By Lesley Batchelor OBE, Director General of the Institute of Export & International Trade
There has been much stated about the pros and cons of globalisation. Critics include groups such as environmentalists, anti-poverty campaigners and, surprisingly, trade unionists.
They claim that globalisation helps the richest countries to continue to dominate world trade at the expense of developing nations. The role of Least Economically Developed Countries (LEDC) in the world market is mostly to provide the North and West with cheap labour and raw materials.
Proponents of globalisation point to the number of people worldwide who have benefited from it. According to the World Bank, between 1981 and 2010, we witnessed the single greatest decrease in material human deprivation in history. At a time when the population of the developing world has increased by almost 60%, the number of those in extreme poverty (subsisting on less than $1.25 per day) has dropped from around 50% to around 20%.
There are no guarantees that the wealth from inward investment will be used to benefit a local community. Profits are invariably sent back to the More Economically Developed Countries, where the Transnational Companies (TNC) are based. Economies of scale that the TNC can use often drive local companies out of business however, the transitory nature of the TNC is that if it becomes cheaper to manufacture elsewhere, it will close the operation with resultant job losses.
Likewise, the TNC home country may lose out in the job market to a LEDC thus creating an imbalance in both trade and social mobility.
So what is Globalisation really about and why has it happened?
Globalisation has been happening for centuries however it has sped up over the last 50 years mainly due to the rate of innovation in communication and transportation technologies. Movement of goods, people and services has never been easier, which in turn is bringing more questions about the need to trade and how to govern its growth. Freedom to trade is the cornerstone on which organisations like the World Trade Organisation (WTO) are founded, promoting free trade between 164 countries who are all committed to removing barriers between them.
The biggest companies are no longer national but multi-national corporations with subsidiaries in many countries (TNCs). Although globalisation is probably helping to create more wealth in developing countries, it is not helping to close the gap between the world’s poorest countries and the world’s richest. Unsurprisingly, the majority of TNCs are based in the US and UK.
Factors attracting TNCs to a country include cheap raw materials and labour supply, good transport links and infrastructure and access to markets where the goods are sold. These factors can be seen in many emerging markets and are often linked to the rising middle classes in these markets. With hundreds of millions of people estimated to join the middle classes in Africa, South America, China and India, the opportunities are very tempting for UK and US companies.
Is globalisation really so bad?
Given the sheer number of people that have been lifted out of absolute poverty and especially now, when our own economy is beginning to feel so fragile and vulnerable, can we afford to start worrying about the impacts of globalisation at this stage?
Are we not just part of a moving system of civilisation that sees cultures, empires and regimes ebb and fall? Of course, if that was simply the case this would all be quite straightforward, however, the next stage of globalisation begins skewing market forces that can take their toll as internationalisation steps in.
So, “drawbridge up versus drawbridge down”, as the Economist recently wrote. The fact is, along with boosting our country’s economic resilience and addressing global challenges such as climate change, promoting economic integration is one of our three strategic priorities.
Surely, economic integration can be a powerful force promoting efficient markets and reform? We have seen that globalisation increases competition in product markets, it widens the range of financing sources available for investment, it allows countries to opt into institutional arrangements of a higher standard and it imposes strict discipline on governance, legal, regulatory and other institutions.
Openness to international markets, globalisation if you will, also spurs investment and innovation within businesses and economies as a whole. Economic integration, and through it globalisation, empowers entrepreneurs and consumers alike. They also create new incentives and opportunities for everybody involved in a modern economy.
So let’s support integration through cross-border financial flows and investment, trade finance, infrastructure, improved skills and standards in SMEs, policy dialogue and partnerships with institutional investors. This may not be the best time to change the plan.