Impacts of globalization on developing economies

Author: iloka benneth chiemelie 

Published: 08/12/2013

Introduction

Eddy and Marco (2006) noted that globalization is presently a popular and controversial issue when it comes to developing countries, although it has for long been a loose and poorly defined concept. The author noted that the definition is sometimes broad and used to encompass an increase in trade and liberalization policies with a subsequent reduction in the cost of transportation and technology transfer. On the side of its impact, it has been linked with an effect on economic growth, employment and income distribution – without a clear comparison of within-countries and between-countries inequalities - and other social impacts that come in the form of poverty alleviation, human and labour rights and other environmental benefits. For this paper, globalization will be defined as an increase in trade liberations and reduction in strict policies in order to attract FDI.

Positive impacts of globalization in developing countries

In terms of FDI, globalization increases the overall performance of the country with a subsequent increase in development, employment and entrepreneurship trainings (see Lall, 2004; Lee, 1996; Orbeta, 2002). As new companies enter the country, the economy is given a boost with the investment made by these companies and the local workforce are employed to work  in these companies, which means an increase in economic development and decrease in unemployment.

Winters et al. (2004) noted that globalization enhance poverty alleviation as the entrance of companies results in demand for labour, land and resources – leading to an increase in skills acquisition, production and entrepreneurship, and a subsequent decrease in poverty level within the country. 

Negative impacts of globalization on developing countries

While earlier discussions have linked globalization to increase in economic development, it should be noted that evidences exist in literatures linking globalization to monopoly and business failure, which will have a direct negative impact on employment (see Rama, 1994; Revenga, 1997; Levinsohn, 1999; ILO, 2002; Cimoli and Katz, 2003). Mostly the companies that internationalize are big companies, and when they enter their new market, they tend to adopt a monopolistic approach to business in order to increase their profitability (especially in cases where the companies have higher currency advantage). The subsequent result will be failure of their local and small competitors, which will also lead to increase in unemployment.

Additionally, the Stolper-Samuelson (SS) theorem predicts is of the notion that FDI should reap the advantage of labour in developing countries, which will lead in demand for low skilled labour and decrease in wage dispersion within the country, as well as income inequality (see Stolper and Samuelson, 1941;  Wood, 1994 and 1997; for a critical view, see Milanovic, 2002).

Management of globalization in developing countries

In order for the positive impacts to be reaped and the negative impact avoided, a number of literature are in support of the idea that right policies should be enacted by the government of these countries (see Lee, 2000; Easterly, 2001; Stiglitz, 2002; Rodrik, 2000; Milanovic, 2003).

Such policies include the liberalization of the domestic labour market or the privatisation of previously state-owned firms, and regulation of through a standard operation platform. These policies will ensure that FDI is encourages, while local businesses are protect. Another benefit will be in the form of employment enhancement and reduction in monopoly as well as financial inequalities in terms of reward system.

Conclusion

From the above analysis, it can be seen that globalization has numerous benefits to developing countries, but lack of proper management will mean a subsequent increase in negative influence on the economy. As such, the governments of developing countries are encouraged to adopt the right policies that increase the positive impact, while reducing the negative impact in order to better reap the positives associated with globalization.

References

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