The Impact of Economic Globalization
for Development Countries
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The Effects of the Economic Globalization for Developing Countries
I. Introduction
The current day globalization has dramatically changed the lives of millions of people from around the world. In the last thirty years, its processes and instruments have dynamically transformed the different aspects of life – economics, politics, and social endeavors, among others – in the most unexpected ways (Denis & Heyck, p. 2). It has altered the past, geo-political systems and economic borders, including commercial and social networks and political institutions (p. 2). Likewise, globalization has also accelerated social polarization (Grumber, p. 28). This transpires as the national income becomes centered on the hands of few rich capitalists in one country (p. 29).
According to the IMF Website (p. 1), globalization has supported the delivery of special progress for people living in developing countries. In their definitive studies, World Bank economists David Dollar and Aart Kraay concluded that since 1980, globalization has led to poverty reduction and the decrease of income inequality in a global scale. They found that in “globalizing” countries in the developing world, income per person grew three-and-a-half times faster than in “non-globalizing” countries, during the 1990s (p. 1). Overall, the economists noted “higher growth rates in globalizing developing countries have translated into higher incomes for the poor.” They also found that in virtually all events in which a country experienced growth at a rate of two percent or more, the income of the poor rose.
Suffice to say, there are positive and the negative effects of globalization in the developing countries, particularly in their economic aspects. Hence, this paper aims to explore the three major developments brought about by globalization and these are as follows: foreign direct investments, domestic economic growth, and the international division of labor. In some ways, there are also socio cultural impacts of globalization, particularly in the economic aspect which directly leads to socio cultural consequences. This paper will also touch on these matters.
II. Methodology
In this paper, we shall focus on the Solow growth model. This model is relatively easy to analyze compared to various endogenous growth models (Bernanke & Gürkaynak, p. 11). Also, it was stated in other globalization papers that there is no evidence that endogenous growth models perform better in practical applications than the Solow’s one (Parente, p. 50).
The Solow model is Y=K^α 〖(AL)〗^(1-α) where K is capital, A is technology, L is labor force.
In this paper, we can evaluate these from three aspects: One is Foreign Direct Investment, Employment Rate, and Technology. Our findings shall show that with the use of economic globalization policy, Investment increase in the developing countries leads the K capital increase. Likewise, the employment opportunities will increase, so the L labor force will increase and the employment rate also increasing. After using the economic globalization policy, the developing countries will import foreign countries skill or between these countries they will share their skill and technology. So, the A technology will increase.
From the increased K, L, A, this paper can find the use of the economic globalization lead to the economic growth by increasing the GDP.
III. Results and Analysis
3.1. Foreign Direct Investment – this paper evidences that with Foreign Direct Investment (FDI) becoming easily accessible to the developing countries which engaged in international trade, investments improved their developing economies. FDI is related to a set of positive effects in the host countries. It is very much needed by the developing countries as they are considered as a stimulating factor of economic growth (International Monetary Fund Website, p. 1). FDI is also considered as complementary to domestic investment and a vital source of financing the account current deficit (p. 1). FDI is one of the major movers in economic growth through capital accumulation. Other economists also propose that FDI facilitates the reduction of the “ideas gap” by know-how transfer and the increase in firms’ productivity, with or without foreign participation (p. 2).
FDI also allows the developing countries to invest in infrastructure and increase tax revenue. This leads to a boost in development in the country. In developing countries, a major requirement for economic growth and sustainable development is the provision of efficient, reliable and affordable infrastructure services, like water and sanitation, power, transport and telecommunications. The availability of efficient infrastructure services is a vital indicator of the pace of market development and output growth. Also, the access to affordable infrastructure services for consumption purposes serves to enhance household welfare, especially of the poor.
Developing countries have realized this potential with the onset of globalization. According to Kirkpatrick, Parker, & Zhang (p. 3), FDI has steadily expanded through the past thirty years. The growth in FDI jumped in the 1990s and it rose to $331 billion in 1995 and $1.3 trillion in 2000 (p. 3). As a result, developing countries witnessed a dramatic increase in the average ratio of FDI to total investment in the 1990s. A major characteristic of this FDI growth has been its growth in the services sector, which is now the dominant sector in global FDI (p. 3).
Linked with “global production sharing” is the conglomeration of transnational companies and foreign direct investment in developing countries. Their increased presence stems in part from the recent removal of controls on capital flows in these host economies. For one, transnational companies formalize direct investments (Goldberg & Pavenik, p. 3). Hence, a major part of the increase in FDI in the services sector has been the growth in private capital flows for infrastructure in response to the overall patterns of privatization of infrastructure in developing countries. However, there was a sharp decline in donor support for infrastructure projects during the 1990s, with aggregate flows of official development assistance for the infrastructure industries slumping by half during the course of the decade
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