Effects of changes in globalisation on economic development

International Trade & Globalisation – Effects of Changes in Globalisation on Economic Development

Learning Objective

Explain how changes in the level of globalisation affect economic development, using appropriate terminology, diagrams, formulas and real‑world examples from both developed and developing economies.

1. What is Globalisation?

Globalisation = the increasing integration of national economies through the growth of:

• International trade in goods and services
• Foreign direct investment (FDI) and other cross‑border capital flows
• Migration of people and labour
• Transfer of technology, ideas and information (e.g., the internet)

2. Specialisation, Comparative Advantage & Free Trade (Syllabus 6.1)

• Specialisation: a country concentrates on producing those goods/services for which it has a lower opportunity cost.
• Comparative advantage: the ability to produce a good at a lower relative (opportunity) cost than another country.
• Free trade: the removal of all barriers (tariffs, quotas, NTBs, subsidies, embargoes) to the exchange of goods, services, capital and ideas.

Advantages of Specialisation & Free Trade

• Higher real GDP – firms can achieve economies of scale.
• More efficient allocation of resources – labour and capital move to their most productive uses.
• Greater variety of goods for consumers and lower prices.
• Stimulates innovation and technology transfer.

Disadvantages / Risks

• Dependence on a narrow range of exports – vulnerable to world‑price fluctuations.
• Domestic industries that are not competitive may shrink, causing job losses.
• Widening income inequality if gains accrue mainly to skilled workers or export‑oriented firms.
• Environmental pressure from expanded production and transport.

3. Why Governments Impose Trade Restrictions (Syllabus 6.2)

Restrictions are introduced for economic, social or political reasons. At least five of the following should be mentioned in exam answers.

• Protect infant industries – give new firms time to become competitive.
• Protect strategic or security‑sensitive sectors (defence, energy, food security).
• Prevent dumping – foreign producers selling below cost to drive out local firms.
• Correct balance‑of‑payments problems – reduce imports when a large deficit exists.
• Reduce consumption of demerit goods (tobacco, alcohol) for health or moral reasons.
• Protect the environment – limit imports that cause pollution or over‑exploitation.
• Generate tax revenue – tariffs as a source of government income.
• Political/diplomatic motives – sanctions, embargoes, retaliation.

4. Main Forms of Trade Restrictions

5. How Restrictions Influence Globalisation

• Reduce the flow of goods & services – higher prices, lower volumes.
• Limit capital flows – fewer FDI and portfolio investments.
• Constrain labour migration – fewer skilled workers move abroad.
• Slow technology & idea transfer – less diffusion of innovation.

Consequently, the pace of globalisation slows. Removing or reducing these barriers has the opposite effect, accelerating integration.

6. Role of Multinational Companies (MNCs) in Globalisation

• Major source of FDI – bring capital, technology and managerial expertise.
• Facilitate technology transfer and diffusion of best practice.
• Create global supply chains – linking producers in developing countries with markets in developed ones.
• Influence host‑country policies through lobbying for investment‑friendly regulations.

7. Effects of Increased Globalisation on Economic Development

1. Higher economic growth – larger markets → economies of scale.
2. Technology transfer & skill development – FDI, MNCs, and trade bring new production techniques.
3. Improved consumer choice & lower prices – competition forces efficiency.
4. Specialisation according to comparative advantage – resources move to most productive sectors.
5. Increased foreign‑exchange earnings – higher export volumes improve the current account.
6. Potential downsides
   • Rising income inequality if gains concentrate in high‑skill or export‑oriented sectors.
   • Greater vulnerability to global shocks (e.g., demand falls in major markets).
   • Environmental pressures from expanded production and transport.

8. Effects of Reduced Globalisation (Protectionism) on Economic Development

1. Short‑term protection of domestic industries – infant‑industry argument; may allow capacity‑building.
2. Higher consumer prices – reduced competition often leads to cost‑pass‑through.
3. Reduced efficiency & innovation – firms face less pressure to improve.
4. Risk of trade retaliation – other countries may impose their own restrictions, shrinking export markets.
5. Long‑term growth constraints – limited technology transfer, lower FDI inflows, weaker foreign‑exchange earnings.
6. Possible improvement in the balance of payments – if import volumes fall enough, the current‑account deficit may shrink, but may also cause currency appreciation (Dutch disease).

9. Impact on Foreign‑Exchange Rates & Current‑Account Balance

• Capital inflows (FDI, portfolio investment) increase demand for the host‑country’s currency → appreciation.
• Higher export earnings raise foreign‑exchange reserves and improve the current account.
• Protectionist measures that cut imports can improve the current account, but a resulting appreciation may make exports less competitive.

10. Environmental Sustainability (Syllabus 6.4)

• Positive aspects
  • Diffusion of cleaner technologies via MNCs and trade agreements.
  • Global environmental standards embedded in NTBs (e.g., EU eco‑labels).
• Negative aspects
  • Increased production and transport raise carbon emissions.
  • “Race to the bottom” – countries may lower environmental regulations to attract FDI.

11. Comparative Impact on Developed vs. Developing Economies (Syllabus 6.3)

12. Key Economic Indicators & Formulas

• Terms of Trade (ToT):
  ToT = (Export Price Index ÷ Import Price Index) × 100
  An improving ToT means a country can buy more imports for a given volume of exports.
• Real GDP (Expenditure Approach):
  Y = C + I + G + (X – M)
• Current Account (CA):
  CA = (X – M) + Net primary income + Net secondary income
• Exchange‑rate effect on trade balance (simplified):
  Appreciation → imports cheaper, exports more expensive → possible trade‑balance deterioration.
  Depreciation → opposite effect.

13. Representative Case Studies

• China (2000‑2020) – Trade liberalisation and massive FDI created an export‑led boom, lifted >800 million people out of poverty, but generated regional income gaps and severe environmental problems.
• United Kingdom (Brexit, 2016‑2022) – Leaving the EU removed tariff‑free access to the single market, raising import costs, creating short‑term uncertainty for exporters, and prompting debate over long‑term growth.
• Vietnam (2000‑2020) – Export‑processing zones, low‑cost labour and openness to FDI turned the country into a major electronics and textile manufacturer, boosting GDP per‑capita while widening urban‑rural disparities.
• Argentina (2001‑2002) – Protectionist response to a balance‑of‑payments crisis (high tariffs, import licences) temporarily improved the current account but led to inflation, reduced foreign‑exchange reserves and a deep recession.

14. Suggested Diagrams for Exam Answers

1. PPF diagram showing specialisation before and after trade – illustrate gains from trade.
2. Supply‑and‑demand diagram of the foreign‑exchange market showing the effect of FDI‑driven capital inflows on the domestic currency.
3. Bar chart comparing export‑price index and import‑price index to calculate Terms of Trade.
4. World map (or schematic) of major trade routes before and after a tariff reduction – visualising increased flows of goods, services and capital.

15. Checklist for a Full‑Mark Exam Answer

• Define globalisation and list its four main components.
• Explain specialisation, comparative advantage and free trade (advantages & disadvantages).
• Give at least five reasons why governments impose trade restrictions.
• Identify and briefly describe the five major types of restrictions.
• Show how each restriction affects the flow of goods, services, capital and ideas.
• Discuss positive and negative effects of increased globalisation on economic development.
• Contrast these with the effects of protectionism.
• Analyse the differing impacts on developed and developing economies (use the comparison table).
• Link globalisation to foreign‑exchange rates, the current account and environmental sustainability.
• Use appropriate terminology (comparative advantage, terms of trade, FDI, balance of payments, Dutch disease, etc.).
• Support arguments with at least one real‑world example or case study (e.g., China, Vietnam, UK‑Brexit).
• Include a relevant diagram where appropriate and label it clearly.

16. Actionable Review Table (Alignment with Cambridge IGCSE 0455)