by Bojana Simeunovic
Globalization represents integration of economies through markets across frontiers, driven by the reduction in costs of transportation and communications due to technological advancements, and economic liberalization which is equivalent to reducing policy barriers to trade and investment (Frankel, 2000; Wolf, 2005, 326). Besides its economic aspect, the phenomenon also includes integration of cultures, governmental traditions, political systems and social norms.
However, globalization as internationalization is nothing new: for instance, many of the large empires and religious movements represented forms of globalization. How is then the current wave different from the earlier ones? What is now called globalization represents “an exponential acceleration of the integration process” (Feketekuty, 2000). This definition dates back to the Canadian visionary Marshall McLuhan who wrote in 1962 “that the electronic age was turning all humanity into a ‘global tribe’—a concept later termed global village.” This concept is sometimes exploited, and the level of globalization exaggerated, as to mean something completely different. Some argue that there are no limits to globalization and that distance and national borders are no longer relevant; that nation-states and geography had lost their preliminary significance. History teaches us that globalization is not a never-ending process (Wolf, 2005, 326). As Dani Rodrik (2001, 347) argues, global integration has become a substitute for a development strategy, and this leads to many failures. However, before addressing this and other major effects of globalization, let us briefly overview global development in the past 100 years in order to understand how the concept evolved, instantaneously faded and gradually reemerged.
Already by 1900s majority of innovations in the transportation and communication industries have already been achieved, such as railroad, steamship, telegraph and refrigeration. As John Maynard Keynes described: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth…” (Frankel, 2000, 310). The booming of economic integration was interrupted by the outbreak of the WWI in 1914 and had not re-emerged until the end of the WWII in 1945. According to Wolf (2005), there are four major reasons for this reversed globalization: geopolitical insecurity, macroeconomic instability (Global Depression), protectionist interests and collectivist ideas (nationalism, imperialism, socialism and communism). As many argue, the world that emerged in 1945 was far more fragmented than the one that entered the war in 1914. Nevertheless, the determination of the victors not to repeat the same mistake again led to the creation of the IMF, World Bank and GATT, later WTO. These organizations helped reinstate the 19th century globalization.
This could be confirmed through various examples. For instance, between 1920 and 1990 the average ocean freight and port charges per short ton of U.S. import and export cargo fell from $95 to $29 (Frankel, 2000, 309). Moreover, as air shipping has increased, various products such as fresh-cut flowers, perishable broccoli, live lobsters, and even ice cream could be sent between continents. Between 1940s and 1990s, the cost of a three-minute telephone call from New York to London fell from $244.65 to $3.32 (Wolf, 2005).
The real breakthrough came during the 1970s, when the Americans finally retained the same levels of globalization that they experienced on the eve of WWI. Ever since that period some four billion people were brought “within the purview of the global market” (Wolf, 2005, 327). One of the main reasons why globalization flourished during this period is because countries that opened internationally also re-considered their domestic policies, and adopted market policies both externally and internally. For instance, China decreased its import tariffs from 40.6% to 6.4% in the period between 1992 and 2002, and thus its exports exploded from $200 to $600 billion between 1992 and 2004 (Wolf, 2005, 327).
One of the major outcomes of these market reforms aimed at increasing levels of globalization (as well as of a decrease in costs of transportation and communication) is the rise of multinational corporations, more precisely the integration of production across national borders. As Wolf (2005) argues, what these MNCs created is “specialization of production within manufacturing on the basis of specific sources of comparative advantage.” Yet, labor and long-term capital markets remain less globalized to this day. Only about 3% percent of world population lives outside of its birth country, in comparison to approximately 10% in the 19th century (Wolf, 2005, 328).
From this and many other examples, a conclusion is clear: Although some claim that international integration in terms of trade and globalization levels has reached its maximum, it remains far below the levels of both national and regional economic interdependence. Frankel (2000) looks at the US as an example to justify this claim, in case of which trade accounts for 12% of GDP. Given that the United States’ output is about one-forth of gross world product, “if Americans were prone to buy goods and services from foreign producers as easily as from domestic producers, the US import-GDP ratio would be equal to .75[…] yet these ratios are only about one-sixth of the hypothetical level.” Globalization is far from complete and highly volatile in terms of its reversibility.
Pros and Cons of Globalization
Firstly, globalization increases the number of competitors reducing monopoly power in the market place and corporate power in the political arena.
Second, market openness can have permanent effect on the growth rate (not just the level of real GDP), since it speeds absorption of frontier technologies and global management best practices, spurring innovation and cutting costs of production (Frankel, 2000, 320). International trade has expanded 16-fold since the foundation of the GATT—the result is a six times larger world economy. One of the OECD studies shows that nations relatively open to trade grow about twice as fast as those that are relatively closed (Micklethwai & Wooldridge, 2001, 366).
On the other hand, some claim the opposite. Analyzing Asian countries that are cited as examples of successful integrationist strategy application, Dani Rodrik (2001) concludes that globalizers are mistaken: integration is the result, not the cause, of economic and social development. “A relatively protected economy like Vietnam is integrating with the world economy much more rapidly than an open economy like Haiti because Vietnam, unlike Haiti, has a reasonably functional economy and polity” (Rodrik, 2001, 352). Moreover, there seems to be no negative relationship between trade restrictions and economic growth. Dani Rodrik and Francisco Rodriguez found that reasons for country’s low economic growth are ineffective institutions, geographic determinants and/or inappropriate macroeconomic policies, rather than failure to liberalize trade policies.
One of the major pro-integration arguments regards poor countries: forces of globalization reduce poverty levels and help poorer nations catch up with the Western capitalist countries, by promoting convergence and thus reducing inequality in income worldwide. This notion is contrary to Heckscher-Ohlin theory, which suggests that those who own the abundant factors within a country gain, whereas those who own scarce factors of production lose from trade. The creation of this gap between the rich and the poor is usually taken as a negative effect of trade and globalization. However, many studies have shown that only between 5 and 30 percent of the increase in this gap could be attributed to trade; the rest is due to technological advancements and inadequate redistribution policies within poor countries. It is proven that there is a tendency for income inequality to grow in the first stages of industrialization. Moreover, income redistribution then becomes a superior good that countries are able to purchase once they acquire certain level of wealth. Income gap decreases at the later stages of industrialization, and therefore globalization, because trade reduces inequality in the long run (Frankel, 2000, 322).
Much serious effect of globalization on the poorer states is the idea that globalization is equitable with development. Focusing on international integration, “governments in poor countries divert human resources, administrative capabilities and political capital away from more urgent development priorities such as education, public health, industrial capacity and social cohesion” (Rodrik, 2001, 348). Globalization is not a shortcut to development; economic growth requires implementation of imported liberal policies and domestic institutional reformation as well. Good example of this sort of failure are majority of the countries in Latin America in which lack of institutional reforms led to a significantly lower level of economic growth in comparison to Asian countries, such as China. Reducing tariffs and nontariff barriers is just a one in a series of steps of economic liberalization that eventually leads to prosperity. To name a few of necessary reforms: tax reform to make up for lost tariff revenues, socials safety nets to compensate with WTO rules, labor market reform to enhance worker mobility across industries (Rodrik, 2001, 348). As Rodrik concludes, ‘globalization above all’ prevents countries from pursuing more development-friendly policies and thus results in lower levels of economic growth.
Another major concern of anti-globalists is environment. In this case, government intervention becomes highly important for dealing with such types of externalities. Also, majority of environmental problems are global, and a single country could do little to solve the problem alone. Moreover, if it is the only one to abstain from production for certain environmental reasons, a country could easily become a looser in the long run. It is per se that industrialization leads to environmental degradation and industrialization is part of globalization. Nowadays, leading countries have attempted at increasing awareness about levels of pollution and overall damage to the environment, but not much has been achieved so far.
While environmental debates stand on a firm basis of strong argumentation, other anti-globalist concerns receive less attention. One such is the idea that globalization means the triumph of giant companies. John Micklethwait and Adrian Wooldridge argue that globalization works in the opposite direction: lower barriers make capital easier to raise, technology easier to buy, markets easier to reach, and ties with national governments ever less important. Companies are not becoming more important than nation-states—governments still consume more than 40% of Western Europe’s GDP (Micklethwait & Wooldridge, 2001, 361). Moreover, geography does not render itself to globalization.[1]
Lastly, Micklethwait and Wooldridge address another backlash of globalization: “[It] means a race to the bottom in labor standards” (2001, 365). This misconception is based on the idea that producers favor lower hourly wages over labor productivity. If this argument were correct, all of FDI should be concentrated in the countries with the lowest wage and the weakest labor standards; but the US is the world’s largest recipient of FDI, and about 80% of its FDI goes to other rich countries. Companies need healthy and skillful workforce as much as they need low-paid unskilled labor, maybe even more so.
What Should We Do
Distance remains one of the main inhibitions of international trade. This includes not only shipping costs but also informational barriers (linguistic, cultural, historical and political differences), which could also be called ‘social distance’ (Frankel, 2000, 315). Face-to-face contact remains highly important for negotiations and exchange of information. Studies show that two countries that speak the same language trade about 50% more than two otherwise similar countries. Colonial links also have significant influence on trade partnerships. Free trade areas increase trade within a group of members by reducing tariffs and other barriers, simultaneously creating tendency towards trading mainly within that group.
The puzzle remains: Is Toyota factory in the United States less or more American than a General Motors factory in China? Modern companies have global interests. The existence of multilateral institutions and a web of international commitments makes it very difficult for protectionist interests to capture legislatures (Wolf, 2005, 329). This however does not mean that globalization is not reversible; integration is not nearly to be finished. In the coming years, developed countries should focus on solving problems such as the resource curse, persistent protectionism and inadequate conditions in the poor countries. They must secure macroeconomic stability and provide solutions to persistent geopolitical instabilities, for the international market to expand and fruits of globalization to trickle down to the poor.
References
Wolf, Martin. (2005, April 5). Will Globalization Survive (Third Whitman Lecture). Washington DC: Institute for International Economics.
Frankel, Jeffrey. (2000, August). Globalization of the Economy. Retrieved from http://www.hks.harvard.edu/fs/jfrankel/NyeGlobWPwFigPost.pdf
Feketekuty, Geza. (2000). Globalization—Why All the Fuss?: Year in Review 2000. Britannica Book of the Year, 2001. Retrieved from http://www.britannica.com.library3.webster.edu/EBchecked/topic/1518171/Globalization-Why-All-the-Fuss-Year-In-Review-2000?anchor=ref816739.
Rodrik, Dani. (2001, March/April). Trading in Illusions. Foreign Policy.
Micklethwai, John; and Wooldridge, Adrian. (2001). Why the Globalization Backlash is Stupid. In Art, Robert; and Jervis, Robert (eds.) International Politics 9th ed. (2009).
[1] Take for instance Los Angeles, America’s major manufacturing center. Although some of those low-tech factories could produce at the cheaper rate somewhere else, they stay within the region for various personal or professional reasons—designers, suppliers and distributors are all available in the neighborhood.
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