Name: .................................... Day......................................... Time....................................... Teacher..................................

HSC Economics
Topic 1 - Globalisation
Exam question and response

Sample Essay

Topic 1 Essay - Globalisation

Q: Analyse the impact of globalisation on the environment and inequality
Response:

Globalisation is the integration between different countries and economies and the increased impact of international influences on all aspects of life and economic activity. As a result of globalisation there has been a range of impacts on the environment and an increasing gaps between the rich and poor causing high levels of global inequality. There has been a widening in the development gap and distinct variations in the standard of living between advanced industrialised economies (AIEs), newly industrialised economies (NIEs), economies in transition, and developing economies. Globalisation has been caused by a variety of factors. Firstly, trade flows have led to greater convergence as economies specialise in producing goods and services in which they have a comparative advantage and rely on other economies to purchase a variety of goods and services. Consequently the value of world trade has grown by 7% per annum since 2000. The gross world product is currently nine times its size in 1950 and the volume of world trade has grown by 33 times since 1950 level. High-income countries account for 69.9% of all world trade causing greater disparities within the global economy. Trade has lifted in response to various organisations and agreements such as the WTO, NAFTA, APEC, EU and GATT). These increased links between economies has led to a greater synchronisation of business cycles. For example a boom in one country can stimulate demand in another, resulting in the ripple effect. Secondly, financial flows have been a significant driving force in the process of globalisation. Finance is the most globalised feature of the world economy because money moves between countries more quickly than goods and services or people. By 2006 FDI was 3 times the 1995 levels. This significant increase was largely influenced by more cross-border mergers/acquisitions, which increased the rate of growth. GFC in 2008/09 caused a large decrease in financial activity. Prior to the GFC there was large increases in global capital market turnover (growing 273% from 1995 to 2008). Global financial flows in 2007 had grown by twice their 2003 levels, increasing at an accelerating rate from 1988 2007, reflecting the rapid process of globalisation. In addition TNCS play a vital role in global investment flows. Therefore actions in one country may affect another. (e.g Asian financial crisis started in Thailand, but quickly spread elsewhere.) Furthermore, rapid improvements in technology have allowed economies to become more integrated leading to the emergence of the global economy. New technology has provided more trade opportunities and greater productivity. It has assisted many countries in achieving economies of scale. The increased integration of technology has created the New Economy (marked by ICT); this prolonged economic expansion in the 1990s. Moreover, technology flows have allowed for an increase in the development of global production webs.

In addition, the flow of international labour continues to grow, driving the process of globalisation. The international labour market has formed as newly developed nations seek help in filling labour shortages. Approximately 1.5% of the worlds workforce lives outside their place of citizenship. Labour markets are generally less regulated to increase flexibility. Job displacement has been a large problem resulting from the globalised labour force, as the spread of outsourcing moves work away from some nations to others. Another development reflecting the process of globalisation is the increasing number and extent of agreements between national governments and international organisations. These agreements and organisations aim to reduce the negative impacts of globalisation such as those upon the environment and increased levels of inequality. The World Bank actively works to help poorer countries with their economic development. One of their major aims was set out in the Millenium Development Goals, whereby they attempted to reduce inequalities by reducing the number of people living on less than $1 a day to half the 1990 level by 2015. Similarly the United Nations Framework Convention on Climate Change is an international environmental treaty, which aims to stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent anthropogenic interference with the climate system. The increasing levels of globalisation have had a significant impact on the environment. The natural environment represents the totality of the physical environment in which society lives and climate, land and water as well as plants and animals. Currently many economists are arguing that increased global production levels are having devastating effects upon the natural environments of individual economies, which could impede future economic growth rates and have severe economic impacts. Many economists argue that international trade worsens the environment by shifting pollution intensive production to low-regulation (and often low income countries). It is argued that globalisation facilitates the relocation of dirty industry to poor countries known as Pollution Haven Hypothesis (PHH). This is due to the way environmental regulation impacts comparative advantage. Furthermore the composition effect refers to the changes in emissions arising from the change in industrial composition following trade liberalisation. For example liberalisation induces an economys service sector to expand and its heavy industry to contract, the countrys total emissions will likely fall since the expanding sector is less emission intensive. Following this resource reallocation within countries, this indirectly impacts environment due to the scale effect more efficient allocation of resources within countries shifts out production possibility frontier, raising the size of the industries pollution base, resulting in greater global emissions, ceteris paribus. The process of globalization has resulted in China experiencing rapid growth, which has produced environmental destruction. As the economy grows so does its demand for resources and environmental problems arise. China is the largest carbon emitter in the world as well as sulfur dioxide. Furthermore, China faces a very high incidence of respiratory diseases, has the worlds highest rate of chronic respiratory disease and faces outbreaks of SARS and Bird Flu in 2003 and 2005

According to Nicholas Sterns 2006 report the global economy needs to reduce greenhouse gases in order to maintain the quality of life of future generations. Thus, countries around the globe will need to price goods and services produced to reflect their full costs to the environment. Many governments around the globe are intending on internalizing these negative externalities imposing a carbon tax on their largest polluters. For example, Nicholas Sarchozy is already imposing a carbon frontier tax on importers such as China who pollute. A range of factors causes higher pollution levels. Firstly, market failure often leads environmental damage as the price mechanism takes into account private benefits and costs to production but it fails to take into account indirect costs such as environmental impacts. This is largely caused by the lack of global property rights. As a result of market failure negative externalities occur. These negative externalities are partially caused from the presence of public goods, which are both nonrival and excludable for example, the atmosphere and the thinning of the ozone layer. The following graph identifies the impacts of not conserving the environment on future economic growth. If the environment is not looked after economic growth rates are relatively high in the short run as indicated by the P1M1. However, as production levels increase this will have a negative effect upon the natural environment (demerit good) and this may lead to the destruction of natural resources causing an increase in production costs, decreased ESD and a decrease in production in the future P2M2 causing a decrease in intergenerational Graph 2 shows the trade off that exists between economic growth and ESD. Point A represents higher economic growth rates yet lower levels of ecological sustainable development. At point B there are lower levels of economic growth but increased levels of ESD. This identifies the possible impactions of Australias carbon tax at $23 per tonne, which may affect economic growth. It could cause a larger trade deficit as exports become less internationally competitive as a result of an increase in prices caused by the carbon tax. Yet, some economists say that whilst this may occur in the short term, there will be benefits in the long-run as it will promote technical and allocative efficiency in cleaner technologies leading to increased economies of scale. According to economist Simon Kuznet pollution levels initially increase with increases in GDP per capita. This is because as income levels increase so do GDP growth rates and so does demand for manufactured goods. Therefore it could be argued that pollution levels are a byproduct of increasing demand for manufactured goods (cars, airconditioners ect.) that improve material standards of living. Also shows that as people receive higher incomes they are more capable and willing to safeguard their improved environmental degradation. A decrease in pollution levels to the right of x, indicates Kuznets simple theory of grow and pollute and then clean up as you income levels increase and allow you to do so. In order to combat these environmental issues it may be necessary for economies around the world to focus on economics measurements such as the Happy Planet Index and Green GDP. The Happy Planet Index is an indication of how successfully economies are able to balance twin goals of human development and environmental sustainability. The index takes account of surveys of life satisfaction, life expectancy and each countrys per capital ecological footprint. In addition the green gross domestic product is an index of economic growth with the environmental consequences of that growth factored in.

The process of globalisation has also significantly influenced the level of inequality within the global economy. Risks and costs of globalisation tend to significantly impact developing countries and the worlds poor. The costs of the repeated crises associated with economic and financial globalisation appear to have been borne overwhelmingly by the developing world, often disproportionately so by the poor who are most vulnerable. On other hand benefits from globalisation in booming times are not necessarily shared widely and equally in the global community. Sub Saharan Africa is a prime example of an economic region, which as suffered severely throughout the process of globalisation. In general terms poverty has fallen world-wide except in Sub Saharan Africa where it continues to rise. It is the most economically marginalised region in the world, with a combined gross domestic product (GDP) of $US544 billion per year is considerably smaller than Australias despite a population 36 times the size. Of Sub-Saharan Africas 48 nations, 34 are classified by United Nations as Least Developed Countries (LDCs) which have a per capita below $US900. Unlike most developing regions, many of the economies of Sub-Saharan Africa are going backwards, with per capita incomes lower than they were 3 decades ago and a continued rise in poverty. The number of people living in absolute poverty has almost doubled, from 164 million in 1981 to 313 million in 2001. In addition incomes have deteriorated from an average of US64cents in 1981 to US60cents in 2001. Irelands economic performance has been profoundly influenced by its connections to the global economy. Ireland is a Celtic Tiger who experienced significantly high growth rates. It specialises in services and high-tech manufacturing. Moreover its FDI inflows are equal to 10% of GDP. Ireland responded to the process of globalisation by carrying out reforms in specific areas. Reforms included: strategic industry policy, reforms to public sector, deregulation of protective barriers (trade) and decreased investment and restrictions. The Industrial Development Agency (Public Sector) is responsible for promoting foreign investment in Ireland. This increased foreign capital investment leads to higher technology transfers. In addition low rates of company tax- 12.5% increase incentives for international businesses to use Ireland. e.g over 20% of Irelands exports are from foreign owned companies. However the GFC caused a rapid contraction in GDP and exposed the economy to a series of challenges, as it was the first country in EU to enter recession. The budget surplus of 3% fell to a deficit of 11.5%. Further the downgrading of Irelands credit rating due to high level of public debt and banking systems bailouts. One of Irelands long-term challenges due to dominance of ETMs in global trade that is susceptible to IBC. As the economy collapse there was a bursting of the domestic property bubble. However, Irelands economic stance remains far above regions such as Sub Saharan Africa, demonstrating that stark inequalities persist within the global economy. Alternatively globalisation has caused China to experience stark inequalities within its own nation due to globalisation. Although the World Bank classifies people living under the poverty line have purchasing power parity of less than $1US per day, there is now an increase of people living on less than $2 per day. So although there are now 2.8% of people under the poverty line, being a drastic difference of 8% in 2009, the reality is still questionable. Per capita incomes are considerably higher in urban areas than rural. Not only this, but the performance of coastal areas in 1990s was averaging 13% which is 5 times the level in Chinas slowest growing western regions, contributing further to the bulk of income being distributed to coastal metropolitan areas. In these ways it is

evident globalisation has impacted income inequality within China due to a changed structure of its economy as trade and financial flows grew. There are several factors, which reinforce rather than reduce global inequalities. Firstly, wealthy countries protect their domestic agricultural sector because it is not competitive with agricultural producers in many developing nations. Developing countries that export commodities are severely affected by continued high levels of global protectionism in the agricultural sector. In addition expanding regional trade blocs like the EU and NAFTA exclude poorer nations from gaining access to lucrative consumer markets. Although the WTO promotes trade reforms to benefit poorer nations such as the development round it has not been successful in achieving many of its outcomes. Secondly, global financial architecture has entrenched global inequalities. Long term international flows of investment heavily favour developed countries. High income countries received over half of total FDI inflows in 2008. Moreover short- term financial inflows also heavily favour the more prosperous emerging economies, which offer better financial returns for currency and stock market speculators. International organizations such as the IMF require structural adjustment policies which are used to advocate the interests of rich countries. Further, as a result of greater access to global financial markets, many developing countries have massive debt burdens. In 2008, total external debt for developing countries was US$3.7 trillion. Huge interest repayments induced by these high levels of debt caused significant problems for many nations. In addition, although technology has the capacity to contribute to closing the gaps in living standards, it is largely geared to the needs of high-income countries and not to the needs of developing nations. Technology such as labour saving technology and pharmaceuticals that deal with the health problems of ageing people in rich countries are of little benefit to poorer nations who have abundant supplies of labour, limited capital resources and a young population whose main health risks are common infectious diseases. Further, developing nations find it difficult to gain access to new technologies as intellectual property rights restrict benefits of technological transfer to poorer countries because they cannot pay developed country prices for those technologies. Furthermore, it can be argued that global aid and assistance contribute to the entrenched problem of inequality. Critics of aid policies argue that a significant proportion of official development assistance is phantom aid (aid that does not improve the lives of poor to reduce inequality) and tied aid. Eleven percent of aid it debt related and a further 5% of foreign aid is spent on administration. These disbursements reduce the amount available for development projects and humanitarian relief. In conclusion, globalisation has had significant impact on the environment and inequality. It is evident that while developed countries have prospered over the era of globalisation, developing countries have suffered. The environment has also become a growing issue of concern due it rapid deterioration as global production levels increase. Hence, globalisation is closely connected to levels of inequality and the environment.