Memorandum submitted by Mr. Michael Kitson
Judge Institute of Management Studies, Cambridge, and the Cambridge-MIT
1. Much of the globalisation debate has
been characterised by disputes between "pro-globalisers"
who view it as a process generating economic growth and prosperity
and "anti-globalisers" who view it as a force for injustice
and exploitation (especially of labour and the environment). Many
of the former derive their credibility from (allegedly) robust
economic models whereas many of the latter see international capitalism
as "putting profits before people".
2. Although both cases have their merits
and weaknesses, an alternative perspective on globalisation is
posited here. The key elements underpinning the analysis that
Globalisation processes are complex.
Globalisation processes are often
Globalisation is often confused with
Globalisation can result in multiple
Globalisation has not been accompanied
by a reduction in national differentiation- varieties of capitalism
exist and will persist.
Globalisation makes economic, industrial
and technology policy more important.
3. The concept pf globalisation has been
applied to a wide variety of variables including social, political
and cultural. Here I adopt a narrower focus, looking at the globalisation
of economic and technological activities with a view to the implications
for government policy.
4. Historically, the process of increased
global integration has been erratic; punctured by periodic crises,
the formation of regional trading blocs, and shifting world economic
5. The growth of world trade and world output
can be evaluated in three historical epochs. First, the pre-First
World War period, from 1870-1913, which was the era of the classical
Gold Standard. Second, the interwar period, which saw the rise
of a reformulated Gold Standard in the 1920s and its subsequent
collapse in the 1930s leading to a series of discretionary and
uncoordinated trade policies. And third, the post Second World
War period which was dominated by the Bretton Woods system (the
rules and institutions that regulated the international monetary
and trading system in the postwar world) until its collapse in
1973 and which has been followed by a number of attempts at establishing
stability in trade and foreign exchange.
GROWTH OF WORLD OUTPUT AND WORLD TRADE 1870-1999
(Annual per cent Growth Rates, calculated
peak to peak)
Source: Kitson and Michie (2000), The Political
Economy of Competitiveness, London and New York (Routledge).
6. As shown in Table 1, during 1870-1913, world trade
increased by an average of 3.5 per cent a year whereas world output
increased by an average of 2.7 per cent a yearin effect,
the growing world economy was becoming more open and more dependent
on international trade. A picture often presented of this period
is that the classical Gold Standard facilitated world growth through
creating the conditions for free trade and low inflation. This
is a misnomer. In reality, the "stability" of the international
system was founded on deflation in weaker countries and migration,
and the adverse impacts of the system were limited by the resort
to protectionism and the transfer of savings from the richer countries.
7. The period between the First and Second World Wars
saw major discontinuities in growth and trade. The relative stability
of the 1920s was followed by the turbulence of the 1930s. As shown
in Table 1, during the 1913-37 period world trade grew at an average
annual rate of 1.3 per cent, whereas output grew at an average
annual rate of 1.8 per cent. During the 1930s, or more precisely
from 1929, the world economy suffered severe disruptions; the
disintegration of the world trading system was reflected in a
movement towards a more closed world economya reversal
of the 1920s trend towards increased openness.
8. During the post-Second World War period, world output
and trade grew at a faster rate than in any previous period. The
Bretton Woods period, from 1950 to 1973 witnessed a rapid growth
of trade (average annual growth of 7.2 per cent) and output (average
annual growth of 4.7 per cent), with a significant rise in the
openness of the world economy. The Bretton Woods system did not
function symmetrically; the burden of adjustment was borne by
the weaker deficit countries, with the stronger countries accumulating
increased reserves. Despite this asymmetry, the Bretton Woods
system was relatively successful because it accommodated a number
of adjustment mechanisms and was anchored by US monetary hegemony.
Two of the adjustment mechanisms, which complemented each other,
were firstly, the discretionary use of domestic monetary and fiscal
policy and secondly, the use of capital controls.
9. The collapse of the Bretton Woods system ushered in
a period of slower growth of world trade and output. From 1973
to 1990, world trade grew at an average annual rate of 3.9 per
cent, around half that achieved in the Bretton Woods period, and
output increased at an average annual rate of 2.8 per cent. Within
this period there were major setbacks in the mid-1970s and the
early 1980s; the former caused by the first OPEC shock and the
latter by "OPEC 2" and the "monetarist" shock
of deflationary policies being adopted in a number of the leading
10. There were several reasons for the 1945-1973 era
of relatively rapid growth coming to an end. The 1973 oil crisis
is often cited. But this was more a symptom than a causethere
was a general rise in fuel and raw material prices caused on the
one hand by the relatively rapid growth itself, combined on the
other with no global system to manage the production of fuel and
raw materials. The original ideas following the Second World War
for developing some such international arrangements were quietly
dropped when the leading capitalist countries found that they
had ready access to such supplies at very low prices. This attitude
was to prove short-sighted. On a global scale the balance of forces
shifted gradually away from the industrialised countries towards
the producers of energy and raw materials. And a similar shift
in the balance of forces occurred domestically in the advanced
economies as the era of full employment led to a strengthening
of labour's bargaining power at the negotiating table and in the
11. Since 1990 there has been a significant increase
in world trade and the world has become significantly more open;
world output has also increased, but only marginally and recent
growth rates are still significantly below those achieved during
the Bretton Woods period. Furthermore, the degree of trade openness
varies significantly between countries.
12. There are a number of lessons that can be drawn from
the uneven and erratic path of trade integration. First, the process
can be slowed (as in the 1970s) or reversed (as in the 1930s).
The reversal of the 1930s reflected a major economic shock (or
shocks)an economic or a geopolitical shock today could
have a similar impact. Second, the period of most rapid growth
of output, trade and openness was a period (Bretton Woods) of
global economic coordination and domestic economic intervention
(a period often maligned as allowing excessive Keynesian interventionalthough
it is a moot point whether it was excessive and/or Keynesian).
13. Much of the globalisation (or the "hyper-globalisation")
literature has characterised a "borderless world" dominated
by footloose multinational companies (MNCs). Conversely, some
globalisation sceptics argue that MNCs remain embedded in their
national or regional economies.
14. Evidence on Foreign Direct Investment (FDI)one
measure of MNC activitydoes show an increase since the
1970s (in volume, and as a share of total investment and of GDP)
but there are significant variations across countries in both
levels of dependence on FDI and increase over time, and the bulk
of FDI flows are within the developed countries . To illustrate
this: FDI inflows into Finland were 0.5 per cent of GDP in 1988
and 9.7 per cent of GDP in 1998 whereas outflows were 2.5 per
cent in 1988 and 14.9 per cent in 1998 (OECD, 2000). For Japana
much more closed economyinflows were 0.0 per cent in 1988
and 0.1 per cent in 1998 and outflows were 1.2 per cent in 1988
and 0.6 per cent in 1998 (OECD 2000). In summary, there are large
variations across time and space, and these variations do not
simply correlate with economic performance.
15. Much of the FDI (up to 90 per cent of FDI in the
OECD, according to some estimates), which does take place, involves
mergers and acquisitions. While this may generate a number of
technological and managerial spillovers, it does not add to the
domestic capital stock.
16. Many globalisation sceptics point out that most MNCs
remain "home" (country or region) based with respect
to their sales and assets (especially R&D facilities). This
is not surprising given the scale of the home base of some countries
(especially the US). FDI, however, may be an effective vehicle
for increasing the globalisation of technology (see below).Much
will depend on the objectives of an MNC: is it seeking the lowest
cost of production or is it seeking to utilise national or sub-national
expertise and research? The latter is important given the potential
benefits of local innovative clusters, hencein management
speak"think globalact local".
17. The notion of a fully globalised economy dominated
by truly global companies is a figment (be it the position posited
by management gurus or their opposite number in the "anti"
camp). But so is the sceptical view that MNCs are essentially
home based. MNCs are becoming more global but this is a process
that is uneven over time, space and activity.
18. A distinction can be made between the three processes
that are often subsumed within the term "technological globalisation"
(on which, see Archibugi and Michie, 1997 and Kitson and Michie,
2000). First, the international exploitation of national technological
capabilities: firms try to exploit their innovations (often developed
in local clusters) on global markets either by exporting products
or by licensing the know-howsee the (uneven) spread of
information communication technologies (ICT) and the activities
of Microsoft. Second, collaboration across borders among both
public and business institutions to exchange and develop know-how.
Third, the generation of innovations across more than one country,
which relates particularly to the activities of MNCs.
19. The first two of these dimensions to the globalisation
of technology have increased in importance. Trade and patent flows
and international technical agreements have increased dramatically
over the past two decades or so. On the third category of the
extent to which MNCs have increased their technological operations
in host countries, the evidence is less clear. As noted above,
many MNCs tend to be loyal to their own home-based country when
they have to locate a strategic asset such as technology although
others may be seeking out competitive clusters abroad.
20. The globalisation of technology is following an uneven
path. As an example, the ICT revolution is often characterised
as "global" but its impact varies between and within
countries. To exploit its full potential will require adequate
investment in infrastructuretelecommunications and computersand
education (to use it).
21. The rapidly increasing financial integration of the
world economy has been apparent since the early 1970s. The collapse
of Bretton Woods and the subsequent dismantling of capital controls
ushered in a wave of financial liberalisation. This encouraged
the growth of international banking and especially the growth
of new financial instruments. The latter, initially devised to
hedge against risk, were soon primarily used for speculative purposes
and, through ICT developments, could be bought and sold very quickly
(``hot money"). Foreign exchange dealings are now primarily
used for speculative purposes: in the early 1970s the ratio of
foreign exchange trading to world trade was around 2:1; by 1980
is was approximately 10:1; by 1995 it was approximately 70:1 and
it is still increasing.
22. The globalisation of capital markets could be a force
for growth if such markets operated efficiently and if financial
institutions could fail without major ramifications for the rest
of the economy (domestic, regional or global). Unfortunately,
neither of these conditions applies. Financial markets are increasingly
dominated by "herding" behaviour so that prices do not
reflect economic fundamentalsthis leads to volatility and,
occasionally, massive misalignments ("over" or "under"
shooting). This can have major adverse effects on the real economy
(production, jobs and capacity) which may persist in the long-term.
Additionally, the failure of a financial institution can spread
to other institutions (contagion) leading to "mania, panic
. . . and crashes".
23. The rapid growth of "hot money flows" has
led to volatility in exchange rates and asset prices and has deepened
recent currency crises. Improved financial regulation is required
and to be most effective it has to be through global institutions.
24. From the above it should be clear that while the
world economy is indeed becoming more integrated, the notion that
we have a fully globalised economy is a misleading simplification.
Historically, the pace and extent of globalisation has varied
during different international policy regimes and has been interrupted
by intermediate developments, such as the formation of regional
25. Although there are those who believe that globalisation
is almost a universal force for good, and there are those that
believe it is universal force for harm, a more reasonable alternative
is to consider that it can have multiple outcomes (some good,
some bad), which will vary over time and space and it will lead
to winners and losers (between countries and within countries).
26. An example: take an economic shocksay, a massive
and rapid downturn in the USwhich is rapidly transmitted
through a "globalising" world economy. The impact of
this shock will vary across countries and across sectors (it will
depend on each country's trading and financial links with US and
its trading partners). It will also depend upon the response of
policy makers. If there is a significant impact and if policy
makers have only limited success, individual economies will go
into recession. The impact of this recession will have multiple
impacts. Some firms may respond to a loss of markets by reducing
capacity (capital stock and skills) which will be difficult to
replace. Others may respond by innovating (``creative destruction")
and uprooting complacent vested interests.
27. The conventional argument in favour of globalisation
is that it improves the allocation of resources and improves specialisation
and the exploitation of comparative advantage. Under certain assumptions
and conditions it may do thisbut under other conditions
it will not. For instance, variations in trade performance in
an increasingly integrated world economy may lead to persistent
divergences in growth rates (winners and losers). Success in international
trade becomes cumulative as increasing demand for net exports
allows countries (or more specifically, the firms and industries
within them) to exploit economies of scale and scope, improving
their competitiveness and leading to further improvements in their
trade performance. Conversely, weaker trading nations may fail
to maintain balance of payments equilibrium at a high level of
economic activity, with deflationary policies then pursued in
an attempt to maintain external balance. The combined impact of
poor trade performance and domestic deflation is likely to lead
to a cumulative deterioration in relative economic growth as countries
fail to exploit the increasing returns associated with a high
level of economic activity. These twin processes of virtuous cycles
of growth and vicious cycles of decline illustrate that the benefits
of trade integration may not be evenly spread.
28. Similarly, there may be winners and losers within
nationsan expanded global division of labour may reduce
the demand for unskilled and semi-skilled labour in the industrialised
countries. Without the appropriate policy response this could
lead to increasing unemployment and job insecurity for those workers.
At the same time, there may be increasing demand for skilled workers
in the industrialised countries, leading to rising incomes. The
resulting inequality could lead to social instability.
29. Globalisation can have multiple outcomes for the
nation state. First, increased trade integration and technological
globalisation can lead to virtuous cycles of growth or vicious
cycles of decline. Second, increasing dependence on MNCs can improve
employment and the technological base or it can lead to instability
as footloose capital is increasingly mobile. The challenge for
policy makers is to maximise the benefits and reduce the costs.
30. The one area of globalisation where the challenge
is simply to reduce the cost is the growth of destabilising hot
31. Conventionally, it has been argued that "globalisation"
makes it no longer feasible for individual countries to pursue
independent economic policies in the face of globalised financial
markets (the "powerless state" perspective). National
economic policy objectives should be limited, it is argued, to
seeking "stability" and "convergence". Stability
and convergence are interpreted, perversely, as stability and
convergence of policy instrumentsinterest rates, exchange
rates, fiscal balances, and so ondespite the fact that
stability in these may cause instability in real economic variables.
31. The alternative argued here is that globalisation
increases the need for the active use of economic instruments
to target real variables such as output and employment. With trade
integration increasing the potential costs and benefits which
will result from one nation's competitive advantage or disadvantage,
increasing globalisation makes national institutions and policies
more important rather than less. The costs of falling behind are
32. Trade performance has always been important for the
UK economy and it is even more important if it is to prosper in
a globalising world economy. The UK is a relatively open economy
and although globalised capital markets allow balance of payment
deficits to be financed in the medium-term, in the long-term they
will have to corrected. A dynamic tradable sector will allow the
UK to maintain a high rate of economic growth without encountering
persistent balance of payments difficulties. This will require
a more dynamic manufacturing sector; the UK cannot rely on trade
in services to compensate for the long-term decline in manufacturing.
In the three years, between 1997 and 2000 the UK trade balance
in manufactured goods deteriorated by £18 billion, whereas
during the same period the surplus on knowledge-based services
increased by £10 billion (Rowthorn, 2001).
33. Industrial and technology policy also becoming more
important in a globalising economy. National and local specific
factors play an important role in the development of industrial
innovation. There are a number of facets of national and local
systems of innovation, although they usually embody education,
innovation and R&D policies, as well as historical and cultural
factors. The creation and development of effective systems of
innovation are important to attract innovative activities including
those associated with some MNCs. This may include investment in
education, communications and university-industry partnerships.
Such policies will create a modern, efficient and productive infrastructure
and a well trained work forcewhich in turn will generate
34. Nations or local areas may also attempt to attract
footloose capital through financial incentives. This creates the
danger of a ``race to the bottom'', where areas compete for cost-sensitive
and mobile capital which does not become embedded into the local
or national economy.
35. Although globalisation reconfigures the scope for
national and local action, it also requires the improved international
regulation of financial institutions. The dangers of unfettered
speculative activities have been illustrated by the financial
crises in Asia and elsewhere. A new framework will require better
information, tightening up the capital backing required by banks
and security houses and greater international coordination of
regulatory functions. The implementation of such changes would
be undeniably difficult. First, the level of cooperation required
would be significant, the "rules of the game" would
be complex and the commitment to a large transfer of resources
between countries (as opposed to within countries) would face
political resistance. Second, there is no longer any one nation
with the economic and political power to take centre stage: the
lead must come from the dominant trading blocs. This itself presents
additional difficulties as there is not only potential conflict
between the blocs but those countries outside the main blocs may
also be disadvantaged. Third, institutional reform would also
be required to provide a more integrated and coherent structure
that can develop with changing conditions. One important lesson
of history is that regulation is best viewed as a process rather
than a static stateand so the regulatory system needs to
develop and change, sometimes quickly, to react to changes in
the international financial system.
36. Active economic, industrial and technology policy
are made more important rather than less by increased globalisationa
process which can mean that a loss of competitive advantage is
translated rapidly into declining market share, output, employment
and living standards. Policy may be more difficult to implement
in face of more intense global pressures. But far from implying
a need for less action, globalisation implies that policy action
may need to be reconfigured and, in some areas, may be more interventionist
than in the past.
Archibugi, D. and Michie, J. (1997), Technology, Globalisation
and Economic Performance, Cambridge: Cambridge University Press.
Kitson, M, and Michie, J. (2000), The Political Economy of
Competitiveness, London and New York (Routledge).
OECD (2000) International Direct Investment Statistics, Paris:
Rowthorn, R. (2001), "UK Competitiveness, Productivity
and the Knowledge Economy", National Competitiveness Summit,
1 November 2001, Cambridge-MIT Institute, Cambridge, UK.
7 November 2001