The Real Costs of Globalisation

Globalisation reduces the cost of goods and services as their production migrates to the lowest cost parts of the world. The lower prices are a benefit for everyone and the low cost parts of the world, which are only now beginning to industrialise, gain tremendously in terms of economic growth and employment. So globalisation is a good thing, But there are some downsides. Jobs disappear in the advanced economies as production moves to the developing world. Up to now, the advanced economies have grown, bar a few booms and busts, more or less continuously, for the past 250 years in UK’s case. But the migration of jobs now seems likely in the advanced economies to be permanent and to be bringing the growth phase of their economic development to an end.

Permanent changes like this are difficult to forecast, and even appear difficult to recognise when they have happened. The initial response is to identify the change as a blip. Commentators today are identifying this quarter’s UK GDP data as indicating the end to the ‘double dip recession’. If miniscule GDP growth is recorded two quarters on the trot, commentators will surely be referring to ‘green shoots’. But it is equally likely that the slightly encouraging data this quarter is a blip and from now on, the lack of economic growth will be the steady state in advanced economies, which might more aptly be described as post-industrial.

Unemployment in those post-industrial economies, notably US and UK, will impact employees of all categories, not just ‘labour’ but also highly qualified professional specialists. The impact on the lower skilled jobs is immediate, whereas the impact on qualified professionals is likely to be delayed somewhat. The R&D, design and engineering functions typically stay with the original base, at least initially. However, these sections gradually migrate to join production, and the speed of migration is likely to increase as the technical training and education systems in the developing economies catch up and overtake – as they are doing – technical education in the post-industrial economies.

Keynes argued that market liberalisation was not an unalloyed benefit. ‘Manufacture of automobiles, for example, could be accomplished more or less equally well, anywhere in the world. It would be better, he argued, for a country to make cars that were not necessarily the best value in the world, than not to make cars at all’ (The Road to Co-operation, p26-7). Informed by his war-time experience, Keynes was concerned that completely freed international trade could lead to war as national economic interests clashed. He argued that some limited protection might not be a bad thing.

Despite these downsides, globalisation is hugely beneficial to global businesses and those who participate in their ownership. Global businesses reduce their costs by sourcing from lowest cost parts of the world but continue to sell in high priced areas and so make greatly increased profits, which encourages further extension of globalisation. They also have the opportunity to avoid paying taxes by the simple means of internal transfer payments whereby one part of the global business can invoice another part for goods or services, real or imaginary, thereby moving profit around the globe to the lowest taxation cantons, a la Glencore, Starbucks, Google, Amazon et al. These two benefits: lowest cost sourcing and avoided taxation reinforce each other and accelerate the employment effects referred to above.

Thus, in the post-industrial world employees in the real economy are severely damaged by globalisation, while those in the financial sector, shareholders and the financial intermediaries who act for them, benefit hugely. These effects – the realisation of Friedman’s injunction to make as much money as possible for stockholders – have not been at all checked by the 2007-8 crash. The overpowering strength of predatory financial sectors, continues to gain momentum, accelerating the multiplication of inequalities to levels which, in the end, will not be accepted and have necessarily to be brought under control, either by the forcible and possibly violent reaction of the dispossessed, or by government intervention.

What might that intervention comprise? As has been stated elsewhere on this site, it needs to be based on clearly stated law which is strictly enforced with truly punitive exemplary outcomes for transgression. This could be more effective and efficient than forms of regulation requiring the creation of bureaucratic structures which reduce the efficiency and effectiveness of market forces.

For example, the avoidance of tax by spurious internal transfer payments could be readily eliminated. For multinational public companies, internal transfer payments could be a specific item of financial audit with the auditors required to sign off internal transfers as being payments for real items and priced reasonably. A falsely based audit certificate could be energetically pursued with the individual auditor being liable to be struck off from membership of their professional association and the audit firm subject to exemplary fines.

Of course, the audit firms would resist such an initiative. They would claim – wouldn’t they? – that such a process would be difficult to audit effectively. That is, of course, absolute nonsense. And they would also claim it would be hugely expensive. It certainly would be expensive while ever there are only four big auditors serving more than 90% of the world’s global businesses. Having eliminated any vestige of competition, anything they do is hugely expensive. Some globalised controls to limit the abuse by global monopolists are needed to augment globalised markets. But that’s another story. – have a look at:

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