The acceptable face of globalisation

Economics Department

Globalisation means many things to many people, but in essence it is actually quite a simple idea. Some of the accusations levelled against it appear to be without substance.

One of the characteristics that distinguishes us from the animal kingdom is that mankind loves to trade. No self-respecting pair of dogs would ever consider trading a spare bone against a spare piece of meat, but children barely above the age of reason have already worked out how to augment their Pokémon card collections by swapping them in the playground.

Another distinguishing characteristic of ours is that we are intelligent. That is why we trade, because we foresee that by exchanging the fruits of our own particular efforts with others, we can all be better off. Those early men who trekked hundreds of kilometres to the Hallstatt valley in modern-day Austria to exchange axe-heads and food against sacks of salt did so because it was worth it. I am not exploiting my baker when I pay him less for a loaf of bread than it would cost me to bake it myself, and he is not exploiting me when he sells it for more than it cost him to make it.

The gains from trade arise whether it takes place between individuals or companies, or within a country, or between countries. The spur of mutual advantage is the same. If political or economic barriers to trade fall, trade will rise, and living standards will rise as well, and vice versa. In the 1930s country after country tried to insulate itself from spreading economic chaos and depression by erecting tariff and financial barriers to trade and capital flows, and succeeded only in making things worse. The contrast with the period after the Second World War is startling: GATT-inspired multilateral agreements to reduce trade barriers, and an international monetary system overseen by the IMF that provided transparency and discipline were followed by over 20 years of the greatest and widest-spread increase in economic prosperity the world had ever experienced.

According to Angus Maddison (see references and Books section), world trade rose six-fold in real terms during the period 1950-73 and per capita GDP rose faster in all regions of the world than during any previous period in world history. Later on, the entry of China and some other East Asian countries into the international trade system on a large scale showed again how powerful trade is as an engine of growth. By the end of the 20 th century, the inhabitants of Hong Kong and Singapore were more prosperous on average than those of most European countries. And in China, incomes have tripled in the past 20 years. This what economists mean by globalisation: rising world trade and capital flows because of lower man-made barriers, and cheaper and faster transport and communication.

But for its opponents, globalisation seems to mean something else: rising inequality between and within nations, rising pollution, the perceived ability of multinational companies to impose their will throughout the world, reckless exploitation of irreplaceable natural resources, and the sacrifice of cultural and other values to the diktats of the marketplace. Frankly, these phenomena, however unpleasant and real they are, have very little to do with globalisation in the economists’ sense. Indeed, some of them are caused by insufficient globalisation. Hence, the remedy is not to discourage world trade, but rather to tackle these problems at source – once it is certain that they really are problems.

Let us start with inequality. There is no doubt that there is a huge difference in average incomes between the poorest and the richest countries, between the US$500 per year or so in several African countries, and the well over $20 000 per year in most OECD countries. But it is hard to argue that these differentials are the direct effect of globalisation. Apart from the handful of oil-rich countries, incomes have grown fastest in countries in East Asia that were the most enthusiastic participants in global trade. Many other developing countries maintained high tariff barriers and exchange controls, and some of them have been racked by civil strife and misgovernment. Globalisation (or rather, the expansion of trade and investment) largely passed them by as a result, and they have stagnated or regressed.

There has also been a rise in inequality within countries, more reliably quantified in OECD countries than elsewhere. In particular, there has been a big rise in the past 10 years or so in the proportion of the very rich, mostly because of the increase in the share of profits in national income, reversing a trend which started in the early 1970s.

There are two main considerations here. One is that it is hard to argue that globalisation as such has been a factor, as no such phenomenon was experienced in earlier years when world trade was expanding even faster. The second is that an increasing number of very rich people should not be a problem as long as there is not also an increasing number of very poor people. And of course as long as poverty is defined in relative terms (relative to average or median earnings or income), then indeed the poor will always be with us. A family classed as living on the poverty line in, say, Sweden would be counted as relatively rich in many non-OECD countries.

The environmental charge that globalisation leads to higher pollution is easy to refute. Some pollution is the inevitable by-product of growing populations and their economic activity. True, increased competition may lead to investment pressures. But legislation and technical developments have greatly reduced the grosser forms of pollution in most OECD countries, and a growing number of non-OECD countries. The fear that multinational companies would relocate their polluting activities to developing countries where environmental controls are presumed to be laxer – a race to the bottom – is less plausible today than, say, 20 or 30 years ago. Research shows that such companies follow higher environmental standards now than statutorily required (and they also usually pay higher wages than the local average). And anyway, the overwhelming bulk of multinational company investment continues to be located within OECD countries.

Moreover, multinational companies have to obey the same rules and laws as their domestic counterparts, and often more stringent ones. They bring highly-appreciated investment and technology to areas of the world that need it, but their importance should not be exaggerated. Some of them are big by any standard (the major oil and auto companies), but collectively they account for a tiny proportion of the world’s investment and assets.

Exploitation of natural resources, replaceable and irreplaceable, has been going on throughout human history. The forests that once covered Europe began to be cut down already in the Iron Age, and the mining industry has existed since records began. Using, and using up, of natural resources is a fact of life. It is happening at a higher rate now because there are more people in the world, and they are – almost all of them – better off than a few decades ago. To the extent that globalisation makes people better off, use of natural resources will increase. What we must aim for is to make sure that that increase does not occur to the detriment of wealth itself; after all, natural resources are at the source of growth and a derelict planet would be no good to anyone. This decoupling between growth and environmental degradation lies at the heart of what is fashionably called sustainable development. But halting exploitation altogether would be unworkable, if not fanciful. Is the solution to reduce the number of people in the world? To stop people becoming better off? Or is it to find alternative products and processes?

Markets are seen by some as inhuman, destructive, ruthless and remorseless. But what are they, really? They are no more than normal people with something to sell looking for bargains to buy. They are as far removed as possible from the alternative of decisions by faceless and unaccountable bureaucrats and planners, which affect the lives of thousands without consultation or the possibility of appeal. That system has been tried, and it comprehensively failed both society and the environment. Markets by contrast respond to the desires, tastes and possibilities of everybody who uses them, provided that they do not fall under the control of a few operators, or of officialdom.

Take McDonald’s, for some reason a target of anti-globalisers everywhere – yet, there are now far more Japanese restaurants in a city like Paris than there are McDonald’s outlets. This fast food restaurant would be a problem only if by its existence nobody else was allowed to sell hamburgers, or if there were no other restaurants. But thanks to globalisation this is not the case.

Consumers now have a choice of goods and services of a variety and quality that were undreamed of half a century ago. We are certainly well beyond the Ford quip of having your car any colour as long as it is black, and when buying food we do not to accept any burger, as long as it is overdone. As for drinks, people often point the finger at global soft-beverage companies, but thanks to globalisation, countries like Chile and Argentine have also discovered that the world likes their wine.

Markets respond to social pressures as well as financial ones. Companies that show they are socially responsible in their employment and environmental policies do well (see article by Chris Boyd). Race towards the bottom, labour standards, frankenstein foods, losing democratic control to business interests: whatever grain of truth such accusations might hold, they are often used by certain NGOs simply to further their own interests, not those of others. Ironically, some of these NGOs themselves are the product of globalisation (indeed, they thrive on it), are non-accountable and can in some cases be found cosying up to business.

Fortunately, we do not live in a standardised world and globalisation reflects, even furthers, this diversity. A catch word much used in marketing today is not globalisation, but glocalisation: how global brands are adapted to suit local needs and wants. I wonder what the arguments would be against that?

*The views expressed in this article are those of the author and do not necessarily represent those of the OECD.

Reference

Maddison, A., The World Economy: a Millennial Perspective, OECD, 2001.

©OECD Observer No 228, September 2001 




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