Discuss the effects of globalisation on income distribution within and across countries and the policies a government can adopt to tackle these effects.      

Introduction

Define Globalisation: Increasing integration of national economies in terms of financial flows, trade, movement of factors of production, ideas and changes in information and technology.

Body

Discuss the effects of globalisation on income distribution across and within countries

Across countries

How Developed countries may experience higher economic growth as compared to Developing countries

  • Developed countries generally have a comparative advantage in the production of capital-intensive manufactured products. Globalisation and free trade resulted in specialisation by the developed countries in these goods and services, which normally have an income elastic demand. On the other hand, developing countries generally have a comparative advantage in the production of labour-intensive agricultural products or raw materials, whose demand is generally income inelastic. Thus with global economic growth, demand for products from developed countries (manufactured products) tend to increase more than that of products from developing countries (agricultural products) and thus leading to higher economic/income growth for developed countries.
  • This is exacerbated by the nature of free trade agreements and arrangements signed that allow the developed countries to benefit more than proportionately due to the bargaining power that the developed countries often have. The nature of the products sold by developing countries (necessities and raw materials) are often income inelastic in demand which means that demand often increases at a slower pace over time (with economic growth). These often results in terms of trade becoming skewed in favour of developed countries, allowing the developed countries to have faster income growth compared to developing countries.
  • Problem of brain drain due to migration of skilled workers to developed countries. The lowering of barriers and improvement in technology increased labour mobility between countries and this has resulted in an outflow of talent from developing to developed countries. This will reduce the long-run aggregate supply (LRAS) of the developing country while enhancing the LRAS of the developed country.

How Developing countries may experience higher economic growth as compared to Developed countries

  • The increasingly liberal movement of factors of production, in particular capital, through various avenues such as Foreign Direct Investment (FDI) from multinational companies (MNCs) have allowed developing countries to increase their productive capacity, leading to long-term economic growth and substantial increase in national income. This is especially important to developing countries that have a relative capital deficiency to develop their domestic industries, thus income growth is higher for developing countries as compared to developed countries.
  • FDI also facilitates the flow of technology and information transfers that allowed developing countries to achieve qualitative improvement in their production methods, without incurring the expenses spent on research and development (R &D) and the mistakes made by developed countries. This allows the developing countries to “free-ride” on the developed countries and achieves a higher rate of economic growth.
  • The advancement of technology, especially the lowering of communication and transport costs, resulted in off-shoring and outsourcing (fragmentation of supply chain) that allowed the shifting of some of the production activities from developed countries to developing countries. For instance, many MNCs have subsequently relocated the production of labour intensive intermediate products to lower labour cost developing countries such as China and Vietnam, thus resulting in higher economic growth for developing countries.

Within countries

  • Increase in trade flows as a result of lowering communication and transport costs, will see an increase in factor incomes for owners and workers in industries where the country has a comparative advantage in and a decrease in factor incomes for the owners and workers of comparatively disadvantaged industries.
  • Outsourcing has also resulted in winners and losers within societies. Workers in sunset industries in developed countries might encounter structural unemployment, especially if they are ill-equipped to make the necessary adjustments to work in the new industries that have taken the place of the sunset industries. This is made worse by the rapid economic and technological changes accompanying globalisation that results in a shortening of the transition period and the hollowing out of the manufacturing base. E.g. USA.
  • While outsourcing has created job opportunities in developing countries, these opportunities often benefit only a privileged minority and only exacerbated the existing income inequalities within the country. E.g. the income inequality between the Chinese in coastal cities and the Chinese inland.

Possible considerations of differing effects

Evaluate possible reasons why the income gap may widen between and within countries and to examine reasons why the gap may not widen between and within countries.

Discuss the policies that a government can pursue to tackle the effects of differences in income distribution across and within countries

With differences in income distribution across and within countries, there is a need for governments to pursue policies that allow economic/income growth to take advantage of the globalisation process while at the same time, alleviating the disparities in income distribution between the different segments of society (e.g. low-skilled versus high-skilled labour).

Policies to promote economic/income growth

Countries may pursue policies, in the context of globalisation, to promote economic growth and increase national income. Policies include: Exchange rate policy, trade policy, supply-side policy and protectionism.

1. Exchange Rate Policy

A country may choose a policy of currency depreciation. With currency depreciation, the price of exports in foreign currency will increase and the price of imports in domestic currency will decrease. Assuming Marshall-Lerner condition is met, this can help to increase net exports. The increase in net exports will result in increase in aggregate demand (AD), increasing actual economic growth of the country.

2. Trade Policy

Through the signing of more free trade agreements and policies to lower trade barriers, trade flows will be increased and if exports increase relative to imports, trade can be an engine of growth that will promote economic growth. Furthermore, countries can undergo reforms to promote the inflow of foreign direct investment and information/technology, which helps to increase both actual (through increasing AD) and potential economic growth (increasing LRAS). For instance, China has eased investment rules by foreigners in domestic enterprises to promote economic growth.

3. Supply-side policy

Globalisation, with the improvement in communication technology and transportation, allows for mobility of labour between countries and countries can make it easier for employers to hire foreign workers in industries such as construction, where local manpower may be lacking. For example, Contact Singapore is an institution established by the government to reach out to overseas talent.

Singapore may also promote foreign direct investment, through the use of incentives such as tax exemptions and grants to multinational companies (MNCs) to attract them to Singapore to invest. Singapore may also provide more public investment and infrastructure development that will enhance Singapore’s efficiency, competitiveness and productive capacity that will help made Singapore a more attractive place for FDI as compared to other countries.

Policies to reduce the income disparities between the different segments of society

1. Income redistribution policies

Provision of assistance by the government to help out the low-income segment of the population such as workfare (wage subsidies), making income tax more progressive in nature and providing rebates (utilities, GST etc.) 

2. Protectionism

Globalisation accelerates the process of economic adjustment that may result in the displacement of workers, especially those in industries that have lost their comparative advantage. Protectionism may provide domestic industries to lessen the possibility of structural unemployment and a more orderly transition to a newly industrial mix that will reduce the fluctuations and the number of “losers” from the process of adjustment.

3. Supply-Side Policy

To facilitate workers who may lose out from the economic transition, interventionist policies, such as promoting skills training may be needed to prepare the workers with the necessary skills to make the transition and reducing the possibility of structural unemployment and widening income gap that exist

Conclusion

Requires a coordinated policy approach where the measures can complement one another to help increase incomes and improve income distribution within the country.

  • Modest depreciation of the currency to boost net exports with selective protectionist measure to protect sunrise industries to promote economic restructuring and economic growth, while supply-side policies to implement skills upgrading can be implemented to help those working in comparatively-disadvantaged industries.

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