The logic behind globalisation

16 October, 2007

I found this snippet of an article in The Economist’s World in 2007 by Anatole Kaletsky which goes some way to explain the economic rationale behind globalisation, outsourcing and increased personal indebtedness. It doesn’t go into the political and social effects of the loss of industrial jobs but I think there is a huge role for government to invest in human capital. If we are going to compete economically during the rest of this century then I think we really have to improve the skills base and vocational education not just through higher education but for the 50% of people who on even the governments best estimates wont go to university.Globalisation undoubtedly has many winners but the benefits are not evenly spread throughout the population. Simply letting The City make billion after billion while letting the rest of the country fall behind is neither sensible economics or politics. If we let inequality run riot then we only have ourselves to blame for the resulting increased unhappiness, violence, crime, lack of trust and other problems such as increased support for extremist groups that we have inflicted on ourselves.Anyway here is the extract:

Platform companies are globally ubiquitous businesses which sell every where but produce nowhere: firms such as Nokia, Dell, IKEA, Apple or LVMH. They have discovered that many traditional businesses can be broken into three distinct components – design, production and marketing – and that the middle phase, production, tends to be the most volatile and the least profitable of the three. The platform companies have responded my outsourcing most of their production to emerging markets, while keeping for themselves the profitable design and marketing ends of the value chain. As a result, they have become less capital-intensive, more profitable and less unstable than traditional firms.

This company led analysis is familiar to any MBA student, but the macro impact of outsourcing on the stability is the advanced economies has only recently started to be understood. When America or European companies outsource to Mexico or China, it is usually the most volatile part of their business that is being outsourced – capital spending, inventories and industrial jobs. In effect a lot of cyclical volatility is transferred from Europe and America to the emerging markets along with the jobs outsourced. That this is not just a hypothetical speculation can be seen in the declining voilatility if many OECD economies since the early 1990s and especially in the remarkable stability in the financial markets in the face of the huge shocks and financial imbalances in the past decade.

An overlooked result of this greater stability is that workers in America and Euroep are mich less exposed to cyclical unemployment and can therefore afford to borrow more, Moreover, this credit is far more readily available and less costly to service because of the next benign change in the global economy: the low inflation which is another by-product of intensified global competition. Low and stable inflation has kept interest rates very low, which in turn has reinforced a third great structural change – financial deregulation.

Deregulated financial markets, combined with low interest rates have transformed the availability of credit and other financial products. Small businesses and individuals can now manage their liabilities, as well as their assets, in ways that were available only to multinationals a decade ago. Many illiquid assets, especially houses, have become highly liquid. This attractive new feature of property (“my home is now an ATM machine”) has naturally pushed house prices much higher than in past decades and has unlocked a vast store to invest in other financial assets.

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