The health crisis provoked by Covid-19 revealed the perils of relying too much on foreign suppliers of some goods. Some reversal in globalisation is now inevitable and many welcome that development. Frances Cowell thinks we should be careful what we wish for.

In February and March this year, just when we needed them desperately, surgical masks and other medical equipment turned out to be fiendishly hard to get hold of. In 2011, devastating floods in Thailand and the earthquake and tsunami in Japan cased massive disruption that caused scarcity in many electronic components and finished goods. It was not until after the fact that governments and businesses found out that there were serious choke-points in their supply chains.

You don’t have to be a globalisation sceptic to think that some production is best done close to, or at home. Governments have found out the hard way how unwise it can be to source too much of their critical supplies from a single, or even a small number of suppliers.

Even before Covid-19, globalisation was under fire, accused of making the rich richer and leaving everyone else behind. That is both true and not true. To see how, let us probe how, exactly, it adds to inequality – and how it lifts people out of poverty.

While different people understand different things when they talk of globalisation, here we take it to mean the explosion in global trade that happened in recent decades, and the vast sums of money that whizz around the world each day. The dismantlement from the 1980s onward of many barriers to trade, such as fixed exchange rates and tariffs on imported goods, together with a multi-lateral rules-based world trading system, certainly boosted the volume of international trade, as did widespread freeing of capital markets. Growth, as measured by aggregate GDP, soared in many countries.

What happened next was both expected and unexpected. With a choice between buying local products and similar products produced elsewhere, people opted for whichever were better, cheaper or both, regardless of where they were made. This was most evident in the expanded range of cheap clothes and shoes, and the ever-declining cost of ever more sophisticated electronic gadgets, many of which were produced in emerging countries.

Teach someone to fish ….

All this international commerce means lots of goodies are more affordable to western consumers. A much more important outcome is that billions of people in developing countries are much less poor than they were, because they now work making things that other people want to buy. This means they are less dependent on aid that often comes with strings attached and can feed corruption. It also builds skills and confidence that can help germinate new home-grown businesses. That must be a good thing: people who are no longer abjectly poor are more likely to send their children, particularly their daughters, to school. Those girls then have fewer, better educated children. And so on, in a virtuous circle – a classic win-win.

Not so fast, you might say. For one thing, much of that poverty reduction has been in China, while many other countries have been left behind. And in nearly all countries that have become richer, the new-found wealth is not shared about, enriching mainly a small, well-connected elite, while the rest wallow. With weak labour and human rights protections, workers in poor countries are often exploited by those well-connected elites. Trade with western countries is just encouraging this exploitation.

Yes, but is that an argument for halting or reversing trade, bearing in mind that many of those exploited workers would otherwise have to survive through begging and prostitution?  Might it make more sense for western firms and governments to use their leverage as trading partners to apply pressure on them to reform and strengthen those protections? In fact many big firms have been shamed by their customers into doing something rather like that. And they can still do much more to help those workers – but only while they continue to trade with them.

And as the example of China shows, even without western pressure, with time, the need for more labour, and the increased productivity of higher-skilled workers, empowers them to demand, and get, better pay and conditions.

So globalisation can and does narrow the wealth gap between rich and poor countries, and has plenty of scope to improve further the lives of many of the world’s very poor. Good reasons in themselves for trading with western partners.

But it also contributes to inequality of income and opportunity in rich, importing countries, where many low-skilled jobs are destroyed while well-connected elites make fortunes by importing stuff.

Déjà vu

This has happened before. Something similar happened with the technical innovations of the industrial revolutions. Mechanisation and subsequent mass production made hitherto unaffordable goods available for ordinary people. But it also destroyed many livelihoods. Lots of people benefited, while an elite made itself obscenely rich in part by exploiting low-skilled workers and even children. Meanwhile, hitherto valued craftsmen were left behind.

We now mock the Luddites who sought to halt industrialisation, and recall that exploitation by the elite gave rise to the protection of workers’ and consumer rights that we now take for granted. The answer was not to unwind industrialisation, as the Luddites wanted, but to protect those vulnerable to the excesses brought on by the enormous structural economic shift that was taking place. Similarly, the current challenges of globalisation and technological change will inevitably prompt a re-think to strengthen and adapt those protections to the new economic reality. If there is one good outcome of Covid-19, it is that the economic dislocation it is provoking is bringing that process forward.

Instead of winding back globalisation, which would undo much of the good as well as some of the bad, we can learn from the social upheaval of the industrial revolutions to bring needed reforms forward so lots of people can benefit sooner. Would it not be better to think about how to preserve the good bits – giving people in poor countries the chance of a better life, and affordable goods for ordinary folk everywhere – while protecting and helping those, in rich and poor countries alike, most likely to be displaced to adapt and benefit from new opportunities on offer?

Just as governments in rich countries can lean on poorer trading partners to strengthen their workers protections and rights, they can also help their own displaced workers move on from low-skilled, low-paid work and retrain for better work with the promise of a stake in the evolving economy. All this can be done while securing supply chains for health care and critical infrastructure. It demands forethought and intelligent planning, not to mention massive consultation and investment in things like basic and adult education. That’s what governments are for, isn’t it?

King Knut found that you cannot order the ocean waves to stop pounding the shore. Better to learn to harness them to launch ships.

Frances Cowell
Australian-born and European by adoption, Frances Cowell writes and speaks at conferences about investment risk and governance, financial market stability and business ethics in financial markets – and the implications for the wider political economy. She believes Europe must urgently assume the lead in protecting and preserving liberal democracy, the rule of law and the multi-lateral institutions and alliances that it depends on.

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