One of the main features of globalisation is the continuous fall in trading tariffs across the world, resulting in an increased amount of trade between countries. But what did this actually do to the world economy? Lower tariffs means that products will be more likely to be produced in those countries where they can be made efficiently; previously, the higher tariffs may have counteracted the lower costs that would arise from this efficiency. However, the prevalence of globalisation means that production of goods will start to shift to more efficient areas.

Let’s take a look at what this means in one case. The manufacturing industry heavily relies on labour in many areas; factories are very labour intensive. Thus, the most efficient places to produce manufactured goods would be countries with cheaper labour – enter the phenomenon of outsourcing, which saw manufacturing industries shift to countries such as China, India, and Mexico, where labour is cheap. This much is established.

However, the richer countries still had to run their economy somehow, and they began to rely more on financial services to play a big role in their economies. Financial services are inherently more unstable than the manufacturing industry; money is just an idea, which is given power by the collective belief of millions across the world. Manufactured goods, on the other hand, embody value by the very value of the raw materials and labour used in making them.

So as the richer countries began to turn to financial services to run more and more of their economy, perhaps this increased the amount of risk in financial industries, and what may have been a minor problem in a less financial oriented economy became the credit crunch that plagues the global economy today.

So, just some quick thoughts up there – is the financial crisis a result of globalisation?