The Limitations of Globalisation

Globalisation's chief winner pictured

The clear advantages which economic theory identifies arising from trade and competition ignore transition effects. Economic theory also presumes a “level playing field” of equal opportunity for all participants.

Both of these issues give rise to important
reservations, and costs which are not taken into account.
First, when globalisation removes existing barriers to international trade and capital flows, trade will expand along the lines of comparative advantage. What this means is that each country will focus on producing those goods and services in which it enjoys a productivity advantage relative to its competitors. Those goods and services will be
exported. The country will reduce the output of those goods in which it experiences a
relative productivity disadvantage, and will import its requirements from its competitors.

But, this requires a significant readjustment of production and output and this will not be as frictionless as the theory suggests. Physical capital is typically dedicated to a specific production process and cannot be switched to another use. The same is true of labour skills. Thus, some capital and labour is likely to be unemployed in the transition period, which may be very long, indeed. Where industries are concentrated regionally, it is even possible that entire regions will remain depressed for years , if not indefinitely.

The Level Playing Field: Business Location
A second reservation with classical trade theory, and its over-simplified picture of globalisation as a “win-win for all” phenomenon, is based on the view that the world economy is not a “level playing field”. Countries express their individual preferences over a wide range of issues, such as the level of taxation and the provision of public services, location incentives to industry, valuation placed on the environment, exchange rate regimes and so forth.

In answer to the critique that the global economy is not a level playing field, I would pose
the question, “should it be?” and: “can it be?”

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