Some Things We Know About Economic Globalisation

Notes prepared for a meeting (February 2005).

Keywords: Globalisation & Trade; Growth & Innovation;

My research is concerned with understanding the underlying process of globalisation., providing a foundation for policy and evaluation. But it is not policy focussed, nor does it aim to come to some simple conclusion about whether globalisation is ‘good’ or ‘bad’. To worry at this stage about such issues would be to damage the development of the understanding of the foundations.
The research project is only one year in (funding is for three years, but obviously globalisation is potentially a much bigger project than that). No doubt in a year’s time there will be new insights. At this stage, the study is not paying a lot of attention to labour effectiveness or technological innovation and technology transfer. Thus the study is an incomplete account of the growth process (although I continue to work on those issues in other theatres, albeit without funding).

1. Economists define “economic globalisation is the increasing integration of national and regional economies”
1.1. Globalisation is the geographical dimension of economic development.
1.2 Attitudes towards globalisation tend to align with attitudes to economic development, especially altitudes to markets and capitalism.
1.3 The WTO, IMF, international capital flows, reductions in protection, outsourcing, brands … are symptoms of globalisation, not the underlying process.

2. Globalisation has been important economic phenomenon since the beginning of the nineteenth century.
2.1 It is not a new phenomenon.
2.2. It is not even clear that late twentieth century globalisation was stronger of more disruptive than nineteenth century globalisation.
2.3 Globalisation was not as vigorous in the first half of the twentieth century.

3. Globalisation is driven by the falling cost of distance.
3.1 As well transport costs, the costs of distance include communication and information costs, storage costs, safety and security costs, the costs of lack of intimacy, and tariffs and other artificial impositions.
3.2 One study found the ‘trade costs’ for US goods exports to foreign market represented an average markup of 170 percent on factory gates costs. In comparison the markup for to domestic markets is 55 percent. These figures vary greatly by product and are indicative rather than accurate. If reliable they indicate exporting faces an average of 74 percent additional costs (270/155=174) relative to domestic supply. About a tenth of this margin is due to policy-induced barriers such as tariffs.
3.3 As long as the costs of distance continue to fall, the forces which drive globalisation will continue. (Even if the fundamentals stagnate, it seems likely that the pressures will continue for decades, as businesses continue to find novel applications of the fundamentals.)

4 While costs of distance have fallen over the last two centuries, they have not fallen evenly.
4.1 The costs for moving information have fallen far more than for moving people and light high-valued goods, which in turn have fallen more than for moving low value heavy goods. (I have yet to study the technology transfer story. The analysis below assumes that technology is as mobile as capital – the standard assumption.)
4.2 The changing relativities change the mix of exports and imports, which will be biassed towards information based services, people (tourists) and relatively light high-valued goods.
4.3 Even this categorisation does not capture all the possibilities and all the relative changes. (For instance, the introduction of refrigeration in the 1880s favoured exporting meat and dairy relative to timber.)

5. Traditionally only manufacturing was relocatable. Today some services are joining them.
5.1 Among those services are outsourcing in all its variety, some retail sales (most famously books), and consultancy services of various kinds. Other kinds of relocatables are the provisions of services to people who come to the supplier (tiurism, education, health).
5.2 The outsourcing debate – particularly vigorous in America – is a rerun of the manufacturing protection debate, but this time it involves the servicing sector.
5.3 Policy comment For policy purposes it is vital not to over focus on past patterns of exporting while ignoring new ones. Recent New Zealand concerns about broadband connections and airports are examples of this forward thinking.

6. There is a powerful interaction between falling costs of distance and production and industry economies of scale.
6.1 Lower costs of distance enable producers experiencing these economies of scales to consolidate firms and industries into specialised locations.
6.2 Standard economic theory assumes no economies of scale in which case comparative advantage explains location. Where there are economies of scale the theory does not explain why the consolidation occurs in some places rather than others.
6.3 Thus there exists internationally competitive firms in a locations which cannot be explained, except by anecdote. Nokia in Finland is an example. Fisher and Paykle is a New Zealand one.
6.4 Policy comment The theory tells us nothing about how to initiate such firms and industries. Its best advice, thus far, is to run an industrial policy which is supportive when one of these surprising industries appear.

7. As the costs of distance fall to near zero, industry may locate to where the population is.
7.1 This would suggest that we would see industry relocate over time to the East and South Asian area (notably China and India). However this is a very long term process – a century rather than a decade, but we may be seeing it underway.
7.2 Almost certainly there will be a narrowing of the income gap between rich and these poor countries. It seems – the theory is murky – that the shift could be possibly be associated with a reduction of absolute income among existing rich countries (via a terms of trade effect).
7.3 Note that the models which give this conclusion assume all labour is of equivalent efficiency. Obviously it is not, and obviously the rich countries can stay ahead of this proposition by ensuring their labour is better quality. But this is a medium run strategy. In the long run the average Asian is likely to be as good a quality worker as the average European or American.
7.4 Policy comment New Zealand may be better placed to benefit from these long run changes in the location of economic activity than some of the other rich countries.

8. The above assumes a high degree of population immobility.
8.1 Significant high population mobility is unlikely, except in the very long run.
8.2 I have yet to work my way through the complexities of where there is moderate population mobility.
8.3 Policy comment Low population mobility seems to be the foundation of the nation state, and – at least in the past – culture.

9. While there will be some policy and cultural convergence, it is unlikely to be total in the medium run.
9.1 Policy convergence is the phenomenon whereby a nation state loses independence of its policy instruments and adopts a genric international policy stance. The evidence, thus far, is that while there may be increasing loss of the freedom to control cross-border goods, services and capital flows, there may be more freedom for distinctive policies reflecting national values in other areas – such as the welfare state.
9.2 Cultural convergence is the phenomenon whereby all cultures converge on a broadly common one. This has not happened within the United States, nor between the US and Canada.
9.3 There are quasi-globalised states – the United States of America and the European Union – where there is less sovereignty and more population mobility, and where these conclusions may need to be modified.

10. Small countries have economic advantages over large countries
10.1 The social cohesion of small countries means they are simpler and less costly to govern, which raises the potential growth rate.
10.2 The exception is the United States, which has resolved the problem of the high costs of large government by great decentralisation.
10.3 A consequence of smallness is a small country cannot have a ‘balanced’ economic structure but must specialise (in order to get the benefits of economies of scale) and trade with the rest of the world to offset the imbalance.
10.4 Policy comment The previous comment may lead to the single most important immediate policy conclusion. It explains why the tradeable sector is central to the growth process in a small country and why focus on the aggregate or domestic economy misses the point.

11. Conclusions
11.1 Insofar as the costs of distance continue to fall, while new ways are found to exploit them, globalisation – the integration of economies will continue. (Two possible reasons for distance costs to rise, is rising costs of transport fuel and increase security requirement.)
11.2 Globalisation presents opportunities and threats, benefits and costs.
11.3 The issue that confronts New Zealand, or any country, is how to deal with ongoing globalisation.
11.4 New Zealand need not be inherently worse off in a more globalised world (although there will be the inevitable downsides).
11.5 This view that New Zealand economy is too small and too distant to be able to function in a globalised world is anti-historical since it was smaller and more distant in the past and still performed very well.
11.6 Moreover distance is becoming less of a handicap as the costs of distance fall. The research says small size may be offset by effective government and by specialisation. New Zealand’s growth prospects need not be pessimistic, nor need we try to resolve them by changing size and location or bewailing we cannot.

Go to top