Decades Have Witnessed an Acceleration of Economic Globalisation

Recent decades ease up interpreted an acceleration of economic globalisation, in particular planetary deal out. Is take nakedness the key strategy to hit economic development? What littleons could you draw for policymaking? Support your arguments with economic system and empirical indicate from developing countries. Introduction In this essay, I shall critically examine the tilt put forward and test whether good deal receptivity is the key strategy to achieving economic development, and from this consider whether we can conduct further analysis upon whether in that respect be any lessons that can be obtained from this in regards to policy making.To focus our discourse using relevant empirical evidence, I forget relate this essay in general towards developing countries, enabling us to take up a tidy understanding of the task at hand. It is of importance that we first briefly explore how the literature describe and pursue globalisation this is done in the next sect ion. The remainder of the essay will be dedicated on segments on economic theory of international affair, the relationship between spate openness and economic growth, we will then draw upon empirical evidence, the negatives of mickle openness, and lessons for policy making.Finally I will offer my reason out remarks. Before delving into the core aspect of the essay, its essential to consider the underlying reason towards trade liberalisation in international trade globalisation and as well provide a definition of trade openness. globularisation can be considered as an important rhetoric of contemporary international relations. The term globalisation is much invoked to describe the process of increasing interdependence and global enmeshment through a variety of economic, cultural, social and, political changes that have do the world over the onetime(prenominal) five decades. Hurrell & Woods, 1995 Guttal, 2007) Globalisation is considered a form of capitalist expansion that en tails the integration of local and national economies into a global, unregulated market economy through an join on in international trade by increases in exports and imports of nations which has been widely regarded as being served by international trade agreements post world-war II. The extent of integration is depict in table 1 where we can see that in that location has been increase in the ratio of trade to gross domestic product (GDP) when integration had been apparent from 1870 up until 1914 the eve of World-War I.Integration was halted during the periods of the two world wars and the era of the Great Depression. During this period protectionism was rife, which saw the integration of trade and foreign asset ownership revert gage close to their levels in 1870. (Dollar, 2005) Table 1 Measures of Global integration Adapted from Dollar (2005) Table 1 Measures of Global integration Adapted from Dollar (2005) In recent decades there have been various literatures invoking contin uous debate discussing whether there is positive correlation between economic growth and trade openness.Advocates thoroughly concomitant that trade liberalisation induces an increase in economic growth whilst critics hold that protectionism is the essence to increased economic growth. The WTO (World make out Organisation) and GATT (General Agreement on Tariffs and Trade) have shaped and influenced the integration of global markets through much debate, discussion and reciprocation, agreements have been established, aiming to promote the vision and objective of trade openness by lowering barriers to trade.Developing countries have been originally on the agenda throughout the history of the GATT and WTO in order to promote development in these countries as WTOs Mike Moore as cited in Rodrik (2001) puts it, the surest modality to do more to help the poor is to continue to open markets. Trade Liberalisation Paradigm Vs. Protectionism Paradigm More open and outward- oriented economi es consistently master countries with restrictive trade and foreign investment regimes. OECD (1998, pp. 6, cited in Rodriguez & Rodrik,1999) Policies toward foreign trade are among the more important grammatical constituents promoting economic growth and convergence in developing countries. IMF (1997, pp. 84, cited in Rodriguez & Rodrik, 1999) Despite such(prenominal) claims, historically during the 1960s, and 1970s although the GATT aided the reduction of trade barriers, it was apparent that numerous developing nations continued to venture in the protectionist perspective to facilitate in driving economic growth.Nations in Latin America and in some African and Asian nations embraced the idea of f Import Substitution industrialization (ISI). ISI refers to a trade and economic policy ground on the premise that a developing country should attempt to substitute products which it imports ( somely finished goods) with locally crapd substitutes. This much times involves governme nt subsidies, full(prenominal) tariff barriers and/or artificially maintained domestic currencies to protect local industries. (Kulkarni and Meister, 2009) sparing authors such as Trebilcock and Howse (1999) hold that their reasoning for adopting such an approach to international trade is that with trade liberalisation protectionist tariffs would have to be reduced, which would in turn hurt domestic production as imports would be considered more attractive than domestic therefore affecting the long run economic growth of their nation. tariffs on industrial products have fallen steeply and now fairish less than 5% in industrial countries. During the first 25 years after the war, world economic growth normd about 5% per year, a high rate that was partly the result of lower trade barriers.World trade grew fifty-fifty faster, averaging about 28% during the period. (Rivera and Olivia, 2004, p. 78) Its apparent by data presented by Rivera and Oliva (2004) and link with data availabl e in table 1 that since after the world war policies adopted to ensure unrestricted flow of products and services consequently run low to global competition and innovation which benefits all involved. Krugman (1986) further elabo order that with such trade liberalisation that there are a number of key benefits. Firstly, due to economies of case enjoyed by nations, economies are able to gain from their comparative degree wages.Secondly, there is a compound in intra-industry trade, increasing product differentiation enabling consumer satisfaction to be increased. Finally as Porter (1990) establishes, trade liberalisation ensures nations adopt sound economic policies to increase competitive advantage to ensure foreign investment occurs in their economy. Theoretical Considerations To elaborate on the points made above its essential to consider the theories of international trade, as comparative advantage is an important concept for explaining figure of speech of trade.David Ricardo firstly introduces the concept of comparative advantage. It is then well recognized as the Ricardian model. In the neoclassical theory of international trade, Heckscher and Ohlin examine the effect of different factor endowments on international trade. Theory of Competitive Advantage The basic idea of premise of Ricardos model boasts that comparative advantage postulates that a nation will export the goods or services in which it has its greatest comparative advantage and import those in which it has the least comparative advantage. (Ricardo, 1817 cited in Widodo, 2009)For example, it takes less productive inputs to produce clothes in China than in Great Britain. However it takes less productive inputs to produce bread in Great Britain than in China. Given this comparative advantage these China and Great Britain can increase their welfare of consumption by specialising in clothing and bread respectively and trade them. The overall gain from this is that greater economic growth can be attained through the utilisation of other economies comparative advantage. Factor Endowment theory Coque et al. (2003) furthers the comparative advantage model outlined byRicardo criticising one area by stating that comparative advantages arise only because international differences in labour productivity. Coque et al. continues by expressing that in the real world, trade also reflects differences in countries resources not only labour, but also other factors of production such as land, capital and mineral resources. The basic premise of this theory is centred that a country will tend to produce relatively more of goods that use its abundant resources intensively. For example, consider two goods and two factors of production (land and labour).The two goods have different factor intensities, that is production of one of the goods use a higher ratio of land to labour than the production of the other. The nation in question has an teemingness of land, therefore would delineate in the production of this good which uses land intensively. Husain (2007) identifies that from these free-trade models, countries gain from trade and world output is increased that the countries will tend to specialise in products that use their resources abundantly and given identical technologies and production throughout the world, factor prices will equalize across trading countries.By enabling countries to move beyond their production possibility frontiers trade is assumed to hassle growth by securing capital as well as consumption goods from other parts of the world. Trade thus stimulates economic growth, promotes and rewards those activities in which the country has relative abundance of factors of production. As developing countries poses labour in abundant supply their wages will rise and the majority of the population will be better off compared to no trade scenario. Empirical EvidenceTrade liberalisation and growth In regards to the protectionism and trade liberalisation p aradigms discussed, a key case study is that of Pakistan. Pakistans international trading policy consisted of ensuring a highly protective trade regime until the late eighties. Tariff place were excessively high and non-tariff barriers kept competing imports away from the domestic markets. It was only in the 1990s that trade loosening policies were initiated. During the period of protection the manufacturing and tax revenues grew by less than 5% annually.Once the tariff reforms were adopted manufacturing, revenues and exports have all grown in double digits. This correlation shows that despite the perceived views that protectionism protected the domestic, once policies that promoted trade openness were in place, exports within Pakistan actually increased, due to the comparative advantages they would have held in certain industries. Per Capita GDP Growth Rates, by Country Type, 1990s (%), based on GDP in get power parity terms)Per Capita GDP Growth Rates, by Country Type, 1990s (% ), based on GDP in purchasing power parity terms) bod 1 Per capita GDP Growth Rates by country type in the 1990s Adapted from Dollar (2005) Figure 1 Per capita GDP Growth Rates by country type in the 1990s Adapted from Dollar (2005) Dollar (2005) furthers this argument by presenting evidence from figure 1, which shows three categories Rich countries (developed industrialised nations), other developing nations (Lack of trade openness) and developing country globalizers (those who have adopted trade openness policy).From the evidence provided it is clear that developing nations that have reformed their trading policies to enable them to become more open have grew substantially than their other developing counterparts who did not. Prabirjit (2007) further adds credence to this discussion by providing empirical evidence on cross-country study of averages and panel regression analysis for a sample of 51 less-developed countries over a unvarying time period 1981-2002. Like many other wo rks in this field, the results from this study shows that a country with a higher trade share based on openness tends to experience a higher real growth.Trade liberalisation and disparity Although weve been able to provide empirical evidence upon the growth benefits of trade openness, many analysts are legitimately concerned about the effects of trade liberalisation on the scattering of income. Research shows that theres no evidence of a authoritative tendency for difference to increase when international trade increases. If we consider figure 2, this figure reflects the experiences of more than 100 countries, with changes in trade and changes in inequality measured over periods of at least five years in order to capture long-run relationship between trade and inequality.From the figure 1 we can see that there is no real correlation between changes in trade and changes in inequality. Figure 2 Changes in trade and income inequality Adapted from Dollar and Kraay (2001a) Figure 2 Ch anges in trade and income inequality Adapted from Dollar and Kraay (2001a) Trade liberalisation and Poverty Reduction One of the most common criticisms of trade liberalization and globalization, particularly in developed countries, is that it drives down wages and exports jobs to low wage economies.As weve analysed the combination of increases in growth has little systematic change in inequality, now with such results can we expect to see a reduction in poverty for developing countries. In Malaysia, for example, the average income of the poorest fifth of the population grew at a robust 5. 4% annually. Even in China, where inequality did increase precipitously and the income growth rate of the poorest fifth lagged behind average income growth, incomes of the poorest fifth still grew at 3. 8%annually. (Clift and Diehl, 2007)The fraction of the population of these countries living below the $1 a day poverty threshold fell sharply between the 1980s and the 1990s from 43%to 36% in Bang ladesh, from 20% to 15% in China, and from 13% to 10% in Costa Rica. Dollar and Kraay (2002) and Ravallion (2001) carry the hypothesis that mean incomes of the poor rise and poverty rates decline with the rise in overall mean incomes. that state reliance on cross country evidence to make inferences about specific instance is not helpful. Apparent factors which impair the effects of trade liberalisationNugent (2002) identifies factors which affect the effects of trade openness for example a trade liberalization program whitethorn have been well-designed but initiated at the wrong time. Arguments about comparative advantage and gains from trade are more plausible when real world conditions approximate those of the theoretical models used to justify them, namely, equilibrium at full employment. Yet, it was during the extremely turbulent and depression-like conditions of the mid-to-late 1980s and early 1990s that most of the Latin American countries and transition economies of Centr al and Eastern Europe initiated their trade liberalization programs.Nugent states that one problem is that in such turbulent circumstances, often before stabilisation has been achieved and when both inflation rates and relative prices are very volatile, the price signals exerted by the trade liberalization measures may be either misleading or too noisy to have the right effects on resource allocation. This can be an argument for delaying trade liberalization until after stabilization can be achieved. But, if trade liberalization is delayed, it may mean that the stabilization programs that help raise the prospects for future growth and stimulate investments will do so in the wrong sectors.Yet, the currency depreciation required to offset reductions in tariff equivalents may also trigger inflation. Clearly, there are tradeoffs and problems inherent in these inevitable interdependencies. But, whether, stabilisation occurs before, after or simultaneously with trade liberalization (if at all), it suggests that the need for a well-articulated, coherent and thinkable program is even greater than would be the case if trade liberalization was to start from a stable, full employment economy.A second problem in which Nugent (2002) identifies is that trade liberalization, and capital market liberalization, is likely to increase the vulnerability of the economy to new kinds of shocks. These shocks can easily be very challenging to policy makers and make it even harder to stick with reforms. Both Chile of the 1970s and Mexico of the mid-1990s were heavily indebted and then buffeted by unexpected shocks in the form of higher interest rates in the US. Indeed, some analysts blame the setbacks of Mexico and Chile in their trade liberalization programs simply to bad luck.Even if this is not entirely true, it is quite true that even if the trade liberalization programs had been well-designed for normal condition over time, they may not have been sufficiently well designed to als o withstand the severe external shocks that may be more likely to come in a liberalized economy. Lessons for Policy Makers The weight of evidence suggests that openness to trade is good for growth and that growth benefits the poor. But to enjoy the full benefits of trade liberalization, McCulloch et. al. 2011) state it should be accompanied by sound policies in areas such as transport and communications infrastructure, market facilitation, competition, information and governance. In order to boost the competitive advantage qualities of the environment subsequently increasing investment within the nation. McCulloch et al (2011) further state that trade liberalization can change the nature of the try and uncertainty that poor households face although not always for the worse. It can also affect their ability to cope with risk and uncertainty.Policies such as improving access to credit markets can help a great deal here along with improvements in asset distribution and in the flexib ility of local labour markets. Conclusion In essence to conclude, in comparison to protectionist international trade policies, from empirical evidence presented trade openness as a whole can be considered as a key strategy to achieve economic development, as we have been able to witness an increase of imports for developing nations which in turn increases efficiency and reduces costs, which can be considered more effective than import substitution policies.However as established in this paper, there are various factors in which can affect the effectiveness of trade liberalisation policies, which policy makers must take into consideration. References Clift, J. and Diehl, E. (2007) Financial Globalization A compiling of articles from Finance & Development Washington, D. C. International Monetary Fund Dollar, D. , 2005, Globalization, Poverty, and Inequality since 1980, World Bank Research Observer, 20 (2) 145-175 Dollar, D. & Kraay, A. 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