Economic Globalisation and National Sovereignty (II)

Chapter for the New Zealand Government and Politics 2ed, edited by Raymond Miller (OUP). First Edition Chapter

Keywords: Globalisation & Trade; Governance; Political Economy & History;

In recent years there has been increasing concern that the phenomenon of supranational economic integration, popularly known as economic ‘globalisation’, is undermining the sovereignty of the nation state. In New Zealand, this has been symbolised by international agencies such as the International Monetary Fund (IMF), World Bank, and World Trade Organisation (WTO). This chapter will explore the economic context of the debate.

Economic globalisation is not a new phenomenon. Arguably, the world was more globalised in the nineteenth century, when migration was much easier and national governments were limited in their ability to interfere in the flows of capital and goods – not only did they have less political power, but there were fewer policy instruments at their disposal. But there were no international agencies (although in some respects the British empire filled some of those roles). Even so, in the last half of the twentieth century there was an intensification of globalisation, following a period when there were significant barriers to economic intercourse.

Yet the term ‘globalisation’ is neither well defined nor well understood. To critics it means individual countries losing their autonomy over the management of their economies. As a consequence, they tend to argue, the general public is less well off. The first view is surely ahistorical. Colonial New Zealand, trading in the international economy from the outset of European settlement, experienced little autonomy. Indeed, New Zealand has always been heavily dependent upon foreign capital and international trade. While parts of the economy have, at times, been isolated from the rest of the world, arguably this had the effect of further exposing the remaining sectors to the vagaries of the international market.

Moreover, it was the nineteenth century forces of globalisation – refrigeration, improved shipping and communications, and Britain’s policy of free trade – that enabled New Zealand to rise to its current high standard of living by exporting pastoral products. It is possible that some New Zealanders could be losers from some of the current technological changes, just as British farmers were from refrigeration. All economic change, including globalisation, involves winners and losers. But it would be foolish to say all globalisation is necessarily bad.

Once the point is recognised, the argument cannot be presented in rhetorical terms but as a matter of careful judgments balancing competing arguments. While it would be easy to conclude ‘it all depends’, it may be more useful to use the analysis to understand what is happening and what are the opportunities and threats.

The economic theory

The assertion that globalisation makes some economies worse off is rejected by some economic theory. There is a well-established view that, subject to some ‘minor’ caveats, the economy as a whole is better off under a free-trade regime in which there are no government-imposed restrictions (compared to any other practical alternative). In the sense described here, ‘better off’ means that there will be more material goods and services to share among the population as a whole.

However, the critics argue that shared benefits may not actually occur. First, the theory assumes that there will be full employment, so that labour and other factors of production that become unemployed as a result of free trade will be redeployed. Sometimes that does not seem to happen, or does not seem to happen for quite a while.

Second, the theory as presented here does not address the possibility that some people may be worse off. For instance, the theory allows that abandoning protection on car assembly results in lower prices for imported cars for all consumers, and that the assemblers transfer to the hospitality industry, say, to earn the foreign exchange from tourists coming from countries that assemble the cars. Even though the country may be better off, the assemblers may be on lower wages and worse off. Advocates of free trade rarely mention this phenomenon, yet it is real enough for millions of displaced workers.

Third, the economic theory does not provide an estimate of the magnitude of the gains from free trade. When the actual potential gains are quantified they prove surprisingly small. For instance, estimates for New Zealand in the 1970s (using quantitative models based on precisely the economic theory alluded to earlier) suggested that the gains for total free trade were less than 1 per cent of GDP, although protection was considerably higher than in the 1990s.

The formal models usually assume that labour and capital are fixed in quantity. But a reality of the new world economy is that international investment flows are substantial and significant, while international migration may be greater than it was, say, a quarter of a century ago. It is not immediately obvious that migration of capital and workers are in a country’s interest, even if it is in the interest of the capital’s owners and (perhaps eventually) the migrating workers.

The political economy of globalisation

It is worthwhile briefly going through the limited conclusions of economic theory, not only because the rhetoric points to greater gains than the theory or the evidence would suggest, but also because it poses the following question: Why is globalisation happening at all? The answer seems to be that it is largely driven by technological changes that have transformed the human geography of the world. Fundamentally the issue is the political and social consequences of technological change.

The results of this change can be seen in the remains of dairy factories scattered throughout Taranaki. Fifty years ago there were numerous factories, each within a few tens of miles of one another. Today there are but two-one. What drove these changes? The sealed road and the motorised milk tanker made it easier for the dairy farmer to deliver the milk further afield. At the same time, larger dairy factories reaped economies of scale that made it worth their while to use milk from more distant farms. The changes meant that dairy farmers were better off (since the lower costs of processing increased their return), but was the whole of Taranaki better off? Some dairy factory workers had to travel further; some villages slowly died. However, generally the change was gradual enough, the region small enough, and the people mobile enough for the communities to adapt to this provincial ‘globalisation’. The communities may have even directly benefited from the improvements in roads and transport, since a wife could get a job in a different place from that of her husband. Indeed, they might both work some distance away from the family home, and might even spend their weekends in yet a fourth location.

A more severe example of this change occurred with breweries, which were once scattered throughout the towns and cities of the nation. Today’s four largest breweries are found in Dunedin, Christchurch, Hastings, and Auckland, as the costs of transport has fallen and economies of scale become more powerful. In this instance the closures were more socially disruptive. Wellington brewery workers could not live in the same house and travel daily to the Hastings brewery after the local one closed down. The worker could move, but that would be likely to have involved a significant social upheaval for the family. In this instance, the benefits of economic rationalisation were likely to go to consumers, in the form of cheaper prices and better choice.

What about boutique breweries which fill niches the big ones can not? They exist because there are technologies that are not so dependent upon economies of scale, and because there is a growing heterogeneity of consumer choice. Certainly they generate jobs in particular localities, but it is also significant that rarely do boutique businesses expand into national and international businesses, neither do manufacturers of boutique goods make up a sizeable part of employment in most industries. (An exception is the fashion clothing industry.)

Suppose a major brewery was to move to Australia, using cheap transport to supply the New Zealand market. That is worse for the community than if the business had gone to a distant part of New Zealand,for any adjustment is usually slower across international boundaries than within nations. Moreover, unlike the intra-national shift, the international relocation reduces the tax base of New Zealand (and increases the tax base of the country of destination). In the long run, labour market adjustment (migration) may resolve an imbalance; but, as Keynes remarked, ‘we are all dead in the long run’.

Even if these economic issues can be resolved, there remains the question of national identity. New Zealanders are likely to be offended that the business has chosen to move offshore. (Whether they are sufficiently offended to prefer to consume a higher-cost domestic substitute puts an economic limit to their indignation.) Thus nationalism is part of the concerns about globalisation– the shifting of business activity to another country is seen to be much more troubling than a shift between regions within a country.

In the examples given here, the changes are a consequence of economic responses to technological change, which are transmitted by profit seeking and other market mechanisms. However a less market-oriented, economic decision-making system may not be that much better. A major danger, as we saw in the planned economies of Eastern Europe, is that it would stop some of the technological change.

The illustrations of the breweries and the dairy factories involved gains from production scale and improved transport. The combination has generated one of the most extraordinary and under-appreciated changes in the international economy. Today, ‘intra-industry trade’ – where countries exchange the same products (e.g. Germans buy Citreons and French Volkswagens) – makes up a quarter of international trade, up from near zero fifty years ago. Despite its growing importance such trade is largely ignored, perhaps because it contradicts the model used in the section on economic theory, for such models ignores the costs of distance and assumes that economies of scale are irrelevant. Moreover, the model’s conclusion of a well determined equilibrium no longer holds. Under inter-industry trade the location of a business may be to some extent dependent upon accidents. The traditional model cannot predict that Nokkia-like firms will arrise in small economies such as Finland. The new intra-industry trade ones can.

By the end of the twentieth century the greatest technological change was coming from improvements in communications. This means that globalisation can now apply to many of the service industries and even to knowledge itself; and that it is possible to globalise business control in a way that was not possible in earlier times.

Moreover, today communities seem more heterogeneous, or perhaps the heterogeneity is better recognised or more easily expressed because of increased affluence. One way this heterogeneity shows is in increasingly fragmented the desires for goods and services, which are more difficult to supply from a single (and hence in a small economy, local) plant. A long time illustration in New Zealand is the preference for a variety of motor vehicle models, so that no local car assembly line has been able to achieve the economies of scale that would make it internationally competitive.

Of course the increasingly heterogeneous communities still have commonalities. One of these commonalities is a national identity, and that expression of an identity via state and economy, including ownership of common property and images. Thus the pressures to reap the technological opportunities that generate globalisation clash with the demands for community and national expression.

Very often it is a clash between the national and the personal. Many of those who publicly object strongly to the consequences of globalisation at the same time avail themselves of its benefits in their personal life: international travel, information sourced from overseas, foreign produced food, clothes, and computers, domestic transport dependent upon overseas imports, and so on.

In summary, the political economy argument is that technological changes – especially the falling costs of distance coupled with economies of scale – are driving globalisation. It is easy to identify the damaging elements of the changes and ignore the beneficial ones, or vice versa. Globalisation seems to benefit some people to the detriment of others. But perhaps it is really the technological change rather than globalisation itself that is detrimental to these people, undermining especially workers with now obsolete skills, or living in locations with now obsolete attractions. However, the problem of people being left behind by technological change is an old one, pre-dating even the Luddite cotton weavers. What is new is that in New Zealand’s experience the most prominent beneficiaries of globalisation seem more likely to be offshore. Less prominent beneficiaries are often general consumers.

The economic state in a globalising world

Globalisation thus challenges us with the question ‘What choice (or what control), if any, does a society have over its social and cultural policy?’ A common view is that international competitive pressures are so strong that they will drive every country down to the lowest common denominator of a pure market economy, with a minimum of government intervention. A small community in a globalised world, so it is argued, has no ability to shape its destiny.

For instance, suppose a society wanted to have a welfare state, providing a degree of public social security. That would involve taxing the incomes of factors of production and of individuals. This would either raise the costs of production, so industries would move offshore to countries where they were not taxed, or depress the returns on factors of production such as capital and labour, which would migrate to countries where their return was not so depressed. The logic of this account is that all countries will be pressured towards minimising taxation, forcing them to dismantle their welfare state and shift to private provision.

In practice, this seems to be overly pessimistic insofar it has not happened and does not seem to be generally happening. However, there may have to be changes to the way the welfare state is organised. Some people will be worse off as a result, yet those better off may include some of the poor (who may benefit from the newly created jobs, for instance). As a result defenders of the traditional welfare state may vigorously resist the changes, even if a lot of the poor are better off. It is right to draw attention to those who are worse off, but doing nothing may make them more so, and make others poorer too.

Much of New Zealand’s difficulties in debating such issues arises from the public prominence of the traditional defenders of the welfare state on the one hand, and right-wing ideological extremists who care little for what is happening to people, on the other. There are options between doing nothing (other than closing up the economy) and the sort of ‘trading naked’ strategy that the extremists have advocated. (New Zealand’s propensity to strip away all interventions has been likened to someone at a picnic taking off all their clothes in the hope that others will follow. The punch line is that the rest of the picnic looks at the naked one, and puts on another jersey.)

Certainly some policy instruments – increasing quotas and tariffs, for instance – are prohibited for international trade reasons, at least in small economies. Even large countries imposing border barriers are likely to be hauled off to the WTO. A positive conclusion may be that the policy issue is to identify new effective forms of industrial intervention although in practice the challenge to implement effective policies may prove harder than it looks.

However, even given greater attention to industrial policy, we can expect greater harmonisation of economic and other relations between countries over the next few years. Again there is a long history. There was grumbling when New Zealand metricated for international trade reasons (as the official statements clearly emphasise) but this was not seen to be a case against the globalisation it was enhancing. The scope of the legal harmonisation is increasing. For instance, there has been active discussion on the degree to which New Zealand should align its competition legislation with Australia’s. Part of the debate is about which regime is more appropriate, but there is also a theme that there are advantages in having a broadly common regime. There is no compulsion to align the legislation. The issue is that of the benefits and costs of doing so. Even were New Zealand to adopt the Australian legislation in total, that would be a sovereign act, and at a later date a New Zealand government might choose to enter into an alternative legislative arrangement. This applies for most other harmonisation, although once it has been adopted it may become increasingly difficult to abandon it.

Harmonisation and international law are not confined to economic matters. There are parallel developments for human rights, peace, the environment, and so on. Indeed those who oppose economic globalisation are often strong advocates of the extension of international law in other realms.

Foreign investment and capital flows

A strong theme in the agitation against globalisation is the increasing ownership of New Zealand capital by foreign firms, and the rising New Zealand foreign owned debt. Again this is not new. It would be easy to argue that the issue is not of national ownership but of national control. Historically a foreign firm that built a factory in New Zealand to supply local markets was almost as dependent upon the New Zealand government as a native one. However, it is widely believed that New Zealand now has less economic control than it had in its recent past, it being argued that globalisation makes it easier for all firms to evade a nation’s control by shifting their activities to less demanding regimes.

Partly it is a matter of magnitude. There is no comprehensive indicator of foreign ownership, but as good as any is foreigners’ share of income from production (technically the nation’s property and entrepreneurial income payments to the rest of the world). In the early 1980s the net aggregate income amounted to between 3 and 4 per cent of GDP. In the early 2000s the ratio was between 7 and 8 per cent, or double that of two decades earlier.

The rise is largely a consequence of the savings and investment decisions of New Zealanders. Over the period domestic savings were insufficient to fund the capital investment the economy demanded, so businesses went offshore to fill the gap. It is a fundamental rule of finance that borrowers (individuals, businesses, or states) reduce their capacity to make independent decisions by the extent to which they are in debt. If the debt rises, that capacity to act independently – their sovereignty – falls. Now it may be argued that much of New Zealand’s past borrowings were unwise – a view with which most future economic historians are likely to agree – hence the problem is not with foreign investment, but with unwise domestic decisions.

Such considerations are unlikely to satisfy those who must suffer from the past decisions, nor does it address the symbolic significance of ownership of an asset to the dispossessed (nicely illustrated by the priority tribal groups (iwi) have given to regaining land from which they have been alienated). While acknowledging this symbolism, however, an economist might ask whether the holders are willing to make the related material sacrifices (as iwi may be doing by taking lower returns in their holdings of land than they might obtain from other investments).


Global financial markets may be overly liquid, and hence excessively volatile. New Zealand, like most debtor countries, no longer depends only upon foreign direct investment (that is, in equity in businesses) to cover its savings gap. Much of its stock of foreign liabilities is in financial instruments that may be withdrawn at short notice (albeit, perhaps, at some cost to the lender). Thus the New Zealand financial system, and the economy that depends upon it, can be subject to substantial external financial shocks. In my opinion, global liquidity is excessive, and potentially detrimental to the global economy. If that detriment occurs, New Zealand is likely to suffer more than most.

That raises the central dilemma that every country faces. The global economy is far from ideal, yet not to engage in it also has offsetting costs. It has been the theme of this chapter that technological changes are increasingly integrating the economies of the world to the general benefit of those involved, although some workers and businesses suffer. However, the global economy may be mismanaged at the international level and domestically. The difficulty that confronts each economy is how to relate to this imperfect situation. The choice is not of autarchy or even maintaining the current status quo, were that possible. Nor is there any benefit in returning to the radical policies practised in New Zealand in recent years – the ‘trading naked’ strategy. Striking a balance between these two extremes poses a number of difficulties, especially for a small country with so little influence.

The critics of globalisation confuse several different issues: the actual global arrangements compared with alternative (and possibly better) ones; the actual policies of New Zealand towards globalisation and other economic issues compared with alternative (and possibly better) ones; and the current losers from globalisation compared with the gainers, while the losers are portrayed as exclusively the poor and the gainers as exclusively the rich. In this confusion it is difficult to identify an alternative, other than one that addresses particular issues (such as protection for a car assembly plant) without examining the general consequences. Neither the uncritical anti-globalisers nor the uncritical pro-globalisers help much towards identifying the options that exist between the extremes. The result has been that New Zealand’s policy decisions have been much less effective than those of many other countries, as evidenced by its poorer international trading performances.

Either approach compromises New Zealand’s sovereignty, although to be realistic we have little idea of what the sovereignty of nations may look like in the long run. With a few exceptions the nation-state is a relatively recent development – less than a couple of centuries old. It may not last another two centuries. However, the cultures that underpin the nation-state are usually older than the state itself, and are likely to survive it. The notion that the world will end up as a grey cultural soup seems unlikely in this new century at least (it has not in the US) . Nationalism, including ethno-nationalism, may not be the force it has been, but it will continue to be a substantial factor in international relations and economics.

As with other economies, New Zealand has some choice over the degree to which it is engaged in the world economy, although each option has costs as well as benefits. Insofar as New Zealand can exercise this choice it retains its economic sovereignty. Yet by going into trading and other economic relationships its choice is reduced. A useful parallel with international trade and investment is marriage. To enter into such a relationship involves some loss-even a permanent loss-of sovereignty. Yet such are the perceived benefits relative to the costs that individuals do get married, and they remain married even when it is evident to others that there are severe downsides in the arrangements. Thus it is with international trading relationships. The general benefits are judged to exceed the general costs.

Even so, for New Zealand international economic relations is rarely a marriage of equals, and sometimes it is a menage-a-trois. The difficulty that New Zealand faces with the proposed US free trade arrangements is more that it would be stranded if its CER partner, Australia had one and New Zealand did not. (New Zealand’s international trading preference is for multilateral arrangements (a harem?) But it may not always have the option.

Moreover international policy may constrain a country’s international political policies. The New Zealand government would deny that this is happening today (e.g. in terms of its stance on the war on terrorism), but it is true that political responses are often presented to improve economic opportunities.

The globalisation debate is really another example of a question that has created a central policy tension for at least two centuries: To what extent should an individual’s life be regulated by market decisions, and to what extent should it be regulated by government/bureaucratic decisions? For those who are not extremists, there is no simple resolution to this question. Globalisation reduces the ability of the government to regulate the life of the nation. At the same time its ability to enhance the benefits from technological change offers opportunities that individuals did not have in the past. Ideally we want to maintain the benefits of both national sovereignty and the technological opportunities. For a small country that may be impossible, and eventually all countries may be too small in a globalised world.

Who knows what the long-run outcome will be? Over the last century nations have developed powers to control the market mechanism and restrain its excesses. We may well see a similar evolution of supra-national powers, with a repeat of the struggle as to who controls them and in whose interests they are exercised.

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Further Reading
Cairncross, F. 1997, The Death of Distance, Harvard Business School Press, Boston.
Chatterjee, S., Conway, P., Dalziel, P., Eichbaum, C., Harris. P., Philpott, B. & Shaw, P.
1999, The New Politics: A Third Way for New Zealand, Dunmore Press, Palmerston North.
Easton, B.H. 1997, In Stormy Seas: The Post-war New Zealand Economy, University of Otago Press, Dunedin.
Giddens, A. 1999, Runaway World: How Globalisation is Reshaping our Lives, Profile Press, London.
Gomoroy, R.E. & W.J. Baumol 2000, Global Trade and Conflicting National Interests, MIT Press, Cambridge, Massachusetts.
Gray, J. 1998, False Dawn: The Delusions of Global Capitalism, Granta, London.
Kelsey, J. 1999, Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, Wellington.
Krugman, P.R. 1997, Pop Internationalism, MIT Press, Cambridge, Massachusetts.
Krugman, P.R. & M. Obstfeld 2000, International Economic: Theory and Policy, 5th edition, Addison-Wesley, Reading, Massachusetts. (Especially pp.139-141 on intra-industry trade.)
O’Rourke, K.H. & Williamson, J.G. 1999, Globalization and History, MIT Press, Cambridge, Massachusetts.
Reich, R. 1991, .The Work of Nations, Simon and Schuster.
Schwartz, H. M. 2000, States Versus Markets: The Emergence of a Global Economy, St Martin’s Press, New York.
Soros, G. 1998, The Crisis of Global Capitalism, Public Affairs, New York.
Stiglitz, J. 2002, Globalization and its Discontents, Allen Lane, London.
Strange, S. 1996, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge University Press, Cambridge, England. .

The author’s writings on globalisation

Discussion Questions
1 Why do people differ so deeply on the question of globalisation?
2 ‘Globalisation is not a new phenomenon. It was particularly vigorous in the nineteenth century. Without it, New Zealand would not have been founded or have flourished.’ Discuss.
3 What makes this round of globalisation different from previous ones?
4 ‘New Zealand has always been a neo-colony.’ How then is the nation-state compromised by the new globalisation?
5 ‘Whatever one may think about the rights and wrongs of globalisation, its forces are so strong the issue is how to live with it.’ Discuss.
6 To what extent are multilateral agreements (such as the Doha WTO round) more in New Zealand’s interests than bilateral ones (such as a free trade agreement with the US.). Can New Zealand remain out of a multi-lateral agreement; can it remain out if bilateral ones become prevalent?
7. Are New Zealand’s international economic policies consistent with its international politics ones? Are the latter moderated for the former, and if so is it the substance which is moderated or the presentation?

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