Globalisation: gains and losses

Globalisation has become one of the catch-cries of our time. A Google search throws up 1.7 million on-line references to it in 0.15 seconds. It's something which most of us have heard of, and on which many have strong opinions. And it's something which means different things to different people, which greatly complicates the task of determining whether it is a "good" or a "bad" thing.

To an economist such as Joseph Stiglitz, who partly as a result of his experiences as chief economist of the World Bank has become a stern critic of various aspects of globalisation, it is "the closer integration of the countries and peoples of the world … brought about by the enormous reduction of costs of transportation and communication and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge and (to a lesser extent) people across international borders".

To Thomas Friedman, the foreign correspondent of The New York Times, globalisation is simply "the spread of free market capitalism to virtually every country in the world". To others who take a different view of free market capitalism, of course, that is precisely why globalisation is a bad thing.

Two years ago The Economist magazine described globalisation simply as "what happens when technology allows people to pursue their own goals and they are given the liberty to do so". That statement neatly captures three of the key factors which are shaping the experience of globalisation over the past two decades or so.

First, improvements in transport, communications and information technologies are having the effect of increasing the range of goods (and, increasingly, services) which can be transmitted from one place to another; increasing the distance over which such transmissions can occur; increasing the speed with which they occur; and reducing the cost of so doing.

Second, individual and societal tastes and preferences are evolving in the direction of favouring greater choice and diversity in the range and origin of the goods and services which we buy and of the experiences which we seek. That evolution is of course facilitated by improvements in education and in communications technologies.

Third, governments have consciously chosen to reduce barriers and impediments which they have erected to cross-border movements of goods, services and capital. Those choices are usually the result of first hand experience of the costs of maintaining such barriers; or of observation of the benefits accruing to others who have removed their own.

There are exceptions, of course. Some countries (such as North Korea and Burma) have chosen to maintain nearly all of their artificial barriers to the movement of goods, services and capital across their borders. Some (such as China) continue to maintain significant controls on cross-border capital flows or, as in Malaysia's case, to re- introduce controls. Most countries maintain tight controls over cross-border movements of labour.

There's a fourth factor which has been important in the modern experience of globalisation - the emergence of corporate strategies which seek profit growth through cost reduction, including the out-sourcing of materials, components and service supply functions, and economies of scale, rather than through price increases. To some extent, this is a reflection of the success of governments and central banks in restoring overall price stability after the "great inflation" of the 1970s and 1980s.

While the word "globalisation" may be new, the concept itself is not. globalisation is the logical extension of the tendency towards increased specialization and trade which has been going on more or less continually since humans first appeared on the surface of the earth.

World Bank evidence clearly shows that globalisation has been a positive force for economic growth. Developing countries which have increased their trade shares of GDP since 1980 have grown almost four times as those which have not. The growth rate of "open" economies has been, on average, 2 percentage points higher than that of 'closed' economies.

Globalisation has also contributed to a reduction in the incidence of poverty. The ratio of the incomes (pdf, 155kb) of the richest 20 per cent of countries to the poorest 20 per cent has declined from 18:1 to 16:1 over the past decade. Though the absolute level of global poverty remains deeply distressing, especially in Africa, these developments represent a decisive break with the trend of the previous century and a half towards ever greater levels of inequality.