Perfectly Competitive Markets and Globalization

Term Paper, 2008

19 Pages, Grade: A



1.1. Globalization-basic concepts
1.2. Conceptual relationship between globalization and perfectly competitive markets

2.1. Realities of globalization
2.2. Challenges to developing countries





1.1. Globalization-basic concepts


The term “globalization”, according to Helleiner (2000), as too frequently used, confuses two totally different phenomena. The first, as to his classification, is the shrinkage in space and in time that the world has experienced in consequence of the technological revolutions in transport, communications and information processing. He explains that for a good many of us, though by no means all, the world has become a much smaller place. References to our “global village” or “spaceship Earth” or, more prosaically, “the global economy”, according to him, capture the reality that what some of us may do in one part of the world carries greater impact on other parts of humanity and does so much more quickly than once was the case. This new technology-driven “globalization” is, as to him, the new reality to which we all are trying to adapt. There truly is no escape from it, as he added.

The second usage of the term, on the other hand, relates to what he calls matters of human policy choice – the degree to which one opens and submits oneself mindlessly to surrounding external forces. According to him, while globalization (in his first meaning) is a fact, and it may constrain some choices, it does not totally foreclose them in the way that many imply. He argues that One cannot quarrel, in the sense of being “for” or “against” globalization, with globalization as fact (although, of course, one is at liberty to like it or dislike it). To equate globalization with external liberalization and full reliance on global “marketplace magic”, however, as some do, is logical confusion; and it is quite misleading. It is certainly convenient for those pushing an external liberalization agenda to be able to depict it as an inescapable concomitant of the globalization fact (p.4).

In this connection, Khor (2001) indicates that The external liberalization of national economies involves breaking down national barriers to economic activities, resulting in greater openness and integration of countries in the world markets. In most countries, national barriers are being removed in the areas of finance and financial markets, trade and direct foreign investment (p.8).

Of these three aspects of liberalization (i.e., finance, trade and investment), trade liberalization, or the removal of impediments to competition, according to Swanson et al. (2001), is a dominant component of the new free market economic policy; it is also characterized as the phenomenon of “globalization”. They stated that trade liberalization includes the removal of both border barriers, such as tariffs and exchange controls, as well as internal restrictions, such as directed credit and preferential purchasing.


Globalization is not new! (Riley, 2006). He stated that indeed there have seen several previous waves of globalization. According to him, Nick Stern, Chief Economist of the World Bank has identified three major stages of globalization:

Wave One: Began around 1870 and ended with the descent into global protectionism during the interwar period of the 1920s and 1930s (Riley, 2006). Accordingly, this period involved rapid growth in international trade driven by economic policies that sought liberalize flows of goods and people, and by emerging technology, which reduced transport costs. This first wave started the pattern which persisted for over a century of developing countries specializing in primary commodities which they export to the developed countries in return for manufactures (Riley, 2006, P. 2-3). It is also stated in Wikipedia (2008) that it was in this period that areas of sub-Saharan Africa and the Island Pacific were incorporated into the world system. Riley (2006) further indicates that during this wave of globalization, the level of world trade (defined by the ratio of world exports to GDP) increased from 2 per cent of GDP in 1800 to 10 per cent in 1870, 17 per cent in 1900 and 21 per cent in 1913.

Wave Two: After 1945, as indicated by Riley (2006), there was a second wave of globalization built on a surge in world trade and reconstruction of the world economy. According to Wikipedia (2008), globalization in this era since World War II was first the result of planning by economists, business interests, and politicians who recognized the costs associated with protectionism and declining international economic integration. In this regard Riley (2006) elaborates that The rapid expansion of trade was supported by the establishment of new international economic institutions. The International Monetary Fund (IMF) was created in 1944 to promote a stable monetary system and so provide a sound basis for multilateral trade, and the World Bank (founded as the International Bank for Reconstruction and Development) to help restore economic activity in the devastated countries of Europe and Asia. Their aim was to promote lasting multilateral economic co-operation between nations. The General Agreement on Tariffs and Trade (GATT) signed in 1947 provided a framework for progressive mutual reduction in import tariffs (p.3).

Wave Three: The current wave of globalization which is demonstrated for example by a sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between countries and trade in goods and services (Riley, 2006).

Main Motivations and Drivers for G lobalization

The process of globalization is motivated largely by the desire of multinational corporations to increase profits and also by the motivation of individual national governments to tap into the wider macroeconomic and social benefits that come from greater trade in goods, services and the free flow of financial capital (Riley, 2006).

Among the main drivers of globalization, according to him, are the following:

Improvements in transportation including containerization ― the reduced cost of shipping different goods and services around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and adds to the process where markets are increasingly similar and genuinely contestable in an international sense.

Technological change ― reducing massively the cost of transmitting and communicating information - sometimes known as "the death of distance" ― this is an enormous factor behind the growth of trade in knowledge products using internet technology. Advances in transport technology have lowered the costs, increased the speed and reliability of transporting goods and people ― extending the geographical reach of firms by making new and growing markets accessible on a cost-effective basis.

De-regulation of global financial markets: The process of deregulation has included the abolition of capital controls in many countries. The opening up of capital markets in developed and developing countries facilitates foreign direct investment and encourages the freer flow of money across national boundaries.

Differences in tax systems: The desire of multi-national corporations to benefit from lower labor costs and other favorable factor endowments abroad and therefore develop and exploit fresh comparative advantages in production.

Avoidance of import protection: Many businesses are influenced by a desire to circumvent tariff and non-tariff barriers erected by regional trading blocs ― to give themsel- ves more competitive access to fast-growing economies such as those in the emerging markets and in eastern Europe.

Economies of scale: Many economists believe that there has been an increase in the estimated minimum efficient scale associated with particular industries. This is linked to technological changes, innovation and invention in many different markets. If the minimum efficient scale is rising, this means that the domestic market may be regarded as too small to satisfy the selling needs of these industries. Overseas sales become essential (p. 3-4).

1.2. Conceptual relationship between globalization and perfectly competitive markets

Globalization has been evolving over many centuries in terms of mercantilism and colonialism (Pinder, 2007). Mercantilism was originally an economic doctrine influential in Europe between the 16th and 18th centuries, which held that nations could maximize their wealth and power by increasing exports and minimizing imports (Fairbrother, 2006). Accordingly, exports would generate earnings in the form of precious metals, while imports required the expenditure of such metals. Adam Smith and modern political economists rejected mercantilism, however, according to him, and laid the basis for the neoclassical paradigm dominant today. In this regard, Pinder (2007) states that

Today, globalization's multi-faceted and multi-leveled expression is underpinned by neo- liberalism, which is prescribed by the laissez-faire economic doctrine of the 18th century philosopher Adam Smith where market forces are to be free to pursue their immediate private interests and be subjected to minimal government regulation. Within this discourse, there is the assumption that once the economy is deregulated and privatized, and thereby the conditions for competition are created, markets will emerge and their operation will cause resources to be reallocated across sectors (P. 4).

According to Crotty (2002), supporters of neoliberal globalization used neoclassical economic theory to sell their program. The standard neoclassical view holds that, in the absence of excessive government interference, both national economies and the integrated global economy will operate efficiently, more or less like the models of a perfectly competitive market system found in college textbooks (Crotty, 2002). To see it in some detail, Fairbrother (2006) explains that

First, Sheppard (2005 : 151) summarizes that, in the neoclassical view, “unrestricted commodity exchange between places is the best way to advance their mutual prosperity.” Neoclassical theory arrives at this conclusion on the grounds that free flowing international trade allows countries to specialize in what they do best, resulting in a more efficient distribution of productive resources, and therefore more wealth for all. Different countries will have comparative advantages in different types of production, whether for reasons of geography and natural resource endowments, or of capital accumulation (physical, financial, human). Relatively labor-abundant countries can devote themselves to labor-intensive production, while capital abundant countries can get out of labour-intensive activities and expand capital-intensive industries. From this point of view —descended from the classic works of Adam Smith and David Ricardo—if another country can produce something more cheaply than can one’s own economy, it makes more sense to import it than produce it at home. Ceasing domestic production of that product in turn allows the home economy to devote itself to producing other things, which it can export as payment for imports. Second, neoclassical theory values international trade for its benefits to consumers: lower prices (effectively expanding everyone’s buying power), and access to a wider range of higher quality goods and services. Because of this emphasis on consumer benefits, the neoclassical view appreciates trade liberalization for the pressures that increased foreign imports bring to bear on domestic producers. The latter have to become more efficient and match both the prices and the quality of foreign imports. Neoclassical trade theory therefore frowns on import restrictions that protect domestic firms (Krueger 1995), even if some domestic firms or industries have to suffer or disappear in the absence of such restrictions. In short, neoclassical arguments for trade liberalization recognize important conflicts between those interests and those of both consumers and export-oriented industries—the latter standing to gain from trade liberalization via increased sales of exports. But they do not consider the interests of import-competing domestic producers to be a priority. Consequently, neoclassical economists recommend that countries drop barriers to trade (such as tariffs and quotas), no matter what any other country chooses to do (Bhagwati 1988; Burtless et al 1998: 27; Krugman 1997), though if other nations eliminate their own barriers to trade as well, so much the better for everyone involved. Third, because of the gains from specialization, and the benefits of both exports and imports, neoclassical theory denies that nations compete with respect to trade. Commercial relations among nations are much more mutually beneficial than win-lose, and a gain for one country does not mean losses for any other. Fourth and last, the neoclassical framework also holds that trade does not affect aggregate employment—trade affects the types and quality of jobs in a country, not their number (Burtless et al. 1998: 9; Krueger 1995: 5). Although imports may close down a domestic industry, sooner or later exports of other kinds of products inevitably rise, generating new employment opportunities elsewhere in the economy. The overall level of employment is much more dependent on macroeconomic factors, aggregate demand and supply, and interest rates, not on trade. What trade does is it creates better jobs. It improves the efficiency of the economy, and by doing so, it creates better paying, more rewarding jobs (P. 21-26).

However, before going to try to conceptually relate globalization with perfectly competitive markets, one should bear in mind, as mentioned by Gale (2006), that industries in the real world rarely satisfy the stringent conditions necessary to qualify as perfectly competitive market structures. According to him, the world in which we live is invariably characterized by competition of lesser degrees than stipulated by perfect competition.

Fawzy (2002) states that In situations of globalization, the competitive field is much more open, more extended; and each globalizing firm can expect to see new actors in its traditional markets. In a globalized or international markets, one should expect to meet many more actors than usual (p. 49).

To put this shortly, in globalization, there are fewer barriers to entry and there are many more players. These relate with two of the conditions necessary for perfectly competitive market structure, namely free entry and existence of many buyers and sellers. As mentioned above, consumers in countries that had been previously protected from global competition are benefiting from globalization most because of: better choice opportunities, product quality improvement, better prices, better services (Gulbe et al., 2004). T his relates to one of the reasons why perfectly competitive market structure is considered desirable for society, namely, according to Gale (2006), the price charged to consumers equals the marginal cost of production to each firm which in other words means that sellers charge buyers a reasonable or fair price. As mentioned above by Fairbrother (2006), domestic producers have to become more efficient and match both the prices & the quality of foreign imports. Moreover, according to Gulbe et al. (2004), globalization can be characterized by the following cross-related global tendencies: market expansion, quality, quantity and speed of international communications, economic integration, uniformity of standards, regulations and practices. Such effort of domestic producers to match the quality of foreign imports together with uniformity of standards, regulations and practices can somehow be expected to lead to homogeneity of product sold in an industry which is the other condition necessary for regulations and practices perfectly competitive market structure. Furthermore, it is mentioned above by Fairbrother (2006) that free flowing international trade allows countries to specialize in what they do best, resulting in a more efficient distribution of productive resources, and therefore more wealth for all. Similarly, according to Crotty (2002), globally integrated financial markets will raise efficiency and productivity it was argued, because they will allocate world savings to the most productive investment projects no matter where in the world they are located. This relates with the fact mentioned in Wikipedia (2008) that perfect competition is a market equilibrium in which all resources are allocated and used efficiently, and collective social welfare is maximized. In this connection, the ease with which goods, capital and technical knowledge can be moved around the world has increasingly enabled the division of labor on a global scale, as firms allocate their operations in line with countries' comparative advantage (Riley 2006). This relates somehow to the other condition necessary for perfectly competitive market structure which is perfect mobility of resources or factors of production.


2.1. Realities of globalization

Khor (2001), in his book of "Rethinking Globalization", expresses his idea about the uneven realities of the present globalization that Globalization is a very uneven process, with unequal distribution of benefits and losses. This imbalance leads to polarization between the few countries and groups that gain, and the many countries and groups in society that lose out or are marginalized. Globalization, polarization, wealth concentration and marginalization are therefore linked through the same process. In this process, investment resources, growth and modern technology are focused in a few countries (mainly in North America, Europe, Japan and East Asian newly industrialized countries). A majority of developing countries are excluded from the process, or are participating in it in marginal ways that are often detrimental to their interests; for example, import liberalization may harm their domestic producers and financial liberalization may cause instability. Globalization is thus affecting different categories of countries differently. This process can broadly be categorized as follows: growth and expansion in the few leading or fully participating countries; moderate and fluctuating growth in some countries attempting to fit into the globalization/liberalization framework; and marginalization or deterioration experienced by many countries unable to get out of acute problems such as low commodity prices and debt, unable to cope with problems of liberalization and unable to benefit from export opportunities. The uneven and unequal nature of the present globalization process is manifested in the fast-growing gap between the world's rich and poor people and between developed and developing countries, and in the large differences among nations in the distribution of gains and losses (p. 16-17).

In particular, he states that The benefits and costs of trade liberalization for developing countries constitute an increasingly controversial issue. The controversial view that trade liberalization is necessary and has automatic and generally positive effects for development is being challenged empirically and analytically. The notion that all are gainers and there are no losers in trade liberalization has proven to be overly simplistic. Some countries have gained more than others; and many (especially the poorest countries) have not gained at all but may well have suffered severe loss to their economic standing (p. 32).

In this regard, whereas the relatively better-off have been doing quite well in the recent bursts of both globalization and liberalization, as Helleiner (2000) says, there is growing anxiety about the fate of the poorer, the more marginalized, the vulnerable and the powerless (e.g. UNRISD, 2000; World Bank, 2000; UNDP, 1999; UNCTAD, 1997). In connection with this, Khor (2001) indicates that The UNDP's Human Development Report 1999 states: 'The top fifth of the world's people in the richest countries enjoy 82 percent of the expanding export trade and 68 percent of FDI - the bottom fifth, barely more than 1 percent. These trends reinforce economic stagnation and low human development. Only 33 countries managed to sustain 3 percent annual growth during 1980-1996. For 59 countries (mainly in sub-Saharan Africa and Eastern Europe and the CIS) GNP per capita declined. Economic integration is thus dividing developing and transition economies into those that are benefiting from global opportunities and those that are not' (UNDP, 1999:31). (p. 32-33).


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Perfectly Competitive Markets and Globalization
Addis Ababa University  (Faculty of Business & Economics)
Advanced Microeconomics II
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perfectly, competitive, markets, globalization
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Fitsum Daniel (Author), 2008, Perfectly Competitive Markets and Globalization, Munich, GRIN Verlag,


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