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Globalisation: gains and losses

By Saul Eslake - posted Friday, 29 August 2003


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.

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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.

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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.

Contrary to what is often alleged, globalisation has not entailed a 'race to the bottom' in terms of labour or environmental standards. Seventy-five per cent of all foreign direct investment goes to rich countries, not to poor ones with lax labour or environmental regulation.

As the British Trades Union Congress noted in a report published last year, "if multinationals were really looking for the cheapest locations for production they would all be rushing to develop facilities in sub-Saharan Africa where wages are the lowest in the world. The fact that none of these phenomena can be observed shows that globalisation is having none of these effects". In fact the wages multinationals pay their workers in low-income countries are typically double what those paid by locally-owned firms in those countries.

Nor has globalisation resulted in multi- nationals increasing their power at the expense of sovereign governments. In fact the proportion of global economic activity accounted for by the world's largest transnational corporations has actually declined slightly over the past decade. Meanwhile the share of national incomes collected by governments in rich countries, including from corporate profits, has continued to rise, reaching a record level at the end of the past decade. Countries such as Sweden have been able to maintain their generous social welfare systems financed by above-average levels of taxation despite being more dependent on international trade than most Western economies.

None of this is to say that globalisation has not imposed costs as well has brought benefits, or even that those benefits have been equally distributed.

Many countries, often with the encouragement of the IMF or the US Treasury, opened up their financial systems to international capital flows without first ensuring that their own institutions were adequately capitalised, supervised or weaned off State-directed lending. The results, across East Asia, Latin America and Russia during the late 1990s was successive tidal waves of capital inflows and outflows, leaving economic devastation in their wake whilst in many cases lenders or investors from rich countries were bailed out at taxpayers' expense.

Similarly, the past decade has seen many botched privatizations in developing countries, resulting in the transfer of publicly-owned assets to private or foreign interests at prices which did not reflect their value to the countries concerned, and often resulting in sharp price increases or deteriorations in levels of service. Although privatization is neither a pre-requisite nor an inevitable consequence of globalisation, the fact that they have often gone together and that privatization has been promoted by institutions such as the World Bank has heightened hostility to globalisation in many countries, and undermined confidence in government processes.

Larger and faster movements of people and goods may have contributed to the faster spread of human and animal diseases, as perhaps suggested by the recent SARS epidemic.

Globalisation has often imposed hardship on businesses (and their employees) who have lost out to foreign competition. All too often governments have failed to provide adequate compensation, income support, adjustment assistance or retraining opportunities for those adversely affected in this way.

Perhaps most of all, globalisation as it has proceeded thus far has been in many respects unfair to the majority of developing countries. Rich country governments have, for the most part, pursued trade and investment liberalization in areas where their own producers enjoy a comparative advantage, whilst resisting liberalization in areas where they do not or where liberalization would require them to confront politically influential interests in their own electorates.

The stand-out area in this regard is, of course, agriculture, where hypocrisy reigns supreme. Agriculture has been the poor relation when it comes to international efforts to advance the economic benefits from more open and less distorted international markets. Agriculture was not brought into the scope of the General Agreement on Tariffs and Trade, the predecessor of the WTO, until the Uruguay Round which came into effect in 1994. That round, for the first time, saw developed countries commit to reductions in agricultural export subsidies, cuts (albeit with many exemptions) in domestic price supports, the conversion of non-tariff barriers (such as quotas) into tariffs, and reductions in the level of tariffs on agricultural imports.

Implementation of these commitments has seen the cost of producer support (at the expense of taxpayers and consumers) in rich countries fall from 38 per cent of total farm receipts in 1986-88 (the base year for the Uruguay Round) to 31 per cent in 2001.

Nonetheless, support for agriculture in rich countries - in the form of production and export subsidies, import restrictions and artificially high prices - still costs taxpayers and consumers in those countries US$311bn in 2001. Tariffs on rich country imports of agricultural products from developing countries average 22 per cent, compared with 3 per cent on imports of manufactured goods. The average EU cow gets US$2 a day in subsidies - more than a quarter of the world's population has to live on.

Developing countries are not themselves immune from hypocrisy on this score: their tariffs on imports of agricultural goods from othe r developing countries average 25 per cent, more than double the average tariff rate they impose on imports of manufactured goods.

By contrast, agricultural policies in the US, the EU and smaller European economies, Japan and Korea provide perverse economic signals and produce perverse outcomes. In particular, and contrary to what many farmers in those countries appear to believe, they do little to maintain the viability of small family-owned farms. Rather, benefits accrue disproportionately to large producers.

The same occurs in Europe. High land prices encourage intensive farming techniques and practices which damage the environment (for example through excessive fertilizer and pesticide use) and human health (through the sort of feeding practices which led to the outbreak of BSE in Europe).

It is highly significant, in my view, that the response of developing countries to these policies which harm them so much is to demand more globalisation, not less. They want fairer globalisation, to be sure: but they do not endorse the demands of the protestors from rich countries who seek to prevent globalisation from being discussed at all, except on their terms, that it be rolled back.

Removal of all post-Uruguay Round barriers to trade in agricultural products would produce welfare gains for the world as a whole of around US$165 billion - nearly two thirds of the total gains to be had from eliminating the remaining barriers to all forms of merchandise trade.

Where and when it has been permitted, globalisation has, on balance, been a "good thing". It has usually resulted in faster economic growth, improving living standards and a reduction in poverty.

But those outcomes are not guaranteed, and they cannot be obtained by trade and investment liberalization alone, in isolation from other reforms, robust domestic institutions and mechanisms to ensure that costs and benefits are widely distributed rather than narrowly concentrated. Trade and investment liberalization are not a substitute for aid; nor do they imply a diminished role for governments. Rich and poor country governments alike need to do more to enhance the potential gains from globalisation, spread them more fairly and reduce its risks.

Globalisation in general, and trade liberalization in particular, are not ends in themselves. globalisation is a "good thing" in principle because it is consistent with human aspirations for greater freedom and for improvements in their well-being and that of their fellow citizens and descendants.

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Article edited by Jenny Ostini.
If you'd like to be a volunteer editor too, click here.

This is an edited version of an address to the 14th International Farm Management Congress in Perth on 13 August 2003. Click here to download the full text (PDF, 36kb).



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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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