Impact of Globalization on Local Economies and Inflation Dynamics
School
South Eastern Kenya University**We aren't endorsed by this school
Course
ECONOMICS 301
Subject
Economics
Date
Dec 10, 2024
Pages
14
Uploaded by JusticeKouprey30216
Globalization and local economyGlobalization has recently risen to the top of the list of hot concerns, not just among the general public but also among central bankers. Some critics have gone so far as to assert that traditional economic theories of inflation, which pay little attention to globalization, are invalidated by economies being more open to flows of commodities, services, capital, and businesses from other countries. Due to the uneven development, it fosters, globalization is negative for the world economy. The colonization of Latin America, Africa, and India by Europeans is perhaps where the idea of globalization first emerged. the start of colonization in the 15th century. Major world powers like Spain and England profited from the wealth of resources available in these new regions. When England supplanted India as the dominant power in 1948, violence, famine, and corruption swept through the nation. England kept taxing India heavily and exporting its resources as a result.The global economy has suffered as a result of globalization. Due to capitalism and the availability of cheap labor abroad, countries have been enduring unequal development, exploitation that limits the growth of their economies, and trade wars since colonization.Long-term price stability is what monetary policy aims to achieve, and thus promotes maximum sustainable employment and economic growth. The Federal Reserve's short-term goal is to fulfill its twin mandate, which includes stabilizing prices as well as lowering the volatility of output and employment near their maximum sustainable levels. Both the behavior of inflation and output as well as the methods in which monetary policy influences inflation and output, or the monetary transmission mechanism, are impacted by globalization,which has a negative impact on the ability of monetary policy makers to stabilize prices and output
The main cause of central banks to target price stability is because its main method of stabilizing the economy is through monetary policy. Since globalization can have an impact on price stability, it must be taken into consideration when determining how large of an impact it will have on monetary policy.Globalization and inflationInflation is the rate at which prices increase. It is important to note that the rate at which prices rise will vary depending on how central banks are able to control them. For example, if a rapid increase in prices occurs due to globalization, there may not be enough of an impact on monetary policy because it may not be possible for central bankers to affect the rates of inflation in the economy at all. If this is the case, central banks may feel as though they are perfectly able to stabilize the economy.According to the globalization of inflation hypothesis, more and more external influences are having an impact on inflation dynamics. The Phillips curve is one example of astandard inflation model that economists have begun to reevaluate in recent years. They have also begun to look more closely at global factors, such as globalization, as a potential explanation for the decreased sensitivity of inflation to domestic determinants. Therefore, traditional inflation models should take into account the role of global factors beyond their impact via import prices, in addition to domestic indicators of slack.The observed co-movement of inflation rates among advanced economies (AEs) in the midst of the expanding internationalization of products, services, and financial markets is what sparked interest in the global causes of inflation. Since 2014, the average headline inflation rate in AEs has dropped from approximately 10% in the 1970s to rates under 2%. But since the early 1990s, globalization has advanced rapidly (Chart 1), having a considerable impact on how the world economy is structured.
While the impact of external factors, such as commodity prices, on inflation outcomeshas received considerable attention, it is also possible to make the case that as the world's economies become more interconnected, shocks in one economy can spread to others, affecting domestic macroeconomic outcomes. In this regard, scholars have examined the ideathat globalization may have a more profound impact on inflation than merely producing short-term changes in the rate of inflation. More particular, globalization could affect the more persistent component of inflation across AEs by altering the structure of the global economy and hence the process of inflation generation.There is conflicting empirical data regarding how global slack affects how inflation reacts to domestic cyclical conditions. Early research on the deflationary impacts of globalization was primarily concerned with indicators of global slack. According to Borio and Filardo, adding global slack to classic benchmark inflation rate equations significantly increases their explanatory power and can be used to explain cyclical changes in inflation among AEs. Global slack is defined as a weighted average of international output gaps. Thereis minimal indication that global slack influences domestic inflation, according to Lodge and Mikolajun, who add measures of both global slack and global inflation to a Phillips curve for a panel of AEs.It has been determined that while global inflation played a larger influence throughoutthe 1970s and 1980s (also known as the Great Inflation period), it played a less effect during times when inflation rates were steadier. According to Bianchi and Civelli, global slack has an impact on inflation dynamics and is positively correlated with globalization, as measured by trade and financial openness. However, the authors come to the conclusion that "... for the consequences of globalization to be economically relevant, considerable major changes in thedegree of openness are required."
According to Kenneth Rogoff's 2003 analysis, more price flexibility has decreased central banks' capacity to use inflation surprises to increase output. In other words, the Phillips curve will get steeper, making the short-term tradeoff between inflation and unemployment more obvious. As a result, central banks will be less motivated to conduct an excessively expansionary monetary policy that raises inflation, as in the Barro-Gordon (1983)model, in an effort to take advantage of the short-run tradeoff between inflation and unemployment.Although its overall impact is a priori unclear, globalization may not only affect inflation levels but also alter how enterprises set their prices and, in turn, alter how inflation reacts to domestic conditions. The ability of businesses to pass domestic expenses on to consumers in order to maintain their competitiveness or market share may be constrained by growing exposure to global competition. Increased trade integration and openness, however, may have an adverse effect on market concentration and favor bigger, more productive firms who are generally more protective of markups. The data in this box, although avoiding making causal claims, lend support to the idea that a company's ability to pass costs on to customers may be constrained overall by increased exposure to international competition.
Figure 1Sources: ECB staff calculations, KOF Swiss Economic Institute and national sources.Figure 2: Global factors affecting the slope of price Phillips curves in CEE EU countriesFrom AuthorsA higher reliance on export markets and greater GVC involvement are linked, for the panel of CEE EU members, to a lesser correlation between inflation and the domestic business cycle (figure, left-hand and middle panels). When compared to observations with
comparatively higher GVC involvement and trade openness, the computed coefficients are much lower (Chart A, yellow bars). However, because the cross-country variation (which generates the estimated coefficients shown in Chart A) is smaller than the country-specific time-variation in GVC participation, it is likely that the contribution of GVC participation in reducing the correlation between activity and prices for individual countries is feasibly minimal.Sources: national sources and ECB staff calculations.Notes: persistent inflation rates are computed based on 12-quarter moving averages of core goods and services, calculated as the weighted average (GDP purchasing power parity (PPP) weights) of six advanced economies (Australia, Canada, the euro area, Japan, the United Kingdom and the United States). The latest observation is for Q2 2020.Because it increases market competition, globalization has the potential to boost productivity development. If monetary policy does not become more expansionary, higher productivity growth may result in lower pricing, which would lower prices directly and cut inflation. Furthermore, because output growth will continue to be rapid when inflation is falling, such growth makes it simpler for the monetary authorities to permit inflation to decline.
If China were genuinely exporting deflation, the impact would mostly be seen in how import prices behave. According to research conducted at the Federal Reserve Board by Kamin, Marazzi, and Schindler (2006), purchases of Chinese goods have decreased U.S. import price inflation by about 1 percentage point annually over the past ten years. This decline has caused a short-term decrease in consumer price inflation of about 0.1 percentage points and a somewhat larger effect over the longer term. Pain, Koske, and Sollie's (2006) work at the Organization for Economic Co-operation and Development (OECD) yields a comparable estimate of the impact of trade in manufactured goods with developing nations on U.S. inflation: -0.2 to -0.3 percentage point.The increased demand for primary commodities from growing Asia, particularly China and India, is also pushing up the price of these products globally. Between 2004 and 2006, the region was responsible for more than 70% of the increase in demand for copper andzinc and around 40% of the increase in world oil consumption. The rise of the Chinese and Indian economies on the world stage has sparked a boom in global commodities, which has served as a significant counterbalance to the deflationary impacts of their low-cost goods and services.The net effect in recent years could have gone either way, but in any event is probablyrelatively tiny, according to analysis by the Board's staff that balances the good effect from rising commodity prices against the positive benefit from cheaper manufactures on U.S. inflation. The staff's best estimation is that China and India's entry onto the international trading scene has slightly impacted inflation going back before the recent boom in commodity prices. Similar findings are drawn from OECD research (Pain, Koske, and Sollie, 2006), which calculates an overall net effect of 0 to - 1/4 percentage point on the economies of the US, the euro region, and the OECD.
Cheaper imports from nations like China lower relative prices for imported items, but Laurence Ball (2006) makes a crucial point that they ultimately have no impact on inflation, which is the change in overall prices. Ball notes that for every decrease in the relative price ofone commodity or service in a price index such as the consumer price index (CPI), there is bydefinition a rise in the relative price of a different good or service, following Milton Friedman's line of reasoning (Friedman, 1974). Any pattern of relative price fluctuations can be accommodated by a specific degree of inflation. The balance between general demand andsupply in the economy, which is ultimately determined by monetary policy, rather than relative prices for one category of goods and services, drives the inflation rate overall. Ball holds the opinion that low-cost imports from China and other low-wage nations shouldn't have an impact on inflation.Globalization and Manufacturing of local goodsDue to comparative or absolute advantages enjoyed by other nations in particular industries, domestic industries in some nations may be in peril. The overuse and abuse of natural resources to satisfy new, greater demands in the creation of goods is another potential risk and negative outcome. By decreasing the viability of ecosystems and their essential functions, globalization may have a significant negative influence on local commons. These resources are highly vulnerable to exploitation without strong local institutions, especially when used to supply international markets. Local communities, governments, and economies that are sustainable can act as a buffer against the harmful consequences of globalization. Local communities are capable of navigating worldwide markets, creating jobs, and maintaining and even enhancing regional biodiversity.Popular movements against globalization and globalization in general, have in recent years gained prominence, especially since the onset of the 2008 recession. In governments of
almost all countries political parties have some form of anti-globalization policies. Social movements are becoming increasingly prominent at the grassroots level as well, with anti-globalization becoming part of the political landscape in European countries such as Spain and Greece.The way that domestic jobs in America are being impacted by foreign manufacturing is another facet of contemporary globalization that has a detrimental effect on the economy. Manufacturing goods in nations like China rather than exporting them to the United States is more affordable due to the availability of inexpensive labor and supplies overseas. Millions of jobs in the United States have been lost as a result of this change in manufacturing. The scale of job losses in America—more than 6 million jobs lost as a result of manufacturing shifting to China—is depicted in the graph. The administration of President Trump is trying to impose protective tariffs on goods imported into the United States from China in an effort to counteract this economic shift. resulting in a trade conflict between China and the United States. Because of capitalism and globalization, American suppliers are now searching abroad for production that is less expensive. Due of this, America lost millions of jobs, and a trade war with China resulted. Because it pits nations against one another in an effort to protect their economies, globalization is harmful for the world economy.Income Disparity and GlobalizationIncome inequality, in economic terms, is the wide divergence in the distribution of income among people, groups, communities, social classes, or nations. Given that it is how we distinguish the top class, middle class, and working class, it plays a significant role in howwe comprehend socioeconomic positions.Competition has risen as a result of globalization. Thousands of people in less developed nations are willing and ready to work for less money than employees in rich
nations get paid in exchange for their services. People from the poor world have come to wealthy countries in pursuit of opportunities in the manufacturing sector, which has led to numerous incidents of job losses in developed nations. Due to having to compete with the displaced workers, this lowers the wages of the remaining employees.The United States has experienced significant income inequality since the 1940s. However, it reached its peak or grew out of control at the beginning of the twenty-first century. In particular, the income of the majority of impoverished households was almost fivetimes lower at the beginning of the 21st century than that of practically all rich people. Compared to what was documented in the 1980s, this was approximately three times higher.Additionally, it is believed that in the 1980s, the United States had a 70% increase in revenue that went directly into the pockets of the wealthy, who at the time made up just 1% of the population. Over the last two decades, this inequality has gotten worse. For instance, only onepercent of Americans were wealthy in the middle of the 1990s. It's interesting to note that these households held more than 40% of capital market stocks, more than 40% of private and public bonds, and more than 40% of all real estate assets.Three steps are taken in the analysis of income inequality within wealthy nations. Thepost-war boom, which spans from the late 1940s to the early 1970s, is the first phase. On the other perspective, the stagnation phase spans from the early 1970s to the early 1980s. The new age spans the early 1980s through the middle of the 2000s. In the years following World War II and up until the 1960s, many wealthy nations experienced rapid income growth. For instance, in the US, earnings for those employed in manufacturing increased by roughly 80%.During the same period, the wealthiest Americans had an increase in income of about 40%.Both the middle class and the wealthy lost income during the era of stagnation that ended in the early 1980s. Because of this, the wealthy's income decreased by around 4%,
while wages for workers in the industrial sector fell by roughly 3%. While earnings in categories like the middle class stagnated throughout the new era that preceded the early 2000s, they rose in the richest category. Particularly, the income of the wealthy group in the United States increased by about 200 percent between the early 1980s and the mid-2000s.income inequality in wealthy nations increased in the 1980s, 1990s, and early 2000s, but it started to slightly decline after 2007.Due to the adoption of economic reform in these nations during the past 40 years or so, globalization played a role in the development of this trend. This feature made these countries more accessible to international markets. As a result, trade liberalization was widelyembraced in the majority of these nations, especially in the 1980s and 1990s, and it played a significant role in their internationalization. Globalization during this time resulted in fewer trade restrictions. The connection between these changes in income disparity between the wealthiest and the middle class has therefore been examined.But by the late 1990s, globalization had introduced additional features beyond trade liberalization and trade openness. The economic environment during this time underwent significant change as a result of a number of factors, including increased capital inflows, increased foreign direct investment, exposure to exchange rate fluctuations or changes that negatively affect exports, and immigration-related pressure on local resources, to name a few.How these nations fit into or integrate into the global market is largely determined by these characteristics.But by the late 1990s, trade liberalization and trade openness weren't the only aspects of globalization that had been adopted. Numerous factors, such as higher capital cash flow, risen direct investment from abroad exposure to exchange rate perturbations or changes that negatively influence exports, and pressure from immigration on local resources, to name a
few, led to a significant change in the economic environment during this time. These qualitieshave a significant role in determining how these countries fit into or integrate into the global market. One possible source and driving factor for economic inequality over time and between nations is globalization.The wealth gap and inequality between a society's highly educated and less educated citizens may be exacerbated by globalization. As a result of ongoing pressure from globalization, earnings for unskilled workers could be dropping.Globalization and OverdependencyA poor route dependency emerges from globalization's exploitation of developing nations for the advantage of rich nations. The contemporary underdevelopment of Latin America, according to Andre Gunder Frank in The Development of the Underdeveloped, is a direct effect of capitalist progress. Only the core nations in Latin America gained as capitalism extended throughout the region. Meaning that having trading links with their colonists was advantageous for nations like Brazil throughout colonization. Developing
nations are a source of inexpensive labor and raw materials for core nations. For instance, during colonialism, the coffee trade significantly boosted Brazil's economy.Brazil, however, had a severe economic downturn soon after its modest economic success. This is so because while Brazil was still a colony, its trade with other European nations was steady, but when Brazil became independent, its fledgling economy could not survive. Brazil's route reliance as a result has stopped the country's economy from expanding.Brazil was used as a resource to the advantage of European nations, and when these nations moved their trade elsewhere, it had a detrimental and long-lasting effect on Brazil's economy.Because it places developing nations on a poor economic trajectory from which they are unable to readily reverse, globalization is negative for the world economy and prevents undeveloped nations from progressing.With a rapid geographic and temporal spread in extraction rates, globalization may lead to an increase in resource exploitation in exporting nations. For instance, growing globalization led to the spread of sea urchin exploitation to numerous nations. The quick exploitation of certain energy sources, the use of virtual water, an increase in pollution, the extinction of species, the depletion of fish stocks, and biological invasions are all effects of globalization. The potential loss from a dual exposure to climatic change and economic globalization is a severe threat, and forest loss and recovery are also at risk.Growth, Unemployment and Inequality There is a wealth of research on the growth effects from globalization, as well as on the impact on unemployment and inequality. There is little evidence to suggest that globalization has produced a rise in unemployment comparable to that observed in the 1970s.Nevertheless, there is a significant number of studies indicating that globalization increases inequality across nations depending upon factors like income, education level, and country of
residence. Nevertheless, the vast majority of economic studies support the view that globalization raises income growth for workers and consumers, who enjoy lower costs and better-quality products. Furthermore, most research suggests that income gains from trade more than offset its distributional effects.Less power of local industries Globalization is said to create room for free access of the world market. This seems toonly apply in the developed countries since they enact protective measures