Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 52 - 59)

TUESDAY 11 JULY 2006

MR MARTIN WOLF

  Q52  Chairman: Mr Wolf, good morning and welcome to our inquiry into globalisation. We really appreciate you taking the time to come and chat to us on this because I do not know if everyone in the Committee has but a number of us have read your book Why Globalisation Works, and we have also followed your columns very assiduously in the Financial Times and your latest one on energy.

  Mr Wolf: One more to do today. Another one.

  Q53  Chairman: Very good. Could you identify yourself for the shorthand writer, please?

  Mr Wolf: Yes. I am Martin Wolf; I am the Chief Economics Commentator for the Financial Times.

  Q54  Chairman: Maybe I can start with asking the question, what is globalisation, in your eyes? What would you identify as the most important threat and most important opportunity for the UK arising from this phenomenon of globalisation?

  Mr Wolf: Those are two quite distinct questions. First of all, I define globalisation, since I am an economist, as fundamentally an economic process with, of course, very wide and fundamental political and social consequences—and indeed cultural consequences. I do not consider those trivial, but I focus on the economic aspects. I regard it as, in essence, a process of economic integration across quite a wide range of markets, trade in goods and services, mobility of capital and, also, increasingly, of labour, and it is driven by two distinct but inter-related processes. The first is a set of policy changes, namely liberalisation of economies, particularly at the border, but that is often very difficult to distinguish from what we often think of as domestic liberalisation. Often the process of domestic liberalisation, for instance of financial markets, almost automatically has international implications. The second process driving it is technological change; changes, essentially, in the costs of transport and communications. So that is how I define globalisation. It is economic integration across a whole range of markets driven by two processes. In the last 20-25 years we have seen a global policy revolution—that is quite clear. A very wide range of countries, of which this is but one—and very far from the most important—have liberalised domestically and internationally, including the world's largest countries in Asia, and in addition we have seen important changes in technology in the last 25 years pretty well exclusively in the area of communications technology. As I have pointed out many times, if you compare what is often called the second globalisation, the present era, with the first globalisation (1870 to 1914, very roughly, or perhaps the middle of the 19th Century to 1914) that was an era in which both transport revolutions and communications revolutions were very important, but if anything the transport revolution was more important than the communications revolution. Our era is the opposite; we have not seen any marked technological change in transport in the last 30 years, we are rather living off the technological changes in transport of the previous period in the 20th Century. As I like to remark, the last really fundamental breakthrough in transport technology occurred in 1903, if I leave aside the rocket. Obviously, a great deal of technological innovation. What does it mean for the UK in terms of opportunities and threats? Well, the opportunities are fundamentally the normal opportunities for the gains from trade. Broadly defined, this country has for a very, very long time been a large trading entity. In fact, in some measures its openness to trade is no greater than it was 100 years ago, although that is difficult to define precisely and, of course, it has changed a great deal. It has always lived off trade and the gains from trade are, in some ways, more substantial than ever before. The threats are, broadly defined, three: difficulties of adjustment to very large changes; losers domestically (there are gainers and losers in a society affected by large changes of this kind) and, finally, the possibility that the changes in the rest of the world will bring about a transformation of our external environment particularly technically our terms of trade, the prices at which we can trade, our exportables relative to our importables, which make us poorer. It is perfectly possible that a globalisation process which is beneficial for the world as a whole can make particular countries worse off if it so happens that their particular exports (the things they are good at exporting) become much cheaper in the world and the things they import become much more expensive. I think it is pretty easy to see examples of countries that have suffered from that. As it happens, the evidence for the UK is reasonably clear that we have had a rather large, in terms of trade, gain in the last 10 years or so (in fact, remarkably large in terms of trade gains—quite striking), so at that level, in terms of the global opportunities, we are almost certainly better off. However, it would be possible to imagine situations emerging in globalisation in which we are in aggregate worse off, which does not mean we would be better off more closed, it just means that world opportunities have got worse for us because we have got more competitors who are driving down the prices of our exports and our imports are getting more expensive. There could well be a continued rise in energy prices as we become a net importer. So that is, briefly, my answer to your question.

  Q55  Chairman: I am coming on to the issue of protectionism but, before that, (maybe in part you have answered it) looking at the longer term, do you envisage a reversal of the current phase of globalisation perhaps at some stage 20 years out or so? If so, what could trigger that reverse?

  Mr Wolf: As you will know if you have looked at my book, I discuss that at length. I think it is perfectly possible to imagine a reversal of this process. I regard it as being in very insignificant measure at the outcome of policy choices. I do not regard globalisation as a predetermined result of technological forces. As I note in the book, the technology available for us to trade globally has been improving; the costs of transport and communication have been falling actually throughout human history and certainly throughout the last couple of centuries. Nonetheless, there was a long period, roughly between 1914 and 1950 when economic integration went into reverse, and that was the result of political and policy catastrophes. The breakdown in international relations (two world wars is a pretty good example of that) and, of course, the great depression in between which led pretty well all the world towards more or less autarkic policies, including of course then the British Empire—the imperial preference system. So in asking what could reverse this, I do not see any reason to suppose that the technology opportunities will be transformed dramatically in the next 20 years; they are more likely to improve than not, unless you think there is going to be an absolutely stupendous increase in energy prices in the next 20 years. I do not find that very plausible, for reasons I have discussed recently, as you note. So the changes would have to be political and policy changes, and the most likely ones are the same as before—a return to massive worldwide protectionism of a type we saw in the Thirties. That, I think, would have to be triggered, almost certainly, by a great depression of some kind. I regard that as a very low probability event—very low probability event—but it is not zero because policy-makers can make huge errors (we saw that in the Thirties) and, of course, a real breakdown in global relationships. The most obvious dangers are either a major international conflict situation or a real perception that terrorism has become such a serious threat that it is no longer possible to allow either the freedom of movement of people or even more the freedom of movement of goods in the way we are used to. One of the obvious examples I have given is what would happen to world trade if (I cannot estimate the probabilities or possibilities of this) a significant nuclear device were let off in a container in a major port. I know people are concerned about this and a lot of security is going into this, but millions and millions of containers move around the world all the time; it is part of the world trading system, and if such an event were to occur security could be tightened so dramatically as to amount to a seizure of trade. Of these I find the latter, the terrorist threat, more plausible than a true breakdown in global international relations. If you compare our period with the pre-1914 era which led, obviously, to the First World War, though there are obviously important rivalries on the world scene and an important shift in the balance of power with the rise of China, above all, it does not seem to me very plausible in our present era (for a whole host of reasons) that we are going to see a repeat of the 1914 catastrophe, but obviously one cannot rule this out. My general conclusion, then, is that it is possible to imagine political changes leading to a reversal, but on balance I think it is not probable. It is possible but not probable. It is more reasonable to assume than not that the process we have seen of the last 20, 25 years is going to continue.

  Q56  Mr Breed: I suppose the question that everyone will be asking when they start to get into it, both individually and as their company, is: "Am I going to be a winner or a loser?" Who do you think are going to be the main gainers and the main losers in the UK?

  Mr Wolf: On companies I am not sure. I think a lot of the companies that were vulnerable to this process in the UK have gone. The industries that were most vulnerable to what is effectively, from an economic point of view, a huge labour supply shock—we had this huge increase in the effective world labour supply of cheap labour, cheap hard work—a lot of the companies most affected by that in the standard textiles and clothing, metal bashing sectors have already gone. They have gone because of earlier waves of competition not so very different, in essence, to what is happening now. In terms of people it is pretty clear from all the evidence we have that this is in practice leading to what theory suggested it would lead, namely, a shift in opportunities towards the highly skilled and cerebral knowledge workers, the people with valuable skills in the world market economy, and is negative for unskilled labour and, particularly, for any semi-skilled labour which is still dependent on working in tradable goods and services. So, in terms of our internal situation, there is this shift which, in my view, is probably being aggravated somewhat by immigration.

  Q57  Mr Breed: You will be aware that the European Commission has proposed this globalisation adjustment fund, to sort of directly help those people which they believe are going to be affected by globalisation. How useful do you think a fund, as a mechanism to redistribute the wealth from globalisation winners to losers, might be? Do you think the sorts of figures we are talking about are anything like enough?

  Mr Wolf: I have always taken the view that funds of this kind are completely useless in the European context. There is a long history to the debate on this (n fact, I have been involved in the debate on this for about 30 years) which goes down to the comparison between the US and European countries. The US has a minimal welfare state, a minimal set of adjustment policies and a big political problem specifically focused on trade. Therefore, the US has historically, and the Democrats particularly, supported trade adjustment programmes to deal with their political problems associated with trade in the absence of any more general welfare support. My view in the European context, and I think that continues to be true here, is that whenever you look at these things it is impossible to separate out (and I discuss this at great length) the effects of trade changes from other changes that are causing adjustment problems. All the evidence we have suggests that even now productivity changes and technology changes are as, if not more, important, and it is not ultimately important for individuals whether they are losing their jobs because of technological change or because of trade, and finding out which it is is very difficult. So I have always believed that the right thing to do is to have general policies which deal with the general problems people have in response to economic change more broadly and unfortunate events. That is the efficient way of dealing with this because we cannot separate out the effect of particular things like this. The trick, which I think this Government has focused on as a major priority (and I think rightly as a priority) is to design a state support system, broadly defined a welfare system, that achieves the aim of helping to adjust and supporting the incomes of relatively unskilled people in an efficient way. That is what we should be doing and I do not think I would change the policies I would want to do just because globalisation has increased a bit compared to other sources of change. Where the change is from is much less important than that we have systems designed to cope with change more broadly.

  Q58  Mr Breed: You indicated early on that you thought the losers might be those that are in the sort of lower skilled activities. How do you think globalisation can affect what you might call low income families? Are they going to be significantly worse off both in real and relative terms?

  Mr Wolf: In general, a lot of low income families in this country, I think, are still not in work, so it is not relevant for them. A lot of low income families are gainers to the extent that there has been a collapse in world prices for a lot of the things they consume, particularly the sorts of things that countries like China produce and export. So I think it is quite difficult to make a general argument that all low income families are either worse off or better off as a result. I do think the evidence is consistent; we have had a marked dispersion in wage outcomes in this country and the same thing has happened in most relatively free market countries. The countries that have not allowed this to happen have had generated structural unemployment problems which suggests to me the same thing is happening. So, in general, one would expect opportunities for unskilled labour to deteriorate, although I think a lot of the deterioration for these people has already happened because I think a lot of the loss of these jobs has already happened. Increasingly, we are going to find, and indeed are finding, that most relatively unskilled people are working in truly non-tradable sectors and there the competition will no longer be relevant to them. That is I think probably where we are going to end up.

  Q59  Mr Mudie: Just following on from that, if you did not have China and India coming through with these populations the present government, I presume, would hope to skill these individuals up that are not at work and have them working in semi-skilled or even skilled areas. Does globalisation not mean a real threat to that sort of scenario? I thought you were very pessimistic; I thought you were actually suggesting: "They are not in work, so they are never going to be in work so do they matter?"

  Mr Wolf: No, I was not trying to suggest that. I think that if you think about the sorts of jobs that will be generated for relatively less skilled people in our country at wages we think are reasonable, which are obviously very much higher than the wages at which people are prepared to work in China or in India, I do not think that is going to occur in labour-intensive, tradable goods, which is the most obvious sector. I do not think that is a very plausible scenario unless we are prepared further to increase (and probably massively to increase) direct or indirect wage subsidisation, which we are of course doing very substantially already through the tax credit system. So I tend to think that the future for people in this category is, as I argue, going to be in the supply of those services which remain, essentially, non-tradable. There are a very large number of them if you start thinking about them in construction, in domestic services—plumbing and all that sort of thing—and in services like hospitals and so forth. That is probably, in practice, where most of the relatively unskilled are going to end up working, if you look towards the future. We are going to be exporting skilled, labour-intensive products and services. That is clearly what we are specialising in. That is not going to be absorbing a large number of unskilled people—it is just a matter of reality.


 
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