Select Committee on Economic Affairs First Report


CHAPTER 2: DEFINING AND DESCRIBING "GLOBALISATION"

21. Although globalisation may be a contested concept, there is no dissent from the view that we live in a period of globalisation. The first two questions which the Committee asked in its Call for Evidence were therefore: what is globalisation? and is it new? Both questions elicited a variety of responses.

Defining globalisation

22. It was noted by many witnesses that globalisation - generic globalisation - should be construed broadly as spanning a range of human activities. A cross-Government Departmental memorandum[4] suggested, "… in an economic context [globalisation] is normally understood to mean a process of increasing international interactions and accelerating international trade, capital and information flows" but that "globalisation can also be seen to have a political dimension, including the diffusion of global norms and values, the spread of democracy and the proliferation of treaties, such as international environmental and human rights agreements." (Ev I, p 1). The Trades Union Congress (TUC) noted that "today globalisation is applied to cultural, political and social changes as well as economic" but, as far as the economic definition was concerned, they thought that a reasonable approach was that adopted by the World Bank and others, namely that it is "the rapid increase in the share of economic activity traded across national boundaries", measured by international trade as a share of national income, foreign direct investment flows and capital market flows (Ev I, p 31).

global integration of economic activity …

23. A number of witnesses described globalisation in terms of a process of increased global economic integration or interaction. For example, Patricia Hewitt, Secretary of State for Trade and Industry, endorsed the definition set out in the White Paper Eliminating World Poverty: Making Globalisation Work for the Poor:[5] "globalisation means the growing interdependence and interconnectedness of the modern world", which is, in turn, demonstrated by "the increased ease of movement of goods, services, capital, people and information across national borders" (Ev II, Q 1848). Dr Gro Harlem Brundtland, Director-General of the World Health Organisation (WHO), similarly referred to globalisation as the circumstances in which "there are interdependencies and … realities and rules that increasingly cross national borders" (Ev II, Q 1188). Dr Caroline Lucas, a Green Party MEP, whilst distinguishing between economic globalisation and "the wider issues that often get bundled up in that same term", defined the former as "an economic process whereby national economies are integrated ever more tightly into one global giant economy"(Ev II, Q 1393) and Anita Roddick of The Body Shop International plc endorsed the definition of economic globalisation formulated by Colin Hines of Greenpeace: "the integration of national economies into the global economy though trade and investment rules and privatisation, with the help of technological advances."[6] (Ev II, p 366). The Royal Academy of Engineering assumed globalisation to mean "progress towards an open and integrated world economy" (Ev II, p 369).

24. Nicholas Stern, World Bank Chief Economist and Senior Vice President, said that he preferred the language of "integration", because "when you think about integration, it is something that has a number of dimensions and you can go a long way or a short way or a medium way on each dimension … The dimensions you can think about are trade, which is one of the easiest to analyse and where the results are clearest, but we also see globalisation of capital, some modest globalisation of labour … and globalisation of communications, technology, transport, crime and disease and so on." (Ev II, Q 1820). Mr Stern thought that, of the various dimensions, trade was "key".

25. Dr Supachai Panitchpakdi characterised globalisation as "increasing linkages" - economic, social, cultural - "between various regions, various economies and various sectors around the world." (Ev I, Q 562). Dr Noreena Hertz said that she saw globalisation "… as the accelerating extent of interconnectedness in the world today …bear[ing] upon economics, politics, law, culture and migration", manifesting itself "in terms of trading arrangements and financial markets … environmental questions and questions of infectious diseases and health." (Ev II, Q 1637).

26. Ignazio Visco, Chief Economist of the Organisation for Economic Co-operation and Development (OECD), suggested that globalisation was "a process towards closer economic integration of markets", channelled through trade in goods and services, mobility of capital and mobility of labour. (Ev I, p 170). Similarly, Sir Samuel Brittan of the Financial Times said that globalisation did not mean "anything different from an open integrated world economy" in which there was free movement of goods and services, capital and labour (Ev I, p 249) and Martin Wolf, also of the Financial Times, referred to the current period of globalisation as "the process of economic integration which has been underway in the last two decades or so" (Ev II, Q 1588).

27. The United Nations Conference on Trade and Development (UNCTAD) offered a definition in the same vein:

"In general terms, globalisation describes the process of increasing economic integration among nations through cross-border flows of goods and resources together with the development of a complementary set of organisational structures to manage the associated network of economic activities." (Ev I, p 360).

And we note that in a report published by the European Commission, Responses to the Challenges of Globalisation: A Study on the International Monetary and Financial System and on Financing for Development,[7] globalisation is characterised as "a trend towards greater integration and interdependence between countries and regions of the globe". It continues: "These growing linkages are often economic and political, but globalisation also has important social, environmental and cultural aspects."[8]

28. The Financial Services Authority (FSA), whilst pursuing the integration theme, emphasised the institutional perspective and defined globalisation in terms of three elements: "… the interdependence of nations, governments and other authorities; … the geographical scope of institutions which operate in a large number of different countries; … and … the globalisation of capital flows and markets." (Ev I, p 318).

… or the diminishing importance of national boundaries

29. A number of witnesses saw the diminishing importance of national boundaries as the key element of globalisation. Matthew Taylor MP, Treasury Spokesperson for the Liberal Democrats, expressed this most clearly when he said: "In some ways, the best definition of globalisation may be that we all play in each others' backyards, and the fences have been torn down between gardens" (Ev II, Q 1352).

30. Willem Buiter, Chief Economist of the European Bank for Reconstruction and Development (EBRD), like other witnesses emphasised - and elaborated on - the diversity of meanings applied to globalisation, but focused principally on the breakdown of boundaries. Globalisation was, he said:

"… very broadly … a process of diminishing importance of distance, geography and national boundaries in shaping all kinds of human activities. It therefore refers to trade liberalisation, trade integration; it refers to increased capital mobility. It refers in certain regions to increased labour mobility; and it also refers to the enhanced mobility of just about everything and anything that is permitted by the combination of technological change, lower transportation costs and communication costs that have been going on for a long time." (Ev I, Q 189).

Mr Buiter added that there were incontrovertibly adverse elements of globalisation: increased mobility of terrorism, increased mobility of contagious diseases and contagion of crises brought about by the globalisation of capital and financial markets. Sir Andrew Large, then Deputy Chairman of Barclays Group plc, also characterised the globalised economy as one in which boundaries, "as fences to restrict capital movement, marketing initiatives, and information transfer", had declining relevance, acknowledging that "regrettably" this also had implications for the global reach of terrorism, drugs and crime. (Ev I, p 289).

31. The World Development Movement (WDM), a non-governmental organisation, saw economic globalisation in similar terms, describing it as "the removal of barriers to business activity across international borders and within societies", again noting that this development had been accompanied by the global spread of a variety of harmful activities including, for example, trafficking in women and children for sex or slavery, illegal trading and money laundering. (Ev I, p 340).

32. We have no difficulty with the broad view of the nature of globalisation. As an economic affairs committee it is not surprising that our main interest in what follows will be on the economy. But as will become apparent, we take some account of politics and administration, the cultural dimension and concerns about the environment in our discussion of the issue.

Driving forces of globalisation

33. Underlying this reduction in the importance of barriers are both technological and policy changes. Differences of opinion arise less from what these "driving forces" are - few, for example, would dispute that technological advances or the pursuit of trade liberalisation through the WTO are relevant - than from how these various components of the globalisation milieu interact and what their relative importance is. We list below some of the evidence we have received about the principal driving forces characterising current globalisation - without judgement as to priority.[9]

Technological changes

34. Many witnesses stressed the importance of advances in transport and communications technology as distinctive features underpinning current globalisation. [10]

35. For example, Diane Coyle, Managing Director of Enlightenment Economics, emphasised the implications of technological advances on the structure of transnational corporations and the location of production. She suggested that the change in trade pattern since the Second World War - with the growth of trade in manufactures and, in particular, intermediate goods - reflected "… a truly global reorganisation of production by companies made possible by information and communication technologies and also declining transport costs." (Ev I, Q 662). Dr Noreena Hertz expressed the point even more strongly, identifying technological advance as the central feature of current globalisation:

"I think what is new now and why the subject is so in the forefront is that the revolutions in communication and technology have just accelerated and escalated companies' abilities to operate all over the globe. So we have this kind of corporate-led globalisation operating in a way that is significantly different to before." (Ev II, Q 1639).

36. In the cross-Departmental memorandum, it is noted that "the recent acceleration in globalisation has been made possible by sharp reductions in transportation, telecommunication and computation costs", and this in turn has made "it easier for firms to co-ordinate production activities in different locations in cost-effective ways, allows new technologies or knowledge to spread more quickly and widely and generally reduces frictions to world commerce." (Ev I, p 11).

37. DHL, a company providing a global carrier service, gave a more specific instance of how technological change had enabled it to speed up the movement of goods across the world: "We have developed industry-leading inventory-control systems that interface directly with customs authorities clearance systems through Electronic Data Interchange, enabling immediate clearance in a virtual, paper-free environment." (Ev II, p 165).

38. Some witnesses emphasised the advance of information and communications technology in relation to the rapidity of market flows. Sir Andrew Large referred to the "instantaneous availability of information on a global basis" (Ev I, p 289) and Tito Mboweni, Governor of the South Africa Reserve Bank, commented on the growing interdependence of different countries in the world economy, "driven in particular by the power and influence of information and communications technology" which allowed capital movements "almost at the touch of a button" (Ev I, Q 574).

Trade liberalisation

39. Following the Second World War, in 1947, the General Agreement on Tariffs and Trade (GATT) was negotiated providing a framework for a policy of trade liberalisation. The GATT was replaced in 1995 by the World Trade Organisation (WTO) with the purpose of promoting trade liberalisation through negotiated agreements and a binding disputes mechanism.[11] A series of multilateral trade rounds under the auspices of the GATT succeeded in reducing trade barriers from their high inter-war levels.

40. In addition to multilateral and unilateral reductions in trade barriers, trade liberalisation has also been pursued in regional integration agreements. Some 150 of these agreements are currently in force, covering more than one third of world trade. Some of these agreements - notably in Europe - have gone beyond tariff liberalisation to include removal of border controls and harmonisation of a range of standards and regulations.

Capital market liberalisation

41. Capital market liberalisation is widely perceived as a distinctive feature of current globalisation. Peter Sutherland, Partner and Chairman of Goldman Sachs International, for example, described the extent of capital flows - assisted by technological developments which have enabled instantaneous transactions - as "truly amazing" (Ev I, p 202). Professor Bulmer-Thomas, Director of the Royal Institute of International Affairs, referred to the "qualitative leap in the scale of liberalisation" of capital flows in the 1980s, promoted by the International Monetary Fund, the World Bank and the Bank for International Settlements, as one of the "key dimensions" of globalisation (Ev I, p 51).

New phenomenon or new label?

previous periods of globalisation

42. Our evidence contains a variety of views on whether or not the phenomenon of current globalisation is new. There appears to be widespread agreement amongst commentators that the first period of globalisation occurred between 1870 and 1914.[12] Michael Kitson of the Judge Institute of Management Studies, Cambridge University, and of the Cambridge-MIT Institute described this period as "the era of the classical Gold Standard", when "in effect, the growing world economy was becoming more open and more dependent on international trade", with the annual average growth of world output and world trade at 2.7% and 3.5% respectively (Ev I, p 109).

43. The World Bank describes the following period from 1914 to 1945 as "the retreat into nationalism" and "rising protectionism", noting, for example, that by 1950:

  • exports as a share of world income were about 5%, about the same level as in 1870;
  • the foreign capital stock of developing countries was about 4% of income, far below the level in 1870;
  • that immigration in to the United States fell from 15 million in the period 1870 to 1914 to 6 million in the period 1914 to 1950.[13]

It then divides the post-Second World War period into two: 1945 to 1980 ("the second wave of globalisation") and post-1980 globalisation ("the new wave of globalisation").[14] The latter, current, period of globalisation is distinguished in the following way:

"First, and most spectacularly, a large group of developing countries broke into global markets. Second, other developing countries became increasingly marginalized in the world economy and suffered declining incomes and rising poverty. Third, international migration and capital movements, which were negligible during second wave globalization, have again become substantial."[15]

44. Michael Kitson suggested that the post-Second World War years could be analysed in three phases. First, there was "the Bretton Woods period" which spanned 1950 to 1973 and was characterised by a rapid expansion of the openness of the world economy (with annual average growth of world output and of world trade at 4.7% and 7.2% respectively). Secondly, following the 1973 oil crisis, a period of slow down occurred until 1990 (with annual average growth of world output and of world trade at 2.8% and 3.9% respectively), since when there has been a period of significant increase in world trade (annual average growth, 1990 to 1999, of 6.2%) although growth in output has remained modest (3.0%) (Ev I, p 109).

45. A number of witnesses gave evidence about how the current period of globalisation could be distinguished from previous periods of significant world economic integration. The Department for International Development said: "We probably all agree with you that qualitatively we are dealing with a very similar phenomenon at the end of the 20th century to that which occurred at the end of the 19th century." (Ev I, Q 11). There were, however, differences between the periods: whereas the first had seen significant migration (especially across the Atlantic), features of the second have been, first, a rapid advance in communications technology and, secondly, a more substantial country coverage. Diane Coyle expressed a similar view: "There is obviously nothing new about globalisation per se. There have been many episodes in history, including the late 19th century and beginning of the 20th century - but they differ in their characteristics …" (Ev I, Q 662). Ms Coyle then listed the differences: the absence of migration as a feature of the present period of globalisation, changes in the pattern of trade (with a relative decline in trade in commodities and an increase in the trade in intermediate goods, manufactures and services), and the development of information and communication technologies (which Ms Coyle describes as "genuinely new").

46. Similarly, Lord Desai, Professor of Economics and Director of the Centre for the Study of Global Governance at the London School of Economics, suggested that the world had "arrived back at the 19th century but on a higher level of technology" (Ev II, Q 1723). It was, he said, wrong to call it a "circle" but rather it was a "spiral": "We have not arrived at the same position as 100 years ago. For one thing, technology is different". He went on to suggest, however, that technology was not the only (or the most important) difference: "secondly, … there are many more nation states now than there were then", but most importantly - "the one major difference compared to the 19th century" was "the movement of people." (Ev II, Q 1724).

47. Professor David Greenaway, Director of the Leverhulme Centre for Research on Globalisation and Economic Policy at Nottingham University, suggested that, to the extent that the openness ratios (that is, the level of trade compared to GDP) of the late 19th century resembled those of the post-Second World War period, globalisation was "not an entirely new phenomenon". The current "vintage", however, had "three new dimensions": its greater global reach ("more countries are part of the international economy and to a greater extent, than in the second half of the 19th century"); the more extensive and more pervasive levels of cross-border investment by transnational corporations; and, the presence of deeper and more integrated capital markets (Ev I, p 97). The WDM similarly focused on the level and nature of foreign investment and the availability of capital as the hallmarks of current globalisation:

"… the phenomenon of globalisation as currently experienced is different from former periods, such as the start of the 20th century, by:

  • Foreign trade and investment being undertaken by the private sector pursuing profit, rather than by a mix of private and public sector.
  • Higher levels of foreign investment.
  • Vastly increased levels of financial capital." (Ev I, p 340).

48. Mr Kitson was keen to stress that globalisation should be seen as a dynamic and evolving process and that the world economy should be regarded in terms of progressing towards (but not having achieved) full globalisation: "… it is a process that is continuing; we are not in some end state of a fully globalised economy …" (Ev I, Q 295). The historical perspective of globalisation as a developing feature of the world economy was expressed by others witnesses as well. Ignazio Visco, for example, described globalisation as "an on-going process that has been … accelerating over the past decades" (Ev I, p 170) and the Royal Society of Edinburgh referred to globalisation as "a continuous process" that had been "around a long time" (Ev II, p 374).

49. We agree with the view that the process of globalisation has a long way to go before anything like a fully open and integrated world economy is reached. In the case of the poorest countries we must think in terms of many decades before this may be achieved, but even the most developed countries are far from fully open.

Objective measures of globalisation

50. Globalisation can be measured, albeit imperfectly. The commonly accepted indicators of the extent of globalisation are: trade flows, capital flows and migration.

TRADE FLOWS

51. The evidence shows that during the current period of globalisation trade flows are high compared to the inter-war period but that levels during pre-First World War globalisation had also increased. During the period 1820 to 1914, the value of world exports rose by a factor of 33 (from US $7 billion to US $236 billion at constant 1990 prices); between 1950 and 1992, they increased by a factor of 10 (from US $376 billion to US $3,786 billion at constant 1990 prices). The ratio of world exports to Gross Domestic Product has increased from 1% in 1820 to 19.1% in 1999.[16] Professor Greenaway drew attention to trade flows as a feature of the present world economy, noting the comparison with the 19th century economy:

"Over the post-World War II period, trade volumes have grown at unprecedented rates, averaging almost 6 per cent per annum for 50 years. … More significantly, however, these growth rates have consistently outstripped the comparable growth rates of real output and average openness of economies, both developing and developed, has increased sharply. But this is not the first time this has occurred. … In the late nineteenth century, openness ratios were also very high and the international economy showed some similar features of globalisation."[17] (Ev I, p 97).

A number of witnesses gave evidence about the comparative level of trade between the post-First World War period of globalisation and the current period. We note, for example, the cross-temporal and cross-national analysis provided in the cross-Departmental memorandum (Ev I, pp 1-2).

CAPITAL FLOWS

52. There are different ways of measuring capital flows. It can be measured by comparing over time the average absolute value of a country's national current account as a percentage of GDP (since the current account is "by definition a measure of [a nation's] net capital inflow or outflow"),[18] or by examining the correlation between domestic saving and domestic investment (the argument being that "in a world of perfect capital mobility, there should exist no systematic relation between domestic saving and investment since domestic saving would search the world for the highest return irrespective of the state of domestic investment").[19] On either measurement, it appears to be the case that capital flows, although they increased significantly during the 1990s, remain lower than they were during the pre-First World War period of globalisation.[20] As with trade flows, it is useful to go behind the veil of the broad figures and consider the detail. The European Commission report - Responses to the Challenges of Globalisation - for example, notes that "the structure of capital flows … has been evolving over time", and that the hallmark of current globalisation (since 1990s) has been the growth in foreign direct investment (FDI) by transnational corporations.[21] (We consider this in more detail in Chapter 6 of this Report.)

MIGRATION

53. Migration has been described as "the most obvious difference between the two waves of globalisation".[22] A number of witnesses raised this point (see paragraphs 45 and 46 above). Whereas trade and capital mobility have reached new levels in the current period of globalisation, labour mobility is far lower than during the pre-First World War period.

New key players

54. The present period of globalisation can also be distinguished by its key players. In their memorandum, Save the Children describe developments such the communications revolution and the decline in costs of transport as "contextual" or "passive" factors underlying current globalisation, factors which "are not in themselves responsible for globalisation as we know it today". In their view "the main forces actively driving globalisation are human and political" (Ev I, p 335). They list these forces as governments (of wealthy countries), international institutions (in particular, the WTO, the World Bank and the International Monetary Fund) and transnational corporations. We would add two other key players as being distinctive features of the landscape of current globalisation: the "new globalisers" - the emerging countries which seem to be succeeding in the globalised economy (such as China, India, South Korea) - and non-governmental organisations (NGOs).

Conclusion

55. We do not offer a simple definition of globalisation, but it is our view that the present period of globalisation represents a new departure in world affairs. Partly this is to do with what has been called "the death of distance", assisted by the absolute and relative decline in transport costs. Coupled with this has been the decline in costs of communication, the counterpart of which is the vast increase in the speed and reliability of communication in words and images. There were similar advances in the 19th and earlier part of the 20th century, but on nothing like the scale of recent years.[23] We have one world, in an economic and cultural sense, which has not existed before.[24]

56. This is, of course, partly a matter of the expansion of market forces, especially those of an international character. There are very few countries indeed which are insulated from such forces. What is also of importance is the spread of branded products which are truly international in character.[25] These have economic significance not least in connection with the exercise of monopoly power. But they have a cultural impact too. It is apparent, especially given the extent of United States ownership of such brands,[26] that much anti-globalisation protest is prompted by the existence and dominance of these brands.

  1. There is closer interconnectedness between countries than ever before. They have much more in common and short-term shocks, whether economic or non-economic, are transmitted more rapidly. Moreover, the forces at work show no signs of abating. Although some of our witnesses claimed that what we observe is much the same as what has happened before, but on a large scale, we believe that recent experience is both quantitatively and qualitatively different.



4   By officials from the Department of Trade and Industry, HM Treasury, the Foreign and Commonwealth Office and the Department for International Development. During the remainder of this report, this memorandum will be referred to as "the cross-Departmental memorandum". Back

5   See note 1 above. Back

6   Colin Hines, Localisation. A Global Manifesto (2000), p 4. Back

7   SEC (2002) 185, 14 .2.2002. Back

8   Ibid, p 17.  Back

9   A fuller analysis is set out in the briefing paper reproduced in Appendix 5. Back

10   We note, however, Sir Samuel Brittan's reminder to us that significant technological changes occurred in the 19th century: "Has the development of information technology added a new element - because any change in any part of the world can be viewed instantly on computer screens? Surely the bigger breakthroughs were made in the middle of the 19th century when we leapt from horse-drawn transport and sailing ships to the railways and transatlantic cable, which transmitted to the New York stock exchange news of the 1873 Vienna financial crash?" (Ev I, p 249). Back

11   We consider the role of the WTO in more detail in Chapter 6. Back

12   This view is taken by the World Bank on the basis that globalisation is measurable in terms of trade, migration and capital flows and that prior to 1870 "none of these flows was sufficiently large to warrant the term globalization" (World Bank, Globalization, Growth, and Poverty (2002), p 23).  Back

13   Ibid, pp 26-27. Back

14   Ibid, pp 24-38. Back

15   Ibid, p 31. Back

16   Figures supplied in the cross-Departmental memorandum (Ev 1, pp1-2). Back

17   Footnotes not included. Back

18   Richard E. Baldwin and Phillipe Martin, Two waves of globalisation: superficial similarities, fundamental differences, NBER Working Paper 6904, January 1999, p 8. Back

19   Ibid, p 9, citing Feldsein, M and C Horioka (1980), "Domestic savings and international capital flows", Economic Journal 90:314-329. Back

20   Ibid, pp 8 and 9, and see the cross-Departmental memorandum (Ev I, pp 3 and 4). Back

21   European Commission, Responses to the Challenges of Globalisation: A Study on the International Monetary and Financial System and on Financing for Development, SEC (2002), 14 Feb 2002, p 20. Back

22   Baldwin and Martin, op citBack

23   See, for example, the written submission of the Royal Academy of Engineering: "The majority view amongst those Academy Fellows who contributed to this discussion is that globalisation is a new phenomenon. Developments such as the communications revolution, air travel, containerisation and bulk transport have generated an unprecedented increase in the volume and speed of trade." (Ev II, p 369). See also the written submission of the World Humanity Action Trust: "[Globalisation] is a manifestation of a greatly increased degree of interconnectedness across the world. It may not be a new phenomenon. However, its present scale … presage substantial impact on national policies of many kinds." (Ev II, p 392). Back

24   Professor Stiglitz gave an example of this. He told us how, in one remote Indian village, the mayor talked to him about biopiracy and the patenting of traditional medicines under new WTO provisions, and in another the mayor spoke about the euro (Ev I, QQ 722-23). Back

25   See paragraphs 172-73 below. Back

26   The Confederation of British Industry give evidence that the parent companies of the top nine global brands are US based (Ev I, p 134). Back


 
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