Thoughts on globalisation (written October 2005)

Globalization – Who wins, and who loses?

“Globalization”, in particular the increase in trade across the globe, is not a new occurrence.  It has been occurring over several centuries already, beginning with the trading of key natural resources and continuing into the last century with international trade (export/import) of, mostly, finished goods.

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In the last decade Globalization has become ever more prominent driven by the growth in the role of emerging markets such as China, India, and Latin America, and the trend for producers to source different parts, not just whole finished goods, from different locations depending on their cost competitiveness. These changes have been created by improved technology and focus on reducing trade barriers. Globalization has also become a source of much media attention and raises emotional arguments due to its fundamental impact on the daily lives of people across the globe.

The primary advantages of globalization include:

(i)    Reduced poverty and improvements in quality of living in some developing nations as some production is moved to low-cost countries (however creating regional disparities whereby some regions in these low-cost countries grow at different rates); and

(ii)  Reduced purchasing cost for many consumer goods/services resulting in increased domestic demand from higher consumer purchasing power and increased quality of living in high-income nations.

Disadvantages include:

(iii) Imbalances in global markets, in particular foreign exchange and interest rates, as change occurs subject to artificial constraints including political, monetary and fiscal policies, resulting in possible future adjustments which could bring about regional or global recession;

(iv) Unemployment in high-income nations as production is moved to low-cost countries and difficulty for those unemployed workers to find alternative employment (a “vicious circle” of companies outsourcing production to low-cost locations, resulting in competitive pressure for other market players to also reduce costs, taking similar actions);

(v)  Concerns of corporate exploitation of workers in low-cost countries resulting in political and social unrest; and

(vi) Risk of some nations/regions being “left behind” due to war, political unrest, obstructive government policies (e.g. Zimbabwe) or difficult environmental conditions (e.g. central Africa).

Deciding on who the winners and losers are and will be, does not have a “black-and-white” answer.  One must consider all parts of society and both the short-term and long-term implications of globalization.

High-income countries benefit from lower cost of production for goods which they sell, much of which is passed on to consumers in the form of lower prices for goods and services.  On the other hand, loss of employment due to transfer of production of low-cost locations challenges high-income countries to either lower their own costs and become more productive (in some cases the cost difference between high- and low-income countries cannot be bridged however) or accept that production will eventually move to low-cost locations and find alternative employment, retraining workers where necessary.  Whatever action is taken, this causes disturbance to society and change cannot usually be implemented overnight.

In the short-term, transfer of production to low-income countries increases employment there, provides higher income and investment in infrastructure is made to facilitate the new production logistics.  Whether the current economic imbalances created by globalization are only short-term or sustainable is yet to be seen – economists differ in their view of the likely outcome of such imbalances.

In the medium term as more low-cost production countries/regions become potential production locations, production may continue to move – for example, free trade agreements in the 1990’s resulted in a transfer of US production to lower cost Mexico, however in many cases such production is now seen to be moving to even-lower-cost China.

In the longer-term global imbalances will be unraveled. As low-income countries absorb the new production a key challenge for them will be to move from being export-lead to having domestic demand driven growth. These countries will then benefit from increased quality of living and increased domestic consumption, with workers demanding wage-parity with their international peers. There will be a fundamental change in the structure of global markets with different regions focusing on different market segments (agriculture, industry and service).

Cost advantages currently held by low-income countries (particularly in low-skilled production roles) will diminish but will be offset by improvements in education and infrastructure, increasing these nations’ competitiveness in other, more-skilled markets. In the long-term high-income countries will continue to benefit from access to lower-cost production and will find new jobs to reduce the unemployment arising from globalization.

Therefore both high- and low-income countries can eventually benefit from globalization.

Sadly however the gap between the nations and regions successful in capitalizing from globalization and those who do not (such as parts of Africa) is likely to grow further unless such differences are successfully addressed. Even high-income countries already demonstrate such inequalities internally (e.g. comparing New York with New Orleans in the USA).

Whether actions currently being taken, among others, by the United Nations, the World Bank, the International Monetary Fund and national governments will be enough remains to be seen. The recent example of the British “Labour Party” and the World Bank leading an initiative to eradicate third-world debt is a step in the right direction.

There will likely be some difficult times as we move towards a truly global marketplace where all nations compete equally as global imbalances and social “resistance-to-change” take their toll. These challenges need to be addressed while other market effects, including civil unrest and war in some regions, and the current high oil price, result in further pressure on economic stability.

Companies wishing to capitalize from globalization need to:

(i) react quickly and identify opportunities to reduce costs and sell to new geographic markets,

(ii) understand local cultural and political differences and their implications on doing business in other regions,

(iii) be open but cautious to participating in joint ventures with local partners; and

(iv) understand and delicately manage the social implications on their existing workforce, and the perceptions held by stakeholders and the general public.

While this appears to be a tricky route, companies that do not take advantage of globalization will lose competitiveness with those that do.

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4 Responses

  1. When I first wrote this we were in the middle of an economic boom, with uncertainties regarding global imbalances, and some questions around the sustainability of cheap debt, but little insight into the economic turbulence to follow. I haven’t made any changes to the post to what I wrote in 2005.

    Subsequent developments have shown some reversion to national protectionism, and globalisation (in particular through foreign direct investment, either organic or M&A) has slowed.

    Nevertheless, perhaps the most important change I would now make to the above is the rapidly increasing relevance and importance of environmental awareness. Perhaps that will be subject of a separate blog post…

  2. Nice post Matt. It’s always interesting to look back at our thoughts, and see how the world has changed and how that affects our point of view.

    Have you by any chance read “The Travels of a T-shirt in the Global Economy” by Pietra Rivoli? I’m just getting started on that book, it’s one of our assignments for Global Markets and Institutions. Sounds like your summary/revision above is very similar to the authors premise, mainly that globalization isn’t a right/wrong issue, and is increasingly becoming an environmental issue.

  3. The “My comments” feature of WordPress.com really is a lifesaver…I didn’t click “notify me” on this original post, but I saw that you responded here.

    I wrote a two-part review of the book. The first part I complained a little, and a classmate called me out. The second part of the review, I got a few really valuable comments on the concept of mitumba.

    http://the-fuqua-experience.com/2009/09/27/travels-of-a-t-shirt-global-economy-1/

    http://the-fuqua-experience.com/2009/10/01/us-consumerism-mitumba/

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