Globalisation – Wealth, poverty and sustainability

by Gary Hadler

[Articles home]

I live in Hong Kong and am an economist by profession.  I also teach Economics to people.  The hottest topic in Economics these days is globalisation.  The following article gives some of my thoughts about this topic.

Globalisation and development

“Globalisation (Globalization) – The integration of the world’s economies brought about by the rapid improvements in communication and transportation. Globalisation involves the spread of economic, social and cultural ideas across the world, and growing uniformity between different places that result from this spread.  It has come about as a result of increased integration of national economies through growth of international trade, investment and capital flows, made possible by rapid improvements in technology.

The above is a fairly standard definition about what globalisation is.  But the real question is “does globalisation work?”  In Economics we start with two basic assumptions.  The first is ‘scarcity’ – This assumption tells us that resources are limited yet wants are unlimited therefore we have to make choices.  Which wants are we to satisfy with our limited resources?

Developed world

The second assumption is that of living standards, which refers to the amount of goods and services available per person. Living standards are limited by a country's ability to produce. Potential national output depends on the country's resources, technology and productivity.

The assumption that underpins this is that it is the main economic role of government to increase the population’s living standards.  Here lies the basic conflict in the economic model of capitalism.  The fact that resources are limited and therefore will run out but every government in the world is seeking to give its people more goods and services.  Those who argue in favor of globalisation point to the fact that the only way for countries to continue to increase living standards is through economic growth.  The best way to achieve economic growth is free trade.  Free trade allows a country to enjoy the benefits brought about by absolute and comparative advantage.  Why then do the advantages of globalisation seem to be helping the wealthy countries more?  Can the environment stand the rapid increase in economic development that is occurring in some of the world?

Those who argue in favor of globalisation often say it is inevitable, but we only have to look at 20th century history to see the process can grind to a halt very quickly.  The two World Wars and the Great Depression are examples of where the globalisation process was interrupted and reversed.  The inevitability of globalisation probably cannot be questioned.  The speed certainly can. 

History can serve as a warning.  For globalisation to succeed requires policy decisions and constant leadership.  It cannot simply be assumed that globalisation will bring benefits or even will continue to expand.  Those who argue in favor of globalisation, point to a limited amount of Asian countries that have seen rapid economic growth as a result of the process.  These people argue that only by global integration can the high rates of growth that are needed to reduce poverty can be be sustained.  A second group argue that globalisation can be good but not if the process is not regulated and directed.  The free market, open economies policies pushed by organisations such as the IMF and World Bank do not appear to have seen the benefits of growth shared.  It can be argued that the economic power of transnationals and the wealthy countries sees unregulated globalisation only really bring benefits to the developed world.

Those who are opposed to globalisation really fall into two main groups.  The first view the system as so biased that it is in need of a complete top to bottom change or reform in order to make global integration attractive for most poor nations.  Barring that, many opponents support isolation.

The second group is opposed on environmental grounds.  This group argues that the world cannot sustain globalisation.  This group argues that environmentally sustainable development (Sustainable development - Is development that meets the needs of the present without compromising the ability of future generations to meet their own needs) can only be achieved with a reduction in the rate of resource use and associated pollution.  The theme of this argument is basically that the allocation of resource consumption needs to be changed.  The developed world must reduce their resource use and pollution level in order for the developing world to increase theirs.  Proponents of this view believe globalisation in the end will destroy us all if we do not change our consumption habits.

It is very clear that the poor or developing nations have not grown anywhere near as rapidly as the wealthy ones in real per capita terms over the past few decades.  The reasons for the lack of growth can be attributed to a variety of factors such as geography, lack of resources, bad governance, corruption, war and other kinds of inhibitors to development.

It does appear the lack of development and growth for many countries is something more than these individual factors.  There seems to be something more systematic at work.  Globalisation as it currently works seems to only bring benefits to some countries and almost none at all to Africa, Central Asia and much of Latin America.

Even if it is accepted that there have been many poor or inappropriate policy choices made by some developing countries, there are legitimate points or objections that can be made about the basic rules which govern the game.  One of these is that most wealthy countries do not want and will not allow any significant migration of labour from poor countries to their own.

The resulting effect of this constraint on the freer movement of people (some skilled labour aside) has resulted in the much slower equalization of incomes, substantially lower flows of remittances and a much reduced build up of skills from returning workers.

If those who support globalisation argue for that freer movement of goods and capital one must ask why not labour?  The reason can probably be found in the fact that no important or significant interest group exists in developed countries which is in favor of free immigration.  There is also little in the way of popular support in the developed world for increased migration.

On top of this there are well organised groups within the developed world which insist on protection or subsidies for their production even though this competes against the goods produced by the poor countries more cheaply.  This robs many countries of the ability to gain from increased trade.  The basic principles of absolute and comparative advantage tell us that all countries would be better off with free trade.  The reality is world trade is far from free.  This is especially true for agricultural products where farm subsides cause depressed prices and world over supply.

The commonplace rise of global communication has also caused increased problems and resentment.  People in remote villages of Africa or Asia can watch CNN and the BBC via a satellite dish and a generator.  The question needs to be asked is a peaceful and content world likely to result when billions of poor people in differing levels of poverty see affluence and waste every day on the TV screen, but are denied the hope or expectation of even the most moderate of gains in their own living standards?  Is it going to continue to be possible for the rich to become even wealthier while billions live in dire conditions of absolute poverty? Is it going to be enough to tighten border controls and continue to try to restrict the flow of migrants?

It is important to remember that the growth of international terrorism is another aspect of Globalisation.  Al Qaeda is a global terror network with cells and sympathizers all over the world.  Many try to link poverty to terrorism but the link is quite weak and not very convincing.  Very poor people are not the ones who hijack planes and explode bombs.  These actions tend to be carried out by the very angry, educated and reasonably well financed groups.  It may be true that some of the foot soldiers come from the very poor but the leaders of these movements are not the destitute.  It is also true though that these groups do have much support and sympathy from those who feel globalisation is leaving them out.

It does seem reasonable to assume that a world in which so much inequality exists will lead to frustration among many.  This may see a reduction in the will to defend the status quo.  Extreme viewpoints may flourish.

This raises another uncertainty about the sustainability of globalisation.  Are the terrorists capable of so changing the existing balance between the costs and benefits from increased flows of goods and, to some lesser extent, people, that fundamentally or radically different modes of economic organisation will need to be chosen?

Already terrorist organisations’ actions have seen a reduction in the ability to travel.  What would happen if a very large scale terrorist attack saw a dirty bomb detonated in a major western city?  Or if biological weapons were used against a country?  Would borders be closed and racial profiling run rampant?  There are worrying signs already of these potential consequences.  This could see globalisation grind to a halt.

Would cities remain centres of commerce and society if dirty bombs were exploded in them?  What would happen if aggressive programs of economic vandalism were targeted at energy supplies and communication networks?

One would expect a society under attack of this kind to tend to place increasing emphasis on safety.  Risk taking would not be encouraged.  Trade and travel would diminish and thus incomes and production would fall. The public would most likely be willing to accept greater intrusions on their privacy and freedoms in the name of increased security.  Those who dissent would be silenced or at the least heavily discouraged. 

In the worse case countries could increasingly withdraw from the world.  There may be a major move towards self sufficiency.  The unreliability and fear of others could see a closing of societies rather than an opening of them.

The possibility of a major pandemic outbreak could have similar or even greater consequences.  Airports could be closed.  Quarantine regulations may make trade almost impossible.  The movement to self sufficiency and isolation may be seen as the only way to protect family and community.

If these very pessimistic scenarios were to occur, it is inevitable that the countries which would suffer the most would be in the developing world.  These could include countries like India and China which have chosen to increasingly integrate themselves into a globalised world.

The Great Depression of the 1930s and the resulting economic dislocation and upheaval is really the only recent model we have for the likely or possible damage that would be done too many developing countries.  It would be a giant step backwards.

So what does the world community need to do to avoid such a possible outcome?  Clearly globalisation would have to work better – and – be seen to work better – for many more people around the globe.

There would need to be a widely shared sense that we all have so much to lose from such criminal terrorism and economic vandalism that there would be a real and conserted alliance against these people and their destructive activities.

The problem is it is not really very clear exactly in what direction those wanting the benefits of globalisation without its vulnerability and imbalances can turn.

Recent experiences have not been positive. The wars in Iraq and Afghanistan have not been successful in reducing disillusionment and spreading democratic values.  In fact it is quite easy to argue that they have had the opposite effect.  These wars have lead to increased insatiability and growing resentment towards many developed countries by those who wish to see the existing world order radically changed.

The recent WTO ministerial conference in Hong Kong ended up close to farce.  The only agreement that was reached was an agreement to do nothing now but to try to bring about changes in the future.  This is really just a way of avoiding the issue.  Will governments in a few years’ time be more willing to implement changes that cause resentment among powerful interest groups in their countries than they are now?  It is probably unlikely.

Can the Euro-bureaucratic model that is scarcely answerable even to its own citizens, much less to those not in any formal way represented, bring about reform? Will the transnational companies and their managers who are more concerned with the earnings of their shareholders implement significant reforms that will see greater equality in the distribution of wealth?  Can the unions or activists, who are in favor of highly protectionist policies while at the same time claiming to want to protect workers in the developing world from the sweatshop conditions where often they are required to work, use their influence to pressure governments for real change?  Does anyone really think that the US political system that has been so captured by special and local interest groups that unwanted weapon systems are approved even while the US itself is facing a growing energy crisis can lead the world to significant reform?  Is the United Nations able to step up to the task of leadership and reform?

The problem is made worse by the fact that the global system has no real core of management and leadership to keep it focused and together in a coherent way.  On top of this the competing groups and interests do not tend to interact in a way that is politically and economically inclusive. 

This is another way of saying that the best economically efficient and desirable solution is not politically or socially viable. 

This means that those in our world with the power need to rethink and reorganize the way production and consumption happens in the world if globalisation is going to continue without major or critical interruptions.  In business or investment, most would be hesitant to put money into an endeavor that has more than one possible critical risk.  Globalisation as it is currently occurring has many.  Changes are necessary if we want our systems to be robust as well as efficient and our lives to be secure as well as affluent.

The alternative may be that all of us, rich and poor alike, will see cycles of globalisation.  These cycles may see two steps forward and then one step backwards, each upwards cycle containing the possible seeds of its own destruction as the competing institutions and secular interest groups fail to adjust adequately or quickly enough to the social, political and environmental strains that  improvements in technology and communication combined with increased open markets bring.

The questions raised by globalisation and its effects on wealth and poverty are vast.  The ability of globalisation be continue in a sustainable way is in my opinion in some doubt.

It has been said that arguing against globalization is like arguing against the laws of gravity.
Kofi Annan 

mail4/F, BOC Group Life Assurance Tower, 134-136 Des Voeux Road Central, HK (entrance on Gilman St.)

Shop A-C, 5/F, Cameron Plaza, 23- 25A Cameron Road, Tsim Sha Tsui

Central: (852) 2116-3916

TST: (852) 2116-3258

[email protected]