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Globalization and its Risks

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Abstract

Globalization is an inevitable process that has been accelerated with the current means of communication and transportation, which help to trade more due to better access to foreign products. Globalization is not only economic, it also covers social and cultural aspects. But since globalization is a process that involves several aspects of society many people see it as a threat to local customs and producers, so they prefer to put some barriers to this process. But it is a process already in development that will be almost impossible to stop so the best thing that each country can do is take advantage of this for their benefit by being more competitive.

 

Globalization is a process that has spread to different areas in all countries, from cultural to economic aspects. For many economists, globalization has allowed the economic development of many countries to be driven by dependence on international trade and technological advances that not only stay in one country but also expand rapidly as well as new knowledge. But beyond the benefits of globalization, there are many people who question the effect that globalization has on different cultures in the world.

For many people, the values of their culture are very important to value and exchange them for more global ones, which is why some people are still reticent to see a total globalization of all aspects. There is a great debate that persists over time about how, and how much, politicians should intervene in this process of globalization and preserve their own identity or how much the economy of foreign goods should be protected.

Globalization has been formally defined as the phenomenon of acceleration and intensification of economic interaction between people around the world, companies, and governments of the countries involved in this effect, although today there is no country that has not been influenced for globalization. But globalization not only involves economic interactions, political and cultural effects have also been evident, which has led to the study of all areas of society and to encourage debate about the positive and negative effects of globalization.

The globalization of the production and distribution of goods and services has been well received by some people who can now access foreign goods of better quality and in some cases at better prices than local production. But the opponents of globalization show their concern about the local producers of each country and their standards of living after the expansion of international trade. In addition to increasing trade and allowing access to new products, globalization allows the exchange of cultural features, customs such as music and other determinants of daily life such as music and literature.

Exposure to the exchange of goods and services brings changes in the customs, values and local traditions of a country. This is also a point of debate since some believe that globalization eliminates the traditions of a country making it universal but at the cost of the loss of knowledge and traditional customs of a country which is not positive for some aboriginal and indigenous communities that can see this change in their traditions as something threatening.

One of the criticisms, in general, is the Americanization of culture and economy. The most powerful companies belong to the United States, as well as the richest people and in turn, many traditions and festivities that come from North America are exported and celebrated in other countries. This has been a high point and a great debate since many people, especially in underdeveloped and poor countries, see this Americanization as a threat, criticizing consumerism and certain values that are handled in that country. But this leader of globalization, as seen in the United States, has several elements that make it the leader of said globalization.

The first element that makes the United States one of the predominant countries in recent decades is the size of its market which represents about 300 million people. This makes it attractive for multinationals as well as generating economies of scale which means that as companies increase their production costs per unit produced are reduced making their operation more profitable. An important aspect of this large market is the wealth of the population since there are countries with similar or larger population sizes such as China and India, but the wealth between these three nations is not compared since the United States has about 25% of global production.

In addition to the importance of the United States market is the element of language because most people in North America speak English and it is a universal language that allows transactions to be made easily. It is not the only country that has contributed to the process of globalization, but it is one of the predominant countries in this process. The following graph shows the magnitude of the US market in urban areas

US market in urban areas

Graph 22. Urban population. Data taken from the World Bank.

The people who are in favor of globalization argue that contrary to what some people think, globalization supports local cultures through technology by allowing better communications through computer telephones and other elements that facilitate the exchange of opinions. In addition, they preach that through television and other visual artifacts, cultural elements can be displayed so that people who see it within each country feel more identified with their culture.

Another positive aspect of globalization is the new awareness of people that are currently being created – better educated with a broader knowledge and a global notion of different cultures. This type of people are the drivers of current economic processes, they have a more cosmopolitan than rational thinking, speak several languages, travel internationally and they have more developed skills with better education standards, so they have better living standards than the people who lived before.

Globalization in the economy is the most known and studied fact by people since it is vital to understand how this effect has an impact on people’s daily lives. Economic globalization involves the reduction or elimination of business and trade barriers between countries, which will encourage exports and imports to increase in each country. Therefore, globalization is the economic unification of different countries including the different types of investments that occur in each country. It is crucial that each country is seen as a piece of a puzzle and that each country will be very important for the good economic development of all countries.

Globalization is not a new phenomenon. It goes back more than  2000 years, during which time trade, traditions, ideas, and other elements have been exchanged between different countries and empires. In the last 200-300 years this unifying process has accelerated, leading to greater specialization in the production of goods and greater interdependence among economies. But what is not clear is that the pace of unification of the economies has not been constant, but has increased rapidly since the end of the Second World War. The following graph shows how trade in goods and services has increased in recent years, where globalization has accelerated.

 Exports of goods and services

Graph 23. Exports of goods and services. Data taken from World Bank.

 

Some of the consequences that globalization has left are:

  • The relaxation of government controls to let the market act independently thanks to the forces of supply and demand.
  • Efficiency in means of transport and communication which helps to make business faster and easier.
  • New technologies that contribute to the quality of life of people. Technological advances have been achieved thanks to the dynamism of trade and skilled labor which has contributed to the progress being made less and less time.
  • Greater dynamism in investments since resources can be easily moved from one country to another without the need to be in several countries to make such investments.
  • Better quality of life for a large part of the population. A better quality of life is achieved with globalization and international trade, consumers can acquire a greater variety of products of good quality and at better prices due to competition between multinationals and local companies.

In addition, globalization reduces labor costs because companies can be in the country that is most beneficial in terms of costs, where there is specialization depending on production and the intensity of capital used. That is why lower prices can be seen in goods and services since with globalization countries have managed to reduce their costs by specializing in countries with economies of scale and with good competitiveness in terms of costs.

Another consequence of globalization is access to the natural resources of different countries. This is an advantage for countries that do not have access to good resources due to their geographic location that determines the climate and their access to seas or not. In addition, there are countries that have better access to mineral resources such as oil or coal. Globalization intervenes in the fact that the multinationals depending on the location and resources of each country decide to locate themselves in a certain area to extract these resources, but also generating benefits for the local communities. The negative aspect of globalization at this point is to what extent it is positive to extract and exploit natural resources of a foreign country since it can destroy nature and many projects will be made for political interests rather than the possible economic benefits.

At this point in the article, we will analyze a determinant of investments in the globalized world that currently exists. Country risk is one of the most important variables when analyzing how risky investment is in a country given its political and economic factors and its relationship with other countries. The formal definition is the risk of an investment due to specific factors common to a specific country. It can be analyzed as the average risk of investments made in a country.

A country can see its risk increase if a country faces difficulties in paying debt acquired as bonds. The factors that may affect the payment of a country’s debt depend on economic, social, political conditions or in some cases due to natural disasters such as earthquakes. Any assessment of the risk of each country will express the level of probability of suffering a loss in the value invested and depending on the level of that country risk the investors will demand a return on an investment since in the finances if greater risks are incurred, it will be claimed better returns that demonstrate that it is a good idea to invest in that asset. In the following graph, you can see the percentage of country risk that some places had in 2016.

Market Risk Premium

Graph 24. Fernandez P., Fernandez I. and Ortiz A. (2016, May 9). Market Risk Premium Used In 71 Countries In 2016. Retrieved November 17, 2017, from http://www.valuewalk.com/2016/05/market-risk-premium-used-71-countries-2016-survey-6932-answers/

Country risk analysis is a predominant component of the specialized risk management departments of banks, insurance companies, risk rating agencies, and financial system regulators. In some cases, country risk includes the risk of payment transfers, confiscation and expropriation, and risks of internal and external wars.

The debtors of these investments can be stated sovereigns, or they can be private agents such as banks and companies that issue debt to obtain financing for their commercial operations. In general, any country or private agent can issue debt and be subject to country risk assessment and each agent that issues debt will be analyzed differently because almost no company or state will face the same determinants in the risk of their investment.

The country risk can be materialized to the extent that there may be a payment crisis and the result of this is the non-payment of the debt by the agents, whether private or state. This debt default occurs especially in countries with high debt or without good access to external debt. Also in cases where the debtor is a state agent, it is determined the number of foreign reserves that a country has since these can be used as payment by the creditors at a specific time. In the following graph, you can see the external reserves of different countries.

Total reserves. Data taken from World Bank

Graph 25. Total reserves. Data taken from World Bank.

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