Chapter 5
The Paradox of Globalisation
Barbara Ridpath
Introduction
Globalisation has gone from praised to pilloried. Throughout most of the post-war era, international trade has been seen largely as a ‘good’. The advantage to both parties of trading was based largely on Adam Smith’s description of comparative advantage in the pin factory. In his example, specialisation enables an economy to be more productive. However, today the lifting of millions from poverty around the world is often measured against the expense of job losses to workers closer to home, a reduction in the bargaining power of labour and an unhealthy interdependence among countries. Externalities such as pollution have been shifted to countries least able either to protest or rectify them.
At the heart of the anti-globalisation movement lies an argument against the inappropriate distribution of the fruits of globalisation, rather than one against its benefits. Nonetheless, this subject will remain a political minefield for years to come. This chapter argues that the benefits of trading, operating and investing cross-border exceed the harm, and that advances in technology make it easier for smaller firms and individuals to take advantage of their benefits. It will explore what is at the heart of the anti-globalisation issue and how to limit the nefarious effects. It will acknowledge the need to consider issues beyond pure economic efficiency, including quality of life and the common good. The intention is to give the reader the analytic tools to arrive at his or her own position on the subject, in order to improve debate and decision-making.
Background
From the age of exploration, we traded commodities and raw materials for finished goods. Then we began to move production closer to the source of the raw materials. After that, manufacturing moved to where the lowest production costs could be found. In the recent past, computing and communication improvements have enabled firms from Apple to Airbus to source materials, produce components and provide assembly in multiple locations. ‘Country of origin’ has become rather more difficult to define as a result. In the near future we may be able to 3D-print objects wherever we choose, completely delocalising design from manufacture. Already services can be outsourced through the internet from labour thousands of miles away, providing anything from secretarial services to engineering design. Looking further ahead, jobs taken by artificial intelligence may make moot the whole issue of delocalisation of labour.
We have come a very long way from when trade and globalisation initially benefited those most able to take advantage of economies of scale; those who could build car plants, steel plants and aluminium smelters where labour, energy or transport was cheapest. Now, in what is being called the fourth industrial revolution, thanks to the internet, almost any work can be ‘outsourced’ to the cheapest supplier anywhere in the globe; almost any small firm or individual can participate as a buyer or seller. Preparation and presentations for an investment banking client meeting, first drafts of company audits, website designs and copy-editing have all been delocalised. Courses can be taught and taken online. As a result, an analyst in Chicago might lose his or her job to a firm in Mumbai, but it also enables a parent in Falmouth to work from home in order to spend more time with small children. Those affected today are no longer just unskilled staff but white-collar professionals at all levels.
Why blame globalisation?
The world as a whole is richer for trade. One billion fewer people live on less than $1.90 a day than in the early 1980s.[1] Hundreds of millions of people have been pulled from poverty. The percentage of the world’s population whose basic human needs – food, water and shelter – are now being met continues to rise. In wealthy countries the costs of basic items of clothing, food and electronics continue to decline as a result of global production possibilities.
Trade and exchange are not at the heart of the issue. Rather, the perception that globalisation is to blame is the result of three clear factors. The first is power; specifically, unequal bargaining power. The second is differential labour, tax and regulatory conditions in different markets. The third set of issues includes education, training and culture.
The unequal bargaining power of some economic actors tilts the playing field to their advantage. The ability to shift, or even to threaten to shift jobs from one place to another limits the bargaining power of local labour. Historically, this was easier for big companies to do than small companies. Over time, this restricted union negotiating power in much of the northern hemisphere. These days, when almost anything can be outsourced, even the smallest companies can source work where it can be done most efficiently, whether ‘efficient’ is defined by costs, quality or a combination of the two.
Successfully manoeuvring in global markets has exacerbated income and particularly wealth differentials between the best off and the worst off. Stagnating real incomes have given many people the impression they are effectively falling behind. It has also concentrated the power that comes with wealth. Commanding large labour forces and highly profitable corporations affects influence with governments and policymakers who pass legislation and write regulations that determine tax rates, tariffs, regulations and employment law. Differences in these factors can have dramatic bottom-line effects on corporate costs and profits. Some jurisdictions intentionally draft legislation as a means of attracting overseas investment. This can become a race to the bottom among countries that compete to provide the most hospitable investment environment. Their intention is to create employment, generate tax revenue and increase economic growth. However, companies and their advisors have become extremely adept at finding the most attractive locations in which to base production, patents and legal entities to maximise the benefits of favourable tax and regulation, sometimes with little value-added in the jurisdiction.
Abilities to tilt the regulatory playing field or reap the tax benefits of jurisdiction-shopping can have significant implications not only for protecting profits but also for protecting market share and ensuring competitors stay small. Smaller organisations often do not have the influence or the scale to take advantage of global comparisons on such a wide range of issues. While advisors who have cut their teeth on large corporations are well placed to advise smaller companies how to take all the advantages they can, these producers are less able to influence policy unless they work through trade organisations.
Differential levels of economic development and lower costs of living and labour were once the biggest differentiators for a company searching to minimise costs. They remain important, but as the benefits of globalisation spread, these differentials tend to decrease, as evidenced by the erosion of competitiveness as wages rise in China. Over time, incremental differences tend to have more to do with the policy, tax and regulatory environment discussed above, and the pool of appropriately skilled talent available.
As production of goods and services requires ever more technical skills, the softer issues such as skill levels, education and training become more important. Successful countries have raised skill levels among their citizens to protect against the risk of joblessness due to globalisation. Some nations use strong industrial policies that attract the companies of tomorrow or offer government-sponsored innovation grants,[2] or strong research universities that help spur innovation and talent. All of these techniques encourage clusters of highly skilled workers that attract investment. Another strategy is to focus on service jobs that used to be more difficult to delocalise. Over time, both outsourcing and automation mean such tactics may provide only temporary respite. Few governments or countries have actively and successfully addressed necessary workforce education and retraining to prepare for future workforce needs, perhaps presuming that the market would force the adjustment. This has inadvertently created much of the current backlash against globalisation.
The hardest and most sensitive issue to address is often the ‘willingness to work hard’ argument. The incentives to work hard for those without social safety nets, or those of the first generation with the possibility of escaping poverty, can contrast markedly with those for workers from wealthy countries unaccustomed to facing competition for their skills from elsewhere. However, economic prosperity is only one element in overall prosperity. A concept of prosperity that includes community, health, leisure, culture, meaningful work and a sustainable environment would go some way to balance current emphasis on consumption and economic growth. Both France and Bhutan have tried to measure gross national happiness. For the moment, however, there is little that encourages businesses to consider the implications of their actions beyond the financial outcome.
Who pays, who benefits?
It is clear that not everyone wins from this game of globalisation. Finding oneself in a global marketplace without strong skills or bargaining power is a disheartening and destabilising position for many workers, and indeed many companies. And it is not just the displaced steel worker in the American Rust Belt. The textile worker in Asia working unacceptable hours in dangerous conditions may be materially better off, but may risk his or her life to be so.
Are these forces genuinely beyond our control? Is it possible for employees, consumers and small companies to improve their bargaining position? These questions can be addressed at two levels. At the ‘macro’ level there are issues that can only be resolved across boundaries by coalitions of the interested and willing. These are issues such as tax policy coordination, labour bargaining and raising conditions among the lowest paid. Issues at the ‘micro’ level are those for which individuals can take responsibility as investors, entrepreneurs, employers, employees or consumers.
At the macro level: International action on tax and labour conditions needs to be coordinated. The International Labour Organization (ILO) was formed in 1919 specifically to bring together governments, employers and workers, to set labour standards, develop policies and devise programmes promoting decent work for all women and men. While these are noble standards, workers’ rights have been largely eroded by diminishing labour-union membership; the move to using contract or freelance workers (sometimes called the ‘gig’ economy); the technological ability to outsource around the world through the internet. New means must be found to seek any kind of level playing field. Reinvigorating the ILO to stop a race to the bottom in regulation on health and safety and work protections would be a start. Creation and protection of social safety networks around the world would diminish a race to the bottom on pay and working conditions. In each case it is important that such changes do not so diminish competitiveness that whole populations are re-impoverished. Corporations do not necessarily see this as something that is in their interest, so it is important to find coalitions of politicians, policymakers and non-governmental organisations that can speak for those with insufficient voice or power to represent themselves.
Corporate tax rates are set by sovereign governments, often with an eye to competitive levels to attract investment. International attention to tax minimisation since the financial crisis has led to work by the OECD to coordinate comparisons and try to stop egregious ‘tax shopping’, notably by offshore financial centres, but there is still work to do. Here too politicians need to understand how important this is to their constituents if change is to occur.
On both of these issues, concerned individuals can engage by raising a concerted voice on the importance of these issues to their elected officials and through non-governmental organisations. In order to do that, individuals need to consider what they believe to be in the common good, and whether that common good is defined as local, national or international.
For example, narrow, selfish agendas of global pharmaceutical companies have pushed tougher patent rules, while banks have lobbied for unfettered access to foreign markets. It is not clear that in either of these areas the corporations have a greater regard for public interest than the protectionists do.[3] Both as companies and individuals, we need to look beyond our narrow self-interest to what we want the world we live in to look like, how we want to treat our fellow citizens on the planet and how our actions affect others.
At the micro level: The fact that the macro is a collection of micro decisions is why the behaviour of the individual is so important in determining the future of globalisation. As we have all seen in recent years, our ability to make our voices heard has been amplified by the magic of social media. The Bangladeshi Primark subcontractor factory collapse in 2013 created serious reputational damage for Primark and changed the buying habits of many of their young customers. The garment industry has changed for the better as a result, but consumers and investors cannot afford to be complacent. Individuals as consumers, investors and employers need to vote with their wallets to make their voices heard.
Consumers have never had so much choice nor have they ever had so much product information at their fingertips. We can choose to buy Fairtrade goods if that is important to us. We can choose to avoid imported, non-seasonal produce or flowers that take away precious water from subsistence farmers. Consumers can choose to support local production or companies with low carbon footprints if that matters to them. We need to learn that every choice about consumption is also a moral choice about the sourcing of the inputs and the labour. At the very least we can choose to buy from companies that share our values, in whom we have confidence that they will check the treatment of subcontracted workers and the quality of their supply chain.
More of us are investors than we realise. Anyone with a private pension is an investor. As investors, we need to consider not just the short-term return of our investments but how the companies we invest in operate, their values and their social purpose. Anyone with a private pension can voice their views on these subjects to the trustees of the plan or the manager of the investments. Increasingly there are funds that take ethical considerations into account, which range from the type of products sold to environmental issues and increasingly labour issues. While in its early stages, some companies are beginning to use triple-bottom-line reporting. This refers to how a corporation deals with and reports on its impact and behaviour with respect to people, planet and profit. The intention of such reporting is to improve transparency and accountability in public disclosure regarding environmental, social and economic dimensions of corporate performance. To ask these questions before investing helps ensure that your money is working in a way that is consistent with your values.
Regarding labour, for those of us who employ people, wherever in the world they might be, we need to consider whether we treat them as we would wish to be treated. We need to think of them as human beings, not just ‘human resources’. Do we pay our employees a wage that permits them to live, or are they required to take a second job to make ends meet? The employment contract should benefit both employers and employees. Employers should develop staff to move up within the business rather than using them up until they are worn out.
Not everyone will be in a position to drive change as readily as others, but each of us can have an impact by using both our money and our voice in accordance with our values. It is often difficult to see the impact of such small movements, but they encourage others to consider their own behaviours. It does not take a majority to create change; a significant and vocal minority can often provide the tipping point for action. The impact of many small voices on child labour, sourcing and environmental issues is becoming significant, as it is also in investment policies and ethical investment funds.
Many businesses anxious to retain the best talent who understand their customers’ demands have already embraced a value proposition for their company that considers ‘What is the right thing to do?’ and the reputational cost of not doing it. It is important to beware, however, of companies that talk a good line but whose actions may not be aligned with their purported policies. Caution is warranted to ensure that fine words are consistent with a company’s actions.
Conclusion
Dani Rodrik suggested 20 years ago that ‘too much globalisation would deepen societal cleavages, exacerbate distributional problems and undermine domestic social bargains.’ He also suggested that economists had a lot to answer for by not being clearer about the costs as well as benefits of free trade.[4] Insofar as it is difficult for any single consumer or investor to have much power to effect change, he was correct. However, as with most things, trade and globalisation are neither all good nor all bad. The arguments are far more nuanced than people with vested interests on either side of the debate want you to believe.
Companies and consumers would be well served to consider the common good in their own decision-making and not just their own self-interest. The Archbishop of Canterbury’s new book recommends dethroning Mammon.[5] This may take some time. Nonetheless, positive engagement would go a long way to redressing the balance of negotiating power in the global marketplace. After all, businesses know just how important consumers are to their success. Look at how much money they spend trying to influence our decisions and desires through marketing and advertising. The consumer needs to learn how to use that influence effectively.
Notes to Chapter 5
[1] Mark Carney, ‘The Spectre of Monetarism’, Roscoe Lecture, Liverpool John Moores University, 5 December 2016, www.bankofengland.co.uk/publications/Documents/speeches/2016/speech946.pdf.
[2] Numerous product developments originating in NASA grants, or technology developments that grew out of the Defense Department in the USA, are often cited as indirect innovation investment by government.
[3] Dani Rodrik, ‘Straight Talk on Trade’, Project Syndicate, 15 November 2016, www.project-syndicate.org/commentary/trump-win-economists-responsible-by-dani-rodrik-2016-11.
[4] Rodrik, ‘Straight Talk on Trade’.
[5] Justin Welby, Dethroning Mammon: Making Money Serve Grace, London: Bloomsbury, 2016.