The Impact of Globalization

By Martin Hattersley, M.A., LL.B.

1. Globalization - is the outcome of a process that has been developing particularly since the inception of the Industrial Revolution, where improvements in manufacturing techniques, assisted by improved methods of transportation, led to the development of mass production and sales from a single producer over a greater market area. This process has now developed to a position where, in the case of a number of products, a single manufacturer - Microsoft, De Beers, OPEC - can have something approaching a monopoly power in controlling word wide production and setting a world wide price.

2. Essential elements of globalization involve a limited number of producers, more standardized products, and world wide markets for the product in question.

3. Real or Financial Causes - There is a "real" element to the globalization process. Mass markets mean that more specialized machinery can be used in production, giving lower per unit cost of the product. There is also a "financial" element - a developed capital market makes it possible to finance a more automated productive process, which in theory should be more efficient in turning out a product at low cost, provided a sufficiently large market can be found. Hence the need for a producer whose volume exceeds domestic demand, to find an export market to absorb the surplus, even at "dumping" prices.

4. The Impact of Globalization - The introduction of a new, high volume, and cheaper method of production of any staple, can have drastic effects both domestically and abroad. Around 1800 the Rothschild family, for instance, initially gained its start towards riches by wholesaling on the Continent cloth produced by the new power looms in Manchester. The price differential between such machine-made cloth and the old hand loom production gave an significant profit margin - but at the same time, caused immense distress among English and continental "hand loom weavers", put out of work by the new machinery. Similarly, the repeal of the Corn Laws, and the consequent vast increase in imported wheat in the 1840's, caused ruin to British Agriculture (see Cobbett's "Rural Rides"), followed by a depression that led to suspension of the Bank Charter Act caused by the outflow of foreign exchange to pay for imported food.

5. In the same way, second hand clothing shipped in bulk from the New World has made it impossible for Africa to establish its own clothing industry - just as Mahatma Gandhi did his unsuccessful best to re-establish a hand weaving industry in India. Efficiency means cheapness, means the exclusion of those who cannot match the price set by mechanization. The leader prospers - and "the devil takes the hindmost", particularly those who have learned skills in now obsolete manufacturing techniques.

6. The Effects of Globalization - The introduction of highly sophisticated manufacturing techniques need not be confined to the originating country, however. If the same processes can be adopted by a cheaper wage country, then globalization means that a whole industry may move from a high wage location to one with lower wages. Thus Sheffield's steel industry has been undercut by Japan, which in turn was undercut by Korea, and in due course we can expect China to take the lead. If slave or prison labour is used in manufacturing in China, then every country in the world with higher labour standards is going to find itself at a competitive disadvantage. Instability and unemployment in developed countries are a natural consequence.

7. Regulating Globalization - To prevent economic devastation through globalization there seem to be a number of alternatives:

• (a) To abandon "free trade" and erect tariff barriers.
• (b) To be so efficient in production as to be cheaper than everyone else in the world,
• (c) To come to some international agreement or establish a cartel (OPEC is a prime example), that sets a market price for a product above the actual cost of production, or
• (d) (Preferably) An enforced international agreement requiring minimum labour standards for products and services traded between nations.

8. To deal with some of the questions raised -

8.1 Driving forces are both real and financial.

8.2 Business will tend to go for the cheapest source of production - mass employment will tend to go to low wage, third world countries (shoes from the Philippines, clothes from Mexico and China, for instance), to the prejudice of "blue collar" employment in first world countries.

8.3 With the development of the Internet, the difference between trade in goods and services becomes less and less, and except for distinctly personal or domestic services, can be supplied more and more easily from any point in the world.

8.4 Some effects of globalization on employment are:

• (a) Automated machinery now turns out consumer products in quantity - even such complex items as automobiles. Employment therefore becomes concentrated in making the machines the turn out the product, well ahead of the time the product reaches the market. There is therefore less and less correlation at any particular moment between the amount of labour being expended in the economy (and therefore wages of labour being paid), and the actual quantity of consumer goods reaching the market for sale. This generates substantial swings in the demand for consumer goods, and in profitability and the price level, depending on the amount of capital investment taking place in an economy at any particular moment in time. It creates a situation where, unless new capital development is taking place, goods already on the market cannot be sold, creating an economy continually swinging between boom and depression. Central Banks try and give stability by varying the interest rate to either encourage or discourage investment, and so the flow of wages to those engaged in manufacturing capital goods, but the process is extremely hit-and-miss.
• (b) There will be continual competition of lower wage countries to take employment for mass production blue collar work, destroying the profitability of similar industries in the more developed world. In the developing world, the tendency will be to exploit labour to the utmost, so as to achieve the lowest possible price on the world market.
• (c) We can expect many skills to become obsolete, as machinery becomes more computerized and sophisticated. Job security is threatened - even computer programmers in Silicon Valley can be laid off. Income distribution will give very high rewards to successful innovators and entrepreneurs, continual financial pressures on white collar workers, and erratic employment for those with technical ability or training, depending whether there is a buyers' or a sellers' market for their particular skills. Those with no skills can expect to compete with the lowest paid in the world if they wish to hold a job at all. (I deal with this question of the causes of this gap between rich and poor in an article on my website at "www.ecn.ab.ca/~martinh/richpoor.htm", which may be of interest, and I commend also Henry George's classic "Progress and Poverty").

8.5 Gainers are those with either

• (a) skills in demand
• (b) investments in land, finance or successful enterprises or
• (c) high positions in corporations with a controlling position in world or local markets.

Losers will be those who depend exclusively on employment for their incomes, particularly those who have no skills, or whose skills have become obsolete.

8.6 Globalization appears to squeeze out quality and the "family firm" with local initiative, knowledge and support, and makes product alternatives either the mass produced of lowest cost, or far more expensive "one of a kind" products, hand made for the luxury market. Wal-Mart and Macdonalds to satisfy the mass market: prestige stores and gourmet restaurants for those who can afford it. Less and less in between.

8.6a Yet while the dominance of trans-national corporations seems to be growing, there still seems to be scope in a rapidly changing world for the small firm to develop if it pioneers in some entirely new field of endeavour.

8.7 The communications revolution, and particularly the Internet, has made globalization cheaper, easier, and therefore much more practical. When a surgeon can conduct an operation in Europe by remote control from America, the potential for globalization, and the development of extremely specialized skills, is obviously enormous. Similarly, video conferencing and e-mail make control of a large enterprise cheap and easy, without much of the expense of travel which was formerly necessary.

8.8 Those who want income from employment have to go where jobs can be found. Residents of countries or areas which are "falling behind" in the globalization race are therefore under enormous pressure to move to areas where jobs are available. The U.S. is invaded by Mexicans. Germany by Turks, and so on. This means that developing countries often lose the few skilled personnel - doctors, university graduates and so on - that they do have, who have gone to seek their fortunes elsewhere, putting them even further behind in the competitive race.

8.9 Control of large enterprises nowadays seems to reside principally with their (very well paid) CEO's, and the large investors - mutual and pension funds, for instance - who are principally concerned with return on their investment rather than service to the public. In some key industries - culture, food, airlines, for instance - there may be reasons for control of ownership, but on the whole, such controls may best be enforced by appropriate government legislation and regulation rather than by ownership. Nationalization in England has not been a great success, and bureaucracy in any organization tends to stifle innovation.

8.9a A device used in Western Canada has been to set up Crown Corporations in areas where there was poor service from poor competition - the Alberta Insurance Corporation, or the Treasury Branch system for instance - with the idea of providing competition and service in particular areas where private enterprise was failing. This approach seems to have worked very well in a number of situations, and the Treasury Branches are still a successful alternative to conventional banks in this part of the world.