The Threat of Globalisation

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The current debate on globalisation is very interesting because it raises such a wide variety of issues. The main concern of the International Forum on Globalisation (IFG) is ‘the emergence and growth of corporate trade and banking institutions that are not accountable to democratic processes or even national government’. A full consideration on the consequences of this would lead us beyond the boundaries of economic thought but I will try to highlight what economic theory adds to the discussion and where available, show evidence to support these theories.

I will therefore try to address the following questions raised in IFG’s position statement. Is there any evidence to suggest that these transnational institutions are growing to the extent that they endanger national economic systems? How is globalisation affecting the returns to different factors of production in the various trading countries? And will globalisation result in the homogenisation of society into a ‘global monoculture’ (IFG 1995) Anti-globalisation protestors fear that powerful corporations who have no base and are not subject to the rules of any one country are becoming a dominant global force.

These transnational companies can move from one region to another taking advantage of cheap labour in India, research grants in the U. S, and lower taxes in Europe all at the same time. These companies are alleged to influence institutions like the WTO and World Bank who are driving for freer trade on commodities, services, and even capital. The United Nations Conference of Trade and Development (UNCTAD) currently believes that there are over 60,000 TNCs throughout the world which together account for over $6 trillion in FDI.

The 100 largest of these own a third of these assets and employ 13. 3 million people worldwide. To help assess the rate of transnationalisation of these companies, UNCTAD has assigned a transnationality index to each company. This is the average of the ratios of foreign and total assets, foreign and total employment, and foreign and total sales. The largest 100 TNCs have an average transnationality index of 53% in 1999 compared to 50% in 1990.

There is no doubt among observers that by using these statistics, FDI for the last 15 years in particular has been growing at a much faster rate than other economic indicators like GDP, or even international trade. Some use these figures to show that massive oil or car companies (many of whom are among the 100 largest TNCs) are beginning to dominate entire national economies. These figures should be put in perspective though. According to Hirst and Thompson (1999), inward FDI in the advanced countries only accounted for about 10% of GDP in most cases, which they believe is not enough to endanger a national economic system.

Furthermore they show that figures issued by the UN are inflated estimates of actual investment as a consequence of normal liability management not to mention a massive increase in merger and acquisition activity in recent times. One final point made by Hirst and Thompson (1999), is that contrary to the claims of Julius (1990) and Ohmae (1990), governments do have a choice over economic policy decisions that can be represented by the differing extent of economic integration in different countries.

They use figures on outward investment as a percentage of total investment, and foreign ownership of domestic corporate bonds to show that the differences between countries from before the 1980s have been maintained. So fears are perhaps unfounded that TNCs are becoming too powerful, but there are those who argue that the current drive towards free international trade constitutes globalisation, and that there are dangers associated with this. Free trade is said to benefit large corporations leaving ordinary workers behind.

Efforts by the WTO to reduce barriers to trade are alleged to be backed by capitalists and are therefore not in the interests of consumers and workers. To assess the credibility of these claims, I shall examine the grounds for and consequences of increased international trade. I will use the Hecksher-Ohlin-Samuelson model to do this because trade between countries with similar levels of technology dominates the international markets. This model assumes that capital and labour in both trading countries are fixed, that they can be split between production of X and Y and that they are homogeneous.

Production of X is labour intensive and that of Y is capital intensive. Finally, goods and factor markets are perfectly competitive with no other distortions such as tax. Crucially, for my use of the model in this case, the level of technology in country H and F is identical but their factor endowments are different. That is country H is relatively well endowed with capital and country F is relatively well endowed with labour. It is important to note that relativity allows one country to have higher absolute supplies of both labour and capital.

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