Why Globalisation Isn’t Perfect

Globalisation is the extent to which economic activity is able to transcend geography. In ancient times trade was limited to a neighbouring villages, then, with the invention of the wheel and the state, trade was able to happen across continents. However this was not yet globalisation in the truest sense; cross border economic activity was limited to a few traders in specific goods, capital, individuals, ideas and firms remained largely constrained to their geographical origin. Perhaps the age of seafaring was the beginning of globalisation; ships were able to transport goods anywhere in the world, the goods one was able to purchase was solely limited by their financial, rather than geographical, position. This criteria, to me, is of less significance, international economic links were very different to local economic links at the time. In the post feudal age, individuals were, on the whole, free to choose their occupation or start a business – but only locally. The ability to migrate for work was limited, industries – though able to sell goods abroad – would struggle to exist in any international form (excluding those focused solely on international trade, such as the British or Dutch East Indian Trading Companies).

Companies operating on an international scale first arose in the 19th century, predominantly in commodity markets. Higher incomes, raising demand for a greater range of goods, combined with new technology in both the extraction and transport of these goods, allowed companies to expand into new markets. Large US or Western European firms invested in Latin America, Asia, Africa and the Middle-East (60% of world investment) in search for minerals, petroleum and foodstuffs – rarely venturing into producing finished goods. The limited range of goods and production processes meant mergers were often economically viable, resulting in large monopolistic firms.

After the war, faster transport and communication, better storage of goods, and the widening range of goods to be sold – allowing new entry points into markets – led to rapid growth in the number and size of transnational corporations (TNCs). By 1971 there were over 100 firms with assets greater than $1billion, with TNCs controlling about 70-80% of economic activity in the capitalist world.

This growth has continued, 51 out of the world’s largest 100 economies are corporations, with the just top 500 making up 70% of world economic activity. It is not only these corporations that connect people. The internet allows information to spread across borders almost instantaneously, airplanes allow people to migrate for work, freight ships allow goods to be produced wherever it is cheapest, rather than closest. These developments are almost universally considered to be beneficial, but it is not certain that they are.

The freedom of movement for goods, capital, individuals, ideas and firms, greatly increases economic efficiency – this has been known since the time of David Ricardo. If a nation has a comparative advantage in an industry, provided the cost of trading is relatively low, it will be cheaper to produce solely in that industry and trade to acquire the goods it needs. Comparative advantages come in many firms; Britain is able to provide financial services cheaper than any other nation due to its central time zone, world language and pre-existing trading hub; Saudi Arabia has vast reserves of cheap oil; France has the climate and arable farmland required in the production of wine. By allowing those nations/regions most suited to the production of a desired good, rather than the country of production, to produce the good, prices are lower for everyone.

There are several secondary benefits alongside this; access to a greater range of goods, a greater pace of scientific development due to pooled research, and, politically, rather than economic, reduced likelihood of conflict between trading partners.

However, while these benefits certainly exist, there are many costs that are ignored by dry economic theory; the rest of this post will lay out these costs, primarily regarding competition and regulation.

If labour, capital and firms were equally mobile the opening of borders would have a balanced, and almost wholly positive economic effect – as described above. As wages rise in one area and unemployment in another people would move, shifting the respective supply and demand of labour, balancing the two areas. Likewise, if investors see potential for high returns in one location they will move capital until the relative returns are equal – the opportunity for abnormal profits is gone. However, globalisation in practice has not simply been the stretching of this principle across countries.

If individuals were able to move with as much ease as firms, there would be no opportunity to exploit low wage work in the developing world – they would simply move to where there are higher wages. We can develop this model further; suppose some nations have more generous welfare states than others, but also high tax rates. With these factors taking different levels of importance for firms and workers respectively, imbalances in their respective supplies will develop. Some countries will experience unemployment, others labour shortages and upward wage pressures. Facing these macroeconomic challenges, governments will adjust their policy programmes in order to achieve stable growth; redressing of the balance between taxation and spending to attract either businesses or workers.

In reality, the increase in competition has been varied across different markets, while firms have been able to move to exploit under-priced labour, labour has not been able to move to exploit high wages. This is in part the fault of regulators not allowing free movement of people, and but more likely due to the practical difficulties and costs of uprooting and moving a family. The result of this is a huge wage differential between the developing and developed world, with low wage work relocating to the former.

There are further flaws with this idea of competition between governments underpinned by perfect factor mobility. The manner in which governments collect taxes and provide services also varies across countries and markets. Perhaps not wholly but to some degree, economic actors are able to ‘choose’ which government activity may affect them. Amazon is able to use roads provided by the British taxpayer to deliver goods – without making contributions to the roads. Tourists are able to attend public museums without paying the full tax burden – admittedly they do contribute to tax receipts indirectly by injecting money into the economy. These instances, while seeming minor, skew incentives for governments and individuals, disrupting the competition described above.

The final barrier to truly beneficial globalisation is the current variance in the prosperity of nations. Developing states struggle to compete in the quality of public services, application of the rule of law, and infrastructure. This makes it more difficult for them to attract inward investment and wealthier individuals willing to pay tax, preventing them from improving their situation. Rather than a force for convergence between the outcomes of nations, globalisation might lead to divergence. A large proportion of direct foreign investment into the developing world is funding resource extraction, when this begins to dry up, or commodity prices are low – as has been seen with the current emerging markets crisis – the outflow of capital will be a hit to the developing world.

The manner in which the expansion of markets is currently undertaken is far from the ideal globalisation textbooks present. If governments are to continue with the opening up of markets there will be winners and there will be losers. It will take international cooperation across a range of issues, such as tax laws and labour rights, not just the removal of trade tariffs, to ensure that the winners aren’t just corporations in the developed world.

Contributed by Michael Tallent, editor-in-chief

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