The Marsden ‘globalisation and New Zealand’ Project (revised)

Revised Version of paper for ‘New Zealand’s Role in World Affairs’ VUW, 5 December, 2003. Published in New Zealand in a Globalising World ed. R. Petman, VUP, 2005.

Keywords: Globalisation & Trade;

In late 2003 I was awarded a three year Marsden Grant to study globalisation and New Zealand’s role in it. This paper sketches the research program, which is primarily driven from an economist’s perspective, but also poses some of the international relations issues.

Globalisation is a topic I have been long working upon, developing out of my earlier study of the New Zealand economy summarised in my book In Stormy Seas: The Post-War New Zealand Economy, whose theme was that the fate of New Zealand will be largely a consequence of what happens overseas, together with our ability to seize the opportunities and manage the problems those events.

The topic presents definitional problems. Many writers avoid defining globalisation analytically, instead characterising it by a series of particular phenomenon such as increasing trade, or capital flows, or logos, or international inequality; or to particular international institutions such as the World Trade Organisation or the International Monetary Fund and the World Bank or the European Union, or multinational corporations; or to particular policies such as free trade, liberalised capital movements, and so on. The London Economist described globalisation as ‘international capitalism’: many anti-globalisers might agree, perhaps adding ‘together with US hegemony’, or even ‘imperialism’.

Stanley Fischer, one time chief economist at the IMF, describes globalisation as ‘the ongoing process of greater interdependence among countries and their citizens’. Joseph Stiglitz, who held a similar position at the World Bank, defines globalisation as ‘the closer integration of countries of the world as a result of lowering transportation and communication, costs, and the removal of artificial man-made barriers.’ Both are focussed on contemporary phenomenon. But it is important to take a historical perspective. Scholars argue that nineteenth century globalisation was in many ways a more powerful and pervasive phenomenon that late twentieth century, at least among peoples of European origin because migration was unrestricted.

Moreover it was not just an inter-nation phenomenon. Indeed it would be ahistoric to think of the states of the beginning of the nineteenth century to be similar to those of today. The modern nation state was a creation of the globalisation process of the times, as it integrated regions and made central government and national markets possible. The ‘United’ States of American became a more meaningful concept when canals and railways brought the states together.

In the end a simple phenomenon-based definition like Fischer’s, may be the most fruitful. We follow Stiglitz, albeit also covering the nineteenth century, with globalisation is the closer integration of nations and regions.

However, for an economist, a definition is not sufficient. We need a process, a mechanism which underpins the phenomenon. The research program is organised around the analytical proposition of globalisation as the consequences of the reductions in the costs of distance.

That these falls have been dramatic is easily demonstrated by considering the world centred on New Zealand. One hundred and fifty years ago it took three months to sail from Britain to New Zealand – carrying goods, people and information. Changes since then has reduced the shipping time to about three weeks, quartering the effective distance in the world. But people, and light valuable goods can fly to Britain in under two days, a reduction of more than 98 percent. Information can be zipped around the world virtually instantaneously.

If these changes are not spectacular enough, think of the changes for meat and dairy products. One hundred and fifty years ago, one could not ship them to Britain at all. The introduction of refrigeration reduced the cost of distance from – effectively – infinity, to a small proportion of the products’ costs of production, and transformed New Zealand’s economy and society.

There is another lesson here. The cost of distance does not diminish uniformly for all products, people, and information. Therein lies its problem, although the technical explanation for which belongs to another paper. Even so a short sketch of the economic analytics may be helpful.

In some useful ways. the costs of distance are analogous to tariffs. The theory of tariffs tells us that while a total elimination of tariffs can be beneficial – in a certain limited sense, under certain restrictive assumptions – a partial reduction may not. The best known example is that a partial free trade agreement need not be beneficial to the participants, if the trade diversion effects are greater than the trade creation effects. Analogously a reduction in the costs of distant (which is always partial) may not be of benefit in all destinations. Much of regional policy is predicated on this outcome, but it can apply also to countries. The regional example also highlights a resolution: if everything is sufficiently mobile then the depressed region can migrate to the prospering one. But in practice not all the population can easily move and the differential labour mobility can compound the region’s difficulties. The same applies between countries, with the additional complication that (nineteenth century Europeans excepted) there are severe restrictions on labour mobility. The implication is that a reduction in the costs of distance, and the consequent increased globalisation, need not be beneficial to all the countries and regions affected.

Of course, very often it is, but there is a tendency to accept the beneficial upsides of any change and grumble about the detrimental downsides. This effect is reinforced by another result, evident in trade theory but which arises much more widely. A technological change can change the income distribution, and make some people worse off. In the case of a fall in the cost of distance, it is not only that the rise in air travel has been a set back for sailors – that is an industry effect, but industries may leave regions with consequent loss of wages to its workers – that is a location effect. Thus there is a considerable political backlash against globalisation, which reflects some of the damage that the process generates to particular workers and regions, albeit without an understanding of the entirety of the process, good and bad.

Another complication is that, as trade theory shows, economies of scales – in the production process or in an industry – undermine some of the clarity of even the limited conclusions of traditional trade theory. But the recent developments involving economies of scale and differentiated product also enhance its relevance to the real world.

In particular an important post-war phenomenon has been the rise of intra-industry trade, where broadly the same product is exchanged between different countries (Germans may buy Renaults and the French Volkswagens). Intra-industry trade hardly existed fifty years ago, but today it makes up about a quarter of the world’s trade, and so is one of the fastest growing parts of it. It cannot be explained merely by comparative advantage – the underpinning notion in traditional trade theory. The relevant concept to describe the new phenomenon is ‘competitive advantage’, although of course a phrase cannot capture all the subtleties of the analysis.

New Zealand has a low involvement in intra-industry trade. Among the industrial nations it is near the bottom (on some measures Australia is a little lower), more like a developing country than a rich one. Undoubtedly comparative advantage served New Zealand well in the past (and undoubtedly we should continue to enhance it by seeking reductions in international barriers to primary product trade). But it seems likely that for long term survival the economy needs to accelerate its intra-industry trade – shifting to a better balance: from comparative advantage to competitive advantage. In my view that is much of what the government’s Growth and Innovation Strategy is about: for the vision implicitly has New Zealand exporting pharmaceuticals to Europe, IT to the US and films to Hollywood as well as importing similar products from them. The strategy’s difficulty is that competitive advantage involves different policies from those appropriate for comparative advantage. (This is in addition to the challenge of creating new competitive advantage industries in an environment where many of the established comparative advantage industries remain successful.) We are only learning what those better policies might be.

Not surprisingly, given my disciplinary training, the Marsden’s research program is founded on the economics of globalisation. However there are some wider issues, which I hope to look at if there is the time and the resources.

One of is the impact of globalisation on culture. There is the possibility of ‘convergence’, where the forces of globalisation eliminate cultural differences, or whether some independence, some choice of national living style, is possible. I am alternately optimistic and pessimistic about this outcome – even in the same paragraph. I am going through a mildly optimistic phase at the moment, after observing that despite over one hundred years of strong globalisation, the United States still contains a number of vigorous cultures within its melting pot, while Canadians are distinct from Americans in numerous ways, despite their closeness to the US and the degree of economic integration between the two economies. This is not to deny that globalisation has, and will, profoundly affect the course of cultural development, and it seems likely that it will extinguish some cultures or meld them into others. The difficulty is – as in most things to do with globalisation – to separate out changes which would happen anyway, from a nostalgia for the past.

A particularly interesting element of culture is the diaspora, those that live outside the geographical boundaries of a culture (or where, in effect, there are no boundaries, as applied to the Jews for more than a millennium). Because diasporas are in part the consequences of labour mobility, they are an integral part of the Marsden project.

A variation on the cultural issue, although also with significant other facets ranging from economics to international relations, is the changing role of the nation state. In many ways nation states are the creation of nineteenth century globalisation. I expect to pay particular attention to the history of Germany, a nation state created in the nineteenth century (it is said that it is the consequence of railways). And yet the same globalisation processes, initially working through the EU, may change the state out of recognition by the end of the twenty-first century. Intriguingly German culture is at least 500 years old, and may outlast the German state.

Nostalgia aside, the changing role of the nation state is arguably the consequence of a need to impose a common rule of economic law in international trade, just as the rise of the nation state in the nineteenth century in part was necessary to create regional economic order. (Think of the Zollverein, the customs union which contributed to the establishment of Germany.) Similarly, increased international economic intercourse is leading to supranational organisations such the WTO. They are a consequence of globalisation not its drivers. (There may be a similar phenomenon of the institutional creation from the international political order.) Those who grumble about supranational institutions often miss the point, which is not their existence but how they function. A useful parallel is how national governments initially acted in the interests of the elite, but how over time they became more democratic and act more in the interests of all. I would have thought the grumblers should be more concerned with the democratisation of the supranational organisations rather than the elimination which their rhetoric often conveys.

Indeed, one might draw a parallel with today’s anti-globalisers and their nineteenth century predecessors, who were concerned with the effects of industrialisation (in part a consequence of the globalisation of the day). That industrialisation was destructive on people and the communities they lived in. The resistors of the day identified the hardship, but they took two broadly different approaches to it. There were those, such as Pierre-Joseph Proudhon, who wanted to reverse the process and return to some sort of (as it happens, idealised) past. But the English radical tradition wanted to harness industry for the benefit of society. Today we live a far more comfortable life than our nineteenth century ancestors because they succeeded. (Karl Marx went further and saw industrialisation as a process which was inherently progressive and would lead to the benefits for the workers. He may have been correct, although the actual path was different from that which he vaguely predicted and some of his followers attempted to enforce.)

The implication of this is that the supranational organisations which the anti-globalisers detest are not so much wrong institutions, but flawed institutions which need to be democratised (although what exactly democracy means in this context has to be clarified.). The optimistic may expect this to happen in due course: the realist may expect a lot of hardship on the way.

It is not obvious that the creation of supranational organisations effectively eliminates nation states. Some interesting analysis by economists Alberto Alesina and Enrico Spoloare argues that middle size nations (that would include New Zealand) perform economically more effectively that larger ones. [1] While there may be economies of size in some economic production processes which benefit large nations’ economies, they seem to be offset by diseconomies of governance. Large nations have difficulty managing the diversities in their population, while smaller economies offset their economic size disadvantage through international trade. The counter-example is the US, which is both large and economically very successful. The authors argue that the US is organised in a very decentralised way, with the implication being that in order to survive as effective nation states, it is necessary that the governance be as decentralised as practicable. If that is true for nations, it may also be true for the world as a whole. A natural unit of decentralisation – but not the only one – is the nation state, which suggests there may be a role for nation states in a highly globalised world albeit, no doubt, a different one from that of today.

Moreover, Alesina and Spoloare’s point out that the existing international boundaries are not inviolate. Indeed there are more than three times as many countries as there were fifty years ago. While this might be seen as a process of decolonisation, the break up of the Soviet Union is an example of what may be better described as democratisation, which might be the ideal of decolonisation.

This analysis, which its authors extend in a number of different directions, is undoubtedly attractive, but it ignores that whatever the strength of markets towards resolving people’s needs, they exist in a context of rules and that different rules give different market outcomes. Size – and military power – may be important in determining how much influence a country has on the defining those rules, and inevitably each will attempt to influence the rules in their own interests. The implication is that globalisation may begin with the economic phenomenon of reducing costs of distance, and there is much economic analysis to follow. But a comprehensive approach requires political and social (and cultural analysis too). Whether the Marsden project (or its researcher) has the resources to tackle these non-economic questions is a matter to be addressed in the future. At the very least it should provide a foundation for others to tackle them.

Even the limited economic focus reminds us that size is not necessarily a disadvantage, providing the economy is reasonably open. Thus it is not only ahistorical to bemoan New Zealand’s size – in the past the economy was more affluent relative to the rest of the world despite being relatively smaller – but the pessimism is not consistent with current economic analysis. Similarly it is ahistorical to bemoan that distance is a major problem for New Zealand’s economic growth – the economy was practically further from the rest of the world in the nineteenth century, but that did not prevent solid economic growth, — and it ignores that distance is diminishing for practical economic intercourse.

Such thinking leads to defeatism, since it suggests there is little option but to grow slowly. (Merging with Australia is sometimes associated with these attitudes, but an Australasian economy would still be small and distant on a world scale.) Instead the evidence says that while size and distance are problems for New Zealand, they also present opportunities.

Just what those opportunities are, is what the Marsden project is about. However the core of the project is to understand the phenomenon of globalisation, not to judge it, and certainly not to come to definitive policy conclusions. But by sharing the understandings of globalisation that the funding enables me to pursue, I hope that my Marsden research project will help New Zealand, and the world, to learn to cope with better, and to control better, one of the most powerful processes shaping the future.

[1] Alberto Alesina and Enrico Spoloare (2003) The Size of Nations (MIT Press).

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