Meaning of globalisation

Globalisation is usually used to refer to the free or freer movement of goods and services and also capital. It does not really mean anything different from an open integrated world economy. But such an economy ought also to involve the free movement of labour.

Globalisation is certainly not a new phenomenon. In fact capital movements in the main industrial centres were a higher proportion of GDP before World War One than they are today. In the sense that I would like to use the word there was also more globalisation then, because movement of workers was then relatively free.

Driving forces behind globalisation. Free trade and capital movements are supported by the so called Washington Consensus which emerged around the early 1990s. This consensus arose largely as a result of the study of the varying experience of Third World countries and the lack of success of those that had tried to insulate themselves from the world economy, and devise for instance strategies of import substitution. This consensus was given a fresh wind by the collapse of the Soviet Union and its satellite regimes and the need to find ways of integrating these countries into the world economy.

Nevertheless I do not think that driving forces were mainly ideological. The framers of Bretton Woods envisaged a combination of trade liberalisation and capital controls. But I doubt if it is possible to have free trade without relatively free capital movements. For once large payments across the exchanges are permitted for one purpose, it is difficult to stop them for other purposes. In exchange control days we had notorious leads and lags which enabled international owners of capital to speculate against currencies which were overvalued. And if capital movements are going to take place in any place, why not admit them openly without having to resort to a complex set of loopholes?

Has the development of Information Technology added a new element - because any change in any part of the world can be viewed instantly on computer screens? Surely the bigger breakthroughs were made in the middle of the 19th century when we leapt from horse drawn transport and sailing ships to the railways and transatlantic cable, which transmitted to the New York stock exchange news of the 1873 Vienna financial crash?.

Effects on Advanced Countries

There is no particular difference between the way globalisation affects the UK economy and other members of the G7. Both critics and supporters say that it makes it much more difficult to implement an independent economic policy or one which is disliked by those responsible for capital movements. In my view this is much exaggerated.

At the UK national level policies which make sense before the word globalisation came into vogue makes sense today, and policies which are vulnerable to adverse confidence movements today would have been nearly as vulnerable a few decades ago. Just to give two examples:- extremely tight exchange and capital controls did not help Sir Stafford Cripps avoid devaluation in 1949. And a Labour government of the 1970s went through a notorious series of foreign exchange crisis when international capital movements were at a much lower level than that of today’s and when people spoke of liberalisation rather than globalisation.

It is an exaggeration to talk about financial markets punishing countries that pursue unorthodox financial policies. In fact they are merely asking for a higher nominal return to cover the risk of currency depreciation and debt repudiation.

Short Termism

A frequent complaint is that short term transactions in the foreign exchange market far outweigh the amount directed to the finance of trade. But these very short term transactions soon cancel each other out, sometimes within hours. In most of the cases where speculators appear to have brought down currencies, whether it was George Soros and sterling’s departure from the ERM in 1992, or the crises in Latin American and Asian markets in the late 1990s, currencies were overvalued or artificially maintained.

Probably the main advantage of the free movement of all kinds of capital and not just direct investment is internal. A study by the US National Bureau of Economic Research suggests the cost to Malaysia of the recent controls may be not so much that foreign investors are wary of a repeat but that domestic financial institutions will merge in a non-transparent way during the period of control in a way that appears to favour the current political establishment. (The Great Reversals, R Rajan and L. Zingales, paper 8178).

Employment

Most advanced industrial countries are within reach of near full employment. Their ability to get there depends partly on the level of effective demand, but more fundamentally on the flexibility of labour and product markets - in other words on people not pricing themselves out of jobs.

Developing countries on the other hand often lack the capital equipment and business and social infrastructure required to provide jobs for all. Anything which speeds up economic development in these countries makes possible higher levels of employment.

Effects on World Economy

As Peter Jay has put it: The opportunity to combine capital and labour, management, technology and markets in the most efficient manner indubitably accelerates the growth and improves the distribution of the prosperity of the globe as a whole. (Road to Riches, 2000). He adds It is an error in any way to regret what we have done and a misconception to wish to recreate the predominant power of the autarchic nation state in order to subdue the forces we have unleashed.

It is ultimately important to allow free access to capital markets. There is however a problem of phasing. Some emerging countries have freed short term capital flows before they have removed barriers to trade and before they have created a climate favourable to long term investment.

A glance at the tables in the World Bank’s annual Development Report shows that, despite all booms and bust and speculative orgies, the emerging world has gained. Consumption per head in low income countries rose by an average of 3.7 per cent per annum in the period 1980-97. It rose in every region except sub Saharan Africa and rose most rapidly in the East Asian and Pacific countries, which were the ones that did most to open up their economies. Other more direct indices of welfare such as expectation of life, literacy and infant mortality also improved.

Admittedly sub-Saharan African, containing 11 per cent of world population did not share in this prosperity. This may have been due to bad luck, natural disasters or the way in which this part of the world has been governed. But it can hardly be a reflection on the international economic system, given what has happened elsewhere.

In the words of a Swedish writer, global capitalism can help deliver the masses from an existence in abject poverty, in filth, ignorance and impotence, always wondering where the next meal is coming from and whether the water you have walked so many miles to collect is lethal or fit to drink. (In Defence of Global Capitalism, Johan Norberg, obtainable from the Institute of Economic Affairs). It is ironical that the anti-globalisation protestors claim to be motivated by disgust at Third World Poverty.

Labour mobility ought to be part of a free and integrated world economy. It would also be a powerful influence for narrowing income differentials worldwide. If workers from North Africa could migrate to European Mediterranean countries this would not only increase the living standards for those who move. It would also help those who stay at home by making labour scarcer than it otherwise would have been.

Gainers and losers

Nearly all countries gain from the opening up of economic frontiers. But within a particular advanced country those sectors most directly open to competition from cheaper competitors - in practice very often unskilled labour - may lose relatively or even absolutely. Such workers benefited in the past from the commercial and political hazards of large scale investment in the developing world, hazards which imprisoned capital in the richer countries. As a result of their removal the real price of low skilled labour may be driven down. Differential impacts of this kind are best tackled by redistribution via the tax and social security system and not by erecting barriers to trade and capital movements.

Taken to its logical conclusion completely free movement of capital on its own or free movement of workers - let alone the two together - might lead to an approximation of pay levels throughout the world for particular types of labour. And so long as unskilled labour remains plentiful worldwide this could lead to a drop in unskilled wages in advanced countries towards Third World levels.

Evidence on the ground, however, indicates that such equalisation is likely to happen, if at all, more slowly than the model indicates. This is suggested by studies of migrant workers in the UK who might be regarded as offering the most direct threats to indigenous workers.

Some high quality and under-publicised research study by the Home Office (Migration: An Economic and Social Analysis, 2001) shows that wages have not been depressed in the UK. Immigrants are often happy to work in public services at rates of pay which national workers would not take. This helps to keep going public services which are otherwise chronically in a state of crisis. Moreover, some migrants have shown entrepreneurial skills in setting up small and medium sized businesses which in turn promote the job prospects of indigenous workers.

Immigrants have tended to perform three types of job. They have worked in public services, especially health, where pay is determined by the government as a debased form of incomes policy. Wages are well below market levels and the effect of newcomers is to reduce shortages. In London 23 per cent of doctors and 47 per cent of nurses are non-UK born.

At the other extreme in relatively low paid and insecure sectors like catering and domestic services, unskilled natives are simply unwilling or unable... to take the large number of available jobs...If migrants do not fill these jobs they simply go unfilled or uncreated. An estimated 70 per cent of catering jobs are filled by immigrants.

There are also the highly skilled information technology workers. According to the Home Office study the inflow of skilled technicians has enabled the IT sector to grow faster rather than to depress pay in it..

Levels of entrepreneurship in self-employment also appear to be high among migrants. It is not only Pakistani and East African businesses who have been attracted to the UK: some 150,000 French entrepreneurs are supposed to have arrived since 1995.

But we must be careful to avoid premature reassurance. We do not know what a similar study would have revealed if there had been completely free immigration to the UK or what might be the results of much larger capital movements in the future. Even in the extreme model, nearly all countries gain from the opening up of economic frontiers but there is a shift in the distribution of income from unskilled labour in the industrial countries to the owners of capital, who presumably benefit from access to large supplies of cheap labour.

The challenge will be, not how to isolate the home economy from global market forces, but how to recycle the income that should eventually be flooding in from the enhanced profitability of capital in its world wide locations.

To take this further would lead one into a discussion of negative income tax and/ or capital distribution schemes of the kind outlined, admittedly not very prominently, in the last Labour election manifesto and also in the Autumn 2001pre-Budget Report.

The two major world economic institutions, the IMF and the World Bank, were created at a time when international transactions were mainly trade and when it was thought that capital movement should and could be controlled. In addition it was assumed that exchange rates would be fixed, but adjustable. Neither institution has changed sufficiently to reflect a world of free capital movements and floating exchange rates.

There are innumerable proposals for reforming them, the study of which would be a full time job which I do not claim to have undertaken. But here are a few thoughts.

One of the IMF's jobs has traditionally been to supervise the setting of exchange rates to guard against policies such as competitive devaluation and - equally - to warn countries that were hanging on to overvalued exchange rates. Midnight oil was spent on matters such as defining a fundamental disequilibrium in a country’s balance of payments. Much of this is now irrelevant.

In its early days IMF credits were an important part of the international capital resources available to a country in distress, especially one with a balance of payments deficit, and which helped to give it time to adjust. Nowadays IMF aid is a small proportion of the international credits available to governments that command confidence. IMF credits and standby facilities are much more a badge of good housekeeping to persuade private investors to support a country in temporary difficulties.

This task is made more difficult by the way in which IMF is used for political purposes, especially by the USA. It has been too free in awarding its good housekeeping badge to countries which the USA wished to support - above all Russia in the late 1990s, but possibly also Argentine in 2001. The USA is quite entitled to support countries or regimes for geopolitical reasons and to assemble international coalitions for this purpose. But it should do this on a government to government basis and not attempt to use international financial institutions as an instrument. One day there may be a managing director of the IMF courageous enough to assert theinstitutions independence.

The great expansion of international capital markets casts doubt over the World Banks role in supporting international development. It has itself to borrow on international financial markets and all it can do is to provide a marginal amount of finance on marginally better terms.

An apparently strange coalition of right and left, recently emerged in the USA, urging that the World Bank should concentrate on poverty relief and on grants rather than loans. This shocked defenders of the international status quo. (The UK government will have nothing to do with it.} But I suspect that this rainbow coalition of critics is correct nonetheless.

International financial architecture

If we believe that the free movement of goods and capital is beneficial, we should not focus so much on regulation. To a large extent excessive volatility in international capital markets arises because decisions are made by salaried employees in Western countries who fear for their jobs unless they keep up with the herd, and who are therefore reluctant to stay away from bandwagons or to invest in unfashionable countries or sectors. The big problem for policy is how to help the victims of this instability without creating moral hazard which would encourage even more unthinking herd-like behaviour by investors.

There is much talk about improved international financial architecture. There is now a vast literature on international banking procedures, applying analogies for instance from Section 11 of US bankruptcy law. For instance:- can anything be done to prevent a herd like rush of investment into countries and activities which are temporarily fashionable only to be withdrawn at the first sign of trouble. Related to this are questions such as whether there can be an organised way of involving private creditors when countries have to write down or postpone their overseas debt obligations.

I leave these areas to those who have specialised in them, only reminding them of the danger of being better prepared to meet the last crisis rather than the next one.