Effects of Globalisation – Benefits and Costs

There are hugely diverging viewpoints on the costs and benefits of the current process of
globalisation.
Employment effects
Concern has been expressed in some
quarters that investment and jobs t in the
advanced economies will drain away to
the developing countries. Inevitably some
jobs are lost as firms switch their production
to countries with lower unit labour costs. But
past experiences suggest that all nations in
the globalization process will gain
providing they can find areas of expertise
and competitive advantage – as trade is a
determinant of growth and rising living
standards.
That has not allayed concerns that certain sections of the population in richer countries -
notably relatively unskilled workers - will lose as an abundance of low-skilled labour in
developing countries makes itself available to the world's companies at cheaper costs –
leading to a fall in the demand for lower skilled workers in industrialised countries. Critics of
globalisation in some developed countries point to the risks of increasing income equalities
and greater job insecurity together with the threat of structural unemployment in industries
where demand for labour falls. Most workers in industry and, especially, manufacturing in rich
advanced countries produce goods that could be imported from abroad.
Static and Dynamic Efficiency Gains
For consumers and capitalists, the rapid expansion of global trade and foreign investment is a
normally considered good thing. Textbook theory suggests that increased competition from
overseas leads to improvements in static and dynamic efficiency and gains in welfare.
Trade enhances the division of labour as countries specialise in areas of comparative
advantage.
Deeper relationships between markets across borders enable producers and consumers
to reap the full benefits of economies of scale.
Competitive markets reduce monopoly profit margins and provide incentives for
businesses to seek cost-reducing innovations and improvements in their products.
The combined effects of these gains in efficiency should be – over time – an
improvement in growth and higher per capita incomes. The OECD Growth Project
found that a 10 percentage-point increase in trade exposure was associated with a
4% rise in income per capita. But these gains represent an average – we must also
consider the distributional consequences of rising incomes.
Expansion of Multinational Activity – Capital does not always flow in one direction!
China's Mountain of Foreign Currency Reserves
Billions of US dollars

2.25 2.25

2.00 2.00

1.75 1.75
US $s (thousand billions)

1.50 1.50

thousand billions
1.25 1.25

1.00 1.00

0.75 0.75

0.50 0.50

0.25 0.25

0.00 0.00
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: Reuters EcoWin

China's Net Foreign Assets

Yuan, trillion (trillion = thousand billion)
20.0 20.0

17.5 17.5
National Currency (thousand billions)

15.0 15.0

12.5 12.5
thousand billions

10.0 10.0

7.5 7.5

5.0 5.0

2.5 2.5

0.0 0.0
00 01 02 03 04 05 06 07 08
Source: Reuters EcoWin

Many developing countries are now exporters of capital and are increasingly willing to use
their foreign exchange reserves to buy up the rights to mineral deposits in other countries and
to engage in merger and takeover activity with long established businesses in the developed
world. China’s foreign exchange reserves tipped over the $2 trillion level in 2009 and many
other emerging market countries and oil and gas exporting nations have accumulated large
trade surpluses that have allowed them to establish sovereign wealth funds for investment in
overseas assets.
The main motivations for the rapid expansion of multinational activity are as follows:
o Higher profits and a stronger position and market access in global markets
o Reduced technological barriers to movement of goods, services and factors of
production
o Cost considerations – a desire to shift production to countries with lower unit labour
costs
o Forward vertical integration (e.g. establishing production platforms in low cost
countries where intermediate products can be made into finished products at lower
cost)
o Avoidance of transportation costs and avoidance of tariff and non-tariff barriers
 o Extending product life-cycles by producing and marketing products in new countries
o The urge to merge – the financial Foreign Investment in the UK Economy
incentives created by the global
Value of external liabilities - direct and portfolio investment
2.00 2.00

deregulation of capital markets is

making it easier to achieve acquisitions 1.75 1.75

and mergers and thereby encouraging 1.50 1.50

the external growth of a business

GBP (thousand billions)

1.25 Portfolio investment 1.25

thousand billions
The UK economy has seen a huge rise in 1.00 1.00

foreign investment over the last fifteen to

twenty years. Some of this has been in 0.75 0.75

portfolio investment (stocks and shares, bonds 0.50

Direct investment
0.50

and property). Direct investment – including

capital investment by foreign businesses – has 0.25 0.25

also been strong. 0.00 0.00

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: Reuters EcoWin

Globalisation and the UK Economy
The UK is a highly open economy. Openness to the global economy can increase the size of
commercial markets available to domestic producers, encourage the transfer of technology
and knowledge and also permit countries to specialise in those goods and services they
produce efficiently by exploiting their comparative advantage.
Thirty years ago, the UK abolished its foreign exchange controls and the major financial
markets have been subject (until recently) to light-touch regulation. This means that each day
there is a huge amount of trade within our stock markets, the short-term money markets and
the bond markets. Little wonder that the City of London has become a hugely important global
centre for financial trading.
UK trade continues to take a high and rising percentage of our total national output. Clearly,
the globalisation process impacts significantly on the British economy with benefits and costs
along the way:

BENEFITS OF GLOBALISATION FOR THE UK COSTS AND CHALLENGES OF

GLOBALISATION FOR THE UK

Opportunities for UK businesses to trade and Risks of increase in structural unemployment in

invest overseas – an injection into the UK industries / regions that lose demand to
circular flow, investment income helps finance lower-cost competition from overseas
current account deficits

Access to cheaper goods and services from Globalisation may lead to rising income and
emerging market countries – leading to wealth inequality (a higher Gini co-efficient) –
higher real incomes average incomes have risen but so too has the
level of relative poverty

Opportunities to live, study and travel Increase in global trade / output has an
overseas environment effect – increased use of non-
renewable resources and CO2 emissions –
growing threats to the global commons

Bigger export markets – chance to exploit Globalisation of brands – perhaps a loss of

economies of scale cultural diversity

More intense competition – drives innovation UK government has less control over the
and gains in allocative, productive and economy – businesses are footloose, economy
dynamic efficiency may become more vulnerable to external
shocks

Britain’s creative industries have successfully The surge in inward migration of labour has
exploited the opportunities of expanding brought economic and social tensions and
global markets increased fiscal costs for the government

Globalisation has lifted hundreds of millions Globalisation contributed to the sharp fall in
of people out of absolute poverty around the interest rates and widening trade imbalances
world and the emergence of an extra one that were part of the root cause of the sub-
billion ‘middle class’ consumers is a huge prime lending boom and bust and the credit
export opportunity for the UK crunch

Falling cost and rising speed of global High food and fuel price inflation has hurt
communications and transport has helped to lower income families most
bring people closer together

Threats and Challenges to Globalisation

‘The political openness generated by, first, the adoption of outward looking policies by the Chinese
under Deng Xiaoping in the early 1980s and, second, by the fall of the Berlin Wall in 1989 are
massive shocks that have rocked the competitive equilibrium of the world economy through both labour
and capital flows.’
Source: Stephen King, chief global economist of HSBC, February 2008

Globalisation is not an inevitable process. 2009 marked a

year when global trade contracted for the first time in many
years and the term de-globalisation started to appear
frequently in international economics news coverage.
o The paradox of inequality: Globalisation has been
linked to a widening of inequalities in income and
wealth. The paradox is that globalisation has reduced
inequalities between countries but widened income
and wealth gaps within nations. Evidence for this is a
rise in the Gini-coefficient for many developed
nations and a growing rural – urban divide growing
in countries such as China, India and Brazil.
o The return of inflation: In many ways globalisation
has reduced costs and prices for many goods and
services. But the driving down of interest rates caused by a glut of global savings
allied to fast economic growth rates in emerging market countries led in 2007-08 to a
surge in the prices of virtually all traded commodities. Food price inflation is the
obvious symptom of this and it placed millions of the world’s poorest people at great
risk.
o Bursting of the financial euphoria / bubbles: A decade or more of strong growth, low
interest rates, easy credit created the conditions for a boom in share prices and
property valuations in many countries. The bursting of these speculative bubbles
prompted the credit crunch and the spreading of contagion from that across the world
in 2008-09.
o Threats to the global commons: Perhaps the biggest long-term threat to globalisation
is the impact that rapid growth and development is having on the global environment.
The threat of irreversible damage to ecosystems, land degradation, deforestation, loss
of bio-diversity and the fears of a permanent shortage of water afflicting millions of
the most vulnerable people are just some of the vital issues facing policy-makers.
o Huge trade imbalances: World trade has grown over recent years but so too have
trade imbalances. Some countries are running enormous trade and current account
surpluses. Whatever the causes, trade imbalances are creating tensions for
globalisation. There is growing political pressure towards
 (1) Economic nationalism – where governments block takeovers and mergers of
domestic industries and businesses by foreign owned multinationals
(2) Resource nationalism: Where countries protect their own factor resources such as
natural raw materials. And countries with trade surpluses but high levels of import
dependency use foreign exchange reserves to buy up the right to import minerals
from other countries.
(3) Trade protectionism to cut balance of payments deficits and protect output and
jobs
(4) Smaller agreements: There has been a shift away from multi-lateral trade
towards bi-lateral trade agreements – a process that will be strengthened after
the collapse of the Doha trade negotiations.
Global Trade Shrinks in 2009
Quarterly Value of World Trade
4.5 4.5

4.0 4.0

3.5 3.5
US Dollars (thousand billions)

thousand billions

3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0
00 01 02 03 04 05 06 07 08 09

Export, EXPORTS,F.O.B. Imports, IMPORTS,C.I.F.

Source: Reuters EcoWin

Germany - Real GDP

National output measured at constant prices, seasonally adjusted, 2000=100
111 111

110 110

109 109

108 108

107 107

106 106

105 105
Index

104 104

103 103

102 102

101 101

100 100

99 99

98 98
00 01 02 03 04 05 06 07 08 09

Source: Reuters EcoWin

The World Trade Organisation has published a pessimistic short forecast for global trade in 2009
predicting that global trade flows will shrink by 9% this year with developed countries such as
Germany and Japan feeling the worst effects of the downturn in trade and exchange. Poorer countries
will see exports fall 2-3%.
The report emphasizes the growing importance of global supply chains which increases the size of the
trade multiplier effect. In a recession the multiplier effect works in reverse and hits those countries
where exports are a large percentage of national output. ‘Production for many products is sourced
around the world so there is a multiplier effect — as demand falls sharply overall, trade will fall even
further.’
Germany is facing a severe recession because of the shrinkage in global trade. Germany’s
merchandise exports in 2008, at $1.47 trillion, were slightly larger than China’s $1.43 trillion. This
meant that Germany retained its position as the world’s leading merchandise exporter. But economists
at Commerzbank forecast that German GDP may shrink by more than 7% this year. 40% of German
GDP is exported and it is heavily reliant on machine tools and engineering that is leveraged to global
industrial cycle. Germany’s traditional heavy focus on exporting manufactured goods is coming to be
seen as an Achilles heel especially given the lack of an alternative source of domestic demand. Japan
too is suffering from a collapse in exports and industrial production
Source: Tutor2u economics blog

The Rise of Sovereign Wealth Funds

Investment funds run by foreign governments, also called ‘sovereign wealth funds’ have been
in existence since the 1950’s. As a result of high commodity prices and the success of export-
oriented manufacturing economies, countries such as China, Singapore, Dubai, Norway, Libya,
Qatar and Abu Dhabi have built up a sizeable surplus of domestic savings over investment.
This surplus has been transferred into sovereign wealth funds worth by some estimates over
$2.5 trillion today, and controlling more money than hedge fund. According to Standard
Chartered, sovereign wealth funds will be valued at more than $13.4 trillion in just a decade.
To some people sovereign wealth funds are a threat to global trade partly because of fears
of a ‘protectionist backlash’ from western governments whose countries are running huge
current account deficits on their balance of payments. There are many questions up in the air
at the moment.
1. How will the SWFs use their gigantic surpluses?
2. Do they have an incentive to invest strategically perhaps for quasi political reasons
and not simply with the aim of maximising returns?
For example, an investment into another nations’ telecoms industry might result in a high rate
of return and perhaps more importantly, an influx of research and development information.
Sovereign wealth funds are already having an important effect on the UK economy.
Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and
Dubai between them own about a third of the London Stock Exchange. The government of
Singapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund,
Dubai International Capital (DIC) has invested money in building stakes in UK companies,
including Travelodge and the London Eye.
Many sovereign wealth funds have provided an injection of fresh financial capital for the UK
banking system in the wake of the losses sustained from the sub-prime crisis and the credit
crunch. The banks have needed to recapitalise to repair their balance sheets and improve
their chances of survival.
Container ships left stranded by downturn in global trade
 World Freight Index - Baltic Dry (BDI)
Daily closing index
12000 12000

11000 11000

10000 10000

9000 9000

8000 8000

7000 7000
Index

6000 6000

5000 5000

4000 4000

3000 3000

2000 2000

1000 1000

0 0
01 02 03 04 05 06 07 08 09

Source: Reuters EcoWin

The global shipping industry is associated with huge internal economies of scale and where demand is
tied to the fortunes of industries such as iron ore, oil and coal but also to the world trade cycle. Things
are looking grim for shipping operators who have bet hundreds of millions of dollars on expanding a
fleet for which there is now substantially less demand.
Containerisation is an idea which developed from an idea developed by the US entrepreneur Malcolm
McLean. Stackable steel boxes have been at the heart of globalisation. But as the world economy
weakens, the global shipping industry is facing a problem of excess capacity. This industry is a good
example of what can happen when there is a lengthy time lag between changing demand for
container vessels, their construction and the new capacity coming on stream. Expensive investments in
new ships which looked a sure fire bet just a couple of years ago are now albatrosses around the
necks of some shipping giants.
Container trade between Asia and Europe is shrinking for the first time in history according to some
estimates. Fleet capacity is forecast to expand rapidly by more than 10 per cent per year from 2008
– 2012 – the result of a huge rise in capital investment in new container ships. But annual container
growth has collapsed due to the downturn and the steep fall in Chinese manufactured exports in
particular. The early signs came from a sharp reduction in shipping costs for dry carriers shipping iron
ore and coal around the world shown by fluctuations in the Baltic Dry Index.
Now the container shipping industry is witnessing a meltdown in the charges for moving a standard 40
foot container – the price has fallen by more than 90 per cent. Many operators are cutting services,
merging operations and encouraging pilots to slowdown to save fuel. Many of the operating costs of
the shipping industry are fixed – container ships operate to fixed timetables in a similar fashion to
airlines. So when they are full, the average fixed cost falls, improving the profit margins of container
operators. Conversely in a falling market the average fixed cost of each container rises. Suddenly the
economics of smaller dry bulk and container ships looks more attractive.
Source: EconoMax

Globalisation and the African Continent

For many years Africa appeared to have largely missed out from the beneficial effects of
globalisation. The gap in real per capita incomes between Sub-Saharan Africa and emerging
market countries grew wider. More recently the region has seen an improvement in her
relative economic position and performance helped in some cases by the strength of global
commodity prices (many African countries rely on exports of primary products as a key source
of income and foreign exchange reserves) and a pick-up in foreign direct investment into the
continent.
Macroeconomic indicators for Sub-Saharan 2007 2008 2009*
GDP at market prices 6.2 4.8 1.0
Private consumption spending 7.1 3.3 0.8
Fixed investment 20.5 12.4 -2.6
Exports 4.1 4.7 -3.2
Imports 11.9 6.6 -3.0

Investment (as a % of GDP) 20.9 21.4 22.3

Exports (as a % of GDP) 35.9 39.3 32.4
GDP per capita, current US$ 1079.4 1240.8 1072.5
Real per capita GDP growth 3.8 2.8 -0.9
Source: World Bank Global Economic Prospects, June 2009
*forecast
Africa has yet has not been directly hit by the credit crisis. The major African banks have
invested little in the problem assets that have brought western financial institutions to their
knees. It has also been helped by the fact that a growing share of output is agriculture for
domestic markets, and is less exposed to declining global markets. Africa is likely to
experience some indirect effects of the global crisis. The global demand for many
commodities, which are at the heart of the export industry in some countries, has fallen. This
includes oil in Nigeria, Angola and Equatorial Guinea, and copper in Zambia. Other export
markets have also been hard hit, for instance the Zambian flower exporting industry has
suffered. Falling demand means falling prices. Crude oil is down by about 70% from its peak
in July and copper about 66%.
Money sent home by African nationals working abroad (remittances) also looks set to fall. This
money sent home is often used to support family income and provide funds for small
businesses. In 2007, £13bn was sent home in the form of remittances. The problem in 2009 is
that 75% of all remittances come from employment in Western Europe and the US, areas
already in recession. With a lower level of funds injected into the economy the national income
multiplier effect will likewise be smaller.
Foreign direct investment into Africa is also set to fall. More than $30bn was injected into
Africa in 2007 in the form of FDI, nearly the same level as the $39bn received in aid. Falling
commodity prices are going to make firms less attracted to an FDI projects in Africa (along
with the inability of firms to access funds for investment, due to poorly functioning credit
markets).
Foreign owned banks with problems in their domestic markets may want to pull funds out of
African banks. This will mean a lower level of loanable funds for the creation of loans for local
businesses. As with many countries across the globe, the indirect effects of the slowdown may
well be a decline in government revenues for many African administrations.
With a lower level of tax revenues African government may have less flexibility with regard
to fiscal policy. Indirect tax revenues account for over a third of all money flowing in African
treasuries - there is no doubt that once again the African economy is facing uncertain waters.
(Source, adapted from EconoMax April 2009, author Jon Mace)
China versus America – From Currency to Energy
Chinese Imports of Selected Primary Products
20.0 20.0

17.5 17.5

15.0 15.0

12.5 12.5
USD (billions)

billions
10.0 10.0

7.5 7.5

5.0 5.0

2.5 2.5

0.0 0.0
00 01 02 03 04 05 06 07 08 09

Inedible crude materials, except fuels

Mineral fuels, lubricants and related materials
Source: Reuters EcoWin

China’s phenomenal growth over the last 30 years can be put into perspective as its economy has
leapfrogged Germany as the world’s third largest economy after the US and Japan. The initiator of
growth in the Chinese economy has been the expansion of its manufacturing base and the export
demand from the US consumer. Recent data indicates that China has amassed $2 trillion worth of US$
reserves through the sale of goods and purchase of US government bonds.
Dollar versus Yuan – Catch 22
A lot has been written about the power that China has over the US with its holdings of US dollars.
Ultimately the Central Bank of China – People’s Bank of China – could collapse the dollar by selling its
supply of dollars/US Bonds in the foreign exchange market. Indeed, many economists believe that
China’s continuing demand for US dollars is the only thing stopping it from collapsing. However, the
fact is China has a stake in the stability of the dollar and if they push too hard to destabilize it they’ll
erode the value of their own dollar reserves. Essentially the more dollars China acquires the more
wealth it has to lose if the dollar crashes in value. Furthermore, a fall in the dollar will reduce the
competitiveness of China’s currency in the US, which would damage China’s economy.
It seems that the two competing powers are too closely tied and too concerned with stability of the
dollar to risk taking each other on, but with energy, (especially oil) the winner can take the gains
without exposure to a corresponding loss
If we move away from the currency market and focus on oil, the US is being outmanoeuvred by China
with respect to energy policy. At present China holds 2% of the world’s oil reserve whilst the US holds
3%. The US consumes up to 20 million barrels a day and China is quickly approaching this level and
directly competing against the US and Europe for prime Middle East oil – presently the Middle East
holds over 70% of the world’s known oil reserves. Therefore, to secure their oil reserves China has
avoided the larger oil producers in the area – Saudi Arabia and Iraq – as they have strong ties with
the US. Instead Chinese authorities have forged links with Iran and Sudan which on the periphery of the
main oil reserves of the Middle East. Also the way they have approached these countries is in the role
of a developer and peacemaker in contrast to the US method which has been seen as an aggressor.
But it is not just the Middle East where the Chinese have been active in securing oil supply – see table
below. The Chinese authorities put great importance in clinching these deals, to the extent that Chinese
President Jintao met in person with the leaders of Russia, Brazil, and Venezuela.
Source: EconoMax, Mark Johnston, June 2009
Oil Rich but Chalk and Cheese – Norway and Nigeria
Both Norway and Nigeria rank among the top 6 oil exporter revenue earners. However once you take
into consideration the quality of life and GDP per Capita the figures tell a different story. How can
these countries be at different ends of the economic spectrum when you consider their oil wealth and
the level of output daily?
Norway
Norway is the world’s third-largest exporter of oil (after Saudi Arabia and Russia). It is a country so
wealthy that despite having a population of just 4.5 million, it is a major player on the world stage. Oil
was discovered off Norway’s western coast in 1969, and the country has ridden several busts and
booms. In 1990’s Norway declared that all state petroleum income would be put aside in a protected
fund and invested outside the country. But oil can be as much a curse as a blessing. Since 1960’s
Holland’s sudden gas wealth pushed up its currency and crippled its manufacturing sector, economists
have been wary of easy money, even coining a term – Dutch Disease – for its impact on the rest of the
economy. However, by spending the real return in a controlled manner Norwegians can enjoy their oil
without ever suffering the disease’s symptoms.
The country’s wealth has allowed one of the most generous welfare states in the world. The sick get
free healthcare and up to a year of fully paid leave. When a woman gives birth she can choose
between taking 10 months off at full pay or a full year at 80% of her salary. Students are not only
exempt tuition fees, they are eligible for €10,000 in loans each year, nearly a third of which gets
written off upon graduation. Unemployment is at 2.7%, but the country has the highest sick leave
figures in the world and one in four working-age Norwegians gets their main income from the state
social security system. In the early 1990’s Norway declared that all state petroleum revenues would be
put aside in a protected fund and invested outside the country.
The country’s wealth has also afforded it a place in the world stage, letting it hit far above its weight.
Norwegians have twice voted not to join the EU but nonetheless as it wealth increases so does its
responsibility. Norway is the leading nation in the provision of foreign aid – 0.98% of GDP in 2006,
but it hasn’t reached its goal of 1%.
Nigeria
Life couldn’t really be more different in the African nation of Nigeria. It was a country blessed with
enormous sudden wealth as oil gushed out from the Niger Delta’s marshy ground in 1956. Oil accounts
for 95% of the country’s export earnings and 80% of its revenue. In 1960 agricultural production such
as palm oil and cacao beans made up nearly all Nigeria’s exports; today, they barely register as
trade items, and Africa’s most populous country, with 130 million, has gone from being self sufficient in
food to importing more than it produces.
A recent UN report shows that the quality of life in Nigeria rates below that of all other major oil
exporting countries. Its annual per capita income of $1,400 is less than that of Senegal, which exports
mainly fish and nuts.
Despite its ranking as the world’s sixth largest oil exporter and Africa’s top producer, Nigeria falls
behind major oil nations in alleviating poverty. Export sales prop up the economy but the frustration at
the uneven distribution of profits has triggered nearly constant violence in the Niger Delta, with
unemployed youth increasingly attacking oil facilities and personnel. Corruption siphons off as much as
70% of annual oil revenues; most Nigerians live on less than a dollar a day. Blame for the lack of
development lies with the multi-national oil firms and the government, partners in onshore operations.
Whilst Norway debates over its embarrassment of riches from oil revenues and how to increase its
foreign aid, Nigeria is a fragile state, beset by risk of armed conflict, epidemic disease, and failed
governance. Nigeria’s absurdity is that poverty perseveres as oil flows.
Source: Mark Johnston, EconoMax
A Third Wave of Outsourcing in the Global Economy
Comparative advantage shows that it is Index of World BioFuel Prices
efficient to cut production in those activities 190
Goldman Sachs Commodity Price Index, Daily closing value
190
where the producer faces a relatively high
opportunity cost. That is the idea behind 180 180

‘outsourcing’. 170 170

A generation ago, firms in the rich world 160 160

increasingly shifted industrial production out 150 150

into the developing world. A decade ago,

Index
140 140
services followed, with numerous ‘back
office’ functions shifting from high cost
130 130

locations to those with lower costs. Now a 120 120

third wave is gathering pace: rich food 110 110

importers are acquiring vast tracts of poor 100 100

countries' farmland to grow their own
supplies. Is this a good thing? 90
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul
90

07 08 09
Why not encourage countries that export Source: Goldman Sachs

capital, but import food, to outsource farm production to countries that need capital, but have
land to spare? Recently, food grown in Ethiopia has been shipped to Saudi Arabia. But
Ethiopia is a hungry country that needs a significant amount of food aid. This is the heart of
the dilemma.
The scale of current land deals is staggering. Sudan will set aside roughly a fifth of the
cultivated land in Africa’s largest country. China secured the right to 2m hectares in Zambia
and will grow palm oil for bio fuel on 2.8m hectares in Congo. Since 2006 the amount of land
handed over globally is equivalent to the whole of France’s agricultural land, or a fifth of all
the farmland in the European Union.
Thanks to rising land values and rising commodity prices, farming has been one of the few
sectors to remain attractive during the credit crunch. When private investors put money into
cash crops, they tend to boost world trade and international economic activity. But now,
governments are investing in staple crops in an attempt to avoid world agricultural markets
altogether. Why?
Over the last couple of years, food prices
soared and food stocks slumped. This did not
particularly scare importers; most of which
(especially oil states) could afford higher
prices. Their problem was the spate of trade
bans that grain exporters imposed to keep
food prices from rising at home. The obvious
answer for food importers has been to access
food directly by finding land (and water)
abroad.
The investors promise a lot: new seeds, new
marketing, better jobs, schools, clinics and
roads. Sudan’s agriculture ministry say investment in farming by Arab states would rise almost
tenfold to represent half of all investment in the country. China has set up 11 research stations
in Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less
than India on agricultural R&D. Even without new seed varieties or improved irrigation,
investment should help farmers. One of the biggest constraints on African farming is simply the
inability to borrow money for fertilisers.
But the deals produce losers as well as winners. Host governments usually claim that the land
they are offering for sale or lease is vacant or owned by the state. But “empty” land often
supports herders who graze animals, or farmers who have worked it for generations without
legal title. Most economists and pressure groups would rather see freer, and fairer, trade in
agriculture.
Source: EconoMax, Author Tom White
De-globalisation
In 2009 the progress of globalisation appeared to come to a halt and go into reverse gear.
The world economy suffered its deepest recession for over sixty years and global trade was
set to shrink by more than 10 per cent. De-globalisation became a buzz word. There are
several aspects of de-globalisation that have become apparent:
A steep slowdown in world economic growth followed by a recession
Unemployment worldwide is forecast to rise by around 30m above 2007’s level
Sharp fall in global trade in goods and services
A large fall in net private debt and equity flows to developing countries
Worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion
A partial reversal of migrant flows and also remittances from migrant workers
Evidence of a return towards economic nationalism and other forms of protectionism
Geographical Seepage in the World Economy
Geographical seepage occurs because of deepened inter-relationships between economies,
supply-chains and financial markets across countries. One example is how developing
countries that were really not part of the financial bubble and subsequent crisis of 2007-08
are now suffering economically because of the spread of the global downturn.
Seepage is partly due to the changing structure of the world economy arising from
outsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeed
more and more industrial production takes place in emerging markets. So when demand for
new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations
see a dramatic fall in export growth. And developing nations reliant on exporting commodities
to advanced economies will suffer from a fall in demand for and price of their output.
Developing countries as a whole are expected to grow by only 1.2% in 2009, after
8.1% growth in 2007 and 5.9% growth in 2008
The Ukraine is likely to see her GDP fall by 15% in 2009 because of a collapse in the
price of metals – one of its major exports
Remittance flows to developing countries are expected to be $304 billion in 2009,
down from an estimated $328 billion in 2008
The global credit crisis has also led to a drying up of capital flows into developing
countries - one consequence is that some emerging markets find it really hard to get
hold of the bank loans needed to finance their continued expansion. According to the
World Bank, private capital inflows to developing countries fell to $707 billion in
2008, a sharp drop from a peak of $1.2 trillion in 2007 and they are forecast to fall
below $400bn in 2009.
Both developed and developing countries will be left with huge amounts of spare capacity -
the global output gap might be as high as 8 or 9 per cent in 2010. This matters for the
inflationary or deflationary risks facing the world economy as we head into 2010.
Decoupling
 Can China and India Decouple Growth from Rich Nations
Annual percentage change in real national output
15.0 15.0

12.5 12.5

10.0 10.0
China

7.5 7.5
India
Percent

5.0 USA 5.0

UK
2.5 2.5

0.0 0.0

-2.5 -2.5

-5.0 -5.0
00 01 02 03 04 05 06 07 08 09

Source: Reuters EcoWin

Decoupling is the idea that the emerging market economies can survive and continue to grow
even when many of the richest advanced nations are in a recession or slump. Globalisation
ought to make the business cycles of countries more closely aligned as trade and capital flows
between nations become ever more important. But there are grounds for thinking that China,
India, Brazil and Russia and other emerging economies can maintain growth momentum
independent of what is happening in the United States, Japan and the European Union. The
main reason is that emerging markets now account for a bigger proportion of global economic
activity. Their share of global GDP is heading towards 25 per cent and their share of global
investment spending – including house building and infrastructure investment – is nearly 30%.
Their share of world trade continues to rise year by year.
China was not immune to the global slowdown of 2007-08 but her growth rate stabilised in
2009 largely as a result of an enormous fiscal stimulus launched by the Chinese government. A
4 trillion Yuan ($585bn, £390bn) stimulus programme was introduced in November 2008 and
China has made huge efforts to kick-start domestic demand (consumption and investment) to
offset the decline in her exports.
Suggestions for reading on globalisation
Articles on globalisation from the Guardian
Articles on the global economy (Guardian)
Can China’s frugal savers help her economy? (BBC news, July 2009)
Global economic downturn in graphics (BBC news)
Global recession (BBC news special reports)
Globalisation and the wages of highly skilled workers (Economic Journal, July 2008)
Globalisation is a benefit for the UK (Jim O’Neill, Telegraph, July 2008)
Goldman Sachs BRIC country analysis (research reports)
World Bank
World Development Movement
World Trade Organisation
World’s cheapest car goes on sale (BBC news, April 2009)