Question

One argument in the debate surrounding globalization is about the inequality between developed and developing nations. Explain how reduced barriers to trade and investment might help reduce this inequality

 

Answer 1

Globalization generally means developing business and economic relations among different nations through trade, mobilization of resources within nations. It integrates one economy with others such that countries participating in globalization such that welfare of a nation can be optimized.

There are arguments in favor or against the statement stated in question. Some experts say that globalization enhances inequality and some argue against this view. They discussed that globalization has both good and bad effects on nations. After the start of globalization process, inequality among nations have risen. However, it is not that inequality was not there before globalization. Global trade has enabled consumers to consume variety of products which cannot be produced in home country due to resource constraints and therefore enhancing consumer welfare due to international trade.

According to the view of Lindert and Williamson stated two views of inequality: one is within country inequality and the other is between nations.

There are arguments that the rich countries take away all the gains generated from international investment in poor economies in terms of profit, dividends, royalties and many other things. However, the counter argument is that globalization also provides opportunity for capital inflows into the capital scarce economies through foreign investment. This investment also generates employment opportunities and enhancing per capita income in these poor nations. It is also true that countries not participating in globalization program, remained unhurt. Nevertheless, it has also been seen that inequality among different socio economic classes in non-participatory countries has risen over time. Therefore, globalization cannot be solely blamed for rising inequality.

Researcher Xiaobo Zhang and Kevin Zhang stressed upon the adverse effect of globalization that raises regional inequality. A large country can influence a small economy in international trade by keeping terms of trade in favor of the developed nation. Another instance is dumping system. Often a developed nation imposes high tariff on the imports from developing nations in the name of moral issues such as health, hygiene, quality, child labor etc making the developing nation worse off.

Another effect is that globalization raises competition among international firms with domestic firms. Infant firms or small domestic firms in developing nations often fail to survive amid high competition as foreign firms enjoy several opportunities in the name of foreign direct investment. Therefore, domestic firms become vulnerable with out any government support due to high operating costs. Therefore, many people lose their job or drop in real wage in the event of shut down of a domestic company. These effects create regional inequalities due to globalization.