Saturday, July 18, 2009

Shrinking marginal benefits of globalisation?

One can discuss if not the marginal benefits of globalisation and international competition are decreasing over time.

The first international trade was ecologically motivated, i.e. populations and cultures in one part of the world lacked locally available critical resources, such as flint, bronze, salt etc. So trade was an ecological adaptation totally essential for human survival.

Gradually trade has been more and more motivated by profits. Free trade and competition and in particular the lowered prices for transport from mid 1800s led to a global division of labour. A division of labour which similarly as the division of labour in the family, within a company or within a society has two functions: one is the increased efficiency in the production and the other is a increased stratification of society with increased inequality and more hierarchy. This is also what we can see in the world today, where some countries are locked in a poverty trap. And despite the promotion of globalisation as a solution they have not benefitted at all.

It also seems that globalisation itself has the effect of gradually reducing the accrued benefits. The theory in favour of globalisatoin is about competition between companies and innovation plays a big role. Innovations are now global. An innovation in Japan can result in a production in Mexico exporting to Scandinavia. This is also linked to increased standardisation on all levels from production to management. There is very little space for innovation on the production level and even when there is innovation it can be applied everywhere. This also means that there is actually little money and profit to be made in the production as such. The money to be made is upstreams, i.e. in the patents and downstream, i.e. in the marketing and branding. It is no coincidence that most successful companies have no own production any longer.

For the production proper the comparative advantages are now mainly about salaries and other components of human and social capital, as all other factors are more or less the same all over the globe (this is based on the low transport costs based on too cheap fossil energy). A factory in Thailand may very well be owned by a company from India, have an American manager and using technology from Singapore. Therefore it is not the own resources of that company that makes it different from their competitors. It is the Thai labour force and the Thai makroeconomics that shall compete with India, Germany and Brazil.

If this analysis is correct it means that it is not companies or entrepreneurs that compete with each other, but it is political systems and states that compete. States can compete by distorting the game with subsidies (such as OECD countries support to its farm sector) or by investing in human or social capital (e.g. by eductions) or by creating a good "business climate" (law and order, less red tape). And one can wonder, why it is wrong that countries compete by spending their resources where they think they make most use? The question is if we perhaps do more harm that good by trying to standardise how countries operate, wether it is done by the EU, the WTO or other mechanisms?

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