Memorandum submitted Dr Philip B Whyman,
Lancashire Business School, University of Central Lancashire
This paper seeks to contribute in two ways towards
the inquiry, made by the Treasury Select Committee, into Globalisation
and its impact upon the real economy.
Firstly, it provides a discussion of the variation
in the definitions of globalisation (and internationalisation),
and why these are important in terms of the development of national
economic policy. Primarily, the paper claims that "strong"
definitions of globalisation lead to claims of the impotence of
national governments relative to Trans-National Corporations,
and this results in a caution in the design and exercise of economic
strategy which is not necessarily borne out by the evidence. Through
a brief review of the data concerning trade and capital flows,
the paper presents an argument that most of the evidence points
towards an increasing internationalisation (not globalisation)
of the world economy. Moreover, in so far as globalisation does
in fact exist, it is little more advanced in many respects than
during the Gold Standard era; the primary difference between the
two periods relating to the composition of long-term capital flowsie
FDI in the contemporary period rather than portfolio investment
in the early years of the last century.
The second feature of the paper relates to the
impact of globalisation upon national economic policy, and specifically
it considers claims of the "death" or "retreat"
of the nation state. The paper argues that, whilst increased internationalisation
has increased certain of the constraints experienced by national
governments, it has certainly not undermined the effectiveness
of many of the main economic policy instruments. Moreover, the
disappointing record of financial crises and resultant macroeconomic
destabilisation throughout many different nations, together with
the relatively poor record of the neo-liberal era, indicates that
a more active economic policy strategy, based upon a proper appreciation
of the role of aggregate demand management, would produce superior
Globalisation and economic policy
The Meaning of globalisation
1. Globalisation is quite possibly "the
most contested concept in contemporary social science" (Grant,
2002:41), being "invariably over-used and under-specified"
(Higgott and Payne, 2000:ix). Indeed, the imprecision that often
accompanies debate surrounding globalisation prompted Wiseman
(1998:1) to claim it to be "the most slippery, dangerous
and important buzzword of the late 20th century".
2. The internationalisation of economic
activity refers to the international expansion of trade, labour
mobility, sourcing of components, product marketing and development,
together with the dramatic increase in capital flows (Scholte,
2000:16). Nevertheless, according to this definition, production
remains primarily national (or regional).
3. Globalisation, by contrast, concerns
"macroeconomic unification" (Glyn and Sutcliffe, 1992:77;
Amin and Thrift, 1994:4; Hirst and Thompson, 1996). Transformation
of production occurs as trans-national corporations (TNCs) lose
their former national identity, become truly footloose in terms
of location of production and their international management owes
no residual alegience to the interests of any individual nation
state. Technological advances that have produced transaction cost
reductions in transport and communications facilitate the development
of a "weightless", information-knowledge-based, service-centred
sector of the economy, together with a greater geographical diversification
of corporate production and associated innovation in strategic,
organisational and operational corporate behaviour (Katz, 1988;
Carnoy et al, 1993). Hence, the OECD (1996:9) characterises
globalisation "evolving [a] pattern of cross-border activities
of firms involving international investment, trade and collaboration
for purposes of product, development, production and sourcing
Evidence for globalisation
4. The evidence for internationalisation
is uncontested. Between 1970 and 1991, world GDP doubled, global
exports nearly tripled in real terms and FDI quadrupled, with
rates of real increase exceeding 25% per annum during the latter
half of the 1980s (UNCTAD, 1993:17). In 1991, world exports of
goods and services were valued at US$4 trillion, one-third of
which was intra-firm trade, whilst exports represented approximately
19% of global GDP (Lazar, 1996:274-5).
5. In terms of international capital flows,
the ratio of foreign assets relative to world GDP from 17.7% in
1980 to 56.8% in 1995 (Crafts, 2000:27). Short term capital has
increased substantially, with the daily volume of trading across
the major foreign exchange markets rising from $18 billion in
1977 to US$2 trillion by 1999a figure approaching one hundred
times the equivalent value of international trade, easily exceeds
the world's entire $1.5 trillion official gold and foreign exchange
reserves and represents a value one third greater than the UK's
annual GDP (Cotty, 2000:283; Eatwell, 2000:349). The vast majority
of financial market transactions are speculative, and have no
relation to the real economya reversal of the situation
in 1971, when 90% of all financial transactions were made to facilitate
international trade and long-term productive investment (Eatwell,
1995:277; Watson, 2002:205). The result is a dramatic reduction
in the timescale over which financial transactions take place,
with less than 1% of net global foreign exchange (FX) transactions
have a maturity of longer than one year (Palley, 1998:178-9).
Moreover, the acceleration in currency trading has increased instability
in exchange rates, tripling the monthly volatility of G7 exchange
rates and producing far greater increases in volatility for developing
nations. Ironically, more money is traded on the world financial
markets in six hours than has been lent by the World Bank during
its entire history (Clark, 1999:1).
6. Evidence for globalisation is mixed.
It is estimated that the largest 500 TNCs perform a majority of
world trade, with the 40,000 corporations with headquarters in
more than three countries accounting for two-thirds of world trade,
and with half this amount occurring internally and therefore not
being subject to external competitive market pressures (UNCTAD,
1995; Martin and Schumann, 1996:112; Lazar, 1996:274-5). The largest
TNCs dominate many global industries, including consumer durables,
air travel, recorded music, electronic components, steel, automobiles,
aerospace, oil, personal computers, semiconductors, credit cards,
visual media, insurance, chemicals, telecommunications, accountancy,
and global merger and acquisitions. The aggregate stock of foreign
direct investment (FDI), which facilitates the internationalisation
of production, was estimated to be US$180 billion in 1991, with
the largest one hundred TNCs controlling half of this amount (Dunning,
1993:15; UNDP, 1999:67; Scholte, 2000:129-130).
Globalisation or internationalisation?
7. The evidence for an increase in international
economic inter-connectedness does not, by itself, prove the globalisation
thesis, because much of the available data can arguably sustain
distinct claims of internationalisation and/or regionalisation
of economies, but where principal economic units remain essentially
national (Petrella, 1996; Vandenbroucke, 1996:10). Indeed, whilst
regional economic integration has been documented, with 109 regional
agreements reported to GATT between 1948 and 1994 (for example
EU, NAFTA, ASEAN), this points towards a "triadisation"
of international economic development, not globalisation (Rugman,
8. It is therefore plausible to describe
the process of internationalisation as a recurrent historical
trend, complete with alternating phases of globalisation and fragmentation
that has been repeated on a number of occasions in the history
of the modern nation state (Clark, 1997). By contrast, other theorists
propose the existence of a linear (not cyclical) trend towards
increasing globalisation, but locate the emergence of the phenomenon
anywhere from 100 to 500 years ago (Porter, 1986:42; Chase-Dunn,
1989:2). Moreover, caution should be exercised when responding
to claims of globalisation, because seemingly permanent economic
trends can be quite rapidly reversed, and therefore advocates
of the globalisation thesis may suffer from a lack of historical
perspective (Hirst and Thompson, 1996:37-8). It is naive to project
the continuation of current trends as if this were an irreversible
Is globalisation new?
9. There is a growing literature that indicates
that, proportionally at least, levels of international trade,
migration of labour and international flows of investment capital
were higher in the late nineteenth century than the comparable
situation at the end of the twentieth century (Zevin, 1992; Wade,
1996). For example, the UK's international trade accounted for
44.7% of GDP in 1913, and after a dramatic decline between 1914
and 1945, it had only risen to 40.5% by 1993. Similarly, France
remains beneath its 1913 levels of openness (35.4%), with Germany
only narrowly surpassing its 1913 figure of 35.1% by 3.2% in 1993,
and with Japan recording a sharp fall from 31.4% in 1913 to 14.4%
in 1993 (Hirst and Thompson, 1996:60; Bairoch, 1996:176). Western
Europe exported 18.3% of its GDP in 1913, only slightly higher
than the 21.7% recorded in 1992, whereas comparable figures for
the USA were 6.4% and 7.5% of its GDP and Japan 12.5% to 8.8%
of its GDP; the latter experiencing a decline in the importance
of international trade (Bairoch and Kozul-Wright, 1996:6). Thus,
although the volume of trade has increased substantially over
the seventy years covered by these statistics, the international
economy does not seem demonstrably more open today than during
the gold standard era (Hirst and Thompson, 1996:37-8).
10. Capital mobility was a feature of the
gold standard period, with one estimate calculating that the stock
of FDI was around 9% of global output in 1913 (Bairoch and Kozul-Wright,
1996:10). Moreover, the growth in portfolio investment, particularly
from France, Germany and the UK, exceeded expansion in output,
and financed the industrial expansion of North America, Argentina,
Australia, South Africa and Nordic European nations like Sweden.
The UK exported an average 4% of its GDP between 1870 and 1914,
with the absolute annual figure having risen to an incredible
9% of GDP by the end of the gold standard epoch (Hirst and Thompson,
1996:37-8). Capital movements were estimated to represent 5.3%
of global GDP at the end of the gold standard epoch, whereas this
figure only averaged 2.3% of world GNP between 1989 and 1994 (Taylor,
1996; Obstfeld and Taylor, 1997). Thus, when compared to relative
GDP, capital flows are smaller today than they were seven decades
ago, indicating that perhaps capital markets are not as tightly
integrated as is typically perceived (Rodrik, 1996:4). One difference
between the two time periods concerns the fact that most capital
flows took the form of portfolio investment in 1913, rather than
foreign direct investment (FDI), with the debt typically issued
by governments and utilised to finance infrastructure investment,
including railway construction, harbour development and telecommunications
(O'Rourke and Williamson, 1999:211-2).
Why do definitions matter?
11. The importance arising from varying
definitions of globalisation relates to their ability to condition
perceptions of realityparticularly concerning the constraints
globalisation imposes upon macroeconomic policy. For example,
the hyper-globalisation thesis claims that an increasing integration
of financial markets, the rising importance of TNCs in global
manufacturing production, and their use of Foreign Direct Investment
(FDI) to expand their control into an increasing number of national
markets, has weakened the ability of the nation state to regulate
capital and utilise traditional economic policy instruments to
secure progressive policy goals (McGrew and Lewis, 1992:22; Held
et al, 1999). It claims that his has caused a "crisis"
and "retreat" of the nation state, where evasion of
regulation and increased capital mobility has "hollowed out"
state authority (Strange, 1996; Sassen, 1997).
12. Adherents to this theoretical position
claim that Keynesian demand management policy is fatally constrained
by capital mobility weakening the ability for government to tax
mobile resources, therefore forcing down tax rates upon skilled
labour and capital, and in the process undermining social policy
and welfare state provision (Reich, 1992; Sachs and Warner, 1995;
Veseth, 1998:137-8). Thus, Gray (1996:32) claims that globalisation
makes the "distributional goals of social democracy unachievable,
at least by traditional social democratic means". Furthermore,
the assumption that TNCs possess credible exit threats and can
use this leverage to force concessions from nation states to their
advantage, may cause governments to pursue "international
regime competition" to secure inward flows of capital investment,
and in the process reduce the burden of taxation and regulation
upon capital, with negative consequences for inequality and the
financing of the welfare state (Cerny, 1990; Garrett, 2000:455).
13. This theoretical position is, however,
contested. For example, a regionalist perspective holds that traditional
economic programmes and policy instruments remain viable at the
supernational level, whilst an intergovernmentalist perspective
proposes that nation states retain considerable autonomy in economic
policy-making and capital can still be regulated at national level
(Hirst, 1999; Baker et al, 2002:411-414).
ON UK AND
The death of the nation statehas it been
14. One aspect of the postulated weakening
of state power relates to financial deregulation providing additional
exit options for private capital, leading to global tax competition,
where corporations threaten to relocate (or FDI will not be attracted)
unless governments reduce corporate tax burdens, and in any case,
tax can be avoided through transfer pricing (Dicken, 1992:391).
The implication is profound for progressive economic policy, since
reducing taxation on mobile capital either requires it to be redirected
onto less mobile labour, thereby increasing social inequality,
or being forced to reduce public expenditure and with it prized
welfare programmes. However, though broadening of the tax base,
through closure of loopholes and greater reliance upon indirect
taxation, tax revenue as a proportion of GDP has remained relatively
constant. Indeed, studies have found a positive and statistically
significant associated between capital mobility and the effective
tax rate (Kopits, 1992; Swank, 1998). Furthermore, the evidence
does not indicate an unequivocal convergence towards a neo-liberal,
market-orientated model of capitalism (Perraton and Clift, 2004).
Indeed, the resilience of these arrangements may indicate the
existence of "institutional comparative advantage" (Garrett,
2000:457; Chang, 2003).
15. A second argument concerning the "retreat
of the state", as governments bargain with TNCs over their
conditions of operation rather than regulate their activities,
neglects the fact that markets are not natural phenomena, but
are always established in some form of legal and institutional
context that defines the conditions under which transactions occur
(Stopford and Strange, 1991). The power of the nation state therefore
creates the conditions for markets to operateie legal and
institutional framework. Indeed, if China can cause Google to
self-censor their search engine and the UAE can frustrate the
operation of Skype within its jurisdiction, national regulation
remains effectiveeven for the supposedly "borderless"
world of the internet. Hence, the World Bank (1997:41) disputes
the "overloaded government" thesis and advocates states
enlarging their role in protecting and correcting markets.
16. When discussing the net benefits to
host economies from attracting inward FDI, it is important to
realise that, for most industrialised economies, FDI flows represent
only a small proportion of GDP and are exceeded by domestic investment
by at least a factor of nine-to-one (Glyn, 1994; Weiss, 1998:174).
The majority of FDI finances non-manufacturing assets such as
golf courses, property (commercial and residential), hotels and
shopping centres, whilst a large proportion of FDI occuring in
the industrial sector is used to acquire existing assets rather
than construct new productive facilities, and is therefore less
effective in improving competition and providing additionality
to the host economy (Fallows, 1994:481). Moreover, the fact that
81% of global FDI stock is located in high wage, high tax OECD
nations, indicates that cost reduction is not the overwhelming
factor causing the globalisation of production (Weiss, 1998:186).
In addition, most TNCs concentrate 70-75% of value-adding activities
in their home nation, indicating that they are more accurately
national (or perhaps regional) firms which operate internationally
(Wade, 1996:101; Hirst and Thompson, 1996:96). Thus, a study of
the world's largest 100 TNCs reaches the conclusion that "not
one of these can be dubbed truly `global', `footloose' or `borderless'"
because no firm has overcome its dependence upon its home base
(Ruigrok and van Tulder, 1995:168-9).
17. The integration of world financial markets
is claimed to increase the cost of domestic stabilization policies
(Kapstein, 1994). Financial markets typically prefer mildly deflationary
policies as this preserves the value of financial assets (Palley,
1999:106). Fear of triggering capital flight and resulting currency
crisis has resulted in governments seeking to appease financial
marketsthe Greenspan approach (Reich, 1992; Sachs and Warner,
1995). In the absence of a more active economic policy, nation
states have indulged in "regulatory arbitrage", where
domestic policy is re-orientated towards the interests of mobile
capitalie liberalisation of the labour and financial markets,
lowering corporate taxation, resisting tougher environmental regulation
(Cerny, 1990, 1997). The experience of the UK (1976), France (1981),
Sweden (1991) and the ERM crisis (1992) are often used to justify
this positionhowever this is a gross simplification (Callaghan,
2000:102-8; Schmidtke, 2002:8; Whyman, 2006). In all cases, policy
mistakes led to the economic problems that precipitated speculative
attack upon national currencies, whereas a combination of tougher
financial regulation, "dirty" floating of the exchange
rate and a reorientation of macroeconomic policy would have provided
a superior solution.
National macroeconomic managementa viable
18. Passive adaptation to perceived dictates
arising from globalisation is not a sustainable position. Globalisation
has failed to produce a self-regulating world economy, characterised
by high and more equally shared growth rates, as predicted by
neo-classical economic theory, but is instead associated with
rising inequality and increased instability. Financial integration
and the increase in short-term liquidity, through financial capital
flows, has increased the probability of contagion from financial
crises elsewhere in the international community. Indeed, the world
economy has experienced 69 banking and 87 currency crises between
1975 and 1996 (Kapstein, 1994; UNCTAD, 1997:65-6; Stiglitz, 2002).
Solow (1997) is sufficiently concerned by these trends that he
recommends that globalisation be slowed down "until we can
be more vigilant in compensating the losers".
19. Fortunately, the state retains substantial
capacities to govern global economic activities (Rodrik, 1996;
Mann, 1997; Weiss, 1998). The vast bulk of a nation's resources
are immobile, including physical and human capital, and therefore
governments can invest in education, infrastructure, targeted
industrial support and facilitation of the development of business
networks in order to enhance the advantages of immobility and
proximity for firms (Bleeke and Ernst, 1993; Wade, 1996:108; Diwan
and Walton, 1997:2). The "embeddedness" of corporations
in national institutions facilitates informational resources and
co-ordination to secure common objectives, whilst the development
of a cluster of skilled labour and a technical supply chain specialising
in the specific activity of the firm reduces uncertainty arising
from a dynamic business environment (Hirst and Thompson, 2000:306;
Zysman, 2000:120-3). Thus, a "national system of innovation"
can be extremely successful in developing international competitive
advantage (Dunning, 1988; Porter, 1990). Indeed, business networks
suggest that the advantages of the maintenance of a strong home
base may be stronger than ever (Patel and Pavitt, 1991; Weiss,
20. Rodrik (1996) has demonstrated that,
far from those economies that are the most integrated into the
world economy suffering a convergence of economic policy and institutional
arrangements resulting in a "shrinkage" of government,
there is actually a positive correlation between openness and
the share of government expenditure in GDP, due to the ability
of government to act as an insulator against external shocks.
Moreover, there is little convincing evidence to indicate that
globalisation has undermined the efficiency of institutional frameworks
within which economic policy operates (Garrett, 1995).
21. Review of the available evidence indicates
that "strong" definitions of globalisation, and claims
of the paralysis of the state, are overstated (Boyer and Drache,
1996; Berger and Dore, 1996; Watson, 1999a). However, propagation
of the hyper-globalisation thesis may be "politically convenient"
since it disciplines expectations and provides a "convenient
post hoc rationalization" for a neo-liberal policy
shift (Hay and Watson, 1999a:155; Watson, 1999b; Grant, 2002:49).
Accordingly, the image of globalisation may be "so powerful
that it has mesmerized analysts and captured political imaginations"
(Hirst and Thompson, 1996; Hirst, 1999:88). Thus, the so-called
crisis of social democracy is based upon a combination of "political
fatalism", a "lack of confidence" and "a lack
of political imagination" (Hay, 1998:529; Whyman, 2006).
22. This is not the forum to develop detailed
policy design, however the management of aggregate demand is a
necessary through not sufficient condition for the achievement
and maintenance of full employment alongside a reasonable rate
of economic growth. There is a large and growing literature suggesting
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