Exposing myths of globalisation

Globalisation brings benefits, though it has costs. Trade and structural adjustment help to maximise the first, and reduce the second.

In 2003 the Harley-Davidson motor company marked its 100th anniversary by announcing record revenues and earnings for an 18th consecutive year. It had a market share of heavyweight motorcycles in North America of 48%, with more than a fifth of its sales being exports. Yet between 1973 and 1980, Harley-Davidson’s market share in North America had plunged to 25% for heavyweight motorcycles! Its turnaround can be put down to many things, including trade arrangements, but reform and restructuring, introducing improved technology and new production methods, all played a key role.

Harley-Davidson is, of course, from the US. But outside the OECD, there are other successful cases. A much quoted example is India’s information technology industry. Indian productivity lags behind high-income OECD countries in manufacturing, but in software and telecommunications services, that gap narrows. Thanks to these dynamic sectors and the regulatory reforms that enabled their expansion, in the 1990s India recorded the highest growth rate of services exports among the world’s top 15 exporters.

There are many more stories like these that put globalisation in a clear light. And for those of us who believe strongly in the benefits of free trade, they help challenge some widespread misperceptions. First, globalisation does not involve an accelerating shift of economic activity out of manufacturing and agriculture into services. In fact, over the past two decades, the transfer of employment into services has slowed down. This does not mean that the full potential of global services has been realised, but the pace of structural change between agriculture, manufacturing and services in the OECD economies has eased. To the extent that employment shifts are occurring, these are now taking place more between different parts of the service economy.

Second, the movement of white-collar jobs offshore is, in the overall scale of things, very modest. True, the OECD has identified industries that in old economic jargon are “footloose”, in that they could operate just about anywhere, but in reality there are limits to this. The much talked of transfer of some 55,000 service jobs out of the US every quarter needs to be seen in the context of the over seven million jobs which are lost (and created) each quarter as part of the normal functioning of the US labour market. Other OECD countries such as France, Germany and Italy are experiencing even more moderate movement of service jobs abroad.

And third, among developing countries, it is not just a handful of the largest, notably China, India and Brazil, who stand to gain from the process of trade liberalisation. For all but a very small number of countries, mostly in sub-Saharan Africa, the gains from multilateral freeing of trade will more than offset the losses that may arise because of erosion of preferences which many developing countries are granted. Dealing with globalisation has two aspects to it. One, countries can choose to ignore it, but it will not go away. Or two, by being involved, countries can seek to shape its future and direction.

Concrete examples of countries that have achieved this are not as thin on the ground as some sceptics suggest. India is not the only example, and our studies have case reports on sectors ranging from farming and fisheries through shipbuilding and steel to IT and healthcare. And beyond OECD countries, we cover as far-flung places as Chile and Lesotho.

Take, for instance, the South African car industry. This might not be a global force, but it has nonetheless emerged from several years of reform that did away with local content requirements and import substitution to become a competitive and robust manufacturer of components and vehicles. The key to the adjustment was, in sum, freeing up access to the wider market. We have documented plenty of examples like this from OECD countries too, such as Australia’s shipbuilding industry or textiles in the Slovak Republic (see references).

True, in sub-Saharan Africa there are deep-seated challenges, reflecting an underlying economic vulnerability. Yet there are positive stories. The recent success of Kenya’s cut-flower industry with serious investment, sometimes against the odds, is a good example.

Trade in services is just as much a key element in successful adjustment, too, as witness India or indeed Ireland. Ongoing OECD analysis finds that when account is taken of restrictions on services inputs into manufacturing–when firms are not able, for example, to access the best-value financial or engineering service–the “protection” that they receive actually turns negative. Services barriers mean that effectively they are being taxed, not protected.

But trade cannot do it all. It is a question of market readiness, for people, products, industries and countries. Even a top athlete cannot win a race with their hands tied behind their back. If there are rigidities in the domestic economy, opening up trade may actually make things worse. This means that trade liberalisation needs to be accompanied by genuine domestic reforms. This means more flexible labour markets, efficient and not overburdensome regulation, and economic policies that promote stability and growth, while respecting social and environmental needs. In other words, open trade can strengthen those economies that allow labour and capital to move from declining to expanding areas of activity.

And there will be declining areas of activity. Some firms will take the knocks and recast themselves as new operations. And many people who lose their jobs will, in less rigid environments, find new ones quickly enough, provided they have the right training and operate in a market where mobility is not an exception. But globalisation brings losers as well as these winners–for both people and countries. The pursuit of efficiency needs to be matched by considerations of equity. This is where governments have a vital role to play. For individual workers this will mean, in particular, the pursuit of active labour market policies that seek to match assistance–for example in job-search or training–to the actual needs of the people concerned. Building confidence and cohesion, not fear or isolation, is vital. As for countries that initially lose–the poorest and most vulnerable–and that are not yet able to benefit fully from the gains from trade, global and local action is needed to build up their export capacity, to strengthen their institutions and governance, and to improve their implementation of internationally-agreed core labour standards. But action must also require them to reduce their own, often high, barriers to trade.

This destroys another misconception of globalisation. As Professor Jagdish Bhagwati and others have documented, trade barriers between developing countries are on average higher than those between developing countries and the markets of the OECD. Allowing the poorest countries to stand apart from the process of market opening is not doing them a favour. They too, with help, stand to gain from the flows of trade and investment that are at the heart of globalisation. That is not to condone OECD trade barriers and distortions; these must be reduced as far as politically and practically possible in all markets, though particularly those that are critical for poor countries, like food and labour-intensive manufactures. To echo Professor Bhagwati, capacity building is all very well, but industries must be allowed to develop traction, which can only come from being out in the marketplace. That is what trade adjustment means. Globalisation brings costs, but the costs of protection are far, far higher.

References

OECD (2005), Trade and Structural Adjustment, forthcoming. The full study will be published in late May 2005. For further information on how to obtain a copy, including individual case studies, contact observer@oecd.org or visit www.oecd.org/ech.

Heydon, Ken (2003), “After Cancún: The dangers of second best” in OECD Observer No 240/241, December 2003, disponible en ligne.

©OECD Observer No 249, May 2005




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