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Economic
globalisation
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9.1 Definition and history of
economic globalisation
DEFINITION OF GLOBALISATION
In economics, the term globalisation involves the spread of business, trade and investment across national borders. Globalisation is the economic unification of the world’s economies, and
its various commercial and financial markets. Hence, instead of
countries being seen as independent and closed sovereign
states, globalisation requires that nations see themselves as
belonging to the one big economy.
Globalisation is the extension of the trend that has been
going on for well over 200 years towards increased international-
isation, specialisation and interdependence of many economies
including Australia. Leading the charge we find multinational or
transnational companies growing out of business operations in
several countries.
THE RECENT ACCELERATION OF
GLOBALISATION
Especially during the 1990s and 2000s, globalisation has spread
quickly. It has been made possible by several developments:
CHAPTER 9 Economic globalisation
281
Relaxation of government controls
There has been a general relaxation of government controls
(deregulation) in most economies and their replacement in
decision-making by the forces of freer markets (demand and
supply) and capitalism.
Better transport and communications
Improved speed and cheapness in transport and communications have meant that businesses are more aware of profit
opportunities and able to move resources and production
between countries.
New technology
There have been huge leaps in technology which permit even
unskilled workers to be involved in modern production.
Mobility of investment
Although some natural and labour resources are difficult to
move between countries, money capital or investment resources
do not suffer this difficulty. Businesses can, therefore, become
mobile multinationals.
Unlike days gone by, under globalisation, it is quite likely that
the food we eat, the clothes we wear, the knowledge and entertainment we absorb, the environmental and other problems we
face, the policies adopted by our governments and the economic conditions affecting our daily lives are all linked to the
global economy and are even less under our control.
TRENDS IN GLOBALISATION
As we shall see, the idea of globalisation is not a new one, but it
has gained far more momentum in recent times.
In 1817, an economist by the name of David Ricardo published his book in which he developed the theory of comparative cost advantage. Here he noted that countries should
specialise in areas of production where their comparative cost
advantage was greatest or their disadvantage least. Through
international free trade and specialisation, he argued that countries would enjoy lower prices, better incomes and higher living
standards. In turn, the growth of trade on this basis, along with
other factors (e.g. better transport and communications), contributed to the development of globalisation.
TRY APPLIED ECONOMICS 1, p. 305
EXERCISE
Globalisation — 1800–2003
■ The 1800s–early 1900s. During the 1800s until World War I, there were plenty of examples of economies linked to the global
economy as suppliers of resources, manufactured goods, services, and even money capital or investment. Colonisation by
Europeans of Australia, parts of Asia (e.g. Vietnam, Malaysia, Indonesia), India, North America (e.g. the United States,
Canada), South America (e.g. Cuba, Brazil, Argentina), the Pacific and Africa, involved encouraging production with a
focus on exports of commodities such as wool, wheat, sugar, spices, cotton, tea, rubber and minerals. In some cases, production costs were held down by exploiting workers and by the use of slave labour. Indeed, European entrepreneurs had
investments in colonies around the world to take full advantage of the resources available. These cheap commodities produced by the colonies were then converted into value-added manufactured items back in countries such as Britain, Spain,
Portugal, Holland, Germany and France. Finished goods were then re-exported at much higher prices. The 1800s thus saw
the dramatic explosion of international trade and partial globalisation of capital on a scale not seen before. It was made
possible by improvements in transport, industrialisation, rising incomes and technology.
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■
1915–47. However, the period between the wars, 1915 to 1945, saw less enthusiasm for internationalisation or globalisation.
Faced with massive disruption to international trade due to war, rising foreign debt and a period of global depression in
the 1930s, many countries including Australia used high tariffs to repel imports and to protect their local producers.
■
1947–70s. In 1947, the previous situation started to change slowly. The General Agreement of Tariffs and Trade (GATT)
was signed after the end of World War II. This had the aim of gradually reducing high tariffs which were an obstacle to
international trade and global economic development. Between 1947 and 1972, world tariffs on manufactured goods fell
from an average of 37.5 per cent to only 9 per cent (Australia did not follow the trend, choosing to maintain high rates of
protection). Again, foreign investment and multinationals took off and free trade blocs (e.g. the European Economic
Community or European Union as it is now known) started to emerge. These encouraged globalisation.
■
1970s–2007. Starting in the early 1970s with Labor Prime Minister Whitlam’s 25 per cent tariff cuts, the Australian Government
began dismantling our system of protection. Accelerated microeconomic reforms, the encouragement of industry
restructuring and further tariff cuts followed in the 1980s, 1990s and 2000s. Further tariff cuts by Australia occurred in 2005
and others are scheduled to 2010 and beyond. Elsewhere in the world, there were other important developments that helped
globalisation including the establishment of new trading blocs (e.g. APEC, NAFTA, CER, the expanded EU) that were
committed to tariff reductions and the idea of free trade. From 1995 on, this idea was reinforced by the World Trade
Organization (WTO). By the 2000s, more than one-third of the world’s GDP was produced by foreign-owned companies
and/or destined for overseas markets. Indeed, about 30 per cent of global economic activity is now created by the largest 200
companies (e.g. Microsoft, McDonald’s, IBM, General Electric, Exxon, Ford, General Motors, Nike, Shell), many adding more
value annually to production than the entire GDPs of some countries (see figure 9.1).
Uruguay
IBM
Deutsche Bank
ING Group
Kuwait
Toyota
Vietnam
General Electric
AXA
Country or company
Ukraine
Nippon T&T
Romania
BP
Shell
DaimlerChrysler
Mitsubishi
Ford Motor Co.
General Motors
Wal-Mart Stores
Chile
Microsoft*
Singapore
Israel
Indonesia
Russia
Australia
India
0
40
80
120
160
200
240
280
320
360
400
440
Annual value of a country’s GDP or a multinational’s value added in production (US$ billions)
Figure 9.1 Comparing the annual size of GDP in selected countries with the annual value added in
production by large multinationals ($ billions), 2000
Note: * denotes estimate only
Sources: Data mostly derived from ‘How big are the big multinational companies?’ by Paul De Grauwe and Filip Camerman
(2002).
CHAPTER 9 Economic globalisation
283
9.2 Reasons for economic globalisation
There are many reasons that may help to explain the globalisation of business activity across national borders. However,
globalisation basically stems from a desire to lift efficiency, cut
costs and lift profits and incomes.
GLOBALISATION HELPS MINIMISE
LABOUR COSTS
In some labour-intensive industries (e.g. areas such as clothing,
aspects of car manufacture, rubber production, toy making),
wages represent the largest input cost for businesses. Given that
in some countries, labour is relatively dear while in others it is
cheap, firms go hunting around the world in search of good
supplies of docile and diligent workers. Looking at figure 9.2
which compares average hourly levels and legal minimum
hourly wages in different nations, it is hardly surprising that
some firms take their operations offshore and move from
country to country. Currently, for example, many labourintensive (i.e. as opposed to capital-intensive) areas of manufac-
turing and other types of production are located in countries
such as Mexico, China, India, Sri Lanka and Indonesia where
hourly pay rates are between $0.30 and $2.00. In some cases
(e.g. Mexico, Thailand and China), wages have actually fallen
over the last decade, causing companies to review their location
strategy. Furthermore, given that investment or money capital
coming from richer nations is quite mobile and can be moved
fairly readily, setting up a factory overseas where labour is cheap
can help boost company profits above levels that would have
applied in the country of origin. Despite this trend, there are
also instances where improved labour efficiency in high-wage
countries has actually attracted industries back home by
affecting their comparative cost advantage. In figure 9.2 below,
wage rates for all countries are compared as a percentage of
those in the US where workers are paid average hourly wage
rates of $22 or 100 per cent, or 100 points. In Mexico, for
instance, wage rates are only 10 per cent of the US, or 10 points
measured in terms of the wage index, whereas in Denmark, they
are 145 per cent of US wages.
International comparisons of hourly wage rates using an index
(expressed as a % of US hourly wage = base of 100 points or $22), 2003
Mexico
Brazil
Hong Kong
Taiwan
Portugal
Pay p
acket
Asian industrialised
Singapore
New Zealand
Name
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.........
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Israel
Time:
Spain
OECD average
Italy
Ireland
Canada
Japan
Australia
United Kingdom
France
100 = base of $22 per hour
United States
Luxembourg
Europe average
Sweden
Austria
Netherlands
Finland
Belgium
Switzerland
Germany
Norway
Denmark
0
20
40
60
80
100
120
Index of wage rates (% of average wage in US)
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Economics Down Under Book 1
140
160
COMPARISONS OF LEGAL MINIMUM WAGES IN SELECTED COUNTRIES
Ranked comparisons of legal
minimum hourly wage rates or
labour costs for manufacturing
workers
Approximate
US$ per hour
(mostly for
2006 or 2007)
Ranked comparisons of legal
minimum hourly wage rates or
labour costs for manufacturing
workers
Approximate
US$ per hour
(mostly for
2006 or 2007)
1. Ireland
11.25
10. Argentina
2.00
2. France
10.80
11. Taiwan
2.00
3. Australia
10.50
12. Russia
1.50
4. United Kingdom
10.00
13. Estonia
1.30
5. Canada
8.00
14. Pakistan
0.90
6. Japan
5.60
15. China
0.60
7. Brazil
5.40
16. India
8. United States (average)
5.15
17. Sri Lanka
No minimum
9. South Korea
3.72
18. Indonesia
No minimum
0.40
Figure 9.2 Where in the world can firms find the lowest wage or labour costs?
Source: Data for the graph derived from US Bureau of Labour Statistics and other sources. Data for the table derived mainly from
Wikipedia, the free encyclopedia.
Some countries have very limited access to cheap natural
resources (e.g. minerals and agricultural land). Here we think of
Singapore, Britain, Taiwan and Switzerland. However, given the
ease of moving money capital and the desire by businesses to cut
costs and maximise profits, some firms relocate elements of
production abroad.
GLOBALISATION HELPS FIRMS
GAIN ECONOMIES OF LARGE
SCALE
Globalisation can help companies to grow bigger. For some
firms, large-scale production is cheaper than small production
runs. This is because fixed production costs (i.e. costs that do not
rise much as output increases including research, advertising,
product development, some aspects of management and, up to
a point, equipment) can be spread more thinly over a greater
volume of sales. In cases where the size of the local market is
small, firms that expand their operations overseas can often
lower their costs, improve efficiency and raise profitability. The
spreading of a firm’s fixed costs over higher annual levels of
output to gain economies of scale is illustrated in figure 9.3.
Sometimes economies of scale are possible because of the
international integration of firms. Sometimes, this is done by
horizontal integration. Here, firms are joined together in the same
industry (e.g. a beer company overseas with a beer company at
home). At other times, firms are joined through vertical
integration downward or upward in different, but perhaps related
industries (e.g. an iron ore firm overseas combining with a steel
producer in the home country).
Annual fixed cost per unit
of output produced ($)
GLOBALISATION INCREASES
ACCESS TO NATURAL
RESOURCES
High per
unit cost
3
A
2
TAKE
Fixed
cost
curve
Notice that the per unit cost of each
extra unit of production by this firm
falls from $3.00 to only $1.00 as the
company raises its annual production
and sales from 1000 units to 5000
units. At higher levels of output, fixed
costs can be spread more thinly.
Exporting can help local firms justify
higher output levels and can enable
them to move from point A to point B
on the fixed cost curve. This helps
increase profits and competitiveness.
IN FIGURE 9.3
B
Low per 1
unit cost
0
0
Few economies of scale
1
2
3
4
5
6
Maximum economies of large scale
A firm’s annual level of production/sales
Figure 9.3 Globalisation can increase economies
of large-scale production (i.e. reduce fixed costs of
production per unit of output)
GLOBALISATION TAKES
ADVANTAGE OF GOVERNMENT
POLICIES
Globalisation of companies enables some firms to take advantage of government policies in both their home country and in
the country they visit. For instance, there is the willingness of
some governments to:
■ pay out generous subsidies
■ provide lower tax rates and other concessions (e.g. cheap
power, water, transport) to producers
■ ignore environmental concerns and protect firms from imports.
CHAPTER 9 Economic globalisation
285
All of these aspects can help to seduce overseas companies to
relocate offshore in search of improved profits. For instance,
some well-known multinational chemical, car and electronic
companies have acted for these sorts of reason. More specifically, a French multinational tyre manufacturer didn’t like its
government’s decision to introduce indicative economic planning some years back so it set up three plants overseas for every
one factory it built at home.
GLOBALISATION HELPS TO
MINIMISE TRANSPORT COSTS
The actual setting up of subsidiary plants in key markets around
the world can sometimes help to lower shipping and other
transport costs. Again this can boost profits.
GLOBALISATION INCREASES
FLEXIBILITY IN
DECISION-MAKING
Sometimes, companies become globalised to improve the flexibility or choice they have in decision-making about production
and investment. For instance, BHP–Billiton, Ford and Fiat have
plants located around the world. It is claimed by some that this
gives them advantages because they can move or source aspects
of production (e.g. engine assembly, car panels) wherever the
overall costs of specific operations are lowest.
TRY APPLIED ECONOMICS 2, p. 305
EXERCISE
9.3 The effects of economic
globalisation for Australia
A few years back at the World Economic Forum, Nelson Mandela posed the question: ‘Is globalisation only to benefit the
powerful and the financiers, speculators, investors and traders?
Does it offer nothing to men, women and children who are ravaged by the violence of poverty?’
Indeed, globalisation has become a hotly debated issue in
recent times as to whether it is a good or bad thing for the world
economy generally and individual economies in particular.
Before looking at the costs and benefits, it is worth remembering that here, in Australia (as in many other countries),
globalisation has meant dramatic change including:
■ a move towards free trade with a need for much greater international competitiveness
■ increased specialisation of local production in areas of comparative cost advantage
■ better efficiency in resource allocation usually involving less
government regulation and a greater reliance on market
forces
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■
the deregulation of the capital, financial, communications,
transport and other markets to improve efficiency by encouraging competition in these markets
■ improved efficiency and cost-cutting through the restructuring
of private and government businesses
■ the widespread application of new technology
■ the growth of globalised multinational businesses where production is sourced from the cheapest supplier in the world
■ the fact that the success or otherwise of government policies, worker
productivity and business competitiveness is judged by international yardsticks including the reaction of global markets to
what we do and how we perform.
Unfortunately, when it comes to judging the effects of globalisation, opinion is divided and conclusive evidence is thin. To
some, it is a ‘panacea’ while, for others, it is a catastrophe. Perhaps
this reflects the fact that globalisation impacts on particular groups
and countries in different ways. However, for a moment, let us take
a look at some of the good and bad effects on Australia’s economy.
THE EFFECT ON AUSTRALIA’S
INFLATION
THE EFFECT ON AUSTRALIA’S
RATE OF ECONOMIC GROWTH
Perhaps the main benefit of the most recent wave of globalisation during the 1990s and 2000s is that Australian consumers
have been able to buy better quality goods and services at lower
prices. Table 9.1 shows the dramatic 70 per cent fall in the
inflation rate during the period 1990 to 2006 (i.e. with globalisation) as against the high levels during the period 1970 to
1989 (i.e. before the last wave of globalisation). While reduced
inflation is not solely the result of government policies that
helped to internationalise and globalise the Australian economy
(e.g. tariff cuts, labour market deregulation, privatisation, competition policy involving the ACCC, deregulation of the capital
market, tax reform), these measures certainly helped.
It is likely that exposing Australia’s local and foreign-owned
firms to greater international competition forced them to
improve quality and become more cost efficient. In turn, this
helped our companies to face up to imports and enabled some
to avoid takeovers by multinationals looking for a new home.
Among other things, tariff cuts, the adoption of freer trade and
the easing of restrictions on foreign investment by the
Australian Government since the latter 1980s, has increased our
economy’s exposure to globalisation. Supporters of globalisation claim that the widespread use of these policies has
helped to lift our rate of economic growth (GDP). Their
reasoning goes something like this:
■ Greater openness involving lower tariffs and less protection
has forced Australia to allocate resources more efficiently into
areas of production where we have a comparative cost advantage. Greater efficiency lifts economic growth because more
output is produced from fewer inputs of resources.
■ Lower tariffs force Australian firms to cut production costs
and lift efficiency in order to survive and compete against
imports. Some firms will then be able to grow by earning
more income from rising exports sales. This helps to boost
economic growth.
Table 9.1
Comparisons of Australia’s inflation rate before and during the most recent wave of
globalisation
ANNUAL AVERAGE
INFLATION RATE (%)
PERIOD OF TIME
Average annual inflation rates ‘before’ the wave of globalisation, 1970–1989
Average annual inflation rates ‘during’ the last wave of globalisation, 1990–2006
Sources: Data derived from ABS 1350.0 and RBA Occasional Paper No. 8.
CHAPTER 9 Economic globalisation
287
■
4
3.5
victims of globalisation. For example, companies closed, like
Arnotts (2001), Heinz (2000), Bonlac (2000), Coburg Dye
Works, Qenos Plastics in Altona, Email oven and dishwasher
appliances (2000) and BAE systems (2000), Blundstone and
Feltex (2007), while at the national level, there were famous
cases like Ansett, Compass and BHP–Billiton’s Newcastle operations. Furthermore, during 2005–07, some firms like Telstra
and Qantas shifted selected operations overseas. Furthermore,
during 2005–07, some firms like Telstra and Qantas shifted
selected operations overseas. In turn, resulting higher levels of
unemployment may undermine consumer confidence, disposable income and economic growth.
THE EFFECT ON AUSTRALIA’S
INCOMES
As a nation, our average income per head of population
depends on how much each of us produces (i.e. the size of our
GDP per person). If globalisation has helped Australia to grow
its production faster than our population, then we would expect
incomes to accelerate. In fact, this has occurred. For instance,
figure 9.5 shows that in the period from 1982 to 1992 (before
the main acceleration of globalisation), average incomes per
person grew slowly by only 1.4 per cent per year. By contrast,
between 1992 and 2006 (following increased exposure to global
influences), household incomes in Australia grew by 2.6 per
cent per year or nearly twice as fast! By mid 2006, average
incomes had reached $44 844 per person per year.
3
2.5
2
1.5
1
0.5
0
Average: 1982–83
to 1991–92 period
before the last wave
of globalisation
Average: 1992–93
to 2005–06 period
of greater openness
and globalisation
Economic growth (annual % change)
Labour productivity (annual % change)
Figure 9.4 Increased globalisation (1992–2006)
may have led to stronger productivity and faster
economic growth for Australia
Sources: Data derived from ABS 1350.0 and RBA Occasional
Paper No. 8.
Although a more open and globalised economy may have
increased our economic growth, there may also be weaknesses:
■ Some economists argue that Australia’s integration into the
global economy may cause our growth rate to become even
more unstable. A severe downturn in Japan or the US, for
example, is likely to cause a recession in Australia.
■ Global forces and international competition have caused some
firms to go bankrupt because they became uncompetitive. In
the short term, this increased structural unemployment and
wasted our productive capacity. Here we think of the many
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Economics Down Under Book 1
Average annual rise (%)
Annual average change (%)
Lower tariffs mean that it is cheaper for Australian firms to
import new equipment, and use more up-to-date and
efficient technology in their production.
■ In the long term, protection of local industry only
encourages slackness, inefficiency and waste of resources.
■ The encouragement of foreign investment (by easing restrictions on the international movement of money capital) has
helped to lift the total level of business investment in Australia. This boosts our productive capacity and increases economic growth (GDP).
■ Lower tariffs (resulting from cuts by most governments here
and around the world) have caused our exports to grow faster
than otherwise. For Australia between 1984–85 and 2005–06,
exported production rose from only 14 per cent of GDP to
nearly 20 per cent of GDP. Indeed, exported GDP has grown
almost 60 per cent faster than the rest of the economy.
By boosting Australia’s efficiency, competitiveness and exports,
increased exposure to globalisation during the 1990s and 2000s
has probably lifted our growth rate for GDP. For instance, figure
9.4 shows that during the 1970s and 1980s (prior to increased
globalisation), our productivity was miserable and GDP grew by
a slow 2.8 per cent per year. By contrast (although this may be a
coincidence), between 1992–93 and 2005–06 (during the last
wave of globalisation), efficiency was up 90 per cent and annual
GDP growth 32 per cent stronger.
4
3.5
3
2.5
2
1.5
1.5% per year
(an average of only
$24 200/head/
year in 1992–93)
2.6% per year
(an average of
$44 844/head/
year in 2005–06)
1
0.5
0
Annual average rise,
1979–80 to 1992–93
(largely before the last wave
of globalisation)
Annual average rise,
1992–93 to 2005–06
(during the last wave
of globalisation)
Figure 9.5 Globalisation (1992–2006) may have
helped to increase the growth in Australia’s level of
average real incomes per person per year
Sources: Data derived from ABS 1350.0, RBA Occasional Paper
No. 8A and RBA Bulletin.
Additionally, higher personal incomes helped to raise more tax
revenue. This then made the Australian Government’s provision
of welfare payments and community services (e.g. public
education and health) more affordable than otherwise. These
measures helped to ensure that the benefits of faster economic
growth (helped by globalisation) were equitably shared among
lower income families. Indeed, despite globalisation, it appears
that inequality in Australia’s final income distribution (i.e. after
government redistribution measures) has not become more
uneven than it was in the early 1980s and the real purchasing
power of the lowest quintile has never been as high.
THE EFFECTS ON AUSTRALIA’S
LABOUR MARKET
■
There are growing numbers of part-time jobs relative to
full-time jobs because employers seek greater flexibility
in staffing.
■ Some groups of workers are disadvantaged in wage
negotiations in the workplace (e.g. often females, nonEnglish-speaking employees, part-time workers, the
inarticulate and uneducated).
■ There has been a dramatic decline in unionism in
Australia (i.e. to only 18 per cent in 2006 for the private
sector) and around the world due partly to greater
competition in labour and other markets. This means
that unions are less able to take action to protect wages
from being driven down towards the low levels existing
in poorer countries.
THE EFFECT ON AUSTRALIA’S
FINANCIAL MARKETS
Since 1991 and the acceleration of globalisation, there has been a
dramatic change in Australia towards a more deregulated labour
market. For instance, the federal government has encouraged the
spread of enterprise bargaining and productivity(efficiency)based workplace agreements (on a firm-by-firm basis), the simplification and scaling back of the minimum wage system, the promotion of union amalgamation, the erosion of union influence in
wage negotiations and relaxed the unfair dismissal laws, especially
for smaller firms employing fewer than 100 staff. All this was
intended to help make our workers and wage system more internationally competitive. However, the effects of these measures on
unemployment and the labour market varies. Workers in competitive and efficient firms and industries where the growth in sales
and profits are strong, have gained better incomes and career
paths. Nevertheless, those in internationally uncompetitive parts
of the economy have suffered in the short to medium terms
because of structural unemployment resulting from international
exposure and its associated policies. Some of these changes in the
labour market are summarised in the panel below.
Some effects of globalisation on the
labour market
■ There is a widening gap in market incomes and wages
between those unskilled workers on minimum wages
and those on enterprise agreements. During the 1990s
and 2000s, the latter group of workers have gained
average rises 2–3 times greater than those on minimum
wages.
During the 1980s, 1990s and 2000s, Australian financial markets
were deregulated and exposed to global pressures, competition
and judgements about the success of the Australian economy in
controlling inflation. In the foreign exchange market where
international currencies are swapped, the dollar was ‘floated’ so
that the exchange rate was decided by demand and supply. In
the market for borrowing and lending credit, foreign banks and
some building societies were allowed to set up in competition
with the main local banks and interest rates were no longer set
by the Reserve Bank. In addition, financial markets were increasingly affected by the movement of large amounts of money
capital and investment, both in and out of Australia. This
exposed our markets to volatile developments overseas. Despite
this problem of greater instability and accountability, one benefit
of global exposure and competition is that local interest rates
(i.e. the cost of credit) have probably remained lower than
would otherwise have been the case. This is good news for
borrowers of credit (e.g. households, businesses) but less favourable to lenders.
THE EFFECT ON CONSUMER
CHOICE
In some ways, globalisation and internationalisation have
expanded the range of consumer choice when buying goods and
services. This is because households and businesses are fairly
free to buy whatever they like in markets around the world. The
surge of e-commerce via the Internet, makes shopping and
banking as easy as a click of a mouse, provided there is the knowhow and ownership of computers. In fact, it was claimed that
over 60 per cent of new Ford sales in the US were via the
Internet. Despite the convenience, this raises the questions of
both equity and quality in making choices. In addition, there are
concerns about whether, eventually, choice will be diminished as
more efficient multinational companies come in and destroy
local competitors and their product uniqueness.
CHAPTER 9 Economic globalisation
289
the economy, brought about by the judgements made by
international markets and investors.
In Australia’s case, tighter control over budget spending has
recently strengthened our international credit rating.
Another consequence of globalisation and visits by multinational companies is the decline in national sovereignty.
Foreign investors buy up Australian assets (e.g. resources, property, utilities, formerly locally owned company icons that were
household names to older generations including the makers of
Aeroplane Jelly, Vegemite, Rosella and Kraft). The rising tide
of private foreign debt and the huge CAD partly indicate this
loss of control over businesses and assets by Australians. Some
writers argue that these worries make government policy even
more complicated and may present a problem during periods
of war or international conflict.
Finally, globalisation and the freer movement of people,
goods, services and capital, present the government with some
other very difficult issues — how to control the spread of terrorism (e.g. 11 September, 2001; Bali bombings 2002) and the
spread of weapons of mass destruction, illegal hard drugs,
crime, worsening global pollution, global warming, disease (e.g.
SARS) and massive shifts of illegal immigrants that could swamp
an economy’s resources and infrastructure. Without effective
government regulation, all these things could seriously undermine our non-economic living standards or quality of life.
THE EFFECT ON GOVERNMENT
AND NATIONAL SOVEREIGNTY
The drive towards globalisation and internationalisation in the
1990s and 2000s has impacted in several ways on Australia’s
government. Foremost, the government must select its
economic management policies more carefully to ensure that
these measures keep inflation down and government budgets in
check. Failure to do so could create awful consequences for
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TRY APPLIED ECONOMICS 3, p. 305
EXERCISE
TRY ONE OF THE TEAM
DEBATES
1, 2, 3, p. 306
TRY THE ESSAY
p. 306
TRY RESEARCH AND
ANALYSIS
1, 2, p. 307
9.4 A case study of a multinational
corporation in Australia — Nestlé
This case study is about Nestlé, which is a well-known multinational corporation that operates in Australia.
4000 cups are served throughout the world every second of
every day of every year. In the early 1940s, ‘Nestea’ was also
added to the product range.
THE HISTORY AND EXPANSION
OF NESTLÉ
1945–74
Between the end of World War II and 1974 marked the beginning of Nestlé’s most rapid period of expansion. This involved
diversification into soups, seasonings, jams, tinned fruit, frozen
food and cosmetics, along with further company acquisitions
including Alimentana S.A., Crosse and Blackwell, Findus,
Libby’s, Stouffer’s and L’Oreal.
1867–1905
The Nestlé company is named after its Swiss founder, Henri
Nestlé. In 1867, Henri, a trained pharmacist, developed a
healthy and inexpensive milk-based food for babies who were
unable to be breastfed. He called this product Farine Lactée
Henri Nestlé. It quickly proved to be a success in saving
babies’ lives at a time of very high infant mortality and malnutrition. In 1874, Jules Monnerat purchased the Nestlé company
and launched its own condensed milk product in competition
with the Anglo-Swiss Condensed Milk Company which had
started operations in 1866. Then, in the early 1880s, Daniel
Peter, a friend and neighbour of Henri Nestlé, invented milk
chocolate and started up the leading company in this area.
Shortly after, the chocolate company started by Daniel Peter
merged with Nestlé. The company developed an even more
diversified range of products. Later on, Nestlé joined forces
with a company owned by Julius Maggi, another Swiss firm that
had developed instant soups, sauces and meat cubes.
1905–18
Nestlé’s clear strategy of expansion and diversification through
research and acquisition of firms continued when, in 1905, it
merged with the Anglo-Swiss Condensed Milk Company. Soon,
it began to open factories in the United States, Britain, Germany, Spain and Australia (the largest overseas market at the
time). It also operated warehouses in Singapore, Hong Kong
and Bombay to supply the growing Asian market. While World
War I disrupted its European sales, due to milk shortages and
transport difficulties, it did mean an expanded demand for
products because of government contracts. The company was
forced to rely more on its 40 overseas plants in the United States
and elsewhere.
1918–45
The end of war in 1918 created challenges for Nestlé. Government contracts for condensed and powdered milk dried up, the
civilian population returned to consuming fresh milk, the cost
of raw materials rose sharply, there was a post-war global
recession, exchange rates moved unfavourably and the company
recorded its first loss. Following company reorganisation and
restructuring by a leading Swiss banker, prosperity and expansion returned. The 1920s and 1930s saw company product
diversification outside its two main areas of milk and chocolate.
The range expanded to include malted milk, Milo (a product
developed in Australia) and a powdered buttermilk for infants.
However, the most interesting development was the invention of
instant coffee. This involved eight years of research and was
aimed at reducing Brazil’s huge surplus of coffee beans. It was
an ‘instant’ success and the market grew so that, today, nearly
1975–81
This period of optimism soon faded in the early to mid 1970s.
This was caused by the collapse of economic growth in
industrialised countries, an appreciation of the Swiss franc
which slowed exports, and the quadrupling of the cost of coffee
beans (1975–77). Although the company’s traditional markets
contracted, those in the developing world helped to offset the
downturn. Another response by Nestlé was to diversify outside
food products as a way of creating a more stable cash flow. It
purchased a United States pharmaceutical company, a brave
move in uncertain times.
1981–2007
Between 1981 and 1995, Nestlé set out to consolidate and
restructure its financial position by selling its unprofitable operations. More recently from the mid 1990s up to 2007, Nestlé’s
position in the global market was helped by world events — the
widespread cuts in tariffs, trade liberalisation and expansion,
the opening up of central and eastern Europe as well as China,
and the dramatic rise of international investment flows. In
addition, there was the growth of free trade areas including the
North American Free Trade Agreement (NAFTA), the Organisation for Economic Cooperation and Development (OECD),
extension of the European Union (EU) and monetary union,
Closer Economic Relations (CER) and other free trade
agreements (e.g. with the US, Thailand, Singapore) and the
attempted Multilateral Agreement on Investment (MAI). Again
the company increased its product range by purchasing
additional firms including Italian mineral water company,
Pellegrino. Valio (ice-cream), Spillers Petfoods, Purina,
Carnation Milk and Jenny Craig. Being a well-diversified multinational corporation, these global events had a favourable
impact on sales and profits.
THE SIZE AND STRUCTURE OF
NESTLÉ INTERNATIONAL TODAY
In 2006, Nestlé had over 487 factories employing over
253 000 workers in more than 80 countries.
Its annual sales were in excess of 91 billion Swiss francs
(i.e. where one franc equals A$1, with annual global sales
equal to around 10 per cent of Australia’s entire GDP) and
profits of over seven billion francs. Both sales were up 6 per
cent and profits rose nearly 44 per cent over the last three
CHAPTER 9 Economic globalisation
291
20
15
10
5
Americas
Europe
Africa, Asia
Other nonand Oceania food activities
25
20
15
10
5
0
nu
tr
it
0
30
io M
n i
an lk
d pr
ic od
Pr
e- u
ep
cr ct
ar
ea s,
ed
m
Ch
di
c
oo s
oc
ol
ki hes
at
ng a
e,
ai nd
co
ds
nf
an e
d cti
b i on
sc a
ui ry
ts
Pe
tc
ar
e
Ph
ar
m
a
pr ceu
od ti
uc cal
ts
25
Comparison of Nestlé product range by
sales importance (billion Swiss francs, 2005)
ve
ra
ge
s
30
Swiss francs (billions)
35
Comparison of Nestlé product sales by global
region or market (billion Swiss francs, 2005)
yogurt, confectionery, food services, pet care, food ingredients,
ophthalmological products and cosmetics. Some of the company’s vital statistical details are summarised in figure 9.6
(p. 000).
Be
Swiss francs (billions)
years. This easily makes it the largest food company in the
world selling dairy products, bottled water, instant roast and
ground coffees, mineral water, coffee substitutes, infant foods,
breakfast foods, soups, pasta, sauces, frozen food, ice-cream,
GLOBAL INDICATORS FOR NESTLÉ
1998
2005
1. Value of sales (billion Swiss francs)
72
91
2. Value of food sales in Africa, Asia and Oceania (billion Swiss
francs)
12.4
15.7
3. Value of food sales in Europe (billion Swiss francs)
26.8
27.6
4. Value of food sales in Americas
22.6
30.8
5. Value of non-food sales (billion Swiss francs)
10
16.5
6. Trading profit (billion Swiss francs)
7.1
8.9
7. Trading profit as % of sales
9.9
8.8
8. Market capitalisation (billion Swiss francs)
117
153
9. Global employment ’000 workers)
225.8
253
10. Spending on research and Development (billion Swiss francs)
11. Number of injuries with lost time per million hours worked
0.7
14 (2001)
N/A
7
12. Water consumption (m3)
7.6 (2001)
4.4
13. Energy consumption (gigajoules)
3.4 (2001)
2.4
14. Greenhouse gas emissions (kg CO2 per tonne delivered)
15. Ozone depleting substances (g R-11 equiv.)
Figure 9.6 Nestlé products and sales
Source: Data derived from Nestlé website.
292
Economics Down Under Book 1
178 (2001)
1.1 (2001)
118
0.28
THE REASONS FOR GLOBAL
EXPANSION AND THE
STRATEGIES USED BY NESTLÉ
As indicated earlier, Nestlé grew in several ways:
■ being innovative in product development through research
in the area of processed foods
■ by means of company mergers and often horizontal integration with firms in the same or similar industry
■ by means of acquisitions of companies allowing for market
and product diversification to gain a more regular flow of
income.
Globalisation of operations appeared to be a logical and natural
process for Nestlé:
■ The merger with the Anglo-Swiss Condensed Milk Company
in 1905 provided it with its first international operations. This
grew in subsequent years across many countries on several
continents.
■ The disruptions to transport and raw materials caused by
World War I encouraged growth and production outside
Europe, especially in the United States where milk supplies
were readily available.
■ Innovation by Nestlé gave the company a cost and technological
advantage unmatched by its rivals anywhere in the world.
■ Expansion gave Nestlé economies of large scale in innovation, plant and technology, product development and R&D,
sales and marketing, and product distribution.
■ Production facilities were located in the company’s main
markets in the United States, Australia and Europe. Production was commenced in countries where sales were greatest or
where company acquisitions suited the expansion strategy
rather than trying to take advantage of countries where
labour was cheap.
■ Nestlé’s expansion appears to have been enabled by the creation of a range of products and brand names, often made by
already well-established companies that were trusted for their
quality. In this sense, their international market for products,
which was expanded by global corporate acquisitions, was
already proven.
THE RELATIONSHIPS BETWEEN
NESTLÉ INTERNATIONAL,
ITS AUSTRALIAN OPERATIONS
AND THE AUSTRALIAN
ECONOMY
Nestlé Oceania is an offshoot of Nestlé International which has
its headquarters in Switzerland. Mention has been made already
of Nestlé’s commencement of production here in 1908. There
was also the addition in 1934 of Milo to its international product
range. This was a locally invented food. Indeed, the world now
consumes over 21 million cups of Milo per day! By 2001, Nestlé
Australia:
■ employed around 5000 workers in production, sales and
distribution
Sales office and distribution facilities – Headquarters for Oceania region
Sales offices only
Plants:
Foods
Confectionery
Dairy Products
Pet Food
Beverages
Gympie
Brisbane
Perth
Adelaide
Echuca
Maryborough
Dennington
Mulgrave
Smithtown
Blayney
Sydney
Blacktown
Lane Cove
Tongala
Canberra
Broadford
Pakenham
Melbourne
Campbellfield
Launceston
■
had operations located in over 20 towns throughout most
States in Australia with is headquarters for Oceania in Sydney
■ sold $2.4 billion of food and beverages (up 40 per cent in the
four years from 1997) under popular brands such as Nescafé,
Milo, Nesquick, Sunshine Milk, Kit Kat, Maggi, Nestlé Yogurt
and chocolates, Peters, Lean Cuisine, Buitoni, Minties, Life
Savers, Allens, Papa Giuseppi’s, Lucky Dog, Friskies and Go-cat
■ exported $427 million of value-added processed food
products to destinations including Asia (56 per cent), Japan
(23 per cent), Pacific Islands (11 per cent), New Zealand
(8 per cent) and China (2 per cent)
■ injected over $1 billion into the Australian economy through
the payment of wages to employees, the provision of training,
expenditure on research and development, support of
community projects, and the purchase of goods and services
from other companies that it needed for its manufacturing
processes and distribution
■ contributed substantially to federal, state and local government taxation revenues.
Some of the statistical details relating to Nestlé’s Oceania operations are summarised in figure 9.7.
Figure 9.7 Vital statistics about Nestlé Australia
and Oceania
Comparison of
Nestlé Oceania
export sales by
global region/market
(% of all exports)
Comparison of
Nestlé Oceania
product sales by category
in 2001 (%)
Other (23.6%)
New Zealand (8%)
Pacific
Islands
(11%)
Japan (23%)
China (2%)
Asia (56%)
Pet food
(7.8%)
Culinary
(10%)
Confectionery
(25.3%)
Ice-cream
(11.1%)
Coffee
(22.2%)
(continued)
CHAPTER 9 Economic globalisation
293
Australian indicators for Nestlé
1997
2001
Value of Oceania sales (A$ billions)
1.71
2.4
Employed workers
5000
N/A
Value of all Oceania exports (A$ millions)
254
427
Value of investment in Australia/Oceania (A$ millions)
100
N/A
Planned value of overseas investment in
Australia/Oceania in the next 5 years (A$ millions)
500
N/A
Injection of money each year into the Australian
economy through wages, purchases of supplies
(A$ millions)
900
1200
TRY APPLIED ECONOMICS 4, p. 305
EXERCISE
TRY THE MULTIPLECHOICE TEST
p. 303
TRY THE REPORT ON
AN INVESTIGATION
p. 306
(est.)
TRY COLLECTION AND
3, p. 14
ANALYSIS OF NEWSPAPERS
Source: Data derived from Nestlé website.
9.5 The effects of globalisation on
low-income countries
Debate rages about the effects of globalisation and multinational
corporations on low-income countries like China, India, Uganda,
Nigeria, Thailand, Vietnam, Chad, South Africa and Bangladesh. Some researchers claim that these developments have
helped to lift living standards and hope for millions of people,
while others say that they have only added to the misery of the
world’s poor. Much of this disagreement about the effects of
globalisation reflects the technical weaknesses of the statistical
evidence used by each side in the debate. Additionally, globalisation seems to have been more beneficial for some regions
and countries (e.g. in Asia), while creating problems for others
(e.g. in Africa generally).
SOME POSSIBLE BENEFITS OF
GLOBALISATION FOR POOR
COUNTRIES
Many economists believe that the last wave of globalisation
(perhaps from the 1980s to at least to 2007) has been an important development that has helped to improve the wellbeing of
the countries most involved. Their research has tried to prove
this from many different angles and using a host of arguments.
Let us examine some of their claims.
Globalisation has lifted economic
growth and the speed of rises in GDP
per person
There are many logical reasons why globalisation should help to
lift the GDP and incomes per person per year (reflecting the
actual purchasing power or living standards of individuals) in
poor countries.
Higher investment and access to technology
Rapid rises in GDP and incomes largely depend on high levels
of business investment in capital equipment and buildings
incorporating the latest technology). Investment (financed by
household saving) helps to lift the efficiency of labour and
natural resources, so that each worker per hour can produce
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Economics Down Under Book 1
more. It grows a country’s productive capacity or expands the
production possibility frontier. Unfortunately, however, in lowincome countries, investment and savings are very low because
household production is at subsistence levels. However, globalisation has helped to overcome these problems. It has meant
greater openness and fewer government controls on the inflow
of direct investment or money capital from rich to poor countries. This inflow includes the introduction of new more
efficient technology. Capital inflow has also allowed local businesses in these countries to expand faster. It is not just the
expansion of overseas firms that occurs but opportunities are
created for growing small-scale local firms in related industries.
Overall, this has helped some poorer countries to escape the
oppressive poverty cycle that otherwise would follow (see figure
9.11 and explanation p.298).
More jobs and lower unemployment rate.
In some countries like Zimbabwe, Turkmenistan, Nepal, Libya
and Namibia where there is little globalisation, unemployment
rates are very high ranging between 30 and 80 per cent of the
labour force. There are also similar percentages of people
working very few hours per day, well below their productive
capacity (i.e. high levels of underemployment). In turn, given
the general absence of government welfare in poor countries,
this lack of employment means low income and poverty. However, following globalisation with higher levels of investment and
business expansion (even if this is by multinationals), more jobs,
higher incomes and better living standards develop. Indeed, the
wages paid by multinationals in low- and middle-income countries are around 1.8–2.0 times higher than the average wage in
those countries. This raises living standards.
Greater efficiency in using resources
Without exception, low-income countries use their resources
very inefficiently. There is little output per person from the
resources available, and so the nation’s productive capacity is
restricted. Greater openness, associated with globalisation and
freer trade (without tariffs and subsidies), cause countries to
allocate or direct resources into specific areas of production,
where they have a comparative cost advantage. That is, they produce the types of goods and services that they are most efficient
Globalisation has slowed inflation and increased purchasing
power
Inflation (i.e. generally rising prices paid for goods and services
including food, building materials, steel, fertiliser, equipment,
medicines, communications and electrical appliances) is most
likely to be worse when there is weak competition (e.g. when
government businesses or a private monopoly control most of
the output of an industry). Globalisation (and with it, lower
tariffs) deliberately expose the economy to greater levels of
competition and business rivalry. This helps to limit inflation
and protect the purchasing power of household incomes.
Indeed, inflation was highest with rates often between 20 and
200 per cent a year, in countries with low levels of globalisation
(e.g. Angola, Eritrea, Ghana, Tajikistan, Zambia and Zimbabwe). By contrast, inflation was lowest with rates usually less
than 3 per cent a year, in economies with greater exposure to
globalisation (e.g. China, India, Vietnam, United States, Australia, France, Japan and Singapore).
Globalisation reduces war and terrorism caused by poverty
Poverty feeds the endless cycle of misery, sickness, despair, discontent, war and terrorism. However, if globalisation can lift
GDP and average incomes above poverty levels, it would have a
very positive effect on the lives of many people in the world
today and lead to peace.
Globalisation makes governments more accountable and
efficient
Governments play a critical role in most economies. They
allocate scarce resources to provide health, education, water,
communications, law and other services. In so doing, they
contribute to national production and living standards. Unfortunately, many governments, especially in low-income countries,
are non-democratic (i.e. they are not elected by a majority of the
people), inefficient, corrupt, incompetent and use their military
power for squashing opponents and promoting their own
political survival. However, because globalisation requires
greater openness and exposure to the judgements of the outside
world, it can help to make these governments far more accountable for their policies and improve the daily living standards of
ordinary people.
Perhaps most importantly, some studies have tried to show that
the rate of growth in GDP per head (i.e. a rough measure of the
yearly rise in the level of average economic well-being or income
per person) is faster in more globalised, open countries, than in
those that have had little exposure to the effects of globalisation. One such researcher (Axel Dreher) calculated a single
index to measure the degree of globalisation. It was made up of
many economic, social and political indicators for
123 countries covering the years 1970–2000. This index was
then compared to the average rate of growth in GDP ($) per
head, to see if there was some relationship. Indeed there was a
strong connection. As shown in figure 9.8 covering 1996–2000,
countries with low levels of globalisation only experienced an
average rise in their value of production per person a year of
1.16 per cent, against a rise of 2.04 per cent (i.e. about 75 per
cent faster) for those countries with relatively high levels of
globalisation. Figure 9.8 also reveals the same sort of success for
globalisation, in all four periods investigated — 1981–85, 1996–
90, 1991–95 and 1996–2000. As a specific example, this research
noted that China’s index of globalisation rose by 2.14 per cent
between 1975 and 2000, causing its growth rate in GDP per
head to be an impressive 2.33 per cent higher than otherwise.
By contrast, countries with low globalisation like Rwanda (with
the lowest globalisation index of only 0.92) that isolated themselves from the rest of the world, had one of the slowest rates
of rise in economic wellbeing and further rises in its poverty
rates. However, despite these impressive observations, many
researchers note that, on its own and without suitable changes
in other government policies, globalisation is not enough to lift
incomes and abolish poverty.
Average rates
of rise per year (%)
at making. This means that a bigger output, GDP or income,
can then be produced from the same inputs or resources, and
so poverty falls and welfare improves.
3
2.5
2
1.5
1
0.5
0
Rise in GDP
per head,
1981–85
Rise in GDP
per head,
1986–90
Rise in GDP
per head,
1991–95
Rise in GDP
per head,
1996–2000
Countries with low globalisation
Countries with high globalisation
INDEX OF GLOBALISATION
Examples (high)
Examples (low)
US
6.48
Pakistan
2.43
UK
5.62
Morocco
2.42
Germany
5.28
Uganda
2.31
Australia
5.08
Iran
2.08
Hong Kong
4.78
Albania
1.96
Spain
4.05
Saudi Arabia
1.84
Malaysia
3.54
Congo, Democratic
Rep.
1.70
Brazil
3.17
Nepal
1.69
Indonesia
3.08
Papua New Guinea
1.37
China
3.04
Madagascar
1.28
India
2.78
Haiti
0.94
Thailand
2.64
Rwanda
0.92
Figure 9.8 The faster rate (%) of growth in GDP
per person per year in countries with higher
globalisation indexes than for those with lower
globalisation
Source: Data derived from Does globalisation affect growth? by
Axel Dreher (2002–03).
CHAPTER 9 Economic globalisation
295
Globalisation has helped to lift the
human development index and
improve daily lives
The United Nation’s human development index (HDI) is
another measure comparing the well-being of people in different countries. It reflects both positive indicators (e.g. long
life expectancy at birth, educational attainment and average
level of income per head per year), and negative indicators (e.g.
infant mortality, prevalence of using child labour). Most countries recorded significant improvements in their HDI between
1980 and 1999, despite what some claim are threats posed by
the recent wave of globalisation.
By nearly doubling the percentage rate of growth in the level
of GDP or income per person a year, globalisation has helped to
improve the daily lives of many people in the ways shown below.
Lower mortality and longer life expectancy
In countries where globalisation has been most rapid, it has contributed to lower infant mortality and increased life expectancy.
This is especially obvious in globalised low-income countries
where average infant mortality rates fell by over 30 per cent
between 1980 and 2006. Additionally, statistical data shows that
rapidly globalising countries like India and China today, have
much lower infant mortality rates (by between 30 and 70 per
cent) and much longer life expectancy (by 20–35 per cent),
than existed in the US in 1913. Nowadays, 85 per cent of the
296
Economics Down Under Book 1
HDI*
If it is true that average incomes per person a year have increased
faster with globalisation, have the lives of the poor benefited or
have the gains gone mostly to the rich? This question and how it
is measured, is hotly debated. While some research shows a wider
gap between low- and high-income earners in many poor countries (and in the world generally), there appears to have been a
big decline in the number of people in poverty, especially in
countries where there has been faster globalisation. Here, poverty
represents the percentage of the population with incomes below
the poverty line as measured by national statistics. It was found
that the least globalised economies had much higher poverty
rates than the more globalised countries. For example, the low
globalised parts of Africa and eastern Europe (countries
including Zimbabwe, Zambia, Mozambique and Tajikstan), had
massive poverty rates of between 60 and 86 per cent of their populations in 2006. By contrast, more globalised countries such as
China, Vietnam, Indonesia, India, Taiwan, Malaysia, US, UK and
Australia had lower rates of between 1 and 25 per cent. In
addition to poverty rates, the United Nations measures welfare
levels by comparing the percentage of people on incomes of less
than $1 per day (allowing for different exchange rates and the
purchasing power or prices in various countries). This indicator
(and a similar one for those on less than $2 per day) shows a
significant drop in the rates of low incomes for most regions in
the world, especially the more globalised countries. Even so, there
have been rises recorded in the percentage of population in some
nations on less than $1 per day, especially in less globalised
countries in sub-Saharan Africa.
world’s population can expect to live until at least 60 years of
age (about twice as long as 100 years ago). Between 1980 and
2006, this caused the gap between life expectancy in rich and
poor globalised economies to narrow considerably. This result is
not surprising given that, with more purchasing power, individuals should have improved access to basic food (calories per
day), safe water, education, technology, transport, sanitation and
medical care.
1
0.8
0.6
0.4
0.2
0
SubSaharan
African
countries
Low
income
developing
countries
Medium
income
developing
countries
High
income
developed
countries
(*1 represents a perfect score)
1980
1999
Figure 9.9 The rise in the human development
index of welfare for globalised and non-globalised
countries (*1 is a perfect score)
Source: Data derived from the UN development program,
human development report, 2001 (New York, UNDP, 2001);
World Bank, World Bank development indicators, 2001
(Washington, World Bank, 2001).
Reduced use of child labour
For hundreds of years, children have been required to help produce and earn income for the family. However, many critics of
globalisation say that it leads to increased use of child labour.
Despite the last wave of globalisation, figure 9.10 shows that
there has been a significant reduction in the use of child labour
throughout the world on the levels that existed previously. Of
course, the question might still remain — would the fall have
been faster or slower without globalisation? Supporters of
globalisation say that higher incomes resulting from globalisation should reduce the need to use child labour and increase
the affordability of education for children.
Children in the
labour force (%)
Globalisation has reduced poverty
and made basic goods and services
more affordable for the poor
40
35
30
25
20
15
10
5
0
SubSaharan
African
countries
Low
income
developing
countries
1980 (% children)
Medium
income
developing
countries
High
income
developed
countries
1999 (% children)
Figure 9.10 The declining percentage of children
in the labour force (child labour) during the last
wave of globalisation (% 1980 against 1999)
Source: Data derived from World Bank, World Bank development
indicators, 2001 (Washington, World Bank, 2001).
Increased daily food intake
In general, the availability of adequate food (measured by the
average number of calories of food intake per day) in poor
countries increased between 1960 and 2006. The rise was nearly
40 per cent in low-income developing countries, but this
excludes sub-Sarahan Africa where there was a miserable rise of
only about 6 per cent. In addition, some say that globalisation
(and the reduction of tariffs), has meant cheaper more affordable food imports for low-income countries (as well as lower
prices generally for most household consumer items like
clothing and other manufactured goods). Despite the frightening 76 per cent growth in their populations between 1970 and
2000, the total number of people suffering from chronic undernourishment in low-income developing countries apparently
fell from 35 per cent (920 million people) to 17 per cent
(790 million people). This suggests that some of the improvements in food intake in poor countries were at least shared or
distributed across their populations, to those in great need.
SOME POSSIBLE COSTS OF
GLOBALISATION FOR POOR
COUNTRIES
their products and often glitzy advertising images, and codes of
ethical conduct projected by several major sporting and exclusive
clothing manufacturers, it seems that some of their workers have
been exploited. Frequently, despite huge hours of work, pay is so
low that it barely covers the rent, and leaves little for buying food
or medicine. The employment of child labour is all too common,
disrupting the education of the young. Additionally, some
workers lead miserable lives in factory sweatshops and urban
ghettos, where their bosses use threats and even violence to meet
their production and cost targets.
In response to these and other criticisms from the media, the
multinationals have often claimed that they are changing their
policies. Apparently, some were attempting to only source their
supplies from factories that met acceptable international labour
standards (e.g. not employing children under 15 years of age).
Additionally, some companies pointed out that while pay rates
appear very poor by Western standards, they are relatively good
for low-income countries. In this way, globalised firms may
actually be raising average incomes and reducing poverty rates
in poorer countries.
Globalisation emphasises profitable
cash crops for international markets
Critics of globalisation (often non-economists), refuse to at the expense of basic food for locals
accept all the impressive claims made by the supporters of
globalisation.
It has been said, ‘there are lies, damn lies, and statistics’, and that
‘figures will show whatever you want if you torture them enough’.
The claim has been made that the statistical data compiled by
some countries and used by the World Bank, the United Nations
and others, to show the supposed benefits of globalisation, can
be unreliable and may lead to misleading conclusions.
Globalisation and trade can help to lift the incomes of some
farmers in the poor countries of Africa. This is why some
farmers in low-income nations choose to grow international
cash crops (rice, sugar, coffee, rubber) that fetch good prices.
However, sometimes this means that the production of cheap
basic food items for the local community is neglected, because
profits here are relatively lower. Besides, poor people on low
incomes (often less than $1 per day) cannot compete with the
high prices paid abroad in richer countries. As a result, local
food consumption is often inadequate and some people starve
or are undernourished.
Globalisation may not be the driver or
cause of economic progress
Globalisation accelerates world
inequality
Depending on how it is defined, it is possible that globalisation
may not be the factor that is driving improvements in economic
growth and poverty reduction. Lots of other events like government microeconomic efficiency reforms may have also played a
role in accelerating growth, and improving income and living
standards. Additionally, some countries that are quoted as good
examples of more globalised economies (e.g. India, China, South
Korea, Vietnam), started to have faster economic growth in the
years before they could be properly classified as globalised.
The gap in incomes between those in the poorest 20 per cent of
countries and those in the richest 20 per cent, has increased
from a ratio of 1:30 in 1960, to around 1:80 in the year 2002. It
is claimed that globalisation has helped rich countries more
than the poorer ones (although some commentators acknowledge that wars and natural disasters have also played a role in
lowering average incomes in some countries and regions).
Unreliable statistical data limits
conclusions about globalisation
Globalisation has increased the
exploitation of workers
In recent years, the media and various action groups have helped
to raise our awareness about the effects of some multinational
corporations on workers in Asia (e.g. Indonesia, Thailand and
Vietnam) and parts of Africa where wages and conditions are not
protected by enforced labour laws (e.g. minimum wages and age
of workers). For example, despite the high prices charged for
Globalisation has undermined local
culture and national identity
For some, globalisation stands for Americanisation or Westernisation, with all its imperfections. This places it in conflict with
local cultures and national identities. Globalisation means that
some countries are losing their unique identity or difference,
and their ability to determine their destiny and who they are
(e.g. as defined by their religion, language, education, values,
traditions, dress, food and clothing). Such a monoculture is not
desirable or beneficial for society generally.
CHAPTER 9 Economic globalisation
297
ON ITS OWN, GLOBALISATION IS
NOT ENOUGH
Despite its strengths, globalisation on its own, can do little to help
poor countries escape daily poverty. More is needed, involving
changes in policy by both rich and poor nations, and no one
should pretend that the task ahead would be easy or quick.
Growing productive capacity in poor
countries
Poor countries have very limited resources and often use them
inefficiently. For example, they face problems like high unemployment, a lack of skilled labour, low levels of investment in
equipment and technology, poor efficiency, often corrupt and
incompetent governments and the inadequate provision of
basic infrastructure (e.g. roads, power, water, sewerage, schools,
communications, hospitals). These problems limit their level of
national output and reduce the size of their production
possibility frontiers (see pp. 5–6). The task then is to grow the
production possibility frontier (i.e. shift it outward) and GDP
more quickly, through new policies and strategies.
Globalisation has worsened
environmental damage in poor
countries
Some critics of globalisation are greatly worried about its environmental effects and unsustainability. Here there are several
concerns. For instance, there are examples of multinational
mining, chemical and other manufacturing companies that
deliberately set up plants in poorer countries overseas (e.g. India,
China, Indonesia, Papua New Guinea or Mexico) to avoid the
tougher pollution and emission standards in their home country.
This helps to cut their costs and raise profits. The countries they
are visiting are often reluctant to strengthen controls, because
they fear they will suffer economically if the company pulls out.
Despite this claim, it is still a matter of debate about whether or
not locally owned corporations are any more environmentally
responsible in their conduct, than foreign business visitors.
Globalisation may lead to social unrest
If the differences in incomes between the world’s rich and poor
are growing and become even more obvious through media
images (as is the case according to some), then according to
Professor Wade of the London School of Economics, this may
pose a real worry.
■ To improve their financial position, will the politically
powerful in low-income countries try to extract even more
income from the poor, or become more corrupt to achieve
their own financial goals?
■ Will the educated leave poor countries (i.e. a ‘brain drain’
that has disastrous economic effects) and seek illegal entry
into richer countries?
■ Will the failure to share the world’s resources more fairly lead
to illegal mass migration that could weaken the economies of
rich countries?
■ Will frustration and a feeling of injustice, inequality and
jealousy, promote international terrorism, directed against
rich nations?
298
Economics Down Under Book 1
Lifting national savings and
investment to break the poverty cycle
As mentioned, Third World nations have low subsistence levels
of income and high levels of poverty. After purchasing basic
necessities, little or no household income remains for saving.
However, without saving (either by households, firms or governments), there is no finance for investment in capital equipment
that is needed to start and grow businesses, or provide government infrastructure, unless there is a rise in borrowing. Even if
credit is available, it is very expensive. This is reflected in high
interest rate repayments. In turn, this makes starting private
businesses almost impossible and most households lack the
basic requirements for gaining a credit rating so that they are
eligible for borrowing from a bank. In addition, if governments
borrow, there is the ongoing burden of repayments. In turn,
with low levels of investment in equipment and new technology,
labour output per hour worked (i.e. efficiency) is very small
indeed. As a result, hourly pay rates and incomes are awfully
low. As seen in figure 9.11, this sets up a poverty cycle, which will
persist, unless it is somehow broken.
1. Low levels of output per worker
per hour causes average incomes
per head per year to be low, so
there is poverty and only some
basic items are affordable.
4. Low investment
spending on new
equipment and
technology makes
labour efficiency
very low.
The vicious
cycle of poverty
in low-income
countries
2. Low levels
of national
saving are due
to subsistence
levels of
income.
3. Inadequate savings make
borrowing credit to set up and
finance business investment
spending very expensive, so
investment levels are very low.
Figure 9.11 The vicious cycle of poverty and
underdevelopment in low-income countries
Breaking out of this cycle is not easy. It may take considerable
time and requires a combination of many strategies, including
perhaps some of the following.
■ Governments must set up and supervise, well run financial
institutions to collect whatever household savings there are.
■ International capital inflow or investment (but with appropriate guidelines to maximise the benefits for the local
community) must be encouraged.
■ International aid and gifts need to be encouraged that do not
have harsh conditions attached that hurt the local community.
■ A system of micro-credit needs to be created where small
sums of money, perhaps as little as $100–200, are provided to
those who want to start up a small business and who, otherwise, would not qualify for bank loans. This needs to be
supplemented with some free basic business training.
■ The government needs to ensure that the rich in particular,
pay the required taxes (on incomes and luxury goods) to
help finance for public investment and infrastructure projects.
■ Government incentives are needed to encourage private
investment in projects that help promote national selfsufficiency in food and basic community services.
■ Measures (e.g. proper accounting and transparent record
keeping) are needed to help avoid wasting or misusing the
government’s limited financial resources.
■ Exports (e.g. cash crops and basic manufactured items) need
to be encouraged to help boost national income and savings.
Reforming government and
promoting democracy
Poor countries badly need political democracy where the
majority of voters in regular and free elections, choose the
government from a range of candidates representing different
political parties. In addition, it is also vital that freedom of
speech and freedom of the press or media (i.e. where it is possible to be critical of government policies) are protected in
national laws. These things add to transparency and help to
hold governments accountable for their actions. Unfortunately,
these important principles are frequently missing in low-income
countries and lead to incompetence, corruption, ineffective
government, chaotic public institutions, civil disobedience and
war. This does much to slow economic progress. Bringing about
the necessary change is exceedingly difficult in countries where
these important concepts are not understood.
Rich countries must reduce their
protection of industry
Many rich nations protect their farmers and miners from competition by poorer countries that are trying to export primary
and basic manufactured products. Here, we think of the heavy
protection of farmers in the US, Japan and the European Union
by means of tariffs, subsidies and import quotas. However, we
also think of the attempts by Australia and some developing
countries through numerous rounds of multilateral trade negotiations, to convince these rich countries of the need to expand
free trade. Progress here has been slow. Unfortunately for poor
countries, this protection by rich nations directly cuts their sales
of crops and minerals. Their export incomes are lower than
otherwise. In addition, without cash sales for exports, many
poor countries have problems purchasing necessary imports of
equipment, medicines and technology. It forces them to run up
huge international debts on which interest then has to be paid
to rich nations. This slows their economic progress, and helps to
perpetuate the poverty cycle.
Provision of basic infrastructure
Having adequate infrastructure including education, health,
power, water supply, transport, and law and order, is an important key to growing the nation’s productive capacity. This is
because all industries need these things to produce goods and
services. Unfortunately, most low-income countries have hopelessly inadequate and unreliable infrastructure. Power supply
blackouts are common, water is not safe to drink or is in short
supply, flooding is common, sanitation inadequate, roads are
congested or impassable, railways are unsafe, communications
are unreliable and public buildings are run down. Clearly there
needs to be a big injection of investment or capital into these
areas (probably initially by the government), to improve living
standards and grow the capacity of local and foreign businesses
to produce more output.
Managing debt levels
Debt levels in most poor countries are often high and represent
well over 100 per cent of their GDP. This causes crippling
interest repayments to rich nations and reduces the level of
government spending on infrastructure. Debt needs to be cut to
manageable levels, wasteful ‘white elephant’ type projects that
add little to welfare, terminated, substantial military expenditures cut and governments held accountable for all spending.
The writing-off or forgiveness of some past debt, by rich
countries, as in 2005–06, provides a breather, but is not a permanent solution. Additionally, borrowed money needs to be used
CHAPTER 9 Economic globalisation
299
efficiently for projects that bring widespread improvements in
the capacity of the economy to produce goods and services that
encourage national self-sufficiency and independence.
Reducing inequality in income and
wealth
Income inequality is often larger in poor countries (e.g. the Gini
coefficient is between 0.5 and 0.7 in Namibia, Central African
Republic, Zambia, Papua New Guinea and Nigeria), than in rich
nations (e.g. the Gini is less than 0.35 in Australia, Canada, US,
UK, Japan). Frequently, inequality is reinforced by unequal
ownership of land, official corruption, the absence of democracy,
closed markets, state and private monopolies, special favours
involving deals with the government and the abuse of social,
political and economic power. Democratic governments can best
deal with economic inequality by introducing fairly progressive
income taxes, promoting proper competition in markets to
check personal greed, tacking corruption, and providing basic
community services.
Reducing population pressures
Population in some low-income countries is growing quickly at
more than double the rate of high-income nations (some of
which actually have declining populations). This places great
strain on the government’s provision of infrastructure and
services including transport, water, education, law and health.
However, the great burden created by population pressures can
be eased. Historical experience tells us that birthrates slow and
families get smaller if there are improvements in general health
(e.g. clean water supply and control of malaria) and education
standards, and by lowering the child mortality (death) rate. This
is because apart from common ignorance about family planning
and health matters, to some extent, large families often reflect the
uncertainties of infant survival and old age, in countries where
there is no government welfare system (e.g. age pensions).
Tackling unemployment and idle
resources
Unemployment and underemployment (workers operating
below their productive capacity) are huge problems in most
poor countries. Rates can be as high 80–90 per cent as in
Zimbabwe, Nauru and Liberia, for example. In part, the
problem reflects a lack of investment, political instability, an
uneven distribution of land ownership, inadequate skills,
training and education, a poor business climate where investment is low, and the absence of government infrastructure or
services. Mention has already been made about possible
solutions to many of these problems.
IS THERE AN ALTERNATIVE TO
GLOBALISATION?
Is there an alternative to the full acceptance of globalisation?
According to some, the answer to this question is ‘yes’. A
number of protestors and opponents of globalisation (and its
main body, the World Trade Organization or WTO) have proposed a different and supposedly more beneficial way to help
low-income countries escape poverty. For example, in her
300
Economics Down Under Book 1
article, ‘Time to replace globalisation’ (2004), Caroline Lucas of
the Greens–European Free Alliance in the European Parliament, is critical of globalisation. She raises a number of issues.
■ She argues that globalisation is based on the Darwin-type
theory of competition, survival of the fittest, the race to the
bottom (who can have the lowest production costs), greed by
the richer nations and the unsustainability of globalisation’s
material emphasis. She also claimed that globalisation is
based on ‘myths’ that she tries to expose, one by one. These
myths include the following:
– globalisation is the only alternative path to economic development
– globalisation’s progress is inevitable
– globalisation is good for the poor
– comparative cost advantage is the most efficient way to use
resources
– more globalisation means more jobs.
■ She outlines an alternative to the failed and unsustainable
system of globalisation. She calls her proposal, ‘localisation’
which is more or less the exact opposite to globalisation. This
is explained as ‘a set of interrelated and self-reinforcing
policies that actively discriminate in favour of the more local’.
Localisation helps to provide an economic and political
framework for people, community groups and local businesses to rebuild and rediversify their economies that have
been partly destroyed by exposure to uncontrolled international free market competition. She believes that the
following proposals will also help to rebuild social cohesion in
communities and help to heal environmental damage caused
by the unsustainable practices of some greedy multinationals.
It is not based ‘. . . on competition for the cheapest, but on
cooperation for the best . . . ’. Promoting this ideal could
involve the introduction of following measures:
– the selective use of tariffs and import quotas to give infant
industries a chance to get established
– controlling capital or investment flows, along with tax
evasion by multinationals
– giving preference to producers and suppliers that manufacture locally (i.e. ‘site here to sell here’)
– developing a local competition policy to eradicate protected
monopolies that push up prices and exploit consumers
– trying to increase the level of democratic involvement in
decision making, both economically and politically
– introducing ecological taxes on energy, polluters and users
of non-renewable resources
– redirecting international aid and trade rules (e.g. those set
down by the WTO) so they are more flexible and friendlier
towards building sustainable local industry and national
economies
– encouraging rich nations to show far greater international
leadership, and adopting a more ethical and responsible
position.
TRY APPLIED ECONOMICS
EXERCISE
5, p. 305
TRY COLLECTION AND
1, 2, p. 312
ANALYSIS OF NEWSPAPERS
TRY WATCHING A VIDEO
p. 315
9.6 The nature and effect of
Australia’s foreign aid
Foreign aid represents the transfer of funds and other types of assistance
by governments and private individuals from high income to lower
income countries. If used properly, aid can be an important way of
helping poor countries to improve their living standards. Most
importantly, this assistance can help to break the vicious cycle of
poverty and raise per capita incomes. It does this by raising the
funds available for investment, lifting efficiency and accelerating
productive capacity.
There are three types of foreign aid summarised below:
The three forms of foreign aid
1. Loans. There are three types of loans — hard loans or
credit offered at the normal market rate of interest; soft
loans offered at a special discounted interest rate; and
tied loans, where conditions are imposed such as
requiring that the money be used to purchase exports
from the donor country. Of these, soft loans are
probably the most beneficial for the recipient country.
(continued)
2. Grants. Grants are straight-out donations of cash that
do not need to be repaid. When used wisely, this is
perhaps the best type of help that high income
countries can offer.
3. Technical and other assistance. This involves the donor
country providing scientific, economic, educational,
technical, industrial, agricultural or military personnel.
With the possible exception of the latter group, these
people advise on matters relating to economic
development.
Figure 9.12 (below) shows Australia’s level and direction of
government foreign aid for 2005–06 which totalled $2491
million. The largest recipients of our foreign aid include Papua
New Guinea, Indonesia, Solomon Islands, Regional Pacific,
Vietnam, Africa, Middle East and Central Asia, and China.
Figure 9.12 also compares aspects of levels of foreign aid in
selected countries. Impressive as this may seem, it is sad knowing
that many other countries are far more generous with their
foreign aid programs as judged by the ratio of aid to GDP. In
Australia’s case, this is a mere 0.26 per cent of our GDP.
Figure 9.12 Snapshot of foreign aid donated by the Australian Government, 2005–06
Key destinations of Australian Government
foreign aid for 2005–06 ($ millions — excludes private aid)
Papua New Guinea
Indonesia
Solomon Islands
Regional Pacific
Vietnam
Africa
Middle East and Central Asia
Philippines
China
Regional East Asia
Cambodia
East Timor
Vanuatu
Bangladesh
India
Regional south Asia
Sri Lanka
Samoa
Laos
Tonga
Kiribati
Naiuru (additions funding)
Thailand
0
100
200
300
400
500
600
A$ (millions)
(continued)
CHAPTER 9 Economic globalisation
301
NET GOVERNMENT FOREIGN AID FOR SELECTED COUNTRIES, 2005–06
COUNTRY
AMOUNT OF
GOVERNMENT FOREIGN
AID DONATED
(US$ MILLIONS)
COUNTRY
AMOUNT OF
GOVERNMENT FOREIGN
AID DONATED
(US$ MILLIONS)
1. Japan
8900
7. Italy
1000
2. United Kingdom
7900
8. Australia
894
3. United States
6900
9. South Korea
423
4. Denmark
2000
10. Portugal
5. Norway
1400
11. New Zealand
6. Switzerland
1100
12. Lesotho
271
99
4
Source: Graph data derived from Year Book Australia, 2006 ABS 1301.0. Table data derived from CIA Factbook.
TRY APPLIED ECONOMICS
EXERCISE
6, p. 306
TRY COLLECTION AND
3, p. 314
ANALYSIS OF NEWSPAPERS
TRY TEAM DEBATES
302
Economics Down Under Book 1
4, 5, 6, p. 306
School Assessment tasks
and learning activities
In order to satisfactorily complete VCE Economics Unit 2, part 2,
the teacher must decide whether a student has demonstrated the
achievement of the specified key knowledge and key skills for
Outcome 2 (see details on p. 228). The teacher’s decision should
reflect results from school-based assessment. Generally, this
should take place as part of the normal teaching and learning
program. In addition, most assessment will be completed in class
under a limited time frame. With this in mind, teachers may
select from an appropriate range of tasks that could include the
following.
SCHOOL ASSESSMENT TASKS AND LEARNING ACTIVITIES
1.
Multiple-choice and short-answer tests
9.
Case studies
2.
Folio of applied economics exercises
10.
Report of an investigation
3.
Analysis of written, visual and statistical evidence
11.
Web quests
4.
Essays
12.
Web page design
5.
Debates
13.
Simulations
6.
Presentations
(oral, multimedia, visual, posters)
14.
A folio of economic exercises using print or
electronic materials
7.
Multimedia presentations
15.
Problem-solving tasks
8.
Role plays
A range of these activities has been provided in the following pages.
MULTIPLE-CHOICE test questions
Using the multiple-choice answer grid below, select the letter (A, B, C, D) that
represents the most appropriate answer for each question by marking it with a tick (✔).
Answer grid
QUESTION
1
2
3
4
5
6
7
8
9
10
11
12
A
B
C
D
Question 1
Economic globalisation involves:
A multinational and transnational companies
B the movement of money capital and production from country
to country
C a move towards the creation of a single international market
for particular goods or services
D all of the above features.
Question 2
Concerning economic globalisation, which statement is generally
false?
A The process has been under way now for over 200 years.
B The process did not start until the 1940s.
C The process did not start until the 1980s.
D The process did not start until the 1990s.
Question 3
The process of economic globalisation has not been helped by:
A the continued existence of tariffs and other government
controls in different economies
B market deregulation in Australia and elsewhere
C cheap electronic communication and faster transport
systems
D international differences in the cost of labour and other
resources needed for production.
CHAPTER 9 Economic globalisation
303
school assessment tasks and learning activities
9.7
Question 4
Concerning economic globalisation, which of the following is false?
A David Ricardo was an Italian economist who made the idea
of globalisation popular in the 1990s.
B Colonisation by European nations in Africa, India, Asia, Australia and the Americas resulted in the international growth
of commodity trade.
C World Wars I and II slowed the process of globalisation.
D International agreements such as WTO and the creation of
the EU helped globalisation.
Question 5
Which statement about the annual sales of Microsoft and other
multinational corporations is false? Microsoft’s annual sales are
higher than:
A Australia’s GDP
B Israel’s GDP
C Norway’s GDP or General Electric’s annual sales
D Poland’s GDP or Toyota’s annual sales.
school assessment tasks and learning activities
Question 6
Which statement is generally false? Economic globalisation helps:
A corporations to take advantage of differences in labour costs
that are an important consideration in the manufacture of
some goods
B provide corporations with access to natural resources that
would not otherwise be available in their country of origin
C to increase per unit costs of production for corporations by
diversification in production
D to increase the flexibility of corporations in decision-making
to maximise profits.
Question 7
Economic globalisation is helped by governments that:
A have fewer environmental laws
B impose higher tax rates on foreign companies
C have minimum wage legislation as in Australia
D offer production subsidies only to locally-owned firms.
Question 8
Economies of large scale gained by some multinational corporations most accurately involve:
A mass production
B lower variable costs as production is increased
C lower per unit fixed costs because these costs can be spread
more thinly over more units of output
D the exploitation of labour as a means of lifting profits as
companies get bigger.
Question 9
Which of the following is not normally an effect of economic
globalisation?
A Economic growth is usually increased by greater efficiency
and larger export volumes.
B Inflation is increased.
C Up to a point, the product range for consumers may be
increased.
D Governments need to consider the effects of their policies
on the reaction of global traders and markets, and the
impact on the inflation rate since these considerations affect
our international competitiveness.
Question 10
Economic globalisation may cause:
A the disappearance of some national companies or their takeover by foreign investors
B massive shifts in population and the spread of illegal drugs
and crime from one country to another
C the depression of local wage levels towards those in cheap
labour countries overseas
D all of the above.
Question 11
Concerning the Nestlé corporation, which statement is false?
A Production is undertaken only in Switzerland even though
its products are sold globally.
B Its market size grew partly as a result of its own product
innovation.
C In part, the company expanded by means of takeovers of
proven companies operating in markets around the world.
D At times, its expansion was interrupted as a result of wars,
global recession and adverse moves in some exchange rates.
Question 12
It is likely that Nestlé started operations in Australia partly because:
A we drink more coffee and eat more chocolate than anyone else
B of our nearness to Asian markets and our reasonably large
and rich domestic market
C wage costs here are lower than elsewhere in our region
D our government gives them lower tax rates and other concessions that are not given to locally-owned companies.
TERMINOLOGY revision
Briefly and accurately write out definitions for each of the terms listed below.
Table 9.2
Economics terms used in chapter 9
company merger
fixed production costs of a firm
labour intensive industries
company takeover
foreign aid
micro-credit
comparative cost advantage
globalisation
multinational company
deregulation of financial markets
horizontal integration of firms
productive capacity of a nation
deregulation of the labour market
human development index
vertical integration of firms
economies of large-scale production
infrastructure
vicious cycle of poverty
304
Economics Down Under Book 1
Question 1
A What is meant by the term, ‘economic globalisation’?
B It took 38 years after its invention for radio to be used by
50 million consumers, 16 years for personal computers,
13 years for TV, and only four years for the World Wide
Table 9.3
Web! How has the WWW helped to accelerate the globalisation of commerce and business?
C Examine the data contained in table 9.3 showing changing
transport and communication costs. How have declining
transport and communication costs helped the process of
globalisation and the spread of multinationals?
Changing transport and communication costs ($US)
YEAR
SEA FREIGHT/
TON
AIR TRANSPORT/
MILE
TELEPHONE CALL/3
MINUTES, LONDON–
NEW YORK
COMPUTERS INDEX
(1990 = 100 POINTS)
1920
$95
NA
NA
NA
1930
$60
$0.68
$245
1960
$27
$0.16
$32
12 500
1990
$29
$0.11
$3
100
NA
Source: Data derived from Human Development Report, 1999 (OUP, 1999); IMF, 1997a.
D How did colonisation by European powers some centuries
ago help to lead to globalisation?
E Using an encyclopedia in your school library (or one such as
Encarta on CD-ROM), find out details about David Ricardo’s
economic theory of international specialisation and comparative cost advantage and use this to write a brief report.
Question 2
A Which countries are seen by multinationals as low-wage countries? Explain how wage differences lead to globalisation.
B What are economies of large scale? Explain how globalisation
can help multinationals gain economies and better profits.
C Explain the methods used by some governments to attract
multinationals. Why are governments often keen to do this?
Question 3
A Globalisation has meant that the Australian economy has
had to undergo change and become more internationalised.
What sorts of change have been forced upon the Australian
Government and society due to economic globalisation?
B Outline one cost and two benefits to Australia of economic
globalisation.
Question 4
A What makes Nestlé a multinational corporation?
B What methods did Nestlé use to gain its dominant position
of the world’s largest food producing company?
C Did Nestlé try to exploit the situation by locating production
in low-wage countries or was the decision determined by the
location of its main international markets?
D Discuss the costs and benefits to Australia of Nestlé’s local
operations.
E For a very critical look at Nestlé’s international activities you
may (with your teacher’s approval) search the Internet for
appropriate references.
Question 5
Examine table 9.4 showing statistical indicators (mostly for 2005
or 2006) for high and low globalised countries.
Table 9.4
INDEX OF GLOBALISATION
(higher value means more
globalised or open
economies)
GDP PER HEAD
(US$ in purchasing
power parity terms
that allow for
inflation and the
cost of living)
POVERTY RATES
(% population)
Australia
5.08
30 161
NA
Rwanda
0.92
1 321
60
China
3.23
5 453
10
Iran
2.08
7 424
40
Zimbabwe
2.22
NA
80
Switzerland
5.57
33 062
NA
Niger
1.50
832
63
COUNTRY
Source: Data derived from NationMaster website.
CHAPTER 9 Economic globalisation
305
school assessment tasks and learning activities
APPLIED ECONOMICS exercises
A What is globalisation?
B Quoting examples, is there any apparent relationship
between the level of globalisation and material living
standards? Explain your answer.
Table 9.5
C Why might globalisation in some countries have the effects
mentioned in question B?
D Select one of the three weaknesses listed in table 9.5 and
then explain how globalisation may have negative effects in
some low-income countries.
Some weaknesses of globalisation
EXPLANATION OF THE NEGATIVE
EFFECTS OF GLOBALISATION
WEAKNESS OF GLOBALISATION
1.
Lack of food produced for consumption by the local population
2.
Exploitation of workers
3.
Social and political unrest nationally and internationally
E For the moment, assume that globalisation helps to lift the
incomes of people in poor countries. However, on its own
globalisation is not enough to make people better off. There
are other obstacles to economic development and higher
incomes. List and briefly explain three other problems common
to low-income countries that need to be corrected if there is
to be a rise in general living standards (i.e. GDP per person).
ESSAY
Write a 400-word essay that weighs up ‘the important costs and
benefits of economic globalisation for Australia’.
TEAM debate
After dividing into teams (one for the affirmative and one for
the negative), work with others to prepare a debate about one
of the following topics:
1. ‘That economic globalisation is a blessing not a curse for
Australia and the global economy.’
2. ‘That economic globalisation leads to a lack of consumer
choice and a way of life modelled on that of the United States.’
3. ‘That economic globalisation must be stopped before it is too
late.’
4. ‘That foreign aid is unimportant and, anyway, it does not get
to those in most need.’
5. ‘That Australia’s foreign aid should stop and the money be
devoted to helping indigenous Australians who are often
living in Third World conditions.’
6. ‘That with sufficient capital for investment, a low income
country could quickly become a high income country.’
REPORT ON an investigation
Figure 9.13 GDP-based map of the world
Source: Financial Review, 19 February 1997, p. 26.
B Foreign aid can be one way of reducing global income
inequality. Define what is meant by foreign aid.
C Name the three main types of foreign aid. Which type of aid is
generally most useful in promoting higher production and
which type is least useful to the country receiving the aid?
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Economics Down Under Book 1
➜
school assessment tasks and learning activities
Question 6
A Global income is divided very unevenly between countries.
Examine figure 9.13. It has been specially drawn so that the
area of the country reflects the size of its GDP relative to
other countries. From the map, which three countries appear
to have the largest GDPs and which three of those named
have the smallest GDPs?
D How much foreign aid does Australia give each year?
Explain how this aid can help to raise living standards in
economically poor countries.
Visit the website for this book and clock on the weblinks
for this chapter (see Weblinks, page 000).
The task
This is a small group activity and it involves some research into
various aspects of a multinational corporation such as American
Express, BHP–Billiton, Deutsche Bank, Exxon, Ford, General
Electric, Johnson & Johnson, McDonald’s, Microsoft, Nike,
Shell, Sony and Union Carbide. You may like to find out information about the following:
the structure and size of the organisation
the reasons for its global expansion
how the company gains a competitive advantage
the use of technology in the corporation
the nature of the relationship between the corporation and
the host country
■ use ‘Google’ as a search engine to try and find criticisms of
these companies.
OR
An alternative to the research theme outlined on the previous
page is to conduct a survey in your home of the basic goods and
services purchased by your family. Discover what proportion of
the basket of items in your home is produced or sold by foreignowned multinationals as opposed to locally-owned firms (note
— the AusBuy Guide is useful for this purpose). Your basket of
items for the survey might include:
1. electrical appliances
2. car
3. breakfast cereal
4. banking
5. shoes
6. fruit
7. underwear
8. hair shampoo
9. insurance
10. magazines.
Use your survey results to:
■ construct graphs showing the degree of foreign business
penetration into the Australian market
■ find out more about a number of the companies noted in your
survey (e.g. their home base, their size, their marketing strategies, their impact on the Australian economy and so on).
Presentation
Your group’s findings could be reported in various ways. For
example:
■ a PowerPoint data show involving computer-generated slides
presented to the class
■ a wall chart or poster
■ a class talk, perhaps illustrated using overhead transparencies
containing graphs, diagrams, flow charts, advertising materials, photographs
■ a written report of 400 words containing graphs and other
illustrative evidence.
References
Use of the Internet can be a great way to obtain information
about some multinational corporations. Most companies run
their own home pages.
RESEARCH and analysis
The task
Working individually or in small groups, your task here is to
imagine that you are an owner of an Australian manufacturing
business wanting to expand your operations to become a multinational. You are investigating possible countries for your
expansion plans. For example, would you want to grow your
Australian business, or would you go offshore, perhaps to China,
Fiji, Philippines, Indonesia, India, United Kingdom, United
States or Brazil?
To get you thinking, start by reading the article, ‘Advance
Australia where? Our brand drain’. Also examine the table
showing what has happened to dwindling number of Australian
firms and their well-known brand names over the years.
Advance Australia where? Our brand drain
By KATE ADAMSON, Consumer reporter
THERE are only a handful of iconic
Aussie brands still made in Australia
and owned by Australians.
A Sunday Herald Sun survey found
only eight of 42 well-known Australian brands remain truly Australian.
The mass exodus to foreign shores
comes as companies resort to using
cheaper labour in China and other
developing countries.
Or the brands have been victims of
takeover deals by global giants.
One of the few remaining Australian made and owned products,
Blundstone boots, announced last
week it would make the boots in Thailand and India.
It will shut its Hobart plant, sacking
more than 300 workers.
It joins other Australian brands
being made overseas such as King
Gee Jeans, Kookaburra cricket bats
and Pelaco shirts.
Tim Tam, Holden, Milo and Sherrin
footballs are still made here, but are
owned by foreign companies.
And the Hills Hoist clothes line,
featured in the Sydney Olympics
opening ceremony, moved production
to China last month.
‘The cost to make some things in
Australia is higher than to make the
same thing in China,’ Hills Hoist
spokesman Graham Twartz said.
Australian Manufacturing Workers’
Union Victorian secretary Steve
Dargavel said manufacturing, which
employed more than a million
Australians, was dying.
‘It’s not because wages are too
high, it’s because Federal Government
policy has failed us,’ Dargavel said.
Social analyst David Chalke said
Australians were emotionally attached
to many brands, but hip pockets came
first.
‘On a simple level we want the
Australian cricket team to win and we
want Australian manufacturing to
win,’ Mr Chalke said.
‘But if it can’t, we think it’s not our
fault. It’s not our job to save
companies. Our job is to feed the kids
and pay the mortgage.’
CHAPTER 9 Economic globalisation
307
school assessment tasks and learning activities
■
■
■
■
■
AUSTRALIAN
OWNED AND
MADE
FOREIGN OWNED,
BUT MADE IN
AUSTRALIA
AUSTRALIAN
OWNED BUT MADE
OVERSEAS
Rosella tomato sauce
Vegemite — Kraft, US
Jockey underpants — China
Four’N Twenty pie
Holden Commodore —
General Motors, US
Sunbeam kettles — China
Akubra hat
Bonds singlet
Kookaburra cricket ball
Drizabone oilskin coat
RM Williams boots
Victa lawn mower
Sheridan sheets — China
Sherrin football — Russell
Athletic, US
SPC Ardmona — Coca
Cola, US
FOREIGN OWNED
AND MADE
Bushells — Unilever, Britain/
Netherlands — Indonesia
Speedo — Pentland,
Britain — China
Hills Hoist — China
Vicks Vaporub — Procter and
Gamble, US — India
Kookaburra cricket bats —
India
Redheads — Swedish
Match — Sweden
Billabong — China
Uncle tobys — Nestlé,
Switzerland
Pelaco shirts — China
Tim Tam — Campbell’s, US
KingGee —China
Aeroplane Jelly —McCormick,
US
Stubbies — China
Slazenger — China
Streets ice-cream —
Unilever, Britain/
Netherlands
Malvern Star — China
Berri juice — National Foods,
Philippines
Big M — National Foods,
Philippines
Milo — Nestlé, Switzerland
Western Star butter —
Fonterra, New Zealand
Allens sweets — Nestlé,
Switzerland
Cherry Ripe — Cadbury,
Britain
Cheezels — Campbell’s, US
Violet Crumble — Nestle,
Switzerland
Nobbys Nuts — PepsiCo, US
Mortein — Reckitt
Benckiser, Britain
Aerogard — Reckitt Benckiser,
school assessment tasks and learning activities
Britain
Source: Herald Sun, 28 January 2007.
Select one of the products mentioned in the article and
imagine you owned the company that produced this item. In
deciding in which country to locate your new operations, try to
consider a selection of the following aspects (as applied to the
product you selected):
■ the level of wage rates or labour costs
■ labour force size and level of education and training
■ market size (located domestically and overseas)
■ transport or freight costs of materials and finished goods
(both domestically and to overseas)
■ the cost of borrowing business credit to finance your expansion
■ government policy towards overseas firms and the environment (in the selected country)
■ the provision of infrastructure (e.g. government provision of
water, power, transport)
■ rates of company tax
308
Economics Down Under Book 1
■
the availability and cost of the natural and other resources
you require
■ the level of competition faced (e.g. are there rival firms?).
References
You will need access to a computer and the Internet in order to
conduct research into the areas of consideration that are listed
above. Some statistical and other data might be found using the
following sites that provide general information about many
countries:
■ CIA data base
■ OECD data base
■ World Bank data base
■ NationMaster
■ ACTU or the international labour movement.
In addition, use various search engines (e.g. Google) to locate
the necessary information. The statistical data found in table 9.6
(pp. 309–12), for example, have been mainly extracted from the
Internet. It may give you a useful start. Try to select a country
for which relevant information is available.
PART 1
Some factors affecting where multinational companies locate their operations
COMPARISONS OF WORKER EFFICIENCY
(LEVEL OF OUTPUT PRODUCED PER WORKER PER HOUR)
Ranked comparisons of labour
productivity (GDP per hour
worked adjusted to purchasing
power parity) from highest to
lowest
Productivity
index as % US
(US = 100
points)
Ranked comparisons of labour
productivity (GDP per hour
worked adjusted to purchasing
power parity) from highest to
lowest
Productivity
index as % US
(US = 100
points)
1. Netherlands
129
15. Australia
80
2. Luxembourg
126
16. Spain
80
3. Belgium
111
17. Italy
78
4. Ireland
104
18. Canada
77
5. France
101
19. Iceland
73
6. Netherlands
101
20. Japan
70
21. Greece
61
7. United States
100 = base
8. Germany
92
22. New Zealand
59
9. Denmark
89
23. Portugal
48
10. Sweden
89
24. Hungary
46
11. Austria
85
25. Korea
40
12. United Kingdom
84
26. Poland
39
13. Finland
83
27. Mexico
30
14. Switzerland
82
28. Turkey
28
PART 2
COMPARISONS OF WORKER EFFICIENCY BY INDUSTRY AGAINST THAT FOR THE US
Industry
US
Australia
Germany
Japan
South Korea
(% US
worker
efficiency)
United
Kingdom
(% US
worker
efficiency)
(the base for
comparison
= 100%)
(% US
worker
efficiency)
(% US
worker
efficiency)
1. Rubber and plastics
100
67
65
82
118
10
2. Textile products
100
66
91
64
80
28
3. Basic fabricated
metals
100
56
81
81
43
31
4. Chemicals,
petroleum and coal
100
51
54
71
65
18
5. Paper, printing and
publishing
100
45
77
55
48
19
6. Food products
100
44
65
32
43
10
7. Machinery,
transport and
equipment
100
44
86
98
59
28
8. Electricity,
machinery and
equipment
100
37
71
80
51
30
(% US
worker
efficiency)
CHAPTER 9 Economic globalisation
309
school assessment tasks and learning activities
Table 9.6
PART 3 COMPARISONS OF WAGES TO LABOUR PRODUCTIVITY AND THE LABOUR COST PER
UNIT OF PRODUCTION EXPRESSED AS A PERCENTAGE OF US DATA, 2002
Wages (A)
US
Labour
Productivity (B)
Unit Labour Cost
(A/B = 100)
100.0
100.0
100.0
Sweden
74.5
53.8
138.5
Japan
62.6
67.8
92.3
Singapore
49.0
49.0
100.0
Taiwan
43.1
24.4
176.9
Korea
27.0
43.9
61.5
Chile
26.2
42.5
61.5
Mexico
16.3
30.3
53.8
Turkey
15.7
22.7
69.2
Malaysia
10.9
12.9
84.6
Philippines
8.6
15.9
53.8
Bolivia
7.7
16.8
46.2
Egypt
5.9
5.1
115.4
Kenya
5.4
3.5
153.8
Indonesia
4.6
6.6
69.2
Zimbabwe
4.6
5.0
92.3
India
3.1
2.9
107.7
China
2.1
2.7
76.9
PART 4 COMPARISONS OF RATES OF COMPANY TAX (%) ON PROFITS
school assessment tasks and learning activities
Ranked comparisons of
countries by company tax rate
Tax rate on
profits (%)
(latest)
Ranked comparisons of
countries by company tax rate
Tax rate on
profits (%)
(latest)
1. Egypt
50 (down to 25)
16. Indonesia
30 (down to 10)
2. Iran
54 (down to 12)
17. China
30
3. United States
40
18. Thailand
30
4. Germany
38
19. Taiwan
26
5. Italy
37
20. Sweden
27
6. India
35
21. Russia
25
7. Spain
35
22. European Union average
25
8. Japan
35 (down to 25)
23. Austria
25
34
24. Vietnam
25
10. France
33
25. Hong Kong
16
11. Greece
32
26. Hungary
16
12. Netherlands
31
27. Poland
19
13. Australia
30
28. Ireland
12
14. UK
30
29. Cyprus
10
15. Denmark
30
30. Estonia
1
9. Belgium
310
Economics Down Under Book 1
COMPARISONS OF LEGAL MINIMUM WAGES
Ranked comparisons of
minimum hourly wage rates or
labour costs for manufacturing
workers
US$ per hour
(approximate,
2006 or 2007)
Ranked comparisons of
minimum hourly wage rates or
labour costs for manufacturing
workers
US$ per hour
(approximate,
2006 or 2007)
1. Ireland
11.25
10. Argentina
2.00
2. France
10.80
11. Taiwan
2.00
3. Australia
10.50
12. Russia
1.50
4. United Kingdom
10.00
13. Estonia
1.30
5. Canada
8.00
14. Pakistan
0.90
6. Japan
5.60
15. China
0.60
7. Brazil
5.40
16. India
0.40
8. United States
5.15
17. Sri Lanka
No minimum
9. South Korea
3.72
18. Indonesia
No minimum
PART 6
COMPARISONS OF AVERAGE LABOUR COSTS FOR MANUFACTURING WORKERS
Ranked comparisons of
average hourly wage rate index
of labour costs for
manufacturing workers
Index of wage
rate (expressed
as a % of
US = base of
100 points)
Ranked comparisons of
average hourly wage rate index
of labour costs for
manufacturing workers
Index of wage
rate (expressed
as a % of
US = base of
100 points)
1. Denmark
145
16. Japan
89
2. Norway
144
17. Canada
85
3. Germany
140
18. Ireland
84
4. Switzerland
127
19. Italy
81
5. Belgium
126
20. OECD average
80
6. Finland
125
21. Spain
69
7. Netherlands
121
22. Israel
55
8. Austria
120
23. New Zealand
50
9. Sweden
119
24. Singapore
35
10. Europe average
111
25. Asian industrialised
32
11. Luxembourg
107
26. Portugal
24
27. Taiwan
22
12. United States
100 = $22 per
hour
13. France
95
28. Hong Kong
22
14. United Kingdom
90
29. Brazil
11
15. Australia
89
30. Mexico
10
CHAPTER 9 Economic globalisation
311
school assessment tasks and learning activities
PART 5
PART 7 COMPARISONS OF THE COST TO BUSINESSES OF BORROWING CREDIT OR FINANCE
Ranked comparisons of bank
interest rates on loans to
businesses, 2006 or 2007
Annual interest
rate (%)
Ranked comparisons of bank
interest rates on loans to
businesses, 2006 or 2007
Annual interest
rate (%)
1. Australia
9.60
6. Hong Kong
7.75
2. United Kingdom
8.30
7. Indonesia
6.25
3. United States
8.25
8. Germany
4.38
4. New Zealand
8.20
9. Singapore
5.33
5. Canada
7.85
30. Japan
1.63
school assessment tasks and learning activities
Source: Part 1, Data derived from OECD, productivity database, January 2006. Part 2, These figures should only be used as a
general guide, they are now rather dated and probably tend to exaggerate the current difference in worker efficiency with US
workers following government efficiency policies (e.g. tariff cuts, workplace agreements) and improved productivity growth, 1994–
2006. Data derived from an article by Fiona Carruthers, ‘US workers twice as efficient in factory output’, The Australian, 24 August
1994, p.4. Part 3, derived from China in Transition, ‘The myth of Chinese Competitiveness — are low wages China’s strength or
weakness?’ by Chi Hung Kwan, (August 2002, p. 2) quoted from the United Nations Conference on Trade and Development
(UNCTAD), Trade and development report, 2002. Part 4, Data derived mainly from Business Council of Australia, KPMG Corporate
Tax Survey, 2004, World Bank and other sources. Part 5, Data derived mainly from Wikepedia, the free encyclopedia. Part 6, Data
derived from the US Bureau of Labour Statistics and other sources. Part 7, Data derived from RBA Bulletin (table F14) and other
sources.
Presentation
You need to prepare and submit either:
■ A written company report
OR
■ A multimedia presentation that reports your findings and
conclusions to the class (involving a PowerPoint presentation)
In setting out your findings, you might include the following:
■ Introduction. An introduction that outlines the product or
company you chose to research.
■ Factors considered important. Select, justify and explain the main
considerations (select a range from the list given and or
include other important factors) that would be important for
your expanding company, in making a decision about which
country you would choose for location. You should also
include why you selected one country over another?
■ Conclusion. Sum up your findings.
Presentation ideas
Illustrate your work with diagrams, downloaded digital photos,
cartoons, tables, and Excel generated graphs.
This activity would take a minimum of 6–7 lessons to complete.
COLLECTION AND ANALYSIS
of newspapers
1. Collect any two newspaper articles about the issue of
globalisation. For instance, these articles may report:
■ the activities and impact of a multinational corporation
■ international discussions relating to reducing tariffs and
farm subsidies
■ the expansion of international free trade areas
■ recent government policies to make the Australian
economy more internationally competitive.
Use the newspaper reports as the basis of analysing the
particular issue or topic you have selected. You may present
your analysis in different ways, perhaps as a short written
312
Economics Down Under Book 1
piece of work or why not try a class presentation (e.g. a
PowerPoint data show, class talk with overhead projector
transparencies, a wall poster for display).
2. There is much poverty around the world and income
inequality between countries is huge. Sometimes people in
rich countries would like to help but do not know where to
start. They often feel powerless. However, each of us could
make a difference. It is not always a matter of giving large
‘handouts’ to those in poor countries, but rather, a matter of
providing them with a ‘helping hand’ so that they can
become economically self-sufficient and permanently
independent. Years ago, an Australian, David Bussau had the
idea of using micro-credit to make a difference. It involves providing individuals and groups (often women) with a small
amount of money capital to start up a business (perhaps
made possible by the purchase of a sewing machine to manufacture clothes, an oven to prepare food, or basic tools for
farming). This could involve lending as little as $100–$200.
In addition, interest rates on these loans are low and repayment times are very flexible to help improve the opportunities for business success. A strength of this scheme, is that
the original money can be used over and over again to help
start up new income-generating activities. Normally, these
people would not be able to borrow credit from banks,
because they are considered a bad risk. Alternatively, those
wanting to go into business were at the mercy of ‘loan
sharks’, who charged huge interest rates and were harsh on
people who default on repayments. Once started, a small
business can earn income, grow household savings, create
jobs for others and reduce poverty in local communities.
Indeed, according to the World Bank, these projects may
eradicate 10 per cent of the world's poverty by 2020. As
recognition of the importance of the idea, the United
Nations declared 2005 as the International Year of Microcredit.
Armed with this background information, read the newspaper article ‘For aid, just help yourself’.
school assessment tasks and learning activities
For aid, just help yourself
Shunned by traditional lenders, people
in the Third World can now get lowcollateral loans to help them improve
their lives. The results are encouraging,
as MATT WADE reports.
THE First World’s reaction to great
natural disasters, such as the Boxing
Day tsunami, the Niger famine and the
Pakistan earthquake, and to Third
world poverty generally, is usually
monetary aid.
At the United Nations General
Assembly in September the Prime
Minister, John Howard, vowed to
double the overseas aid allocation to
about $4 billion a year by 2010, as
Australia joined other wealthy nations
in pledging billions of dollars in
additional aid and debt relief for poor
countries.
But this year has also been the UN’s
International Year of Microcredit — a
scheme to promote the use of tiny
loans to help impoverished families
increase their incomes. While it has
received less attention than natural disasters and political rhetoric, this
method of helping the poor is
flourishing.
A report released today by the
poverty advocacy group RESULTS
found that more than 92 million
people in developing countries were
granted microloans last year. Of those,
66.6 million were classified as very
poor — surviving on less than $US1
($1.34) a day.
Microcredit is the provision of
small, collateral-free loans and other
financial services, mostly to very poor
women who would normally be
excluded from mainstream financial
institutions. Loans of about $150 to
$200 are used to start or expand small
income-generating activities.
The State of the Microcredit Summit
Report says the number of very poor
people receiving a small loan grew
from 7.6 million in 1997 to last year’s
66.6 million, an average annual
growth of 36 per cent.
It is possible that 1100 million
people will receive a microloan this
year — that’s five times the population
of Australia. The report estimates that
more than 80 per cent of microloans
for the poor are taken by women. ‘The
increase represents an additional 45.3
million poorest women reported as
receiving microloans in the last five
years,’ it says.
Bangladesh, once synonymous with
famine and natural disasters, has
become the showpiece for the effectiveness of microcredit, Millions of
microloans have been made in Bangladesh and research by the World Bank,
an advocate of microfinance, has concluded they have been crucial in
reducing poverty in that country.
A World Bank researcher, Shahidur
Khandker, studied three Bangladeshi
groups that provide microcredit — the
Bangladesh
Rural
Advancement
Committee, Grameen Bank and a
government program called RD-12.
Khandker concluded that 3 per cent of
clients got out of poverty each year
because of their microloans and that
microcredit accounted for 40 per cent
of the reduction of moderate poverty
in rural Bangladesh.
The UN Development Program’s
Human Development Report found
that Bangladesh had overtaken its
giant neighbour India in reducing
child mortality, despite having lower
average incomes and a lower economic growth rate. It said Bangladesh
had achieved rapid human development and the prevalence of microcredit had helped.
Microcredit had been especially
important in expanding choice and
empowering women. ‘While disparities still exist, women have
become increasingly powerful catalysts for development, demanding
greater control over fertility and birth
spacing, education for their daughters
and access to services,’ the Human
Development Report says.
Microcredit for the poor was first
tried in the early 1970s and has
become an integral part of the drive to
alleviate poverty. Initially, the idea of
using loans to help the poor was
treated with suspicion by many aid
agencies. But the strategy’s success in
generating income for poor families
meant it could not be ignored.
Most big aid agencies now have
microcredit projects. Thousands of
organisations specialising in microcredit have also emerged.
Opportunity International, which
made more than a million microloans
last year, says the average loan in
developing countries is about $180
over six months. It says 87 per cent of
(continued )
CHAPTER 9 Economic globalisation
313
its loans go to women and each loan
affects more than seven people on
average. It has a global repayment rate
of 98 per cent — better than many
commercial banks.
Many microcredit organisations
resemble traditional financial service
firms, carrying banking licences and
offering a range of products for poor
clients, such as insurance. There are
also ratings companies that assess the
credit-worthiness of the major microcredit organisations. Some of the
world’s biggest financial firms, such as
Citigroup, Deutsche Bank, ABN
Amro, HSBC and ING have recently
become involved in microcredit.
RESULTS Australia says microcredit can help the world achieve one
of the Millennium Development Goals
— to halve the number of people
living on less than US$1 a day by
2015.
‘Microfinance, while not a panacea,
is still the best tool we have to reduce
poverty among the very poor,’ the
RESULTS report says.
However, the Australian Government devotes a surprisingly small
amount to this form of poverty
alleviation — $14 million of its $2.5
billion aid budget. Considering the
Howard Government’s philosophical
commitment to small business, this is
peculiar.
The national manager of RESULTS
Australia, Maree Nutt, says more
government money must be put into
microcredit. ‘The percentage of
Australian aid funding allocated for
microfinance has reached a plateau in
recent years. Our goal is to see an
increase in spending to around
$40 million per year within the next
two years. This could bring its
allocation to around 1.2 per cent —
not unreasonable, given its effective-
ness in helping to reduce poverty,
particularly in the lives of very poor
people.’
Bruce Billson, who, as the parliamentary secretary for Foreign Affairs
and Trade is responsible for the aid
program, says he is all for microcredit
and has indicated there will be further
spending on it. ‘Our commitment to
microcredit is significant and it is an
important part of our overall aid program. I’m optimistic we are going to
see more support going into this area.’
Nutt wants the government to concentrate new spending on helping
small-loan providers to get started or
to expand their capacity. ‘Our aid
funding can play an important role in
this initial phase,’ she says. ‘One a
program begins to cover costs, more
funds for future expansion can be
accessed from commercial and private
investors. The donor can make its exit
but the service remains.’
school assessment tasks and learning activities
Source: The Sydney Morning Herald, 7 December 2005.
A What types of international aid are currently provided by
the Australian Government? About how much money
does this involve each year? How much will it involve by
2010?
B How many people internationally, benefit each year from
micro-credit?
C The article says that micro-credit involves ‘small, collateral-free loans and other financial services . . . ‘? What do
you think this means and how is the money used?
D Using Bangladesh as a case study, how successful has the
use of micro-credit been?
E Name some international organisations providing microcredit.
F What is the main United Nations ‘Millennium development goal’?
G What changes are needed to Australia’s foreign aid program, according to RESULTS Australia?
3. Read ‘If the world were a village of 1,000 people’.
‘If the world were a village of 1000 people’ condenses the
population of the world down to 1000 people (not the nearly
7 billion as we now have). Answer the following questions:
A What is the most common nationality?
B How would expenditure on defence compare with
spending on health or education?
C What are the most serious causes of death?
D Of the village income of $3 million, what proportion
would the top 200 (i.e. 20 per cent) income earners
receive, relative to the lowest 200?
314
Economics Down Under Book 1
E What proportion of the population would be children
and what proportion would be over 65 years of age? Suggest reasons for this situation.
F What percentage of married women has access to and
uses, modern contraceptives? In turn, what problems
does this create for some low-income countries?
G The richest or best fed 270 people (i.e. 27 per cent)
would eat food crops grown on 280 acres of the most fertile 700 acres of arable land available. How much land is
left to feed the remaining 73 per cent of the people?
H What proportion of villagers has access to clean drinking
water?
I What proportion of villagers owns automobiles?
J What proportion of villagers is illiterate? Explain how this
might affect production, income and living standards?
K What percentage of children is immunised against preventable diseases?
L Looking at the total village budget (public and private) of
$3 million available for spending (i.e. an
average
of
$3000 per person if it were divided evenly; which, as mentioned, it is not), what area is regarded as more important
— education, health or defence?
by DONA MEADOWS
If the world were a village of 1000
people, it would include
■ 584 Asians
■ 124 Africans
■ 95 East and West Europeans
■ 84 Latin Americans
■ 55 Soviets (including for the
moment Lithuanians, Latvians, Estonians and other national groups)
■ 52 North Americans
■ 6 Australians and New Zealanders.
The people of the village have considerable difficulty in communicating
■ 165 people speak Mandarin
■ 86 English
■ 83 Hindi/Urdu
■ 64 Spanish
■ 58 Russian
■ 37 Arabic.
That list accounts for the mother
tongues of only half the villagers. The
other half speak (in descending order
of frequency) Bengali, Portuguese,
Indonesian, Japanese, German, French
and 200 other languages.
In this village of 1000 there are
■ 329 Christians (among them 187
Catholics, 84 Protestants, 31
Orthodox)
■ 178 Moslems
■ 167 ‘non-religious’
■ l32 Hindus
■ 60 Buddhists
■ 45 atheists
■ 3 Jews
■ 86 people of all other religions.
■ One-third (330) of the 1000 people
in the world village are children and
only 60 are over the age of 65. Half
the children are immunized against
preventable infectious diseases such
as measles and polio.
■ Just under half of the married
women in the village have access to
and use modern contraceptives.
■ This year 28 babies will be born. Ten
people will die, 3 of them for lack of
food, 1 from cancer, 2 of the deaths
are of babies born within the year.
■
■
■
■
■
One person of the 1000 is infected
with the HIV virus; that person most
likely has not yet developed a fullblown case of AIDS.
With the 28 births and 10 deaths, the
population of the village next year
will be 1018.
In this 1000-person community, 200
people receive 75 percent of the
income; another 200 receive only 2
percent of the income.
Only 70 people of the 1000 own an
automobile (although some of the
70 own more than one automobile).
About one-third have access to clean,
safe drinking water.
Of the 670 adults in the village, half
are illiterate.
The village has six acres of land per
person, 6000 acres in all, of which
■ 700 acres are cropland
■ 1400 acres pasture
■ 1900 acres woodland
■ 2000 acres desert, tundra, pavement
and other wasteland.
■ The woodland is declining rapidly;
the wasteland is increasing. The other
land categories are roughly stable.
The village allocates 83 percent of its
fertilizer to 40 percent of its cropland
— that owned by the richest and bestfed 270 people. Excess fertilizer running off this land causes pollution in
lakes and wells. The remaining 60 percent of the land, with its 17 percent of
the fertilizer, produces 28 percent of
the food grains and feeds 73 percent of
the people. The average grain yield on
that land is one-third the harvest
achieved by the richer villagers.
In the village of 1000 people, there are
■ 5 soldiers
■ 7 teachers
■ 1 doctor
■ 3 refugees driven from home by war
or drought.
The village has a total budget each
year, public and private, of over $3
million — $3000 per person if it is distributed evenly (which, we have already
seen, it isn’t).
Of the total $3 million
■ $181 000 goes to weapons and warfare
■ $159 000 for education
■ $l32 000 for health care.
The village has buried beneath it
enough explosive power in nuclear
weapons to blow itself to smithereens
many times over. These weapons are
under the control of just 100 of the
people. The other 900 people are
watching them with deep anxiety, wondering whether they can learn to get
along together; and if they do, whether
they might set off the weapons anyway
through inattention or technical bungling; and, if they ever decide to dismantle the weapons, where in the
world village they would dispose of the
radioactive materials of which the
weapons are made.
Source: Sustainability Institute, 31 May 1990.
CHAPTER 9 Economic globalisation
315
school assessment tasks and learning activities
If the world were a
village of 1000 people
WATCHING a video or DVD
summary
There are a number of interesting videos covering the topic of
globalisation. Try viewing one of the following programs:
■ No Sweat — Nike
■ The New Rulers of the World
■ Ketchup in the Curry
■ Exploring the Global Economy (Learning Essentials & Video
Classroom)
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Economics Down Under Book 1
■
■
■
Impacts of Globalisation (Classroom Video)
The Global Market Impact (VEA Production)
Tales from the Global Economy — The Cuppachino Trail (Learning
Essentials)
summary
Summary
chapter 9
Definition and history of economic globalisation
Economic globalisation refers to the spread of business, trade
and investment across national borders, and the unification of
local markets to become international markets. Globalisation
has been accelerated by the deregulation of markets and economies by national governments, improved speed and cheapness
of transport and communications, technological advances and
the increased mobility of money and capital. Globalisation is not
a new development but the process has recently accelerated. For
instance, colonisation by European powers over the past few
hundred years and the growth of commodity trade in wool, minerals and grains started the process. As noted by economist,
David Ricardo, international specialisation in areas of comparative cost advantage assisted the trend, as did the move towards
tariff reductions, freer trade and the formation of international
treaties, trading blocs and agreements (e.g. WTO, IMF, EU).
Reasons for economic globalisation
Corporations go global because it is beneficial for their
efficiency, costs, profitability and growth. More specifically, the
benefits relate to:
■ the minimisation of labour costs by moving to low-wage countries for labour intensive production
■ a greater access to natural resources than would be available
in the country of origin
■ the gaining of better economies of large scale by expanding
the size of the business; in this way costs that are relatively fixed
(e.g. product development, management) can be spread more
thinly reducing the per unit cost or price of the product
■ an ability to take advantage of helpful government policies
offered in some countries (e.g. absence of environment controls, tax concessions or exemptions, free land or cheap
power) that are good for profits
■ the desire to minimise transport and storage costs
■ improving the flexibility in company decision-making.
The effects of economic globalisation for Australia
Globalisation has both good and bad effects on individuals,
countries and regions. For Australia:
■ Globalisation and openness have helped to lower inflation by
exposing local producers to intense foreign competition as
tariffs are reduced.
■ Globalisation and openness increased structural unemployment in the short term by forcing the closure of uncompetitive local industries and firms. However, in the long term,
globalisation can probably help to increase employment in
areas where there is good efficiency and a comparative cost
advantage exists.
■ By forcing governments, firms and workers to lift efficiency,
globalisation has probably helped to accelerate economic
growth.
■ Globalisation and openness have helped to lower the cost of
credit or interest rates through stiffer competition among
financial institutions (e.g. banks).
■
Globalisation has increased consumer choice or product variety by giving our consumers access to foreign items, provided
that the unique local product is not forced out of the market.
■ Globalisation has forced government policy to focus on the
control of inflation, the promotion of economic efficiency
and cost reduction, responsible budgetary and monetary policies, and the acceleration of microeconomic reforms.
■ Globalisation may create environmental problems if foreign
companies are encouraged by governments not concerned by
pollution or damage to the natural environment.
■ Globalisation may have led to the spread of crime, terrorism,
illegal drugs and uncontrollable migration which could
undermine both economic and non-material living standards
of countries.
A case study of a multinational corporation in Australia —
Nestlé
Nestlé is a multinational which originated in Switzerland in the
1860s. Today, the company employs over 253 000 workers in
80 countries with annual sales equal to about 10 per cent of
Australia’s GDP.
■ The company expanded quickly using several strategies.
These included the use of technology and research to invent
popular products (e.g. instant coffee, infant and powdered
milks), advertising, takeovers of successful food and other
producers in local and foreign countries that produced good
quality products, business rationalisation, and the expansion
into strategic high income markets for their products around
the world.
■ In Australia, Nestlé employs around 5000 workers in over 20
towns, produces $2.4 billion in sales (e.g. Nescafé, Milo, Sunshine Milk, Kit Kat, Maggi, Nestlé Yogurt, Peters, Lean Cuisine, Minties, Life Savers, Papa Giuseppi’s, Lucky Dog and
Allens), has annual exports valued at around $427 million
and injects about $1.2 billion (estimate only) into the
Australian economy in wages, tax and purchases.
The effects of globalisation on low-income countries
Commentators find difficulty reaching agreement about the
effects that the last wave of globalisation (1980 to at least 2007)
has had on low-income countries in Asia and Africa. Some
research suggests that it has greatly helped to accelerate GDP
per head, improved the Human Development Index and
reduced poverty rates. In addition, it is claimed that it has
helped to reduce global income inequality. However, critics
point out the weaknesses in the statistical data used to conclude
that globalisation is beneficial for low-income countries. They
also note that globalisation may not be the main driver behind
faster economic growth, and they focus on growing world poverty, inequality, the exploitation of workers, starvation, the
attack on the environment, and adverse global social developments caused by widening incomes between countries. In conclusion, it was suggested that, on its own, globalisation
(openness in international trade and capital movements) will do
CHAPTER 9 Economic globalisation
317
little to raise poor living standards and reduce poverty in poor
countries. Other strategies are also needed including encouraging democratic principles to control government corruption
and incompetence, encouraging national saving and investment, improving infrastructure, solving unemployment,
reducing population pressures and lowering income inequality.
summary
The nature and effect of Australia’s foreign aid
Foreign aid refers to financial (hard and soft loans, and gifts)
and other assistance, usually given by richer countries to poorer
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Economics Down Under Book 1
countries. Australia gives almost $2.5 billion annually in government foreign aid, but this is only a miserable 0.26 per cent of
our GDP. Aid goes to countries including Papua New Guinea,
Solomon Islands, China, Indonesia, Vietnam, Philippines, East
Timor and Fiji. Aid helps make up for the deficiency of saving
and investment funds in poorer countries, and can help break
the circle of poverty by raising efficiency and per capita income
levels.
CONCEPT MAP 9
Economic globalisation
Economic globalisation —
the spread of business across national borders
and the unification of national markets to form the
global market
Some reasons for globalisation include:
1. Minimisation of labour costs — cheap
labour/wages
2. Better access to cheap natural and
other resources (e.g. power, minerals,
taxation)
3. Increased economies of large scale
through global expansion
4. Encouragement of multinationals by
some government policies and
inducements
5. Minimisation of transport costs for raw
materials and finished products
6. Increased flexibility in decision-making
by firms
Globalisation has good and bad effects on countries.
Some possible good effects of
globalisation in Australia and in poorer countries:
• lower inflation rates via competition
• increased efficiency, exports, economic growth and
incomes
• creation of new employment in some industries
• increased consumer choice
• improved performance of government economic
management.
Some possible bad effects of
globalisation in Australia and in poorer countries:
• structural unemployment in some industries that
close down due to competition
• increased environmental problems
• the possible spread of crime, terrorism and disease
• reduced border controls and increased migration
• possible worker exploitation — sweat shops.
Case study of the operation of a multinational
corporation in Australia — e.g. Nestlé
Globalisation is not enough, on its own, to help low income countries that often
face other social, economical and political problems.
• undemocratic and incompetent governments
• low national savings and investment — vicious circle of
poverty/underdevelopment
• inadequate infrastructure
• excessive debt levels
• severe income inequality in income and wealth
• population pressures — inadequate government services
• high unemployment and underemployment means wasted
resources and reduced productive capacity
Foreign aid from wealthier nations can help overcome some problems in low income countries.
In 2001–02, Australia’s Government aid exceeded $2491 million. There are three types of aid:
Loans — soft loans are seen
as better than hard loans.
Grants or gifts do not
require repayment.
Technical and other
assistance
Major recipients of Australian aid include Papua New Guinea, Fiji, Solomon Islands, Indonesia, Vietnam,
Philippines, China, East Timor. Much of this aid is devoted to improving the productive capacity
of countries and for disaster relief.
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