The Role of Globalization in Economic

Development
Brandon Levy

What role does globalization play in economic

development? Depending on who or what group you
ask, the answers will widely vary. The role of
globalization has proven to be essential to a nations
ability to yield the maximum potential from its available
resources. The maximization of those resources
generally leads to the improved economic development
of the nation. The prosperous economic development
that is typically gained because of the increased
interconnectedness among countries usually results in a
better standard of living, and an overall improved quality
of life. The successful economic development of a nation
hinges on its ability to globalize. Given that the
international integration of national economies has such
a profound effect, globalization plays a central role in
determining the future of the world. This paper attempts
to explain what role globalization has played and its
overall impact on economic development.
Globalization is the process of increased
interconnectedness among countries. Trade between
nations had taken place for hundreds, even thousands of
years. However, the scale of that trade was relatively
small. The main difference between international trade
and globalization is the scale on which the trading takes
place. It was the advances in technology and
communications that made the nineteenth century when
the first phase of globalization occurred. Although there
is not an absolute consensus among academics, most
historians believe that the first phase of globalization
began in the early 1800s and lasted until 1914. For
these reasons, most economic historians consider the
long century before 1914 the first era of globalization
(Rodrik 2011, ch.2).
Technology Facilitates Globalization
A culmination of new technologies during the
mid-19th century made it cost effective, thus
advantageous for nations all over the globe to quickly
increase trade. The first phase of globalization began
during the early part of the nineteenth century and lasted
until 1914. This phase of globalization was facilitated by

technological advances made both during and after the

Industrial Revolution. Improved ship building
techniques as well as advances in navigation and
communications were among the most significant
reasons that the first phase of globalization took place
during this period. First, new technologies in the form
of steamships, railroads, canals, and the telegraph
revolutionized
international
transport
and
communications and greatly reduced trade costs starting
in the early part of the nineteenth century (Rodrik 2011,
ch. 2).
Europeans no longer had to sail all the way
around Africa or travel the dangerous Silk Roads in
order to reach the Asian markets. The Suez Canal which
was completed in 1869 expedited travel between the
East and West which enabled the further expansion of
trade. In addition to quicker trade routes, steel was used
as an alternative to iron in the building of the hulls of
large ships. The use of steel made the ships lighter and
consequently faster. Steel ships and quicker routes
improved travel times and cut down on the cost of
shipping. The increased efficiency of steamers, the
competition resulting from the greater number of ships
and the shortened distances through the Suez Canal all
contributed to a significant decline in freight rates during
this period (Priest 2012, 2).
Another significant technological advance that
contributed to the economic development of many
nations was the triple expansion engine. Engines were
becoming smaller and the mechanics were increasingly
becoming more efficient. Thanks to the advances in
engineering, steam that previously would have been lost
could now be harnessed. These advances not only made
ships faster, they made the ships more reliable. The large
steamers did not require as much coal to operate as they
had previously. The resulting engine ran faster and
more smoothly on considerably less fuel than a
compound engine of the same power (Priest 2012, 1).
The advances made to engines during the nineteenth
century allowed the shipping industry to continually
increase cargo capacity and drastically reduce delivery
times. This was instrumental in expanding trade and
opening up new markets.
The improved transportation of both people and
goods had made the world more accessible than ever
before. Technology made it cost effective for many
merchants to expand their trade to new markets all over

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the world. The reduction in shipping costs is what

primarily made it advantageous for nations to expand
their trade. The growth in the amount of ships in the
world was paralleled by a vast expansion in trade.
Between 1860 and 1910, Britains trade with India
increased threefold, from 38,600,000 to 116,100,000;
with Australia from 17,100,000 to 60,000,000; and
with South Africa from 3,900,000 to 29,900,000, and
all during an era of gradually falling prices (Priest
2012, 2).
Historically, the international integration of
national economies has for the most part benefitted all
participants. That is, the benefits of the winners have
outweighed the losses of the losers. What is important to
note, is that depending on your particular perspective,
that may or may not be true. Meaning that the age old
adage, whats good for the goose might not actually
be what is good for the gander. This in-fact was the
case during the first phase of globalization. Despite
advances in technology and increased economic activity,
this phase of globalization had not been prosperous for
everyone. Prior to the expansion of trade that came in the
nineteenth century a lack of competition had permitted
British farmers to charge inflated prices for their crops.
Obviously, competition would force farmers to charge a
new price, the world price. British farmers animatedly
maintained that trade restrictions were necessary for
agricultural imports. Landlords wanted high tariffs that
kept food prices high and raised their incomes (Rodrik
2011, ch. 2). Ultimately, the Corn Laws were abolished
in Britain in 1846, globalization played a key role. The
Corn Laws clearly illustrated that trade policies which
had stemmed from globalization significantly impact
income distribution. In the future this would continue to
pose tremendous problems amongst nations agreements
to trade with each other.
The technological advances derived from the
Industrial
Revolution
led
to
an
increased
interconnectedness among countries. Consequently,
globalization produced a divide in the world economy.
The world economy soon split between an increasingly
industrial core and a largely raw materials-producing
periphery (Rodrik 2011, ch. 7). Some countries were
able to adapt more quickly to the changes that had so
abruptly taken place. Europe, North America, Australia
and New Zealand had the necessary systems in place to
deal more effectively with the new challenges posed by

globalization. Supported by sizable capital flows from

Europe, these economies would eventually become part
of the industrial core (Rodrik 2011, ch.7).
In order for a nation to sustain its trade relevance
the government of that nation would need to grow and
maintain the infrastructure necessary to protect its
domestic interests. Governments had grown the largest
in those economies that were the most exposed to
international
markets
(Rodrik
2011,
ch.2).
Governmental regulations vary between nations.
Technological innovations generated an enormous
amount of money for whoever is first to patent an
innovation. Without proper infrastructure, who actually
has the power to enforce intellectual property or patent
laws? Additionally, international trade leaves plenty of
room for politicians to manipulate tariffs on imports as
well as taxes on exports. International trade is not an
even playing field.
Not only do governmental trade regulations vary
between nations. Leaders in individual industries
develop regulations that not all countries are willing to
adhere to. Inflated bureaucracies add to the confusion.
However, rules and regulations that govern industry
vary from one nation to the next (Rodrik 2011, ch.3). If
a pharmaceutical company in the U.S was trying to
develop a vaccine for a deadly virus that could
potentially save millions of lives, it would take years of
testing and clinical trials in order to ensure the safety of
the recipients of the vaccine. The extensive safety
precautions mandated by the United States government
could and often does slow the process of developing
much needed vaccinations. A competing drug
manufacturer operating in a lesser developed nation
could potentially develop the vaccine faster and in-turn
profit from the patent rights. In this instance, the lack of
infrastructure in the developing nation could actually
aide in their economic development.
Outsourcing is Good & Bad
A popular criticism of globalization is
outsourcing. While outsourcing provides jobs to a
population in one country, it takes away those jobs from
another country, leaving many without opportunities. In
the United States there has been tremendous
animosity with regards to the outsourcing of
American jobs to foreign countries. Many
Americans view international trade as a hindrance

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to the continued economic development of the

country. An overall resentment of globalization
has become common in the United States among
the general public. Americans see more and more
jobs being outsourced and do not understand how
that is positively impacted them. Survey after
survey finds that a distinct majority of people
support restrictions on imports to protect jobs and
the economy (Rodrik 2011, 88). Many
Americans share the viewpoint that wealthy
business owners despite knowing the domestic
consequences choose to replace U.S. workers in
exchange for massive profits attained from cheap
labor overseas. The United States is hardly an
example in this. For example, a global survey
undertaken
in
the
late
1990s
found
overwhelming support for trade protection: nearly
70 percent of the respondents in the global
sample favored limiting imports (Rodrik 2011,
88).
The opposing side would point out that
American consumers are able to benefit from
lower prices which were made possible because
of cheaper labor. Defending either side of this
argument is not an easy task. The typical
economist would think this is an easy dilemma
and point out that the gains of the winners
(consumers) outweigh the losses of the losers
(displaced workers). International trade benefits
the majority of people in a national economy, but
it does not benefit every member of society
(Gerber 2011, 11). However, is that what actually
happens? The most common question is intuitive.
How can an American be a consumer if they
cannot afford to buy anything?
Without directly linking American
wage stagnation to the impact of
globalization,
Treasury
Secretary
Hank Paulson acknowledge in August
2006 that unfortunately the clear
benefits of trade-such as stronger
economic growth, more jobs, and -a
higher
standard
of
living
for
Americans-are broader, sometimes
take longer to manifest themselves and
are less visible than some of the
immediate dislocations which are
linked to trade (Priest 2012, 174).

That is where policymakers are needed in order to

find the right mix of domestic policies and trade
regulations. These policy makers are tasked with
the difficult challenge of figuring out how the
vast majority of the nation can benefit from
foreign trade.
Globalization has often been thought to be
the primary reason for income inequality within a
nation. Take for example the United States of
America. A growing number of Americans
believe that globalization is increasing the gap
between the rich and poor, even depleting those
who are already poor. Essentially, making the
rich even richer, and the poor even poorer. A
famous result due to Wolfgang Stolper and Paul
Samuelson states that some groups will
necessarily suffer long-term losses in income
from free trade (Rodrik 2011, 38).
Globalization & Population
Prior to the world becoming globalized
nations had barriers that reduced trade. A
developing nation could not fully utilize its
abundance of labor if it could not produce and
export large quantities of goods to wealthier
nations abroad. The developing country is most
likely surrounded by similar emerging economies
that could not afford to consume the necessary
amount needed to affect change. The wealthier
developed countries would benefit from the
savings realized from lower production costs.
Developed countries would not have to devote as
many resources to the production of goods.
Instead the wealthier nations human capital
could be spent on more highly leveraged
activities, namely science and innovation. Since
the 1960s, manufacturing in North America and
Europe has become a smaller part of the economy
when measured as a share of GDP and as a share
of overall employment (Gerber 2011, 86). While
simultaneously
reducing
labor
intensive
manufacturing
jobs
the
larger
industrial
economies have made enormous technological
leaps forward.
The more people that are in the economy
equates to additional producers and consumers.
Essentially, the additional participants in the

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economy facilitate increased economic activity.

As populations increase, markets expand and the
expanded markets induce greater specialization,
which in turn increases output and productivity
(McGuire 2011, 48). The expansion of economic
activity would parallel the expansion of growth
(Gerber 2011, 64). Globalization allows a
productive nation to capitalize from its
comparative advantage by increasing the amount
that the nation can export.
Increased populations can have many
positive effects on the economic development of
a nation. The most obvious benefit of an
increased population is a greater labor pool.
Economies of scale benefit exponentially from
increases in population. History has proven that a
large labor force, more often than not, eventually
benefits its populace. While many large
populations experience periods of growing
pains, ultimately they are able to capitalize from
their comparative advantage gained from their
increased labor force (Gerber 2011, 65).
China and India are the most
populous countries in the world. In
2009, Chinas 1.33 billion people
plus Indias 1.16 billion accounted
for 37 percent of the worlds
population
of
6.77
billion.
Throughout most of the twentieth
century both countries had limited
economic ties with other nations
and made very little impact on the
world economy (Gerber 2011,
14).

benefits of globalization. In 1978 China had only

12 firms directly controlled by the Ministry of
Foreign Trade, which were authorized to conduct
foreign trade. By 2001 that number had ballooned
to over 35,000 (Lardy 2002, 40-42). When Deng
became preeminent leader in 1978, Chinas trade
with the world totaled less than $10 billion;
within three decades, it had expanded a
hundredfold (Vogel 2011, 697).
Since 1978, income per capita in China has
grown at an average rate of 8.3 percent annum-a rate that
implies a doubling of incomes every nine years. Thanks
to this rapid economic growth, half a billion people were
lifted out of extreme poverty (Rodrik 2011, ch. 7). In
1980 Chinas government, headed by Deng Xiaoping,
began to undergo a dramatic change in its economic
strategy: Over the next thirty or so years, China opened
the country to extensive foreign investment. Deng
believed that competition from foreign companies would
force Chinese businesses to become stronger (Vogel
2011, 476). Chinese industries were finally allowed to
privatize. This privatization in turn, set in motion a
process of income concentration founded on a measured
strategy of reconstructing a dominant economic class
connected to overseas capitalists. Severe competition
was created across many industries. A large number of
new (mostly small) firms were founded in most
transitional economies (Brandt & Rawski 2008, 68,).
The profit erosion that ensued because of competition
urged many existing enterprises to search for
revolutionary processes and product innovations in order
to ensure their survival.
Globalization & Disease

China is an example of an economy being able to

take advantage of its large population. Primarily
due to the benefits of globalization China was
able to achieve positive economic development.
Modern Chinas rise to becoming a world
economic power is based on its enormous
productive capacity. Output per worker has
tripled in China between 1980 and 2004. Only
India has come close to being able to compete
with Chinas productivity (Brandt & Rawski
2008, 26-27). The expansion of trade has without
a doubt, allowed the people of China to take
advantage of their large labor force and reap the

Despite the many potential positive aspects

associated with globalization, there are also as many
potentially negative aspects. The increased sizes of
markets associated with globalization leads to extensive
economic growth. Economic growth perpetually
increases incomes. Increased incomes continually lead to
increased consumption. As domestic consumption
increases demand from foreign markets increase. This
Smithian cycle of economic growth produces a perfect
environment for bacteria and disease to thrive.
Increased market size provided a resource for the
pathogens that prey on humanity (McGuire 2011, 68).

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Positive economic development that occurred because of

globalization often meant that a nation was more
susceptible to unfamiliar infectious diseases. Increased
concentrations of humans are obviously highly
correlated with increased concentrations of domestic
animals (McGuire 2011, 71).
With increased human densities came
animals that provided transportation and
food. Both humans and their animals
excreted waste products that were not
subject to sanitary disposal. Waste
products contaminated water supplies,
foods, housing, and soils, and exposed
people to the microbes they harbored.
This created ideal breeding grounds for
opportunistic infestations by newly
introduced
microbial
pathogens
(McGuire 2011, 69).

During the 14th century a plague known as Black Death,

would undeniably change the world. Black Death was
one of the most devastating contagions that man had
ever experienced. The first outbreak of the plague was
believed to have originated in China in the early 1330's.
International trade between Asia and Europe had been
increasing considerably, and in 1347, ships thought to be
infested with rats from China reached Sicily. The ships
had brought the disease with them. Since Italy was the
epicenter of European trade and politics, this provided an
ideal opportunity for the disease to spread. The plague,
being carried by the rats, was conveyed to humans by
the fleas that were living on the rats. The plague hit
cities first and then quickly infected the rural regions.
The Black Death spread so quickly, by 1350 one-third of
all Europeans were dead (McHenry 1992, 297-298).
The plague did not discriminate amongst the
social classes; many of the European rulers were dead.
This was a preview of the power globalization would
have on the economic development of the world.
Ultimately the plague allowed the wealthiest Europeans
the opportunity to gain control of their country. The
wealthy and educated Europeans quickly seized control.
The feudal system established in Europe made the
transition of power almost natural. The Black Death
struck not only Western Europe but also the Mongol
Empire, including China where it had originated. But in
China no bourgeois arose to take control (Needham
2004, 230). There were several predominant reasons

why there was never a bourgeois revolution in China.

Primarily, the Chinese had long benefitted from a stable
government as well as the establishment of bureaucracy
(Needham 2004, 231-232). Ultimately, the consequences
of international trade would illuminate the power that
globalization would have on the world.
The plague which had originated in China
changed Europe and the rest of the world forever. A
claim can be made that inadvertently, China contributed
to European prosperity by reducing its population.
International trade brought the pandemic caused by
Black Death to Europe. Black Death more than just
devastated medieval Europe; it caused significant
economic and social changes in all areas of the world
(Needham 2004, 230). Fernand Braudel, an economic
historian determined that it was in fact Black Death that
had intensified the recession that had been going on
since the turn of the century in the European economy
(Braudel 1984, 78). The severity of the recession caused
economic and societal changes to significantly speed up
between 1350 and throughout the 1400s. Black Death is
a perfect example of the impact that globalization has on
the world. Despite the world not yet being globalized,
international trade allowed a deadly virus to be
transported from one nation and spread to many.
As the world becomes more globalized more
things are transported. Although it is positive that
different cultures from around the world are able to
interact, they begin to mix, and their distinctions and
individuality of each society begin to fade. Nineteenthcetury developments in transportation, the increase in the
volume of freight, and the movements and numbers of
people affected the transmission of diseases (McGuire
2011, 131). There may be a greater chance of disease
spreading worldwide, as well as invasive species that
could prove devastating in non-native ecosystems.
Increased concentrations of humans and
animals have increased the diseases that are able to
infect humanity. Some major zoonotic diseases
(originating in animal populations but transmitted to
humans) that result from increased animal and human
densities are anthrax, botulism, brucellosis, hemorrhagic
fevers, plague, leptospirosis, rabies, salmonella, tetanus,
trichinosis, and toxoplasmosis (McGuire 2011, 73).
Other devastating diseases such as chicken pox, cholera,
ergotism, hookworm, influenza, malaria, measles,
mumps, onchocerciasis (river blindness), polio, rubella

141

and schistosomiasis once needed to be transferred to

humans by animals (McGuire 2011 72). These diseases
have manifested and now are spread through human
contact. Diseases, morbidity and increased infant
mortality were some of the consequences of
globalization. It was only with the increase in the
knowledge of public health and biology, and improving
water and sanitary practices that occurred relatively
recently, did infectious parasitic diseases cease their
slaughter of the innocents (McGuire 2011, 135).
Education
The amount of focus a nation chooses to
put on education is obviously highly correlated
with the nations ability to innovate. Innovations
derived from a nations investment in education
improve efficiency and ultimately lead to, among
other things, a higher standard of living. At the
most basic level, science can be linked to
economic growth because science innovation
contributes to productivity growth, which in turn
drives capital accumulation, output growth and
general economic growth (Conway 2009, 11).
The
human
race
has
benefitted
from
globalization.
Globalization
has
enabled
scientists/medical professionals from different
nations to share advances in medicine. Increases
in the global population can be largely attributed
to the advances made in medicine. Each new
discovery helps to progress anothers research.
Essentially, one innovation or discovery leads to
many more.
Many
technologies
developed
by
industrial nations have already made a significant
impact on less developed nations. For example,
vaccines have eradicated smallpox and are close
to eradicating polio. The sharing of scientific
research amongst nations has significantly
reduced both child and adult mortality rates
around the world (Conway 2009, 7). The
challenges of improving the lives of those in
developing countries are large and diverse, and
will not be achievable without the contribution of
scientific
knowledge
and
innovative
technologies (Conway 2009, 7).
The improved interconnectedness among
nations has also improved the ability of

humanitarians to administer aid to developing

countries. Multinational corporations funding
of HIV/AIDS treatment programs in poor nations
represents one prominent example (Rodrick
2011, ch.10).
Globalization & Regulation
There is little international regulation, an
unfortunate fact that could have dire consequences for
the safety of people and the environment. Large
Western-driven organizations such as the International
Monetary Fund and the World Bank make it easy for a
developing country to obtain a loan. However, a
Western-focus is often applied to a non-Western
situation, resulting in failed progress. The interconnected
relations between nations allow one country to borrow
technology from another country in order to improve its
own economic development at the expense of the
innovating nation without compensation. A nation would
allow another country to spend its resources on the
research and development of a technology only to later
benefit (at no cost) from that nations investment. A
perfect example would be borrowing of American
military technology.
Globalizations
Development

Positive

Effect

on

Economic

There are countless positive aspects of

globalization. For instance, as more money is poured
into developing countries, there is a better chance for the
people in those countries to economically succeed and
increase their overall standard of living. Global
competition encourages creativity and innovation and
keeps prices for commodities/services in check.
Developing countries are able to reap the benefits of
current technology without undergoing many of the
growing pains associated with development of these
technologies. Governments are able to better work
together towards common goals now that there is an
advantage in cooperation, an improved ability to interact
and coordinate, and a global awareness of issues. There
is a greater access to foreign culture in the form of
movies, music, food, clothing, and much more. In short,
the world has more selection. Globalization has a
positive net effect on the economic development of the
world.

142

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