How Globalisation has lead to differences in the development of Nations

Globalisation refers to the process of global integration through the breakdown of manmade and natural barriers to the movement of labour, investment, finance, trade and technology. Some countries are able to globalise easier while others find it significantly harder to break down the barriers for globalisation. The standard of living is a measurement of the economic development of a nation that is measured through the United Nations Human Development Index (HDI). It measures through three main aspects: life expectancy at birth, educational attainment and GNI/Capita PPP. Due to the variations in the ability of a country to globalise, as well as domestic issues that restrict growth, and global factors that negatively affect equality, there are present variations in the HDI between different countries and hence there are variations in the standard of living between countries.

The greater the ability of a country to partake in a trade agreement the higher its standard of living. This is because, free trade allows for comparative advantage to occur, where over the short to medium term there will be high unemployment, due to the low profitability of competing industries (which are inefficient due to lower costs overseas), which cause local businesses to close. Whilst over the long term there will be lower unemployment due to the specialisation of industry, creating economies of scale for more productive industries. This will also mean an increase in the aggregate demand (AD) of a country, if ceteris paribus is considered, with net exports (X-M) increasing and hence AD will increase too (as AD = C + I + G + (X-M)). This will lead to an increase in total output or GDP (fig 1.1) over the short to medium term. Trading with other countries also allows for greater access to a wider range of material goods and services, which also raises the standard of living of a nation. An increase in trade will therefore increase the amount of goods and services available in a certain country, increasing the production possibility frontier (Fig 1.3). This will lead to an increase in the aggregate supply (AS) of a nation (Fig 1.2) which will lead to an economic growth over the long term.  Hence, greater trade will lead to a higher standard of living and development.

Trade systems allow for certain countries to increase their GDP, through trading with each other, however, by doing so, they restrict other countries which are not a part of this agreement from accessing the same benefits. For example, the AANZFTA (ASEAN, Australia and New Zealand Free Trade Agreement), a multilateral agreement between the countries that are a part of ASEAN as well as Australia and New Zealand, allows for free trade to occur between member countries. This means lower costs of imports as well as exports, which can raise the aggregate demand of participating nations, as explained above. This also means that non-participating countries, such as Zimbabwe, will not be able to access the tariff free benefits and hence all imports from non-member countries will be higher, leading to a contraction in demand.

This ultimately means a lower net export (X-M) for non-member countries, lower aggregate demand and hence a decrease in total output/GDP. These excluded countries may also not be able to access material goods and services and hence their standard of living will not increase while other, wealthier countries will increase their standard of living, causing variation in HDI between nations.  Poorer nations also do not have the ability to implement international agreements due to infrastructure and administration costs.

Foreign Direct Investment (FDI), a global factor, and financial flows improve the ability of a country to set up businesses and improve employment. With more people employed, there will be a rise in GNI/Capita PPP, if ceteris paribus is considered, hence increasing the HDI of a nation. Developed and emerging economies are heavily benefited through FDI, with developed economies themselves accounting for only half of global FDI inflows (Dixon 2014 pg 58). Less developed countries on the other hand do not receive the same benefits with the world’s 48 least developed countries receiving just 4.4% of global FDI inflow (Dixon 2014 pg 58). This may be due to poorer nations not providing the most optimal returns with more developed nations and emerging economies being a better investment, monetarily.  This lack of investment means that there will not be significant increases in GNI/Capita PPP, further leading to a discord between the standard of living amongst developed, emerging and less developed nations.

Global aid and financial assistance is a necessary measure to reduce inequalities between nations. However, shortfalls have occurred with high-income economies providing less aid than promised with much of it going towards ‘technical cooperation’ according to the OECD. This means that although on paper global aid and financial assistance may seem relatively high, in reality, most of that money does not contribute to development or improvement projects to raise HDI – with a large portion of aid going towards countries and projects that better political and militaristic benefits for donor countries. These lacks of provisions for poorer nations mean that they are unable to receive the assistance necessary to reduce inequality.

Inequality can further be perceived through technology flows with poorer nations unable to keep up with the rapid development and rollout of new technological advancements. More developed nations are able to set up infrastructure and adopt new technological advancements most often meaning the economy is easier to globalise and develop. This is because technology can increase efficiency, with digitalisation reducing waste and inefficiencies due to it being instantaneous and computer advancements being able to calculate data faster. Hence, less developed nations that are unable to access technology may be unable to compete and hence unable to develop at the same speeds as their more developed counterparts, creating a divide between living standards and levels of development. It is noted by the World Bank that around half of the difference in living standards between the United States (a highly developed economy) and developing nations are reflective of developing nations unable to adopt newer technologies (Dixon 2014, pg. 60).

An increase in GDP will lead to an increase in economic development and hence the standard of living of a nation. This is because economic growth leads to an increase the GNI/Capita PPP (Purchasing Power Parity) of a nation, as higher incomes are achieved (due to more people being employed and higher wages as business flourishes through FDI and other means). This raises the HDI of a nation, through increasing one of the measures of HDI which is the GNI/Capita PPP. Hence, an increase in GDP will lead to an increase in the standard of living of a nation.

Some countries are not able to globalise at fast enough rates in relation to other countries. This may be due to the aforementioned global factors but also may be attributed to domestic issues such as a lack of natural resources, labour supply and quality, and government responses to globalisation.

Certain countries have a greater access to natural resources, due mainly to variations in the abundance of desirable resources in each country. Thus, certain countries have a greater likelihood of a trade agreement occurring as natural resources are necessary for construction and development. For example, Australia has a large amount of natural resources (in particular coal and iron ore) and this has seen the creation of many free trade agreements, most notably the ChAFTA (China-Australia Free Trade Agreement) in late 2014. China requires large amounts of coal and iron ore due to the nation being an emerging economy and the country currently undergoing mass industrialisation. Thus, those with access to cheap natural resources have high value assets which can be sold, increasing overall aggregate demand. This access to natural resources allows for development to occur with FDI rising in resource rich countries (85% of Australia’s mining companies are foreign owned), improving the standard of living. This means that less fortunate countries will be restricted from this potential development, leading to a contrasting of HDI.

China also provides a benefit to Australia too, due to its large labour supply. Due to the fact that labour costs are one of the greatest in the production process, a large labour supply can reduce this cost, lowering the total cost of the good, leading to an expansion in demand. China is thus able to manufacture mass goods at low costs, proving desirable to Australia. Hence, larger labour supplies can increase the likelihood of attaining a trade agreement.  However, this means that coutnries with a large cheap labour force have lower GNI/Capita PPP, meaning a lower standard of living. The reasons behind cheap labour forces is usually due to education with less developed nations unable to attain the same level and quality of education as more developed nations. Hence, HDI will be lower in less developed nations due to this.

With lower incomes, means lower MPS and APS. A lower MPS and APS decrease the savings pools and hence, since savings are used for investment, access to capital is restricted. This means that less developed nations with these lower MPS and APS levels are unable to easily establish new businesses and provide good and services for their wants and needs, leading to a lower standard of living.

Establishing new businesses is not only reflective of the accessibility of capital but also the willingness of individuals to start a new company. Starting a new business involved much financial risk and due to issues such as low incomes and individual attitudes towards business development – usually in less developed nations these issues impact upon the entrepreneurial culture and hinder the ability for new businesses to start. Often individuals in less developed nations are unwilling to take the risk to start businesses as there are not enough effective protections put in place.

These protections can be largely attributed to the political and economic institutions that are in place. Social institutions such as welfare prevent and alleviate the wealth gap and improve the standard of living overall for the nation. Less developed economies may not able to have such advanced social institutions due to issues such as inability to access new technology and corruption being prevalent in Governments. Political institutions, rather economic policy and domestic policy also can improve or restrict the variations in HDI between nations. Budgets that are passed in developed nations usually include foreign aid and this can heavily influence the level of development of nations. Trade agreements and political/economic alliances are also determined through these government institutions, with highly developed nations receiving more bargaining power.

The ability of a country to globalise is affected through 2 main categories, global and domestic factors, with each causing gaps between those that are wealthier and those that are less developed. Globalisation has led to these variations with these factors proving to be of more importance to the influence that they have on HDI levels. It can be seen that globalisation usually favours nations that are emerging or developed with many exclusions and restrictions being placed upon less developed nations.

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