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Globalization and the British Economy
The phenomenon of globalization has had a profound impact, on the way businesses are conducted throughout the world. Globalization is today omnipresent, and from London to Tokyo it has embraced the entire world. Markets that were inaccessible as early as some three decades ago are now wide open for the Western companies, and are now able to receive Western products and also sell produce to the Western markets. The cultural and technological exchange happened through globalization has facilitated the creation of innovative and exciting products, services, and concepts, and world is today ‘but one small global village’. Globalization has had both positive as well as negative effects on the global economy. This paper is an attempt to explore whether the positive effects outweigh the downsides to the globalization of the British economy.
Globalization – The concept
Before we embark on a discussion as to how globalization impacts the economy, it is imperative to understand the concept of globalization. Globalization is a dynamic and synergistic process that seeks to eradicate the geographic, cultural, and trade barriers that exist between the countries of the world. Globalization has intensified in the last two decades, owing to the monumental progress made in transport and communication technologies. This integration process has enabled free flow of labor, technology, and capital, across countries’ borders. Many countries have even gone to the extent of accepting common currencies, such as ‘euro’ as their official currency, to facilitate easy trade with other countries. Currencies like the French Franc, Dutch Guilder and German Deutschmark have gone out of circulation.
Many regional alliances such as the European Union and SAARC have lowered regulations for the citizens of the other member countries, visiting their country. Most countries do not require passports to travel between the member countries of their regional alliance, and some countries even waive off the need for work permits for citizens from friendly countries. In North America, there is the NAFTA (North American Free Trade Agreement) agreement between the US, Canada and Mexico, which entitles the citizens of these countries to travel and conduct trade with the region without any major regulatory controls.
During the twentieth century, particularly since the Great War, United States officially supplanted the United Kingdom as the dominant economic force in the world. During this phase of globalization, which was fuelled by the industrial revolution, American technology and power transformed the international order. For centuries before that, Europe, in particular Britain was the primary proponent and custodian of the process of globalization. Through imperialism, it conquered distant lands and used them both as the source of raw materials for its local industries and market for its finished products.
Britain as an imperial empire laid the foundation for global trade. It had colonies as far spread and separated from each other as India, Australia, and Canada. During the early twentieth century, it had almost one-fifth of the world’s population under its control. Twentieth century and the two wars saw shift in political and economic powers. The United States emerged as a powerful player in this century, which is popularly dubbed as the ‘American Century’. During the cold war era that followed the WWII, Britain sided with the United States. During this time the UK practiced a quasi-globalization among the US allied countries, and offered them foreign aids to promote trade and cultural exchanges through fewer trade barriers.
Driving factors of Globalization
According to Michael Mussa, Economic Counselor and Director of Research IMF, there are three driving factors for globalization. First, is the drastic developments witnessed in the areas of communication and transportation. Today far off places are connected with each other, and travel and transport of goods are done at a less time consuming and effective manner. Communication revolution has enabled people to stay in touch with each other, from any corner of the world. This has helped the companies manage their business all over the world, and the consumers to have knowledge of products/services available in far off markets. Further, it allows organizations to source cheap labor from or outsource part of their operations to, foreign countries, and thus bringing down the price of the end products. These developments also help in technological and cultural exchanges.
Second driving factor is the tastes of individuals and societies. People are generally attracted towards cheaper products available through economic integration. When the consumers prefer cheaper products manufactured in other countries, naturally the businesses are forced to import them. Not just cheaper products, but products’ quality too plays a role, in determining consumer tastes, which in turn directs the amount of foreign trade.
Third factor delineated by Mussa is the role of public policies. Not just market forces, but also the policies of the government, ruling the country, also have a significant role in determining the character and pace of economic globalization. Public policies are important in fostering innovations, and providing proper funds to invest in infrastructure for transportation and communication.
For example, the economic policies of Margaret Thatcher and her conservative party played a proactive role in globalizing the British economy. She dumped the Keynesian economics for good, and adapted a more market-driven policy. Her policies were instrumental in bringing globalization in its full force to UK. After the Second World War, Britain, which was a model of progressive democratic governance for centuries together, showed a steady decline in its economic development. Thatcher and her policies of non-interventionist trade policies not just put globalization in motion in the UK, but also initiated an economic revival.
Apart from the above mentioned factors, the millions of migrants who come ashore United Kingdom every year in search of a better life are another reason, behind the surge in globalization. Britain, because of its stable governance and employment opportunities, has always attracted immigrants. Today, London is considered the food capital of the world, with restaurants offering almost all varieties of cuisines available in the world, to serve the Londoners who hail from varied different ethnic origins. The industries across UK are always on the lookout for cheap labor, and this caused many people from all across the globe migrate to Britain in huge numbers during the past century, which started a wave of globalization that has continued to till date.
Factors Impeding Globalization of Britain economy
One of the most restraining constraints for the progress of globalization is the sudden rise of commodity prices, particularly energy prices. Since UK has to depend mostly on imports for its oil needs, global oil price fluctuations affect its economy in an adverse way. Twice in the last two decade, the fuel prices in UK increased above the general global price index, and the brunt was felt by all businesses, and even farmers. So, during this period the price of commodities produced in UK were higher and hence less competitive.
Political unrest and the resultant uncertainty caused is another challenge to globalization. The greatest threat to globalization in UK has been the threat of terrorism. After the 9/11 attacks, there took place massive changes in the immigration laws which affected the labor force of UK industries. The immediate effects of such terrorist attacks are life losses and damage to property. But the long term effects include what is known as ‘terrorist tax’, whereby the financial markets experience a period of uncertainty and apprehension. The increased security spending also inflicts burden on the economy. Also, the technological innovations offered by globalization are used by terrorists to enhance their sinister plans. For example, Mohammad Sidique Khan, part of the group involved in London suicide bombing, used social sites such as YouTube to post his video and spread inflammatory messages.
Such periods of uncertainty also affect the labor market and foreign relations in some cases. For example, the British support of Israel resulted in disruption of relations with the Middle East, and after the war on terror, many Arab immigrants were discriminated against in the labor market. During the cold war era, the relations between the US and the communist bloc, most notably China and Russia, was a major roadblock for UK, who was an ally of the US. After the trade relations improved, the UK economy benefited by means of cheaply manufactured goods from china and technological alliances from Russia. Thus, the political climate is a major factor in globalization.
Globalization – Advantages
Most economic pundits argue that globalization benefits everybody. Each country has a benefit to offer to others. So instead of toiling to be self-sufficient, it is easier to purchase a cheaper product from outside. Each country is like a family, and no family tries to produce everything they use. They produce what they can, sell the excess to others, and buy those things which could be bought cheaper from outside. Each member of the family, then do their jobs to earn the money to pay for the goods purchased. Globalization is a similar concept where the world is viewed as one big global village, where each country forms a family.
Across the globe, many countries have been benefited by the concept of globalization. Many developing and under developing nations have benefited, by way of reduced poverty rates and improved awareness to human rights and environmental concerns. Not just the poor and developing countries, but also developed nations, like the UK, have been the beneficiaries of globalization. The UK economy has been aided by the increased international co-operation, lower trade barriers, and development in economic interactions brought by globalization.
Export of goods to other countries has the obvious benefits of increasing the trade surplus of the country, which in turn benefits the economy. Brands such as Aviva, Vodaphone, and Royal Bank of Scotland are today universally known, and such multinational corporations drive the economic growth. Apart from this, British companies are able to source cheap raw materials and labor from developing countries. There is also a worldwide exchange of ideas and knowledge, which benefits the British businesses. For example, a breakthrough technological innovation in Japan can enhance the gaming experience for a British consumer. Also, a certain part or whole of the service sector are outsourced to foreign countries, where the job can be done at a lesser cost. Britain had a sustained period of development (close to 2.5%) for the most part of the past decade, which in turn contributed to increased living standards and employment opportunities.
Global trade gives British people access to many goods that cannot be produced in the country. In some cases even products that can be produced in the country are imported, because either the domestic production is not sufficient, or it is less costly to import them. Imports not just provide cheap and quality products to the country, but it also creates job opportunities and wealth for wholesalers, distributors, and retailers. Currently, Britain is running on a trade deficit. The imports of the country exceed the exports of the country by £50bn per year. However, while Britain runs a deficit in terms of goods it occupies a much healthier position in terms of service exports. In the period between 1998 and 2008, Britain was the second largest service exporter next only to the US.
Not just cheaper products, but products whose quality standards exceed than those locally produced too are imported heavily by UK. For example, though UK car manufacturers produce excellent variety of cars in varying prices points, consumers also prefer other European or Asian brands, because of the qualities and features offered. The same logic holds true to any other products such as wine, cheese, shoes, etc. Manufacture of certain goods has been stopped completely in the UK as cheaper and better versions of those products can be imported.
Many UK companies also have shifted their manufacturing plants to countries where labor is cheap, and raw materials are available. In this way, they are able to produce the product cheaper, yet get to market the brand in their UK label. For example, Tesco, a British global giant, has a trading outpost in Hong Kong, which oversees designing, production, quality control and shipment of about almost 50,000 Tesco product lines. Each day almost 200 containers full of goods leave the Kwai Chung Container Port in Hong Kong, to distribute products to Tesco shops all around the globe. This division is called the Tesco International Sourcing. Operating with close to 800 suppliers across various countries, it almost reminds us of the old East India Trading Company. It has 533 employees in its payroll, all from various countries such as Hong Kong, Thailand and Sri Lanka. Thus, there are undoubtedly several advantages to the British economy arising due to globalization.
Globalization – Downsides
Though globalization comes with many positives, it has a few disadvantages too. The main drawback is the lowering of wages for labor force, and the job losses caused by outsourcing. With increased international competition in the labor market, many British citizens are forced to accept a pay cut. For many laborers, the globalization concept is a cause of panic, as they fear they may lose their health care and other such benefits. International competition also means that some domestically produced products may sell at lesser prices, which is good news for the consumers, but will affect the traders.
Also, in the closely knit globalized economy, a financial crisis in one country may affect the entire world, and thus would impact the British economy. For example, in 1997 collapse of some banks in Thailand, gave rise to a financial chaos that spread across many countries in the region. Oscillating oil prices, for example, is controlled by OEPC. So, any rise in demand for the OPEC controlled oil production will definitely affect British economy too. For example, in 1973, when Syria and Egypt attacked Israel on Yom Kippur, UK, along with the US, supplied arms to Israel, resulting in the OPEC nations imposing an embargo on it. It resulted in widespread demand for oil and price rise.
Under globalization, many jobs are being exported from Britain. Many British jobs like engineering and back office operations are outsourced to countries like India, which boasts large English speaking, educated, population. Indian and other South Asian workforce operate at much lower wages than their British counterparts. Reports state that, an Indian engineer earns less than $20,000 a month, which is one-fourth of the average Western engineer’s earning. Many people also believe that globalization increases the gap between the rich and the poor, with the capitalists taking all the benefits thanks to low cost labor, and in the process, exploiting both the British workforce, by denying them jobs, and the foreign workforce, by paying them less than what they deserve.
Activists blame globalization for many evils such as environmental degradation, promoting unequal wealth distribution, eroding sovereignty, and for spreading a homogeneous culture. There are other indirect impacts of globalization, like the increased consumption of energy resources. After 2001, when China joined the World trade Organization, coal consumption began to accelerate uncontrollably. In an age where fossil fuel is becoming rarer day by day, this monstrous consumption by globalized organizations, spurning out large-scale production of goods, is a severe strain on the natural resources.
The demand for oil and the resultant price rise can be detrimental to developed countries, such as Britain, than the developing nations. This is because, developing countries are more equipped to use high priced energy resources than the developed nations. In Britain, oil is used for all sorts of purposes from commuting to growing foods. On the contrary, in developing countries number of people who own a car or motorcycle is less, and the government offered subsidies also play a role in minimizing the effect. Also, a large number of workers are out of jobs, which means that the state has to spend more on unemployment benefits, which in turn puts pressure on the economy.
Conclusion
The debate about the benefits or lack of it, of globalization is been raging for the past few decades. However, the truth is whether we like it or not, globalization is upon us and is here to stay. With the communication technology taking us ever close to each other, allowing us to forget our petty differences based on color, creed, or religion, and uniting us under a single umbrella of humanity, there are more benefits to this phenomenon than negatives. World countries today are totally dependent on each other, so instead of debating on the negatives, governments across the world should take proper measures to ensure fair trade. Geographical and political barriers are already dissolved and instead of plotting to rebuild them and exist in isolation, it would be more appropriate to diagnose the areas in which globalization fails and take proper steps to mend them.
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