Economic Globalization and its Limitations

Introduction

One main feature of the twenty first century is globalization. This phenomenon has permeated and affected almost every facet of today’s global society, ranging from the economic to the social sphere.

Brady and Denniston (2006) describe globalization as the integration of regional economies, societies and cultures of the world. This has led to what these scholars refer to as the global village, where the borders between different countries become blurred and the world becomes one global village.

There are various forms of globalization, according to Joshi (2009). These include political and cultural globalization among others. Economic globalization is such one form of globalization that has characterized recent developments in the global arena.

Joshi (2009) and Riley (2005) provide a working definition of the term ‘economic globalization’. They conceptualize it as the increasing economic integration of regional and national economies of the world (Joshi 2009: Riley 2005).

This interdependence is brought about by increase in movement of goods and services across national borders. Technology and capital are also part of this across-the-border exchange. The end product of economic globalization is the emergence of a single global market that is not inhibited by geographical borders.

There has been ranging debate surrounding the benefits and costs of economic globalization and integration. This has led to the emergence of different schools of thought, either supporting or opposing international integration of national economies.

There have been those with the view that the costs of this development are more than the benefits, arguing that few states and economies benefit more from economic globalization at the expense of many.

On the extreme end of the continuum are those individuals who feel that many negative developments in the world today are incorrectly attributed to economic globalization. They are of the view that economic globalization is more beneficial than it is costly.

It is as a result of this discourse that Robert Gilpin has written several books to state his position on how he feels as far as economic globalization is concerned. One book stands out from several that have been written and published by this scholar. This is “Global Political Economy: Understanding the International Economic Order”, a book published by Princeton University Press in the year 2001.

On page 362 of this book, Gilpin argues that economic globalization, as a phenomenon, is “much more limited” (in scope and in orientation) than many people in today’s society understand (Gilpin 2001: 362). This scholar is of the view that in extension, the impacts that economic globalization has on various spheres of the society, ranging from economic to social, are also limited.

This essay is going to critically assess this proposition by Gilpin within the context of contemporary global economic trends and developments. The author will make efforts to identify the relevancy, or lack of it thereof, of this proposition in today’s economic world.

Economic Globalization and the Nation State: Limitations

There are those, like Hirst and Grahame (2003) who argue that economic globalization has negatively affected the nation state in many ways. They argue that globalization has brought with it constraints to the nation state as far as economic control is concerned.

They are of the view that the state has surrendered control over the economy to international regulatory bodies such as the World Bank (United Nations Economic Commission for Europe [herein referred to as UNECE] 2007).

However, Gilpin, who makes a case for economic globalization and its effects on contemporary society, opposes this position. He is of the view that individuals who claim that globalization has brought with it constraints to the nation state are exaggerating (Gilpin 2001: Little and Smith 2006). Gilpin argues that those who hold such views fail to give their argument a historical perspective.

There is one major assumption that Gilpin contends with as far as limitation on nation states by economic globalization is concerned. Proponents of this argument appear to make the assumption that governments and nation states once held unfettered control and autonomy over the economic matters within their borders (Sugden and Wilson 2005).

Gilpin calls this assumption an “imaginary past” on the part of the proponents. When this imaginary past is contrasted with the current state of affairs, it is easier to see that nation states have in fact been curtailed by economic globalization when it comes to economic control.

But according to Gilpin (2001), this assumption is erroneous. This is given the fact that a historical analysis reveals that the interaction between the state and the market in contemporary society is not as revolutionary as these scholars would like to make it appear.

Economic globalization can be traced back to the period immediately after First World War. However, its notable growth and expansion took place after the Second World War. Historical analysis indicates that before the onset of the First World War, nation states held little control over their economies (Hirst and Grahame 2003).

This is considering the fact that the nation states were operating under the auspices of what Anup (2010) and Fischer (2009) refer to as the gold standard. This gold standard exerted what Gilpin refers to as “golden fetters” on the nation states (Gilpin 2001). Exchange rates and such other aspects of the market were controlled by this gold standard.

When viewed from this perspective, it is notable that the impacts of economic globalization on the nation state are limited in nature. It is important to note that the control that nation states have over their economies is actually greater today than it was before the onset of the First World War.

This is despite the fact that economic globalization had not permeated the society during those times. In contemporary society, the exchange rates are flexible, and are not as fixed as they were during the gold standard era.

The role of the nation state in the economy has been elevated in contemporary society as opposed to how it was before the out break of the First World War. In the period before the onset of the First World War, the role of the nation state in the economy was minor and highly constrained (Brady and Denniston 2006).

The central banks, the major organ of the government when it comes to financial regulation, was tasked the minor role of ensuring that the nation’s currency remained stable.

Contrast this with the state of affairs after the First World War. The great depression of the 1930’s, the second world war and the cold war are some of the notable events that elevated the role of the nation state in the world market. Nations needed to harness their economic resources to meet the rising needs of their citizens, and also to meet the rising economic needs of the wars (Anup 2010).

For example, today, the United States of America government regulates the economy to ensure that consumers are not exploited. This is despite the fact that economic globalization is more rampant in the United States of America than in any other country, for example from the developing nations.

Economic Globalization: Geographical Limitations

The term economic globalization creates the impression of a phenomenon that has a global appearance. It is easy to assume that economic globalization has permeated every niche of the global space.

However, this is not the case. The proposition by Gilpin to the effect that economic globalization is more limited than many would like to appreciate seems to perfectly apply to this case. This phenomenon is limited in geographical scope than many would like to appreciate.

A critical analysis of economic globalization would reveal that north America, western Europe and pacific Asia are some of the areas that the phenomenon appears to be confined within (Little and Smith 2006). A review of balance of trade statistics would reveal to the discerning observer that these regions are the grounds within which much of international trade takes place.

Imports and foreign direct investment are some of the factors that indicate how open an economy is to the outside world. The regions mentioned above, considered as open economies given that international trade is a major fixture of their activities. However, imports from other countries and direct foreign investments are very small in these countries when compared to the size of their domestic economies (Anup 2010).

Gilpin gives figures to support this argument. For example, in the year 1970, the imports made by the United States of America amounted to five percent of the Gross Domestic Product [GDP] (Gilpin 2001: Little and Smith 2006). In 1995, this figure rose slightly to about thirteen percent (Gilpin 2001).

This development indicates that economic globalization is not as balanced spatially as many people believe. North America, Western Europe and pacific Asia appear to be conducting a lot of trade on foreign economies. Today, these industrialized nations invest more on developing nations of the third world. Investments by developing nations on these industrialized economies are negligible.

For example, the United States of America has more direct foreign investment in African countries. This is compared to the size of foreign investments made into American economy by African countries. These industrialized nations exert their presence in third world countries through their multi national corporations such as Coca Cola, Microsoft among others (United Nations Economic Commission for Europe 2007).

Trade and Economic Globalization: Limitations

Conventionally, many individuals assume that trade is the largest and central facet of economic globalization and in extension, of international trade. It is a fact beyond doubt that trade has grown exponentially within the past fifty years (Joshi 2009).

Exchange of goods and services between nation states is more enhanced today than it was immediately after the Second World War. This can perhaps be attributed to the fact that developments in sectors such as transport have eased movement across borders, in addition to other technological developments such as communication.

However, this development does not negate the fact that trade as a facet of economic globalization is a limited phenomenon. Gilpin (2001) argues that trade accounts for a very small portion of the most nation states’ economies.

The above argument by Gilpin may appear erroneous especially when it is obvious that the number and variety of tradable items has been on the rise in the international market. For example, discoveries in the communication field have seen the introduction of new “tradables” such as mobile phones and computers in the international market.

However, when one takes a look at the international market and competition in this market, Gilpin’s argument appears to hold water. For example, Little and Smith (2006) holds that competition in the international market is between firms and organizations. It is not between ‘tradables’ or items as many people would like to believe.

Economic Globalization and Benefits: Geographical Limitations

The major motivation for international trade, and hence economic globalization, is profits. Many economies engage in international exchange to gain foreign exchange and to bolster their economies.

However, a critical approach to this assumption would reveal that benefits of economic globalization are more limited than many people believe in contemporary society.

As earlier indicated above, foreign direct investment and importation are limited to regions of the northern America, Western Europe and pacific Asia. That is the reason why one will find many Chinese firms constructing roads in African countries, but few, if any, African countries, have such contracts in the Asian economy.

The same limitation above applies when it comes to benefits. The same regions and economies that heavily invested in other economies are the same that derive larger benefits from the international market (Gilpin 2001). A larger portion of the proceeds from international trade are invested in the industrialized countries that have heavy investments (United Nations Economic Commission for Europe 2007).

For example, majority of the multi national corporations from the industrialized nations invest in Africa and other third world countries to benefit from the cheap labor and cheap raw materials from these economies.

However, the profits made from these ventures are invested in the mother countries, as opposed to investing them back to the third world economy from which the corporation is operating from. Chinese firms engaged in construction of roads in Africa will invest their returns in China, not in Africa.

The proceeds from foreign direct investments are invested in sectors such as real estate in the mother countries. When third world countries or what Anup refers to as the developing economies make proceeds from international trade, the same is invested in ways different from that observed in the developed nations (Anup 2010).

The little proceeds are mainly invested in raw materials sector. For example, the economies will try to expand their agricultural acreage to increase production of raw materials that will eventually be used by the multinationals to make even bigger profits.

As much as Gilpin wishes to make a case for the economic globalization, some of his arguments are self defeating. He admits that the benefits from the international exchange are enjoyed by the few at the expense of the many.

This admission alone confirms that economic globalization is not as limited as Gilpin would wish to make his audience believe. The skewed distribution of these benefits is what makes the developing economies remain as such; developing. As long as the skewed distribution remains, disparities in the international economies will forever remain.

Economic Globalization and the Law of One Price: Limitations

As earlier indicated, economic globalization portend the integration and interdependence of various regional and nation state economies in the world. For this to happen, there are certain factors that have to be taken into consideration and met for the economies to be considered as integrated fully.

Many people erroneous consider economies to be interdependent and integrated without taking into consideration these factors. In fact, Gilpin (2001) argues, when the factors are considered, it would appear that the integration and interdependence of the economies is more limited than many would believe.

One of such factor is the “law of one price” (Gilpin 2001: Little and Smith 2006). Economists are of the view that for this law to be met, similar goods and services must be retailed at similar or nearly similar prices at different economies around the world (Gilpin 2001).

When this happens, the economies can be considered to be more interdependent and more integrated than those within which the law of one price does not apply or is absent.

When the law of one price is taken into consideration, Gilpin (2001) argues that it appears that integration and interdependence of economies in the contemporary society is limited substantially. It is a fact beyond doubt that prices of similar goods and services vary greatly within different economies in contemporary society. This is clearly depicted by the differing cost of living in different parts of the world.

For example, the cost of living in the United States of America is quiet different from that in sub Saharan African. This is despite the fact that the goods and services consumed by those living in these different countries are more or less the same.

Another case in point is the cost of labor depicted by wages paid in different economies. When one considers labor as a commodity, it would appear that different economies retail this similar commodity at different prices, negating the law of one price.

However, what Gilpin fails to tell his audience is that the law of one price may have been negated by the mechanisms of the same economic globalization he is trying to defend. For example, skewed distribution of benefits from international trade will mean that individuals living in third world countries will always be poor.

As such, they will retail their labor cheaply than those living in well to do societies such as the United States of America or China. Economic globalization, it will appear, is more complicated than Gilpin portrays it to be. Unless one analyses the intertwining threads of this phenomenon individually and collectively, comprehensive analysis can not be claimed.

Conclusion

There are other factors that make economic globalization appear to be limited in scope and otherwise than popularly believed. For example, it is assumed that labor migration automatically follows on the footsteps of economic globalization (Gilpin 2001).

However, critical analysis would reveal that globalization of labor which is marked by labor migration has greatly reduced in contemporary society. Few individuals move from one country to the other in search of labor as compared to periods before the First World War.

However, it would appear that these limitations in labor migration are brought about by mechanisms of economic globalization. Many countries would literally close their borders to immigrants to protect the wages of their citizens.

In conclusion, it is important to note that Gilpin’s arguments appear right in some aspects. However, when he argues that economic globalization is limited than many realize, it appears at some junctures that, actually, it is his arguments that are limited.

Some of his arguments fail to capture the complicated nature and dynamics of the international trade. But this does not negate the fact that, to some extent, economic globalization is actually limited.

References

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Gilpin, R. 2001. Global political economy: understanding the international economic order. Princeton: Princeton University Press.

Hirst, P., and Grahame, T. 2003. The limits to economic globalization. Web.

Joshi, RM. 2009. International business. New York: Oxford University Press.

Little, R., and Smith, M. 2006. Perspectives on world politics. 3^rd Edition. Oxon: Routledge Taylor & Group.

Riley, T. 2005. Year 12 economics. New York: Tim Riley Publications.

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