Opportunities and Risks of Globalization

Chaired By Lord Callaghan of Cardiff
18-20 March 1997
Washington, D.C.

Introduction

1. Since the 1970s, the far reaching changes that have taken place in the world economy have been collectively called globalization. This term describes the extension of the traditional patterns of international economic activity to high levels and to new areas: technology, trade, production, finance, investment, and information. New regions of the world have been embraced.

2. The first major development is the dramatic advances which have been achieved in information technology in the past two decades. As telecommunications and computers have become more sophisticated, the flow of information between geographically distant parts of the globe has dramatically increased. International enterprises are able to disperse production world-wide whilst retaining tight day by day control.

3. The second major development and, to a considerable extent, a corollary of this information revolution, is the acceleration and intensification of international financial flows. Over the last two decades, we have seen a progressive shift from segmented national finance markets to a single global finance market characterised by an enormous pool of highly mobile funds.

4. The third major development, again heavily influenced by the information revolution, is the incorporation of new regions of the globe into the open world economy. The ongoing transition of Russia from state socialist to capitalist market economy, the increasing marketization of the Chinese economy, and the liberalisation of many less developed economies, has for the first time lent the open market system a truly global scope, and added a huge new labour force to the world market.

5. These developments have acted to integrate the world economy, and at the same time to intensify competition between individual countries as both the number of players, and the size of the stakes, have increased. This intensification of competition has qualitatively changed the nature of the market place, necessitating a radical shift in economic policies and business strategies.

6. These developments are unstoppable and offer significant opportunities to raise aggregate living standards across the world in the long term. Economies in Asia, and increasingly in Latin America, which have embraced this shift and pursued export oriented, open market strategies, have succeeded in capturing vital foreign investment and vital market share, and thus attained high levels of growth. In the medium term this will increase their political influence.

7. Globalization will not of itself improve a nation's economic well-being. The new conditions have created the potential for serious problems in the world economy. These problems can be categorised in terms of:

(a) A danger that the scale of capital movements and the lack of regulation may permit a serious dislocation to occur within financial markets with serious ramifications for the world economy as a whole.

(b) A danger that, whilst many countries have succeeded in taking advantage of the opportunities of globalization, others, most noticeably in sub-Saharan Africa, have failed to do so, and are becoming increasingly marginalised in what has become a two track world economy.

(c) A danger that developed economies will fail to adjust to the increased competition in the world economy, leading to a backlash against globalization and a squandering of the opportunities offered by it.

8. Such risks must be managed and overcome. It is essential that we do not allow the reality of globalization to persuade us that nothing can be done to address the challenges that it poses.

Whilst nation states may have declined in power, they retain a considerable scope for action within their own boundaries, and they can recover many of their previous capabilities by multilateral cooperation. Globalization is an opportunity we must take advantage of, not an alibi for inaction. The future welfare of all the world's peoples cannot become a mere handmaiden of impersonal international market forces. Bold and enlightened leadership, and close co-operation will be required.

Stabilising the international financial system

9. The scale of current international financial flows, the impact of speculative movements, and the rapidity with which such movements take effect and spread across the globe, raise the danger of a serious dislocation occurring in financial markets.

Yet the decline of the Bretton Woods system, and, more broadly, of the capability (and readiness) of the US to play the role of hegemonic stabiliser, has deprived the markets of the regulation necessary to control such dislocations and minimise the danger of their destabilising other sectors of economic activity.

10. In this context, the contemporary failure to cooperate on financial matters recalls the failure to cooperate on trade matters in the 1930s, with all of its attendant consequences of depression, widespread unemployment, and even social disorder.

It is evident now that there is a disconnection between the competitive economic strength of some countries and their exchange rates.

Whilst attempts to manipulate exchange rates and tax levels in order to capture investment opportunities may seem beneficial to individual states in the short term, such a stance will inevitably have negative ramifications at a systemic level in the long term. Cooperation between the major groups of economies is an essential prerequisite for successful management of the changes implied by globalization.

11. The existing framework of international institutions is inadequate for the needs of the next century, and should be overhauled and strengthened. Formerly excluded powers must be swiftly and fully incorporated into its structure. As regards the G7, the expansion of Russia's role is a positive move, and this status should also be extended to China. Both should also be permitted, and assisted, to fulfil the obligations that will enable them to participate as full members in all world institutions.

In its early days the Group of 7 fulfilled a useful co-ordinating and informing purpose and it could once more fulfil such a role if it were to abandon its present practice when the leaders meet, of a formalistic exchange of bureaucratic positions uttered largely for the benefit of domestic audiences.

Such meetings need a much smaller bureaucratic involvement and hopefully a much reduced media presence. Participation should eventually be extended to nations such as India and Brazil, and the dynamic economies of the Asian community, as they grow.

12. A single European currency, as envisaged by the Maastricht treaty, would go a long way towards establishing a more stable equilibrium between the United States, Japan, and the European Union, as the controllers of the three major reserve currencies, imposing a disciplining effect on individual states, and providing the basis for genuine cooperation to address systemic problems.

13. Prudent domestic policy is an essential prerequisite for exchange rate stability, but it is not of itself sufficient. There is a need for urgent consultation and co-ordination on the extent to which any country is able to manipulate exchange rates for domestic purposes.

(i) Whilst recognising the difficulties involved, we reiterate the recommendation to explore the possible use of target zones, put forward in the InterAction Council report ''To create a stable international financial system,'' (Geneva, March 1996, para 22).

(ii) The ability of countries to carry their foreign debt in their own currencies should be curbed. This has permitted certain states to escape the consequences of unsound fiscal policy by destructive exchange rate policies. They have been able to run up excessive debts, and yet export the burdens to other countries by devaluation.

14. A further area of concern is the growth of derivative trading. Whilst such instruments undoubtedly perform a useful role in the international financial markets, participants can be exposed to unacceptable losses when they are improperly used, with serious spill-over consequences for markets. Areas which demand immediate attention are how far non-banks should be permitted to trade, the requirement by law of larger margins, and the regulation of over-the-counter trades.

Reintegrating developing economies into the world economy

15. Many developing countries are ill positioned to take advantage of the opportunities offered by globalization. The problems caused by their inadequate educational provision, widespread health problems, excessive population growth, and low population welfare levels, prevent them from attracting the foreign investment necessary to development. Other factors such as large international debts, high military expenditure, weak government structures, and endemic corruption, also inhibit their healthy development.

As a result, certain regions, most noticeably sub-Saharan Africa, are becoming increasingly marginalised in what is fast becoming a twin track world economy.

The most important challenge facing us today in regard to these developing economies is to reintegrate them into the world economy.

16. Development Policy: Fast sustainable growth is a top priority and should be an essential part of IMF and World Bank policy. Whilst, for example, fiscal concerns, environmental concerns, and the role of women, are priority issues, the elimination of poverty will not be achieved by these in isolation. The rural population constitutes a majority in all of these countries, and giving priority to a reasonable financial return for their produce would do much to stimulate faster growth.

The constant switch of donor priorities in the past has been a major obstacle to consistent development, a constant shifting of goal posts which has prevented any coherent, long term strategy from emerging. The tendency to subordinate growth to other objectives has ignored the fact that, without it, other problems are liable to remain insoluble. Only if the overall objective of growth is prioritised will developing economies gain the resources to solve their problems for themselves.

17. Investment: Central to achieving fast sustainable growth is the ability to attract foreign investment. Multilateral institutions have a vital role to play in creating an environment attractive to such investment, by fostering efficient government, legal reform, banking reform, and the development of capital markets.

18. Official Development Assistance (ODA) remains an essential tool for promoting such growth, but it is not without its problems. Three reforms are necessary:

(i) ODA should be targeted with much greater selectivity. The current scatter gun approach to much of it is too indiscriminate to produce results.

(ii) ODA should be cut off from those countries which refuse to cut excessive defence spending. Otherwise, aid becomes little more than a substitute for resources directed to the defence sector.

(iii) ODA should be focused on those countries which make adequate efforts to control population growth and raise population welfare levels. Unless this problem is addressed, real growth in per capita incomes will be extremely difficult to achieve regardless of the level of aid.

Four central areas should be given greater emphasis in ODA:

(iv) Education: if developing economies are to participate fully in the world economy it is essential that they be equipped with the skills necessary to meet foreign competitors on an equal footing.

(v) Disease control: in sub-Saharan Africa, for instance, infectious diseases (especially AIDS) and parasitic diseases (especially Malaria) cause 53% of all deaths between ages 15 and 44. In addition to current health assistance, biomedical support would seem to hold out the possibility of considerable gains.

(vi) The role of women: In order for family planning programs to succeed it is vital that they be preceded and accompanied by adequate education, especially for women, and legal reform to permit women to engage in business in their own right.

(vii) Social protection: In addition to family planning programs, attention to social protection might enable us to address some of the root causes of the population growth, enabling people to have fewer children without fearing that they would be left unprovided for in old age.

19. Trade: The current terms of trade discriminate against many developing economies, particularly sub-Saharan African states. There is a serious danger that, as the world increasingly organises into preferential blocs, and privileged hinterlands, such states will find themselves effectively excluded from the international trading system. This inequity must be addressed and fairer terms of trade established.

In particular, given that the highest proportion of the population is employed in agriculture in such economies, developed states could make a great contribution to development by reducing and then eliminating the subsidies they currently provide to their own agricultural sectors. These subsidies not only undermine developing economies but also represent a serious distortion within their own societies. Whilst it must be recognised that this might have a detrimental impact on rural areas, this could be more than offset by transferring a portion of the money saved to rural regeneration projects.

Restructuring developed economies to meet the challenge of globalization

20. Many developed economies are failing to adjust to the new conditions created by globalization. Sectors of economies in a number of countries are handicapped by inflexible labour practices and inadequate educational and training provision, making new investment less attractive.

Consequently, although these countries are undoubtedly benefiting in aggregate terms from the new conditions, these benefits are tending to be distributed unevenly, and an increasingly large, predominantly unskilled, section of their societies is becoming marginalised.

At the same time, many of these states, particularly those in Western Europe, are finding it harder to finance adequately the welfare services which represented the basis of the social contract with their societies during the post war period. This raises the prospect of a backlash against globalization which may squander the opportunities offered by it.

21. The first step in addressing this situation must be for the political leaders of developed economies to refrain from using competition from low wage economies as a scapegoat for their domestic problems. There is currently insufficient data to support the purported connection between competition from low wage economies and rising inequality and unemployment in the developed world. Indeed, the general correspondence between wage levels and productivity levels suggests that such a connection is unlikely to materialise in a majority of economic sectors. Developed world problems should be seen first and foremost as products of developed world conditions.

22. The central task which confronts these states is therefore, not to protect their economies from low wage competition, but rather to raise productivity levels ahead of wage levels. Only if productivity levels can be so raised will developed economies regain their competitiveness. This implies:

(i) An effort to restructure labour markets in order to create a more flexible system of employment practices.

(ii) An attempt to enhance basic educational and vocational training capabilities, particularly in the use of new technologies.

23. At the same time, however, there should be an effort to alleviate some of the worst consequences of the transition, offset the rising inequalities between skilled and unskilled labour within developed countries, and mitigate the shift in power which is occurring between increasingly mobile capital and largely static labour. Governments must provide both a safety net for those left unemployed by this shift, and retraining opportunities to enable them to re-enter the job market.

24. It is essential that these measures be placed into a broader context of an effort to build a new industrial democracy, based on social understanding and the fostering of consensus. The social contract which has underlain the advanced industrial democracies for the last fifty years needs to be redesigned to accommodate the changed circumstances produced by the process of globalization. Some form of contract is not merely an essential bulwark against extremist reactions to globalization, but also an essential foundation of a continuation of consensual politics in those countries. The counterpart to demanding responsible wage settlement on the part of labour, for instance, must be a recognition of the responsibility to support those adversely affected by the process of globalization on the part of the state.

Conclusion

25. It must be noted, by way of conclusion, that it is ultimately impossible to consider the economic issues posed by globalization in isolation from the broader geopolitical context in which they rest. If we are to take advantage of the opportunities of globalisation, a relatively stable strategic environment is an essential precondition.

Yet this is by no means as secure as much of the triumphalism associated with the end of the Cold War would seem to suggest. In many regions of the world, such as the former Soviet Union, Balkans, Middle East, Indian Sub-continent, and East Asia, there remains a potential for conflict which, if allowed to develop unchecked, could have serious implications for our chances of meeting the challenge of globalisation.

It would therefore seem essential that the structure of economic governance proposed here be supplemented by an enhanced structure of security governance. The precise shape which such a structure might take is beyond the scope of this working group, involving, as it would, the future of the United Nations and the Security Council, the relationship of NATO with Russia, the settlement of the Middle East, and other regional problems. But we are clear that there is a need for urgent consultation and cooperation to enhance stability in these parts of the world.