Globalization
For good or ill, globalization has become the economic buzz- word of the 1990s. National economies are undoubtedly becoming steadily more integrated as cross-border flows of trade, investment and financial capital increase. Consumers are buying more foreign goods, a growing number of firms now operate across national borders, and savers are investing more than ever before in far-flung places. //
Whether all of this is for good or ill is a topic of heated debate. One positive view is that globalization is an unmixed blessing, with the potential to boost productivity and living standards everywhere. This is because a globally integrated economy can lead to a better division of labor between countries, allowing low- wage countries to specialize in labor-intensive tasks while high- wage countries use workers in more productive ways. And with globalization, capital can be shifted to whatever country offers the most productive investment opportunities, not trapped at home financing projects with poor returns.
Critics of globalization take a gloomier view. They predict that increased competition from low-wage developing countries will destroy jobs and push down wages in today's rich economies. There will be a "race to the bottom" as countries reduce wages, taxes, welfare benefits and environmental controls to make themselves more
"competitive". Pressure to compete will erode the ability of governments to set their own economic policies. The critics also worry about the increased power of financial markets to cause economic havoc, as in the European currency crises of 1992 and 1993, Mexico in 1994 - 1995 and South-East Asia in 1997. //
Despite much loose talk about the "new" global economy, today's international economic integration is not unprecedented. The 50 years before the first world war saw large cross-border flows of goods, capital and people. That period of globalization, like the present one, was driven by reductions in trade barriers and by sharp falls in transport costs, thanks to the development of railways and steamships. The present surge of globalization is in a way a resumption of that previous trend.
That earlier attempt at globalization ended abruptly with the first world war, after which the world moved into a period of fierce trade protectionism and tight restrictions on capital movement. Capital controls were maintained after the second world war, as the victors decided to keep their exchange rates fixed — an arrangement known as the Bretton Woods system, after the American town in which it was approved. But the big economic powers also agreed that reducing trade barriers was vital to recovery. They set up the General Agreement on Tariffs and Trade (GATT), which organized a series of negotiations that gradually reduced import tariffs. GATT was replaced by the World Trade Organization (WTO) in 1995. Trade flourished. In the early 1970s, the Bretton Woods system collapsed and currencies were allowed to "float" against one another at whatever rates the markets set. This signalled the rebirth of the global capital market. //
Could the trend towards globalization be reversed a second time? Doing so might be more difficult than before. New technology and new types of financial instruments make it tricky for governments to impose effective capital controls. Likewise, the growth of multinational firms that can switch production from one country to another would make it harder to erect effective trade barriers. Another reason to suppose that globalization is more durable this time around is that free trade is built upon firmer institutional foundations than earlier in this century. At that time, free trade proceeded largely through bilateral treaties rather than multilateral institutions such as the WTO. Withdrawal from the WTO would not be done lightly. //
