TCS Daily

Our Special Responsibility

By Frits Bolkestein - May 21, 2003 12:00 AM

Globalization is the buzz word of our time. But what exactly does globalization mean?

How is it likely to affect our lives? Is it a curse or a blessing? Should we fear globalization or should we acclaim it? Will it bring us more economic well-being or will it undermine the foundation of the welfare states, especially in Europe? Will it lead to a rat race in which only the fittest can survive, thus destroying our traditional communities and cultural diversity? Will it lead to ecodumping and social dumping by low-wage countries with the devastation of the environment and the loss of competitiveness of our industries in their wake? Will it drag us down into a race to the bottom, thus jeopardizing our standard of living? Or will it, on the contrary, unleash the wealth-creating capacities of our societies even further, thus promoting individual and collective freedom and facilitating the fulfillment of ever growing individual and social ambitions?

The definition of globalization is similar to that of an elephant. According to a well-known story, three blindfolded people are led to an elephant. One is made to feel a leg, another its trunk, and the third its tail. On being asked, the first one states it's a tree, the second one thinks it's is a fire hose and the third one states it is a whip. In the same way there are different notions of globalization.

In a narrow sense, globalization involves the rapid and pervasive diffusion around the globe of production, consumption and investment of goods, services, technology and capital. This process has been promoted by trade liberalization, international flows of capital and foreign direct investment and the integration of national markets. It has also been boosted by rapid developments in information processing, communications technology and transportation facilities, which have erased borders and shrunk time and distance.

In 1492, for instance, it took five months for Queen Isabella to learn of Columbus' voyage; it took two weeks for Europe to learn of President Lincoln's assassination; and it took only 1.3 seconds for the world to witness Neil Armstrong's first step on the moon. The cost of three-minute telephone call between London and New York plunged from several hundred dollars in 1930 to a few eurocents today. The cost of computer power has declined by more than 99 percent and is still going down. The unit cost of sea freight declined by 70 percent from 1980 to 1996.

All this has generated fundamental changes in business organization and practices in which the multinationals play a major role. According to a United Nations study, the world's 60,000 transnational corporations now produce about one quarter of the world's output. Their foreign affiliates had sales of $11 trillion in 1998 compared with world exports of $7 trillion. The growth of multinational companies has produced a significant expansion of foreign direct investment in both industrial and developing countries. American investment overseas is equal to about 20 percent of GDP today, compared with 7 percent in the early 20th century.

The pace of globalization in a narrow sense may be illustrated in various ways. The volume of world trade grew more rapidly than world output during the 1970s and 1980s, especially in the manufacturing sector, and foreign direct investment rose much more rapidly than either foreign trade or gross domestic product, as multinational companies sought to position themselves effectively in an increasingly global economy.

In a broader sense, however, globalization exceeds the interaction of economic factors and agents and also includes its impact on social and cultural systems, policies, and processes for social reform that promote human development and an improvement of the human condition.

But is globalization really a completely new phenomenon? In some respects, today's market and trade globalization has yet to reach the level of integration achieved under the gold standard and free trade at the beginning of the twentieth century. In 1913, Britain was exporting capital on a scale equal to 9 percent of its GDP per annum, and had overseas assets worth almost 140 percent of GDP. Moreover, there was far more mobility of labour in the global economy than exists today.

Now let us look at the criticisms often leveled at globalization.

  • Does globalization lead to growing income inequality within and between nations?

  • Is globalization a threat to our or anybody's standard of living, the welfare state and, more generally, our way of life?

  • Is globalization harmful to the environment?

Most critics of globalization concede that it promotes growth but argue that it only serves the interests of the rich. As the prosperous become more so, inequalities widen and the poor are left out. It is a claim that is made of rich and poor countries, and of rich and poor people within any given country.

But experience over the past few decades has abundantly taught us that poor countries which cut themselves off from the global economy and fail in other ways to establish a platform for growth will indeed stay poor; the rest grow and in fact catch up with the wealthier developed nations.

The economist Paul Krugman has noted in this respect: 'If most countries [...] are eager or at least willing to participate in globalization, it is because they are convinced that it is in their own interests. And by and large they are right. The raw fact is that every successful example of economic development this past century - every case of a poor nation that worked its way up to a more or less decent, or at least dramatically better, standard of living - has taken place via globalization; that is, by producing for the world market rather than trying for self-sufficiency. Many of the workers who do that production for the global market are very badly paid by First World standards. But to claim that they have been impoverished by globalization, you have to carefully ignore comparisons across time and space - namely, you have to forget that those workers were even poorer before the new exporting jobs became available and ignore the fact that those who do not have access to the global market are far worse off than those who do.'

Overall, countries integrating rapidly with the world economy have fared better than those integrating more slowly, the fastest globalizing countries have enjoyed rate of economic growth that averaged 30 to 50 percent higher over the past 20 years. The same countries also enjoyed greater political freedom, more social spending and received higher scores on the UN Human Development Index, an indicator of longevity, literacy and standard of living.

As regards income distribution within countries, a paper by David Dollar and Aart Kraay of the World Bank shows that growth really does help the poor: in fact, it raises their incomes by about as much as it raises the incomes of everyone else. The authors have looked at data on growth, incomes and a variety of other variables for 80 countries over four decades. On average, incomes of the poor rise one-for-one with incomes overall. As the authors emphasise, this is not 'trickle-down' - meaning that the rich get richer and then, after a while, the poor do better as well. The rich, the poor and the country as a whole all see their incomes rise simultaneously at about the same rate.

A rising tide of wealth is supposed to lift all boats. Yet globalization has its winners and its losers. Globalization has proceeded largely for the benefit of the dynamic and economically advanced countries, whilst its economic impact on many poor nations and a large quantity of poor people has been staggering, one reason being that trade liberalization did deliberately exclude two sectors that are vital to the economies of many developing countries: agriculture and textile industries. Here the ball lies clearly in the court of the developed countries.

But the developing countries can achieve a lot of progress on their own. India is an interesting case in point. The world's biggest democracy, for four decades it pursued policies of anti-globalization, shutting out trade and foreign investment as best it could. To put it mildly, this did its hundreds of millions of poor no good at all. Finally, in the past decade it has begun to embrace globalization, gradually opening itself up to the world. As a result, India's economic growth rate, and with it the welfare and prospects of the poor, has started to pick up. To be sure, the process is still underway and halfway at most, but hopes are high.

More generally, the question of whether or not developing countries are likely to exploit opportunities in the world market will depend on the fulfillment of a number fundamental conditions: the rule of law, secure property rights, macro-economic stability, the fight against corruption, a reliable judiciary and basic public services, such as health and education. Most of the poorest countries have suffered because of domestic misrule, corruption and inept economic policies.

So far for the Third World. But what about our own societies?

Critics often claim that in the light of globalization, countries have lost all room of manoeuvre to design their own socioeconomic system in accordance with their own national political preferences. The British political scientist John Gray, for example, regards - what he calls - the demise of the welfare state as a direct effect of globalization:

'To imagine that the social market economies of the past can renew themselves intact under the forces of downwards harmonization is the most dangerous of the many illusions associated with the global market. Instead social market systems are being compelled progressively to dismantle themselves, so that they can compete on more equal terms with economies in which environmental, social and labour costs are lowest.'

Many other authors make the same assertion. They call it: 'a race to the bottom'. But is it true? Let us take a look at the long term. The expansion of world trade and the shift in Western economies from manufacturing to the service sector has taken place continuously throughout the postwar period. The contemporary pace of change is not exceptional. Indeed, the social consequences of today's technological innovation are less dramatic than those generated by earlier waves of change, such as the mechanization of agriculture or the migration from the land to cities in the middle decades of this century, a process that truly transformed the social landscape of Western nations. The strength of Western economies is that they always show themselves able to adapt to change.

In order to substantiate this point let us refer to the British economist Paul Hirst who wrote: '... the issue of international exposure is not new and historically a high degree of internationalization has been typical of the smaller advanced countries, and it has induced higher rather than lower levels of public and welfare spending.' In this respect he referred to Denmark and the Netherlands as small and highly international states, which face similar pressures but with different industrial and institutional structures. And he observed: '... they offer a crucial experiment. ... If the effect of internationalization is to undermine welfare, it should be visible here. If societies can contain these external pressures, then the ability of different complexes of institutions to adapt and respond shows that policy does have an effect and that there are options at the political level.'

And indeed, these countries have fared exceptionally well over the last decade, both economically and socially. More generally, it is now clear that cutbacks on welfare state spending have nowhere been dramatic when viewed in relation to the continuing bulk of provisions. Why is this so? The answer lies in the durability of existing welfare state institutions and their support within different political constituencies.

Contrary to what many people seem to believe, welfare state reform was primarily induced, not by globalization, but by the fact that the welfare state has succumbed to its inherent flaws. It has eroded incentives to participate in the labour market, to change jobs where necessary, to save and to engage in entrepreneurial activities. In doing so, it has jeopardized our capacity to adapt to changing circumstances and has therefore undermined the wealth-creating capacity of our economies, which is the ultimate source of prosperity as well as the source of financing of our welfare states.

Experience with the overextended welfare state over the last few decades has taught us that rigidities at the micro level will result in bad economic performance and instability at the macro level, whereas, flexibility and propensity to change on the micro level will increase economic performance and stability at the macro level.

There is a broad-based consensus that a society requires a certain degree of solidarity between the rich and the poor in order to continue to function as a democratic polity and a free market economy. The welfare state with its provisions is the institutional expression of that solidarity. But it should be designed in such a way that it is sustainable. In other words we must find an optimal equilibrium between efficiency and equality - a proper balance between the creation of wealth and its distribution. One may argue about the precise point where this balance should be struck - and this is the subject of a major part of our political debate - but nobody in Europe contests the welfare state as a matter of principle.

Even before the notion of globalization emerged - some time in the eighties - the reform of the welfare state was long overdue. And many countries which started early with this reform are today in a far better shape - both in terms of economic growth and employment - than those which postponed the biting of the bullet. Irrespective of globalization it had to be done.

Is globalization then harmful to the environment? On this Paul Krugman wrote: 'Certainly some forests have been cut down to feed global markets. But nations that are heedless of the environment are quite capable of doing immense damage without the help of multinational corporations - just ask the East Europeans. [...] the most conspicuous examples of environmental pillage in the Third World today have nothing to do with the WTO. The forest fires that envelop Southeast Asia in an annual smoke cloud are set by land-hungry locals; the subsidized destruction of Amazonian rain forests began as part of a Brazilian strategy of inward-looking development. On the whole, integration of the world economy, which puts national actions under international scrutiny, is probably on balance a force toward better, not worse, environmental policies.'

And indeed as far as the relationship between trade and environmental protection is concerned, it is important to understand why trade generally benefits the environment. The reason is that it boosts economic growth. As people get richer, they want a cleaner environment - and they acquire the means to pay for it.

Therefore, we should pursue our efforts to foster the process of globalization. Since the end of World War II trade liberalisation as promoted by GATT - now WTO - has made an invaluable contribution to economic growth and a rise in the standard of living, from which broad layers of the world population have benefited. There is no reason to believe that the wealth-creating potential of this process has been exhausted. On the contrary!

Economic growth is not manna from heaven. It has to be earned by increasing efficiency and productivity. These are fostered by powerful competitive pressures inherent in the emerging global market. In that sense they are beneficial to the long-term health of our economies. They eliminate inefficient industries and free up resources for new opportunities for high quality, high value-added industries that are competitive on the world level.

Liberalisation still offers boundless opportunities for the substantial improvement of the human condition throughout the globe. The advanced economies carry a special responsibility for progress towards its achievement. Therefore, it is of utmost importance that they do not yield to the siren songs of anti-globalists.

Frits Bolkestein is Internal Market Commissioner. Hans H.J. Labohm is a senior visiting fellow at the Nederlands Instituut voor Internationale Betrekkingen Clingendael and a frequent TCS contributor.

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