The G Word: the Benefit Of International Economic Intercourse

Listener 17 February, 2001.

Keywords Globalisation & Trade;

The US-led world economic boom of the 1990s may be ending. The economy in 2001 is likely to be rocky in the US, stagnant in Japan, and the rest of the world could suffer with them. That will generate a loss of confidence, not only in the state of the economy, but in some of the euphoric theories that have been dredged up to justify the over-optimism. Dont panic: monetary-based economies fluctuate – always have, always will. But the long term trends – such as globalisation – will grind remorselessly on, and we still need to think about them rigorously.

Globalisation is caused by technological change altering the geography of production and finance. Usually the innovations reduce the tyranny of distance, but they can be particularly disruptive when combined with economies of scale, and businesses consolidate their global production into just a handful of locations, distributing throughout the world. As a general rule consumers (if they maintain their incomes) are beneficiaries, but initially only some producers gain. The introduction of refrigeration (and steamships and telegraphy) in the late nineteenth century benefited British consumers and New Zealand pastoral farmers, but English farmers suffered.

Technological change almost always makes some workers worse off, since it usually involves closing some plants and making some skills redundant. Understandably those who suffer try to prevent their losses by raising protection or securing a government subsidy. If they are successful, then consumers get less (or no) benefit from the new technology. But those who protest against the forces of globalisation are not just workers threatened with redundancy.

The most common concern is that nations lose their sovereignty. Unfortunately ‘sovereignty’ is a very complicated notion: economic sovereignty is different from legal sovereignty. We give up pure economic sovereignty because it benefits us. We could be an autarchy independent of everyone else in the world, but New Zealand would not be a green and pleasant land. It would not just be a matter of giving up a whole range of products we cannot make ourselves or make to an adequate quality level (would you fly in a locally made plane powered by grass?). We would have to cut ourselves off from social intercourse with the rest of the world (who would there be for the All Blacks to beat, the Black Caps to lose to?). And we would be unable to extend our consumption with the rest of the world by borrowing from them. (Whether we should is one matter. The fact is we do.)

It is a bit like marriage. An individual is (broadly) sovereign, but gives up some of that sovereignty for a marital partnership which they judged, rightly or wrongly, to make them better off. The metaphor breaks down when we note that economic marriage is rarely a partnership of equals. Tiddly little New Zealand is, more often than not, a junior player in a harem, with very little leverage over the sultan.

Sometimes the sultans come together, defining unilaterally what the marriage contract involves. That was the trouble with the Multilateral Agreement on Investment (MAI), developed by the investing countries solely in their interests. But the dissenters ignored that some sort of MAI makes sense, giving a framework by which investors in foreign countries know their rights, and have a means of enforcing them. No country has to sign. Each can retain its unrestricted economic sovereignty, but it does so international investors would be reluctant to invest in it. The objection should not to an MAI per se, but the particular one, which contained unnecessary and unfair provisions. There is so much international investment that inevitably there will be another MAI (if called by something else). At issue will be what is in it.

Although New Zealand sometimes punches above its weight in international fora, we are still in a very light weight class,. So unless we join with others (as we did in the Cairns Group on agricultural trade) we have little to contribute to international agreements and they may totally ignore our interests. Avoiding irrelevance requires a finesse which has appeared lacking in recent years. The crudity of the economics underpinning last year’s Singapore trade agreement was just embarrassing. Almost – one might say – as crude as that of those who opposed it.

I remain unclear what those who oppose globalisation really want. Objecting to ‘international capitalism’ (as the London ‘Economist’ equates with globalisation) is one thing, but what is the realistic international economic alternative? Certainly we dont have to pursue ‘trading naked’, in which we seem to be willing to give our trading partners just about anything they want in exchange for a ‘free trade agreement’ which may be of the most marginal benefit to us.

What I would hope is a sober public debate which is premised on New Zealand being a small economy in a globalised world over which we have little influence, which recognises that the exporting sector is usually our major engine of growth and that we can benefit from international economic intercourse. But that it not just a matter of saying ‘OK’ if anyone asks us to a one night stand.