Globalisation: Major Changes in the Economy

Saturday, April 29, 2006

Unbridled Capitalism Will Lead to Very Real Problems (Second Half of Interview)
Full interview here.

Harvard economist Kenneth Rogoff (Economic Counsellor and Director of the Research Department for the International Monetary Fund (IMF) from 2001 to 2003, current professor at Harvard University) discusses the dangers of unbridled capitalism, the greed of corporate CEOs and a fundamental problem with the United States economy, with German news provider Spiegel.

SPIEGEL: Are Western corporate CEOs driven by globalization, or do they themselves use the situation to their advantage?

Rogoff: We react to market forces and we try to protect jobs -- that's the image many managers have of themselves. They have no idea why people are so furious with them. Look at corporate takeovers where outgoing CEOs get a $50 million settlements and 5,000 workers are let go. That kind of thing happens all the time. On the one hand, it shows that we have a flexible economic system and we permit change. On the other hand, it's completely naive to think that this doesn't create tensions.

SPIEGEL: But don't companies and countries that oppose globalization end up hurting themselves?

Rogoff: There are no easy answers. Of course it would be suicidal to nationalize our industries, for example. But those who say the economy is growing and everything's just great are simply unwilling to acknowledge these cracks in the system. Incidentally, this gap is much bigger in China. It's the 21st century along the coastline, but if you travel to the interior, where two-thirds of all Chinese live, you'll experience the 18th century. These are incomprehensible inequities. They have an extremely raw form of capitalism.

Major Change #1: Globalisation has somewhat contributed to discrepancies in levels of opportunities available, in a country itself. As seen from Rogoff's quoted examples of both the United States and China, globalization has created economic gaps within a society. This is due to the fact that globalization may have affected only some parts of the country. For example, in the case of China, its coastlines may have been modernized quite a bit, but within its interior, not much may have been changed. Thus, we can see that in certain circumstances, globalization has widened economic gaps within a country.

SPIEGEL: According to the 19th century English economist David Ricardo, free trade is good for everyone. According to his theory, the wealthy industrialized nations would simply have to concentrate on becoming even more technologically advanced to make up for their outsourcing losses in certain industries.

Major Change #2: The shift in direction that economies have to take, especially developed economies, is mainly due to globalization. They have to evolve from just being efficient mass-producers to technologically advanced entities, in order to remain competitive. Developed countries have to advance themselves technologically, in order to retain an edge over developing countries which are able to provide cheaper labour for the means of mass production (factory employees). Globalisation has made it no more the Industrial Age, but the Technological Age, for some countries.

Rogoff: Ricardo was never right. Sure, there are more winners than losers, and winners profit to a greater extent than the losers suffer. But the assertion that everyone benefits simultaneously from free trade is simply incorrect.

SPIEGEL: Protectionism ...

Rogoff: ... is not a solution. We can't turn back the clock. But unbridled capitalism will lead to some very real problems. We will see that ever-increasing deregulation can lose political support among the population in the long term.

Major Change #3: And because of Major Change #2, protectionism sometimes arises, due to the need to protect certain sectors of the country's economy from globalization. For example, Japan has a protective automobile industry, obliging its residents to purchase locally-produced automobiles, and not foreign ones. At first, this was due to the temporary need to protect their budding automobile industry from competition from the foreign-made automobiles, but as time passed and these local industries matured, the government was attracted to the profits garnered through protectionism, and so it stayed, dismissing demands from other countries, for the trade sanction to be lifted, especially those from the European and North American continents. We can thus see how and why protectionism arises due to globalization.

SPIEGEL: If entire industries are shifted to the Far East, how can new jobs be created in the West?

Rogoff: Our high-tech industries are raking in tremendous profits, but for 50-year-old steelworkers or people in the aviation industries, it's difficult or impossible to improve their situations. The problem -- at least in the United States -- is not that people can't find jobs. The problem is that they're no longer finding jobs that provide them with dignity and decent social status. This tremendous downward pull for unskilled laborers has been around for a long time. But now outsourcing is also beginning to affect people in mid-level and higher-level jobs -- those who had felt secure in their positions.

Major Change #4: The job sector for some countries, especially developed ones, are revolutionised, due to outsourcing, and other phenomena that take place due to globalization. Outsourcing is defined as, the management and/or day-to-day execution of an entire business function by a third party service provider. Simply put in this context of globalization, it simply means, the job is going to someone else who can do it comparatively well, and who usually accepts lower wages doing it, i.e. more bang for the buck. Thus, this creates a vacuum in the job sector, and more often than not, attractive jobs are the ones being outsourced, leaving "undesirable" job opportunities behind, like unskilled labour, as mentioned above by Rogoff. We can thus see how globalization may affect job sectors in certain countries.

SPIEGEL: Are you saying that not even a first-class education can protect against competition from the Chinese?

Rogoff: You know, I was a chess pro in my younger days. Back then, the best player in New York could earn a pretty good living. But now the Indians and Chinese have become brilliant chess professionals. They get on a plane and play all over the world. This has led to dramatic pressure on incomes. Nowadays, the best chess player in Argentina can no longer make a living playing chess.

Major Change #5: Globalisation has also made it such that people from different countries have almost equal economic opportunities. Although there may still be plenty of discrepancies in the level of economic opportunities among other countries, the situation has much improved over the last few decades, due to the advent of globalization. This phenomenon has led to increasingly intense competition for higher-paid jobs around the world, such as managerial positions offered by multi-national corporations. We can thus see that globalization has leveled much of the playing field of knowledge and opportunities on the global level.

SPIEGEL: What's Germany's place in the globalized world?

Rogoff: Even if your economy grows a little this year, the trend is pointing downward. You need reforms in the labor market, in the tax system, in the area of corporate governance and in the education sector. Your school system is very good compared with the US, but your universities are not competitive.

Major Change #6: In the eyes of the governing bodies, globalization could most probably be the biggest cause for economic reforms all over the world. The main thing that causes change to be constant is competition. Be it any area of society, competition, more often than not, is the cause of change. The team manager wants to change the game strategy, so as to have an edge over the other team. The political party changes team line, to appeal to more voters to win the election. In the same way, globalization induces competition, be it in prices or jobs. We can thus see that globalization enacts economic changes.

SPIEGEL: You've already written off one of the world's biggest economies?

Rogoff: Please don't misunderstand me. If Berlin would finally enact some decisive reforms, it could surpass the United States in growth for 20 years. Germany has such incredible wealth --with its culture, its education and its highly qualified population. It would just have to flex its muscles a little to achieve growth rates of four to five percent in the coming years and turn itself into an economic miracle, as it did in the 50s and 60s. But that won't happen as long as you have this political paralysis.

Major Change #7: As seen in Major Change #6, globalization induces economic change due to its competitive factor. Here, we see that countries have to embrace Major Change #6 in order to remain relevant to the global economy, thus, they have to actively engage in pursuits that may enable them to search out the best changes to make to their respective economies. There are various platforms for them to do so, like in the form of international organizations, for example, the World Trade Organization, which facilitate such pursuits. Therefore, we can see that globalization, due to its nature, has initiated the creation of such bodies, thus enabling various economies to keep up with globalization.

This post is unique (and rightly so), in the sense that I used an interview as reference source for my analysis on economic globalization. Hopefully, besides my analysis, the interview will be able to effectively present the interviewee's views on globalisation, thereby enlightening readers about what globalization actually does to the global economy, and the individual economies of different countries. The first half of the interview, which is not really relevant to globalization, is available in the link I provided at the start of this post, anyway.

Marc, the Economic 'Expert'
Posted by cram at 11:45 pm
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