Wolfgang LEHMACHER Globalisation and Open Markets July 2009
What is Globalisation? Globalisation is a process of increasing global integration, which has had a large number of positive effects for nations that have embraced it, but also negative consequences for those that have not Globalisation is defined by the World Bank as increasing global integration as a result of reduced costs of transport, lower trade barriers, faster communication of ideas, rising capital flows, and intensifying pressure for migration Globalisation is considered to be an ongoing process, which has risen and fallen in intensity over the past 150+ years Globalisation has had a broad range of positive and negative influences on societies throughout the world, and its impact has been heavily discussed and debated On the positive side, globalisation has been one of the greatest contributors to global poverty reduction in the last 20 years through its contributions to economic growth, and by facilitating the flow of ideas it has fostered innovation, discouraged conflict and spread awareness of human rights On the negative side, globalisation has sidelined some nations who have not embraced its principles, producing winners and losers at a national level, and has contributed to cultural homogenisation The World Bank believes that improving the international architecture for globalisation will allow these negatives to be addressed, making globalisation more inclusive Source: World Bank
Progress of Globalisation over Time Globalisation is considered an ongoing process that has risen and fallen in intensity over the past 150 or more years Waves of Globalisation Merchandise exports and foreign capital stock (% - LHS) Immigration flows (millions RHS) 1870-2000 35% 12 Immigrants to the United States, by 30% 10 decade (millions) (1) 25% 20% 15% 10% 5% 8 6 4 2 Merchandise exports as % of world GDP Foreign capital stock as % of developing country GDP (2) 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 0 First wave of globalisation Second wave Third wave Globalisation has risen and fallen over the course of human history, enabled by technology improvements but occasionally held back by regressive or protectionist government policies The recent global economic cycle until 2007-2008 was one of rising globalisation, although the continuation of this trend is now uncertain Source: World Bank, OECD, McKinsey Quarterly (1): Migration to the USA used as a proxy for global migrant flows (2): Foreign capital stock used as a proxy for global capital flows
Drivers of Globalisation There are a number of factors that contribute to increasing globalisation and that tend to reinforce one another, with improvements in the efficiency and cost of transport a key aspect Changes in individual tastes and preferences These have shifted in the direction of favouring greater choice and diversity in the range and origin of goods and services, facilitated by improvements in education and communications Conscious changes in government policy These have generally been in the direction of reducing or eliminating barriers to cross-border movements of goods, services, capital and to a lesser extent labour (through migration) These moves have accelerated in the last 30 years following opportunities for governments to observe first-hand the costs of erecting and maintaining such barriers, and have led to formation of organisations such as the World Trade Organisation (WTO) Changes in corporate strategies This has included a greater emphasis on growing profits through cost reduction rather than through price increases, which leads to strategies such as global sourcing Improvements in transport, communication and information technologies These have the effect of increasing the range of goods (and increasingly services) which can be transmitted from one place to another, as well as increasing the speed and distance over which they can be transmitted Similarly, these improvements have reduced the cost of such transmissions, making them more accessible and viable for businesses
Increase in Global Trade Flows Over the past 20 years globalisation has been accompanied by an unprecedented increase in the volume and value of goods and services traded across borders Increasing transport efficiency and lower trade barriers are naturally linked to increases in global trade of goods and services As a result, global trade flows and the percentage of goods and services traded internationally are generally seen as a proxy for globalisation as a whole The last 20 years have seen an unprecedented increase in the flow of traded goods Merchandise exports as a share of global GDP have almost doubled in this time, rising from an already record-breaking 15% in 1990 to 26.5% in 2008 International Trade share of Global GDP Global merchandise trade as a share of global GDP 1990-2008 30% 25% 20% 15% 10% Data from the last 12 months suggest a partial reversal of this trend (and of globalisation more broadly) as a result of: Declines in demand and industrial output during the global recession, resulting in fewer goods being traded Shifts by governments towards more protectionist policies that restrict trade flows 5% 0% 1990 1994 1998 2002 2006 Source: IMF, WTO
Globalisation and Economic Development (1) This increase in trade has led to substantial growth in national and per capita incomes, especially for those developing countries that have embraced globalisation and global trade Extensive research by the World Bank has studied the impact of globalisation on wealthy and developing economies over the past 20-30 years The complexity of the factors contributing to national output and per capita income mean that research can only indicate that increasing trade is correlated with a rise in incomes, however Developing countries that embraced globalisation and saw significant increases in trade during the 1990s also experienced an average growth in per capita incomes of 5% The already-globalised rich countries enjoyed similar real growth in incomes of 2.2% over the same period Developing countries that failed to embrace globalisation (through lack of opportunity or restrictive trade policies) saw per capita incomes fall by 1.4% in real terms Growth in Personal Income GDP per Capita Growth, by country groups (1) 1990-1999 6% 5% 4% 3% 2% 1% 0% -1% -2% Less Globalised Rich More Globalised Developing Links have been established between embracing globalisation and openness to trade on one hand, and growth of the economy on the other (1): Rich countries are OECD members plus selected others (incl HK and Singapore) More and less globalised refer to a basket of 72 developing countries for which detailed historical trade data is available. The more globalising are the top one-third of these countries in terms of growth in trade relative to GDP between 1975 and 1997 Source: World Bank
Globalisation and Economic Development (2) The growth in personal incomes can be partly explained by the higher wages paid by firms with links to overseas, which is most pronounced in the poorest of countries A study conducted by the Institute for International Economics which examined the wages paid to manufacturing workers across a broad cross-section of countries found that globalisation can have a positive impact on the wages of individual workers The study found that firms that were foreign owned or that had an affiliation with a foreign firm paid higher wages than their local competitors This was true across countries from all income groups from wealthy developed countries to the poorest developing nations However the ratio was most significant in the poorest of countries, where foreign linked firms paid wages that were twice as high as local competitors Average wages paid by foreign affiliates (US$ 000) Average paid by local competitors (US$ 000) High Income Middle Income Low Income All 32.4 9.4 3.4 15.1 22.6 5.4 1.7 9.9 Ratio 1.4 1.8 2.0 1.5 Wages Ratio of Foreign to Local Firms Ratio of wages paid by foreign-inked firms vs domestic firms 1994 2.5 2.0 1.5 1.0 0.5 0.0 High Income Middle Income Low Income All Source: The Economist, Institute for International Economics
Specialisation in a Global Context The link between globalisation, trade and economic development can be partly explained by international specialisation, which leads to economies of scale and efficiency benefits The capacity of international specialisation is a major driver of the economic benefits of globalisation This is the process by which stronger flows of international trade allow particular countries to specialise in the production and trade of goods or services in which they have a comparative advantage Specialisation is facilitated by globalisation since stronger global trade flows make it easier for a country to import goods or services that it has not specialised in Comparative advantage may be derived from either natural resources or through clustering Natural resources such as an abundance of arable land, minerals or people may lead directly to specialisation E.g. China s central role in global manufacturing is the result of a very large population of cheap semiskilled labour Clustering, which can occur either organically or as a result of deliberate policies, refers to a large grouping of businesses in a similar industry being located in the same country, which can lead to specialisation E.g. Japan s clustering of automotive manufacturers and parts suppliers have allowed its entire auto industry to achieve economies of scale, reducing costs across the sector Specialisation contributes to economic growth by substantially increasing the efficiency and productivity of specialised industries Specialised clusters attract more suppliers and customers, promoting efficiency along the supply chain Clusters also promote specialised research centres and knowledge sharing that can drive innovation This results in higher output and makes the industry more competitive globally, which collectively results in better economic returns for the industry and host country Source: World Bank, OECD
Globalisation and Social Development Declining Inequality The trend of globalisation has had substantial social benefits, with the most significant being a reduction in inequality between people in different countries Globalisation results in a reduction in inequality of incomes for nations that participate in global trade and integration In overall terms, income inequality within globalizing countries declined between 1975 and 1995 This was primarily a result of a significant drop in inequality between nations as the large developing nations benefitted from globalisation and millions of people in China and India saw incomes rise This supports the view that globalisation has a strong impact on global poverty reduction, and has lifted millions out of poverty The rise in individual and national incomes has also had flow-on effects in a range of areas including health and education This has occurred directly through the freer flow of knowledge and technology, leading to better education and improved access to leading healthcare technology and techniques (illustrated on the next slide) It has also occurred indirectly since rising incomes provides people with a greater capacity to afford social services Globalising Country Household Inequality (1) Mean log deviation of household incomes (2) 1975-1995 1.00 0.80 0.60 0.40 0.20 0.00 1975 1980 1985 1990 1995 Between Within a Country (1): The globalising world is defined as the OECD countries plus the top third of developing countries that saw significant trade growth since 1975 (2): Mean log deviation is commonly used by the World Bank as a measure of inequality and broadly represents, on a scale of 0 to 1, the deviations of the richest and poorest incomes from the average Source: World Bank
Globalisation and Social Development Improved Health Globalising countries such as Mexico and the Philippines have also seen a substantial rise in life expectancy and other health indicators, while non-globalisers have not seen these benefits Globalisers Non-Globalisers Mexico Exports (% of GDP) and Life Expectancy (years) 1960-2000 South Africa Exports (% of GDP) and Life Expectancy (years) 1960-2000 80 60 40 20 1960 1970 1980 1990 2000 80 60 40 20 1960 1970 1980 1990 2000 0 0 Exports as % GDP Life Expectancy at Birth Exports as % GDP Life Expectancy at Birth Philippines Exports (% of GDP) and Life Expectancy (years) 1960-2000 Zambia Exports (% of GDP) and Life Expectancy (years) 1960-2000 80 60 40 20 1960 1970 1980 1990 2000 80 60 40 20 1960 1970 1980 1990 2000 0 0 Exports as % GDP Life Expectancy at Birth Exports as % GDP Life Expectancy at Birth Source: World Bank World Development Indicators
Increasing Global Trade Flows The value of goods in intercontinental trade grew by 64% between 2004 and 2007, illustrating the enormous opportunity that globalisation presents 4,105 billion CAGR 2004-2007 Other (1) +24% 2,503 billion North America to Europe Europe to North America North to South America South to North America Europe to Asia Asia to Europe North America to Asia Asia to North America +15% +8% +23% +18% +12% +20% +12% +12% 2004 2007 Source: WTO (1): Includes all trade to and between Africa, the Middle East, and Russia/CIS
Re-balancing of the Global Economy This trade growth is being led by the BRIC nations (Brazil, Russia, India, and China) which have been the swiftest of the developing nations to globalise, culminating in China s accession to the World Trade Organisation in 2001 BRIC vs G7 GDP Growth US$ billions 2005-2050 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 BRIC CAGR 7.1% G7 CAGR 1.9% By 2040 these 4 economies will have outgrown the G7 and will be the dominant global markets Source: Goldman Sachs
Intra-regional Opportunities Each of the BRIC countries is about to become a hub for globalised trade flows within its region, as illustrated by the intra-asian trade flows driven by China and India Russia / CIS $79.8 billion North America $756.4 billion Europe $714.6 billion Middle East $150.4 billion Intra-Asia $1,889.8 billion South / Central America $92.3 billion Africa $91.4 billion Note: All values are in US$ Source: WTO World Trade Stats 2008
Outlook for the Global Economy In light of the global economic slowdown, which has started in 2008, the outlook today is uncertain, with the risk of an oscillating recovery or even a prolonged global recession We are in a situation of high uncertainty, where a slow oscillating recovery is probably the most realistic scenario However the risk remains of a W-shaped recovery, driven by another sudden decline that erases recent gains. This could be driven by: A renewed collapse of global credit markets due to addition bank losses/failures, which would deny credit to businesses looking to recover A collapse in demand if current stimuli-packages come to an end and governments are too financially weak to maintain stimulus Current signs point to a slow recovery led by emerging markets Severe global recession Credit markets reopen / recover Slow, oscillating recovery driven by emerging economies Long recession (5+ years) affecting all markets Short recession with rapid global recovery Moderate recession, but global trade remains depressed Credit markets closed / volatile Moderate global recession Source: Adapted from McKinsey (see appendix for details)
Dangers of Economic Nationalism Moves to reverse globalisation through economic nationalism (protectionism) have risen in the last year as the economic outlook worsens. However, protectionist policies carry significant consequences for the protected nation and the world as a whole 1 2 3 4 5 Protectionism removes competitive pricing pressures in the market being protected, increasing prices for consumers and adding to inflationary pressures Price increases apply to both the protected goods or services and to any goods within the supply chain It reverses the drive towards clustering and efficiency gains by maintaining small pockets of industry in a large number of countries These small pockets typically fail to benefit from the economies of scale or other benefits brought about by international specialisation In addition, protectionism for the sake of preventing job losses runs the risk of defending particular companies or plants that are inefficient or ill-suited to market demand; as seen recently with American car companies which had failed to adapt to market demands for smaller cars Protectionist policies have a high probability of producing retaliation from trading partners (a trade war), reducing demand for exports of goods or services from the protected market E.g. the US recently suspended a programme within NAFTA that allowed some Mexican truck drivers to carry goods over its borders in response Mexico raised import tariffs on some goods from the US These policies also remove demand for goods and services produced in developing countries, resulting in lower incomes and higher rates of poverty for people who are already disadvantaged, with associated impacts on health and education Finally, these policies can lead to an increase in nationalist sentiments in other areas, which can lead to political or military conflict in extreme cases Source: The Economist
Enablers of the Next Growth Phase The next growth phase will probably be led by the BRICS economies, through a combination of domestic consumption and intra-regional trade flows The prolonged global expansion over the 15 years to 2007, was primarily driven by two factors Massive productivity improvements in Western businesses High levels of Western consumption based on cheap credit, which was primarily supplied by savings in Asia and the Middle East In broad terms this overextension of credit to fuel consumption sowed the seeds for the recent economic downturn, which has been driven by a collapse in consumption from over-leveraged households and businesses in Western countries As a result, it is unlikely that the recovery or the next phase of growth will be driven by Western consumers or businesses, as they will primarily be focused on deleveraging Instead, the next phase of growth will involve a re-balancing to focus more on the large BRICS emerging markets Domestic consumption from China, India and other emerging markets will be a major driver as household incomes rise The BRICS markets will become focal points for trade and growth as the nations around them develop, fuelling intraregional trade (see next slide) BRICS economies will also drive greater inter-regional trade that avoids the previous focal points of North America and Europe (e.g. China and India have recently been investing heavily in Africa, which will create trade flows) This will have significant implications for the logistics industry, which will need to rapidly develop new linehauls and presences to reflect the changing priorities of global trade The next cycle of rising globalisation, will probably be needed to avoid social and political tensions and further reduce global poverty