Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
chapter Economic globalisation 9 9.1 Definition and history of economic globalisation DEFINITION OF GLOBALISATION In economics, the term globalisation involves the spread of business, trade and investment across national borders. Globalisation is the economic unification of the world’s economies, and its various commercial and financial markets. Hence, instead of countries being seen as independent and closed sovereign states, globalisation requires that nations see themselves as belonging to the one big economy. Globalisation is the extension of the trend that has been going on for well over 200 years towards increased international- isation, specialisation and interdependence of many economies including Australia. Leading the charge we find multinational or transnational companies growing out of business operations in several countries. THE RECENT ACCELERATION OF GLOBALISATION Especially during the 1990s and 2000s, globalisation has spread quickly. It has been made possible by several developments: CHAPTER 9 Economic globalisation 281 Relaxation of government controls There has been a general relaxation of government controls (deregulation) in most economies and their replacement in decision-making by the forces of freer markets (demand and supply) and capitalism. Better transport and communications Improved speed and cheapness in transport and communications have meant that businesses are more aware of profit opportunities and able to move resources and production between countries. New technology There have been huge leaps in technology which permit even unskilled workers to be involved in modern production. Mobility of investment Although some natural and labour resources are difficult to move between countries, money capital or investment resources do not suffer this difficulty. Businesses can, therefore, become mobile multinationals. Unlike days gone by, under globalisation, it is quite likely that the food we eat, the clothes we wear, the knowledge and entertainment we absorb, the environmental and other problems we face, the policies adopted by our governments and the economic conditions affecting our daily lives are all linked to the global economy and are even less under our control. TRENDS IN GLOBALISATION As we shall see, the idea of globalisation is not a new one, but it has gained far more momentum in recent times. In 1817, an economist by the name of David Ricardo published his book in which he developed the theory of comparative cost advantage. Here he noted that countries should specialise in areas of production where their comparative cost advantage was greatest or their disadvantage least. Through international free trade and specialisation, he argued that countries would enjoy lower prices, better incomes and higher living standards. In turn, the growth of trade on this basis, along with other factors (e.g. better transport and communications), contributed to the development of globalisation. TRY APPLIED ECONOMICS 1, p. 305 EXERCISE Globalisation — 1800–2003 ■ The 1800s–early 1900s. During the 1800s until World War I, there were plenty of examples of economies linked to the global economy as suppliers of resources, manufactured goods, services, and even money capital or investment. Colonisation by Europeans of Australia, parts of Asia (e.g. Vietnam, Malaysia, Indonesia), India, North America (e.g. the United States, Canada), South America (e.g. Cuba, Brazil, Argentina), the Pacific and Africa, involved encouraging production with a focus on exports of commodities such as wool, wheat, sugar, spices, cotton, tea, rubber and minerals. In some cases, production costs were held down by exploiting workers and by the use of slave labour. Indeed, European entrepreneurs had investments in colonies around the world to take full advantage of the resources available. These cheap commodities produced by the colonies were then converted into value-added manufactured items back in countries such as Britain, Spain, Portugal, Holland, Germany and France. Finished goods were then re-exported at much higher prices. The 1800s thus saw the dramatic explosion of international trade and partial globalisation of capital on a scale not seen before. It was made possible by improvements in transport, industrialisation, rising incomes and technology. 282 Economics Down Under Book 1 ■ 1915–47. However, the period between the wars, 1915 to 1945, saw less enthusiasm for internationalisation or globalisation. Faced with massive disruption to international trade due to war, rising foreign debt and a period of global depression in the 1930s, many countries including Australia used high tariffs to repel imports and to protect their local producers. ■ 1947–70s. In 1947, the previous situation started to change slowly. The General Agreement of Tariffs and Trade (GATT) was signed after the end of World War II. This had the aim of gradually reducing high tariffs which were an obstacle to international trade and global economic development. Between 1947 and 1972, world tariffs on manufactured goods fell from an average of 37.5 per cent to only 9 per cent (Australia did not follow the trend, choosing to maintain high rates of protection). Again, foreign investment and multinationals took off and free trade blocs (e.g. the European Economic Community or European Union as it is now known) started to emerge. These encouraged globalisation. ■ 1970s–2007. Starting in the early 1970s with Labor Prime Minister Whitlam’s 25 per cent tariff cuts, the Australian Government began dismantling our system of protection. Accelerated microeconomic reforms, the encouragement of industry restructuring and further tariff cuts followed in the 1980s, 1990s and 2000s. Further tariff cuts by Australia occurred in 2005 and others are scheduled to 2010 and beyond. Elsewhere in the world, there were other important developments that helped globalisation including the establishment of new trading blocs (e.g. APEC, NAFTA, CER, the expanded EU) that were committed to tariff reductions and the idea of free trade. From 1995 on, this idea was reinforced by the World Trade Organization (WTO). By the 2000s, more than one-third of the world’s GDP was produced by foreign-owned companies and/or destined for overseas markets. Indeed, about 30 per cent of global economic activity is now created by the largest 200 companies (e.g. Microsoft, McDonald’s, IBM, General Electric, Exxon, Ford, General Motors, Nike, Shell), many adding more value annually to production than the entire GDPs of some countries (see figure 9.1). Uruguay IBM Deutsche Bank ING Group Kuwait Toyota Vietnam General Electric AXA Country or company Ukraine Nippon T&T Romania BP Shell DaimlerChrysler Mitsubishi Ford Motor Co. General Motors Wal-Mart Stores Chile Microsoft* Singapore Israel Indonesia Russia Australia India 0 40 80 120 160 200 240 280 320 360 400 440 Annual value of a country’s GDP or a multinational’s value added in production (US$ billions) Figure 9.1 Comparing the annual size of GDP in selected countries with the annual value added in production by large multinationals ($ billions), 2000 Note: * denotes estimate only Sources: Data mostly derived from ‘How big are the big multinational companies?’ by Paul De Grauwe and Filip Camerman (2002). CHAPTER 9 Economic globalisation 283 9.2 Reasons for economic globalisation There are many reasons that may help to explain the globalisation of business activity across national borders. However, globalisation basically stems from a desire to lift efficiency, cut costs and lift profits and incomes. GLOBALISATION HELPS MINIMISE LABOUR COSTS In some labour-intensive industries (e.g. areas such as clothing, aspects of car manufacture, rubber production, toy making), wages represent the largest input cost for businesses. Given that in some countries, labour is relatively dear while in others it is cheap, firms go hunting around the world in search of good supplies of docile and diligent workers. Looking at figure 9.2 which compares average hourly levels and legal minimum hourly wages in different nations, it is hardly surprising that some firms take their operations offshore and move from country to country. Currently, for example, many labourintensive (i.e. as opposed to capital-intensive) areas of manufac- turing and other types of production are located in countries such as Mexico, China, India, Sri Lanka and Indonesia where hourly pay rates are between $0.30 and $2.00. In some cases (e.g. Mexico, Thailand and China), wages have actually fallen over the last decade, causing companies to review their location strategy. Furthermore, given that investment or money capital coming from richer nations is quite mobile and can be moved fairly readily, setting up a factory overseas where labour is cheap can help boost company profits above levels that would have applied in the country of origin. Despite this trend, there are also instances where improved labour efficiency in high-wage countries has actually attracted industries back home by affecting their comparative cost advantage. In figure 9.2 below, wage rates for all countries are compared as a percentage of those in the US where workers are paid average hourly wage rates of $22 or 100 per cent, or 100 points. In Mexico, for instance, wage rates are only 10 per cent of the US, or 10 points measured in terms of the wage index, whereas in Denmark, they are 145 per cent of US wages. International comparisons of hourly wage rates using an index (expressed as a % of US hourly wage = base of 100 points or $22), 2003 Mexico Brazil Hong Kong Taiwan Portugal Pay p acket Asian industrialised Singapore New Zealand Name : .. ......... ......... ... ......... ......... Amou . . ... nt : ......... ......... . Israel Time: Spain OECD average Italy Ireland Canada Japan Australia United Kingdom France 100 = base of $22 per hour United States Luxembourg Europe average Sweden Austria Netherlands Finland Belgium Switzerland Germany Norway Denmark 0 20 40 60 80 100 120 Index of wage rates (% of average wage in US) 284 Economics Down Under Book 1 140 160 COMPARISONS OF LEGAL MINIMUM WAGES IN SELECTED COUNTRIES Ranked comparisons of legal minimum hourly wage rates or labour costs for manufacturing workers Approximate US$ per hour (mostly for 2006 or 2007) Ranked comparisons of legal minimum hourly wage rates or labour costs for manufacturing workers Approximate US$ per hour (mostly for 2006 or 2007) 1. Ireland 11.25 10. Argentina 2.00 2. France 10.80 11. Taiwan 2.00 3. Australia 10.50 12. Russia 1.50 4. United Kingdom 10.00 13. Estonia 1.30 5. Canada 8.00 14. Pakistan 0.90 6. Japan 5.60 15. China 0.60 7. Brazil 5.40 16. India 8. United States (average) 5.15 17. Sri Lanka No minimum 9. South Korea 3.72 18. Indonesia No minimum 0.40 Figure 9.2 Where in the world can firms find the lowest wage or labour costs? Source: Data for the graph derived from US Bureau of Labour Statistics and other sources. Data for the table derived mainly from Wikipedia, the free encyclopedia. Some countries have very limited access to cheap natural resources (e.g. minerals and agricultural land). Here we think of Singapore, Britain, Taiwan and Switzerland. However, given the ease of moving money capital and the desire by businesses to cut costs and maximise profits, some firms relocate elements of production abroad. GLOBALISATION HELPS FIRMS GAIN ECONOMIES OF LARGE SCALE Globalisation can help companies to grow bigger. For some firms, large-scale production is cheaper than small production runs. This is because fixed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) can be spread more thinly over a greater volume of sales. In cases where the size of the local market is small, firms that expand their operations overseas can often lower their costs, improve efficiency and raise profitability. The spreading of a firm’s fixed costs over higher annual levels of output to gain economies of scale is illustrated in figure 9.3. Sometimes economies of scale are possible because of the international integration of firms. Sometimes, this is done by horizontal integration. Here, firms are joined together in the same industry (e.g. a beer company overseas with a beer company at home). At other times, firms are joined through vertical integration downward or upward in different, but perhaps related industries (e.g. an iron ore firm overseas combining with a steel producer in the home country). Annual fixed cost per unit of output produced ($) GLOBALISATION INCREASES ACCESS TO NATURAL RESOURCES High per unit cost 3 A 2 TAKE Fixed cost curve Notice that the per unit cost of each extra unit of production by this firm falls from $3.00 to only $1.00 as the company raises its annual production and sales from 1000 units to 5000 units. At higher levels of output, fixed costs can be spread more thinly. Exporting can help local firms justify higher output levels and can enable them to move from point A to point B on the fixed cost curve. This helps increase profits and competitiveness. IN FIGURE 9.3 B Low per 1 unit cost 0 0 Few economies of scale 1 2 3 4 5 6 Maximum economies of large scale A firm’s annual level of production/sales Figure 9.3 Globalisation can increase economies of large-scale production (i.e. reduce fixed costs of production per unit of output) GLOBALISATION TAKES ADVANTAGE OF GOVERNMENT POLICIES Globalisation of companies enables some firms to take advantage of government policies in both their home country and in the country they visit. For instance, there is the willingness of some governments to: ■ pay out generous subsidies ■ provide lower tax rates and other concessions (e.g. cheap power, water, transport) to producers ■ ignore environmental concerns and protect firms from imports. CHAPTER 9 Economic globalisation 285 All of these aspects can help to seduce overseas companies to relocate offshore in search of improved profits. For instance, some well-known multinational chemical, car and electronic companies have acted for these sorts of reason. More specifically, a French multinational tyre manufacturer didn’t like its government’s decision to introduce indicative economic planning some years back so it set up three plants overseas for every one factory it built at home. GLOBALISATION HELPS TO MINIMISE TRANSPORT COSTS The actual setting up of subsidiary plants in key markets around the world can sometimes help to lower shipping and other transport costs. Again this can boost profits. GLOBALISATION INCREASES FLEXIBILITY IN DECISION-MAKING Sometimes, companies become globalised to improve the flexibility or choice they have in decision-making about production and investment. For instance, BHP–Billiton, Ford and Fiat have plants located around the world. It is claimed by some that this gives them advantages because they can move or source aspects of production (e.g. engine assembly, car panels) wherever the overall costs of specific operations are lowest. TRY APPLIED ECONOMICS 2, p. 305 EXERCISE 9.3 The effects of economic globalisation for Australia A few years back at the World Economic Forum, Nelson Mandela posed the question: ‘Is globalisation only to benefit the powerful and the financiers, speculators, investors and traders? Does it offer nothing to men, women and children who are ravaged by the violence of poverty?’ Indeed, globalisation has become a hotly debated issue in recent times as to whether it is a good or bad thing for the world economy generally and individual economies in particular. Before looking at the costs and benefits, it is worth remembering that here, in Australia (as in many other countries), globalisation has meant dramatic change including: ■ a move towards free trade with a need for much greater international competitiveness ■ increased specialisation of local production in areas of comparative cost advantage ■ better efficiency in resource allocation usually involving less government regulation and a greater reliance on market forces 286 Economics Down Under Book 1 ■ the deregulation of the capital, financial, communications, transport and other markets to improve efficiency by encouraging competition in these markets ■ improved efficiency and cost-cutting through the restructuring of private and government businesses ■ the widespread application of new technology ■ the growth of globalised multinational businesses where production is sourced from the cheapest supplier in the world ■ the fact that the success or otherwise of government policies, worker productivity and business competitiveness is judged by international yardsticks including the reaction of global markets to what we do and how we perform. Unfortunately, when it comes to judging the effects of globalisation, opinion is divided and conclusive evidence is thin. To some, it is a ‘panacea’ while, for others, it is a catastrophe. Perhaps this reflects the fact that globalisation impacts on particular groups and countries in different ways. However, for a moment, let us take a look at some of the good and bad effects on Australia’s economy. THE EFFECT ON AUSTRALIA’S INFLATION THE EFFECT ON AUSTRALIA’S RATE OF ECONOMIC GROWTH Perhaps the main benefit of the most recent wave of globalisation during the 1990s and 2000s is that Australian consumers have been able to buy better quality goods and services at lower prices. Table 9.1 shows the dramatic 70 per cent fall in the inflation rate during the period 1990 to 2006 (i.e. with globalisation) as against the high levels during the period 1970 to 1989 (i.e. before the last wave of globalisation). While reduced inflation is not solely the result of government policies that helped to internationalise and globalise the Australian economy (e.g. tariff cuts, labour market deregulation, privatisation, competition policy involving the ACCC, deregulation of the capital market, tax reform), these measures certainly helped. It is likely that exposing Australia’s local and foreign-owned firms to greater international competition forced them to improve quality and become more cost efficient. In turn, this helped our companies to face up to imports and enabled some to avoid takeovers by multinationals looking for a new home. Among other things, tariff cuts, the adoption of freer trade and the easing of restrictions on foreign investment by the Australian Government since the latter 1980s, has increased our economy’s exposure to globalisation. Supporters of globalisation claim that the widespread use of these policies has helped to lift our rate of economic growth (GDP). Their reasoning goes something like this: ■ Greater openness involving lower tariffs and less protection has forced Australia to allocate resources more efficiently into areas of production where we have a comparative cost advantage. Greater efficiency lifts economic growth because more output is produced from fewer inputs of resources. ■ Lower tariffs force Australian firms to cut production costs and lift efficiency in order to survive and compete against imports. Some firms will then be able to grow by earning more income from rising exports sales. This helps to boost economic growth. Table 9.1 Comparisons of Australia’s inflation rate before and during the most recent wave of globalisation ANNUAL AVERAGE INFLATION RATE (%) PERIOD OF TIME Average annual inflation rates ‘before’ the wave of globalisation, 1970–1989 Average annual inflation rates ‘during’ the last wave of globalisation, 1990–2006 Sources: Data derived from ABS 1350.0 and RBA Occasional Paper No. 8. CHAPTER 9 Economic globalisation 287 ■ 4 3.5 victims of globalisation. For example, companies closed, like Arnotts (2001), Heinz (2000), Bonlac (2000), Coburg Dye Works, Qenos Plastics in Altona, Email oven and dishwasher appliances (2000) and BAE systems (2000), Blundstone and Feltex (2007), while at the national level, there were famous cases like Ansett, Compass and BHP–Billiton’s Newcastle operations. Furthermore, during 2005–07, some firms like Telstra and Qantas shifted selected operations overseas. Furthermore, during 2005–07, some firms like Telstra and Qantas shifted selected operations overseas. In turn, resulting higher levels of unemployment may undermine consumer confidence, disposable income and economic growth. THE EFFECT ON AUSTRALIA’S INCOMES As a nation, our average income per head of population depends on how much each of us produces (i.e. the size of our GDP per person). If globalisation has helped Australia to grow its production faster than our population, then we would expect incomes to accelerate. In fact, this has occurred. For instance, figure 9.5 shows that in the period from 1982 to 1992 (before the main acceleration of globalisation), average incomes per person grew slowly by only 1.4 per cent per year. By contrast, between 1992 and 2006 (following increased exposure to global influences), household incomes in Australia grew by 2.6 per cent per year or nearly twice as fast! By mid 2006, average incomes had reached $44 844 per person per year. 3 2.5 2 1.5 1 0.5 0 Average: 1982–83 to 1991–92 period before the last wave of globalisation Average: 1992–93 to 2005–06 period of greater openness and globalisation Economic growth (annual % change) Labour productivity (annual % change) Figure 9.4 Increased globalisation (1992–2006) may have led to stronger productivity and faster economic growth for Australia Sources: Data derived from ABS 1350.0 and RBA Occasional Paper No. 8. Although a more open and globalised economy may have increased our economic growth, there may also be weaknesses: ■ Some economists argue that Australia’s integration into the global economy may cause our growth rate to become even more unstable. A severe downturn in Japan or the US, for example, is likely to cause a recession in Australia. ■ Global forces and international competition have caused some firms to go bankrupt because they became uncompetitive. In the short term, this increased structural unemployment and wasted our productive capacity. Here we think of the many 288 Economics Down Under Book 1 Average annual rise (%) Annual average change (%) Lower tariffs mean that it is cheaper for Australian firms to import new equipment, and use more up-to-date and efficient technology in their production. ■ In the long term, protection of local industry only encourages slackness, inefficiency and waste of resources. ■ The encouragement of foreign investment (by easing restrictions on the international movement of money capital) has helped to lift the total level of business investment in Australia. This boosts our productive capacity and increases economic growth (GDP). ■ Lower tariffs (resulting from cuts by most governments here and around the world) have caused our exports to grow faster than otherwise. For Australia between 1984–85 and 2005–06, exported production rose from only 14 per cent of GDP to nearly 20 per cent of GDP. Indeed, exported GDP has grown almost 60 per cent faster than the rest of the economy. By boosting Australia’s efficiency, competitiveness and exports, increased exposure to globalisation during the 1990s and 2000s has probably lifted our growth rate for GDP. For instance, figure 9.4 shows that during the 1970s and 1980s (prior to increased globalisation), our productivity was miserable and GDP grew by a slow 2.8 per cent per year. By contrast (although this may be a coincidence), between 1992–93 and 2005–06 (during the last wave of globalisation), efficiency was up 90 per cent and annual GDP growth 32 per cent stronger. 4 3.5 3 2.5 2 1.5 1.5% per year (an average of only $24 200/head/ year in 1992–93) 2.6% per year (an average of $44 844/head/ year in 2005–06) 1 0.5 0 Annual average rise, 1979–80 to 1992–93 (largely before the last wave of globalisation) Annual average rise, 1992–93 to 2005–06 (during the last wave of globalisation) Figure 9.5 Globalisation (1992–2006) may have helped to increase the growth in Australia’s level of average real incomes per person per year Sources: Data derived from ABS 1350.0, RBA Occasional Paper No. 8A and RBA Bulletin. Additionally, higher personal incomes helped to raise more tax revenue. This then made the Australian Government’s provision of welfare payments and community services (e.g. public education and health) more affordable than otherwise. These measures helped to ensure that the benefits of faster economic growth (helped by globalisation) were equitably shared among lower income families. Indeed, despite globalisation, it appears that inequality in Australia’s final income distribution (i.e. after government redistribution measures) has not become more uneven than it was in the early 1980s and the real purchasing power of the lowest quintile has never been as high. THE EFFECTS ON AUSTRALIA’S LABOUR MARKET ■ There are growing numbers of part-time jobs relative to full-time jobs because employers seek greater flexibility in staffing. ■ Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often females, nonEnglish-speaking employees, part-time workers, the inarticulate and uneducated). ■ There has been a dramatic decline in unionism in Australia (i.e. to only 18 per cent in 2006 for the private sector) and around the world due partly to greater competition in labour and other markets. This means that unions are less able to take action to protect wages from being driven down towards the low levels existing in poorer countries. THE EFFECT ON AUSTRALIA’S FINANCIAL MARKETS Since 1991 and the acceleration of globalisation, there has been a dramatic change in Australia towards a more deregulated labour market. For instance, the federal government has encouraged the spread of enterprise bargaining and productivity(efficiency)based workplace agreements (on a firm-by-firm basis), the simplification and scaling back of the minimum wage system, the promotion of union amalgamation, the erosion of union influence in wage negotiations and relaxed the unfair dismissal laws, especially for smaller firms employing fewer than 100 staff. All this was intended to help make our workers and wage system more internationally competitive. However, the effects of these measures on unemployment and the labour market varies. Workers in competitive and efficient firms and industries where the growth in sales and profits are strong, have gained better incomes and career paths. Nevertheless, those in internationally uncompetitive parts of the economy have suffered in the short to medium terms because of structural unemployment resulting from international exposure and its associated policies. Some of these changes in the labour market are summarised in the panel below. Some effects of globalisation on the labour market ■ There is a widening gap in market incomes and wages between those unskilled workers on minimum wages and those on enterprise agreements. During the 1990s and 2000s, the latter group of workers have gained average rises 2–3 times greater than those on minimum wages. During the 1980s, 1990s and 2000s, Australian financial markets were deregulated and exposed to global pressures, competition and judgements about the success of the Australian economy in controlling inflation. In the foreign exchange market where international currencies are swapped, the dollar was ‘floated’ so that the exchange rate was decided by demand and supply. In the market for borrowing and lending credit, foreign banks and some building societies were allowed to set up in competition with the main local banks and interest rates were no longer set by the Reserve Bank. In addition, financial markets were increasingly affected by the movement of large amounts of money capital and investment, both in and out of Australia. This exposed our markets to volatile developments overseas. Despite this problem of greater instability and accountability, one benefit of global exposure and competition is that local interest rates (i.e. the cost of credit) have probably remained lower than would otherwise have been the case. This is good news for borrowers of credit (e.g. households, businesses) but less favourable to lenders. THE EFFECT ON CONSUMER CHOICE In some ways, globalisation and internationalisation have expanded the range of consumer choice when buying goods and services. This is because households and businesses are fairly free to buy whatever they like in markets around the world. The surge of e-commerce via the Internet, makes shopping and banking as easy as a click of a mouse, provided there is the knowhow and ownership of computers. In fact, it was claimed that over 60 per cent of new Ford sales in the US were via the Internet. Despite the convenience, this raises the questions of both equity and quality in making choices. In addition, there are concerns about whether, eventually, choice will be diminished as more efficient multinational companies come in and destroy local competitors and their product uniqueness. CHAPTER 9 Economic globalisation 289 the economy, brought about by the judgements made by international markets and investors. In Australia’s case, tighter control over budget spending has recently strengthened our international credit rating. Another consequence of globalisation and visits by multinational companies is the decline in national sovereignty. Foreign investors buy up Australian assets (e.g. resources, property, utilities, formerly locally owned company icons that were household names to older generations including the makers of Aeroplane Jelly, Vegemite, Rosella and Kraft). The rising tide of private foreign debt and the huge CAD partly indicate this loss of control over businesses and assets by Australians. Some writers argue that these worries make government policy even more complicated and may present a problem during periods of war or international conflict. Finally, globalisation and the freer movement of people, goods, services and capital, present the government with some other very difficult issues — how to control the spread of terrorism (e.g. 11 September, 2001; Bali bombings 2002) and the spread of weapons of mass destruction, illegal hard drugs, crime, worsening global pollution, global warming, disease (e.g. SARS) and massive shifts of illegal immigrants that could swamp an economy’s resources and infrastructure. Without effective government regulation, all these things could seriously undermine our non-economic living standards or quality of life. THE EFFECT ON GOVERNMENT AND NATIONAL SOVEREIGNTY The drive towards globalisation and internationalisation in the 1990s and 2000s has impacted in several ways on Australia’s government. Foremost, the government must select its economic management policies more carefully to ensure that these measures keep inflation down and government budgets in check. Failure to do so could create awful consequences for 290 Economics Down Under Book 1 TRY APPLIED ECONOMICS 3, p. 305 EXERCISE TRY ONE OF THE TEAM DEBATES 1, 2, 3, p. 306 TRY THE ESSAY p. 306 TRY RESEARCH AND ANALYSIS 1, 2, p. 307 9.4 A case study of a multinational corporation in Australia — Nestlé This case study is about Nestlé, which is a well-known multinational corporation that operates in Australia. 4000 cups are served throughout the world every second of every day of every year. In the early 1940s, ‘Nestea’ was also added to the product range. THE HISTORY AND EXPANSION OF NESTLÉ 1945–74 Between the end of World War II and 1974 marked the beginning of Nestlé’s most rapid period of expansion. This involved diversification into soups, seasonings, jams, tinned fruit, frozen food and cosmetics, along with further company acquisitions including Alimentana S.A., Crosse and Blackwell, Findus, Libby’s, Stouffer’s and L’Oreal. 1867–1905 The Nestlé company is named after its Swiss founder, Henri Nestlé. In 1867, Henri, a trained pharmacist, developed a healthy and inexpensive milk-based food for babies who were unable to be breastfed. He called this product Farine Lactée Henri Nestlé. It quickly proved to be a success in saving babies’ lives at a time of very high infant mortality and malnutrition. In 1874, Jules Monnerat purchased the Nestlé company and launched its own condensed milk product in competition with the Anglo-Swiss Condensed Milk Company which had started operations in 1866. Then, in the early 1880s, Daniel Peter, a friend and neighbour of Henri Nestlé, invented milk chocolate and started up the leading company in this area. Shortly after, the chocolate company started by Daniel Peter merged with Nestlé. The company developed an even more diversified range of products. Later on, Nestlé joined forces with a company owned by Julius Maggi, another Swiss firm that had developed instant soups, sauces and meat cubes. 1905–18 Nestlé’s clear strategy of expansion and diversification through research and acquisition of firms continued when, in 1905, it merged with the Anglo-Swiss Condensed Milk Company. Soon, it began to open factories in the United States, Britain, Germany, Spain and Australia (the largest overseas market at the time). It also operated warehouses in Singapore, Hong Kong and Bombay to supply the growing Asian market. While World War I disrupted its European sales, due to milk shortages and transport difficulties, it did mean an expanded demand for products because of government contracts. The company was forced to rely more on its 40 overseas plants in the United States and elsewhere. 1918–45 The end of war in 1918 created challenges for Nestlé. Government contracts for condensed and powdered milk dried up, the civilian population returned to consuming fresh milk, the cost of raw materials rose sharply, there was a post-war global recession, exchange rates moved unfavourably and the company recorded its first loss. Following company reorganisation and restructuring by a leading Swiss banker, prosperity and expansion returned. The 1920s and 1930s saw company product diversification outside its two main areas of milk and chocolate. The range expanded to include malted milk, Milo (a product developed in Australia) and a powdered buttermilk for infants. However, the most interesting development was the invention of instant coffee. This involved eight years of research and was aimed at reducing Brazil’s huge surplus of coffee beans. It was an ‘instant’ success and the market grew so that, today, nearly 1975–81 This period of optimism soon faded in the early to mid 1970s. This was caused by the collapse of economic growth in industrialised countries, an appreciation of the Swiss franc which slowed exports, and the quadrupling of the cost of coffee beans (1975–77). Although the company’s traditional markets contracted, those in the developing world helped to offset the downturn. Another response by Nestlé was to diversify outside food products as a way of creating a more stable cash flow. It purchased a United States pharmaceutical company, a brave move in uncertain times. 1981–2007 Between 1981 and 1995, Nestlé set out to consolidate and restructure its financial position by selling its unprofitable operations. More recently from the mid 1990s up to 2007, Nestlé’s position in the global market was helped by world events — the widespread cuts in tariffs, trade liberalisation and expansion, the opening up of central and eastern Europe as well as China, and the dramatic rise of international investment flows. In addition, there was the growth of free trade areas including the North American Free Trade Agreement (NAFTA), the Organisation for Economic Cooperation and Development (OECD), extension of the European Union (EU) and monetary union, Closer Economic Relations (CER) and other free trade agreements (e.g. with the US, Thailand, Singapore) and the attempted Multilateral Agreement on Investment (MAI). Again the company increased its product range by purchasing additional firms including Italian mineral water company, Pellegrino. Valio (ice-cream), Spillers Petfoods, Purina, Carnation Milk and Jenny Craig. Being a well-diversified multinational corporation, these global events had a favourable impact on sales and profits. THE SIZE AND STRUCTURE OF NESTLÉ INTERNATIONAL TODAY In 2006, Nestlé had over 487 factories employing over 253 000 workers in more than 80 countries. Its annual sales were in excess of 91 billion Swiss francs (i.e. where one franc equals A$1, with annual global sales equal to around 10 per cent of Australia’s entire GDP) and profits of over seven billion francs. Both sales were up 6 per cent and profits rose nearly 44 per cent over the last three CHAPTER 9 Economic globalisation 291 20 15 10 5 Americas Europe Africa, Asia Other nonand Oceania food activities 25 20 15 10 5 0 nu tr it 0 30 io M n i an lk d pr ic od Pr e- u ep cr ct ar ea s, ed m Ch di c oo s oc ol ki hes at ng a e, ai nd co ds nf an e d cti b i on sc a ui ry ts Pe tc ar e Ph ar m a pr ceu od ti uc cal ts 25 Comparison of Nestlé product range by sales importance (billion Swiss francs, 2005) ve ra ge s 30 Swiss francs (billions) 35 Comparison of Nestlé product sales by global region or market (billion Swiss francs, 2005) yogurt, confectionery, food services, pet care, food ingredients, ophthalmological products and cosmetics. Some of the company’s vital statistical details are summarised in figure 9.6 (p. 000). Be Swiss francs (billions) years. This easily makes it the largest food company in the world selling dairy products, bottled water, instant roast and ground coffees, mineral water, coffee substitutes, infant foods, breakfast foods, soups, pasta, sauces, frozen food, ice-cream, GLOBAL INDICATORS FOR NESTLÉ 1998 2005 1. Value of sales (billion Swiss francs) 72 91 2. Value of food sales in Africa, Asia and Oceania (billion Swiss francs) 12.4 15.7 3. Value of food sales in Europe (billion Swiss francs) 26.8 27.6 4. Value of food sales in Americas 22.6 30.8 5. Value of non-food sales (billion Swiss francs) 10 16.5 6. Trading profit (billion Swiss francs) 7.1 8.9 7. Trading profit as % of sales 9.9 8.8 8. Market capitalisation (billion Swiss francs) 117 153 9. Global employment ’000 workers) 225.8 253 10. Spending on research and Development (billion Swiss francs) 11. Number of injuries with lost time per million hours worked 0.7 14 (2001) N/A 7 12. Water consumption (m3) 7.6 (2001) 4.4 13. Energy consumption (gigajoules) 3.4 (2001) 2.4 14. Greenhouse gas emissions (kg CO2 per tonne delivered) 15. Ozone depleting substances (g R-11 equiv.) Figure 9.6 Nestlé products and sales Source: Data derived from Nestlé website. 292 Economics Down Under Book 1 178 (2001) 1.1 (2001) 118 0.28 THE REASONS FOR GLOBAL EXPANSION AND THE STRATEGIES USED BY NESTLÉ As indicated earlier, Nestlé grew in several ways: ■ being innovative in product development through research in the area of processed foods ■ by means of company mergers and often horizontal integration with firms in the same or similar industry ■ by means of acquisitions of companies allowing for market and product diversification to gain a more regular flow of income. Globalisation of operations appeared to be a logical and natural process for Nestlé: ■ The merger with the Anglo-Swiss Condensed Milk Company in 1905 provided it with its first international operations. This grew in subsequent years across many countries on several continents. ■ The disruptions to transport and raw materials caused by World War I encouraged growth and production outside Europe, especially in the United States where milk supplies were readily available. ■ Innovation by Nestlé gave the company a cost and technological advantage unmatched by its rivals anywhere in the world. ■ Expansion gave Nestlé economies of large scale in innovation, plant and technology, product development and R&D, sales and marketing, and product distribution. ■ Production facilities were located in the company’s main markets in the United States, Australia and Europe. Production was commenced in countries where sales were greatest or where company acquisitions suited the expansion strategy rather than trying to take advantage of countries where labour was cheap. ■ Nestlé’s expansion appears to have been enabled by the creation of a range of products and brand names, often made by already well-established companies that were trusted for their quality. In this sense, their international market for products, which was expanded by global corporate acquisitions, was already proven. THE RELATIONSHIPS BETWEEN NESTLÉ INTERNATIONAL, ITS AUSTRALIAN OPERATIONS AND THE AUSTRALIAN ECONOMY Nestlé Oceania is an offshoot of Nestlé International which has its headquarters in Switzerland. Mention has been made already of Nestlé’s commencement of production here in 1908. There was also the addition in 1934 of Milo to its international product range. This was a locally invented food. Indeed, the world now consumes over 21 million cups of Milo per day! By 2001, Nestlé Australia: ■ employed around 5000 workers in production, sales and distribution Sales office and distribution facilities – Headquarters for Oceania region Sales offices only Plants: Foods Confectionery Dairy Products Pet Food Beverages Gympie Brisbane Perth Adelaide Echuca Maryborough Dennington Mulgrave Smithtown Blayney Sydney Blacktown Lane Cove Tongala Canberra Broadford Pakenham Melbourne Campbellfield Launceston ■ had operations located in over 20 towns throughout most States in Australia with is headquarters for Oceania in Sydney ■ sold $2.4 billion of food and beverages (up 40 per cent in the four years from 1997) under popular brands such as Nescafé, Milo, Nesquick, Sunshine Milk, Kit Kat, Maggi, Nestlé Yogurt and chocolates, Peters, Lean Cuisine, Buitoni, Minties, Life Savers, Allens, Papa Giuseppi’s, Lucky Dog, Friskies and Go-cat ■ exported $427 million of value-added processed food products to destinations including Asia (56 per cent), Japan (23 per cent), Pacific Islands (11 per cent), New Zealand (8 per cent) and China (2 per cent) ■ injected over $1 billion into the Australian economy through the payment of wages to employees, the provision of training, expenditure on research and development, support of community projects, and the purchase of goods and services from other companies that it needed for its manufacturing processes and distribution ■ contributed substantially to federal, state and local government taxation revenues. Some of the statistical details relating to Nestlé’s Oceania operations are summarised in figure 9.7. Figure 9.7 Vital statistics about Nestlé Australia and Oceania Comparison of Nestlé Oceania export sales by global region/market (% of all exports) Comparison of Nestlé Oceania product sales by category in 2001 (%) Other (23.6%) New Zealand (8%) Pacific Islands (11%) Japan (23%) China (2%) Asia (56%) Pet food (7.8%) Culinary (10%) Confectionery (25.3%) Ice-cream (11.1%) Coffee (22.2%) (continued) CHAPTER 9 Economic globalisation 293 Australian indicators for Nestlé 1997 2001 Value of Oceania sales (A$ billions) 1.71 2.4 Employed workers 5000 N/A Value of all Oceania exports (A$ millions) 254 427 Value of investment in Australia/Oceania (A$ millions) 100 N/A Planned value of overseas investment in Australia/Oceania in the next 5 years (A$ millions) 500 N/A Injection of money each year into the Australian economy through wages, purchases of supplies (A$ millions) 900 1200 TRY APPLIED ECONOMICS 4, p. 305 EXERCISE TRY THE MULTIPLECHOICE TEST p. 303 TRY THE REPORT ON AN INVESTIGATION p. 306 (est.) TRY COLLECTION AND 3, p. 14 ANALYSIS OF NEWSPAPERS Source: Data derived from Nestlé website. 9.5 The effects of globalisation on low-income countries Debate rages about the effects of globalisation and multinational corporations on low-income countries like China, India, Uganda, Nigeria, Thailand, Vietnam, Chad, South Africa and Bangladesh. Some researchers claim that these developments have helped to lift living standards and hope for millions of people, while others say that they have only added to the misery of the world’s poor. Much of this disagreement about the effects of globalisation reflects the technical weaknesses of the statistical evidence used by each side in the debate. Additionally, globalisation seems to have been more beneficial for some regions and countries (e.g. in Asia), while creating problems for others (e.g. in Africa generally). SOME POSSIBLE BENEFITS OF GLOBALISATION FOR POOR COUNTRIES Many economists believe that the last wave of globalisation (perhaps from the 1980s to at least to 2007) has been an important development that has helped to improve the wellbeing of the countries most involved. Their research has tried to prove this from many different angles and using a host of arguments. Let us examine some of their claims. Globalisation has lifted economic growth and the speed of rises in GDP per person There are many logical reasons why globalisation should help to lift the GDP and incomes per person per year (reflecting the actual purchasing power or living standards of individuals) in poor countries. Higher investment and access to technology Rapid rises in GDP and incomes largely depend on high levels of business investment in capital equipment and buildings incorporating the latest technology). Investment (financed by household saving) helps to lift the efficiency of labour and natural resources, so that each worker per hour can produce 294 Economics Down Under Book 1 more. It grows a country’s productive capacity or expands the production possibility frontier. Unfortunately, however, in lowincome countries, investment and savings are very low because household production is at subsistence levels. However, globalisation has helped to overcome these problems. It has meant greater openness and fewer government controls on the inflow of direct investment or money capital from rich to poor countries. This inflow includes the introduction of new more efficient technology. Capital inflow has also allowed local businesses in these countries to expand faster. It is not just the expansion of overseas firms that occurs but opportunities are created for growing small-scale local firms in related industries. Overall, this has helped some poorer countries to escape the oppressive poverty cycle that otherwise would follow (see figure 9.11 and explanation p.298). More jobs and lower unemployment rate. In some countries like Zimbabwe, Turkmenistan, Nepal, Libya and Namibia where there is little globalisation, unemployment rates are very high ranging between 30 and 80 per cent of the labour force. There are also similar percentages of people working very few hours per day, well below their productive capacity (i.e. high levels of underemployment). In turn, given the general absence of government welfare in poor countries, this lack of employment means low income and poverty. However, following globalisation with higher levels of investment and business expansion (even if this is by multinationals), more jobs, higher incomes and better living standards develop. Indeed, the wages paid by multinationals in low- and middle-income countries are around 1.8–2.0 times higher than the average wage in those countries. This raises living standards. Greater efficiency in using resources Without exception, low-income countries use their resources very inefficiently. There is little output per person from the resources available, and so the nation’s productive capacity is restricted. Greater openness, associated with globalisation and freer trade (without tariffs and subsidies), cause countries to allocate or direct resources into specific areas of production, where they have a comparative cost advantage. That is, they produce the types of goods and services that they are most efficient Globalisation has slowed inflation and increased purchasing power Inflation (i.e. generally rising prices paid for goods and services including food, building materials, steel, fertiliser, equipment, medicines, communications and electrical appliances) is most likely to be worse when there is weak competition (e.g. when government businesses or a private monopoly control most of the output of an industry). Globalisation (and with it, lower tariffs) deliberately expose the economy to greater levels of competition and business rivalry. This helps to limit inflation and protect the purchasing power of household incomes. Indeed, inflation was highest with rates often between 20 and 200 per cent a year, in countries with low levels of globalisation (e.g. Angola, Eritrea, Ghana, Tajikistan, Zambia and Zimbabwe). By contrast, inflation was lowest with rates usually less than 3 per cent a year, in economies with greater exposure to globalisation (e.g. China, India, Vietnam, United States, Australia, France, Japan and Singapore). Globalisation reduces war and terrorism caused by poverty Poverty feeds the endless cycle of misery, sickness, despair, discontent, war and terrorism. However, if globalisation can lift GDP and average incomes above poverty levels, it would have a very positive effect on the lives of many people in the world today and lead to peace. Globalisation makes governments more accountable and efficient Governments play a critical role in most economies. They allocate scarce resources to provide health, education, water, communications, law and other services. In so doing, they contribute to national production and living standards. Unfortunately, many governments, especially in low-income countries, are non-democratic (i.e. they are not elected by a majority of the people), inefficient, corrupt, incompetent and use their military power for squashing opponents and promoting their own political survival. However, because globalisation requires greater openness and exposure to the judgements of the outside world, it can help to make these governments far more accountable for their policies and improve the daily living standards of ordinary people. Perhaps most importantly, some studies have tried to show that the rate of growth in GDP per head (i.e. a rough measure of the yearly rise in the level of average economic well-being or income per person) is faster in more globalised, open countries, than in those that have had little exposure to the effects of globalisation. One such researcher (Axel Dreher) calculated a single index to measure the degree of globalisation. It was made up of many economic, social and political indicators for 123 countries covering the years 1970–2000. This index was then compared to the average rate of growth in GDP ($) per head, to see if there was some relationship. Indeed there was a strong connection. As shown in figure 9.8 covering 1996–2000, countries with low levels of globalisation only experienced an average rise in their value of production per person a year of 1.16 per cent, against a rise of 2.04 per cent (i.e. about 75 per cent faster) for those countries with relatively high levels of globalisation. Figure 9.8 also reveals the same sort of success for globalisation, in all four periods investigated — 1981–85, 1996– 90, 1991–95 and 1996–2000. As a specific example, this research noted that China’s index of globalisation rose by 2.14 per cent between 1975 and 2000, causing its growth rate in GDP per head to be an impressive 2.33 per cent higher than otherwise. By contrast, countries with low globalisation like Rwanda (with the lowest globalisation index of only 0.92) that isolated themselves from the rest of the world, had one of the slowest rates of rise in economic wellbeing and further rises in its poverty rates. However, despite these impressive observations, many researchers note that, on its own and without suitable changes in other government policies, globalisation is not enough to lift incomes and abolish poverty. Average rates of rise per year (%) at making. This means that a bigger output, GDP or income, can then be produced from the same inputs or resources, and so poverty falls and welfare improves. 3 2.5 2 1.5 1 0.5 0 Rise in GDP per head, 1981–85 Rise in GDP per head, 1986–90 Rise in GDP per head, 1991–95 Rise in GDP per head, 1996–2000 Countries with low globalisation Countries with high globalisation INDEX OF GLOBALISATION Examples (high) Examples (low) US 6.48 Pakistan 2.43 UK 5.62 Morocco 2.42 Germany 5.28 Uganda 2.31 Australia 5.08 Iran 2.08 Hong Kong 4.78 Albania 1.96 Spain 4.05 Saudi Arabia 1.84 Malaysia 3.54 Congo, Democratic Rep. 1.70 Brazil 3.17 Nepal 1.69 Indonesia 3.08 Papua New Guinea 1.37 China 3.04 Madagascar 1.28 India 2.78 Haiti 0.94 Thailand 2.64 Rwanda 0.92 Figure 9.8 The faster rate (%) of growth in GDP per person per year in countries with higher globalisation indexes than for those with lower globalisation Source: Data derived from Does globalisation affect growth? by Axel Dreher (2002–03). CHAPTER 9 Economic globalisation 295 Globalisation has helped to lift the human development index and improve daily lives The United Nation’s human development index (HDI) is another measure comparing the well-being of people in different countries. It reflects both positive indicators (e.g. long life expectancy at birth, educational attainment and average level of income per head per year), and negative indicators (e.g. infant mortality, prevalence of using child labour). Most countries recorded significant improvements in their HDI between 1980 and 1999, despite what some claim are threats posed by the recent wave of globalisation. By nearly doubling the percentage rate of growth in the level of GDP or income per person a year, globalisation has helped to improve the daily lives of many people in the ways shown below. Lower mortality and longer life expectancy In countries where globalisation has been most rapid, it has contributed to lower infant mortality and increased life expectancy. This is especially obvious in globalised low-income countries where average infant mortality rates fell by over 30 per cent between 1980 and 2006. Additionally, statistical data shows that rapidly globalising countries like India and China today, have much lower infant mortality rates (by between 30 and 70 per cent) and much longer life expectancy (by 20–35 per cent), than existed in the US in 1913. Nowadays, 85 per cent of the 296 Economics Down Under Book 1 HDI* If it is true that average incomes per person a year have increased faster with globalisation, have the lives of the poor benefited or have the gains gone mostly to the rich? This question and how it is measured, is hotly debated. While some research shows a wider gap between low- and high-income earners in many poor countries (and in the world generally), there appears to have been a big decline in the number of people in poverty, especially in countries where there has been faster globalisation. Here, poverty represents the percentage of the population with incomes below the poverty line as measured by national statistics. It was found that the least globalised economies had much higher poverty rates than the more globalised countries. For example, the low globalised parts of Africa and eastern Europe (countries including Zimbabwe, Zambia, Mozambique and Tajikstan), had massive poverty rates of between 60 and 86 per cent of their populations in 2006. By contrast, more globalised countries such as China, Vietnam, Indonesia, India, Taiwan, Malaysia, US, UK and Australia had lower rates of between 1 and 25 per cent. In addition to poverty rates, the United Nations measures welfare levels by comparing the percentage of people on incomes of less than $1 per day (allowing for different exchange rates and the purchasing power or prices in various countries). This indicator (and a similar one for those on less than $2 per day) shows a significant drop in the rates of low incomes for most regions in the world, especially the more globalised countries. Even so, there have been rises recorded in the percentage of population in some nations on less than $1 per day, especially in less globalised countries in sub-Saharan Africa. world’s population can expect to live until at least 60 years of age (about twice as long as 100 years ago). Between 1980 and 2006, this caused the gap between life expectancy in rich and poor globalised economies to narrow considerably. This result is not surprising given that, with more purchasing power, individuals should have improved access to basic food (calories per day), safe water, education, technology, transport, sanitation and medical care. 1 0.8 0.6 0.4 0.2 0 SubSaharan African countries Low income developing countries Medium income developing countries High income developed countries (*1 represents a perfect score) 1980 1999 Figure 9.9 The rise in the human development index of welfare for globalised and non-globalised countries (*1 is a perfect score) Source: Data derived from the UN development program, human development report, 2001 (New York, UNDP, 2001); World Bank, World Bank development indicators, 2001 (Washington, World Bank, 2001). Reduced use of child labour For hundreds of years, children have been required to help produce and earn income for the family. However, many critics of globalisation say that it leads to increased use of child labour. Despite the last wave of globalisation, figure 9.10 shows that there has been a significant reduction in the use of child labour throughout the world on the levels that existed previously. Of course, the question might still remain — would the fall have been faster or slower without globalisation? Supporters of globalisation say that higher incomes resulting from globalisation should reduce the need to use child labour and increase the affordability of education for children. Children in the labour force (%) Globalisation has reduced poverty and made basic goods and services more affordable for the poor 40 35 30 25 20 15 10 5 0 SubSaharan African countries Low income developing countries 1980 (% children) Medium income developing countries High income developed countries 1999 (% children) Figure 9.10 The declining percentage of children in the labour force (child labour) during the last wave of globalisation (% 1980 against 1999) Source: Data derived from World Bank, World Bank development indicators, 2001 (Washington, World Bank, 2001). Increased daily food intake In general, the availability of adequate food (measured by the average number of calories of food intake per day) in poor countries increased between 1960 and 2006. The rise was nearly 40 per cent in low-income developing countries, but this excludes sub-Sarahan Africa where there was a miserable rise of only about 6 per cent. In addition, some say that globalisation (and the reduction of tariffs), has meant cheaper more affordable food imports for low-income countries (as well as lower prices generally for most household consumer items like clothing and other manufactured goods). Despite the frightening 76 per cent growth in their populations between 1970 and 2000, the total number of people suffering from chronic undernourishment in low-income developing countries apparently fell from 35 per cent (920 million people) to 17 per cent (790 million people). This suggests that some of the improvements in food intake in poor countries were at least shared or distributed across their populations, to those in great need. SOME POSSIBLE COSTS OF GLOBALISATION FOR POOR COUNTRIES their products and often glitzy advertising images, and codes of ethical conduct projected by several major sporting and exclusive clothing manufacturers, it seems that some of their workers have been exploited. Frequently, despite huge hours of work, pay is so low that it barely covers the rent, and leaves little for buying food or medicine. The employment of child labour is all too common, disrupting the education of the young. Additionally, some workers lead miserable lives in factory sweatshops and urban ghettos, where their bosses use threats and even violence to meet their production and cost targets. In response to these and other criticisms from the media, the multinationals have often claimed that they are changing their policies. Apparently, some were attempting to only source their supplies from factories that met acceptable international labour standards (e.g. not employing children under 15 years of age). Additionally, some companies pointed out that while pay rates appear very poor by Western standards, they are relatively good for low-income countries. In this way, globalised firms may actually be raising average incomes and reducing poverty rates in poorer countries. Globalisation emphasises profitable cash crops for international markets Critics of globalisation (often non-economists), refuse to at the expense of basic food for locals accept all the impressive claims made by the supporters of globalisation. It has been said, ‘there are lies, damn lies, and statistics’, and that ‘figures will show whatever you want if you torture them enough’. The claim has been made that the statistical data compiled by some countries and used by the World Bank, the United Nations and others, to show the supposed benefits of globalisation, can be unreliable and may lead to misleading conclusions. Globalisation and trade can help to lift the incomes of some farmers in the poor countries of Africa. This is why some farmers in low-income nations choose to grow international cash crops (rice, sugar, coffee, rubber) that fetch good prices. However, sometimes this means that the production of cheap basic food items for the local community is neglected, because profits here are relatively lower. Besides, poor people on low incomes (often less than $1 per day) cannot compete with the high prices paid abroad in richer countries. As a result, local food consumption is often inadequate and some people starve or are undernourished. Globalisation may not be the driver or cause of economic progress Globalisation accelerates world inequality Depending on how it is defined, it is possible that globalisation may not be the factor that is driving improvements in economic growth and poverty reduction. Lots of other events like government microeconomic efficiency reforms may have also played a role in accelerating growth, and improving income and living standards. Additionally, some countries that are quoted as good examples of more globalised economies (e.g. India, China, South Korea, Vietnam), started to have faster economic growth in the years before they could be properly classified as globalised. The gap in incomes between those in the poorest 20 per cent of countries and those in the richest 20 per cent, has increased from a ratio of 1:30 in 1960, to around 1:80 in the year 2002. It is claimed that globalisation has helped rich countries more than the poorer ones (although some commentators acknowledge that wars and natural disasters have also played a role in lowering average incomes in some countries and regions). Unreliable statistical data limits conclusions about globalisation Globalisation has increased the exploitation of workers In recent years, the media and various action groups have helped to raise our awareness about the effects of some multinational corporations on workers in Asia (e.g. Indonesia, Thailand and Vietnam) and parts of Africa where wages and conditions are not protected by enforced labour laws (e.g. minimum wages and age of workers). For example, despite the high prices charged for Globalisation has undermined local culture and national identity For some, globalisation stands for Americanisation or Westernisation, with all its imperfections. This places it in conflict with local cultures and national identities. Globalisation means that some countries are losing their unique identity or difference, and their ability to determine their destiny and who they are (e.g. as defined by their religion, language, education, values, traditions, dress, food and clothing). Such a monoculture is not desirable or beneficial for society generally. CHAPTER 9 Economic globalisation 297 ON ITS OWN, GLOBALISATION IS NOT ENOUGH Despite its strengths, globalisation on its own, can do little to help poor countries escape daily poverty. More is needed, involving changes in policy by both rich and poor nations, and no one should pretend that the task ahead would be easy or quick. Growing productive capacity in poor countries Poor countries have very limited resources and often use them inefficiently. For example, they face problems like high unemployment, a lack of skilled labour, low levels of investment in equipment and technology, poor efficiency, often corrupt and incompetent governments and the inadequate provision of basic infrastructure (e.g. roads, power, water, sewerage, schools, communications, hospitals). These problems limit their level of national output and reduce the size of their production possibility frontiers (see pp. 5–6). The task then is to grow the production possibility frontier (i.e. shift it outward) and GDP more quickly, through new policies and strategies. Globalisation has worsened environmental damage in poor countries Some critics of globalisation are greatly worried about its environmental effects and unsustainability. Here there are several concerns. For instance, there are examples of multinational mining, chemical and other manufacturing companies that deliberately set up plants in poorer countries overseas (e.g. India, China, Indonesia, Papua New Guinea or Mexico) to avoid the tougher pollution and emission standards in their home country. This helps to cut their costs and raise profits. The countries they are visiting are often reluctant to strengthen controls, because they fear they will suffer economically if the company pulls out. Despite this claim, it is still a matter of debate about whether or not locally owned corporations are any more environmentally responsible in their conduct, than foreign business visitors. Globalisation may lead to social unrest If the differences in incomes between the world’s rich and poor are growing and become even more obvious through media images (as is the case according to some), then according to Professor Wade of the London School of Economics, this may pose a real worry. ■ To improve their financial position, will the politically powerful in low-income countries try to extract even more income from the poor, or become more corrupt to achieve their own financial goals? ■ Will the educated leave poor countries (i.e. a ‘brain drain’ that has disastrous economic effects) and seek illegal entry into richer countries? ■ Will the failure to share the world’s resources more fairly lead to illegal mass migration that could weaken the economies of rich countries? ■ Will frustration and a feeling of injustice, inequality and jealousy, promote international terrorism, directed against rich nations? 298 Economics Down Under Book 1 Lifting national savings and investment to break the poverty cycle As mentioned, Third World nations have low subsistence levels of income and high levels of poverty. After purchasing basic necessities, little or no household income remains for saving. However, without saving (either by households, firms or governments), there is no finance for investment in capital equipment that is needed to start and grow businesses, or provide government infrastructure, unless there is a rise in borrowing. Even if credit is available, it is very expensive. This is reflected in high interest rate repayments. In turn, this makes starting private businesses almost impossible and most households lack the basic requirements for gaining a credit rating so that they are eligible for borrowing from a bank. In addition, if governments borrow, there is the ongoing burden of repayments. In turn, with low levels of investment in equipment and new technology, labour output per hour worked (i.e. efficiency) is very small indeed. As a result, hourly pay rates and incomes are awfully low. As seen in figure 9.11, this sets up a poverty cycle, which will persist, unless it is somehow broken. 1. Low levels of output per worker per hour causes average incomes per head per year to be low, so there is poverty and only some basic items are affordable. 4. Low investment spending on new equipment and technology makes labour efficiency very low. The vicious cycle of poverty in low-income countries 2. Low levels of national saving are due to subsistence levels of income. 3. Inadequate savings make borrowing credit to set up and finance business investment spending very expensive, so investment levels are very low. Figure 9.11 The vicious cycle of poverty and underdevelopment in low-income countries Breaking out of this cycle is not easy. It may take considerable time and requires a combination of many strategies, including perhaps some of the following. ■ Governments must set up and supervise, well run financial institutions to collect whatever household savings there are. ■ International capital inflow or investment (but with appropriate guidelines to maximise the benefits for the local community) must be encouraged. ■ International aid and gifts need to be encouraged that do not have harsh conditions attached that hurt the local community. ■ A system of micro-credit needs to be created where small sums of money, perhaps as little as $100–200, are provided to those who want to start up a small business and who, otherwise, would not qualify for bank loans. This needs to be supplemented with some free basic business training. ■ The government needs to ensure that the rich in particular, pay the required taxes (on incomes and luxury goods) to help finance for public investment and infrastructure projects. ■ Government incentives are needed to encourage private investment in projects that help promote national selfsufficiency in food and basic community services. ■ Measures (e.g. proper accounting and transparent record keeping) are needed to help avoid wasting or misusing the government’s limited financial resources. ■ Exports (e.g. cash crops and basic manufactured items) need to be encouraged to help boost national income and savings. Reforming government and promoting democracy Poor countries badly need political democracy where the majority of voters in regular and free elections, choose the government from a range of candidates representing different political parties. In addition, it is also vital that freedom of speech and freedom of the press or media (i.e. where it is possible to be critical of government policies) are protected in national laws. These things add to transparency and help to hold governments accountable for their actions. Unfortunately, these important principles are frequently missing in low-income countries and lead to incompetence, corruption, ineffective government, chaotic public institutions, civil disobedience and war. This does much to slow economic progress. Bringing about the necessary change is exceedingly difficult in countries where these important concepts are not understood. Rich countries must reduce their protection of industry Many rich nations protect their farmers and miners from competition by poorer countries that are trying to export primary and basic manufactured products. Here, we think of the heavy protection of farmers in the US, Japan and the European Union by means of tariffs, subsidies and import quotas. However, we also think of the attempts by Australia and some developing countries through numerous rounds of multilateral trade negotiations, to convince these rich countries of the need to expand free trade. Progress here has been slow. Unfortunately for poor countries, this protection by rich nations directly cuts their sales of crops and minerals. Their export incomes are lower than otherwise. In addition, without cash sales for exports, many poor countries have problems purchasing necessary imports of equipment, medicines and technology. It forces them to run up huge international debts on which interest then has to be paid to rich nations. This slows their economic progress, and helps to perpetuate the poverty cycle. Provision of basic infrastructure Having adequate infrastructure including education, health, power, water supply, transport, and law and order, is an important key to growing the nation’s productive capacity. This is because all industries need these things to produce goods and services. Unfortunately, most low-income countries have hopelessly inadequate and unreliable infrastructure. Power supply blackouts are common, water is not safe to drink or is in short supply, flooding is common, sanitation inadequate, roads are congested or impassable, railways are unsafe, communications are unreliable and public buildings are run down. Clearly there needs to be a big injection of investment or capital into these areas (probably initially by the government), to improve living standards and grow the capacity of local and foreign businesses to produce more output. Managing debt levels Debt levels in most poor countries are often high and represent well over 100 per cent of their GDP. This causes crippling interest repayments to rich nations and reduces the level of government spending on infrastructure. Debt needs to be cut to manageable levels, wasteful ‘white elephant’ type projects that add little to welfare, terminated, substantial military expenditures cut and governments held accountable for all spending. The writing-off or forgiveness of some past debt, by rich countries, as in 2005–06, provides a breather, but is not a permanent solution. Additionally, borrowed money needs to be used CHAPTER 9 Economic globalisation 299 efficiently for projects that bring widespread improvements in the capacity of the economy to produce goods and services that encourage national self-sufficiency and independence. Reducing inequality in income and wealth Income inequality is often larger in poor countries (e.g. the Gini coefficient is between 0.5 and 0.7 in Namibia, Central African Republic, Zambia, Papua New Guinea and Nigeria), than in rich nations (e.g. the Gini is less than 0.35 in Australia, Canada, US, UK, Japan). Frequently, inequality is reinforced by unequal ownership of land, official corruption, the absence of democracy, closed markets, state and private monopolies, special favours involving deals with the government and the abuse of social, political and economic power. Democratic governments can best deal with economic inequality by introducing fairly progressive income taxes, promoting proper competition in markets to check personal greed, tacking corruption, and providing basic community services. Reducing population pressures Population in some low-income countries is growing quickly at more than double the rate of high-income nations (some of which actually have declining populations). This places great strain on the government’s provision of infrastructure and services including transport, water, education, law and health. However, the great burden created by population pressures can be eased. Historical experience tells us that birthrates slow and families get smaller if there are improvements in general health (e.g. clean water supply and control of malaria) and education standards, and by lowering the child mortality (death) rate. This is because apart from common ignorance about family planning and health matters, to some extent, large families often reflect the uncertainties of infant survival and old age, in countries where there is no government welfare system (e.g. age pensions). Tackling unemployment and idle resources Unemployment and underemployment (workers operating below their productive capacity) are huge problems in most poor countries. Rates can be as high 80–90 per cent as in Zimbabwe, Nauru and Liberia, for example. In part, the problem reflects a lack of investment, political instability, an uneven distribution of land ownership, inadequate skills, training and education, a poor business climate where investment is low, and the absence of government infrastructure or services. Mention has already been made about possible solutions to many of these problems. IS THERE AN ALTERNATIVE TO GLOBALISATION? Is there an alternative to the full acceptance of globalisation? According to some, the answer to this question is ‘yes’. A number of protestors and opponents of globalisation (and its main body, the World Trade Organization or WTO) have proposed a different and supposedly more beneficial way to help low-income countries escape poverty. For example, in her 300 Economics Down Under Book 1 article, ‘Time to replace globalisation’ (2004), Caroline Lucas of the Greens–European Free Alliance in the European Parliament, is critical of globalisation. She raises a number of issues. ■ She argues that globalisation is based on the Darwin-type theory of competition, survival of the fittest, the race to the bottom (who can have the lowest production costs), greed by the richer nations and the unsustainability of globalisation’s material emphasis. She also claimed that globalisation is based on ‘myths’ that she tries to expose, one by one. These myths include the following: – globalisation is the only alternative path to economic development – globalisation’s progress is inevitable – globalisation is good for the poor – comparative cost advantage is the most efficient way to use resources – more globalisation means more jobs. ■ She outlines an alternative to the failed and unsustainable system of globalisation. She calls her proposal, ‘localisation’ which is more or less the exact opposite to globalisation. This is explained as ‘a set of interrelated and self-reinforcing policies that actively discriminate in favour of the more local’. Localisation helps to provide an economic and political framework for people, community groups and local businesses to rebuild and rediversify their economies that have been partly destroyed by exposure to uncontrolled international free market competition. She believes that the following proposals will also help to rebuild social cohesion in communities and help to heal environmental damage caused by the unsustainable practices of some greedy multinationals. It is not based ‘. . . on competition for the cheapest, but on cooperation for the best . . . ’. Promoting this ideal could involve the introduction of following measures: – the selective use of tariffs and import quotas to give infant industries a chance to get established – controlling capital or investment flows, along with tax evasion by multinationals – giving preference to producers and suppliers that manufacture locally (i.e. ‘site here to sell here’) – developing a local competition policy to eradicate protected monopolies that push up prices and exploit consumers – trying to increase the level of democratic involvement in decision making, both economically and politically – introducing ecological taxes on energy, polluters and users of non-renewable resources – redirecting international aid and trade rules (e.g. those set down by the WTO) so they are more flexible and friendlier towards building sustainable local industry and national economies – encouraging rich nations to show far greater international leadership, and adopting a more ethical and responsible position. TRY APPLIED ECONOMICS EXERCISE 5, p. 305 TRY COLLECTION AND 1, 2, p. 312 ANALYSIS OF NEWSPAPERS TRY WATCHING A VIDEO p. 315 9.6 The nature and effect of Australia’s foreign aid Foreign aid represents the transfer of funds and other types of assistance by governments and private individuals from high income to lower income countries. If used properly, aid can be an important way of helping poor countries to improve their living standards. Most importantly, this assistance can help to break the vicious cycle of poverty and raise per capita incomes. It does this by raising the funds available for investment, lifting efficiency and accelerating productive capacity. There are three types of foreign aid summarised below: The three forms of foreign aid 1. Loans. There are three types of loans — hard loans or credit offered at the normal market rate of interest; soft loans offered at a special discounted interest rate; and tied loans, where conditions are imposed such as requiring that the money be used to purchase exports from the donor country. Of these, soft loans are probably the most beneficial for the recipient country. (continued) 2. Grants. Grants are straight-out donations of cash that do not need to be repaid. When used wisely, this is perhaps the best type of help that high income countries can offer. 3. Technical and other assistance. This involves the donor country providing scientific, economic, educational, technical, industrial, agricultural or military personnel. With the possible exception of the latter group, these people advise on matters relating to economic development. Figure 9.12 (below) shows Australia’s level and direction of government foreign aid for 2005–06 which totalled $2491 million. The largest recipients of our foreign aid include Papua New Guinea, Indonesia, Solomon Islands, Regional Pacific, Vietnam, Africa, Middle East and Central Asia, and China. Figure 9.12 also compares aspects of levels of foreign aid in selected countries. Impressive as this may seem, it is sad knowing that many other countries are far more generous with their foreign aid programs as judged by the ratio of aid to GDP. In Australia’s case, this is a mere 0.26 per cent of our GDP. Figure 9.12 Snapshot of foreign aid donated by the Australian Government, 2005–06 Key destinations of Australian Government foreign aid for 2005–06 ($ millions — excludes private aid) Papua New Guinea Indonesia Solomon Islands Regional Pacific Vietnam Africa Middle East and Central Asia Philippines China Regional East Asia Cambodia East Timor Vanuatu Bangladesh India Regional south Asia Sri Lanka Samoa Laos Tonga Kiribati Naiuru (additions funding) Thailand 0 100 200 300 400 500 600 A$ (millions) (continued) CHAPTER 9 Economic globalisation 301 NET GOVERNMENT FOREIGN AID FOR SELECTED COUNTRIES, 2005–06 COUNTRY AMOUNT OF GOVERNMENT FOREIGN AID DONATED (US$ MILLIONS) COUNTRY AMOUNT OF GOVERNMENT FOREIGN AID DONATED (US$ MILLIONS) 1. Japan 8900 7. Italy 1000 2. United Kingdom 7900 8. Australia 894 3. United States 6900 9. South Korea 423 4. Denmark 2000 10. Portugal 5. Norway 1400 11. New Zealand 6. Switzerland 1100 12. Lesotho 271 99 4 Source: Graph data derived from Year Book Australia, 2006 ABS 1301.0. Table data derived from CIA Factbook. TRY APPLIED ECONOMICS EXERCISE 6, p. 306 TRY COLLECTION AND 3, p. 314 ANALYSIS OF NEWSPAPERS TRY TEAM DEBATES 302 Economics Down Under Book 1 4, 5, 6, p. 306 School Assessment tasks and learning activities In order to satisfactorily complete VCE Economics Unit 2, part 2, the teacher must decide whether a student has demonstrated the achievement of the specified key knowledge and key skills for Outcome 2 (see details on p. 228). The teacher’s decision should reflect results from school-based assessment. Generally, this should take place as part of the normal teaching and learning program. In addition, most assessment will be completed in class under a limited time frame. With this in mind, teachers may select from an appropriate range of tasks that could include the following. SCHOOL ASSESSMENT TASKS AND LEARNING ACTIVITIES 1. Multiple-choice and short-answer tests 9. Case studies 2. Folio of applied economics exercises 10. Report of an investigation 3. Analysis of written, visual and statistical evidence 11. Web quests 4. Essays 12. Web page design 5. Debates 13. Simulations 6. Presentations (oral, multimedia, visual, posters) 14. A folio of economic exercises using print or electronic materials 7. Multimedia presentations 15. Problem-solving tasks 8. Role plays A range of these activities has been provided in the following pages. MULTIPLE-CHOICE test questions Using the multiple-choice answer grid below, select the letter (A, B, C, D) that represents the most appropriate answer for each question by marking it with a tick (✔). Answer grid QUESTION 1 2 3 4 5 6 7 8 9 10 11 12 A B C D Question 1 Economic globalisation involves: A multinational and transnational companies B the movement of money capital and production from country to country C a move towards the creation of a single international market for particular goods or services D all of the above features. Question 2 Concerning economic globalisation, which statement is generally false? A The process has been under way now for over 200 years. B The process did not start until the 1940s. C The process did not start until the 1980s. D The process did not start until the 1990s. Question 3 The process of economic globalisation has not been helped by: A the continued existence of tariffs and other government controls in different economies B market deregulation in Australia and elsewhere C cheap electronic communication and faster transport systems D international differences in the cost of labour and other resources needed for production. CHAPTER 9 Economic globalisation 303 school assessment tasks and learning activities 9.7 Question 4 Concerning economic globalisation, which of the following is false? A David Ricardo was an Italian economist who made the idea of globalisation popular in the 1990s. B Colonisation by European nations in Africa, India, Asia, Australia and the Americas resulted in the international growth of commodity trade. C World Wars I and II slowed the process of globalisation. D International agreements such as WTO and the creation of the EU helped globalisation. Question 5 Which statement about the annual sales of Microsoft and other multinational corporations is false? Microsoft’s annual sales are higher than: A Australia’s GDP B Israel’s GDP C Norway’s GDP or General Electric’s annual sales D Poland’s GDP or Toyota’s annual sales. school assessment tasks and learning activities Question 6 Which statement is generally false? Economic globalisation helps: A corporations to take advantage of differences in labour costs that are an important consideration in the manufacture of some goods B provide corporations with access to natural resources that would not otherwise be available in their country of origin C to increase per unit costs of production for corporations by diversification in production D to increase the flexibility of corporations in decision-making to maximise profits. Question 7 Economic globalisation is helped by governments that: A have fewer environmental laws B impose higher tax rates on foreign companies C have minimum wage legislation as in Australia D offer production subsidies only to locally-owned firms. Question 8 Economies of large scale gained by some multinational corporations most accurately involve: A mass production B lower variable costs as production is increased C lower per unit fixed costs because these costs can be spread more thinly over more units of output D the exploitation of labour as a means of lifting profits as companies get bigger. Question 9 Which of the following is not normally an effect of economic globalisation? A Economic growth is usually increased by greater efficiency and larger export volumes. B Inflation is increased. C Up to a point, the product range for consumers may be increased. D Governments need to consider the effects of their policies on the reaction of global traders and markets, and the impact on the inflation rate since these considerations affect our international competitiveness. Question 10 Economic globalisation may cause: A the disappearance of some national companies or their takeover by foreign investors B massive shifts in population and the spread of illegal drugs and crime from one country to another C the depression of local wage levels towards those in cheap labour countries overseas D all of the above. Question 11 Concerning the Nestlé corporation, which statement is false? A Production is undertaken only in Switzerland even though its products are sold globally. B Its market size grew partly as a result of its own product innovation. C In part, the company expanded by means of takeovers of proven companies operating in markets around the world. D At times, its expansion was interrupted as a result of wars, global recession and adverse moves in some exchange rates. Question 12 It is likely that Nestlé started operations in Australia partly because: A we drink more coffee and eat more chocolate than anyone else B of our nearness to Asian markets and our reasonably large and rich domestic market C wage costs here are lower than elsewhere in our region D our government gives them lower tax rates and other concessions that are not given to locally-owned companies. TERMINOLOGY revision Briefly and accurately write out definitions for each of the terms listed below. Table 9.2 Economics terms used in chapter 9 company merger fixed production costs of a firm labour intensive industries company takeover foreign aid micro-credit comparative cost advantage globalisation multinational company deregulation of financial markets horizontal integration of firms productive capacity of a nation deregulation of the labour market human development index vertical integration of firms economies of large-scale production infrastructure vicious cycle of poverty 304 Economics Down Under Book 1 Question 1 A What is meant by the term, ‘economic globalisation’? B It took 38 years after its invention for radio to be used by 50 million consumers, 16 years for personal computers, 13 years for TV, and only four years for the World Wide Table 9.3 Web! How has the WWW helped to accelerate the globalisation of commerce and business? C Examine the data contained in table 9.3 showing changing transport and communication costs. How have declining transport and communication costs helped the process of globalisation and the spread of multinationals? Changing transport and communication costs ($US) YEAR SEA FREIGHT/ TON AIR TRANSPORT/ MILE TELEPHONE CALL/3 MINUTES, LONDON– NEW YORK COMPUTERS INDEX (1990 = 100 POINTS) 1920 $95 NA NA NA 1930 $60 $0.68 $245 1960 $27 $0.16 $32 12 500 1990 $29 $0.11 $3 100 NA Source: Data derived from Human Development Report, 1999 (OUP, 1999); IMF, 1997a. D How did colonisation by European powers some centuries ago help to lead to globalisation? E Using an encyclopedia in your school library (or one such as Encarta on CD-ROM), find out details about David Ricardo’s economic theory of international specialisation and comparative cost advantage and use this to write a brief report. Question 2 A Which countries are seen by multinationals as low-wage countries? Explain how wage differences lead to globalisation. B What are economies of large scale? Explain how globalisation can help multinationals gain economies and better profits. C Explain the methods used by some governments to attract multinationals. Why are governments often keen to do this? Question 3 A Globalisation has meant that the Australian economy has had to undergo change and become more internationalised. What sorts of change have been forced upon the Australian Government and society due to economic globalisation? B Outline one cost and two benefits to Australia of economic globalisation. Question 4 A What makes Nestlé a multinational corporation? B What methods did Nestlé use to gain its dominant position of the world’s largest food producing company? C Did Nestlé try to exploit the situation by locating production in low-wage countries or was the decision determined by the location of its main international markets? D Discuss the costs and benefits to Australia of Nestlé’s local operations. E For a very critical look at Nestlé’s international activities you may (with your teacher’s approval) search the Internet for appropriate references. Question 5 Examine table 9.4 showing statistical indicators (mostly for 2005 or 2006) for high and low globalised countries. Table 9.4 INDEX OF GLOBALISATION (higher value means more globalised or open economies) GDP PER HEAD (US$ in purchasing power parity terms that allow for inflation and the cost of living) POVERTY RATES (% population) Australia 5.08 30 161 NA Rwanda 0.92 1 321 60 China 3.23 5 453 10 Iran 2.08 7 424 40 Zimbabwe 2.22 NA 80 Switzerland 5.57 33 062 NA Niger 1.50 832 63 COUNTRY Source: Data derived from NationMaster website. CHAPTER 9 Economic globalisation 305 school assessment tasks and learning activities APPLIED ECONOMICS exercises A What is globalisation? B Quoting examples, is there any apparent relationship between the level of globalisation and material living standards? Explain your answer. Table 9.5 C Why might globalisation in some countries have the effects mentioned in question B? D Select one of the three weaknesses listed in table 9.5 and then explain how globalisation may have negative effects in some low-income countries. Some weaknesses of globalisation EXPLANATION OF THE NEGATIVE EFFECTS OF GLOBALISATION WEAKNESS OF GLOBALISATION 1. Lack of food produced for consumption by the local population 2. Exploitation of workers 3. Social and political unrest nationally and internationally E For the moment, assume that globalisation helps to lift the incomes of people in poor countries. However, on its own globalisation is not enough to make people better off. There are other obstacles to economic development and higher incomes. List and briefly explain three other problems common to low-income countries that need to be corrected if there is to be a rise in general living standards (i.e. GDP per person). ESSAY Write a 400-word essay that weighs up ‘the important costs and benefits of economic globalisation for Australia’. TEAM debate After dividing into teams (one for the affirmative and one for the negative), work with others to prepare a debate about one of the following topics: 1. ‘That economic globalisation is a blessing not a curse for Australia and the global economy.’ 2. ‘That economic globalisation leads to a lack of consumer choice and a way of life modelled on that of the United States.’ 3. ‘That economic globalisation must be stopped before it is too late.’ 4. ‘That foreign aid is unimportant and, anyway, it does not get to those in most need.’ 5. ‘That Australia’s foreign aid should stop and the money be devoted to helping indigenous Australians who are often living in Third World conditions.’ 6. ‘That with sufficient capital for investment, a low income country could quickly become a high income country.’ REPORT ON an investigation Figure 9.13 GDP-based map of the world Source: Financial Review, 19 February 1997, p. 26. B Foreign aid can be one way of reducing global income inequality. Define what is meant by foreign aid. C Name the three main types of foreign aid. Which type of aid is generally most useful in promoting higher production and which type is least useful to the country receiving the aid? 306 Economics Down Under Book 1 ➜ school assessment tasks and learning activities Question 6 A Global income is divided very unevenly between countries. Examine figure 9.13. It has been specially drawn so that the area of the country reflects the size of its GDP relative to other countries. From the map, which three countries appear to have the largest GDPs and which three of those named have the smallest GDPs? D How much foreign aid does Australia give each year? Explain how this aid can help to raise living standards in economically poor countries. Visit the website for this book and clock on the weblinks for this chapter (see Weblinks, page 000). The task This is a small group activity and it involves some research into various aspects of a multinational corporation such as American Express, BHP–Billiton, Deutsche Bank, Exxon, Ford, General Electric, Johnson & Johnson, McDonald’s, Microsoft, Nike, Shell, Sony and Union Carbide. You may like to find out information about the following: the structure and size of the organisation the reasons for its global expansion how the company gains a competitive advantage the use of technology in the corporation the nature of the relationship between the corporation and the host country ■ use ‘Google’ as a search engine to try and find criticisms of these companies. OR An alternative to the research theme outlined on the previous page is to conduct a survey in your home of the basic goods and services purchased by your family. Discover what proportion of the basket of items in your home is produced or sold by foreignowned multinationals as opposed to locally-owned firms (note — the AusBuy Guide is useful for this purpose). Your basket of items for the survey might include: 1. electrical appliances 2. car 3. breakfast cereal 4. banking 5. shoes 6. fruit 7. underwear 8. hair shampoo 9. insurance 10. magazines. Use your survey results to: ■ construct graphs showing the degree of foreign business penetration into the Australian market ■ find out more about a number of the companies noted in your survey (e.g. their home base, their size, their marketing strategies, their impact on the Australian economy and so on). Presentation Your group’s findings could be reported in various ways. For example: ■ a PowerPoint data show involving computer-generated slides presented to the class ■ a wall chart or poster ■ a class talk, perhaps illustrated using overhead transparencies containing graphs, diagrams, flow charts, advertising materials, photographs ■ a written report of 400 words containing graphs and other illustrative evidence. References Use of the Internet can be a great way to obtain information about some multinational corporations. Most companies run their own home pages. RESEARCH and analysis The task Working individually or in small groups, your task here is to imagine that you are an owner of an Australian manufacturing business wanting to expand your operations to become a multinational. You are investigating possible countries for your expansion plans. For example, would you want to grow your Australian business, or would you go offshore, perhaps to China, Fiji, Philippines, Indonesia, India, United Kingdom, United States or Brazil? To get you thinking, start by reading the article, ‘Advance Australia where? Our brand drain’. Also examine the table showing what has happened to dwindling number of Australian firms and their well-known brand names over the years. Advance Australia where? Our brand drain By KATE ADAMSON, Consumer reporter THERE are only a handful of iconic Aussie brands still made in Australia and owned by Australians. A Sunday Herald Sun survey found only eight of 42 well-known Australian brands remain truly Australian. The mass exodus to foreign shores comes as companies resort to using cheaper labour in China and other developing countries. Or the brands have been victims of takeover deals by global giants. One of the few remaining Australian made and owned products, Blundstone boots, announced last week it would make the boots in Thailand and India. It will shut its Hobart plant, sacking more than 300 workers. It joins other Australian brands being made overseas such as King Gee Jeans, Kookaburra cricket bats and Pelaco shirts. Tim Tam, Holden, Milo and Sherrin footballs are still made here, but are owned by foreign companies. And the Hills Hoist clothes line, featured in the Sydney Olympics opening ceremony, moved production to China last month. ‘The cost to make some things in Australia is higher than to make the same thing in China,’ Hills Hoist spokesman Graham Twartz said. Australian Manufacturing Workers’ Union Victorian secretary Steve Dargavel said manufacturing, which employed more than a million Australians, was dying. ‘It’s not because wages are too high, it’s because Federal Government policy has failed us,’ Dargavel said. Social analyst David Chalke said Australians were emotionally attached to many brands, but hip pockets came first. ‘On a simple level we want the Australian cricket team to win and we want Australian manufacturing to win,’ Mr Chalke said. ‘But if it can’t, we think it’s not our fault. It’s not our job to save companies. Our job is to feed the kids and pay the mortgage.’ CHAPTER 9 Economic globalisation 307 school assessment tasks and learning activities ■ ■ ■ ■ ■ AUSTRALIAN OWNED AND MADE FOREIGN OWNED, BUT MADE IN AUSTRALIA AUSTRALIAN OWNED BUT MADE OVERSEAS Rosella tomato sauce Vegemite — Kraft, US Jockey underpants — China Four’N Twenty pie Holden Commodore — General Motors, US Sunbeam kettles — China Akubra hat Bonds singlet Kookaburra cricket ball Drizabone oilskin coat RM Williams boots Victa lawn mower Sheridan sheets — China Sherrin football — Russell Athletic, US SPC Ardmona — Coca Cola, US FOREIGN OWNED AND MADE Bushells — Unilever, Britain/ Netherlands — Indonesia Speedo — Pentland, Britain — China Hills Hoist — China Vicks Vaporub — Procter and Gamble, US — India Kookaburra cricket bats — India Redheads — Swedish Match — Sweden Billabong — China Uncle tobys — Nestlé, Switzerland Pelaco shirts — China Tim Tam — Campbell’s, US KingGee —China Aeroplane Jelly —McCormick, US Stubbies — China Slazenger — China Streets ice-cream — Unilever, Britain/ Netherlands Malvern Star — China Berri juice — National Foods, Philippines Big M — National Foods, Philippines Milo — Nestlé, Switzerland Western Star butter — Fonterra, New Zealand Allens sweets — Nestlé, Switzerland Cherry Ripe — Cadbury, Britain Cheezels — Campbell’s, US Violet Crumble — Nestle, Switzerland Nobbys Nuts — PepsiCo, US Mortein — Reckitt Benckiser, Britain Aerogard — Reckitt Benckiser, school assessment tasks and learning activities Britain Source: Herald Sun, 28 January 2007. Select one of the products mentioned in the article and imagine you owned the company that produced this item. In deciding in which country to locate your new operations, try to consider a selection of the following aspects (as applied to the product you selected): ■ the level of wage rates or labour costs ■ labour force size and level of education and training ■ market size (located domestically and overseas) ■ transport or freight costs of materials and finished goods (both domestically and to overseas) ■ the cost of borrowing business credit to finance your expansion ■ government policy towards overseas firms and the environment (in the selected country) ■ the provision of infrastructure (e.g. government provision of water, power, transport) ■ rates of company tax 308 Economics Down Under Book 1 ■ the availability and cost of the natural and other resources you require ■ the level of competition faced (e.g. are there rival firms?). References You will need access to a computer and the Internet in order to conduct research into the areas of consideration that are listed above. Some statistical and other data might be found using the following sites that provide general information about many countries: ■ CIA data base ■ OECD data base ■ World Bank data base ■ NationMaster ■ ACTU or the international labour movement. In addition, use various search engines (e.g. Google) to locate the necessary information. The statistical data found in table 9.6 (pp. 309–12), for example, have been mainly extracted from the Internet. It may give you a useful start. Try to select a country for which relevant information is available. PART 1 Some factors affecting where multinational companies locate their operations COMPARISONS OF WORKER EFFICIENCY (LEVEL OF OUTPUT PRODUCED PER WORKER PER HOUR) Ranked comparisons of labour productivity (GDP per hour worked adjusted to purchasing power parity) from highest to lowest Productivity index as % US (US = 100 points) Ranked comparisons of labour productivity (GDP per hour worked adjusted to purchasing power parity) from highest to lowest Productivity index as % US (US = 100 points) 1. Netherlands 129 15. Australia 80 2. Luxembourg 126 16. Spain 80 3. Belgium 111 17. Italy 78 4. Ireland 104 18. Canada 77 5. France 101 19. Iceland 73 6. Netherlands 101 20. Japan 70 21. Greece 61 7. United States 100 = base 8. Germany 92 22. New Zealand 59 9. Denmark 89 23. Portugal 48 10. Sweden 89 24. Hungary 46 11. Austria 85 25. Korea 40 12. United Kingdom 84 26. Poland 39 13. Finland 83 27. Mexico 30 14. Switzerland 82 28. Turkey 28 PART 2 COMPARISONS OF WORKER EFFICIENCY BY INDUSTRY AGAINST THAT FOR THE US Industry US Australia Germany Japan South Korea (% US worker efficiency) United Kingdom (% US worker efficiency) (the base for comparison = 100%) (% US worker efficiency) (% US worker efficiency) 1. Rubber and plastics 100 67 65 82 118 10 2. Textile products 100 66 91 64 80 28 3. Basic fabricated metals 100 56 81 81 43 31 4. Chemicals, petroleum and coal 100 51 54 71 65 18 5. Paper, printing and publishing 100 45 77 55 48 19 6. Food products 100 44 65 32 43 10 7. Machinery, transport and equipment 100 44 86 98 59 28 8. Electricity, machinery and equipment 100 37 71 80 51 30 (% US worker efficiency) CHAPTER 9 Economic globalisation 309 school assessment tasks and learning activities Table 9.6 PART 3 COMPARISONS OF WAGES TO LABOUR PRODUCTIVITY AND THE LABOUR COST PER UNIT OF PRODUCTION EXPRESSED AS A PERCENTAGE OF US DATA, 2002 Wages (A) US Labour Productivity (B) Unit Labour Cost (A/B = 100) 100.0 100.0 100.0 Sweden 74.5 53.8 138.5 Japan 62.6 67.8 92.3 Singapore 49.0 49.0 100.0 Taiwan 43.1 24.4 176.9 Korea 27.0 43.9 61.5 Chile 26.2 42.5 61.5 Mexico 16.3 30.3 53.8 Turkey 15.7 22.7 69.2 Malaysia 10.9 12.9 84.6 Philippines 8.6 15.9 53.8 Bolivia 7.7 16.8 46.2 Egypt 5.9 5.1 115.4 Kenya 5.4 3.5 153.8 Indonesia 4.6 6.6 69.2 Zimbabwe 4.6 5.0 92.3 India 3.1 2.9 107.7 China 2.1 2.7 76.9 PART 4 COMPARISONS OF RATES OF COMPANY TAX (%) ON PROFITS school assessment tasks and learning activities Ranked comparisons of countries by company tax rate Tax rate on profits (%) (latest) Ranked comparisons of countries by company tax rate Tax rate on profits (%) (latest) 1. Egypt 50 (down to 25) 16. Indonesia 30 (down to 10) 2. Iran 54 (down to 12) 17. China 30 3. United States 40 18. Thailand 30 4. Germany 38 19. Taiwan 26 5. Italy 37 20. Sweden 27 6. India 35 21. Russia 25 7. Spain 35 22. European Union average 25 8. Japan 35 (down to 25) 23. Austria 25 34 24. Vietnam 25 10. France 33 25. Hong Kong 16 11. Greece 32 26. Hungary 16 12. Netherlands 31 27. Poland 19 13. Australia 30 28. Ireland 12 14. UK 30 29. Cyprus 10 15. Denmark 30 30. Estonia 1 9. Belgium 310 Economics Down Under Book 1 COMPARISONS OF LEGAL MINIMUM WAGES Ranked comparisons of minimum hourly wage rates or labour costs for manufacturing workers US$ per hour (approximate, 2006 or 2007) Ranked comparisons of minimum hourly wage rates or labour costs for manufacturing workers US$ per hour (approximate, 2006 or 2007) 1. Ireland 11.25 10. Argentina 2.00 2. France 10.80 11. Taiwan 2.00 3. Australia 10.50 12. Russia 1.50 4. United Kingdom 10.00 13. Estonia 1.30 5. Canada 8.00 14. Pakistan 0.90 6. Japan 5.60 15. China 0.60 7. Brazil 5.40 16. India 0.40 8. United States 5.15 17. Sri Lanka No minimum 9. South Korea 3.72 18. Indonesia No minimum PART 6 COMPARISONS OF AVERAGE LABOUR COSTS FOR MANUFACTURING WORKERS Ranked comparisons of average hourly wage rate index of labour costs for manufacturing workers Index of wage rate (expressed as a % of US = base of 100 points) Ranked comparisons of average hourly wage rate index of labour costs for manufacturing workers Index of wage rate (expressed as a % of US = base of 100 points) 1. Denmark 145 16. Japan 89 2. Norway 144 17. Canada 85 3. Germany 140 18. Ireland 84 4. Switzerland 127 19. Italy 81 5. Belgium 126 20. OECD average 80 6. Finland 125 21. Spain 69 7. Netherlands 121 22. Israel 55 8. Austria 120 23. New Zealand 50 9. Sweden 119 24. Singapore 35 10. Europe average 111 25. Asian industrialised 32 11. Luxembourg 107 26. Portugal 24 27. Taiwan 22 12. United States 100 = $22 per hour 13. France 95 28. Hong Kong 22 14. United Kingdom 90 29. Brazil 11 15. Australia 89 30. Mexico 10 CHAPTER 9 Economic globalisation 311 school assessment tasks and learning activities PART 5 PART 7 COMPARISONS OF THE COST TO BUSINESSES OF BORROWING CREDIT OR FINANCE Ranked comparisons of bank interest rates on loans to businesses, 2006 or 2007 Annual interest rate (%) Ranked comparisons of bank interest rates on loans to businesses, 2006 or 2007 Annual interest rate (%) 1. Australia 9.60 6. Hong Kong 7.75 2. United Kingdom 8.30 7. Indonesia 6.25 3. United States 8.25 8. Germany 4.38 4. New Zealand 8.20 9. Singapore 5.33 5. Canada 7.85 30. Japan 1.63 school assessment tasks and learning activities Source: Part 1, Data derived from OECD, productivity database, January 2006. Part 2, These figures should only be used as a general guide, they are now rather dated and probably tend to exaggerate the current difference in worker efficiency with US workers following government efficiency policies (e.g. tariff cuts, workplace agreements) and improved productivity growth, 1994– 2006. Data derived from an article by Fiona Carruthers, ‘US workers twice as efficient in factory output’, The Australian, 24 August 1994, p.4. Part 3, derived from China in Transition, ‘The myth of Chinese Competitiveness — are low wages China’s strength or weakness?’ by Chi Hung Kwan, (August 2002, p. 2) quoted from the United Nations Conference on Trade and Development (UNCTAD), Trade and development report, 2002. Part 4, Data derived mainly from Business Council of Australia, KPMG Corporate Tax Survey, 2004, World Bank and other sources. Part 5, Data derived mainly from Wikepedia, the free encyclopedia. Part 6, Data derived from the US Bureau of Labour Statistics and other sources. Part 7, Data derived from RBA Bulletin (table F14) and other sources. Presentation You need to prepare and submit either: ■ A written company report OR ■ A multimedia presentation that reports your findings and conclusions to the class (involving a PowerPoint presentation) In setting out your findings, you might include the following: ■ Introduction. An introduction that outlines the product or company you chose to research. ■ Factors considered important. Select, justify and explain the main considerations (select a range from the list given and or include other important factors) that would be important for your expanding company, in making a decision about which country you would choose for location. You should also include why you selected one country over another? ■ Conclusion. Sum up your findings. Presentation ideas Illustrate your work with diagrams, downloaded digital photos, cartoons, tables, and Excel generated graphs. This activity would take a minimum of 6–7 lessons to complete. COLLECTION AND ANALYSIS of newspapers 1. Collect any two newspaper articles about the issue of globalisation. For instance, these articles may report: ■ the activities and impact of a multinational corporation ■ international discussions relating to reducing tariffs and farm subsidies ■ the expansion of international free trade areas ■ recent government policies to make the Australian economy more internationally competitive. Use the newspaper reports as the basis of analysing the particular issue or topic you have selected. You may present your analysis in different ways, perhaps as a short written 312 Economics Down Under Book 1 piece of work or why not try a class presentation (e.g. a PowerPoint data show, class talk with overhead projector transparencies, a wall poster for display). 2. There is much poverty around the world and income inequality between countries is huge. Sometimes people in rich countries would like to help but do not know where to start. They often feel powerless. However, each of us could make a difference. It is not always a matter of giving large ‘handouts’ to those in poor countries, but rather, a matter of providing them with a ‘helping hand’ so that they can become economically self-sufficient and permanently independent. Years ago, an Australian, David Bussau had the idea of using micro-credit to make a difference. It involves providing individuals and groups (often women) with a small amount of money capital to start up a business (perhaps made possible by the purchase of a sewing machine to manufacture clothes, an oven to prepare food, or basic tools for farming). This could involve lending as little as $100–$200. In addition, interest rates on these loans are low and repayment times are very flexible to help improve the opportunities for business success. A strength of this scheme, is that the original money can be used over and over again to help start up new income-generating activities. Normally, these people would not be able to borrow credit from banks, because they are considered a bad risk. Alternatively, those wanting to go into business were at the mercy of ‘loan sharks’, who charged huge interest rates and were harsh on people who default on repayments. Once started, a small business can earn income, grow household savings, create jobs for others and reduce poverty in local communities. Indeed, according to the World Bank, these projects may eradicate 10 per cent of the world's poverty by 2020. As recognition of the importance of the idea, the United Nations declared 2005 as the International Year of Microcredit. Armed with this background information, read the newspaper article ‘For aid, just help yourself’. school assessment tasks and learning activities For aid, just help yourself Shunned by traditional lenders, people in the Third World can now get lowcollateral loans to help them improve their lives. The results are encouraging, as MATT WADE reports. THE First World’s reaction to great natural disasters, such as the Boxing Day tsunami, the Niger famine and the Pakistan earthquake, and to Third world poverty generally, is usually monetary aid. At the United Nations General Assembly in September the Prime Minister, John Howard, vowed to double the overseas aid allocation to about $4 billion a year by 2010, as Australia joined other wealthy nations in pledging billions of dollars in additional aid and debt relief for poor countries. But this year has also been the UN’s International Year of Microcredit — a scheme to promote the use of tiny loans to help impoverished families increase their incomes. While it has received less attention than natural disasters and political rhetoric, this method of helping the poor is flourishing. A report released today by the poverty advocacy group RESULTS found that more than 92 million people in developing countries were granted microloans last year. Of those, 66.6 million were classified as very poor — surviving on less than $US1 ($1.34) a day. Microcredit is the provision of small, collateral-free loans and other financial services, mostly to very poor women who would normally be excluded from mainstream financial institutions. Loans of about $150 to $200 are used to start or expand small income-generating activities. The State of the Microcredit Summit Report says the number of very poor people receiving a small loan grew from 7.6 million in 1997 to last year’s 66.6 million, an average annual growth of 36 per cent. It is possible that 1100 million people will receive a microloan this year — that’s five times the population of Australia. The report estimates that more than 80 per cent of microloans for the poor are taken by women. ‘The increase represents an additional 45.3 million poorest women reported as receiving microloans in the last five years,’ it says. Bangladesh, once synonymous with famine and natural disasters, has become the showpiece for the effectiveness of microcredit, Millions of microloans have been made in Bangladesh and research by the World Bank, an advocate of microfinance, has concluded they have been crucial in reducing poverty in that country. A World Bank researcher, Shahidur Khandker, studied three Bangladeshi groups that provide microcredit — the Bangladesh Rural Advancement Committee, Grameen Bank and a government program called RD-12. Khandker concluded that 3 per cent of clients got out of poverty each year because of their microloans and that microcredit accounted for 40 per cent of the reduction of moderate poverty in rural Bangladesh. The UN Development Program’s Human Development Report found that Bangladesh had overtaken its giant neighbour India in reducing child mortality, despite having lower average incomes and a lower economic growth rate. It said Bangladesh had achieved rapid human development and the prevalence of microcredit had helped. Microcredit had been especially important in expanding choice and empowering women. ‘While disparities still exist, women have become increasingly powerful catalysts for development, demanding greater control over fertility and birth spacing, education for their daughters and access to services,’ the Human Development Report says. Microcredit for the poor was first tried in the early 1970s and has become an integral part of the drive to alleviate poverty. Initially, the idea of using loans to help the poor was treated with suspicion by many aid agencies. But the strategy’s success in generating income for poor families meant it could not be ignored. Most big aid agencies now have microcredit projects. Thousands of organisations specialising in microcredit have also emerged. Opportunity International, which made more than a million microloans last year, says the average loan in developing countries is about $180 over six months. It says 87 per cent of (continued ) CHAPTER 9 Economic globalisation 313 its loans go to women and each loan affects more than seven people on average. It has a global repayment rate of 98 per cent — better than many commercial banks. Many microcredit organisations resemble traditional financial service firms, carrying banking licences and offering a range of products for poor clients, such as insurance. There are also ratings companies that assess the credit-worthiness of the major microcredit organisations. Some of the world’s biggest financial firms, such as Citigroup, Deutsche Bank, ABN Amro, HSBC and ING have recently become involved in microcredit. RESULTS Australia says microcredit can help the world achieve one of the Millennium Development Goals — to halve the number of people living on less than US$1 a day by 2015. ‘Microfinance, while not a panacea, is still the best tool we have to reduce poverty among the very poor,’ the RESULTS report says. However, the Australian Government devotes a surprisingly small amount to this form of poverty alleviation — $14 million of its $2.5 billion aid budget. Considering the Howard Government’s philosophical commitment to small business, this is peculiar. The national manager of RESULTS Australia, Maree Nutt, says more government money must be put into microcredit. ‘The percentage of Australian aid funding allocated for microfinance has reached a plateau in recent years. Our goal is to see an increase in spending to around $40 million per year within the next two years. This could bring its allocation to around 1.2 per cent — not unreasonable, given its effective- ness in helping to reduce poverty, particularly in the lives of very poor people.’ Bruce Billson, who, as the parliamentary secretary for Foreign Affairs and Trade is responsible for the aid program, says he is all for microcredit and has indicated there will be further spending on it. ‘Our commitment to microcredit is significant and it is an important part of our overall aid program. I’m optimistic we are going to see more support going into this area.’ Nutt wants the government to concentrate new spending on helping small-loan providers to get started or to expand their capacity. ‘Our aid funding can play an important role in this initial phase,’ she says. ‘One a program begins to cover costs, more funds for future expansion can be accessed from commercial and private investors. The donor can make its exit but the service remains.’ school assessment tasks and learning activities Source: The Sydney Morning Herald, 7 December 2005. A What types of international aid are currently provided by the Australian Government? About how much money does this involve each year? How much will it involve by 2010? B How many people internationally, benefit each year from micro-credit? C The article says that micro-credit involves ‘small, collateral-free loans and other financial services . . . ‘? What do you think this means and how is the money used? D Using Bangladesh as a case study, how successful has the use of micro-credit been? E Name some international organisations providing microcredit. F What is the main United Nations ‘Millennium development goal’? G What changes are needed to Australia’s foreign aid program, according to RESULTS Australia? 3. Read ‘If the world were a village of 1,000 people’. ‘If the world were a village of 1000 people’ condenses the population of the world down to 1000 people (not the nearly 7 billion as we now have). Answer the following questions: A What is the most common nationality? B How would expenditure on defence compare with spending on health or education? C What are the most serious causes of death? D Of the village income of $3 million, what proportion would the top 200 (i.e. 20 per cent) income earners receive, relative to the lowest 200? 314 Economics Down Under Book 1 E What proportion of the population would be children and what proportion would be over 65 years of age? Suggest reasons for this situation. F What percentage of married women has access to and uses, modern contraceptives? In turn, what problems does this create for some low-income countries? G The richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of the most fertile 700 acres of arable land available. How much land is left to feed the remaining 73 per cent of the people? H What proportion of villagers has access to clean drinking water? I What proportion of villagers owns automobiles? J What proportion of villagers is illiterate? Explain how this might affect production, income and living standards? K What percentage of children is immunised against preventable diseases? L Looking at the total village budget (public and private) of $3 million available for spending (i.e. an average of $3000 per person if it were divided evenly; which, as mentioned, it is not), what area is regarded as more important — education, health or defence? by DONA MEADOWS If the world were a village of 1000 people, it would include ■ 584 Asians ■ 124 Africans ■ 95 East and West Europeans ■ 84 Latin Americans ■ 55 Soviets (including for the moment Lithuanians, Latvians, Estonians and other national groups) ■ 52 North Americans ■ 6 Australians and New Zealanders. The people of the village have considerable difficulty in communicating ■ 165 people speak Mandarin ■ 86 English ■ 83 Hindi/Urdu ■ 64 Spanish ■ 58 Russian ■ 37 Arabic. That list accounts for the mother tongues of only half the villagers. The other half speak (in descending order of frequency) Bengali, Portuguese, Indonesian, Japanese, German, French and 200 other languages. In this village of 1000 there are ■ 329 Christians (among them 187 Catholics, 84 Protestants, 31 Orthodox) ■ 178 Moslems ■ 167 ‘non-religious’ ■ l32 Hindus ■ 60 Buddhists ■ 45 atheists ■ 3 Jews ■ 86 people of all other religions. ■ One-third (330) of the 1000 people in the world village are children and only 60 are over the age of 65. Half the children are immunized against preventable infectious diseases such as measles and polio. ■ Just under half of the married women in the village have access to and use modern contraceptives. ■ This year 28 babies will be born. Ten people will die, 3 of them for lack of food, 1 from cancer, 2 of the deaths are of babies born within the year. ■ ■ ■ ■ ■ One person of the 1000 is infected with the HIV virus; that person most likely has not yet developed a fullblown case of AIDS. With the 28 births and 10 deaths, the population of the village next year will be 1018. In this 1000-person community, 200 people receive 75 percent of the income; another 200 receive only 2 percent of the income. Only 70 people of the 1000 own an automobile (although some of the 70 own more than one automobile). About one-third have access to clean, safe drinking water. Of the 670 adults in the village, half are illiterate. The village has six acres of land per person, 6000 acres in all, of which ■ 700 acres are cropland ■ 1400 acres pasture ■ 1900 acres woodland ■ 2000 acres desert, tundra, pavement and other wasteland. ■ The woodland is declining rapidly; the wasteland is increasing. The other land categories are roughly stable. The village allocates 83 percent of its fertilizer to 40 percent of its cropland — that owned by the richest and bestfed 270 people. Excess fertilizer running off this land causes pollution in lakes and wells. The remaining 60 percent of the land, with its 17 percent of the fertilizer, produces 28 percent of the food grains and feeds 73 percent of the people. The average grain yield on that land is one-third the harvest achieved by the richer villagers. In the village of 1000 people, there are ■ 5 soldiers ■ 7 teachers ■ 1 doctor ■ 3 refugees driven from home by war or drought. The village has a total budget each year, public and private, of over $3 million — $3000 per person if it is distributed evenly (which, we have already seen, it isn’t). Of the total $3 million ■ $181 000 goes to weapons and warfare ■ $159 000 for education ■ $l32 000 for health care. The village has buried beneath it enough explosive power in nuclear weapons to blow itself to smithereens many times over. These weapons are under the control of just 100 of the people. The other 900 people are watching them with deep anxiety, wondering whether they can learn to get along together; and if they do, whether they might set off the weapons anyway through inattention or technical bungling; and, if they ever decide to dismantle the weapons, where in the world village they would dispose of the radioactive materials of which the weapons are made. Source: Sustainability Institute, 31 May 1990. CHAPTER 9 Economic globalisation 315 school assessment tasks and learning activities If the world were a village of 1000 people WATCHING a video or DVD summary There are a number of interesting videos covering the topic of globalisation. Try viewing one of the following programs: ■ No Sweat — Nike ■ The New Rulers of the World ■ Ketchup in the Curry ■ Exploring the Global Economy (Learning Essentials & Video Classroom) 316 Economics Down Under Book 1 ■ ■ ■ Impacts of Globalisation (Classroom Video) The Global Market Impact (VEA Production) Tales from the Global Economy — The Cuppachino Trail (Learning Essentials) summary Summary chapter 9 Definition and history of economic globalisation Economic globalisation refers to the spread of business, trade and investment across national borders, and the unification of local markets to become international markets. Globalisation has been accelerated by the deregulation of markets and economies by national governments, improved speed and cheapness of transport and communications, technological advances and the increased mobility of money and capital. Globalisation is not a new development but the process has recently accelerated. For instance, colonisation by European powers over the past few hundred years and the growth of commodity trade in wool, minerals and grains started the process. As noted by economist, David Ricardo, international specialisation in areas of comparative cost advantage assisted the trend, as did the move towards tariff reductions, freer trade and the formation of international treaties, trading blocs and agreements (e.g. WTO, IMF, EU). Reasons for economic globalisation Corporations go global because it is beneficial for their efficiency, costs, profitability and growth. More specifically, the benefits relate to: ■ the minimisation of labour costs by moving to low-wage countries for labour intensive production ■ a greater access to natural resources than would be available in the country of origin ■ the gaining of better economies of large scale by expanding the size of the business; in this way costs that are relatively fixed (e.g. product development, management) can be spread more thinly reducing the per unit cost or price of the product ■ an ability to take advantage of helpful government policies offered in some countries (e.g. absence of environment controls, tax concessions or exemptions, free land or cheap power) that are good for profits ■ the desire to minimise transport and storage costs ■ improving the flexibility in company decision-making. The effects of economic globalisation for Australia Globalisation has both good and bad effects on individuals, countries and regions. For Australia: ■ Globalisation and openness have helped to lower inflation by exposing local producers to intense foreign competition as tariffs are reduced. ■ Globalisation and openness increased structural unemployment in the short term by forcing the closure of uncompetitive local industries and firms. However, in the long term, globalisation can probably help to increase employment in areas where there is good efficiency and a comparative cost advantage exists. ■ By forcing governments, firms and workers to lift efficiency, globalisation has probably helped to accelerate economic growth. ■ Globalisation and openness have helped to lower the cost of credit or interest rates through stiffer competition among financial institutions (e.g. banks). ■ Globalisation has increased consumer choice or product variety by giving our consumers access to foreign items, provided that the unique local product is not forced out of the market. ■ Globalisation has forced government policy to focus on the control of inflation, the promotion of economic efficiency and cost reduction, responsible budgetary and monetary policies, and the acceleration of microeconomic reforms. ■ Globalisation may create environmental problems if foreign companies are encouraged by governments not concerned by pollution or damage to the natural environment. ■ Globalisation may have led to the spread of crime, terrorism, illegal drugs and uncontrollable migration which could undermine both economic and non-material living standards of countries. A case study of a multinational corporation in Australia — Nestlé Nestlé is a multinational which originated in Switzerland in the 1860s. Today, the company employs over 253 000 workers in 80 countries with annual sales equal to about 10 per cent of Australia’s GDP. ■ The company expanded quickly using several strategies. These included the use of technology and research to invent popular products (e.g. instant coffee, infant and powdered milks), advertising, takeovers of successful food and other producers in local and foreign countries that produced good quality products, business rationalisation, and the expansion into strategic high income markets for their products around the world. ■ In Australia, Nestlé employs around 5000 workers in over 20 towns, produces $2.4 billion in sales (e.g. Nescafé, Milo, Sunshine Milk, Kit Kat, Maggi, Nestlé Yogurt, Peters, Lean Cuisine, Minties, Life Savers, Papa Giuseppi’s, Lucky Dog and Allens), has annual exports valued at around $427 million and injects about $1.2 billion (estimate only) into the Australian economy in wages, tax and purchases. The effects of globalisation on low-income countries Commentators find difficulty reaching agreement about the effects that the last wave of globalisation (1980 to at least 2007) has had on low-income countries in Asia and Africa. Some research suggests that it has greatly helped to accelerate GDP per head, improved the Human Development Index and reduced poverty rates. In addition, it is claimed that it has helped to reduce global income inequality. However, critics point out the weaknesses in the statistical data used to conclude that globalisation is beneficial for low-income countries. They also note that globalisation may not be the main driver behind faster economic growth, and they focus on growing world poverty, inequality, the exploitation of workers, starvation, the attack on the environment, and adverse global social developments caused by widening incomes between countries. In conclusion, it was suggested that, on its own, globalisation (openness in international trade and capital movements) will do CHAPTER 9 Economic globalisation 317 little to raise poor living standards and reduce poverty in poor countries. Other strategies are also needed including encouraging democratic principles to control government corruption and incompetence, encouraging national saving and investment, improving infrastructure, solving unemployment, reducing population pressures and lowering income inequality. summary The nature and effect of Australia’s foreign aid Foreign aid refers to financial (hard and soft loans, and gifts) and other assistance, usually given by richer countries to poorer 318 Economics Down Under Book 1 countries. Australia gives almost $2.5 billion annually in government foreign aid, but this is only a miserable 0.26 per cent of our GDP. Aid goes to countries including Papua New Guinea, Solomon Islands, China, Indonesia, Vietnam, Philippines, East Timor and Fiji. Aid helps make up for the deficiency of saving and investment funds in poorer countries, and can help break the circle of poverty by raising efficiency and per capita income levels. CONCEPT MAP 9 Economic globalisation Economic globalisation — the spread of business across national borders and the unification of national markets to form the global market Some reasons for globalisation include: 1. Minimisation of labour costs — cheap labour/wages 2. Better access to cheap natural and other resources (e.g. power, minerals, taxation) 3. Increased economies of large scale through global expansion 4. Encouragement of multinationals by some government policies and inducements 5. Minimisation of transport costs for raw materials and finished products 6. Increased flexibility in decision-making by firms Globalisation has good and bad effects on countries. Some possible good effects of globalisation in Australia and in poorer countries: • lower inflation rates via competition • increased efficiency, exports, economic growth and incomes • creation of new employment in some industries • increased consumer choice • improved performance of government economic management. Some possible bad effects of globalisation in Australia and in poorer countries: • structural unemployment in some industries that close down due to competition • increased environmental problems • the possible spread of crime, terrorism and disease • reduced border controls and increased migration • possible worker exploitation — sweat shops. Case study of the operation of a multinational corporation in Australia — e.g. Nestlé Globalisation is not enough, on its own, to help low income countries that often face other social, economical and political problems. • undemocratic and incompetent governments • low national savings and investment — vicious circle of poverty/underdevelopment • inadequate infrastructure • excessive debt levels • severe income inequality in income and wealth • population pressures — inadequate government services • high unemployment and underemployment means wasted resources and reduced productive capacity Foreign aid from wealthier nations can help overcome some problems in low income countries. In 2001–02, Australia’s Government aid exceeded $2491 million. There are three types of aid: Loans — soft loans are seen as better than hard loans. Grants or gifts do not require repayment. Technical and other assistance Major recipients of Australian aid include Papua New Guinea, Fiji, Solomon Islands, Indonesia, Vietnam, Philippines, China, East Timor. Much of this aid is devoted to improving the productive capacity of countries and for disaster relief. CHAPTER 9 Economic globalisation 319