Integration Of Economy The Developing Countries example essay topic

Globalization, as coined cited in Landau (2001), is! SS internationalization of markets where products are widely traded, capital is mobile, not particularly site-specific, and will move to different location should profits be higher (and secure); consumption patterns in different countries are not mutually exclusive, or at least can be catered to by extending the product range, and prices are sensitive across borders and predominantly set in world (cross border) markets. !" Globalization is really a hot topic for the recent years. It seems that it is a conjuncture of economic components, supported by powerful players and a web of institution. Especially, the economy of the whole world growing or depression, currency inflation or deflation, are totally affected by this phenomenon. It has added a new line of divide in the world economy, and identifies the winner and the losers.

Undoubtedly, the winner is the one who can increase integrated in the world economy by getting benefit from trade flows, investments, through out the global economy. The loser is the one who detached from this process and getting far behind to jump into the platform of globalization. So, the new global economic structure is developing or being formed. Here I would like to discuss the effects of the development of economic globalization that brings to the developing countries. The Economic globalization causes out the effect that lacking of diversification of the economic structure. There is a trend that economic rivalry among industrialized countries has shifted around services, which cover a wide range of economic activities.

As stated by the WTO secretariat, the economic activities have been divided into twelve sectors, which are business, communication, construction and engineering, distribution, education, environmental, financial, health, tourism and travel, recreational, cultural and sporting, and transport. The Growth of services is linked to development in new information technology, which affects all activities, all of which have strong information content. Services play a central role in facilitating trade in goods as a result of transportation, telecommunications, marketing, and distribution services. Services account for around 60 percent of GDP in developed countries. International trade in service is really growing constantly. The value has increased at an average rate of more than 6 percent over the period 92-94.

Services account for a quarter of international trade in goods around 700 billion. In 1993, trade in services represented 154 billion. In 1996, the share of services in the added value exports accounted for 37 percent for low-income countries, 53 percent for middle-income countries, and more than 70 percent for developed countries. What does it means? The integration of the global economy encourages the countries focus on their strength. The developed countries shift to the tertiary industry and the developing countries mainly focus on the sourcing supply and the assembly production.

Globalization reduces the production diversities within one country. As a result, developing countries will depends on advanced countries to boost up their economy under globalization context. Moreover, it discourages developing countries to have upward improvement in their economy. It also makes the developing countries difficult to shift to New industrialized countries. In addition, not only the economic structure is affected but also the linked economy and the policy.

The fluctuation of economy on one country will directly affect the others! |. The most obviously case can be stated as the 1997 Asian financial crisis. Under the linked economy between the different countries in Asia, one country suffers by the economic crisis and depression will carry out the linkage effect to the other countries in close relationship.

That's why when the financial crisis exited at Thailand on 1997, the damage spread to the other Asia countries faster than we expected. Also, in The Economics of Interdependence, Richard Cooper (1968) argued that there is a conflict between nation states and the international economy. The states are finding them difficult to make a balance between increasing economic interdependence on the one hand, and the pursuit of legitimate national objectives on the other. The national economies are linked together so that macroeconomic policies, and particularly American fiscal and monetary policies, had a deep impact on exchange rates and on other economies. The decision by the United States in 1980 to check inflation and the fall of the value of the dollar had tremendous reverberations throughout the world economy. This policy aimed to check money supply, the creation of credit, and an increase of borrowing money from the banks.

The dollar appreciated, but the world entered in a phase of recession triggered by a second oil price increase and stimulated by an unprecedented wave of protectionism. The falling price of commodities deeply affected developing countries, as they also had to face an increase of Euro loans, swollen by the second oil shock of 1979. Rising of economic interdependence, states have lost control over the central aspects of their economy and also their ability to reach domestic objectives. As a result, their policy instruments are being called into question and dilemma. Therefore, Economics policies in advanced countries will also influences the economics policies, as well as social and political policies, of the developing countries. For sometimes, it is difficult for the developing countries to have their own monetary policies and fiscal policies.

These policies possibly not suitable for them or even bring harms to their long-term development since, the policies are not set up for theirs needs. Globalized economy raises the phenomenon of intra-trade. One third of the ready today is intra-industry trade. What is intra-trade? It compasses two types of trade. Firstly, it is the composition of trade in similar but differentiated finished goods.

The second includes trade in components, which is trying to import of components from a country and re-export of finished goods. The intra-industry trade has added a deeper layer of integration than was previously the case since it extends the number of countries involved in the production process. It is also associated with intra-firm investments and intra-firm alliances. A new international division of labor is taking place in which the industrial process is no longer concentrated in developed countries. A small fraction of developing countries benefits from intra-industry trade constituting as much as one-third of Newly Industrialized Countries! | total manufactures trade.

A much higher share of trade among developed countries is intra-industry trade than among developing countries and the Newly Industrialized Countries. The report made by Yarbrough and Yarbrough reported that intra industry trade among is developing countries 14.5 percent, Newly Industrialized Countries 41.9 percent, and the developed countries 58.9 per cent. The most of the benefits from globalization goes to developed countries but less to developing countries. Intra-trade of trade blocs as percentage of total export of each trade bloc TRADE BLOCS 1980 1990 2001 EUROPE Baltic countries... 12.0 European Free Trade Association 1.1 0.8 0.7 European Union 60.8 65.9 61.2 Euro Zone of the European Union 51.4 55.1 50.1 European Union and accession countries 61.8 67.9 67.8 AMERICA Andean Group 3.8 4.1 9.4 Central American Common Market 24.4 15.4 15.0 Caribbean Community 5.3 8.1 13.4 Free Trade Area of the Americas 43.4 46.6 60.1 Latin American Integration Association 13.9 11.6 14.5 Southern Common Market 11.6 8.9 20.8 North American Free Trade Agreement 33.6 41.4 54.8 Organization of Eastern Caribbean States 9.0 8.1 5.6 AFRICA Economic Community of the Great Lakes Countries 0.1 0.5 0.8 Common Market for Eastern and Southern Africa 5.7 6.3 5.2 Economic Community of Central African States 1.4 1.4 1.1 Economic Community of West African States 9.6 8.0 9.8 Mano River Union 0.8 0.0 0.7 Southern African Development Community 0.4 3.1 10.9 Economic and Monetary Community of Central Africa 1.6 2.3 1.3 West African Economic and Monetary Union 9.9 12.1 13.5 Arab Maghreb Union 0.3 2.9 2.6 ASIA Association of South-East Asian Nations 17.4 19.0 22.4 Bangkok Agreement 1.7 1.6 8.7 Economic Cooperation Organization 6.3 3.2 5.4 Gulf Cooperation Council 3.0 8.0 5.1 Melanesian Spearhead Group 0.8 0.4 0.8 South Asian Association for Regional Cooperation 4.8 3.2 4.9 INTERREGIONAL Asia Pacific Economic Cooperation 57.9 68.4 72.5 Black Sea Economic Cooperation 5.9 4.2 14.8 Commonwealth of Independent States... 18.2 Source: UNCTAD Handbook of Statistics.

From the above diagram, the percentages of Intra trade (export) of most of the trade bloc in the United States had greatly increased within this 10-year. As compared with Europe, there was no significant change in their export percentage. For Asia, most of the trade blocs enjoyed only slightly increased in export percentages. For Africa, few trade blocs enjoys increased in export but most of them declined in export. This showed that intra trade promoted by globalization only brings more benefits to developed countries but the less developed countries are not always enjoy it. By the way, talking about the globe division of labor, which is the ability of producers to slice up the value chain, breaking the production process into many geographically separated steps.

In the globalized economy, the difficulty to trace the exact origin of a product is increasing. The production process is increasingly separated between pre-assembly and assembly activities on a global basis. Virtually all manufactured products that are available in markets today are produced in more than one country. More than 80 per cent of the semiconductors shipped in the United States are assembled and tested overseas, mainly in the five South East Asian countries.

Three- quarters of Taiwan's electronic production is eventually sold under someone else's brand name. Affecting by the globe division of labor, the sourcing has become internationalized too. The international! yensourcing! | that is the purchase of intermediate inputs from foreign sources has grown faster then domestic! yensourcing! |.

Mr. Year, a committee of WTO, in 1999, estimated that global production sharing accounted for more than $800 billion, or some 30 per cent of world trade in manufactured products. This highlights the increased interdependence of countries. Production sharing is of crucial importance for developing countries. They import components and parts, and re-export them in assembled form to the original country.

Under the global division of labor leads lots of world-class corporation getting into the developing countries to set up the pre-assembly factory. The local source supply company of the developing country can earn the chance to export more for satisfying the increasing needs of global sourcing. Economic globalization encourages the capital flow and the international transportation system. The global division of labor increases the reliability of the exportation to the manufactory countries, the developing countries.

The economy of them can earn huge benefit from it. It seems that increasing the linkage between the companies or the proportional increasing of the international trade build up the globe economy. Actually, the driving force of globalization is possibly not the increasing of international trade but the foreign direct investment. Between 1982 and 1994, FDI doubled as a percentage of world gross domestic products to 9 percent, in 1996 the global FDI stock was valued 3.2 trillion, rising from 1 trillion in 1987 and 2 trillion in 1993. It increased at an average annual rate of 34 percent trade compared with an annual rate of 9 percent for global merchandise.

Nowadays, the global economy, FDI has superseded trade with global sales by multinational enterprise affiliates and service of 5 trillion in 1992. Why the FDI can attract the global corporation to invest huge amount of money? It is attracted because of a variety of reasons: access to specific factors of production e.g. resources and brand names, or cheaper factors of production, such as investment and subsidies. International competitors could undertake mutual investment in one another company in order to gain access to other's product range.

FDI could also aim to secure access to customers in the host country market. FDI should be stimulated by the relaxation of ownership and entry requirement and other liberalizing measures to open markets to greater competition. Cross-broder mergers and acquisitions also fuel the increase of FDI. The cross-broder M&A activity accounted for between a half and two-thirds of world FDI flows in the 1990's. The value of all cross-border M&A sales amounted to 544 billion in 1998, representing an increase of about 60 percent over that in 1997, doubled between 1988 and 1995 to 229 billion. These trends have increasingly been associated with a more elaborate system of intra-firm flows of goods and services as well as inter-firm alliances, thereby adding a deep later of integration to the global economy.

To some extent, FDI is also an answer to domestic or regional policies. FDI could be attracted by the trade diversionary aspect of regional integration. This is commonly known as! yen tariff jumping! | FDI, and occurs when firms are prevent from, exporting into the host country by the existence of tariffs and other barriers to trade.

Foreign firms jump the barriers by establishing a local presence within the host countries. Roger Strange (1996: 19) argues that the relationship between regional integration and FDI depends upon the underlying entrepreneurial motivation for the investment and upon the liberalization provision of the integration. So, some of the developing countries do not add a tariff or with a limited level on the limitation of the export, who can attract much more global corporation's direct investment. However, in recent year, there was a decline in FDI by developed countries.

For example, the United States decreased her FDI from $300912 million in 2000 to 124 435 million in 2001. And the United Kingdom decreased her FDI from $116 552 million in 2000 to 53799 in 2001. there was also shape decrease in FDI from Belgium and Luxembourg and Germany. In the contrast, the FDI invested in Developing countries have gradually increased, such as China, Mexico, South Africa and Singapore. Foreign Direct Investment inflows, in country groups (millions of dollars) GROUP 1998 1999 2000 2001 TOTAL WORLD 694,457.3 1,088,263.0 1,491,934.0 735,145.7 Developed countries 484,239.0 837,760.7 1,227,476.0 503,144.0 Least developed countries (LDCs) 3,947.6 5,428.3 3,704.3 3,837.6 Developing countries 187,610.6 225,140.0 237,894.4 204,801.3 From the above diagram, the total FDI reduced 50% from 2000 to 2001 and both FDI inflow to developed countries and developing countries were declined in this period.

As shown in the above diagram, more then 50% decrease in FDI inflow in developed countries but there was only insignificant decrease in developing countries. The proportion declined in FDI inflow in developed countries was significantly greater than that of in developing countries. It implies that there is potential growth in FDI inflow in developing countries. Under the globalization context, it encourages FDI inflow to developing countries. As show the result of the developing countries increase in export. A question is then rise up.

The emergence of large exports of manufactured goods from low-wages to high- wage countries. Export success in developing countries, especial East Asia was possible through the process of rapid capital accumulation, learning and productivity growth. However, a significant ingredient was that the industrial dynamism went hand-in-hand with rising real wages. This explains also the shift in East Asia trade patterns. Rising wages eroded the cost advantages in unskilled labor industries such as textiles and clothing or chemicals, which provided the initial, push on foreign markets. One of the responses was to relocate in other countries in the region, such as Malaysia, Thailand, and China.

The other response was to upgrade towards more capital and technology-intensive industries such as electronics, machinery, and transport equipment. From 1991 to 1999, nearly 800000 Taiwanese businesses have moved offshore, about half to China and half to South- east Asia. From 1991 to 1999, nearly 80000 Taiwanese businesses have moved offshore, about half to China and half to South-East Asia. After seeing different effects on the globalization of economy, it does carry out the advantages and the disadvantages for the developing countries. Although under the integration of economy the developing countries seems can earn large amount of investment, the feedback of harmful may not smaller than the benefit can get. The global division of labor and the intra trade on one hand can increase the quantity of export and the investment.

But on the other hand, the economy is becoming high vulnerability. The reliability of the exportation, as a result, the importing countries have power to directly control the exporting countries. The importing countries mainly are the few developed countries: United States or Europe etc. They can control the exporters! | exporting quantity by adjusting the allowance of import. In the process of international trade, under this situation, the exporting countries mainly the developing countries, become decreasing the bargaining power.

Then, the business is shifting the location to the developing countries for enjoying lower wages rate. More and more labor in the less developed countries are employed by the global corporation. But under the capital intensive of the global corporation, the mechanization is taken place. The machine will step by step replace the domestic labors. As there is the lacking of diversification of the economic structure, the tertiary industry is not developed well enough. The replaced with low skilled labors can only try to find another similar industry to apply for.

They have no chance for them to upgrade or shift to other higher skill position. When the global corporations leave there, the large scale of unemployment will exist. So, the global investment may not surely possible to help the economy but sometimes may be worse. In the future, it is possible that the economy of the world will be concluded as only one economy under the globalization, which is the economy that handled by the global corporations.

Cooper, Richard N. (1968) The Economics of Interdependence: Economic policy in the Atlantic Community, New York: McGraw Hill. Yarbrough, Beth V. and Yarbrough, Robert M, (1997)! yen Dispute Settlement in International Trade: Regionalism and Procedural Coordination! |, in Edward Mansfield and He lem V. Miner (eds), The Political Economy of Regionalism, New York: Columbia University Press. Alice Landau, (2001) Redrawing The Global Economy: elements of integration and fragmentation, Palgrave. Marie-Laure Djelic and Sigrid Quack (2003) Globalization and Institutions: Redefining the Rules of the Economic Game, Edward Elgar. web.