Second Teaching Unit / Third Learning environment

Essential reading

Global economies in developed

and underdeveloped countries

Content

1 Effects of globalization

2 Global structures

3 Conclusions

Keywords: global structures, rich countries, poor countries, developed economies, underdeveloped countries.
1. Effects of globalization
Globalization makes the world look as a unit, not as a number of small pieces. Even though some
businesspersons think this new phenomenon has negative effects on the world’s economy, it also has
positive effects.

1.1. Effects on rich countries

“Globalization forces businesses to adapt to different strategies based on new ideological trends”
(Pologeorgis, 2017). This premise has been debated by authors through the years, but the main
point is the effects of globalization in rich and poor countries. Big companies, for example, agree
that globalization has helped businesses by improving their sales and being more competitive. Also,
globalization has helped the growing of international business made by these countries increasing the
competition among them to have a bigger market share. This has been possible by improving their
technology and processes in their industries. China, for example, has used technology to increase
their production and apply scale economy so companies are able to produce an average of 20.000
units per day.

Rich countries, therefore, benefit form globalization since the companies can establish production or
offshoring activities at underdeveloped economies, where they can find lower wages and costs. Nike,
for example, established their production activity in Vietnam, because of its cheap labour rate. So,
they increase production, prices and profit without having to pay high salaries.

It is important at this point to ask if globalization really leads to inequality and if it makes rich countries
richer. This is true if you analyse the way rich countries are taking advantage of poor countries in
terms of cheap labour. For example, Nike established its production in Vietnam increasing the United
States sales. Multinational firms accelerate their efficiency by taking advantages of the globalization
phenomenon (see Figure 1). These firms normally look for countries like Bangladesh, India, Vietnam
or Thailand to locate their activities in order to lower their costs. In fact, the Spanish multinational
firm Inditex (owner of ZARA, Bershka and Stradivarius ) has its production located in Bangladesh.

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 Increases Stabilized
competition security

More wealth
More efficient equality throughout
markets Positive effects the world
of globalization

Figure 1. Positive effects of gobalization

Source: designed by the author

1.2. Effects on poor countries

According to Pavcnik (2009), economic growth is the channel through which globalization can
affect poverty. In fact, the author explains that there is no evidence that trade increases poverty and
decreases growth. Why countries like India are still poor despite having big companies established
there? How does globalization affect wages, incomes and access to resources in poor countries?
Small companies, on the other hand, agree that globalization is an enemy because Chinese
competitors have entered all the markets with lower prices, making it very difficult to compete. This
can be considered as a threat to domestic jobs. Nevertheless, the truth is that small companies
are not prepared to compete in an international market. The bad-called poor countries can be
characterized using the following points:

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 Lack of infrastructural
Lack of proper
development and
market
industrialization

Undeveloped Shortage of
Unemployment economy technology
and skills

Agricultural Lack of capital

backwardness formation
High population
natural growth rate

Figure 2. Characteristics of underdeveloped economies

Source: designed by the author

Through Figure 2 it is possible to understand part of the inequality caused by globalization, and it
is that it contributes to increase the difference between the price of a product and the salaries.
African countries, for example, have not been benefited by globalization and they are the poorest in
the world. Bad labour conditions, low women empowerment, low access to education and corrupt
governments are variables that have prevented these countries to grow economically. Foreign direct
investors are not interested in creating companies or moving their activities to these countries due to
its lack of political stability which increases the risk of doing business.

“Nigeria, Burkina Faso, Côte D'Ivoire, Senegal, Guinea, Gambia, Ghana, Sierra Leone, Cape Verde,
Togo, Guinea Bissau, Liberia, Mali and Mauritania are among the poorest groups in the world” (United
Nations, 2001). These countries’ globalization process has been difficult. Many of them can’t ensure
the access to electricity or sanitation to their citizens, not to mention the access to information
technologies. In fact, African countries are always at the bottom of all the indexes used to measure
social and economic development.

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The political and security situation in African countries is very fragile. Corruption, internal conflicts
and a large number of refugees increase the lack of food and bad conditions. According to the Food
and Agriculture Organization of the United Nations (FAO), malaria and HIV increased the people’s
mortality to such a degree that life expectancy went from 48 to 46 years old.

Nevertheless, countries in South East Asia, like China and Indonesia, have shown a decline in their
levels of poverty, especially in rural areas. According to Bardhan (2006), globalization has helped
them integrate their economies worldwide and has forced them to achieve competitive advantage,
rather than a comparative advantage. “When a country opens itself up to the world market,
globalization can become a positive mechanism for increasing economic opportunity” (Molloy, 2016).

The fact that some poor countries can take advantage of globalization depends on the government’s
goals. Special strategies concerning technification of the rural areas to improve their process are been
implemented in these countries. While some countries are using economies of scale, others are still
ahead of these processes.

Greater access to capital

Access to knowledge

More job opportunities

Figure 3. Positive effects of globalization in poor countries

Source: designed by the author

Poor economies can benefit from globalization processes by increasing their competitiveness in many
aspects, but governments have to be responsible for paying more attention to the bottle neck factors
and invest money in technology and innovation, in order to improve competitiveness and achieve:

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 Investment in
infrastructure

Support local Development of

enterprises human resources

Technological Stronger
capability institutions

Figure 4. Aspects eading to competitiveness in poor economies

Source: designed by the author

1.3. Effects on Colombia

In Colombia, globalization also had effects in all aspects. Economically, for example, the country
started to look forward for cooperation from develop countries. Also, the country became more
aware of the importance of signing free trade agreements as an opportunity to open markets and
obligate companies to become more competitive. Products like oil, coal and ferronickel had a
substantial worldwide demand, and Colombia is a leader in producing and exporting these products.
In addition, Colombia started to realize the importance of foreign direct investment, so the country
improved its macroeconomic conditions to attract international firms. In fact, nowadays you can find
many international companies in Colombia, including hotels, banks and juice producing companies.
For example, Citibank, Marriot, BBVA and even Cosechas are foreign companies in Colombia.
Foreign companies also arrived through franchises, private operations, or by purchasing local
companies, including the Starbucks chain (USA), Itaú Bank (Brazil), Axa Seguros (France), Ripley
(Chile), Victoria’s Secret (USA), Marriott (USA), Versace (Italy), Dolce & Gabbana (Italy), GAP
(USA), Forever 21 (USA), and Geronimo Martins (Portugal).

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Moreover, Colombian companies have also had the opportunity to go out to international markets
and increase their sales.

Leonisa Noel
(Costa Rica) (USA,
Netherlands)

Carvajal Bancolombia
(USA) (Panamá)

Alpina Arfos
(Ecuador) (Dominican
Republic)

Figure 5. Colombian companies in international markets

Source: designed by the author

All these companies are not only exporting but also taking advantage of an investment agreement and
have established productive operations in different countries. The Minister of Commerce is creating
strategies to improve small companies to export added value products. In fact, Colombian companies
are now exporting to United States, Panama, the Netherlands, Turkey, Mexico and Ecuador. Another
positive effect of globalization on Colombian is that companies have started to realize the importance
of integrating information technology in their processes. Many organizations are now innovating on
their production process by using new technology and innovation.

Different products especially exotic fruits are now being exported all over the world: uchuva,
mangostino, avocado, pineapple and many other are now recognized in Europe as Colombian
products. The exports of Colombia between 2016 and 2017 were as shown on the next figure.

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50%
45% 44%

40%
35%
30%
25%
20%
15%
7%
10%
5% 5% 4% 3% 2% 2% 2%
5%
0%
um tea ers y its its s ga
r les en
t
le nd ow werl Fr
u d
an ture Su hic m
tro
ee
a Fl
dj
e s
i ac
c ve uip
Pe f an al st anuf Ca
r eq
Co rls Pm tric
Pe
a ec
El

Figure 6. Colombian exports 2016-2017

Source: designed by the author

In fact, Asian countries are importing Colombian fruits and vegetables and this is an important market
due to its size. Products like flowers, onions and broccoli are exported from Colombia to South Korea,
Thailand, Malaysia and China.

Colombian exports to Venezuela and Ecuador decreased, so the country started its
internationalization process looking forward to new and different markets that include countries like
Norway, Switzerland, Iceland, the European Union and South Korea.

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 50
40
32,4
30
15,7
20
7,2
10
2,4
0
Agricultural Other sectors
-10 Manufacture
-20 Oil and extractive
-30 industry

Percentage 2017 Percentage 2016

Figure 7. Colombian exports by sector 2016-2017

Source: designed by the author

Globalization though has a bad side, a dark one that also affects Colombia. Environmental issues
like fracking are negative effects of globalization. Many oil companies are damaging the rivers and
the species with oil spills. The bad handling of toxic waste is also a problem with big multinationals. In
addition, Colombia must compete with more innovative and advanced companies that make them
unprofitable and out of competition. The imported products became a problem for small companies
that were not prepared to assume the new changes demanded by the customers.

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Figure 8. Environmental damage caused by globalization
Source: Brgfx (2019)

2. Global structures
Before globalization, most of the countries used to base their economies on agriculture and farming.
However, with the spread of globalization, the economic structures needed to change and adapt to
this new phenomenon. New institutions were created such as the International Monetary Fund, the
World Bank and the World Trade Organization to ease the globalization process in the countries.

Global structures, however, involve the interaction between people and organizations. Thus, these
agents can be classified in four sectors of the global economies.

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 Government

Firms/ Financial Households

Companies
insitutions

Rest of
the world

Figure 9. The four global economic sectors

Source: designed by the author

While rich countries have built strong global economic structures that include global value chains
“where the different stages of the production process are located across different countries” (OECD,
2018), underdeveloped countries have difficulties integrating their operations worldwide.
The concepts of outsourcing and offshoring have begun to gain importance within the companies
and governments since. Through these processes, companies can locate some core areas in other
countries where costs are cheaper.

This new concept has helped developing economies to integrate into global trading and increase,
not only their productivity but also their competitiveness. However, why are the global value chains
important as a new economic model or structure within the economies? The answer is very simple,
it lies in the ability of firms and countries to add value to their products, using raw materials from
different countries, and selling the product for further transformation or final consumption (World
Economic Forum, 2017).

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Now you understand why your clothes are made in the world and not in one specific country. Dell,
for example has a big global value chain, so when you make an order, the information flows from the
computer to the different areas around the world responsible for the different activities.

Global value chains give you the opportunity to explore a new supplier, distributor, producer or even
customer service in order to make your operations easier and cheaper.

Job creation and increase

leaving standards

Access to new
technology

Countries must move to

higher added-value tasks

Figure 10. Importance of global valued chains

Source: designed by the author

Developing countries can be part of these global structures if their governments focus on improving
regulation concerning business taxation, innovation, and making trading easier for companies and
supporting entrepreneurs.

3. Conclusions
Globalization affects rich and poor countries in different ways. Each country decides to take
advantage or not of all the benefits it brings to the economies. The fact that multinational companies
are growing fast in production is because they took advantage of globalization and established their
production activities in poor or underdeveloped countries.

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The idea of this was to help poor countries to improve their economies, but it didn´t happen that
way. Many poor countries continue to struggle even though they receive direct investment from
big international companies. The main reason is that rich companies are just worrying about making
money with low wages and bad labour conditions, rather than really helping the countries.

On the other hand, rich countries are getting richer due to great advantages brought by globalization.
One these advantages is the possibility of bringing their operations into poor countries, because
they can benefit from the host conditions, such as low salaries, which translates into lower costs
and higher profits.

One example of this is what happened in the small town of Oroya, Peru. The big multinational
Doe Run established operations there and created many jobs. However, the industry were highly
contaminating the environment and the people were getting sick and dying. The government decided
to expel the company and the people were mad because they were going to be unemployed. They did
not really care about being sick, they just cared about having a job.

To summarize…
Researchers have proved that the effects of globalization are like a lotto.

In Colombia, companies like Ecopetrol are damaging the environment with oil spills. For that reason,
the government is promoting small companies to enter the international markets with different
products, like clothing, apps, and manufactured and agricultural items. The idea is to take advantage
of the global value chains as the big countries did, and to become a developed country.

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References
Bardhan, P. (March 26 2006). Does globalization help or hurt the world’s poor?: Overview/
Globalization and Poverty. Scientific American. Retrieved from https://www.scientificamerican.com/
article/does-globalization-help-o-2006-04/

Molloy, B. (April 4 2016). Does globalization harm the poor? Institute for Faith, Work and Economics.
Retrieved from https://tifwe.org/does-globalization-harm-the-poor/

OECD. (May 22 2018). Global value chains (GVCs)OECD. Retrieved from http://www.oecd.org/sti/
ind/global-value-chains.htm
Pavcnik, N. (April 28 2009). How has globalization benefits the poor?. Yale Insights. Retrieved from
https://insights.som.yale.edu/insights/how-has-globalization-benefited-the-poor

Pologeorgis, N. (2017). How globalization affects developed countries. Investopedia. Retrieved from
https://www.investopedia.com/articles/economics/10/globalization-developed-countries.asp

United Nations (October 11 2001). Poverty, negative effects of globalization highlighted, as third
committee concludes discussion of social development issues. United Nations. Retrieved from https://
www.un.org/press/en/2001/gashc3631.doc.htm

World Economic Forum (2017) Thee Global Competitiveness Report. Retrieved

from http://www3.weforum.org/docs/GCR2017-2018/05FullReport/
TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

References of figures
Brgfx (2019). Environmental damage caused by globalization. [Vector]. Retrieved from:
https://www.freepik.es/vector-gratis/tierra-enferma-concepto-contaminacion_4485459.
htm#page=1&query=poluci%C3%B3n&position=2

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 TECHNICAL INFORMATION

Module: Globalization and Competitiveness

Second Teaching Unit: Economic globalization and
development
Third Learning environement: Global economies

Author: Sandra Milena Chicas Sierra

Academic advisor: Claudia Rocío Puentes Mendoza

Graphic designer: Brandon Steven Ramírez Carrero
Assistant: Eveling Patricia Peñaranda Izquierdo

This material belongs to the Politécnico Grancolombiano.

Total or partial reproduction is prohibited.

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