THE GLOBAL ECONOMY

How has Globalisation worsened Economic Inequality?

Insights

What Has Happened?

Globalisation is a process of increasing economic integration and interdependency between economies, alongside the increasing impact of international influences on all aspects of economic activity and development. As the world becomes ‘more globalised’, there has been debate of whether this connectedness has increased economic equality across the world, or if it has worsened the divide between the developed west and the lagging African region in particular.

The benefits of globalisation are perfectly encapsulated by the emerging Asian economic region, specifically the South East which neighbours Australia. Economies like Vietnam, Thailand, Indonesia and of course, China, have developed from struggling economies marred by violence and political unrest into powerhouse economies which are now the production centres of the world – specialising in the low cost, productive manufacturing of Simple Transformed Manufactures. Critical to their growth is the ability to openly trade, facilitated by Globalisation. All major South East Asian economies are trade liberalisers, and actively facilitate free trade negotiations through free trading blocs like the ‘Comprehensive and Progressive Trans-Pacific Partnership’ (CPTPP). This helps exploit the increasing interconnectedness of the global economy and drive export returns, translating to stronger economic growth.

Further, critical to China’s resounding success is membership and integration into the World Trade Organisation in December 2001, again a product of globalisation. Strong economic growth rates across the board in these countries, averaging approximately 5-10% pre pandemic, has transformed the region from significantly impoverished to the new capital of opportunity. Despite the endurance of poverty, Child mortality rates have dropped 32%, Educational Attainment is up 50%, and Life expectancy has increased an average of almost 10 years, all contributing to tangible improvements in the UN’s Human Development Index (HDI). Inequality has drastically declined, and continues to be improved upon

Since introduction into the WTO, and thus the benefits of globalisation, China has been able to improve its HDI faster than any other economy in the world - Since 2010, it has also grown at an increasingly faster rate than India, the second largest improver.

However, the improvements in Africa, a region of historical underdevelopment and colonial damage, has not reaped the same benefits. Globalisation in theory was meant to intensively integrate Africa into the global economy, but it has instead opened it up to more exploitation from Transnational Corporations and stronger protection measures from leading developed Economies, encapsulated by the EU’s ‘Common Agricultural Policy. Hence, HDI metrics still remain low and inequality hasn’t changed as significantly as the Asian region – the African Continent’s 2020 Growth rate above 3% is severely inadequate with the growth rates necessary for improvement.

Accelerating Poverty Reduction in Africa: In Five Charts
Although an unconventional metric for measuring inequality, Total fertility rates can inform levels of educational attainment and thus, HDI improvements. Although the African continent has shown a decreasing trend of fertility, indicative of improving global equality as less women are exclusively having children, the rates of decline are significantly less than those of developed economies. This provides an alternative insight, other than financial or social data, to reflect the distance between geographical regions in the global economy, as some are benefitting more from Globalisation than others.


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Globalisation and the Global Trade System

Globalisation has ‘failed’ in its ability to deliver widespread improvements to income equality through the international trade system holistically, which reinforces inequalities. Wealthy countries have implemented high artificial protection of their agricultural sectors to combat the reality that they are not internationally competitive against agricultural producers in developing nations.

High levels of protectionism in the agricultural sector impacts developing exports in  poorer economies, and protection alone in OECD countries ($253bn) provided 22% of farming incomes in the EU and Asia. Furthermore, Expanding Regional Trading Blocs like EU and North American Trading Blocs exclude poorer nations from access to lucrative global consumer markets. This is particularly important for the African continent, where outside of Diamond and Resource Trading dominated by predatory TNC’s, Agricultural production is its most important export. 

Furthermore, the benefits of free trade agreements are not accessible to developing nations due to substantial costs of implementing international agreements and solving protectionist disagreements. To capture such costs, a 1% increase in administrative costs will decrease GWP by $75 billion. In essence, the structure of international trade has meant that the benefits of a more globalised economy are concentrated amongst developed economies, who reap the benefits of greater connectedness and the protection of their own domestic industries. 

The Global Financial System

Irrespective of the harm globalisation has appeared to inflict upon the emerging African region, the epicentre for underdevelopment, financial flows are beginning to show signs of promise. Developed economies now only account for 50% of Foreign Direct Investment (FDI), representing a shift to equality as in 2010, they accounted for 62%. FDI is extremely important, and is used by developing economies to rapidly improve technology, transport, healthcare and education infrastructure, allowing them to develop a stronger skilled workforce, better trade efficiency and increased technology receptivity to capitalise on digital innovation - 3 key improvements fundamental to equality improvements. 

However, despite this seeming improvement, the majority of FDI flows are heading toward BRICs economy’s - Brazil, Russia, India and China; developing economies who experience extremely high rates of economic growth, averaging 8%,  and reflect the largest improvements in equality. Lower Developing Economies, capturing the entire central and Sub-Saharan African region, only receive 2% of FDI flows. Together with corrupt governments and non-existent taxation structures, it is impossible for these economies to address equality improvements and reduce the financial divide with rapidly growing countries. 

The IMF is a key international organisation which prioritises providing financial support to regions damaged by globalisation. It has been under intense scrutiny for its ‘structural adjustment packages’ which serve the interests of rich countries rather than its targeted developing countries. The IMF has since responded in the past with zero interest loans to low-income countries and a range of credit ‘reserves’ to be tailored to low income recipients.

The nature of global financial flows also means developing countries have extraordinary foreign debt burdens. In 2009 alone, total external debt was $3.5t, which reduces income available for governments to promote growth through spending on education and infrastructure. Further, 6 African economies now stand at 100% external debt to GDP ratios, and more than 19 countries as of 2017 have exceeded the 60% debt to GDP ratio outlined as the maximum sustainable rate by African Monetary cooperation program 

Aid and Global Equality

Aid is often overlooked, but is in fact fundamental to ensuring global equality and improving conditions in developing economies. The total level of developed aid provided by high income economies was $US125bn (0.3% of GDP). There is a 58% shortfall since 1970 and development aid may further reduce as developed economies undergo fiscal contraction to reduce large budget deficits.

There are also significant concerns ‘phantom aid’ – funds which do not improve lives of the poor. According to the OECD, 1/6 of foreign aid is donated to ‘technical cooperation’, ‘administration’, debt relief and the proportion of aid is ‘tied aid’. This functions as a subsidy, as aid must be spent on exports of the donor country, and in actuality does little for the economic development of the recipient economy. This reflects the continuum that Aid often reflects the strategic and military considerations of developed economies rather than meeting actual needs. 'Politicising aid in conflicts and crises' (Oxfam) found that $US178bn from developed economies went to Iraq and Afghanistan alone since 2002, reinforcing ulterior motives behind Aid. 

Improvements in aid will provide high levels assistance in ensuring impoverished economies can increase their development through stronger technology flows. The World bank estimates that 50% of the differences in living standards between the USA and developing countries is the slower, or complete absence of adaptation of new technologies, regarded as the ‘digital divide’. 

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