The process of globalisation did not start yesterday. Nor did it start a few decades ago. It started since immemorial times when people from one country decided to send their goods by land or sea to other countries to exchange them with other goods they did not produce but wished to have. That is, globalisation began when people discovered that voluntary exchanges increase the prosperity and improve the quality of life of citizens in all participating countries. However, unlike earlier times, nowadays the forces that promote the opening of economies and societies to international trade and to other multifaceted exchanges are very powerful and exceedingly rapid, and hence they may cause disruptions that need attention by governments and international organisations. This section is devoted to the identification of these forces as well as a brief assessment of their consequences.
6.3.1 The Forces That Drive Globalisation
Many decades ago, the purchase of a product by citizens in country A from country B was complex and costly. The buyers in country A expressed their interest in the product by contacting potential local suppliers. The suppliers would identify and assess the magnitude of the effective demand and place orders for sufficient quantities to avoid stock outs and hence losses of sales. The producers in country B would fill the orders and ship the goods to country A; and, finally, after cleared through customs, the goods would arrive in the warehouses of the importers and become available for sale. Because of the long distances that intervened, both
literally and in terms of time and money, importers were obliged to keep sizable inventories, which rendered the retail prices of imported goods too high to allow for widespread consumption. Gradually though conditions changed, improvements in the transportation and communication industries in the period preceding the First World War reduced the cost of transacting globally and enabled international trade to flourish to the remarkable extent described by Keynes (1919, 6–7) in the following passage:
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world and share, without exertion or even trouble in the prospective fruits and advantages;. . .He could secure forthwith, if he wished, cheap and comfortable means of transit to any country or climate without passport to foreign quarters, without knowledge of their religion, language or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded the state of affairs as normal, and permanent, except on the direction of further improvement and any deviation from it as aberrant, scandalous, and avoidable.
In the decades that followed, the tremendous progress in transportation, electronic communications and logistics virtually eliminated distances and helped reduce the time and cost involved from production to consumption. Keeping large inventories is no longer needed, and demand can be satisfied just about anywhere in the world with minimum delay and low distribution costs. The forces that promote globalisation are (a) the technological developments that shrink distances and reduce distribution costs; (b) the rapid growth of global products and customers;
(c) the systematic R&D efforts through which new products and production methods are discovered; (d) the development of international standards of quality and (e) the increasing inability of countries to close their borders and isolate their people from the world.9
Globalisation has been strengthened also by the competition among countries to attract fixed direct investment (FDI), as well as the spread of democratic gover- nance. As documented by Jensen (2003), to make their countries attractive to FDI, governments are induced to:
• Harness public deficits and reduce the taxation of enterprises
• Take steps so as to reduce corruption and bureaucracy
• Decentralise decision-making
• Increase infrastructural investment
• Adopt economic policies for restructuring their economies so as to gain compet- itive advantages or exploit more effectively those that they have
• Become more disciplined and trustworthy
9For an excellent analysis of the forces that propagate the diffusion of the free market economy through international trade, see Simmons et al. (2006).
Reforms that help bring about the above include the improved efficacy of institutions and the strengthening of democracy, a reduction in taxes and the acceleration of domestic and international investment.
6.3.2 Effects of Globalisation
Fischer (2003) found that globalisation is accompanied by the following main effects:
• Lowers the proportion of people living below the poverty line, increases literacy, reduces mortality and stimulates the spread of democracy to more countries
• Reduces economic inequality between countries to a greater extent among the richest countries and to a lesser, but increasing rate, among poorer countries.
Within certain countries, it may increase inequality in the short term, due largely to shifts knowledge mandated by new technologies
• Accelerates economic development and especially in countries that encourage exports over import substitution. Trade liberalisation, especially of agricultural products, increases productivity in poor countries.
• Stimulates the liberalisation of money flows, which typically favours less- developed countries, although occasionally this process may give rise to eco- nomic crises in the short term.
These findings are supported by numerous other empirical studies. From them we list below some key supplementary conclusions:
• According to the taxonomic study by Winters et al. (2004), in some countries/
regions/sectors of production, international trade increases the number of people living below the poverty line. But at the country level in most cases, the number of people living below the poverty line decreases, implying that which countries stand to benefit from international trade depends on their economic and social policies.
• Globalisation reduces inequality to an extent which is inversely proportional to the index of the flexibility that characterises the markets of a country.
Koujianou-Goldberg and Pavcnik (2007) found that in the period 1980–1990 this convergence benefited more skilled workers in developing economies, due mainly to state interventions in traditional industries.
• Acemoglou and Robinson (2006) found that through the spread of international trade, foreign direct investment, better education and other improvements, per capita income increases and the middle class expands. In turn, as the middle class gains economic strength, it pushes for a larger share in the exercise of political power and even towards the expansion of civil liberties and the curtail- ment of state interventions in the economy. The outcome of the conflict that arises is uncertain and can last for many years. But in view of the costs it faces from a potential class takeover, the ruling class is forced eventually to grant more freedoms and accept democracy.
• Rauch and Trindade (2003) found that globalisation reduces transaction costs and increases the productivity and profitability of businesses. The explanation they offer for this effect is that the increased elasticity of substitution or complementarity of goods and services in the international environment raises competition and reduces transaction costs through improvements in information.
• Globalisation is accompanied by many positive but also negative effects, as evidenced by the current economic crisis, as well as the one in Southeast Asia in the 1990s. The study by Martin and Rey (2006) showed that (a) the more open an economy to international trade, the less the probability to be hit by an economic crisis in another country; (b) this result holds more for developing economies and (c) the more open and attuned an economy to money flows, the less adversely it is influenced by an economic crisis abroad. In view of this evidence, Kose et al. (2003) and Mishkin (2009), among others, have developed policy recommendations for controlling the spread of economic disturbances that emanate from either the demand or the supply side of international money flows. The thrust of their recommendations is that governments should avoid using social democratic practices to control convergence because state interventions reduce competition and slow down globalisation.
Moreover, it is worth noting that globalisation is accompanied by effects like the following, which change the structure of the international economy:
• Year after year, more and more countries harmonise their institutions by strengthening the protection of property rights and the criminalisation of corrup- tion. By doing so, institutions and legal systems converge, thereby reducing transaction costs both among citizens in a given country, as well as among different countries.10
• The number of national currencies decreases, particularly among countries with open economies. This trend is likely to lead to a limited number of currencies, and in the distant future perhaps to a single world currency.
• Countries participating in globalisation tend to adopt similar economic policies.
The monetary policies that were adopted in the USA in the early 1980s aimed at reducing interest rates, as well as the growth rate of money supply. This policy was implemented in all advanced countries, in the late 1990s and successfully tamed inflation.11 By implication, when governments in different countries synchronise their policies, the results are much more positive than if they follow independent paths.
The preceding references to the effects of globalisation were selective and brief.
But they suffice to justify the following concluding remarks.
Globalisation is a process by which the living standards and lifestyles that prevail in countries with democratic systems of governance and free market
10Regarding the convergence of institutions, see the study by Calomiris (2002).
11Goodfriend (2007) describes how the same monetary policy spread among various advanced countries.
economies spread and exert liberating effects on the values, institutions and organisation of countries with authoritarian, hereditary and theocratic regimes.
These effects create conditions of contestability in political markets. In particular, while on the demand side, citizens press for more freedoms and democratisation, on the supply side, the centres of political power, using old and modern tricks, try to maintain their control over developments. The reasons why these centres react negatively are obvious. If citizens are exposed to international trade, tourism, communications and other international relations, they see the risks of losing their grip on the political power and the benefits that go with it. Hence, the culprit for them is not globalisation per se, but rather the pressure for democratisation.
If this interpretation is valid, then political elites that feel threatened by globalisation would be expected to react even violently against its spread. Do we observe phenomena consistent with this assessment? Our view is that the suppres- sion of civil liberties at home and the spread abroad of terrorism, illegal immigra- tion, the incitation of riots between minorities with different ethnic and religious backgrounds, which lived for centuries in peace in the countries where they settled, are reactions deliberately induced by powerful authoritarian regimes trying to protect themselves from the pressure of the middle classes. The only way to confront these conflicts is through a framework of global democratic governance.