-‐argument is that globalisa;on has helped to achieve the biggest reduc;on in extreme poverty the world has seen. Per capita GNI has been rising quickly in many lower-‐income na;ons including in Sub-‐Saharan Africa. And countries such as China and Brazil have seen the Gini coefficient decline because of strong export performance, many more jobs and successful pro-‐poor growth policies including higher minimum wages and condi;onal cash transfer policies for families. These policies can help overcome some of the costs of globalisa;on.
Knowledge Applica;on
Analysis Evalua;on
To what extent do the costs of globalisa;on outweigh the benefits (30)
Trucks
Cars
1200
300
1600 900
South Korea
Mexico
450
2400
Mexico has a compara4ve advantage in producing cars and South Korea has the advantage in manufacturing trucks. For Mexico the opp.cost ra4o is 3 cars to 1 truck and for South Korea it is 4 cars to 3 trucks. So a terms of trade of 2 cars to 1 truck will benefit both countries and allow increased consump4on amer specialisa;on
To what extent do the costs of globalisa;on outweigh the benefits (30)
Another cost of globalisa;on is the fact that economic imbalances between countries have grown. This is shown for example in the increasing gap between na;ons running huge trade and current account surpluses (Singapore and Norway both have surpluses greater than 10% of their GDP) and countries with persistently high trade deficits including the UK, South Africa and Brazil with deficits of more than 5% of GDP. In theory, globalisa;on is good for the majority of countries because it allows na;ons to specialize in and export the goods and services in which they have a compara;ve advantage. This ought to lead to mutually beneficial gains for all na;ons involved through lower prices, higher real incomes and a more efficient alloca;on of resources. More contestable markets at interna;onal level cause produc;vity to be higher and it reduces the market power and profits of domes;c corpora;ons. But diverging compe;;veness in global markets has created winners and losers. Many poorer countries are running large external deficits and becoming increasingly reliant on external finance from the IMF and sovereign wealth funds of surplus countries. There is also a danger that the imbalances that are a feature of globalisa;on are causing shims towards protec;onism through capital controls and managed currencies.
Knowledge Applica;on
Analysis Evalua;on
To what extent do the costs of globalisa;on outweigh the benefits (30)
To some cri;cs of globalisa;on, another cost has been the excessive power and reach of global brands who dominate many consumer markets and whose standardized products have caused a loss of cultural diversity, falling sales and employment for local producers and a consequen;al increase in unemployment. For example, in the hotel industry, with franchising the chief opera;ng model, over half of the world's hotels are now branded proper;es with many taking a big market share in some of the world’s poorest countries. The profits from these hotels rarely stay in the host na;on and it is argued that global brands enjoy such economies of scale that they make much smaller local businesses unable to compete effec;vely. A counter-‐argument to this is to argue that the investment brought into poorer countries by mul;na;onal hotel chains is a benefit of globalisa;on. They employ more people offering pay and condi;ons beher than available before, and their training schemes help to boost the human capital of the labour force as well as providing a flow of foreign exchange revenues for na;onal governments. Many TNCs have made progress in recent years in ethical sourcing of local products and in cudng the environmental footprint of their opera;ons helping to boost long term sustainable growth.
Knowledge Applica;on
Analysis Evalua;on
To what extent do the costs of globalisa;on outweigh the benefits (30)
On balance I would argue that the long-‐term benefits of globalisa;on are greater than the disadvantages. Even thought the World Trade Organisa;on has yet to get close to comple;ng a new mul;-‐lateral trade deal, the high volume of bi-‐lateral trade agreements, current ahempts to establish the Trans-‐Pacific Partnership and the strengthening of free trade areas such as ASEAN shows how important interna;onal trade and investment remains. There is a trend towards regionaliza;on rather than globalisa;on and this may con;nue, and globalisa;on also faces threats from structural inequality and imbalances in living standards and development outcomes. But the protec;onist fears of the immediate post-‐crash period have not materialized. Globalisa;on will con;nue, accelerated by technological spill-‐overs and the movement of talented people across borders because the long term benefits (tangible and intangible) are enormous.
Knowledge Applica;on
Analysis Evalua;on