Globalization and the United Kingdom Economy
Introduction
Globalization has changed not only the world economy but also the world itself and it is expected to continue to do so in the future. The United Kingdom played an important role in the growth of globalization decades before The First World War. The United Kingdom is also among the first countries to open its door to globalization.
Globalization Defined
The (1997) defines globalization as the process by which markets and production in different countries are becoming increasingly interdependent because of the dynamics of trade in goods and services and flows of capital and technology (cited in 2004). According to (2002, p.1), globalization entails the speedy integration of the world economy, not just at the regional level. In principle, globalization should offer poorer countries an opportunity to grow faster and catch up with more affluent countries. According to (2002) the term globalization implies a worldwide processes that are relatively new and still incomplete. These multidimensional processes are being experienced unevenly throughout the world and in different sectors of social life . Globalization as defined by (2002) is a complex set of human forces involving the production, distribution/transmission, and consumption of technical, economic, political and socio-cultural goods and services which are administratively and technologically integrated on a worldwide basis The (1999) defines globalization as the most important economic, political, and cultural phenomenon of our time.
Driving Forces behind Globalization
1. Technological Advancement
Technological progress has been at the forefront of the push towards a globalize world. In particular, the recent significant developments in communications and information processing, including developments in the mobile telephony, e-mail, the Internet and the World-Wide Web and transportation technologies, it is argued, have advanced the cause of economic globalization. In real terms, developments in microprocessors, satellites, optical fiber and wireless technologies have had the effect of reducing the cost of global communication and with it the cost of coordinating, controlling, planning and managing a global organization ( 2002).
2. Adoption of Free Market Ideology
Innovations in shipment have made it possible for products to be shipped more economically to any part of the world. These cost reductions have intensified competition in the global marketplace. In particular, these advancements provide opportunities for far-flung business interactions to create more global business opportunities. Consequently, it is possible for small, previously unknown, local companies to tap into both national and international markets. The global integration of financial markets has been made possible by a confluence of supply and demand factors. The supply side factors include deregulation of currency controls, innovations in financial instruments, and advances in communications and IT that allow transactions to be executed instantaneously across national boundaries. The demand side factors include the increase in corporate restructuring that created demand for new sources of financing, rapid growth in foreign investment and trade, and the adoption of free market principles in a number of previously regulated economies ( 2002, p. 4).
3. Economic Expansion
The increase of foreign direct investment (FDI) has been one of the forces behind the rapid globalization trend. In recent years, many countries particularly those in the developing world, have opened their economies to FDI by liberalizing FDI regulations and hence made it easier for foreign companies to enter their markets. Governments in many developing countries have created opportunities through the liberalization of their economies for firms in their countries to attract FDI and this in turn has opened the doors to Multi National Companies (MNCs) to expand their network of operations in developing countries (2002,). When a Multi National Company sets up economic activity abroad under its direct control, it effectively lends to the country in which it is investing, and that country therefore borrows form the MNC’s home country (2004).
4. Increase of Free Trade
Economic globalization has been accelerated by the decline in barriers to investment and free trade including, declining of tariffs and other barriers to international trade. Beginning in the mid-twentieth century, declining tariffs and advances in air and freight transport paved the way for a great expansion in global trade. This gave rise to the greater interdependence of national markets for goods and services, particularly financial services, resulting in the integration of capital and financial markets. Globalization makes the movement of capital to move freely across nations. This mobility produces global movements in exchange rates, interest rates, and stock prices ( 2001).
The recent drivers of globalization have paved the way for increased international trade in goods and services, and cross border flows of both capital and labor. Because of these changes, the global economy has evolved. Trade in goods and services, international foreign direct investment, and migration have all increased and production is increasingly organized along global value chain. Technology has also improved leading to changes in the composition of most advanced economies output and employment. Also, as a result of the changes in global economy, the balance of economic power in the global economy has also changed. The entry of highly populous, low-wage economies onto the world stage has changed the market make up of the global economy, particularly in terms of countries’ shares of total world output.
United Kingdom: Current Economic Condition
This 2008, the world was shaken by the chaos in several financial centers, particularly the United States. United Kingdom, as one of the major financial centers of the world was affected by the economic problems of the United States. As the US economy slowed and financing conditions tightened, demand in a number of other advanced industrial economies weakened. At the same time, however, global inflation has risen, led by rapid increases in prices of energy and key food items. The global economy is experiencing a downturn because of the US recession. Of all the other major advanced industrial economies, the United Kingdom shared some features with the United States. The UK economy appeared to have slowed towards the end of 2007, as consumption was dampened by tighter credit conditions and weakening confidence. Falling property prices also raised the image of a downturn in the construction sector.
The Changing UK Economy
The previous discussion discussed the different changes that have shaped and continue to shape the global economy. In this part, the changes in the UK economy will be discussed. The UK economy has continued its long-term structural change during the past ten years with a continuing shift in terms of the shares of output and employment from manufacturing towards services. Growth in real estate, renting and business services has been central to growth in services. In turn, growth in business services has been central to growth in the broader real estate, renting and business services sector. Business services include a diverge range of services, from the creative and technical, such as advertising, legal services and computing, to industrial cleaning and call centers. The UK has seen impressive growth in many service sector exports. Financial services and other business services in particular have become significant contributors to overall UK export volumes in recent years. While other countries have also benefited from the technological changes that have allowed increase trade in services, UK performance has been particularly strong. The shift towards services also reflects the decline in the average price of manufactured goods relative to services. This shift in relative prices has occurred both as a result of global improvements in manufacturing productivity driven by improvements in technology and related investment and as a result of the increased involvement of low-wage economies in manufacturing rather than tradable services. Changes id domestic demand also have an important part to play in explaining the ongoing changes in the structure of the UK economy. Key features of the twentieth century were rising real incomes and increasing leisure time.
United Kingdom’s Economy and Globalization
Benefits
Positive globalizes see a range of benefits for all countries and people in the process of globalization. It is generally considered as a positive trend that inevitably benefits consumers by increasing the efficiency of markets. According to this version of the globalize perspective, poorer countries experience particular benefits in the process of globalization. It is suggested that an integrated global market accelerates the transfer of technology from the richer to the poorer countries. Moreover, the richer countries have a surplus of funds to lend, and this provides a real opportunity for rapid industrialization of poorer countries.
Consumers are the principal beneficiary of globalization. Its benefits in terms of faster growth, quicker access to new technology, cheaper imports and greater competition are available for all. Globalization has made the world economy more efficient and has created hundreds of millions of jobs, mainly, but not only, in developing countries (2000 cited in 2004). Globalization offers hope to the world’s poorest. Just as more open trade tends to promote economic growth, growth in turn leads to poverty reduction (2000). The greatest reductions in poverty in the last 20 years took place in the countries that have successfully joined the global economy and moved toward openness and liberalization.
Challenges
Globalization has made the world borderless. We are now living in ‘one global village’, where people are more mobile and products, services and companies are free to enter other markets. Globalization has given birth to a global economy. The current and future condition of the global economy will have tremendous impacts on the economy of a highly liberalized country such as the United Kingdom. Among the different developments in the global economy that affect the economic condition of the United Kingdom are:
1.Shift in the Global Economic Activity– the global economy is undergoing a major transformation with extensive and fundamental changes in technology, production and trading patterns. The exchange of information becomes faster while the cost and time of transportation is decreasing, causing geographical barriers to crumble. Economic activity is becoming increasingly flexible, dividable and dispersed across continents, with an increasing level of specialization. More countries are opening up their economies and seizing the opportunities that come from closer integration into the global economy. The changes are expected to intensify over the next ten years. In particular, the rise of large emerging markets, most significantly China and India, is likely to shift the balance of global economic activity in the coming decade. The expansion of these emerging economies will mean that they account for an increasing share of global output. The relative economic position of advanced and emerging economies will change. There is also demographic changes that will affect the economic activities of different countries. It is expected that population growth will be experienced more by developing countries than developed ones. Differences in the rate of population growth and in the evolution of the age structure will have significant effects in economic developments. At the national level, they will affect the level of saving, investment, labor supply and output ( 2004).
2. Integration of Global Markets – the rapid and sustained growth in foreign direct investment (FDI) seems likely to continue, with rapidly growing economies attracting increasing inflows and becoming more important suppliers of FDI. As advanced economies liberalize previously heavily protected markets, such as agriculture, textiles and clothing, and developing countries utilize their comparative advantaged to increase their share of global trade and grow, all countries can benefit from more efficient allocation of resources, and more competitive prices, and developed countries with flexible economies will become able to more into more productive sectors ( 2004).
3. International Economic Activity – the international relocation of economic activity, particularly services, is expected to intensify in the next decade. Increasing flows of FDI, further trade liberalization, rising skill levels and improving infrastructure in large emerging markets should support further international specialization ( 2004).
4. Technology and Innovation – as both global competition and the speed of technological change increase, there will be increasing rewards from innovation and increasing pressures on firms to make the best use of innovation. Economic activity in all countries is under pressure to move up the value chain, utilizing higher technology, globally integrated markets and better channels of information flow are putting increasing pressure on firms to innovate more rapidly and frequently ( 2004).
Globalization and the Challenges to the UK Economy
The dominant feature of the world economy in the next decade will be increasing pace of change and expanding reach of global markets into national economies. People and businesses will need to be increasingly flexible to respond to these changes.
1. Establishing Stability in an Open Economy – further trends in increasing cross-border trade and investment, more integrated capital markets and greater global competition pose challenges to every country. These changes reinforce the need for a stable macroeconomic environment to address the potentially increased uncertainties. The United Kingdom needs to capitalize on the new opportunities that increasing investment flows and trade can offer, while balancing this with flexibility to adapt to greater uncertainty ( 2004).
2. Promoting an Outward Looking Economy – macroeconomic stability and long-term sustainability are important in attracting foreign investment and retaining and encouraging domestic investment in increasingly integrated global financial markets, in which the sources and destinations of investment are becoming ever more diverse. As the balance of global economy shifts, UK firms need to establish string links with emerging economies and other trading partners to access the opportunities of the changing global economy. Investment is a crucial driver of an economy’s productivity and hence of the level of prosperity prevailing in the economy. In a world of more closely integrated global financial markets and mobile capital flows, mobile investment will increasingly locate in those economic environments where it can achieve the greatest, risk-adjusted, returns. A range of factors contributes to an economy’s investment environment, and hence to the expected returns on investment. A key challenge for the UK is to provide an economic environment that is able to attract high quality domestic foreign investment, not by attempting to compete with emerging economies on the basis of labor costs, but through high levels of productivity built on a foundation of macroeconomic stability and driven by skills, competition, enterprise and innovation ( 2004).
3. Removing Barriers to Competition and Encouraging Enterprise – production processes are becoming increasingly flexible, with production dispersed across continents and accompanied by an increasing level of specialization. This means that new sectors are opening up to international trade and emerging markets and developing countries increasingly have the means to compete in global markets. The UK has historically experienced low rates of productivity growth compared to other major industrialized economies. In order to succeed in a more open and competitive global economy, the UK needs to compete on high-productivity products, services and production methods rather than low wages (HM Treasury 2004).
Conclusion
The United Kingdom can be considered as one of the most open economies in the world. It was one of the first countries to reap the benefits of globalization. Over the years, many countries have embraced globalization and have endeavored to participate in the global economy and trade. Now, the world has become borderless, and more and more economies are opening up. Despite the benefits that participants in the world economy are reaping, there are also issues that must be addressed. United Kingdom as a mature economy needs to face the challenges that globalization entails. One of these challenges is the increasing participation of developing countries in the world economy, which pushes the United Kingdom to think of ways to attract foreign direct investments. As more economies are opening up, the United Kingdom must also develop its policies regarding trade, reduce barriers, and encourage enterprise.
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