Globalisation – Opportunities and Threats

As we have mentioned already, there are hugely diverging viewpoints on the costs and benefits of the current process of globalisation. One thing is certain, globalisation is here to stay.

Employment effects

Concern has been expressed in some quarters that economic activity and employment in the advanced economies will drain away to the developing countries. Inevitably some jobs are lost as firms switch their production to countries with lower unit labour costs. But the neo-classical theory of international trade and most past experiences suggest that all nations in the globalization process will gain in the long run – as trade is an important determinant of long run growth and rising living standards

That has not allayed concerns that certain sections of the population in richer countries - notably relatively unskilled workers - will lose as an abundance of low-skilled labour in developing countries makes itself available to the world's companies at much cheaper costs – leading to a fall in the demand for lower skilled workers in industrialised countries. Critics of globalisation in some developed countries point to the risks of increasing income equalities and greater job insecurity together with the threat of structural unemployment in industries where demand for labour falls.

Unemployment in the World
	Total	Male	Female
	million	million	million
1995	157.3	92.7	64.7
2000	177.2	104.7	72.5
2002	191.4	113	78.5
2005	191.8	112.9	78.9
Source: International Labour Office

Static and Dynamic Efficiency Gains

For consumers and capitalists, the rapid expansion of international trade and foreign investment is a normally considered good thing. Textbook theory suggests that increased competition from overseas leads to improvements in static and dynamic efficiency and gains in economic welfare. Vigorous trade has made for more choice in the High Street, greater spending, rising living standards and a growth in international travel.

Expansion of Multinational Activity

The growth of multinational activity throughout the world is the result of a mix of economic and political factors. Most outward investment from one country to another takes places between developed countries. Indeed in 2000, 99% of outward direct investment from the United States went to high-income (81%) and middle-income countries (18%).

The main motivations for the rapid expansion of multinational activity are as follows:

• Higher profits and a stronger position and market access in global markets
• Reduced technological barriers to movement of goods, services and factors of production
• Cost considerations – a desire to shift production to countries with lower unit labour costs
• Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)
• Avoidance of transportation costs and avoidance of tariff and non-tariff barriers
• Extending product life-cycles by producing and marketing products in new countries
• The urge to merge – the financial incentives created by the global deregulation of capital markets is making it easier to achieve acquisitions and mergers and thereby encouraging the external growth of a business

Impact of Globalisation on the UK Economy

The UK is a highly open economy. Openness to the global economy can increase the size of commercial markets available to domestic producers, encourage the transfer of technology and knowledge and also permit countries to specialise in those goods and services they produce efficiently by exploiting their comparative advantage.

In 1979, the UK abolished its foreign exchange controls were abolished and the major financial markets have been gradually deregulated. This means that each day there is a huge amount of trade within our stock markets, the short-term money markets and the bond markets.

UK trade with other countries continues to take a high and rising percentage of our total national output. Clearly, the globalisation process impacts significantly on the British economy with benefits and costs along the way:

The UK has been a favoured venue for overseas direct investment – indeed a large percentage of total investment into the European Union from non-EU countries has come into the UK. Many factors explain this trend – including improvements in the supply-side performance of the economy, a favourable tax system and a much improved record on industrial relations. At the same time, UK investment overseas has soared partly as a result of a high level of merger and takeover activity.

• Rising level of import penetration – particularly in those industries where Britain’s previous comparative advantage has been eroded such as textiles and clothing and the manufacture of lower-valued added electronic products
• Competitive forces for nearly all sectors: Globalisation increases the importance for Britain of continuing to develop a competitive advantage in industries with major growth-potential as a means of improving living standards in the long term. Globalisation has involved a speeding up of the process by which comparative advantage can change over time – not least because of the faster diffusion of technological progress. Greater investment is needed in high value goods and services – for example in high and medium-high technology manufacturing and in knowledge-intensive service sectors
• Structural change in industries – for example the long-term loss of output and employment in industries such as textiles. This creates problems where factor resources are occupationally and geographically immobile

The current wave of globalisation places increasingly heavy emphasis on the importance of human capital as a factor determining long-run economic growth. The UK has probably lost forever its comparative advantage in producing low-value added manufacturing products. Other countries with significantly lower labour costs can now meet global demand for many textile and clothing products and cheaper electronic products at much lower cost than we can. Whereas the global demand for high skill services and high value-added manufacturing output remains strong and a rising share of UK exports overseas are in hi-tech manufacturing industries and knowledge-intensive services. Maintaining this emerging comparative advantage in a globalised economy requires a substantial improvement in the skills and flexibility of the workforce – a point emphasized in this statement from a recent CBI research report.

Impact of Globalisation on the British Government

Globalisation is also having an effect on the British government – for example in prompting pressure for changes in the corporate tax regime and demands for further reforms of our labour markets and the welfare system. Some economists believe that globalisation reduces the ability of governments to levy business taxes – because multinational corporations can move their production to countries offering the lowest tax base and the taxation of knowledge products transmitted across international boundaries becomes ever-more difficult.

But this issue ignores the fact that many complex factors influence business location decisions (including proximity to growing “emerging” markets) and relative tax burdens between different countries are often not the decisive factor in determining where financial capital flows to

Globalisation and the Unemployment-Inflation Trade-Off

Globalisation has increased competitive pressures on British businesses in tradable goods industries. Has this helped to improve the trade-off between unemployment and inflation illustrated by the Phillips Curve? Cheaper prices for many international commodities and finished manufactured goods have certainly helped to control inflation in recent years and therefore reduce inflationary expectations.
Writers on globalisation

There are many people writing on globalisation issues and they often have a very different perspective on the advantages and disadvantages of global economic integration. Here are some links to some higher-profile writers.

• Globalization Institute
• Guardian Special Report on Globalisation
• Joseph Stiglitz
• Martin Wolf
• Naomi Klein
• Philippe Legrain
• Thomas Friedman