The Pros and Cons of Globalization

Globalization has significant advantages, the most important being (efficient) capital allocation to deserving industries and companies all over the world. Globalization allows the provision of capital to deserving companies and industries through foreign portfolio investment (FPI) and foreign direct investment (FDI), promoting growth of companies and industries all over the world including in developing countries. The emphasis on developing countries is due to the fact that unlike in developed economies, domestic investment is not common in developing markets, and hence does not make up a significant portion of total investment in their stock markets, starving based companies of growth capital.

Apart from the investment advantage, there is also the advantage of having a large market for commodities such as agricultural and mineral products, and goods produced for which countries have a comparative advantage to others, thereby significantly increasing a country's income and promoting growth. On the import side, increased globalization means countries can now easily import goods and commodities that they lack or find expensive to produce.

The most striking disadvantage of globalization is evident when countries have a major trading partner. The consequence of this is that Recession is exported from the major trading partner's economy to the economies of countries that depend on its patronage.  A relevant, recent and perfect example is the recession being faced by oil producing nations and emerging markets following the recession in China and the Bank of China's subsequent devaluation of the RMB. The world unavoidably suffers with large global players, particularly China and the U.S. and this is more so for smaller markets. As a result of their market focus and being insignificant on a global scale, developing countries (especially those that depend heavily on exports) experience country specific recession alone but also experience recession faced by most of the rest of the world. The China example above also points at another con which is that manipulation of an individual country's currency to suit its own need has a detrimental effect on its trading partners' trade balance and the trade balance of its competitors. Sometimes, this results in currency wars as countries continually depreciate their currency in response to a competitor depreciating its currency in a bid to make their own exports more attractive.

Finally, globalization causes uncertain and unstable growth particularly in the smaller, poorer countries which is a direct result of the fact that their investment pool is mostly foreign. At any sign of trouble foreign investors immediately withdraw their funds from the country, reducing the equity base of companies based in developing countries, and exchange their currency leading to depreciation of the smaller country's currency. This is of course the cost of having a weak economic system that is highly dependent on outsiders.