So what is so bad about globalization?

[amadeus]

What we need is a world movement against globalisation.....

Better start by throwing out your computer - I'll bet you not one component of it was made in Britain.

 

[Murky]

Globalisation goes hand in hand with capitalism, which is bad.

I don't agree that all caplitalism is bad. The concept of capitalism is actually good in terms of improving the economic conditions we live in. Small scale capitalism is one of the driving forces of innovation. We need innovation to keep up with growing demands brought on by a growing population.

 

[Rambuchan]

So what is so bad about globalization?

There are two main problems with Globalisation as we know it today, namely the process by which neo-liberal capitalism is spread through the world:

1) It generally assumes two truths about economic development and the state of the world economy that simply are not true, and tailors policy accordingly.

The first is the assumption that pre-industrial countries must have open economies, without protective measures, in order to most effectively develop into industrialised economies. Yet there are no examples of this in history. All the world's developed, industrialised economies employed selective and protective tariffs and quotas in the process of their development, guarding and nurturing industries until ready to compete internationally.

Many of the developing world's industries, like those now wealthy when in their earlier stages, are simply not ready for liberalisation. And their societies do not yet have in place mechanisms to deal with heavy industry and a market economy; such as regulations on working conditions, healthy and safety, quality standards, environmental measures, minimum wage, worker representation, anti-monopoly trusts, the rule of law and so on.

The second flawed assumption is that the world economy is a complete and perfect pure market economy. This isn't the case and will most likely never be. Whenever information is imperfect and markets incomplete, ie. always, and especially in developing countries, then Smith's invisible hand works imperfectly. World governments, especially the wealthy ones, are aware of this and are far more Keynesian with their own policies than with those they dictate to the developing world through the IMF and World Bank.

The consequences of these two flawed assumptions can be quite damaging. See, for the best example of these two fallacies at work, agricultural industries in developing countries that are opened up to compete with heavily subsidised farmers' goods from Europe and America. I still think that the case of Rwandan coffee growers, post 1989 WTO pricing talks, is the clearest illustration of how wrong this can go. But there are also many banking crises and collapses to look to.

2) The decisions about the nature, process and purpose of Globalisation are controlled by too few, who are often biased in favour of the industrialised world and do not serve the interests of the developing world. The IMF and the World Bank, the two institutions that oversee Globalisation, are essentially controlled by the West. Their Managing Directors are appointed by Europe and America respectively, as a matter of policy. These heads often do not have experience with the developing world, for it's deemed unnecessary, and often come from deep within the financial communities of the West, or worse, the political establishment (Paul Wolfowitz was the classic recent example).

As such, there is heavy criticism that the power wielded, which is significant, and policies dictated to the developing world via these institutions are biased, politicised and do not serve those they are supposed to. This is best seen at work in the conditionalities that are put in place to accompany policy directives (the case of Ethiopia's banking sector is one good example here). But this is increasingly coming under fire and there is a growing movement to reform governance and voting rights at the IMF and World Bank.

Many, like myself, hope that dealing with 2) will introduce parties that will bring less of 1).

 

[Part_Time_Civer]

There are two main problems with Globalisation as we know it today, namely the process by which neo-liberal capitalism is spread through the world:

1) It generally assumes two truths about economic development and the state of the world economy that simply are not true, and tailors policy accordingly.

Globalization is (at least in my definition) a process, not an entity that can assume things.

The first is the assumption that pre-industrial countries must have open economies, without protective measures, in order to most effectively develop into industrialised economies. Yet there are no examples of this in history. All the world's developed, industrialised economies employed selective and protective tariffs and quotas in the process of their development, guarding and nurturing industries until ready to compete internationally.

Fair point. The quota's and tariffs in the western world are a shame. My country has long been trying to collaborate with the English to get rid of the Commom Agricultural Policy, but we were always opposed by the French. (hopefully that will change now that they have a smart person in charge

Many of the developing world's industries, like those now wealthy when in their earlier stages, are simply not ready for liberalisation. And their societies do not yet have in place mechanisms to deal with heavy industry and a market economy; such as regulations on working conditions, healthy and safety, quality standards, environmental measures, minimum wage, worker representation, anti-monopoly trusts, the rule of law and so on.

So it not really globalization that's there problem, but rather law and order (or lack of that really). I do agree they should be allowed to protect their industries though.

The second flawed assumption is that the world economy is a complete and perfect pure market economy. This isn't the case and will most likely never be. Whenever information is imperfect and markets incomplete, ie. always, and especially in developing countries, then Smith's invisible hand works imperfectly. World governments, especially the wealthy ones, are aware of this and are far more Keynesian with their own policies than with those they dictate to the developing world through the IMF and World Bank.

I see what you mean, but I don't know if we shouldn't protect them from overt goverment spending. After all, they already pay a higher risk premium on bonds than, say, Germany.

The consequences of these two flawed assumptions can be quite damaging. See, for the best example of these two fallacies at work, agricultural industries in developing countries that are opened up to compete with heavily subsidised farmers' goods from Europe and America. I still think that the case of Rwandan coffee growers, post 1989 WTO pricing talks, is the clearest illustration of how wrong this can go. But there are also many banking crises and collapses to look to.

About the banking crises, I think it has a lot to do with fixed exchange rates combined with poor internal regulation.

2) The decisions about the nature, process and purpose of Globalisation are controlled by too few, who are often biased in favour of the industrialised world and do not serve the interests of the developing world. The IMF and the World Bank, the two institutions that oversee Globalisation, are essentially controlled by the West. Their Managing Directors are appointed by Europe and America respectively, as a matter of policy. These heads often do not have experience with the developing world, for it's deemed unnecessary, and often come from deep within the financial communities of the West, or worse, the political establishment (Paul Wolfowitz was the classic recent example).

Of course institutions like the IMF are essentially failing. The question is whether they do because of incompetence, bad will, or that is it just the political circumstances they operate in. I honestly don't know the answer to that one...

Many, like myself, hope that dealing with 2) will introduce parties that will bring less of 1).

I think the thing about globalization is that it's like guns. They are not bad in itself, but can be used in a bad way. (ok, not a good example because guns are usually used in a bad way I guess, but you know what I mean).

BTW, let's not forget that lack of globalization can also be pretty devastating (one could argue that it contributed to the economic downturn of the 30s and thus WW2)

good post btw

 

[amadeus]

Yet there are no examples of this in history.

False. Great Britain in the early 19th century and Japan after the Meiji Restoration.

BTW, let's not forget that lack of globalization can also be pretty devastating (one could argue that it contributed to the economic downturn of the 30s and thus WW2)

Look at what happened after Hawley-Smoot.

 

[luiz]

The first is the assumption that pre-industrial countries must have open economies, without protective measures, in order to most effectively develop into industrialised economies. Yet there are no examples of this in history. All the world's developed, industrialised economies employed selective and protective tariffs and quotas in the process of their development, guarding and nurturing industries until ready to compete internationally.

Many of the developing world's industries, like those now wealthy when in their earlier stages, are simply not ready for liberalisation. And their societies do not yet have in place mechanisms to deal with heavy industry and a market economy; such as regulations on working conditions, healthy and safety, quality standards, environmental measures, minimum wage, worker representation, anti-monopoly trusts, the rule of law and so on.

I think Hong Kong is a good exemple for a country that developed (and alot!) under a basically liberal capitalist system.

Plus, even if there was not a single exemple, it would not be prove of impossibility. All developed nations had corrupt leaders once, this does not mean that developing nation ought to have corrupt leaders to achieve developed status. The protectionism practiced by most developed countries in their past, most economists agree, harmed their development. They could be richer now had they beign more rational.

Your argument however is a very common one, so it requires further clarification. The notion of free trade is not based on absolute advantages, but rather on comparative ones. So even if a country was capable of producing everything cheaper and better than another, trade between the two would still increase the total wealth of both.

The second flawed assumption is that the world economy is a complete and perfect pure market economy. This isn't the case and will most likely never be. Whenever information is imperfect and markets incomplete, ie. always, and especially in developing countries, then Smith's invisible hand works imperfectly. World governments, especially the wealthy ones, are aware of this and are far more Keynesian with their own policies than with those they dictate to the developing world through the IMF and World Bank.

Nobody makes that assumption. I have never met a single person who said that world economy is a perfect free market, nor read any text stating that. The false assumption, I would argue, is that just because the market is not perfect this automatically makes free trade a bad thing.

Another false (and yet common) assumption is that developed nations do not follow policies like those proposed by the IMF or WB. They do. I posted on another thread the recommendations of the infamous Washington Consensus, and pointed out how even "socialist" Scandinavia follows the overwhelming majority of said principles, which are very moderate and not at all laissez-faire.

The consequences of these two flawed assumptions can be quite damaging. See, for the best example of these two fallacies at work, agricultural industries in developing countries that are opened up to compete with heavily subsidised farmers' goods from Europe and America. I still think that the case of Rwandan coffee growers, post 1989 WTO pricing talks, is the clearest illustration of how wrong this can go. But there are also many banking crises and collapses to look to.

Actually, if Europe and the US would drop their subsidies and tariffs, it would be their agriculturers who would be out of a job. It is the EU and US who cannot compete, in agricultaral issues, with Brazil (for exemple), not the other way around.

European subsidies and tariffs are a perfect exemple of keynesian nonsense screwing, and badly, the poor of the world.

2) The decisions about the nature, process and purpose of Globalisation are controlled by too few, who are often biased in favour of the industrialised world and do not serve the interests of the developing world. The IMF and the World Bank, the two institutions that oversee Globalisation, are essentially controlled by the West. Their Managing Directors are appointed by Europe and America respectively, as a matter of policy. These heads often do not have experience with the developing world, for it's deemed unnecessary, and often come from deep within the financial communities of the West, or worse, the political establishment (Paul Wolfowitz was the classic recent example).

Those two bodies hardly have the power to direct globalization. In fact they only act when requested by the actuall governments.

I really don't understad why the IMF and WB come under so heavy fire. Frequently I disagree with their proposed policies - but it's not like they force them down the throat of anyone.

 

[gallego]

A very good post by Rambuchan. I think it is important to see that globalization is inevitable and nobody is going to stop it; the goal is to guide it down a desirable path.

And Great Britain was the first country to industrialize. It's completely different being the first kid on the block than being one of the last. There are many new pressures associated with developing today that make it much more difficult. One simple example is that people in undeveloped countries want to consume like those in developed countries now instead of the sustained saving and investment that those countries did for generations to develop. Another is that fierce international competition can destroy fledgling national industry and countries become dominated by the demands of the world market instead of being a strong economy for their own needs. A very simple example of this from Friedrich List is slavery. It's very good for the world economy to have cheap, labor-intensive goods, but it prevents any industrialization by the country itself. Serving the world market is not always the best idea. Look at the US and the rise of its corporate development post-Civil War; there was huge protectionism and government help of industries that combined to develop the country.

Can't really comment on the Meiji Restoration, but I think the general concepts of the above still hold. In fact there are many who believe that a key component of East Asian industrial development was the government intervention and focused state-led policies of "picking winners," i.e. making big investments in heavy industries and electronics that wouldn't be profitable at first but would ultimately build up the economy.

 

[illram]

Globalization is a meaningless catch-phrase. The problem is multi-national corporations seeking to relax trade barriers and create extra-governmental bodies of law, with the objective of cheaper employment of poor people and relaxation of environmental standards in third world countries, all so they can sell their 3rd world cheaply manufactured goods in wealthy 1st world countries with less legal red tape and for greater profits. In a word, perpetuating the misery and poverty of 90% of the world so that I can buy cheap clothes and make their shareholders rich.

I'm all for capitalism and the free market, but there is a balance. Letting them run the show entirely by eliminating all government oversight, and making them beholden to no one but international trade agreements drawn up in private at G-8 summits and corporate events in the Bahamas doesn't sound good to me.

 

[Shadylookin]

it hurts industries which imports from other countries can be made cheaper.

For example our free trade agreements hurt people with blue color industrial jobs.

Of course overall we've benefited from free trade, but almost every economic decision has it's unintended consequences

 

[innonimatu]

@@aaglo
I can think of a couple of thigns that are bad about globalization:

- the private small enterprises around the world die out, because of huge producers take over the market with cheaper products. It also causes some unemployment.
This is not a true statement. There is in many industries and inherent benefit to being local. As for unemployment, it would cause frictional unemployment, which is a type of unemployment economists are not concerned about (we care more about structural)

That's the problem with most economists, they are not concerned with many of the consequences of the changes they cause. They won't even consider them! It is undeniably true that small private enterprises are dying out as a consequence of ever larger markets. Most economists look at this and say: look, the world is improving - larger enterprises are more efficients.

Smart economists are also politicians. They would look at this and think abut the political consequences of concentrating the power of decision-making over these large corporations on the hands of only a few administrators: concentration of political power, formation of a new type of elite comprising a small group of top managers who share a single culture,
This elite displaces previous ones and causes resistance, even possibly violent conflict, in the process. It is selected in a process that promotes a single culture, a single view of humanity (utilitarian in the extreme), and it will (has already) gain enough political influence to direct government policies affecting the lives of everyone on the world. Historically every state where concentration of economic power has been allowed to run unchecked has collapsed into anarchy and disappeared. And we are now allowing it to happed worldwide!

Some economists saw this:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

but they have by now been proclaimed obsolete.

@@aaglo
- pollution levels increase, since products have to be transported increasingly longer distances.
Neither is this. Long-Haul transport is actually more efficient per unit transported.

I have no doubt that the gain in efficiency is easily offset by the many more kilometers that all products travel from their production sites to their final destinations, and in between (components being assembled).

 

[Part_Time_Civer]

That's the problem with most economists, they are not concerned with many of the consequences of the changes they cause. They won't even consider them! It is undeniably true that small private enterprises are dying out as a consequence of ever larger markets. Most economists look at this and say: look, the world is improving - larger enterprises are more efficients.

Smart economists are also politicians. They would look at this and think abut the political consequences of concentrating the power of decision-making over these large corporations on the hands of only a few administrators: concentration of political power, formation of a new type of elite comprising a small group of top managers who share a single culture,
This elite displaces previous ones and causes resistance, even possibly violent conflict, in the process. It is selected in a process that promotes a single culture, a single view of humanity (utilitarian in the extreme), and it will (has already) gain enough political influence to direct government policies affecting the lives of everyone on the world. Historically every state where concentration of economic power has been allowed to run unchecked has collapsed into anarchy and disappeared. And we are now allowing it to happed worldwide!

Karl Marx believed that company that are bigger are always more efficient, and that therefore by a process of natural selection only the biggest companies would survive. In the end, all production would be controlled by just a few (resulting in utmost exploitation) but of course before that would happen, revolution would already have taken place.

You can understand why Karl Marx would think that if you consider that he lived in an era in which bigger companies were almost always more efficient, because the industries they operated in (railways, sea transport, cotton production etc) dictated economies of scale.

What Marx failed to see was the development of human capital on the one hand (firms cannot pay me 5 cents per hour, because there's 'capital' stored in my head) and the problem of 'information costs' (I think Coase calls them differently but forgot the term) on the other hand. That means that your local hardware supplier may be more efficient than Staples, because they are smaller and can respond more flexible to the market. Marx was a great economist, but in the end his theories became obsolete.

I have no doubt that the gain in efficiency is easily offset by the many more kilometers that all products travel from their production sites to their final destinations, and in between (components being assembled).

I do have doubt. If the gains are really ofsett by the transportation costs, then why would the market demand these products? I always try to pay a little as possible for the stuff I buy, I think it's reasonable to think everybody does (on most occasions).

 

[JerichoHill]

@@innonimatu

This is what I said:
This is not a true statement. There is in many industries and inherent benefit to being local. As for unemployment, it would cause frictional unemployment, which is a type of unemployment economists are not concerned about (we care more about structural)

This is how Inn responded.
That's the problem with most economists, they are not concerned with many of the consequences of the changes they cause. They won't even consider them! It is undeniably true that small private enterprises are dying out as a consequence of ever larger markets. Most economists look at this and say: look, the world is improving - larger enterprises are more efficients.

Your response has no relationship to what I posted. Never did i make a claim that small enterprises and businesses were not succumbing to mega-malls or whatever. I made a claim that "There is in many industries and inherent benefit to being local". Not all. Please learn to read.


I have no doubt that the gain in efficiency is easily offset by the many more kilometers that all products travel from their production sites to their final destinations, and in between (components being assembled).
I would beg to differ. If it was not economically profitable to produce in countries or distances farther away due to their own economic advantages, then this wouldn't be done.

I did a two year stint as an anti-trust regulator. I'm obviously not against maintaining competition between firms

 

[aronnax]

Globalisation = Destruction of local culture for money

Thats why I hate it

 

[Rambuchan]

Globalization is (at least in my definition) a process, not an entity that can assume things.

Fair cop. I hope it was clear what I was saying when I tried to point out that it was a process with my opening sentence. For clarity: It's the institutions and, specifically, the personnel behind the policies from these institutions that make the assumptions.

Fair point. The quota's and tariffs in the western world are a shame. My country has long been trying to collaborate with the English to get rid of the Commom Agricultural Policy, but we were always opposed by the French. (hopefully that will change now that they have a smart person in charge

Let's see...

So it not really globalization that's there problem, but rather law and order (or lack of that really). I do agree they should be allowed to protect their industries though.

Timing. That's the problem. There is too much haste (why?). As I said, their industries and societies aren't ready. Lack of law and order is one umbrella term to cover the host of elements that are not yet in place.

I see what you mean, but I don't know if we shouldn't protect them from overt goverment spending. After all, they already pay a higher risk premium on bonds than, say, Germany.

Can you explain this a bit more please?

About the banking crises, I think it has a lot to do with fixed exchange rates combined with poor internal regulation.

There's always a fair bit more at play. I omitted such detail for the sake of brevity. Weren't those fixed rates part of the package from the IMF or were they part of the liberalisation strategy before the crisis set in in Asia late 90s? I can't quite recall now.

Of course institutions like the IMF are essentially failing. The question is whether they do because of incompetence, bad will, or that is it just the political circumstances they operate in. I honestly don't know the answer to that one...

I'm of the view that it's the politicised nature of the institutes that causes the failures.

I think the thing about globalization is that it's like guns. They are not bad in itself, but can be used in a bad way. (ok, not a good example because guns are usually used in a bad way I guess, but you know what I mean).

You're right. Twice over. Globalisation is not bad in itself and yours is not a particularly good example.

BTW, let's not forget that lack of globalization can also be pretty devastating (one could argue that it contributed to the economic downturn of the 30s and thus WW2)

Of course, a more open and connected world will bring about a more peaceful world. The questions really are: what are they opening to? when? and under whose terms?

 

[Rambuchan]

False. Great Britain in the early 19th century and Japan after the Meiji Restoration.

Wasn't Britain well on its way to being a developed, industrialised nation by this point? Didn't they employ heavy tariffs on external goods (like cotton products from India) coming into Britain? And didn't they remove tariffs on say, British cotton goods going into their colonies like India, in the century before? The growth of the British Cotton Industry is a classic example of tariffs being used to protect an infant industry. I don't know about the Meiji Restoration period.

 

[classical_hero]

Of course Tariffs goes against globalisation and generally does not help the industry that is in trouble get out of it woes, because it enables bad business models to still be in play, when they should have been allowed to go under allowing those that had a good business model to thrive and thus making the economy stronger, since it would get rid of the bad apples.

 

[Richard Cribb]

Wasn't Britain well on its way to being a developed, industrialised nation by this point? Didn't they employ heavy tariffs on external goods (like cotton products from India) coming into Britain? And didn't they remove tariffs on say, British cotton goods going into their colonies like India, in the century before? The growth of the British Cotton Industry is a classic example of tariffs being used to protect an infant industry.

Correct.

I don't know about the Meiji Restoration period.

I do, even if I am not by far an expert.
But I know sufficiently to know that that assertion is quite absurd. If one examines its politics, one will find quite heavy governmental intervention in and regulation of the economy.
However, I more than suspect that he has read that historically illiterate Milton Friedman, who uses Britain and the Meiji restauration as examples of free trade in one of his books (Free to Choose, if I remember correctly).
By the way, Hong Kong and Singapore are not very good example either, also there the governments played a much bigger part than which is sometimes, probably for ideological reasons, openly communicated.
I think it can't be said too often that capitalists usually love the state, and for obvious reasons.
As for globalization,it is quite an empty word,which would mean different things depending whom you ask. But from the establishment it is just an euphemizing substitute for a process that is not at all new; economic imperialism. Already Marx describes capitalism as an international and internationalizing system.

 

[El Koeno]

...
And Great Britain was the first country to industrialize. It's completely different being the first kid on the block than being one of the last. There are many new pressures associated with developing today that make it much more difficult. One simple example is that people in undeveloped countries want to consume like those in developed countries now instead of the sustained saving and investment that those countries did for generations to develop. Another is that fierce international competition can destroy fledgling national industry and countries become dominated by the demands of the world market instead of being a strong economy for their own needs.

Why does it matter so much that you're later? If anything it makes it easier. There are plenty of examples of things that went well and things that went wrong. Moreover, there are well developed markets for your inputs and outputs, that allow you to capitalize on those past experiences.

 

[Fugitive Sisyphus]

Globalisation = Destruction of local culture for money

Thats why I hate it

You should buddy up with AL_DA_GREAT. What so great about "saving" culture?

 

[Part_Time_Civer]

Originally Posted by Part_Time_Civer
I see what you mean, but I don't know if we shouldn't protect them from overt goverment spending. After all, they already pay a higher risk premium on bonds than, say, Germany.

What I meant here is this. If a (any) goverment borrows money in the international capital market they (obviously) pay a certain interest rate. A country like Zimbabwe would pay more interest than a country like Germany. The reason is that investors are afraid that Zimbabwe may not repay their loans (default) because they may be bankrupt once the bond expires. The difference between the interest Germany (or any 'thrustworthy' country) pays and what Zimbabwe pays is the so-called risk premium.

Well, politicians (also German politicians) have a short-term view on goverment spending. They want to spend more rather than less in order to boorst their economy and increase their chance of being elected in the future. In developed countries however, the chance of this getting out of hand is smaller than in developing countries. Now, the more you spend, the higher your risk premium, thus the interest rate and the harder it gets to repay your debt in the end.

There's always a fair bit more at play. I omitted such detail for the sake of brevity. Weren't those fixed rates part of the package from the IMF or were they part of the liberalisation strategy before the crisis set in in Asia late 90s? I can't quite recall now.

As far as I remember what was going on was generally this:

1. South-East Asian countries had their currencies pegged to the dollar. Makes sense because it will increase international trade (and investment) since currency risk (from an private persepective) is removed.
2. As the respective economies of these countries grew more and more parties were inclined to exchange dollars for the local currencies (to purchase local products, but also to invest in stocks and bonds). Normally, the currencies would appreciate as demand increases, but the rates were fixed....so what happened was that the monetary supply of these nations grew.
3. A growing monetary supply stimulates economic growth.
4. Increased economic growth increases foreign investment.
5. Increased investment increases the monetary supply (see 2.)

Now we have a loop (more or less). In itself this wouldn't be so bad, the only problem is that the continous prosperity covers up structural failures.

6. Banks understand the market is growing at a fast pace.
7. A fast growing market requires an aggressive strategy (providing loans at low cost (interest)) in order to quickly gain market share. In terms of the BCG's matrix a lot of products were considered to be question marks and stars, rather than cash cows and dogs.
8. Low interest rates induce firms (and banks) to increase financial leverage (so low equity, high debt).

So what you have is an economy at high speed where everybody is doing their best to get a piece of the action. So far so good.
But at some point this happened:

9. For some reason, some investors pull out their money. I don't know what triggers this, if I knew I'd be rich.
10. Demand for the local currency decreases, so the central bank gives out dollars in exchange for the local currency
11. Money supply growth loses momentum
12. Economic growth slows down.
13. More investors pull out their money.
14. chain 9 till 13 goes on and on
15. Banks did provide a lot of risky loans (remember they were aggressive). Now some debtors default.
16. Some banks default (their high-debt and mismatched balance sheet makes them extra vulnerable)
17. Outright panic amongst (foreign) investors
18. Decreasing monetary supply, rising interest rates, more bankrupcies and lots of mayhem

Whether the the fixed currency rates were part of national policy or 'enforced' by the IMF is something I don't know. Will research that later today.