Effects of Globalization on the Micro Level
Globalization was generally derived from the assumptions of neo-classical economics. In order for a country to achieve economic development, it must open its economy to trade liberalization. Trade liberalization serves as a redistribution mechanism of capital and goods. Poor and developing countries can export unlimited volume of goods and services to developed countries. Added to that, the capital inflows from developed countries would serve as a stimulant for capital build-up in the recipient country (developing countries).
Because developed countries usually experience labor shortages, labor immigrants from developing countries would serve as the compensating medium. Here economists assume that the “income” derived from labor migration would then serve as capital outlay. While for many economists globalization is a positive force of development, certain practical issues were laid exposing the bad effects of globalization on the micro-level (individual and communal).
There are generally two negative impacts of globalization on the micro-level. The first impact focuses on the condition of the labor force of developing countries (exposed to globalization). It is generally noted while globalization aims for wealth redistribution between developing and developed countries, inequality in terms of income and capital increased (Goldberg, R.K., and N. Pavcnik, 2006). Skilled workers from developing countries are paid less than unskilled workers from developed countries. In China, for example, after opening to globalization, several multi-national corporations (which are based in developed countries) transferred a significant portion of capital to the country.
The reason can be derived from the cost of labor in the country. It is estimated that the cost of labor in China is one-eight (on the average) compared to labor cost in developed countries (Goldberg, R.K., and N. Pavcnik, 2006). Multi-national corporations found it rational to shift a significant portion of their capital to labor-rich China. The economic assumptions are clear. Labor surplus would drive the market to realign wages. The more workers, the less average labor price. The inverse relationship between the number of needed workers and labor price pushed these corporations to increase their capital inflow to China. Needless to say, because labor costs are below the market price of labor, these multi-national corporations can increase their profit level, generating new capital (to be transferred to the “mother” country).
Added to that, it was found out that after 10 years of exposure to trade liberalization, China experienced vast disparities in terms of income of its own citizens. Urban workers, on the average, have generally higher incomes than rural workers. Needless to say, these urban workers are generally better off than their rural counterparts. Thus, the vast disparity of income between developed and developing countries is mirrored out in the labor price of urban and rural workers. It can be said that the macro-level effect of globalization resulted to internal income disparities. This owes much to the economic rationalizing of multi-national corporations regarding the “proper” handling of labor costs.
Exposure to longer working hours and poor working conditions are also major impacts of globalization in the workplace. These impacts severely decreased the labor productivity of developing countries. Stallings (2007, pp. 6-7) noted that in Latin America, the opening of several countries to trade liberalization and privatization led to capital build-up in the short-run. Foreign direct investment and other capital inflows contributed to economic growth as well as sustainability of the industrial sector.
The labor sector though suffered. The expected level of employment growth as well as improvement in labor productivity in many sectors of several Latin American countries was not met. In fact, some industries like the garment and textile industries suffered from stagnation and high-costs of operations. Several governments were forced to implement longer working hours and tax incentives to several multi-national companies. The general effect: labor productivity decreased by half. Strikes became a common sight in the streets of major Latin American cities. Companies owned by local residents were forced to close as a result of the policy. Multi-national corporations though can easily shift their capital base to countries undeterred by political and economic debacles.
We come now to the second general effect of globalization on the micro-level. Globalization requires that all national currencies be on a floating status. This would allow the efficient transfer of capital from developed countries to developing countries. As such, many economists assume that this policy would generally improve the overall economic standing of developing countries in terms of capital outlay and technology acquisition. This is though not the case.
Akar (2007) noted that floating currencies would essentially alter the predictability of the market. Inflation, or in many cases stagflation, are usually the main economic problems in developing countries. Because developing countries only own a small percentage of the world’s total monetary reserve, they can easily be affected by price changes in the world market (Kasapidis, R, 1999). Price changes can destroy the predictability of the markets of developing countries. Inflation can become highly unpredictable.
Thus, this puts financial institutions on a very high-level of risk. This high risk can be translated to low-level investment schedule of firms. Nonetheless, the overall interest rate increases as a result of monetary downfalls. Increases in interest rate causes inflation and concomitantly, low economic output.
On the individual level, as inflation progresses, the present volume of goods and service that can be bought by the value of money is less than the previous volume of goods and services bought. In a simple relationship, globalization requires that national currencies be on a floating status. For developing countries, putting its national currencies on a floating status increases the risks on financial institutions. These risks are translated to high inflation and low economic output. The end: the current purchasing power of a consumer’s income is devalued.
Akar, O. (2007). Globalization. Available from: <http://www.eli.vt.edu/news/archives/2001/news5.html> [Accessed 24 October 2007].
Goldberg, P.K., & N. Pavcnik. (2006). Distributional Effects of Globalization in Developing Countries. Available from: <http://scid.stanford.edu/events/IndiaJune2007/DevelopmentResearch/Goldberg%205-17-07.pdf> [Accessed 24 October 2007].
Kasapidis, R. (1999). The Opportunities and Dangers of Globalization. Available from: [Accessed 24 October 2007].
Stallings, B. (2007). Globalization and Liberalization: A View from the Developing Countries. U.N. Economic Commission for Latin America and the Caribbean. Available from: [Accessed 24 October 2007].