Policy Network

Resisting globalisation is a losing strategy (I)

For nearly a generation, none of the large, advanced capitalist economies have been able to both deliver growth and promote social justice at the same time. The United States produced generally strong growth from the early 1990s until the financial meltdown, but virtually all of the economic gains in that period were captured by the highly trained professionals and managers at the top of the skills ladder and by the wealthiest 1%, who hold about 45% of America’s financial assets. Inequalities of wealth are less drastic in the major Western European economies. But the annual growth rate of the German, French and British economies averaged between 20 and 35% lower than that of the US economy over this period; and the incomes of moderate and middle-income Western European households largely stagnated, much as they did in the United States.

On both sides of the Atlantic, the challenges to fairness and growth come mainly from the signature economic developments of the time: the spread of contemporary globalisation and the economic impact of information and communications technologies. Reforms to restore the capacity of market-based economies to deliver fairness with growth have to address how these two developments are reshaping our economic lives.

1. The hallmark of contemporary globalisation is the large waves of foreign direct investments in developing nations by multinationals in advanced countries. Unlike foreign investments in earlier times, foreign direct investments (FDI) now involve huge transfers of the world’s most advanced technologies, business methods and entire business enterprises to developing economies. Through this FDI, companies can deconstruct and redistribute their production and assembly operations across nations and markets in order to take advantage of the efficiencies, resources and domestic markets of each country. And much of this FDI now flows to developing countries which create an environment attractive to multinationals through large-scale public investments in their education, infrastructure and public health systems. This process has produced the most rapid gains in output, productivity and incomes on record, in countries as disparate as China, Hungary and Brazil.

2. However, the process of contemporary globalisation carries some significant costs for advanced economies. The United States and Europe continue to host manufacturing to serve their own markets and produce the most high-end components for worldwide manufacturing. But most production and assembly has moved to developing nations and will never return. The efficiencies of these global supply and production networks have cost advanced economies much of their manufacturing base, including thousands of firms that produce goods and services used by manufacturers. They have also created a new international division of labour, in which the United States and other advanced countries have, or soon will, become predominantly idea-based economies. Since 1995, US companies have invested more in intellectual property and other intangible assets than in physical assets; and two thirds of the current value of US public companies can be traced to those intangibles. This shift drives up the incomes of those who create ideas or operate well in workplaces dense with the technologies that organise, analyse and transmit ideas – mainly professionals and managers – and drives down the market value of everyone else’s labour.

3. Globalisation squeezes average incomes in advanced economies in another way. The creation of thousands of new businesses in lower-cost countries, and of tens of thousands of new, more internet-enabled enterprises in advanced countries, has intensified competition. With greater competition, companies have less ability to raise their prices. The positive effect has been nearly a generation of historically low inflation and interest rates. The negative impact comes when companies that cannot raise their prices have to swallow the rising costs of energy or healthcare, for example, or payroll taxes. This squeeze forces them to cut other costs, starting with cuts to jobs and wages.

4. The big European nations sometimes try to resist globalisation, but that is a losing strategy. Less than 10% of the total stock of foreign direct investments made by Western European companies is located today in developing countries, compared to 30% of the FDI stock of large US firms. The result has been lower efficiency and shrinking global market shares. Not only has the United States experienced stronger growth. In addition, the world market share of Europe-based high-tech firms fell from nearly 25% in 1990 to about 18% in 2006, while the market share of US-based high-tech companies jumped from 24 to 41%. Remaining aloof from globalisation has not preserved European incomes: per capita incomes in Germany, France and Britain today average more than 30% less than in the United States.

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