ECONOMICS: by Colin TeeseNews Weekly
Globalisation: where is it going?
, October 5, 2002
Globalisation - the integration of the world economy, became the economic catch cry of the last 20 years of the 20th century.
Defined in ordinary language it means the deregulation of financial markets, the privatising of government enterprises, and the dismantling of barriers to the free movement of goods and services between countries.
Australia, for some reason, coined its own name for the process - economic rationalism. The rest of the world heralded it as a return to the principles of neo-classical economics previously discredited with the onset of the Great Depression of the 1930s.
Advocates of those principles have always asserted that economies worked best without government intervention. Interference with the free flow of market forces, it was claimed, was first and foremost a gross affront to civil liberty; markets, so the theory went, worked best only when individuals were left to take responsibility for their own considered responses to market signals."Interference"
Government interference - because it did nothing more that frustrate the proper operation of markets - inevitably led to inferior economic outcomes which affected the prosperity of all.
So, why did the failed globalism of the first 30 years of the 20th century became respectable enough for recycling 40 or 50 years later? The reasons are too complex to canvas in detail here. Among them, however, is the fact that by the 1970s the government regulatory systems deemed necessary to rescue the world from the shortcomings of globalism 40 years earlier, had been expunged from the public memory.
Recycled globalism - or Neo-Classical Economics - according to its advocates, represented the only way that modern economies could be saved from the consequences of accumulating public debt and apparently uncontrollable inflation.
It would replace the so-called Keynesian prescriptions of intervention in the functioning of the market economies to such problems (named after the brilliant British economist who devised them in the 1930s) which, it was said, had been demonstrated not to work in the real world.
With 20 years of revamped globalism behind us, it is time for reassessment: and once again, as happened the 30s of the last century, the cracks are beginning to show.
True, the world has not been revisited by a depression of 1930s magnitude - at least not yet. And, in any case, those who endured the full adverse effects of the 1930s financial collapse, are now mostly dead.
Not that any of this is conceded by the advocates of economic rationalism. Indeed, they continue to preach the gospel of free trade, deregulation of financial markets, and privatisation as if those processes had been a roaring success.
Only this week a letter in the Australian Financial Review
, from a spokesman for the Institute of Public Affairs (IPA) - a strong defender of the processes of globalism - argued the virtues of privatising electricity generation in Victoria and South Australia. New South Wales and Queensland, the writer urged, should follow suit. Competition, he insisted, delivered better efficiency and lower prices to consumers.
The facts - which somehow seem to have eluded the conscience of this writer - tell a different story. Electricity prices, in the privatised system of Victoria and South Australia, are around 20% higher than in the northern states whose power generation and delivery systems remain in public ownership.
As to competition, it might be better to dismiss the views of the IPA spokesman, and, instead, rely upon those of the Productivity Commission. A couple of years ago, that agency felt compelled to remind a Senate Committee that competition would not necessarily deliver lower prices to consumers. It made no mention of efficiencies.Practical outcome
At least so far as electricity is concerned they were right. And the reasons aren't too difficult to discover. At the time the enterprises were sold, the respective Premiers boasted that the prices received were double the value the enterprises had placed upon themselves.
In these circumstances, how could the new owners possibly generate satisfactory returns on their bloated investments without raising prices? And that is precisely what has happened.
How South Australia intends to deal with the problem - which, incidentally, impacts upon domestic and industrial consumers alike - is not clear. But the Victorian Government acted quickly to head off what could have been a devastating electoral backlash to steep rises in electricity prices. It has handed out $100 million in subsidies to the foreign-owned company now delivering power to Victorians in order to keep prices down.
Assuming the subsidy continues, it will not take long for the benefits of the high sale price to be wiped out.
By way of digression, it is interesting to note that this kind of government handout to a foreign-owned company which has made a bad business decision, passes muster with the likes of the Financial Review
and the IPA.
However, when the same level of assistance is proposed for, say, the sugar industry, the response is quite different.
The Financial Review
, for example, considers the proposed sugar industry subsidy an outrage against both domestic consumers and our international training partners. And yet, far from bailing out an inefficient company, the sugar subsidy is merely intended to shield Australian farmers - and an entire region - from the adverse economic consequences of a sugar price collapsed by overseas subsidy practices.
None of this detail, however important, addresses the wider question of whether or not there have been real benefits for the poor or disadvantaged - either individuals or nations - from globalisation.Benefits
Of course committed globalists have been trumpeting globalisation's benefits for years. But, here again, against all the evidence. The facts, if allowed free play, contradict all misplaced optimism.
The latest economic rationalist to defend the idea of favourable world economic outcomes from globalism is Alan Mitchell, Economics Editor of the Financial Review
. He draws upon recent documentation prepared by the Treasury and Reserve Bank.
Purportedly, this evidence demonstrates that, for the seventeen years after 1960, per capita incomes in poorer countries grew twice as fast as those in the richer countries. This is contrasted with the previous twenty years when the poor countries grew at only half the rate of the rich.
The trouble is, both the Treasury, the Reserve Bank and Mitchell are very selective with figures. For Mitchell's conclusions to be validated at all, they must include China and India. Without the spectacular growth in those economies the economic performance of the poorest economies in East Asia is disastrous.
But why should those economies not be included, some might ask? Because, of all the countries studied, those happen to be the very ones not
to have embraced globalism. China, in particular, has not deregulated capital markets, has not adopted free trade, nor has it privatised public enterprises. It remains, in fact, a highly regulated economy. The same applies, in lesser degree, to India.
And, there is good evidence to suggest that much of the gains in India and China have resulted from retaining restrictions while benefiting from the deregulation of others.
Meanwhile Treasury and the Reserve Bank, upon whose data Mitchell draws heavily, appear to have chosen their base period - the seventeen years from 1980 - very carefully.Asian meltdown
Their comparison stops at the beginning of the Asian financial crisis. And with good reason. Taking out India and China, for reasons already made clear, makes the performance of poorer countries who practised globalism bad enough; if the three years after the Asian crisis are included, it appears much worse.
Mitchell himself admits that the 'Asian Tigers', who opened up their markets through globalism, had decades of growth wiped out in a few weeks by the operation - in their economies - of global financial markets.
Nevertheless, Mitchell's optimism about the benefits of globalism remains undiminished. In his own words, "We are still fine-tuning that little problem [that is, the collapse of the 'tiger economies'] out of the system - and a big part of the solution will be to make global banks carry more of the cost of their Third World mistakes". For the sake of Mitchell's credibility, let us hope that "fine-tuning mistakes" is not shorthand for new regulations.
Now what do the facts really show? A respected Washington think tank has said it all.
Using International Monetary Fund, World Bank, and OECD data it has done a comparative study of percentage growth in Gross Domestic Product (GDP) - which is the internationally accepted measure of countries' economic advancement - for 116 countries, developed and developing.
It has used two periods of comparison; 1960-1980, that is the period before
deregulation and globalisation, and, 1981-2000, representing the period after
Of 116 countries, only 12 achieved higher percentage growth in GDP in the period of globalisation. Three of these were developed countries - Luxembourg, Britain and Ireland.
Of the nine developing countries to have done better in the period 1980-2000, the only two making really significant advances were China and India - and they, as was mentioned earlier, have not really deregulated.
Russia, which has accepted deregulation most enthusiastically, has done worst. Its GDP has declined by more than 50%; and its numbers of poor living on less than four dollars a day has risen from two million to 60 million.
Despite all the evidence, this carefully researched study, correctly, does not conclude that it has established a causal connection between a downturn in percentage growth in per capita GDP and globalisation - it merely presents the facts as coincident events.
Alan Mitchell unashamedly awards "game set and match" to globalisation.
A more balanced opinion might conclude that globalisation had been defeated - if not in straight sets, then nevertheless decisively.
- Colin Teese was Deputy Secretary of the Department of Trade