What can governments do to enjoy the benefits whilst avoiding the problems of globalization?
If you were to take a straw poll asking governments what was the primary benefit of globalization, (be they Developed or Developing; Free Market or Planned); they would have at the top of their list International Trade. If you were to probe further, they might possibly give you a Ricardian explanation postulating that global trade provides the ability to import goods and services at a lower price than can be produced domestically, while simultaneously exporting goods and services in which they have a comparative advantage in a global market and reaping economies of scale that otherwise would not be achievable if they produced just for the domestic market.
In order to achieve these advantages some governments might point to a historical disadvantage and argue that although their country might possess the natural resources and workforce they do not have the finance to invest in new industries. Consequently, they might cite the importance of the free flow of international finance as vital to attract Foreign Direct Investment into the country. However, for some countries the theory of comparative advantage is not necessarily the best macroeconomic policy to adopt . For instance after the Second World War, Japan did not focus its productive capacity in rice production but through its Ministry of International Trade and Industry invested and protected fledgling automotive and other new industries until it could compete in the world market.
Despite the obvious attractions of globalization, governments are faced with many challenges. The evidence shows that the benefits are not being shared equally. For instance; Dowick and Delong showed that the more global world trade becomes the more unequal it becomes on a country basis. Instead of a convergence between rich and poor countries the GDP per capita divergence has increased. The reasons are not always clear but some argue that MNC’s have undue influence driving down wages in developing countries and crowding out investment in domestically initiated industries. Although MNC’s can provide employment in developing countries it can be low skilled with little emphasis on developing new skills and education in the workforce. Governments could respond by insisting on more joint ventures, public/private partnerships, franchising, local management representation and restrictions/conditions on the repatriation of profits to the home country. There is some evidence that in Asian countries this has worked. In previous decades these countries assembled products on behalf of other countries, but with government encouragement, companies such as Lenovo and Foxconn in China now develop and produce products in their own right. In developed countries minimum wage legislation can be introduced to ensure the economic benefits are shared without impacting overall employment. In developing countries low wages and poor working conditions can be tackled through international organizations such as the ILO and WTO. To date the success of these organizations in improving standards is limited, except in the near unanimous acceptance of the eradication of enforced child labor. Where pressure on MNC’s has been successful it is often attributed to one of the social impacts of globalization the most prominent of which is the internet.
Another challenge all countries face is the interconnectedness of trade and finance. As observed above it is the main benefit of globalization but during recessions it impacts those countries that depend on exporting and finance sectors the hardest. The UK is one example where its economy had a larger proportion of GDP generated by the finance sector than many comparative economies. One response might be to implement protectionist measures but this is difficult to undertake in practice in the short term and would be counterproductive for world trade. An equally poor response (albeit a very popular one) would be to depress demand at home and depreciate the currency to deter imports of consumer goods and force domestic companies to find international markets for their goods and services. Alternatively, governments can stimulate their economies through investment in infrastructure projects that inject money into the domestic economy whilst also stimulating demand for imports. The success of this policy can be helped or hindered by the response of other countries. Without convergent regional and even international economic policies, the country that stimulates its economy while its neighbours deflate is likely to see part of its stimulus leak to other countries without the reciprocal benefit of the other countries’ stimulus. Alternatively, if all countries try to deflate, total world output will decline leading to prolonged deflationary period as witnessed during the Great Depression of the 1930’s.
Figure 1 - World output collapsed during the 1930's. Not so much in the latest recession A reasonable extrapolation of comparative advantage also implies a degree of deindustrialization, especially in mature western economies as MNC’s look for cheaper methods of production elsewhere. A hollowing out of the economy can occur and clusters of regional technological competence disappear (E.g. the automotive and automotive parts industry in Birmingham, UK and the iron and steel industry in Sheffield, UK). Governments should not accept the inevitability of this process. There are three possible government responses. One is to protect long established uneconomic industries but this is unlikely to be successful in the long-term. The second is to develop service industries less prone to foreign competition but this can lead to de-skilled, lower paying jobs compared to manufacturing jobs. Thirdly, governments can provide the incentives and investment to develop new industries e.g. Green Jobs.
Going back to the straw poll it is unlikely that in the past governments would have cited environmental impacts of globalization as a concern. Maybe this is because governments are preternaturally inclined to focus on solutions for current and past problems and not future ones. To compound the problem it is unlikely that the free-market will develop environmentally positive outcomes by itself if the focus is the maximization of profits and the optimal allocation of current resources. It is unlikely that national governments will impose costs and limits on their own industries unilaterally for fear of being priced out of the market. Global consensus limiting carbon emissions is difficult to reach because developing countries are of the opinion that they did not contribute to the global warming in the past and see it as a check on their future development. Consequently, the impact of climate control is likely to become the single most negative downside to the benefits of globalization until all governments accept that the benefits of globalization can only be enjoyed in the future with sustainable development
