Globalisation: the facts behind the myth
David Miles On claims that we work in a global market place
Monday 22 December 1997
As an economist I like this scene; it is an excellent example of a common phenomenon: wilful misinterpretation of evidence in one's own favour. The dramatically overused, and much abused, notion of "globalisation" is largely based on misinterpretation of evidence; and the concept is most frequently used by those with a vested interest of one sort or another.
For example, governments, when in power (though rarely when in opposition), frequently claim they are constrained by global forces. "We cannot ban tobacco advertising in Formula One racing since..." or "There is no point in our banning exports of arms to that country because of the global market..." And what better way for corporate spokesmen and women to justify an attempt at changing work practices or gaining acceptance for a small pay settlement than by saying that in a global market failure to compete will result in death.
How can the claims of the globalists be assessed? Is it true that in the last 10 to 20 years there have been such changes in technology, in the nature of traded goods and the way materials, information and people move around the globe, that the world is now a dramatically different place than it was 50 or even 20 years ago?
Hermann Goering once, famously, said: "When I hear the word culture I reach for my gun." When I hear the word globalisation I reach for the Annual Abstract of Statistics. And what statistics reveal is that the claim that there is a global world market place in most commodities is hard to square with the facts.
Consider, first, the allocation of accumulated wealth across different asset classes. Portfolio theory says that diversification is a good thing. Suppose we live in a world with no barriers to international portfolio diversification. It would seem to follow that the portfolio of wealth held by the private sector in various countries should be fairly widely internationally diversified.
The chart reveals a picture of portfolio allocation dramatically at odds with this. It shows the proportion of the total wealth held by the personal sectors in the major economies that is in the form of claims on governments or companies in foreign countries. I use here a very wide definition of financial assets - it includes direct ownership by households of equities, bank deposits and bonds; but it also includes all the assets held by pension funds, life insurance companies, mutual funds and so on, on behalf of the personal sector. The chart reveals that in Europe, typically only about 5 per cent of the overall financial assets of the private sector are international. The UK and the Netherlands stand out as countries with an unusually high degree of international diversification; but even there only around 15 per cent of assets are claims on foreign governments or companies.
Labour is dramatically less mobile than financial wealth. Indeed labour mobility now is probably lower than for much of the past 150 years. For those who are relatively well off (almost anyone in a developed country) a combination of inertia and familiarity with one's own culture and language make the option of moving to another country to work fairly unattractive for most people. For those who are far from comfortable (in developing countries the vast majority), immigration restrictions rule out the option of moving to countries where standards of living are dramatically higher.
It is plausible, of course, that physical capital (the location of factories and offices) is more mobile than human capital. Is there a global market here? In fact the degree of mobility of capital may well be no greater than 100 years ago. Consider the recent evidence from the UK. The UK has been one of the most successful countries in Europe in attracting foreign direct investment. Over the last 10 years the level of foreign direct investment in the UK has averaged about pounds 12bn a year. But that still only represents a little over 10 per cent of domestic fixed investment over that period. So one of the most successful developed countries in attracting inward investment still finds that about 90 per cent of its capital formation is done by nationals.
This observation fits in with the empirical evidence first uncovered over 15 years ago by Martin Feldstein and Charles Horioka. They found an extremely high correlation between changes in physical investment in countries and changes in domestic saving. The implication of their finding was that most investment in developed countries gets financed from domestic saving. Most studies continue to find a very significant correlation between national saving and investment.
Of course it would be absurd to argue that all this means economies are insulated from world economic developments. But the claim of the globalists seems to be that there has, fairly recently, been some dramatic change in the degree of integration of world markets. Two forces - one worldwide and the other specific to Europe - are often argued to be behind this. First, technology has so increased the ease with which information can be transferred that the physical location of many operations is often now irrelevant. Second, and specific to Europe, the creation of the single market, the abolition of many tariffs, and the imminent creation of a single currency area, has (it is argued) had a massive impact.
I doubt whether either of these factors are really that new or have caused a huge jump in market integration. In the second half of the 19th century there were few capital or trade restrictions between the capitalist countries. For much of that period there also, effectively, existed a single currency (the gold standard). And for much of the 19th century there were huge movements of workers between countries (largely from Europe to America).
At the same time there were enormous flows of capital between countries. And in the 40 years from 1861-1901 the pace of technological change was stunning. In those four decades the following were invented; the telephone, the internal combustion engine, the microphone, the electric locomotive, the motor car, the aeroplane, the radio transmitter. It is far from obvious that in the period since 1960 there has been such a change in technology.
In fact, claims about globalisation are themselves not particularly new. I am old enough to remember Labour politicians in the mid-1960s blaming many of the country's economic ills on the Gnomes of Zurich - the faceless operators of the global levers of economic power. And there is a much longer tradition of politicians being prey to the dark forces of foreign financiers.
So the next time you hear someone pontificating about globalisation ask yourself just what they are trying to make you believe ... and why.
David Miles is Professor of Finance at Imperial College, University of London and an economic adviser to Merrill Lynch.
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