“I’m deeply concerned about Globalisation. It has been the most powerful progressive tool in the history of humanity, yet one of the most destructive force humanity has ever lived” – Ian Goldin, The Butterfly Defect (2014).
Introduction.
Not many international developments have received as much attention in the contemporary economic sphere as the concept of “Globalisation”. In the past year, this concept has become a debated buzzword that has generated a great deal of heat. It does not just pose a polemic around its desirability and its future effects, but its theoretical foundations are also under question. The world appears to be in the middle of a major imperfectly understood economic change (Panic, 2003).
Those who speak about globalisation may not have the same definition in mind, but they invariably agree about the basis: globalisation is the expansion of economic activities across political boundaries of nations states (Nayyar 1997). It is about increasing integration, openness and interdependence between countries in the world economy (Hirst and Thomson 1996). Put simply, globalisation is about walls coming down in an increasingly interconnected world. It has been said to bring huge benefits: as barriers have been lowered many economies have seen an extraordinary improvement in living standards and incomes; it has also been heavily criticised, as it widens levels of inequality and favours the ‘stronger players’.
This paper aims to examine further the concept of globalisation, walk through the empirical process of the emergence of the contemporary global economic order, analyse the core economic aspects of globalisation, establish who are the players, and critically examine the benefits and drawbacks of this unstoppable phenomenon.
The emergence of the contemporary world economic order: a brief history.
According to Baldwin and Martin (1999), today’s globalisation depth and breath are unprecedented, but it is not a new phenomenon. Since the modern international trading system developed in the 19th century, the world has seen two major waves or globalisation. The first was that of the belle époque (1870 – 1914), the second begun towards the end of Second World War. This essay will mainly focus on the characteristics and impact of the second wave of globalisation.
The first blow to the second wave of economic globalisation was presented by the onset of World War I. The period of instability and crises that followed the war ultimately lead to the Great Depression in 1930, followed by World War II. Towards the end of World War II, the Breton Woods system emerged, which meant imposed government capital controls to regain monetary policy autonomy, system of fixed exchange rates, limited capital mobility and autonomous monetary policies (Stiglitz and Ocampo 2008). Three international economic organisations that were to set the rules of the global economy emerged from the Bretton Woods period: the International Monetary Fund, created to administer the international monetary system; the World Bank, initially designed to provide loans for Europe’s postwar reconstruction; and the and the GATT, which later became the WTO, as a global trade organisation that enforced multilateral traded agreements (Krueger, 1999).
As Mundell (2000) argues, the 1970s witnessed the beginning of a new era in the international financial system. Corporate interests decided that the Keynesian regulations approach no longer worked to their advantage – they were rather seen as obstacles to profit-making. As a result of the oil shock and the breakup of the Bretton Woods system, a new wave of globalisation began. (Stiglitz, and Ocampo 2008)
The core economic aspects of globalisation.
According to Nayyar (1997), three are the main economic dimensions in the phenomenon of international openness: international trade, international investment and international finance. However, of course, the concept of openness also extends to flows of labour, services, technology and information across boundaries.
The last few decades have witnessed profound changes in the volume, direction, and nature of international trade. More countries than ever before have been persuaded to push away protective barriers and further integrate into the world economy (Milner, H. 1999). After 1950s, the volume of world foreign trade expanded at about 9 percent per annum. (Hirst and Thomson, B. 2015) and world exports increased from $883bn in 1975 to $6638bn in 2000 (Nayyar, 2006). As shown in graphic 1, since the 60s there has been a general increase in the world’s trade openness, measured as the sum of exports and imports of goods and services as a share of the total GDP (Worldbank 2016).
North-South trade economic integration has been perceived to increase rapidly from the 1970s onwards and has reached dramatic levels by the early 1990s. For example, between 1970 and 1992, in the case of manufactured goods, OECD imports from the new industrialised countries increased from a 4.6 per cent share of OECD manufactured imports to 15.8 per cent (Hirst and Thompson 1996). Over the same period, manufactured exports to the NICs as a percentage of total manufactured exports increased from 9.6 percent to 15.2 per cent. In the case of the US, developing countries as a whole accounted for 29 per cent of US manufactured goods imports; this ratio grew to 36.4 per cent by 1990 (Sachs and Shatz 1994).
Although it appears that the world has experienced openness as a whole, the framework for trade seems rather asymmetrical. Multilateral agreements for trade coincide closely with the interest of TNCs, which are world economic leaders in capital exports, technology innovation and service providing. According to Nayyar (1997), ‘the pressure from the industrialised countries to introduce ‘social clause’ and a ‘environmental clause’ on the agenda of world trading is simply a pretext for circumventing the rules of trade liberalisation wherever necessary’.
Although trade was undoubtedly the dominant factor driving the world’s economy in the period of 1945-73, it has been dwarfed by the sudden increase in foreign direct investment and international finance flows from the early 80s. The fraction of countries with a liberalised financial system has risen a threefold over the past 50 years (Kose and Ozturk, 2014) . Graphic 2. shows the growth in the world’s net capital flows in billios of USD (IMF, 2003).
Between 1985 and 1995, FDI flows expanded at an average rate of 18.4 per cent compared with an annual rate of 11 per cent for global trade, and 8.5 per cent for world GDP (Hirst and Thomson 2002). The stock of direct foreign investment in the world economy increased from $502 billion in 1980 to $1948 billion in 1992 (Nayyar 1997). This sudden increase in FDI has been particularly noticeable in the industrial countries: 3.5 percent of their GDP in 2000, against about 10 percent for the developed countries (World Bank, 2002).
About 60% of the flows of FDI over the period of 1991-6 were between just the members of the Triad bloc, which also accounted for 75% of the total accumulated stock of FDI in 1995. Approximately, between 54% and 70% of the world’s populations was in receipt of only 16 % of global FDI flows.
Financial flows, constituted mostly by short-term capital movements sensitive to exchange rates and interest rates in search of capital gains, have also seen an incredible growth. As the world economy has become more tightly integrated, new technology and access to new markets has lead to cross-border capital flows to unprecedented heights; financial institutions have expanded their activities geographically, acting as intermediaries to channel funds from lenders to borrowers across borders (McKinsey Global Institute, 2013). Total global financial assets have risen from $250 billion in 1970 to almost $70 trillion in 2010. Financial markets have become deeper and more sophisticated as they integrate with world markets, increasing the financial alternatives for borrowers and investors..
Although it possesses some benefits, it also poses some serious challenges such as the increase in financial volatility and systemic risks. As it can be seen in Fig. 2, foreign direct investment and financial flows have not only raised sharply, but their nature is also is more short-term, more speculative and less stable. While the surge of the capital flows has been associated with growth, many developing countries have experienced significant financial crises, which have taken a serious toll in terms of macroeconomic and social costs (Prasad, 2003).
The most striking asymmetry, perhaps, is when it comes to comparing trade and financial flows with technological and labour flows (Nayyar 1997). The physical people mobility of labour has been substituted by trade flows and investment flows, and barriers to immigration are higher now than they were in the 19th century. That has lead to unfairness in how the rules are written, as the developing countries have given access to their markets without a corresponding provision for labor mobility. Industrialised countries instead have the chance to export capital which employed scarce labor abroad to provide the intended gods. As Hirst and Thompson (1999) emphasise, ‘a world market for labour does not exist in the same way that it does for goods and services’.
The players.
There are four main agents in economic globalisation: governments, borrowers, investors, and international financial institutions (World Bank, 2014).
Governments, although they are the main agents of globalisation as they are responsible for the liberalisation of restrictions in trade and capital flows, they are not key players any longer. Arguably, governments have been replaced by individuals and transnational corporations, which dominate investment, production and trade in the world economy; and international banks or financial intermediaries, which control the world finance. Nation autonomy is being eroded by international capital and international finance capital everywhere, both in the developing and industrialised world (Nayyar 1997).
Borrowers and investors include households and firms. Of these, TNCs are among the world’s biggest economic forces. The Economist, in its ‘Survey of Multinationals’ (1993) reported that ‘the 300 largest TNCs own or control at least one-quarter of the entire world’s productive assets, worth about $5 trillion’. Their ability to to disperse manufacturing processes into many phases carried out in many different locations around the world reflects the changing nature of global production. TNCs are perceived by some people as a positive force which contributes to the economic growth, employment, lower prices and the accessibility to the wide spectrum of products. However, as a result of their size, they tend to dominate in industries where output and markets are oligopolistic, or concentrated in the hands of a relatively small number of firms. As mobility is easy, TNCs tend to shift their production to less-industrialised countries, where the appeal of fewer costs and regulations usually gives little promise to workers of decent working conditions, sufficient pay, or job security (Greer and Singh).
International financial institutions and global trade groups are those said to set the rules of the global economy. They provide financial support (via grants and loans) for economic and social development activities in developing countries with the aim to eliminate poverty and help developing countries transition into market economies. But according to Nayyar (1997), ‘the conditionality is meant in principle to ensure repayment, but in practice it imposes conditions or invokes rules to serve the interests of international banks which lend to the same countries’. These institutions have persisted for over five decades, expanded their mandates, changed their missions, and increased their membership. They have, however, become highly contested. As Stiglitz (2002) notes, ‘Inter- national bureaucrats—the faceless symbols of the world economic order—are under attack everywhere… Virtually every major meeting of the International Monetary Fund, the World Bank and the World Trade Organisation is now the scene of conflict and turmoil.’
Conclusion.
Globalisation is perceived positively by some: the Nobel-Prize winning economist Amartya Sen believes that it ‘has enriched the world scientifically and culturally, and benefited many people economically as well’; the UN has predicted that the forces of globalisation may eradicate poverty in this century. Others are much more skeptical. The economist Joseph Stiglitz sees globalisation as a force for perpetuating inequality in the world rather than reducing it (Stiglitz 2002).
It seems that walls between societies have gone dow, while walls within societies have gone up. As a result inequality is growing everywhere. According to the economist Ian Goldin, ‘globalisation provides extraordinary profits, for those that are there at the right place, right time, right set of skills, right attitude to be able to benefit. For those that are not, [but instead are] imprisoned in geography, localities, lack of education or mindsets, those fall further and further behind’.
The world economy is six times larger than 50 years ago and the average person is better off than it was. The average annual growth rate of world GDP per capita was about 2 percent, and it has more than doubled between 1965 and 2013 despite a major increase in population. At the same time, the rise of income per head has differed widely between countries and regions, so that income gaps have widened sharply (World Bank, 2013), as can be seen in Figure 3.
(GDP per capita)
In short, globalisation has helped to create undreamed opportunities for some, but it has also contributed to increased impoverishment, inequalities, work insecurity and weakening of institutions. The benefit of financial integration for developing countries can be large, but globalisation also poses new challenges for policymakers. For successful integration, economic fundamentals must be strong and markets need to be properly regulated and supervised, as integration increases a country’s exposure to foreign shocks. International connectiveness and interdependence are growing, helped by advances in technology and technical progress in transport and communications, which will continue to help globalise production and finance. Globalisation has stimulated innovation by intensifying competition; competition has forced the introduction of new technologies, and so on. We may say that this has lead to global growth.
At the same time, advances in technology combined with government de-regularisation and privatisation have contributed to an uneven impact of globalisation. The vertiginously increasing technology developments depend of infrastructures, institutions and policies, which leave some areas completely deserted and with the impossibility of ever catching up with those developed economies.
As Stiglitz (2002) puts it, ‘Globalisation can be a force for good and it has the potential to enrich everyone in the world, particularly the poor. But if it is the case, the way globalisation has been managed, including international trade agreements that have played such a large role in removing those barriers and the policies that have been imposed on developing countries in the process of globalisation need to be radically thought.”
In this period of globalisation, data cannot be drawn from historical precedents because globalisation at the level that we are experiencing it is unprecedented (Goldin and Mariathasan, 2014). However, historical evidence shows the need for, and feasibility of, some sort of public governance at the national and international levels that regulates economic growth and trade openness with the aim to avoid inflation and unemployment in the North; stagnation, underemployment and exploitation in the South, and inequality in the world as a whole. Policy makers should aim to facilitate integration, sustainable growth, improved access to markets and measures against inequality.
In this heavily interconnected world, lifting walls and going alone is not neither an answer nor a feasible option, but the need for a better globalisation is imperative.