Globalisation and Economic Development

Syllabus: The Global Economy → Globalisation and economic development.

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Economic growth against economic development

This distinction opens the whole dot point group and gets examined directly, so get it precise.

Economic growth is an increase in the volume of goods and services an economy produces over time, measured by the change in real GDP. It is purely quantitative. Economic development is broader and qualitative: a sustained improvement in living standards and wellbeing, which includes growth but also health, education, life expectancy, environmental quality, equality of opportunity and how the gains are shared.

Growth is generally necessary but not sufficient for development. An economy cannot fund better health and education without producing more. But growth happens without development often enough, and there are four recognisable ways it does. The gains accrue to a narrow elite, so median living standards never move. Growth is achieved by depleting natural capital, so it cannot last. Output rises while health, education and life expectancy do not. Or a resource boom drives the growth and generates almost no employment.

The argument all of that unlocks is worth stating plainly in an essay: two economies with identical GDP per capita can have very different living standards depending on distribution and on public provision of health and education. That is precisely why development indicators exist at all.

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Distribution of income and wealth globally

Global inequality operates at two levels and the exam expects both. Between countries, meaning the gap between advanced and developing economies. And within countries, meaning inequality among a nation's own citizens.

The pattern is that a small number of economies account for the majority of world output while most of the world's population lives in economies producing a small share of it. Within-country inequality has risen in many economies, advanced ones included, even as between-country inequality has narrowed, driven largely by the growth of China and more recently India.

Wealth is far more unequally distributed than income, because it accumulates across generations and generates further income as it goes. Any answer treating the two as interchangeable is weaker for it.

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Income and quality of life indicators

Income indicators

GDP is the value of final goods and services produced within a country's borders. GNI is GDP plus net income from abroad, and it is the better measure wherever foreign ownership is significant, because profits repatriated overseas count in GDP but not in GNI. GNI per capita divides that by population and is the World Bank's standard classification measure.

Purchasing power parity adjusts for differences in the cost of living, and it is essential for comparison, because a given income buys far more in a low-cost economy and unadjusted figures overstate the gap accordingly.

All income measures share the same limitations. They say nothing about distribution, since an average conceals the spread. They exclude the non-market economy of subsistence agriculture, household and unpaid work, all of which are large in developing economies, and they exclude the informal economy entirely. They ignore negative externalities, so pollution and resource depletion raise measured output while lowering welfare. They ignore leisure. And they count defensive expenditure, such as cleaning up after a disaster, as a positive.

Quality of life indicators

The Human Development Index is the UNDP's composite measure across three dimensions: a long and healthy life, measured by life expectancy at birth; knowledge, measured by mean and expected years of schooling; and a decent standard of living, measured by GNI per capita at PPP. It runs from 0 to 1, with bands for low, medium, high and very high human development.

HDI earns its place in an exam because it lets you make the growth against development argument with actual evidence. China's HDI of about 0.815 puts it in the very high band while its GNI per capita ranks far lower in the world, and that gap is public investment in health and education delivering development beyond what income alone would imply.

Its limitations are worth knowing too. It is still an average, so it says nothing about distribution. It excludes political freedom, human rights and personal security. It excludes environmental sustainability entirely. And the weighting of its three components is a value judgement rather than a technical fact.

Other indicators worth naming: infant mortality, adult literacy, access to safe water and sanitation, the Gini coefficient, and the Sustainable Development Goals.

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Developing, emerging and advanced economies

These categories are conventions rather than precise definitions, and different institutions draw the lines in different places.

Advanced economies have high GNI per capita and high HDI, a large services sector, developed financial and legal institutions, and high productivity. Australia, the United States, Japan, Western Europe.

Emerging economies are industrialising and growing rapidly, with incomes rising quickly from a lower base and increasing integration into world trade and finance, but with institutional and infrastructure gaps still open. China, India, Brazil, Indonesia.

Developing economies have low GNI per capita and HDI, a large agricultural or extractive sector, limited infrastructure, high population growth, and often heavy dependence on a small number of primary export commodities.

One sub-group sits awkwardly across the categories. Economies rich in resources but weak in institutions can post high income alongside low development. That is the resource curse, where a commodity windfall crowds out other industries, appreciates the currency, and funds corruption rather than public services.

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Reasons for differences between nations

Group these, because an ungrouped list reads as a brain dump.

Global factors constrain what any developing economy can achieve. Trade barriers in advanced economies fall on exactly the goods developing economies produce competitively, meaning agriculture and labour-intensive manufacturing. Volatile commodity prices make export income unpredictable for economies dependent on a few of them. Terms of trade have declined over the long run for many primary-commodity exporters. Foreign debt servicing consumes revenue that would otherwise fund development. And access to global capital is limited, or arrives as volatile short-term flows rather than long-term investment.

Domestic factors determine how well an economy uses the room it has. Institutions come first, meaning the rule of law, secure property rights, enforceable contracts and low corruption, and they are widely regarded as the single most important determinant, because without them investment simply does not happen. Then political stability and the absence of conflict. Human capital, being the health and education of the workforce. Physical capital and infrastructure in transport, power and telecommunications. Economic policy, and whether government invests in capacity, maintains stability and manages resources well. Population growth, where it outpaces growth in output per person. And natural resources and geography, including whether an economy is landlocked or has usable ports.

The evaluation is that global factors constrain and domestic factors determine, so attributing the whole gap to either alone makes for a weak answer. The strongest responses argue that institutions and human capital decide whether globalisation delivers development or merely extraction.

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The effects of globalisation on development

Argue every one of these both ways.

Trade, investment and transnational corporations

On the positive side, access to world markets allows specialisation and economies of scale. FDI brings capital, technology and management practice a developing economy lacks. TNCs create employment and transfer skills. The economies that integrated into world trade, China above all, achieved the fastest poverty reduction in history, lifting roughly 500 million people out of poverty in a single generation.

On the negative, gains distribute unevenly both between and within countries. TNCs repatriate profits, may use transfer pricing to minimise tax, and can dominate a small host economy outright. Integration increases exposure to the international business cycle. Reliance on a narrow set of commodity exports leaves an economy hostage to price swings it cannot influence. And competition can destroy domestic industries before any replacement emerges.

Environmental sustainability

Industrialisation has raised emissions, pollution and resource depletion. Production relocates to economies with weaker regulation, which is the pollution haven effect, and global supply chains are transport-intensive by design.

Working the other way, globalisation spreads clean technology, and international agreements create a mechanism for coordinated action. China now leads the world in installed renewable capacity and electric vehicle production, and runs a national emissions trading scheme.

The argument to reach is that environmental degradation is not an inevitable price of development but a policy choice about which growth path gets taken.

The international business cycle

Integration synchronises national cycles, and developing economies are hit hardest by a global downturn. Their exports concentrate in commodities whose prices collapse, capital flows out towards safety, and they have far less fiscal capacity to respond than an advanced economy does.

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What the exam does with this

This group carries full extended responses. Section IV in 2023 asked about globalisation's impact on growth and development in an economy other than Australia, and 2022 Q28 asked why nations experience different rates of growth and development.

Three things separate a top-band answer.

Hold growth and development apart throughout. If a question names development, an answer entirely about GDP is answering something else.

Use HDI and GNI per capita together, and say what the gap between them shows.

Argue globalisation both ways with a mechanism each time. "Globalisation has both costs and benefits" earns nothing. "FDI transferred technology and management practice, raising productivity, but the coastal concentration of that investment widened regional inequality" earns the marks.

Your case study economy supplies the evidence for all of this. See the China case study, which maps directly onto these dot points.

Related notes: International economic integration · Trade, financial flows and foreign investment · Distribution of income and wealth