Globalization has become a reality in spite of protectionist policies prevalent in many countries of the world. It is no surprise that a man from Nepal can use the GM automobiles while a man from USA is able to furnish his house with the high quality carpets from Nepal. Owing to high competition among the global giants, the price of major products has gone down. Consumers have never experienced such a wide variety of products and price ranges ever before.
However, this is not the end of the story for all the developing countries. Many industries in the developing countries failed to compete with the international giants, and subsequently they went out of the market. This triggered the unemployment problem that already engulfed these nations. Yet, empirical evidences show that open economies have progressed more than the relatively closed economies. Hence, there is no doubt that developing countries should open their economies if they are to prosper in the long run.
Recent growth rates in many developing countries are evidences to the fact that globalization favors growth. In fact, the export share of developing countries in textiles, one of the major exports of developing countries, rose from a mere 15% to 50% from mid-1960s to 1998 while that of clothing rose from around 25% to 70% during the same period (IMF). This is just an example from among hundreds of others. To develop an economy, a country has to identify the products in which it has a comparative advantage and hence, specialize in those products.
International trade is based on comparative advantage and specialization. A country has to seek the areas in which it has the comparative advantage and export those goods. A country does not gain from producing what it can but from producing the products which are better suited to its environment. China, a developing economy, has a large labor surplus. So, it has the advantage in the businesses that are labor intensive. Japan is a country which has a labor shortage. Japan cannot focus on products which are labor intensive. Rather it has a highly educated labor force which is able to produce high quality products with the aid of technology. Japan should focus on hi-tech products in order to progress. So, developing countries can find an edge over developed countries in different areas only if there is an open economy with few barriers to trade.
Globalization has allowed countries to focus on the products in which they have comparative advantage. The need for production of all types of goods has long been obsolete. Today, a country produces the goods in which it is best and imports the goods it wants. Imagine all the products that lie on the shelves in a shopping mall. They must have come from many different countries. Imagine the Toyota car that you bought recently or the MP3 player that has China’s seal in it, all were manufactured abroad. We consume products from all over the world. We buy Toyota for its quality. We buy Chinese goods for their good bargain in terms of price. We no more produce all the goods we consume.
However, globalization has not been taken seriously in all parts of the world. Still there are many hindrances to globalization. Artificial manipulation of prices of goods has led to the malfunctioning of the theory of comparative advantage. USA gives a huge amount of subsidies in agriculture in which it does not have comparative advantage. The developing countries which have a comparative advantage in agriculture have thus become victim to the artificial manipulation of prices. It is interesting to note that USA alone spends 49,001 million dollars in support to farmers every year (IMF, 2001 figures). This is hurting the developing countries which have a comparative advantage. This money could have been employed in some other efficient sectors. Thus, it is like a dead weight loss to the world. Brazil, which has a huge potential for export in agricultural commodities, has been at a great disadvantage because of this. True benefit of globalization comes when there are no restrictions on trade such that all countries can specialize on products based on comparative advantage.
It is not only the rich countries that have hindered the growth of the developing countries through trade barriers. Developing countries fear from globalization. China has not opened its economy to the full despite its entry into WTO. The developing countries have been the victim of so-called “protectionism myths.”1 They believe that they need to protect their economy to boost domestic firms. Developing countries believe that protecting an economy will save the jobs from going out to foreign firms. While protectionism benefits domestic businesses in the short run, it fails to allocate resources efficiently in the long run. J.R. Kearl believes that import restrictions destroy domestic jobs. He believes that by opening an economy, a country forces people to move from relatively inefficient industries to relatively efficient industries. So, there is no such thing as destruction of jobs, but rather there will be a shift in the type of jobs available in an economy.
Furthermore, developing countries are in need of new technology, foreign investment and new skills. They can gain from these only if they open themselves to the external world. The initial boom of East Asian countries can be attributed in part to the huge capital inflow from the west. Western, the author of the book “East Asia: Growth, Crisis and Recovery,” believes that East Asian nations prospered because they had a huge capital inflow from the west, and at the same time they had an access to large markets in the west, particularly USA.
Hence, there is no doubt that globalization furthers growth. Though there will be some instabilities in the economy in the transition phase, all countries will gain from the liberalization of their economy in the long run. Access to a large market allows countries to specialize in the products in which they have comparative advantage. It is imperative that developing countries opened their economy if they are to prosper.
(sources suppressed for better view)