The Challenge Of Globalisation

Presentation to an EPMU seminar, 29 April, 2010

Keywords: Globalisation & Trade; Labour Studies;

Twenty years ago the Engineering Union commissioned me to think about the alternative to Rogernomics. According to the last prime minister, Helen Clark, my report Open Growth was influential on the last Labour Government’s economic strategy, although it was not totally implemented; curiously the Labour opposition has since moved towards my advice on monetary policy. We are now past the wreckage of Rogernomics – although there is still economic damage from it. What we need now is to think about future evolution of the world economy and how New Zealand fits in, rather than simply defending ourselves against the New Right. So today, I am going to be talking about one of the most important forces shaping our future – globalisation.

I am mindful of the parallel with nineteenth century industrialisation which was a manifestation of an earlier phase of globalisation. Progressives were divided on how to deal with it with its harsh impacts on the quality of life of ordinary people. One camp was opposed to industrialisation and wanted to return to some sort of rural Arcadia. While that group has never entirely disappeared, it was the other camp who triumphed. They took the view that industrialisation was an irresistible process, but it was essentially a progressive one to be harnessed for social purposes rather than left to unbridled capitalism. The union to which you belong was one of the means by which this bridling occurred, but there were many others – including the welfare state.

Today’s globalisation is a similar force, and our response has to be similar too. While it is socially disruptive we cannot deny it, and we must harness it for social purposes rather than surrender or try to retreat. The reason nineteenth century progressives were successful was that they understood the issues of the day, and of the future. Sure there was rhetoric and sheer brute force, but behind this was careful analysis. That is what I am going to try to convey today.

Globalisation is such a big topic that I am just going to focus on the particular issues that the Engineering Printing and Manufacturing Union faces. We shall see that it – you – are under one of the most critical areas of the pressures which globalisation generates. Focussing on that means I shant be giving a lot of attention to, say, the financial sector and the Global Financial Crisis. That is not because it is unimportant – we just have to leave the issue for another day.

My book, Globalisation and the Wealth of Nations, which elaborates the analysis in today’s presentation, defines globalisation as ‘the increasing economic integration of regions and nations’. The integration is on many dimensions, not just trade of goods and services. It includes labour markets, capital markets, financial markets, information and even commercial law.

Why does globalisation occur? It is a response to the falling costs of distance – not just transport costs but many other costs such as information and inventories. Railways would not have worked without telegraph to link the stations; inventory management has changed the way transport is used; containers made the assembly on completely knock down car units uneconomic.

Our history is littered with the examples of falling costs of distance. Some of our ancestors were held up in the Western Pacific for a thousand years until they found the means – probably the outrigger and the lateen sail – which enabled them to sail east and developed the Polynesian culture. Cook gingerly entered the Pacific with hardly any maps and experimenting using the chronometer to identify longitude. His success meant within a few decades Europeans were confidently sailing around the Pacific. Many of us will have descendants who sailed for months around the world to settle here. In 1882 we sent the first refrigerated meat to Britain, transforming the economy and New Zealand society. Reductions of the cost of distance continue. We were reminded how important they are today, when recently an Icelandic volcano temporarily raised them, causing considerable havoc to the movement of persons and goods.

Will the costs of distance continue to fall? The reduction has been remorseless in the past, but there is a case that higher transport fuel costs will restrict the fall in the future. Maybe, but there are substitutes to oil, while increased fuel efficiencies may offset the higher fuel prices. Peak oil may slow down the fall in the cost of distance, or even stagnate it for a decade or so. It would be unwise to assume that globalisation pressures will go away in the long term, while in the medium run there is still possibilities for adjusting to recent falls in the costs of distance.

One cost of distance which will not be affected by oil price hikes is telecommunications costs, whose fall has had a revolutionary impact on what can be internationally traded. Traditionally economists divided the economy into three sectors. The primary sector were those activities which had to be located near the resources they were based upon – farming, forestry, fishing, mining. The tertiary sector were those activities which had to be located near the consumer – services. The secondary sector (manufacturing) was more footloose, to be located somewhere between the extremes of where the resources are and where the consumers are, depending on transport and other distance costs. This meant governments could influence where they were located by policy, such as border protection.

Cheap telecommunications has untied a whole range of services from being close to the consumer. Who would have expected fifty years ago that call centres and business centres could be outsourced offshore; who would have imagined an effective bookshop on the other side of the world – for that is what is? While the internationally tradeable sector was once confined to manufacturing and tourism, today chunks of the service sector have joined it.

While the falling costs of distance can revolutionise an industry – and an economy, as refrigeration did to New Zealand – its effects are even more radical when it is combined with economies of scale. Having a large scale steel works is of little value when transport costs are such that it can only supply a very limited neighbourhood. When transport costs come down it can extend its market and lower its average costs of production by producing more.

This, and some related economies of agglomeration, mean that industry tends to concentrate in particular locations. Historically those locations were in north-west Europe and the mid-west of North America, slowly spreading out into nearby locations in Europe and other parts of the North American continent. But they also jumped to Japan.

What happened was that as costs of distance fall, it is possible for industrial concentrations to establish themselves in lower wage regions – and ultimately – countries. The economic model which explains this is quite complicated, but instead rely on your common sense. The dispersal of manufacturing has happened not only to Japan, but to Korea, to Taiwan, and most of all to China, not to mention it is happening – and will happen – elsewhere. Yet in each country the manufacturing is concentrated in urban areas.

The expectation is that in the long run tradeable production will locate where the populationis. That means Asia. It is almost an accident that industrialisation started off in the North Atlantic economies, and they wont always be concentrated there. Certainly Europe and North America had the initial advantages of good science, were outward looking towards the rest of the world and had less-repressive governance. But other countries can adopt those fundamentals. There is nothing inherently ‘European’ about industrialisation – as the Japanese have demonstrated and other Asian economies are demonstrating. I’ll come back to the importance of the conclusion that there is nothing distinctively racial or cultural about a manufacturing industry.

This industrialisation of Asia has an attraction for New Zealand. It will raise the demand for food without a corresponding surge in production. So instead of selling to rich North Atlantic consumers whose food requirements are largely saturated, we face the positive prospect of growth for some of our main exports.

Food processing aside, what is in the future New Zealand manufacturing and the tradeable service sector? The record is that, since the 1980s, New Zealand and other rich countries has gone through a process of substantial deindustrialisation. In our case there are few, if any, manufacturing businesses competing against imports and we are increasingly seeing the offshoring of tradeable services.

That does not mean to say there are no opportunities for manufacturing in the rich economies. Germany nicely illustrates one strategy which is to make the advanced machinery which it sells to lower wage countries who use the equipment for routine production.

I had hopes for such a strategy for New Zealand in which we became world class exporters of machinery and equipment for farming, fishing and forestry based on our comparative advantages in these resources. Unfortunately the Rogernomics reforms were destructive to this industrial development which needed nurturing rather than demolishing. We still have a few left – Gallagher electric fencing is an example – but alas many other promising opportunities – such as Allflex eartags – were destroyed.

An even more sophisticated manufacturing strategy is illustrated by a Danish firm Nordo Nordisk which makes cartridges used by diabetics to inject themselves with insulin. Each new generation of the product is developed in Denmark and manufactured and tested there. When they have got new model right, they ship their manufacturing plant to other countries such as Brazil and China. But they dont close down their local factory, because they have moved onto designing an improved version. This is an example of the dynamic chaining of industrial production, new designs new and processes keep arising. That depends on creativity and innovation. Rich economies probably still do this better.

Another example of chaining is that of supply. A windbreaker assembled in China may made of components manufactured in six or more other countries. New Zealand is going to be active in the bottom of the chains where we produce the resources. My guess is that we are not well geographically located to provide the middle level components. I hope I’m wrong, and that there are mid-chain opportunities for us.

What we should not do in New Zealand is expect to promote tradeable products which can be produced more easily offshore. A couple of weeks ago Deborah Wince-Smith, President of the (US) Council on Competitiveness, told us the United States should not get involved in tradeable production which mainly depends on ‘routine, rule-based or digitised’ processes. What she meant was that they could be done cheaper elsewhere. To compete against them you have to pay their wage rates and, to put it frankly, who wants Chinese wage levels?

You might think you can avoid these low wages by protecting home production by a tariff, import control or subsidy. Consider underpants. We could make underpants here in New Zealand paying decent wages by, say, import controls. But that would mean all other New Zealanders would pay more for the underpants, and their effective wages would be lowered, so we would be spreading the lower foreign wages across other workers. The same thing applies if we gave a subsidy. Other workers would have to pay the taxes, so their after-tax wages would be reduced. (You might argue that someone else – say wealth-holders – should pay the taxes instead, but why not levy those taxes anyway and reduce taxes on workers?)

When workers demand protection for their jobs, they may well be undermining some others’ jobs or incomes. It makes sense to have transitions rather than abrupt terminations, and to have policies which support workers during the transition from one job to the next. The price of our high standard of living is a dynamic economy in which workers are changing jobs, learning new skills, adopting new technologies.

Whether we like it or not, we are going to have a dynamic economy. That means transitional unemployment. If we try to prevent unemployment of some workers, then others will become permanently unemployed. And rather than a progressive dynamic economy, we will have one which while it will appear to be stagnating, but in fact will be contracting. An implication is that we need an active manpower policy, one which accepts that there will be redundancies, but that we can reduce the stress in the period of unemployment, by assisting with upskilling, relocating, and job searching.

Fortress New Zealand is not an option. We have too high a demand for overseas products – the oil for your car, the media you watch, the electronic products you fiddle around with. Not to mention that the country is heavily borrowed offshore, and we need to service the debt. The big effort in the future has to be to drive industries which generate foreign exchange or – where that is efficient – conserve foreign exchange.

There are various caveats to this analysis. When I was working for the Engineering Union in the 1990s I was always sensitive to these caveats, but they were rarely decisive. The union’s approach was that reductions in protection were inevitable, but the adjustment costs were often onerous on the workers and communities involved, so it argued for a slow phasing out (rather than the guillotine which was more common), plus active policies to promote alternative industries (they were rarely forthcoming).

What are the alternative industries? As those German and Danish examples show, and as indeed does Gallagher fencing and as did Allflex eartags, before it was dismantled by the corporate raiders, the jobs have to be skilled. The point is that while Asian workers are not fundamentally different from you or I, they have not had the opportunities to obtain the skills. That gives New Zealand workers an advantage and enables them to be paid more. In due course the Asians will catchup, so New Zealand needs to continue upgrading its skills.

In the 1990s we failed to do this, especially when the apprenticeship system collapsed. Your Labour Government introduced a skills upgrading policy in the 2000s, but we should not just think of only training the young and formal qualifications. All workers need upskilling, much will be on-the-job.

I was (and remain) an enthusiast for the workplace reform program in which unions and business were engaged in making the workplace better for workers and for production. That included on-the-job training and upskilling, it included a strategy of continuous improvement, and a workplace environment of self-management. Did you know in some Chinese factories the salary bill of the expatriate managers exceeds the wage bill of all the process workers? That is an overhead New Zealand business can hardly afford and, in any case, continuous improvement involves every worker, together with the management’s confidence they can trust their workers to perform in the best interests of the business.

I report all this with a certain sadness because the current government seems not to be as enthusiastic for programs of upskilling the work force and upgrading the workplace as was its predecessor. I dont know what strategy it has for industrial renewal it has, but without components like this, it will not be a success.

We can see some elements of an industrial and labour market policy, much of it a carryover from the previous government. Earlier I mentioned that these industries cluster in cities. New Zealand’s largest city is Auckland; any industrial policy is vitally dependent upon getting Auckland to work well. That is why there is an emphasis on improving the governance of Auckland, although one may have doubts that they have got it right this time. It is also why there is so much effort being put into improving Auckland’s networks and infrastructure. A city which is an ongoing traffic jam is not going to be a successful city for business – or to live in.

I use to think the issue was commuters and private cars. But business needs to truck goods around the city, and to its ports. That is why public transport is so important – to free up the roads for business trucking.

Auckland may not be big enough to be a successful industrial centre on its own. I came to this conclusion in a study of the biotech industry. The United States does not have a biotech industry; rather there are about twelve American urban conglomerations that do, and they are all bigger than Auckland. Is Auckland too small to have a biotech industry? A couple of hours to its south – close in US urban terms – there is another nascent biotech industry at Hamilton. Combine the two populations and Auckland is closer to the critical mass. So a successful Auckland requires good connections with Hamilton. Indeed it really requires good connections to just about the whole of the North Island if it is to be a global industrial centre. At the moment Auckland is too inward looking to have this wider perspective; we’ll know it is on its way when Aucklanders becomes more outward looking.

The defining region is by overnight trucking and that rules out the South Island as a part of the Greater Auckland industrial concentration. For the South Island to succeed industrially New Zealand’s needs Christchurch as a second centre of industrial concentration, and its second global city. I fear that at the moment Christchurch is too complacent to take up this challenge.

Capital city Wellington is not going to be a similar centre, except it may be the home of a world class information technology industry, spinning off from the government needs. It also has Wellywood. Little Peter Jackson spent his boyhood at the Empire film theatre at the end of Courtenay Place. Today he wants to live and work in his home city, and Wellington is the beneficiary (although Auckland is actually a bigger centre for screen productions because that is where television is).

Wellywood is an accident, and the film industry may one day move somewhere else. We cannot plan for such accidents, although we can be favourably disposed to enhancing them when the opportunity occurs – as happened to Jackson’s film activities.

Rapid response to unexpected opportunities is not enough. As one senior economics official remarked to me, we seem to being doing all the right things, but the policies to promote growth do not seem to be working. That is because the policies may be necessary, but they ware not sufficient. What we have been trying to do is put in the preconditions for growth – upskilling, research and development, infrastructure, quality taxation and commercial law – but we are not doing anything about identifying the industries where we are going to expand. Its as if we are relying on Peter Jacksons to popup all around, rather than trying to guess where they may pop up, and promote the needs of the likely industries.

Surely any upskilling, R&D and infrastructure have to take place with a view about where they will be needed. What is the point of putting a lot of effort into, say, the space industry which is unlikely to get of the ground in New Zealand.

What are the industries which are likely to be important? The obvious group are the resource processing industries. Their exports should be expanding as much as sustainability allows, and we should be aiming to do as much of the processing as possible here, before the resources leave these shores.

Other industrial opportunities are harder to identify. They will be in the tradeable sector. The probability is that they will be based on creativity and design and the technologies of the future – information technology, biotechnology and nano-technology. All require a highly skilled workforce although often the skills will be different from the traditional ones the Engineering Union fostered.

Yet the values that have been at the core of the Engineering Union for almost 150 years will still be required: skilled artisans taking pride in their workmanship and interested in the new technologies, showing independence and self reliance, even when they are in an employment relation, working with their mates – and with the management – to create high quality goods and services at a fair remuneration. Globalisation will make many jobs and skills redundant, but it is not going to make those values redundant. And while the dynamism it engenders may make you and your children redundant, with the right policies that will be temporary with an unemployment a transition to better work, better working conditions and better pay.