Discuss whether developing countries have more to gain from globalisation than developed countries.

  1. Introduction
    1. Globalisation refers to the process of continuing integration of the countries in the world where national markets become increasingly interlinked. Globalisation leads to greater interdependence between countries as there is greater mobility of goods and services, capital, labour and technological know-how amongst countries. As such, globalisation has exposed national economies to much more intense competition than ever before.
  1. Body
  2. With globalisation, there is increased trade as trade barriers are reduced. Developing countries such as China open their market to international trade and capital flow, making a breakthrough in producing low-end manufactured goods at lower opportunity cost with her relative abundance of low-wage labour. As such, China is able to gain comparative advantage (CA) in producing low-end manufactured goods as compared to developed countries. With increase in export price competitiveness, total revenue increases. Coupled with increased market access for export, this will lead to a rise in net exports. Hence AE would increase, ceteris paribus. This is especially beneficial for developing countries such as China as there would be greater utilisation of unemployed or underemployed resources. In addition, the continuing reallocation of manufacturing activities from industrialised to developing countries opens new opportunity to expand trade.
  • While developing countries gain jobs and foreign money as a result of globalisation, the converse happens to developed countries. Manufacturing jobs, for example, have been dramatically cut in the U.S. and Canada as a result of globalisation. This means that while developing countries’ citizens have more opportunities, this comes at the expense of developed countries’ labour markets. Developed countries that have lost its CA to China would experience a fall in demand for its low-end manufactured goods since China’s low-end manufactured goods are substitutes of their products. This fall in production activities leads to retrenchment of workers, especially for low-skilled and older workers, thus resulting in structural unemployment in the developed countries.
  • Developing countries may have a comparative advantage in primary products. However, this may not offer a large scope for economic growth. The TOT for most

developing economies has been deteriorating. This means that year by year they have to export more and more goods (especially primary agricultural products) to support a given volume of imports. As such, their standard of living will not rise as fast. The problem of weak TOT is due to the income inelastic nature of demand for their products. Hence, even as globalisation brings about a rise in incomes, the demand for primary agricultural products would only increase less than proportionately, ceteris paribus. However, fuel-exporting developing economies have been in a much stronger position, although in recent years, there has been considerable volatility in their TOT as the world price of crude oil has fluctuated widely. On the other hand, for developed countries, their TOT has experienced longer-term improvement. This means that they have continued to receive increased real prices, especially for their exports of manufactured consumer goods. Hence they are able to enjoy a greater amount of import for a given export, leading to a higher standard of living.

  • Globalisation has led to greater financial flows across national border. Total FDI flows in the world increase. New technology, in both developing and developed economies, creates greater demands for those with higher skills.
  • When there is an increase in demand for skilled labour in developing countries, it raises the wages of these workers. This is made worse by the fact that with increased labour mobility resulting from globalisation, it may give rise to a brain drain of skilled workers in developing countries as highly qualified professionals migrate to developed countries to benefit from the higher wages, thus worsening the severe skilled labour shortage. Hence with increase in wages of high-skills workers while low-skilled workers’ income may remain constant or decrease, it will lead to a widening of income inequality in the developing countries. For the developed countries, wages of workers in high value-added sectors rise exponentially compared to wages of workers in low skilled and low value-added sectors. Hence with demand for skilled workers outstripping its supply, wages continue to rise. This thus worsens its income gap.
  1. Conclusion

It is not necessarily true that developing countries have more to gain from globalisation than developed countries. In fact, it has been argued that the benefits of globalisation can outweigh its costs for most countries.

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