Business Educators Australasia Conference, Sydney, Thursday, October 4, 2012
Just as the media have lost interest in talking about globalisation it’s starting to have big effects on Australia and on the daily lives of Australians. Often, the consequences of globalisation are buried too deep to be visible to the untrained eye, but that doesn’t change the reality. Why are overseas holidays a lot cheaper these days? Why are a lot of factories laying off workers? Why have the banks started putting up interest rates off their own bat, or not passing on all of the cuts in rates? Why isn’t my super doing as well as it used to? Why are the retailers always complaining? Why do the mining companies keep running all those ads telling us what great guys they are?
The short answer to all those questions is ‘globalisation’. Whenever something changes in Australia we have a tendency to look around us for an explanation. Increasingly, however, the explanation comes from elsewhere in the world. If we want to understand what’s happening to our lives - the forces shaping our lives - we need to understand globalisation: what it is, what’s driving it, how it affects us and where it’s taking us. To be economically literate - to have an understanding of what’s going on - Australians need to understand the process of globalisation. For many of our students, high school is the main chance they’ll have to learn about a largely invisible force that’s influencing their present and their future.
What is globalisation?
Globalisation is a process - a process by which the natural and human-made barriers between countries are being reduced. The natural barriers of time and space are being reduced by advances in technology, particularly the information and communications technology revolution. The human-made barriers between countries are being reduced by deregulation - governments pulling down or greatly liberalising the rules and regulations they have made to keep their economy separate from other economies. Sometimes governments pull down their barriers because advances in technology have made it easy to get around them. The point is that, as the barriers between countries and national economies are reduced, more of the forces changing our lives are coming from abroad.
The back story
I suppose you could say the process of globalisation began with the first trade between countries, by ship or on the Silk Road. But it’s generally held that the first wave of globalisation began in the late 19th century, with the spread of steel-hulled steamships, mass migration to the New World and the invention of the telegraph and laying of undersea cables. This first wave was brought to a halt by World War I and reversed by the protectionist reaction to the Great Depression.
The second wave began slowly after World War II, with the successive rounds of reductions in import duties and restrictions on trade under the General Agreement on Tariffs and Trade, developments in transport (including invention of the jumbo jet), information processing and telecommunications, the development of offshore financial markets and the advent of the multinational company.
At first the great increase in trade was between the developed countries themselves. But then the developing countries - particularly in Asia - began switching their development strategies from ‘import replacement’ (attempting to develop manufacturing sectors behind high barriers to imports) to export-led growth. Developing countries began lowering their protection, and the last round of multilateral reductions in import restrictions under the GATT - the Uruguay round of 1994 - saw many developing countries (including China) joining the newly formed World Trade Organisation.
The emerging economies
The greatly increased trade and flows of foreign direct investment between the developed and developing countries led to strong growth in many developing countries - particularly in Asia. Multinational companies set up manufacturing operations in these countries and transferred the latest technology, effectively spreading the industrial revolution and fostering rapid industrialisation and urbanisation. The most rapidly advancing economies - which are moving from poor to middle-income - are now referred to as ‘emerging economies’. Some countries - including South Korea and Singapore - are now classed among the high-income countries, as developed rather than developing.
Before the industrial revolution began in Europe in the late 18th century, the two biggest economies were China and India. That was on the strength of their big populations. Because China and India remain the two most populous countries, and because their economic emergence began earlier than many other developing countries, their development is shifting the world’s centre of economic gravity from the North Atlantic (America and Europe) towards Asia.
The standard pattern of economic development established in Asia in the decades since World War II has been the production for export of simple, labour-intensive manufactures such as textiles, clothing and footwear, taking advantage of the main thing the poor countries have to offer the world: an abundance of poorly educated but cheap labour. As this early trade starts to lift national income, the level of education and skill rises and the country progresses to producing more elaborately transformed manufactures. Although some people in rich countries imagine it’s not happening, education, skills and national income rise and so do real wage levels. Eventually, labour becomes too expensive for the country to continue producing simple, labour-intensive manufactures, so this production moves to other poor countries that are just starting out on the road to development. Countries that export also have to import; they tend to import those raw materials they don’t produce domestically and capital equipment for further economic development. Initially, economic development probably adds to income inequality in the emerging economies, even while lifting many people out of absolute poverty. Eventually, however, rising real wage rates should work to reduce inequality.
Changing world trade patterns
Historically, the developed countries have been importers of raw materials - food, fibre, minerals and energy - and exporters of manufactures. Much of the growth in their trade with each other since the war has been based on high levels of specialisation - ‘intra-industry trade’ (eg trade between the car makers in different countries) rather than on comparative advantage. Most of their economic growth has come from growth in their services industries - health, education, business services, culture and recreation - most of which hasn’t involved overseas trade.
With the rise of the emerging economies and particularly China, however, much of the world’s manufacturing activity is moving to Asia, causing manufacturing to contract in developed economies and faster growth in their sophisticated services sectors. But the ICT revolution is also making it possible for some services to be traded between countries. Initially this has involved the ‘outsourcing’ of fairly menial jobs such as call centres and data processing, but it is growing to include such high-end services as software development and sub-editing.
Many people in the developed economies are alarmed by the shift of jobs in manufacturing and services to the cheap-labour countries. They see it as a loss with no corresponding gain. Some have even convinced themselves there’s no gain to the cheap-labour countries because multinationals appropriate all the profits. They imagine that because we would not want to work for such pay and conditions, workers in the poor countries are being exploited and gain little. In truth, the poor countries gain greatly from their export income and local workers are keen to get a job and earn an income, particularly the generally better-paying jobs offered by foreign multinationals.
The gains from trade are mutual, though not necessarily equal. Rich countries (and their workers) gain from their access to cheaper manufactures and services, and also from their access to bigger markets for their exports. This is not to deny that the outsourcing of jobs causes pain to workers displaced from their jobs and needing to find new ones, nor that the benefits from trade with poor countries may be shared unequally.
Emerging economies take the running
For many decades, the United States and the other developed countries made the running for the global economy; their growth largely determined the world’s growth. Now, however, China, India and the other emerging economies have expanded to the point where they account for more than half of gross world product (when countries’ GDPs are combined after adjusting to achieve purchasing power parity), and for at least a decade their growth has accounted for most of the annual growth in gross world product. With the North Atlantic economies still mired by the GFC, this is likely to become even truer for at least the rest of the decade, which will hasten the shift in the world’s economic centre towards Asia. Similarly, whereas the cycle in world commodity prices used to be driven by the North Atlantic economies’ economic cycle, now Asia’s cycle - and its more structural demand - will drive.
Australia and the rise of Asia
Whereas the usual pattern is for developed countries to import raw materials and export manufactures, Australia’s huge endowment of national resources means for us it has always been the other way round: we tend to mainly export rural and mineral commodities and mainly import manufactures. For most of the 20th century it looked like we were getting the losing end of the stick. World trade in commodities wasn’t growing much and prices were stagnant, whereas trade in manufactures was growing strongly with ever-rising prices. About the time of the Sydney Olympics, in 2000, it was fashionable for foreign businessmen to condemn us as an ‘old’ economy.
What changed all that was the emergence of the Asian economies, led by China. When countries start to develop they require huge amounts of steel - to make exports but also for building factories, railways, bridges, buildings and even roads. When their consumers become more prosperous they want to buy appliances and cars made of steel. It just so happens that Australia is one of the world’s chief producers and exporters of the two main components of steel: iron ore and coking coal. China’s booming demand for coal and iron ore caught the world’s producers off guard, causing global demand to outstrip global supply, forcing prices up to unknown heights. The main commodity exporters are now rushing to expand supply. As they do prices will fall back.
Since the early noughties we’ve been selling China and India ever-growing quantities of iron ore and coking coal, plus steaming coal for use in power stations, all at exceptionally high prices. This is the origin of our resources boom which, as prices start to fall back, is continuing in a boom of investment in the construction of new mines and natural gas facilities. As this additional production capacity comes on line, the volume (quantity) of our exports of coal and iron ore will be expanding, even as the prices we get for them ease back.
Studies of the stages in the economic development of other, now-developed Asian economies - such as Japan and South Korea - suggest the period during which a rapidly developing economy needs exceptional amounts of steel can last for 20 or 30 years. This explains why the resources boom is regarded as more structural (lasting) than cyclical (temporary). It also explains why the lasting increase in demand for our mineral and energy exports will bring about a change in the industrial structure of our economy. The mining industry will account for a significantly higher proportion of GDP, and its expansion will attract labour and capital from other Australian industries, whose share of GDP will decline.
The rise in the value of the dollar, which has accompanied the rise in the export prices we receive, has worsened the international price competitiveness of our export and import-competing industries, particularly manufacturing, but also tourism and the education of international students. This has the effect of reducing those industries’ sales and profits. Some manufacturers have been hit hard, with factories closing and workers being laid off. The manufacturers are demanding additional government assistance, and get much sympathy from the public. But economists point out that the high dollar and its contractionary effect on manufacturing is actually part of the market mechanism that is helping to shift resources from the contracting manufacturing to the expanding mining. This, of course, doesn’t stop the process being very painful for the manufacturers and their workers.
The high dollar is one of the main ways ordinary Australians are benefitting from the resources boom. It is redistributing income from the miners to all those firms and consumers who buy (the now-cheaper) imports. Everyone who has taken advantage of the strong dollar to go on an overseas holiday is sharing in the benefits from the resources boom, whether or not they realise it. Even so, because the miners are doing so well from the boom they have been seeking to reduce public resentment of their good fortune by running advertisements pointing to all the good things they are doing in the community.
As China and India develop economically they are acquiring a larger and prosperous middle class, which is expected to grow considerably over the next 20 years. The growth of Asia’s middle class will increase the opportunity for greater Australian exports to Asia of food (meat, wheat and dairy products), manufactures and tourism.
The digital revolution
No technological development has done more to break down the barriers between countries than the digital revolution, particularly the spread of the internet, which is now being accessed more easily via tablet devices and smart phones. This is greatly benefitting the users of the internet, but is forcing considerable structural change on many industries.
The internet has undermined the ‘business models’ - the traditional way of selling products - of the music industry, film and television and, with the advent of the e-book, publishing and bookselling. The newspaper industry is being turned on its head by the shift of classified and display advertising and news to the internet and other digital ‘platforms’. The internet is also making many formerly non-tradable services tradable.
The retail industry is being hit and forced to change by a host of different forces: the end of the period in which households were reducing their rate of saving, thus allowing consumer spending to grow faster than household incomes; and consumers’ preferences shifting from goods to services. But the biggest challenge is coming from the digital revolution. People are using their smart phones in stores to compare prices with those offered by other stores and then demand discounts. And people are using the internet to buy online, including from overseas sites. This is not yet having a big effect on retailers, but it will in coming years. Retailers complain that people buying on the internet usually avoid having to pay the GST, and that the high dollar is making overseas prices more attractive. But these are not their biggest problem. It’s that multinational companies are used to selling identical books, CDs, DVDs, software, shoes and many other things at different prices in different countries. That is, for many years many big companies have engaged in international price discrimination, generally charging much lower prices in America than in Britain, with highest prices in Australia. The internet is breaking down this discrimination and will eventually force down many Australian prices.
Financial integration
Since the 1980s, reductions in the cost of telecommunications and deregulation have been turning the many national financial markets increasingly into one big set of global financial markets. As part of this, most developed countries have floating exchange rates, with the level of those exchange rates now affected less by trade flows (the current account of the balance of payments) and more by short-term capital flows (the capital account). This has increased the frequency of financial crises, such as the Asian financial crisis of 1997-98 and the global financial crisis of 2008-09.
Greater financial integration added to the severity of the GFC and the speed with which it spread around the world. While the crisis was centred on America’s sub-prime home loan debacle, it turned out many of these toxic assets had been bought by European banks. The globalisation of the media meant news of bank failures in the US, Britain or Europe was beamed into living rooms in all the countries of the world, almost in real time. This frightening news caused an instantaneous slump in business and consumer confidence in virtually every country, including many not directly affected by the crisis, such as Australian and China and the other emerging economies.
World recessions are usually sequential - some countries are still going in while others are coming out - thus making them less severe. But the world recession precipitated by the financial crisis was highly synchronised because of the integration of global financial markets and the globalisation of the news media. This contributed to the severity of the recession.
The greater integration of financial markets has increased the likelihood of ‘contagion’ - when one country gets itself into difficulty, this may cause the financial markets to lose confidence in neighbouring countries, whether or not they have the same degree of problems as the original country. After the tiny Greek economy got into difficulties within the euro area, European officials worried the market’s loss of confidence could spread to Portugal, Spain and even Italy.
Globalisation has increased the number of ‘channels’ through which economic difficulties in one country are transmitted to other countries. Formerly, the main channel was international trade. Now there’s a financial channel, where problems with the finances of one country lead to a global rise risk premiums, increasing borrowing costs in many other countries. And there’s a psychological channel, where bad news from one part of the world can damage business and consumer confidence in other countries, even those not directly affected.
The GFC and its aftermath in the US and Europe have had a big effect on our banks, even though they had been tightly supervised by our authorities and held few of the assets that became toxic. The world’s central banks have tightened their rules for the world’s banks, requiring them to hold higher proportions of shareholders’ capital and higher proportions of their funds in liquid form. This has increased the costs facing our banks along with other countries’ banks. Before the GFC, our banks obtained a high proportion of the funds they needed to relend to Australian customers from short-term borrowing in overseas markets. At the time, these funds were very cheap. But their price increased greatly as a result of the crisis. After the crisis, our authorities realised our banks’ heavy reliance on short-term foreign borrowing made them vulnerable to further international crises. So they required the banks to borrow for longer periods overseas and to rely more on domestic deposits. The greater competition between our banks to attract local deposits has greatly increased the interest rates they have to pay on those deposits (to the benefit of Australian savers). They’ve also had to pay more for their longer-term foreign borrowings. This has increased our banks’ cost of borrowed funds quite independently of changes in the official cash rate. And it explains why the banks have been increasing their rates without reference to the cash rate and cutting rates by less than the full fall in the official rate. The Reserve Bank has retained its control over market interest rates by cutting its cash rate by more than it otherwise would have.
Our sharemarket is another of the financial markets that has become more globally integrated in recent decades. Being one of the first markets to open each morning, it takes its lead from what happened on Wall Street overnight. You would hope that, eventually, the value of an Australian company’s shares will reflect that company’s own prospects. In the short-term, however, our market tends to reflect the worries of investors in Wall Street and Europe. And the prospects for those economies are not bright at present.
