Globalisation

Table of contents:

Introduction

Globalisation: very advanced?
International trade
International finance
MNCs and FDI

Companies can produce anywhere

National governments: lost their ability to regulate

Conclusion

Globalisation

Essay 1: Lester Thurow argues that globalisation is already very advanced, that companies can produce anywhere in the world, and that government have lost their ability to regulate their national economies. How far is this view on globalisation valid?

Introduction

Globalisation, a word that appeared more than once in the news the last couple of years. Göteborg and Genua are for the public maybe the two best known cities in relation to this subject. In these two cities the so-called anti-globalists left a trace of destruction and had violent confrontations with the police.

But what does globalisation actually means? Held and others give the following definition: „Globalisation is a process, which is not at end-state, and which reflects recent sharp increases in levels of international activity, particularly, but not exclusivelym international flows.“ (Held a.o.)

In the lecture notes there is a text written by Lester Thurow. Thurow is a member of the hyperglobalist school and we can summarize his view on globalisation in three main points. He thinks that globalisation is already in a very advanced stage, that companies can produce anywhere in the world, and that governments have lost their ability to regulate their national economies.

This view is a extreme view on globalisation. In this essay I will also try to find out and point out how valid this view on globalisation actually is. I will also try to give the view of the opposite side, the globalisation sceptics. My analysis will follow on the theory of Lester Thurow, the main points of which I have mentioned above.

Globalisation: very advanced?

The first point of Lester Thurow that I’m going to handle is the one which says globalisation is already very advanced. The hyperglobalists on the one hand, agree with this point. They argue that global markets are perfectly integrated, that consumers are able to buy all kinds of products from all over the world and that companies can, in theory, produce anywhere in the world (there are always restrictions).

The globalisation sceptics, on the other hand, say that there is regionalisation than globalisation. Think of the development of the 3 main trading blocs EU, NAFTA and APEC. Their second opinion is that the current level of globalisation hasn’t changed since the Gold Standard Period¹ (Held and others, 199???).

If we take a deeper look, we can say that not all arguments given by the two parties are totally correct. To find an answer on the question how advanced globalisation really is, I’m going to analyse international trade, international finance and foreign direct investments(FDI)/ the developement of multinational corporations (MNCs).

International trade

We can start by saying that all countries trade, not all in the same proportion, but they all do. The story of international trade starts in the Middle Ages with the Hanseatic League², and the Italian trading and banking houses. In the 17th and the 18th century countries started to do trade with their colonies (e.g. Britisch and Dutch East India Company). But the real take-off for international trade was after the Industrial Revolution, when companies became able to produce very large quantities and could develop comparative advantages. International trade grew further with the expansion of the MNCs, with a very fast growth between 1950 and 1973 (Hirst and Thompson, 1999).

But is international trade already very advanced? What does ‚very advanced‘ mean actually? I take the Gold Standard Period to compare with because in this period, international trade was at a very high level, certainly in the end. The globalisation sceptics say that the level of globalisation is not higher now than in the Gold Standard. This argument is based on the evolution of the merchandise trade/GDP ratio for a range of important countries. If we compare 1913 to 1995, the level of that ratio is equal of even lower for a couple of countries.

Contrary, the hyperglobalisation approach and also Held believe that there quite a significant difference in favour of the present. Their beliefs are based first on the fact that the world market is more open now, as a result of the decrease in transportation and communication costs and a decline in protectionism. Second, when we take a look at the development of the intensity of trade, measured by the export/GDP ratio, there is a clear upward trend. Already in the 1970‘s this ratio was higher than the Gold Standard Period.

The big difference between the two opposite parties is the fact that the growth of GDP of the Second World War is particularly a result of the expansion of non-tradable services.

Held a.o. write a last argument in favour of Thurow on this subject is that the institutional framework has changed a lot. In the Gold Standard Period, bilateral en lateral agreements set a range of standards of trade. In the postwar period, there was the GATT, with its most favoured nation concept, which is transformed now in the WTO.

To conclude this little part, I think it’s pretty clear that globalisation is already very advanced, at least in the area of international trade.

International finance

International finance grew rapidly after the Second World War, Held a.o. say. This is also opinion of the hyperglobalists. They argue that the international financial market is the ultimate perfect global market: everybody is able to borrow and to save by the international banks, shares and bonds are sold all over the world, etc. Since the 1960’s, global financial flows increased because the demand for international finance increased. US multinational companies (MNCs) started investing in Europe and at the same time US banks opened offices in foreign countries, especially London, so that loans in US dollars were not controlled (not by US because it happened outside the US and not by foreign government because it was in US dollars). In the 1970’s, banking got even more internationalised. The big US and European banks opened offices all over the world and also European and Japanese MNCs started investing in the states. In the 1980’s, most capital controls were eliminated by the most OECD-countries and portfolio investment³ had its take off, first into developed countries’ assets, later also in the emerging markets (SE Asia and Latin America). In the 1990’s, financial markets were completely internationalised.

Also interest rates got more and more synchronised. Because it was so easy to move capital, other countries followed always quite fast when a country raised its interest rate. Otherwise capital would flow away from the country with the lowest rate to that one with the highest rate (Lecture notes).

The sceptics on the other hand, think that financial markets are not that integrated at all, there rather national. They say that only nominal interest rate are globally determined not the real one. This was more or less the case in the Gold Standard Period. They argue also that there hasn’t been a change in the speed at which dramatic share price decreases spread around the globe since the beginning of the 20th century. So panic on financial markets is noticed almost a the same time as 90-100 years ago, at least for professional investors (Hirst & Thompson).

Only 9% of all corporate equities of the ‘big four economies’⁴, are in foreign hands. And only 10% of all financial assets held by households are foreign. This figures state, the sceptics say, that the financial market in mainly domestic (Hirst & Thompson).

As a conclusion we can say that financial markets are very internationalised. The arguments the sceptics give are not strong all, and the figures we saw in class proove that you can’t deny the very advanced globalisation in this area.

MNC and FDI

Mutlinational companies are quite important for world economy if we take a look at the figures: they are responsible for one third of world output and two third of international trade. MNCs have a long history but their real expansion was after the Second World War in the US. In the 1970’s, also Asian and European MNC started expanding.

The hyperglobalist school argues that MNC can sell and produce anywhere in the world. Because of this, a kind of international competition was created and the result is that no MNC can afford to be not represented on a market. That meant that there were a lot of foreign direct investments on a lot of markets (especially the markets of the developed countries), mainly Mergers and Acquisitions (Held a.o.).

The sceptics say that MNC have almost all their sales in their home country, so that they are rather national companies with international transactions. They also have doubt about the figures mentioned above: when a lot of sales are in the home country, more than two third of world output is produced by national companies. And one fourth of international consists of trade between branches, trade that doesn’t go through the market. So they argue that MNCs are not so important for globalisation.

Maybe the sceptics are right on this point, but this can not deny the fact that globalisation is already very advanced. By looking at international trade and especially international finance this became very clear to me.

Companies can produce anywhere in the world

MNCs have always introduced a lot of innovations, some autors call them sometimes “technologically dynamic industries”. Because of this technological advantage, which is very important for their growth, MNCs are able to produce wherever they get the best conditions (cost and demand conditions). The costs of moving their technology does not really influece the advantage of moving. As a result, national governments do a lot of efforts to attract MNCs (FDI) because of employment, investments, taxes, etc. (Held a.o.)

National government: lost their ability to regulate?

The first point we have to say on this question is that governments are always restricted under capitalism. They need to ensure economic production, and in some countries certain groups have a lot of influence on the government/economy (e.g. in the US the “military- industrial bloc”).

The hyperglobalist say that governments have no more influence and they refer to the interest rates that are determined globally (see above) and the fact that MNCs can just move away if they don’t like the policy (Lecture notes).

The sceptics and also Held a.o. argue that the have maybe lost some tools but that they have still a certain power left. Think about ‘home country responsibility’⁵ in banking. Held a.o. also say “Global economic networks run accros the networks of power of the national states and therefore governments still have power.” But we have to see the difference between strong and weak states. Some countries have an important market where no MNC wants to be excluded from and then the state can still regulate the national economie.

Conclusion

After this rather short view on the extended subject of globalisation we can say that Lester Thurow view is partly valid. About the first two points, globalisation is very advanced and companies can produce anywhere in the world, I agree with Thurow. The first point has very strong arguments in the fields of international trade and especially international finance. The second point is also very clear.

On the third subject, I disagree with Thurow. Governments have certainly lost some of their power, but especially countries with strong markets the power is still substantial.

Globalisation is already at a very high level but I think there is still quite a lot of room left for expansion. If I only think about the enormous evolution of the internet, I can conclude that the globalisation process is not at all at its end-state like the definition in the beginning also said.

References

HELD, D. , PERRATON J. a.o. (1997), Globalisation of Economic Activity, New Politic Economy, Vol. 2, N°2

HIRST & THOMPSON (1999), Globalisation in Question, 2nd edition

Lecture notes

THUROW, L. (1996), The Future of Capitalism, chapter 6: Plate Four: A Global Economy

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¹ Gold Standard Period: a period between 1870 and 1914

² a kind of trading bloc, consisting of a number of European cities in Europe, mainly in Germany

³ investments done only for the financial reasons, not to extend own business

⁴ Germany, USA, France and Japan

⁵ when a bank has offices in a foreign country, the central bank of the home country is still responsible for supervision and overseeing.