Globalization and Us

Notes for a presentation for the Smith Institute at 11 Downing Street, 1 May 2002
By Diane Coyle
Many aspects to globalization. One that doesn¹t grab headlines but is probably the most significant is international reorganisation of production.

Due to: – declines in transport costs ­ air freight since 60s, ocean freight since early 80s; – falling tariffs between OECD countries especially Uruguay Round and since; – ICTs which allow monitoring and management of production across great distances.

Impact has been extraordinary.

– Increase in trade in goods ­ for US share of exports to value added up from 10% in 1960 to 47% in 1999; for France 17% to 65%; for UK34% to 64%.

– Growth in trade in components has been much faster than growth in trade in finished goods. Almost 1/3 of world trade in manufactures now consists of parts, not completed goods. Share of imported components in manufacturing export value added now more than 20% in leading OECD countries.

– Increase in FDI. Resource flow from OECD to developing countries has nearly tripled in less than 10 years, and while portfolio flows (1/3 of the $300bn pa total) are volatile, FDI flows are stable.

FDI grew 29% a year 1983-89. Another surge in 90s, doubling between 97 and 99 alone. World total $1.1 trillion in 2000, only 16% to developing countries.

So OECD countries mainly investing in each other. Take-off within Europe since mid-90s particularly dramatic. EU15 sending 6% of GDP across national border in FDI by 1999, up from 1-2% through early 90s.

This tells us reallocation of production is a huge phenomenon within the EU, because of single market and euro. Only to be expected ­ EU has many, many more centres of production within each industry compared to US, and would expect relocation to fewer centres, greater specialisation as a result of single market.

But parts of developing world becoming more important too, get about 10-15% of world FDI flows, of which 90% accounted for by middle-income countries with skilled labour.

Relocation of supply chain (outsourcing, delocalisation) is highly beneficial in aggregate: exploiting comparative advantage within the vertical supply chain, as well as between different finished goods, important new source of gains from trade. Increased global competition also beneficial ­ getting fewer, bigger suppliers in the world, but more in each national market and exploiting bigger economies of scale.

Especially beneficial for developing countries. Not exploitative ­ wages rise, clusters of industry and skilled labour created, technology transferred.

Many globalisation myths need bursting eg no evidence of race to bottom in tax or environmental standards. Big increase in global inequality predates 1980 and has stabilised since (although NB Africa).

But disruptive. Jobs move. Our jobs, in OECD countries, especially Europe. We, not developing countries, have the big losers from globalisation.

Non-OECD share of world manufacturing exports ­ mainly E Asia ­ has become significant only since 1980, climbing from 7% of total to 32% in 1998. They are becoming part of global supply chain ­ but not big enough yet to explain either unemployment in some EU countries or wage inequality. [Highest estimate of impact of trade on wage inequality in US/UK puts it at 30% compared to 70% technology.] Only 15% of UK imports of goods from developing countries in 2001.

So mostly this is something we¹re doing to ourselves. And our anti-globalisation campaign is a conversation we¹re having with ourselves, a northern phenomenon.

Protest positively damaging. To the extent it affects policies by slowing trade liberalisation for eg, it will harm poor people in poor countries. There are concerns but they need more globalisation, not less ­ zero growth for non-globalisers in 1990s, 5% a year for the globalisers. A halt or reversal of globalisation will also harm our growth prospects.

However, we do need better policies for the unemployed and others affected by industrial change. Need to focus on people, not specific jobs or industries.

Diane Coyle, 2002.