Adjusting to Globalisation

Adjusting to Globalisation

India & United Kingdom

Globalisation:

“Globalization is a dynamic process of liberalization, openness and international integration across a wide range of markets, from labour to goods and from services to capital and technology. It is not a new process but, rather, has unfolded gradually since the middle 1950s and it will take many years yet to finally reach completion, if politics permits.”(Dehesa, 2006).

“The expansion of domestic markets and activities into a world-wide system. As long ago as the Roman Empire trade was encouraged internationally. In the seventeenth century companies trading to the East Indies from Western Europe not only exported and imported but established factories in distant countries. From the late nineteenth century major industrial and banking companies set up foreign subsidiaries. Today globalization does mean that increasingly economic activity takes place within worldwide markets, often electronically. Branding has produced more homogenization of tastes and reduced the scope for local governments become less important: large corporations and world markets dictate the distribution of production and of incomes. Critics point out the threat to democracy posed by the establishment of institutions not subject to national governments.”(Rutherford, 2002)

Globalisation is “the integration of economies and societies by an increasingly free flow of goods, services, people, ideas and capital”. Globalisation is, thus, about much more than the location of production in low wage economies.(IMF)

Some countries are accepting the globalization and adjusting according to it, they are called open economies, but some don't want to be in this economic race they are called closed economies. An open economy is a country which allows the people including businesses to sell and buy the goods and services with other people and businesses internationally. On the other hand one who discourages this trade is called closed economy. The countries do not control this trade by making law, but they control this trade by economic and trade policies. If a country do not want to trade in a particular good or service because it is harming the economy of that country they make some changes in the trade policies to discourage its trade, like charging higher tax, tariff policy, Import and Export quotas etc. But if it wants to trade in a particular good or service because it is beneficial to the economy, than it make some policies that encourage the trade of that good or service, like low tax rate, low tariff, subsidy etc.

It is a believe that developing and less developed countries should liberalize their trade and become an open economy in this era of globalization in order to become a developed country. Different countries have different effects of globalization because they are in different conditions and environment, they should adopt the globalization as it best suits to its situation by making the suitable policies.

In this world in which we are living, all the countries want growth. We are talking here particularly about economic growth only. For that, globalization or integration of trade is the best possible way to be a developed country. Any country is not perfect in itself. All countries have some specialities or advantages over other country and as well as some drawbacks. Countries can trade these specialities with other countries and remove its drawbacks. By adopting globalization in proper way the countries can become a strong economy. A country with strong economy generates greater revenue to invest in education, infrastructure, health of people, defence, technology and everything.

In this study we will compare two countries, one developed and other developing and present a brief analysis of the facts in these two countries. In order to do that we first need to classify the developing and developed country.

Developed country -

Those countries which are highly industrialised and comes under the category of developed economies in which the tertiary and quaternary sectors of industry dominate are called developed country. This level of economic development usually translates into a high income per capita and a high Human Development Index (HDI).

Developing country-

Those countries which are not developed and they are also not a failed state is classified as developing countries. These countries are in a phase of economic development and they have low per capita income and a moderate to low Human Development Index (HDI). These countries have an undeveloped industrial base and relatively low standard of living.

WTO does not have any classification measures for developed and developing country. The members announce for themselves that weather they are developing country or developed country. IMF, CIA and World Bank have a list of developed and developing nations.

United Kingdom is a Developed country. It comes under the list of developed country in CIA, IMF and World Bank. United Kingdom also comes under CIA and IMF advanced economy list.

India is a Developing country because in the International Monetary Fund's World Economic Outlook Report of April 2008, India is classified as a developing country.

A brief comparison of two countries-

India

United Kingdom

Location

South Asia

Western Europe

Population

1.1 billion

60.6 million

Population growth rate

1.578%

0.276%

Net migration rate

-0.05migrant(s)/1,000 population

2.17migrant(s)/1,000 population

Area

Total

Land

Water

3,287,590 sq km

2,973,190 sq km

314,400 sq km

244,820 sq km

241,590 sq km

3,230 sq km

Irrigated land

558,080 sq km

1,700 sq km

Literacy

61%

99%

Government type

federal republic

constitutional monarchy

Labour force

516.4 million

30.71 million

Unemployment rate

7.2%

5.4%

Population below poverty line

25%

14%

Inflation rate (consumer prices)

5.9%

2.4%

Budget

Revenues

Expenditure

$145.2 billion

$182.4 billion

$1.155 trillion

$1.237 trillion

Public debt

58.8% of GDP

43.3% of GDP

Oil - proved reserves:

5.848 billion bbl

4.029 billion bbl

Exports

$140.8 billion f.o.b.

$415.6 billion f.o.b.

Imports

$224.1 billion f.o.b.

$595.6 billion f.o.b.

Reserves of foreign exchange and gold

$239.4 billion

$47.04 billion

External debt

$165.4 billion

$10.45 trillion

Exchange Rate/US dollar

45.3

0.5418

Military expenditure (% of GDP)

2.7%

2.6%

GDP (US$)

911.8 billion

2.4 trillion

GDP growth (annual %)

9.2

2.8

Foreign direct investment, net inflows (BoP, US$)

17.5 billion

139.7 billion

Sources World bank, CIA, IMF

When we compare India and United Kingdom we find that India is very strong by the population and land but when we compare the economy then it is very clear that UK has a much more strong economy than India. Below is the comparison of both the economies in which all the figures are expressed as percentage of GDP and are of the year 2006.

India UK

Merchandise trade 32% 45%

Export of goods and services 23% 29%

Import of goods and services 26% 33%

Gross capital formation 34% 18%

Revenue 12.7% 38.8%

Cash surplus/deficit -2.8% -2.8%

Source World Bank

UK is more advanced in trade than India, here we can see that merchandise trade is 45% of UK's GDP but only 32% in case of India. UK economy does import and export of goods and services more than Indian economy. India is forming the capital more than UK economy. But UK generates more revenue than India. Both the countries are making cash deficit of 2.8%.

Trade Comparison-

By analysing trade activities we find that United Kingdom is much advanced in trade than India. United Kingdom's merchandise exports is 327792 US $ higher than India which is around 271.21% more than India. For imports also United Kingdom has higher figures which is 425913 US $ higher than India which is around 242% higher than India. India's share in total imports and exports of the world is 1.41% and 1% respectively, in comparison to United Kingdom which is 4.48 and 3.71 respectively. With such a low population than India United Kingdom's export and Imports is more than three times than India. Not only merchandise trade but United Kingdom is advanced in commercial services trade also in comparison to India. United Kingdom has 200% more export of commercial services and 171% more import of commercial services than India. India's share in total imports and exports of commercial services of the world is 2.40% and 2.71% respectively, in comparison to United Kingdom which is 6.51% and 8.17% respectively. So in all kind of Trade United Kingdom is in greater position than India.(WTO)

Breakdown of country's total Import and Export by destination and main commodity groups- India-

Source WTO

India mainly Import from the European Union which is having around 16% share in total import and other major exporter to India is china which is having approximately 10% share followed by Saudi Arabia, United States and Switzerland which are having closely 7%, 6% and 5% shares respectively. The remaining 56% Exporter to India is other countries of world.

India mainly export to European Union which is having share of around 21% in total export and other major importers from India is US which is having approximately share of 15% followed by UAE, china and Singapore which are having closely 9%, 7% and 5% shares respectively. The remaining 43% importers from India is other countries of world.

Source WTO

India mainly exports manufactured products, which is 68% of the total export of commodities. The remaining exports are fuels and mining products of 20% and agricultural products of 12%. While considering the imports India imports mainly the manufactured products 49% of total imports and 39% of fuels and mining and 5% of agricultural products.

United Kingdom-

Source WTO

UK mainly Import from the European Union which is having around 51% share in total import and other major exporter to UK is US which is having approximately 8% share followed by China, Norway and Japan which are having closely 6%, 4% and 2% shares respectively. The remaining 29% Exporter to UK is other countries of world.

UK mainly export to European Union which is having share of around 62% in total export and other major importers from UK is US which is having approximately 13% sahre followed by Switzerland, Japan and Canada which all are having closely 2% shares each. The remaining 19% importer from UK is other countries of world.

Source WTO

UK mainly exports manufactured products, which is 78% of the total export of commodities. The remaining exports are fuels and mining products of 13% and agricultural products of 5%. While considering the imports UK imports mainly the manufactured products 65% of total imports and 12% of fuels and mining and 9% of agricultural products.

By analysing these facts we can say that United States and European Union both are major Importer and Exporter for both India and United Kingdom this is because of they both are big economy of the world and they have big share in the trade of whole world.

India and United Kingdom both have mainly manufactured products as a major commodity for Import and Export. The share of this commodity is the highest in both the economies because of the liberalised trade. These countries are exporting and importing the manufactured products for the consumer market, but in the terms of value United Kingdom has much greater value of these Import and Export than India.

India has implemented new Foreign Trade Policy (FTP) in August, 2004, covering a five year period of 2004-2009 is a comprehensive policy for the overall development of India's foreign trade sector. It is built around two major objectives - “(i) to double India's percentage share of global merchandise trade within the next five years; and (ii) trade to act as an effective instrument of economic growth by giving a thrust to employment generation” (Department of commerce India). By implementing new trade policies India is adjusting to this globalized world and climbing on the ladder to become a developed country.

GDP (Gross Domestic Product)-

Source IMF

When we compare the GDP of both the countries we find that UK has higher GDP than India. GDP of both countries are growing. Figures after 2007 are estimated figures of IMF. The gap between the GDP of India and UK is widening over the time. That means UK's GDP is growing more than India's GDP, India is developing but UK is developing more than India. This market exchange rate GDP does not consider living standards. It distort the real differences in income. To compare the living standards GDP by purchasing power parity would be more appropriate because it considers relative cost of living and inflation rates. So lets compare the GDP values by purchasing power parity.

Source IMF

According to GDP by purchasing power parity UK GDP has already been overtaken by the Indian GDP and according to IMF estimates in future it will going to be around double the UK GDP. That means India might not be rich than UK internationally but domestically it is richer than UK.

Components of GDP-

There are three basic sectors of production in any economy Agriculture, Services and Industry. Lets have a look how India and UK's GDP is distributed among these three sectors.

Here we can see that there are significant differences between the sectors in which the GDP is distributed between both countries. UK does not have good climate conditions for agriculture, because of that only 0.9% share of total production of UK but India has good climate conditions so it has a major part which is 17.6% of the GDP. Almost all of the agriculture part of the UK production is covered by the service sector. UK's service sector is 75.7% which is very high compared to India which is 52.9%. India's GDP has more fraction of production from the Industries than UK. In India's GDP, agriculture and Industry sectors has more fraction than UK's GDP but service sector has a lot more contribution in GDP of UK than of India.

So how more economic growth should be achieved by India and UK and does globalization help in achieving that? The simplest definition of economic growth is an increase in real gross domestic product (GDP) (that is, GDP adjusted for inflation).(Goodwin, Neva 2007). That means higher the aggregate production of a country, higher will be its economic growth. To increase the output there is one way to expand the inputs used to produce it. Economists think that there is a mathematical relationship between various inputs and the level of output and call it "production function", in which the basic two inputs are labour and capital. We added some more variable and estimated the following model for both India and UK for the period of 1991 to 2006.

In which GDP is the gross domestic product, Labour is the labour input for the production, which is the labour force in the economy, it can also be measured by the total hours worked in a year in an economy. Capital is the total capital employed which is engaged in production activity, directly or indirectly. FDI is the foreign direct investment in the country. Openness is the measure of how open the economy is for the foreign trade, which is measured by adding import and export and then dividing it by GDP, in other words the fraction of import and export in the GDP. Finally Export measures the amount of export by the country. By estimating this we got the following results-

For India

For UK

According to the literature labour and capital both are the significant parts of the GDP but here we are getting some strange results, for India capital is not significantly contributed in GDP, but for UK both labour and capital is significant inputs for production. One more strange thing is in both countries capital is a negative variable for production but these are not of large amount and for India it is not statistically significant. For both economies FDI is also not significant variable. Openness is not significant for India but for UK it is significant and openness is harming the UK economy according to the results. The international trade and development theory suggests that there exists a positive correlation between economic and export growth. Neoclassical school of economists suggests that exports make major contributions to economic growth. There are usually four reasons mentioned for the support of this hypothesis: a) fostering specialization helps to benefit from the comparative advantages; b) utilizing the full capacity of the plant size, where domestic demand is less than the full capacity production; c) getting benefits of the greater economies of scale due to large market, and d) increasing the rate of investment and technological change.(Mozhgan Alaei Far,2004) Export is significant for both the economy and that is in accordance to the literature. So both the countries should make some export promotion policies in order to facilitate economic growth.

Conclusion -

After comparing both the countries we can conclude that UK of course is a developed country that's why he has a strong economy. But India is still developing and it is growing very fast. India was the colony of Britain it was not an independent economy like UK. It got Independence in 60 years only that's why it is developing but in last 60 years only it has grown very remarkably. After independence also it was a closed economy. It liberalizes its trade recently in 1991. If it will still develop like this it will soon come under the category of developed country.

References :

Dehesa, G. (2006) “Winners and Losers in Globalisation” Blackwell Publishing Ltd. U.K.

Rutherford, D. (2002) “Routledge dictionary of economics” Publisher Routledge.

World Bank http://www.worldbank.org/

CIA https://www.cia.gov/library/publications/the-world-factbook/

IMF http://www.imf.org/external/data.htm

WTO http://www.wto.org/

UNCTAD http://stats.unctad.org/handbook/ReportFolders/ReportFolders.aspx?IF_ActivepathName=P/VIII.%20Development%20indicators

Department of commerce India http://business.gov.in/trade/index.php#

OECD http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html

EU KLEMS march 2008 release http://www.euklems.net/euk08i.shtml#top

Goodwin, Neva, Julie A. Nelson and Jonathan M. Harris(Lead Authors). 2007. "Economic growth." [First published in the Encyclopedia of Earth April 23, 2007; Last revised October 9, 2007; Retrieved August 31, 2008]. <http://www.eoearth.org/article/Economic_growth>

PWT http://pwt.econ.upenn.edu/php_site/pwt_index.php

Mozhgan Alaei Far,(2004) “The Relationship between Export and Economic Growth : assessing the evidence from Iran(1959-1999)” Web link: http://www.saee.ch/saee2004/Mozhgan_AlaeiFar.pdf

Akaranant kidsom(2005) “Total Factor Productivity Levels and Comparative Progress:

The OECDs and The East Asian Countries.” Web link: https://dspace-unipr.cilea.it/bitstream/1889/851/1/KIDSOMTFP%20Levels%20and%20Comparative%20Progress%5B1%5D.pdf

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