What is globalisation? Fact vs fiction

Those who welcome globalisation and those who oppose it tend to regard it as unprecedented, inevitable and irreversible. It is none of these things.

Globalisation is neither an ideology nor a set of outcomes, but a process. It is, as the Penguin Dictionary of Economics defines it, 'the geographical dispersion of industrial and services activities (for example, research and development, sourcing of inputs, production and distribution) and the cross-border networking of companies (for example, through joint ventures and the sharing of assets)'.

In other words, globalisation is simply the logical extension of the tendency towards increasing specialisation and trade that has been going on throughout human history. Adam Smith may not have coined the phrases 'specialisation' and 'division of labour' to describe this particular aspect of human evolution until 1774, but it had been going on for a long time before he did. Thus, nations have traded with one another since time immemorial.

The extent and pattern of trade among nations has not been determined simply by differences in endowments of natural or human resources. Throughout human history there have been barriers to exchanges of goods and services, both within nations and among them. These barriers generally consist of three types: (i) physical - for example, high mountains, harsh deserts and wide oceans; (ii) economic - for example, when the cost of transporting goods from one place to another exceeds the difference between the cost of producing them in each; and (iii) political - such as laws prohibiting outright trade in particular goods and services, or with particular countries, or laws which impose such high taxes on cross-border transactions as to render some or all of them uneconomic.

Seen in this light, 'globalisation' can be viewed as a logical extension of the process through which barriers to the exchange of goods and services among far-flung nations are being either dismantled or overcome.

Not unprecedented

Many aspects of what is referred to today as 'globalisation' proceeded at least as rapidly in the four decades before the outbreak of World War I as they have over the past two decades. The increase in world trade as a share of world GDP, for instance, was proportionately greater between 1870 and 1913 than it has been since 1975. True, trade in services was much smaller and some parts of the world (such as China) were largely outside the global system. Notwithstanding the East India Company and others like it, the term 'multinational corporation' was yet to be invented. But in at least one respect - the movement of people - the world was in fact much more 'globalised' than it is today. Around 60 million Europeans migrated to the Americas, Australia, New Zealand and South Africa during the century after 1820, until 'New World' countries began placing restrictions on immigration from the late 1880s onwards.

Australia, like the United States at this time, was an 'emerging economy', and was very much part of the process of global economic integration. Until the 1890s depression, British investment in Australia was roughly the same proportion of GDP as foreign investment from all sources has been over the past 20 years. By 1913, exports accounted for a larger share of our GDP than they ever were to again until the mid-1980s. This was an era in which Australians enjoyed the highest living standards in the world.

It was also a period of rapid technological change. New means of transport (think of the steamship and refrigeration) were coming into vogue, new means of communication (the telegraph and the telephone) were spreading, and the costs of both were falling.

Another interesting parallel is that, like the 1990s, it was a time of considerable financial instability, especially in emerging markets. There were reportedly 32 separate currency crises in 16 different countries, including Australia between 1882 and 1913. In most cases, the economies affected by these crises bounced back surprisingly quickly, as most of the Asian countries did from the 1997-1998 crisis.

Of course, there were some important differences between the globalisation of the period before World War I and the contemporary era. First, the composition of trade has shifted from primary commodities to manufactures and, more recently, services. Second, the nature of capital flows has changed. Where portfolio investment (stocks and bonds) was once the predominant form of cross-border investment, direct foreign investment through the establishment and expansion of branches, subsidiaries and affiliates is now common. Another significant difference is that a century ago globalisation involved a certain degree of coercion through colonial expansion, 'gunboat diplomacy' and 'unequal treaties'. Today, it is largely being facilitated by the voluntary decisions of the world's governments to open their doors to international trade and investment.

Not irreversible

'Globalisation' during the period before World War I eventually prompted a political backlash. Continental European governments began raising tariffs in the late 1870s and 1880s, when the impact of cheap grain from the Americas, Russia and Australia began to make itself felt in European markets. The United States raised tariffs as a revenue measure during the Civil War, and kept them high for a long time after. Canada adopted an explicitly protectionist policy after 1878. Tariffs rose in Latin America from the 1870s onwards.

In Australia, Victoria raised its maximum tariff from 10% in 1865 to 45% by 1893 and, as the dominant colony, it was then able to impose its protectionist policies on the rest of Australia after Federation in 1901. Britain finally succumbed to the protectionist tide in the first decade of the 20th century. The only part of the world where trade barriers did not increase significantly after the 1870s was Asia, and that was because of colonial policies or 'unequal treaties' rather than the decisions of sovereign rulers.

The pre-1914 period was also a time in which erroneous conclusions were drawn about the implications of economic interdependence. Just as Thomas Friedman has recently stated that 'no two countries that both had McDonald's had fought a war against each other since each got its McDonald's, so it was argued before 1914 that the 'elaborate interdependence, not only in the economic sense, but in every sense' among the powers of that era guaranteed 'the good behaviour of one state to another'. World War I soon shattered these illusions.

In the years after World War I, governments around the world consciously and deliberately pulled up their drawbridges. They raised tariffs, most famously America's Smoot-Hawley Tariff Act of 1930, imposed restrictions on the movement of capital, and regulated both the temporary and permanent movement of people through the introduction of passports and numerical limits on immigration. The consequences, both for the world economy and for Australia, were disastrous.

Not inevitable

Globalisation eventually resumed following World War II, but it was more limited than the pre-1914 phase. Governments of the world's most developed countries embarked on a coordinated programme - through the General Agreement on Tariffs and Trade (now the World Trade Organisation) - of lowering barriers to trade in manufactured goods.

Australia decided not to participate in the successive rounds of trade liberalisation during the 1950s and 1960s. Hence, it provides an interesting insight into the consequences of opting out of globalisation. We did not participate largely because these 'trade rounds' did not include agricultural goods. What happened during that period? The share of exports in Australia's GDP rose by only two percentage points between 1950 and 1973, less than half that for the world as a whole. By the end of that period it was no higher than it was in 1929.

Many Australians look back on this period as a 'golden age'. Yet it was during this so-called 'golden age' that our long slide down the rankings of national living standards occurred. The Australian economy actually grew more slowly than that of the rest of the developed world. Our productivity growth performance during the 1950s and 1960s was below that of almost every other developed country except the United States.

Others also chose not to participate in the postwar global economy. The countries of Latin America, and most of the post-colonial countries of Africa and Asia, pursued high levels of self-sufficiency, using the full range of trade barriers, nationalised industries, bureaucratic planning and subsidies to do so.

A small number of Asian countries did not. Their contrasting experiences provide another salutary lesson. In 1960, South Korea's per capita GDP was the same as Algeria's, and its third largest export was wigs. Forty years later, even after the Asian crisis, it is the world's 13th largest economy. This growth, and that of the other so-called 'newly industrialising Asian economies', was led by exports.

How well did Latin America's decision to shut out the rest of the world serve its citizens? They succeeded in achieving a high level of self-sufficiency-Latin America's imports fell from nearly 10% of GDP in 1929 to 6% by 1950 and to just 4% by 1973. But the living standards of Latin America's people fell further and further behind those countries with whom they had been roughly comparable at the end of World War II. The experience of Africa has been even worse. It is precisely because the governments of so many countries have observed for themselves the consequences of opting out versus choosing to be part of globalisation that the process has indeed become global over the past 20 or so years. Many facets of what we call globalisation today would have been impossible if it had not been for the decisions of so many governments (including Australia's) to allow, for instance, their citizens to buy goods made in other countries or to obtain the foreign currency necessary to travel abroad.

Globalisation and its critics

If integration in the global economy did not benefit nations, why would countries resort to imposing economic sanctions-that is, externally imposed restrictions on trade and investment-on 'rogue' or pariah states? Clearly, globalisation brings significant economic benefits to a large number of people.

The past two decades, for instance, have been the first in the last two centuries in which global inequality declined rather than rose. Globalisation has clearly benefited the overwhelming majority of the world's poor. A recent study of the experience of 126 countries over 40 years by two researchers at the World Bank shows that openness to foreign trade benefits the bottom one-fifth of the population as much as it does the population as a whole.

Anti-globalisation protestors demonstrating on behalf of the world's poor outside Seattle or the World Economic Forum in Melbourne last year would have been better off demanding that the United States, the European Union and Japan tear down their trade walls against the exports of the developing world, in particular agricultural commodities and textiles. Removal of those trade barriers would do far more to lift people out of poverty in the Third World than the immediate cancellation of all outstanding Third World debt. If developing countries were permitted to export agricultural products and textiles to rich countries, perhaps adults could earn higher incomes, and their children could go to school. Then, in a generation or so those countries would decide-as indeed Western countries did in the 19th century, when per capita GDPs were not that much higher than those of some Third World countries are today-that child labour was no longer acceptable.

Those who oppose globalisation in the name of 'core labour standards' are simply furthering the interests of rich country protectionists. Where in Australia, for example, does one find the most egregious abuses of 'core labour standards'-that is, poorly educated workers enduring long hours in poor conditions performing repetitive tasks for low pay? In the textiles, clothing and footwear industries, the most highly protected industries of all. So why would increasing tariffs further improve 'core labour standards', either here or in developing countries?

Opponents of globalisation also complain that multinational companies pay their workers in developing countries less than their employees in the industrialised world. But they fail to add that their productivity is a lot less, a point which simple comparisons of hourly wages overlook. Moreover, OECD statistics show that foreign firms pay their employees higher wages than domestic firms; that employment in foreign-owned firms has risen faster than employment in domestically-owned firms; that foreign-owned firms tend to export more than domestic ones (other than in the US); and that, in many cases, foreign-owned firms spend more on R&D than domestically-owned ones.

Finally, opponents of globalisation express concern about the erosion of 'national sovereignty'. They claim that the growing 'power' of financial markets has deprived governments of their ability to decide how big their spending programmes should be and how they should be financed. Yet if globalisation were such a threat to the taxing powers of Australian governments, how could it be that in the financial year 1999-2000, the Commonwealth Government's tax take was, at 26.1% of GDP, the second-highest ever recorded? Of course, other factors are involved. But the point is that globalisation has not prevented governments from pursuing policies appropriate to their circumstances.

What financial markets have done is to make more obvious, more quickly, the costs and consequences of irresponsible economic policies-running deficits under inappropriate circumstances, for example. Since it is often to the short-term advantage of politicians to pursue irresponsible economic policies, it is not surprising that many of them chafe at the heightened discipline and scrutiny imposed by financial markets. But future generations have cause to be grateful.

Moreover, when it comes to issues other than trade and investment-human rights (including, in the Australian context, the rights of Indigenous people, and gays and lesbians), the environment, whaling, and 'core labour standards'-the same people are usually eager proponents of the idea that the 'sovereign prerogatives' of governments should be over-ridden.

Winners and losers

The recent unease and angst over globalisation can in part be attributed to one of the most profound consequences of contemporary globalisation-increased competition. Not only do businesses face more intense competition than ever before, but governments also find themselves in a form of competition with other governments to attract or retain investment and jobs within their jurisdictions. And workers increasingly see themselves as being in competition, not just with the workers at the rival firm on the other side of town, but with workers in other countries.

Competition is a positive force for economic and social progress, but it is almost by definition disruptive and unsettling. Because individuals are not equal in their endowments, they differ in their capacity to cope with competition. For this reason, the outcomes of competition may often seem 'unfair'. Thus, Alan Greenspan was probably right when he said that

"It is the degree of unbridled fierce competition within and among our economies today-not free trade or globalisation as such-that is the source of the unease that has manifested itself, and was on display in Seattle."

Not even the most one-eyed enthusiasts of globalisation would argue that the process is costless and without losers. Two of them, John Micklethwait and Adrian Wooldridge, US correspondents for The Economist and authors of the stridently pro-globalisation book, A Future Perfect, concede that globalisation "does indeed extract costs, occasionally terrible ones" and that "globalization [sic] can often be just downright unfair or carelessly vicious". Governments, businesses and multilateral organisations need to respond to these concerns. For instance, strong and flexible 'social safety nets' will be needed, more resources will need to be allocated to education, and the decline in R&D will have to be reversed if we are to prosper in this new era.

Conclusion

Australia is one of the countries that stands to benefit most from globalisation. But history clearly shows that governments can put the brakes on globalisation if they think it is in their political interests to do so. Regrettably, history is also littered with too many examples of governments taking political decisions that make citizens worse off. at