Globalisation of Commodity and Financial Markets

In this article we will discuss about the globalisation of commodity and financial markets.    

Various changes have taken place in the market economies over the last two decades. Technological progress in the form of process innova­tion, and development of new products, decline in the importance of agriculture and manufacturing and a consequent increase in the share of the services in national income and employment are the most notable of such changes.

Another aspect of the constant change that occurs in evolving market economies is globalisation. Contacts between the world’s people are widening and deepening as natural and artificial barriers fall. Huge declines in transport and communication costs have reduced natural barriers.

Com­munication is also much easier and cheaper. The trend toward globalisation has accelerated in the last five years or so. In this context, R.G. Lipsey write-“At the heart of globalisation lies the rapid reduction in transportation costs and the revolution in information technology. The cost of moving products around the world has fallen greatly in recent decades. More importantly, our ability to transmit and to analyse data has been increasing dramatically, while the costs of doing so have been decreasing, equally dramatically”. The communication revolution has perhaps been the most important contribu­tion to the development of what has come to be called ‘the global village’.

Three important characteristics of the global village are:

(i) Disintegration of production,

(iii) An increase in competition, and

(iii) A fall in the power of the nation state.

Artificial barriers have been eased with the reduction in trade barriers (tariffs, quotas and exchange controls). The expansion of capital flows has been even more dramatic. Less visible, but infinitely more powerful, are the world’s financial markets.

The modern era of globalisation is distinguished less by the scale of the flows than by their character. In trade, for example, a much smaller share by value consists of commodities (partly a reflection of lower prices relative to manufactures) and a larger share in services and intra-company trade.

Today, technology is more easily transferred to developing countries, where sophisticated production can be combined with relatively low wages!

The increasing ease with which technology can accompany capital across borders threatens to break the links between high productivity, high tech­nology and high wages. The availability of higher levels of technology all over the world is putting pressure on the wages and employment of low-skilled workers.

Many markets are globalising. For example, as some tastes become universal to the young generation, we can see the same type of T-shirts and shoes in virtually all big cities. Take for instance the case of Adidas, Nike and Reebok.

Many corporations are globalising, as they increasingly be­come transnational’s. These are large firms which operate in many countries and have an increasingly decentralised management structure. McDonald’s restaurants are operating throughout the world with 2,000 or more branches.

1. Production:

The communication revolution has permitted many large international companies to decentralise their production processes. The globalisation of production has created jobs and incomes in developing countries like India, while, at the same time, putting less skilled labour in the developed countries under strong competitive pressures.

We also see globalisation of many labour markets as the revolutions in transport and communications allow the various components of any one product to be produced all over the world. For example, a music system, or a car, contains various parts and components manufactured in several countries. This very fact makes it difficult to ascertain where it is made. We only know where a product is assembled.

2. Competition:

The information and communication revolution has also caused an internationalisation of competition in almost all industries. High costs of transport and communication do no longer protect local firms.

Consumers gain by being able to choose from a wide range of stand­ardised low-priced goods and services. Successful firms gain worldwide sales Firms that lag behind even for a moment is likely to be wiped out by competition from diverse quarters.

As Lipsey has put it:

“Global competi­tion is fierce competition” and firms need to be fast on the uptake — either of other people’s new ideas or of their own — if they are to survive.

3. Economic Policy:

The globalisation of production also permits tran­snational corporations to shift production around the world. So rapid and stringent national economic policies that erode profitability may be self-de­feating as firms move production elsewhere. In short, globalisation of production and consequently of competition means a great reduction in the scope for individual countries to implement distinctive economic policies.

4. Investment:

In the area of investment in financial capital, the most important result of globalisation is that large firms are seeking a physical presence in many major countries. In the 1950s and 1960s most foreign investment was made by the USA and Japanese firms to establish a presence in foreign markets. Today most industrially advanced countries see major flow of investment in both directions, inward as foreign firms invest in their markets, and outward as their own firms invest abroad.

Perhaps the most important push to globalisation of investment was given by the ‘freeing’ of investment flows from government regulation. As a result, the investors in most advanced countries are accumulating shares in the world economy.

In short, the world is truly globalising both in trade and investment flows As RG Lipsey has put it- “Today no country can take an isolationist economic stance and hope to take part in the global economy where an increasing share of jobs and incomes are created”.