The world is linked as never before due to advances in communication and transportation and due also to trade agreements that have lowered or eliminated barriers in the exchange of goods. But this growing interdependence has not come without a price. This Sidebar looks at some of the problems created by globalization.

Life in the Global Marketplace

The everyday things that we take for granted often connect us to faraway people and places. Consider, for example, the morning routine of an office worker in California. After waking and showering, she puts on a designer sweater and a pair of khaki pants. She brews and drinks a cup of coffee and eats a banana before heading off to work. Each of these products followed a complex path from a different part of the world to take its place in this woman’s morning routine.

Let's start with the sweater. Its story begins with sheep grazing on the plains of Australia. There, farm workers sheared the sheep's wool. At an Australian factory, workers spun the wool into yarn and dyed it. The yarn traveled to another factory in Portugal, where workers knitted and sewed the sweater according to a pattern produced by an Italian fashion designer. From Portugal, the sweater traveled to a warehouse in New Jersey, then to the mall in California where this woman bought it.

The khaki pants began as cotton in a field in Pakistan. The cotton was harvested and ginned in a nearby town and then transported to Karachi, where workers at a factory spun, wove, and finished the khaki cloth. In an Indonesian factory operating under contract with an American retailer, a woman sewed this cloth into pants, which then traveled first to the retailer’s Los Angeles warehouse and then to another store at the mall, where they caught this woman’s eye.

The coffee beans grew on a plant in the mountains of Kenya. Kenyan farm workers harvested the coffee “cherries” and then dried and hulled them to produce raw coffee beans for shipment to the warehouse of an importer in Virginia. From there they traveled to a plant in California, where workers roasted the beans and packed them for delivery to the café from which this woman bought them.

The banana that this woman purchased in her local supermarket grew on a tree in Ecuador. Ecuadorian workers harvested the banana as part of a bunch and packed it for shipment to a Los Angeles wholesale market. From there it was sent to the supermarket’s warehouse and finally to the supermarket itself.

Before she has even left her house, this woman has used products that tie her to hundreds of workers on six different continents. Although she may not be aware of it, the car that she drives and her activities at work during the day will link her to hundreds of other people working in different parts of the world—people she may never meet but whose lives are tied to her own in the complex web that is our global economy.

A History of Globalization

In ancient times, traders carried the most exotic and valuable goods over long distances. Caravans brought Chinese silk to the Roman Empire, and during the Middle Ages Arabs sold ivory from East Africa and spices from Indonesia to the merchants of Venice. Until about 1500, however, long-distance trade played only a minor economic role in just a few parts of the world, and nearly all of the world's people relied on foods and fibers grown within a short distance of their homes.

A truly global economy first began to develop in the 15th century with the Age of Exploration, when political and military support from emerging nation states and advances in seafaring technology enabled European merchants to establish trading networks that spanned the globe. Europeans established colonies, slave plantations, and trading outposts in tropical regions to grow or obtain goods unavailable in Europe, such as sugar, tobacco, coffee, and spices. Europeans also seized parts of North America and Siberia for their furs and abundant timber.

During the 19th century, industrialization in Europe and North America dramatically increased the volume and economic importance of international trade. The industrialized countries imported raw materials and foods from around the world and exported manufactured goods. Because business owners in the industrialized world retained the wealth generated from trade and manufacturing, people in other parts of the world could not afford the technology necessary to compete with the industries of Europe and North America. Without the new technologies, these people had to continue selling raw materials to obtain manufactured goods. The main exception to this pattern was Japan, whose strong government protected local producers from foreign competition and channeled the country’s wealth into industrial facilities. By the 20th century the world was divided into two unequal parts: the industrialized countries and the rest of the world, which the industrialized countries dominated economically and militarily.

During the 20th century several new developments quickened the pace of globalization and strengthened the economic links among countries. One of the most important changes was the drop in transportation costs, made possible by the availability of inexpensive oil. Another key development was the emergence of more and more multinationals, or corporations with operations in more than one country. A third factor that promoted globalization was the creation of international economic institutions—such as the International Bank for Reconstruction and Development (the World Bank), the International Monetary Fund (IMF), and the World Trade Organization (WTO)—to help regulate the flow of trade and money among nations. Finally, advances in telecommunications and computer technology made it much easier for managers to coordinate economic activity among corporate divisions, clients, and vendors in different parts of the world.

Globalization and Development

The developing countries of Central and South America, Africa, and Asia once merely exported raw materials and cash crops (crops produced for sale overseas) in return for manufactured goods. The people in these countries provided for most of their own needs through subsistence agriculture and small-scale crafts. In time, though, people in these countries grew increasingly dependent on the global economy, because local crafts could not compete with the inexpensive, factory-made exports of the economically developed countries (western European nations, the United States, Canada, Australia, New Zealand, and Japan). To decrease their dependence, many developing countries sought to strengthen their economies by building factories, modern dams, and roads during the 1960s and 1970s. Some countries also imposed tariffs and other barriers to trade in an attempt to protect developing local industries from competition with imported manufactured goods. Governments frequently made poor financial choices, however. Infrastructure projects such as dams and highways were often too massive for local needs. Choices about industry were sometimes based on the financial interest of government leaders rather than on the best interests of the country, and protection from competition frequently resulted in inferior goods. As a result, products could not compete on the global market with the higher-quality goods from the industrialized countries. Many developing countries then had little income to pay off debts incurred during their expansion.

A few developing economies succeeded in building prosperity through industrialization during the 20th century. The most notable of these were South Korea, Taiwan, Singapore, and Hong Kong S.A.R. Like Japan during the 19th century, they established tariffs and other barriers to protect local products from foreign competition and invested local wealth in industrial development. Also like Japan, they focused on selling the products they manufactured to foreign consumers in order to bring wealth into the country. By the end of the 20th century some experts considered these economies to be developed, rather than developing, although many of South Korea’s economic successes were reversed in the financial crisis of 1997. Following a similar path, China advanced economically through a rapid expansion of manufactured exports during the late 20th century.

Meanwhile, multinationals based in the economically developed world set up low-wage manufacturing facilities in some developing countries, particularly in Southeast Asia and in Central and South America. These factories typically generated few long-term benefits for the local economy. The profits flowed outside the country to the shareholders of the foreign multinational. Also, the developing countries were forced to participate in a “race to the bottom” to attract multinational investment. If a developing country or its people sought higher wages or enforced labor or environmental protections, multinationals often simply relocated production to a country with lower costs.

At the end of the 20th century many developing countries, especially in Africa, still lacked a strong industrial sector. These countries continued to rely on money earned from exports of cash crops and raw materials to buy manufactured goods and service their debts. An emphasis on the export of cash crops and raw materials leads to increases in production. As transportation became more efficient, countries began to compete to sell the same goods, and more goods and increased competition drove down prices. This cycle perpetuated poverty.

Facing an inability to attract further investment or pay for imports, many debtor nations turned to the World Bank and the IMF during the 1980s and 1990s for relief in the form of extended credit and new loans. In exchange for this relief, debtor countries had to present a plan of reforms to the lending institutions. These reforms often included privatization plans and reductions in government expenditures. The measures were intended to ensure that these countries could repay their loans, but reforms were often painful.

The Fate of the State Socialist Economies

During the early 20th century the Union of Soviet Socialist Republics (USSR) created a state-owned economy shielded from the competitive pressures of the global market. The state also imposed severe limits on citizens’ personal freedom. This system, known as state socialism, initially raised living standards, and after the Soviet victory in World War II this economic model was introduced in eastern Europe and other parts of the world.

Insulation from market competition and lack of intellectual freedom caused state socialist countries to fall behind the economically developed countries technologically, however. The USSR and eastern European governments channeled scarce resources into an arms race with the United States and other wealthy countries. Living standards stagnated and economies faltered. In the late 1980s citizens of these countries demanded an end to state socialism, and the countries reentered the global market economy.

After half a century of insulation from competition, the industries in the former state socialist countries generally could not compete on the global market. Only countries that had maintained some forms of private ownership, had well-developed infrastructures, and had post-Communist governments that regulated economic reforms—such as Poland and Hungary—seemed likely to join the ranks of the economically developed countries. Others, particularly the Central Asian countries, seemed more likely to follow the pattern of the developing nations.

The Globalization of Agriculture

With the development of refrigeration and cheap long-distance transportation in the late 20th century, increasing numbers of farmers competed in the global market. A baker purchasing flour, for example, did not care whether the flour was made from wheat grown in North America, South America, Europe, or Australia, as long as the quality was good and the price was low. With tractors and other forms of mechanization, a single farm worker could do the work of dozens of manual laborers. This made it possible for mechanized farmers in North America, Europe, and Australia, where labor costs were high, to outsell small-scale producers from the developing countries on the global market, even though these countries had much lower labor costs. In addition, economically developed countries, particularly the United States, shipped agricultural surpluses—especially wheat, which does not grow well in most tropical climates—to developing countries in Africa and elsewhere at heavily subsidized prices or even for free, as food aid.

Locally grown food crops could not compete with these inexpensive imported foods. Small-scale farmers in many developing countries were unable to make a living and had to sell their lands to larger producers who could afford to mechanize. Farmers in developing countries also tended to shift from local food crops to more lucrative cash crops, especially crops such as bananas, coffee, cacao, and sugarcane that cannot grow in the colder climates of the wealthy, industrialized countries. Thus many developing countries, especially in Africa, became dependent on imported foods.

The Globalization of Manufacturing and Services

By the end of the 20th century a firm’s research, development, marketing, and financial management no longer needed to occur in the same place, or even in the same country, as its manufacturing operations. Increasingly, service activities dominated the economies of wealthy countries, while manufacturing declined in relative importance. To cut costs, companies relocated some kinds of manufacturing to developing countries, where wages are lower. Such activities included garment production and the assembly of simple parts.

Other activities remained in the economically developed countries because they required a highly skilled workforce or proximity to wealthy consumers. Examples are advanced health care, financial services, retail, engineering, and software development, all considered service activities. The service sector grew in importance in the developed economies of North America, Europe, Australia, New Zealand, and Japan, while manufacturing in some developing countries expanded rapidly. The kinds of manufacturing that remained in the wealthier countries included construction, food processing, and skilled activities such as machine tooling and some kinds of chemical production.

Many of the economically developed countries banded together in large trading blocs, or economic unions, to promote mutual prosperity. Examples include the European Union (EU) and the free-trade zone established by the North American Free Trade Agreement (NAFTA). These trading blocs expanded the market areas within which companies could operate without facing customs duties or other kinds of barriers.

One World

Events in one country may have serious consequences for ordinary people in another part of the world. In the late 1990s, for example, a long economic recession in Japan spread to Southeast Asia. The countries of Southeast Asia had relied on Japanese banks for money to build their economies and on Japanese consumers to buy their products. The recession prompted Japanese banks to curtail their investments and purchases, causing many other Asian economies to falter. Eventually other foreign investors panicked and pulled their money out of Southeast Asia, and thousands of Thais, Indonesians, and others lost their jobs as these countries’ economies shrank.

Meanwhile, the economy in the United States grew steadily. As the Asian economies soured, their currencies dropped in value relative to the U.S. dollar, and Asian exports became cheaper. Many Asian companies sought to improve their fortunes by exporting goods to the United States, and during the late 1990s U.S. consumers bought many inexpensive Asian goods. Temporarily, at least, this was good news for Asian workers and investors, who hoped a strong U.S. market would lift their sagging economies. Indeed, in 1999 the long Japanese recession showed signs of ending.

This apparent good news had a dark side, however. The growing Japanese economy attracted foreign investors, who bid up the dollar price of the Japanese yen and thus the price of Japanese goods in international markets. The rising yen posed two dangers. First, it threatened to make Japanese exports too expensive, possibly leading to a drop in sales of Japanese goods and a renewed recession in Japan. Second, as Japanese goods rose in price in dollars, the danger of inflation grew in the United States. Rising inflation in the United States brings the danger of a rise in interest rates and a drop in stock prices that could bring the U.S. economic boom to a halt. If the U.S. economy were to falter, investors and exporters all over the world could suffer.

Throughout the world, both rich and poor countries have grown ever more dependent on one another economically. They face problems that are increasingly global in scale. The ultimate example of a global challenge is the ecological one. Both high rates of consumption and economic desperation have led to environmental strains such as the depletion of resources, the generation of pollution, and the conversion of natural habitats for economic uses. In the long term, the success of globalization may depend on its ability to bring economic well-being to all of the world’s peoples without causing further environmental damage.