JIRD

Journal of International Relations and Development

Vol. 3, No 4 (December 2000)

 

Globalisation: Neither Hell nor Paradise
by Marian Svetlièiè *

Introduction

A lot has been written about globalisation, which has become a fashionable subject of discussion, albeit it is not always clear what exactly the term means. 1 Critics of globalisation 2 who, according to Krugman (1996), all too frequently take resort in "chiropractic economics", take globalisation to be a zero-sum thing and in so doing tend to ignore, for example, the principle of comparative advantages under which international trade is in fact a positive-sum game. There is also criticism of the market being seen as a sacred thing and, at least implicitly, exalting the state into a sacred object. Not the least important weakness of such criticisms is their in—conclusiveness in terms of policy recommendations, and the lack of consistency (Martin and Schumann 1997). 3 Getting the analyses right is itself a very difficult task, the more so when it comes to providing solutions. Nevertheless, some ideas should be put forward in order to build a "new house" when the old one becomes unpleasant to live in, or even too unsafe due to the ever more frequent (financial) "earthquakes".

Misunderstandings about globalisation and its implications largely relate to ignorance of the phenomenon and its features. Recent negative attitudes towards globalisation are not surprising given the inverse relationship between knowledge and prejudice about a certain thing. If one is not familiar with and does not understand something then one has a prejudice against it. Globalisation indeed goes hand in hand with increasing economic difficulties and instability, the threat of world—wide recession, the slowing down of growth rates, not to mention the spread of diseases (AIDS 4 ) and uneven development, 5 accompanying high general growth rates. 6 Capitalism has won the ideological battle. But the transition from socialism to capitalism has not been as smooth as might have been expected. At the same time, even developed countries are today suffering unemployment, rising inequality and the degradation of moral standards, growing poverty, increasing crime rates and, last but not least, drugs are becoming a widespread and dangerous "disease". All of these, coupled with increasing job insecurity or insecurity in general as a result of the turbulent, unpredictable and very risky developments around the world, have led many people to see globalisation as being responsible for all such evils, and to even look for solutions for instance in de-linking from the "evil" global capitalist market. 7

Whenever one comes across a more "populist" interpretation of globalisation, one may recall the 145-year-old fictitious petition 8 of candle-makers by the French economist Frederick Bastiat.

We are suffering from intolerable unequal competition from a foreign rival with superior technology for the production of light. He threatens to flood our market with cheap light. This is nothing other than the sun. Therefore, we propose to pass a law ordering the shutting up of all windows, curtains and holes through which the light of the sun enters our houses in order to promote our own production of candles
(quoted in Salvatore 1995:36).

Many arguments arising from the petition, and which Bastiat himself used to ridicule the arguments of protectionists, can be applied as an effective and illustrative example in contemporary globalisation discussions. Similar to the petition, some would seek to shut all the windows, doors and holes before globalisation enters the economy, or obstruct the activities of those companies aimed at internationalisation. Interestingly, there are no voices against exports, even though exports are historically one of the primary forms of globalisation. Time has shown, however, that exports are the driving force behind development, so they must be promoted. The same applies to imports. Hardly anybody is prepared to argue against imports, too, except for imports of low quality goods or when individual lobbies try to protect themselves against foreign competition, and try to maintain protection in their sector by having their production subsidised. 9 Whereas import-prejudice does not exist, there is a substantial prejudice against foreign direct investment (FDI), although there are no significant differences between the two forms of international economic relations (IER). If one desires to have goods one does not have, or is incapable of producing, one either opts to import the goods or import the knowledge (possessed by foreign investors) that can provide such goods or services in one’s own backyard. In the case of imports, it is foreign instead of domestic labour that is employed to produce the goods. Regarding employment, imports have a negative while FDI has a positive impact. Foreign investors thus, by producing goods in the domestic economy, employ the domestic workforce, pay taxes to the host country, and thereby contribute to the growth of welfare. Prejudices against FDI are however much greater than those against the importing of goods. This is especially true in cases where labour is imported to produce the goods, for anybody can see that a foreigner is thereby replacing a local employee.

The above indicates that there seem to be many unfounded prejudices towards the different forms of globalisation, as well as towards globalisation itself. But globalisation is, of course, not without its own negative aspects. The saying ‘every coin has two sides’ also applies to globalisation. Or, if one applies the candle-makers’ petition, the sunlight, albeit essential for life on earth, can also cause skin cancer. Yet — if we use the same analogy — to protect oneself against the negative impacts of sunlight, one has to use sun-protecting creams of various factors, depending on the season, time of the day, skin type and sunbathing time. In economic terms, it is necessary to maintain a balanced, selective economic policy, benefiting from the positive aspects of globalisation and restricting the negative ones — "those causing cancer".

Despite the influence of the recent flood of articles against globalisation and the ever more frequent violent protests against the World Trade Organisation (WTO), the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), and other "bastions of globalisation" (as the criticism goes), we will mostly concentrate on the positive sides of globalisation also taking into account what the viable alternatives are. This is not to say that there are no negative sides of globalisation, 10 although it would be unfair to say that these negative aspects rule the day, as it were, or that companies everywhere tend to be ignorant of possible abuses of workers. 11 The article will not ignore such negative trends, yet it will be argued that the positive, welfare-enhancing effects prevail, especially when an appropriate economic policy is in place. It will be recalled that globalisation is not policy-free and not merely the result of spontaneous processes, but is also a man-made phenomenon. The situation is similar to that of the market, which in principle is the best regulator of economic activities, yet even the market has its deficiencies and market failures that have to be corrected. All of this also applies to globalisation.

This article will address some of the dilemmas about globalisation, particularly its economic dimensions. Although the text itself is not based on any new empirical data, but instead mostly relies on existing research whenever applicable, it seems important to point to the long-term effects of globalisation and to thereby respond to the anti-globalisation arguments. Specifically, the benefits of globalisation are more of a long-term nature, which is why the short-term-oriented observers do not "see" them and cannot appreciate them. 1 For individuals, the benefits of improved allocation of resources and economies of scale and scope are largely manifested through the loss of employment, closing down of plants, increasing social differences, and similar negative phenomena (Svetličič 1998b:1019). Uncertain and volatile environments have also made it very easy for politicians to be seduced to use globalisation as an easy scapegoat for any unwelcome economic news. It has become very attractive for politicians in a phase of recession to find a scapegoat for (their) bad economic results 13 (Burtless et al. 1998:ix, 6). Yet, as will be argued below, things are more complex than they might seem at first blush.

Is Globalisation an Entirely New Phenomenon?

One of the biggest questions regarding globalisation is therefore whether it is really as new as it is frequently presented. For Hirst and Thompson (1999), globalisation is only new rhetoric trying to explain something that has already been with us for as long as capitalism. 14 In works such as Bairoch and Kozul—Wright (1996), Kindleberger (2000), Malmgren (2000), and Rondinelli and Behrman (2000) it has also been argued that globalisation is only a continuation of processes that began with the espousal of free trade in the mid-nineteenth century. This group of authors would defend their thesis by pointing to data demonstrating the shares of international trade and foreign investment in gross domestic product (GDP) at the beginning of the twentieth century. Only in the past few years have both shares outpaced those at the beginning of that century. Simultaneously, there are also many authors who already way back in the past explained what is now termed globalisation. Some elements of what is today called globalisation were already noted by such economists as Smith (1776/1937) and Ricardo (1817/1963), and later, Marx and Engels (1848/1967), Hilferding (1910/1980) and Lenin (1917/1970). Marx and Engels clearly stated in the Communist Manifesto that the need for a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. 15 It must nestle everywhere, settle everywhere, and establish connections everywhere. The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country (Marx and Engels 1848/1967:83). ‘In place of old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations’ (ibid.:84).

Hilferding addressed the issue of merging bank and industrial capital into financial capital meaning ‘making one uniform capital. Before separated spheres of industrial, commercial and bank capital has now come under the joint command of high finance with which the masters of industry and banks are united in close personal union’ (Hilferding 1910/1980:344). This is, on a larger scale, also happening nowadays. Integration of international financial markets in a single, vibrant market with huge capital transfers is probably the main feature of the global economy. Financial capital has increasingly been becoming an independent factor. 16 One can witness large daily capital movements in the world’s financial markets, movements that years ago one could not have even dreamt about. Communications technology and its modernisation, the possibilities of enormous capital transactions in real time with the click of a mouse, have enabled all of this. We are witnessing an enormous increase in international trade, and an even larger one in FDI, which has already become a more important generator of wealth than international trade itself.

Globalisation thereby strengthens the importance of size. Competitive pressures are so strong that capital has to find a globally optimal allocation of resources in order to stay or become competitive. Hilferding concluded that the development towards financial capital has increased the importance of the size of the economic territory. The bigger the economic territory the larger the economic unit can be and hence the lower the production costs, so stronger specialisation again leads to lower production costs. The larger the economic territory the greater the possibility that the economic activity will be located where the best natural conditions exist, and where labour productivity is highest. There is no doubt that in developed capitalist production free trade would bind the whole world market into only one economic territory and so enable the highest productivity and the most rational international division of labour (Hilferding 1910/1980:356).

World production is today integrated and exceeds world exports of goods and services. 17 Today, one can say that FDI is a more important growth generator than international trade. Nevertheless, the situation is not as new as it seems, and all these tendencies have their own origin. Viewed objectively, the share of global trade in world output in 1913 was similar to that today, perhaps only a few percentage points lower (UNCTAD 1994; Lewis 1996; Economics 1999:7). The situation is similar in the case of international investment, which does not mean that the quality of these relations was at the same level. In fact, it is quite different to that of the past. Globalisation is thus not so quantitatively new, but it is qualitatively. One can speak about a leap from quantity to quality. An increase in the importance of FDI as compared to trade clearly reflects this. So does integrated global production, which did not exist in the past. There was a certain kind of globalisation, more accurately referred to as internationalisation, limited to the leading trading nations of the time. While they traded internationally, others were left out. The "others" were not even aware of this possibility or did not possess the infrastructure for such trade (e.g. merchant fleets). The communications revolution has, with the cutting of transport and other transaction costs relating to long distance trade, enabled "others" to integrate into international trade. The lack of infrastructure was thus one of the reasons behind the less intensive international co-operation of small economies and companies alike. There are also substantial differences in the area of foreign investment. While it is true that the shares are similar, investment in the past was predominantly in the form of portfolio investment, and not the FDI that prevails today. FDI has become a global phenomenon, and can be made by small countries and companies as well.

By being a locomotive of development and forming a framework for integrated international production, FDI is a generator of international trade, whereas in the past it was the opposite. Previously, international trade preceded FDI (Vernon 1966). Nowadays, companies are forced to skip individual stages of internationalisation and jump immediately onto the FDI "train". Multinationals are emerging overnight, companies have no time to learn, and have to do business globally from the start. These are the so-called "born multinationals" that increasingly originate in small countries. 18 This is an example of the "relatively new qualitative characteristics" we had in mind when arguing that globalisation is not an entirely new phenomenon. Similarly, even portfolio investment has lately, particularly due to technical possibilities, been becoming increasingly important compared to ten years ago. Financial markets’ globalisation is, with its scope, depth and speed of transactions, perhaps the most important "innovation" of globalisation.

Is Globalisation Irreversible?

The process of globalisation is not predetermined. It can be slowed, detoured, or halted with changes in public policy (Kindleberger 2000). There is ‘no turning back. Technology will not allow a reversal of a global economic integration’ (Malmgren 2000:42). However, globalisation does not have a linear tendency either. It has never happened in history that an extrapolation of past trends was correct. Least of all because of great technological inventions, as well as those in the area of the world’s social structure. These inventions can either stimulate or stall modern globalisation trends.

The enormous growth of the Internet industry could serve as the best illustration of the real globalisation of the world economy. One of the main policy tasks today is to get those unconnected connected, to get them included in globalisation trends in order to integrate those who are now left out or left behind. The Internet is enabling not only small companies to participate in the global economy, but also every individual in even the most distant parts of the world. For this, one does not even need to own a personal computer; one can simply borrow one, and connect in to the world economy. 19

The "Internetisation" of the global economy can substantially restructure contemporary forms of globalisation. It can boost international trade by enhancing individuals’ possibilities to actually purchase from a global supply. Goods are namely easily imported via the Internet, so the importance of "intra-firm" international trade could drop. In the long run, "Internetisation" could accelerate the closing of the gap between the technological frontrunners and the free riders. This would mean that an increasing number of goods would be produced locally, while knowledge and information would be global. Accordingly, one could revive Keynes’ remark (1933) saying that he sympathised ‘with those who would minimise, rather than with those who would maximise, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel — these are the things which should of their nature be international. But let goods be homespun whenever is it reasonably and conveniently possible and, above all, let finance be primarily national.’

Oscillations in the development of globalisation are not only possible, but also very likely. A reversal of globalisation is, however, not to be expected in the near future, in the time of our generation. It seems that the harsh lesson with economic crises when the remedy was protectionism with such devastating consequences has been learned, so the recent Asian crises received quite different responses (The Economist, 5 September 1998:17). 20 The social costs of protectionism have proved to be higher than the social costs of preventive measures. International institutions are now obviously capable of finding solutions to the problems of recession, volatility and unpredictability of globalisation in "normal’ dimensions. Given recent experience, one may argue that globalisation can be halted only in the event of a major global crisis or war. Actually, pessimists would not exclude this possibility, given the large number of local wars and conflicts. But the conflict prevention mechanisms available within the system of the United Nations (UN) and other international organisations would seem to provide more effective means of preventive diplomacy and peaceful settlement of disputes than in the past.

There could, of course, still be "sand in the wheels" of globalisation. The most probable cause of the world economy’s globalisation setback could be the absence of adequate compensation policies to remedy the unequal distribution of globalisation’s costs and benefits among countries and their citizens. Globalisation’s benefits are in fact not distributed equally; some gain more than others. The result is that certain social classes are negatively affected by globalisation. Ricardo (1817/1963) already argued that international trade is beneficial for all, but not for all equally. Those who are deprived have to be compensated if international trade is to contribute to the growth of global or national economy welfare.

The velocity and depth of changes caused by globalisation, which can even widen this gap, point to the increased importance of the re—distributive role states and international organisations can play. Otherwise, the widening of social differences could cause political problems and backlashes for globalisation. There is a growing awareness about this, which may lead to a transformation of the character of globalisation, putting more emphasis on compensation for those on the losing end of it.

Is Globalisation Unfair and Inequitable?

There are views (Martin and Schumann 1997) that globalisation represents the cause of inequality within and among countries. Indeed, the differences in incomes in developed countries have widened and in some less-developed countries (Asia comes to one’s mind) they have narrowed. Let us look at some figures. Generally, world inequality has increased in the twentieth century, mainly due to a large decline in the real per capita income in poor countries but again not as substantially as in 1900. The Gini coefficient — a measure of inequality, ranging from 0 (perfect equality) to 1 (complete inequality) — has risen from 0.40 to 0.48 between 1900 and 2000 (IMF 2000:155). 21 The living standards in the most developed countries, as measured by real income per capita, grew substantially between 1965 and 1995. Even excluding Asian newly developing industrialised countries, developing countries on the whole have more than doubled their real income per capita over the past thirty years. This average gain, however, is no greater than that achieved by the advanced economies, implying that per capita income levels between the two groups have not converged. Developing countries have become increasingly polarised into high- and low-income clusters (IMF Survey 1997:154). ‘The world’s 20 richest countries had 30 times more incomes than the poorest 20 percent. Now, that wealth has grown to 74 times’ (Business Week 2000:49).

Although many critics blame globalization for exclusion and impoverishment, remarkable progress has been made in all major dimensions of human development since the late 1960s. The health of people living in developing countries has risen by more than one-third since 1960, and accessibility to safe water supplies has doubled to almost 70 percent of the population. Per capita food production increased by more than 20 percent. The infant mortality rate in developing countries dropped between 1960 and 1992 by more than half (Rondinelli and Behrman 2000:7-8).

Life expectancy at birth of low-income countries has also substantially improved by 8.5 years from 1970-75 to 1995-2000 (UNDP 2000:189). Krugman and Venables (1995) argue that under certain assumptions convergence is achieved even at the expense of the industrial countries. On the other hand, UNCTAD (1997:iv) Report suggests that the differences in incomes of the seven richest countries increased compared to the seven poorest countries. Whereas in 1960 the difference was twenty-fold, in 1995 it had increased to thirty-five-fold.

In his most recent book, Krugman (1999a:161) states that ‘the world is an unfair place’. But according to The Economist (27 January 1996:66) ‘fair or not, trade 22 raises incomes in both [trading] countries. Victims of such injustice and exploitation should always be so lucky.’ Something similar was claimed by Ricardo (1817/1963) who, in his law of comparative advantage, demonstrated that trade is welfare increasing for all trading countries. He did, however, not claim that the benefits of trade are equally distributed among all countries. Within individual economies, trade enables the division of labour and specialisation, both of which then increase the living standard and welfare of the participants. However, some gain more than others and some may even lose. Globalisation strengthens the welfare of the participating national economies but one cannot expect fairness from globalisation. Neither Ricardo nor the free-trade and globalisation advocates in the modern version claim (with some possible exceptions) that international trade and globalisation are equitable. Talking about trade and globalisation is not to talk about justice, but about welfare, efficiency and the living standards of people.

Markets are therefore not ‘fair’. Yet they efficiently stimulate productivity and resource allocation, which provide for an optimal specialisation and therefore improve welfare within and among countries. This is what globalisation is all about. At the same time, there must be no doubt about the existence of market failures, deficiencies and weaknesses that have to be regulated by the state. But ‘wise governments learn to work with the markets, not against them’ (Economics 1999:133).

It is precisely because globalisation does not distribute the benefits equally, because there are winners and losers, that one has to regulate the market that brings such benefits in the first place. Globalisation is responsible for a 5-percent to 25-percent income differentiation between skilled and unskilled labour (IMF 1997:75). Salaries of the skilled are increasing, and those of the unskilled are falling. To prevent this social polarisation and its ultimate negative impact on welfare, one has to regulate the market. Those who benefit the most from globalisation should not be deprived of such benefits to the extent that they would become less interested in the further promotion of globalisation or, according to Ricardo, international trade. Should this occur, globalisation and thereby also its welfare-improving benefits would come to a standstill. The final outcome would be that those benefiting least from globalisation would also lose, with their welfare falling below the level at which it is today. Even those who lose jobs as a result of globalisation win by the falling prices, also resulting from globalisation — they benefit as consumers. The state should, with its compensation policy, compensate those losing jobs or offer them re-education for other jobs. The best way towards poverty reduction is widespread development, not "throwing sand into the wheels" of globalisation because of its differentiation effects. There are other instruments to address poverty and underdevelopment. In order to be effective they have to address the real causes of poverty — and that is not globalisation. Globalisation can only be a contributing, but not the only, or major, factor of poverty. Indeed, the ‘globalized economy has the potential to penalize policy shortcomings very strongly, and this aspect of globalization increases the risk that a poor country becomes (or feels) excluded from the global economic system’ (IMF 2000:37). Among important causes of poverty are also ‘misguided economic policies, weak institutions, political instability, and recurrent civil unrest and armed conflicts’ (ibid.).

Compensatory policy within countries is one and compensatory policy in the world is another instrument, which can address the issue of the losers of globalisation. International organisations can play a very important role in compensating the losers of the spontaneous outcomes of globalisation, by financing the development of infrastructure which would enable them to benefit from positive effects of globalisation and to reduce most pressing ills like AIDS and debt. But not by way of stopping globalisation and depriving the world from the welfare-enhancing effects it is producing. Another approach is to get

multinationals to endorse a set of basic human rights, environmental, and labour principles, and allow private groups to monitor their compliance. This is a UN new programme called Global Compact which so far some 44 companies, including Shell and Nike, have signed up to
(Business Week 2000:45).

In the past, many blamed international trade for causing the Great Depression, and imports for causing the loss of employment. Later, it became apparent that such accusations were irrational, and protectionism economically harmful. Today, people are protesting against globalisation. Imports and international trade became widely acceptable because of the growing awareness of their beneficial impact on growth of the world and national economies, because they are a generator of development. Subsequently, FDI emerged, and with the increase of FDI protests grew against it. This was largely for psychological reasons because FDI represented the direct access of foreigners to the management of "domestic" companies. Foreigners became owners of factories and real estate, spoke foreign languages, and brought in foreign customs. Nevertheless, these investments created new employment, paid taxes into the national budget, and broadened the supply of those products in the market that domestic producers were unable to produce in the same conditions and at the same price. It is quite apparent that people notice only the external manifestations of a certain event or process. In the case of imports and their impact on domestic economy, we tend to forget that each imported vehicle means one less domestically produced vehicle, and therefore also less employment. Sometimes this fact is not just overlooked or forgotten, but simply tolerated because of beneficial impact of imports (e.g. on the welfare of citizens, competition). However, when a vehicle is produced in the national economy by a foreign-owned company, which provides employment and work for domestic suppliers, one tends to focus only on disadvantages, 23 and disregards the benefits of such an arrangement. 24

As Robinson (1963/1981) put it bluntly many years ago, poverty as a result of capitalist exploitation is nothing compared to the poverty when there is no such exploitation. While such an argument may be difficult to substantiate in itself, it can be used as a metaphor in our discussion of globalisation. Translated into globalisation terms, an unequal distribution of income or globalisation-caused poverty is nothing compared to the alternative, i.e. the fact that globalisation would not have occurred in the first place. In the latter scenario, one would not have benefited from its advantages brought about by the world-wide division of labour, specialisation, economies of scale and scope, and consequently the trend towards the "optimal" allocation of resources. It is essential to maximise the positive impacts of globalisation that generate welfare and, at the same time, minimise its social polarisation effects in a way that does not impede those positive impacts.

Is Globalisation a Zero-sum Game?

Globalisation is not a zero-sum game. It is not true that what one country gains the other one loses. Such perception of globalisation is not surprising, however, given that parallel to globalisation the world is facing increasing unemployment and widespread crises. Globalisation only accentuates the tendencies for unequal development that are already present. Put differently: globalisation is a generator of improvements in living standards; it also enhances inequality-generating factors; but is directly responsible for only part of the existing inequalities. As ‘bad things can happen to good economies’ (Krugman 1999a:10), they could also happen to globalisation.

On the whole, however, globalisation and international trade are according to the major principle of economics — the principle of comparative advantages — positive-sum games in which everybody wins, but not everybody equally. In order that everyone wins and to avoid social disintegration, it is essential to maintain proper compensation policies that redistribute parts of the gains to the "losers", thereby increasing their common welfare. If we fail to act, argues Rodrik, ‘we risk an ugly political backlash against trade, that globalisation will contribute to social disintegration. A victory for globalisation that comes at a price of social disintegration will be a hollow victory indeed’ (Business Week, 28 April 1997:11).

Does Globalisation Mean a Market Economy and Free International Trade?

It is impossible to simply equate globalisation with free international trade and markets. Globalisation is not merely market-regulated IER. The market is just one way of organising social affairs. They could also be organised differently. The alternative to the market is an increased role of the state, a big government or ruler, but that would distort trade, and results would not necessarily be beneficial for the public — this is at least what history teaches us. According to Hayek (1988), such a way of regulating social affairs is based on ‘the fatal conceit’ which leads to different forms of centralised governance, of totalitarianism such as nazism, fascism and socialism, which means a denial of individual liberty. The centrally-planned way of regulating economic and social affairs leads to bondage, to a non-free society and poverty. When addressing market weaknesses, one has always to consider what is (are) the alternative(s) and what is (are) their possible weakness(es). Looking at things this way, one can more easily come to the conclusion that even a "bad" market is better than a "good" government. Or, as Hayek (1997:152) claimed,

those who argue that we have to an astounding degree learn to master the forces of nature but are mistaken when they carry the comparison further and argue that we must learn to master the forces of society in the same manner in which we have learned to master the forces of nature. This is not only the path to totalitarianism but the path to the destruction of our civilisation and a certain way to block future progress. Boundless possibilities for a policy of discrimination and oppression provided by such apparently innocuous principles as government control of the development of industries have been amply demonstrated to all those desirous of seeing how the political consequences of planning appear in practice.

Economics long ago recognised that markets are not ideal, that they have their failures that need to be corrected. Here is where the role of the state becomes important, but not the role of a "great and omnipotent state" which would replace the market, and which Hayek criticised. The state should mainly have the task of correcting the market’s weaknesses. However, it could become very dangerous if the state starts to be seen as a "replacement" for the market, if there is a tendency for the ‘re-establishment of the primacy of the state over economy’ (Martin and Schumann 1997:18). The return of the role of the state such as that it had in times of fascism and socialism would be detrimental to globalisation. This could take us back to the administrative economy that produces the so-called white elephants, which today still represent a huge burden on the transition of ex-socialist countries.

Yet, as already argued, the state still has a role to play. As all market results are not socially acceptable, neither are all the results of globalisation. Some negative effects call for corrections, for the re—distributive role of the state. Burtless and his associates (1998:8) wrote that ‘the role of the government is to help those who want to help themselves,’ and not act for them. What is needed therefore is a "reinterpretation" of state interventionism, where states would play a role to create and sustain the necessary stability in which markets could operate. Political stability is becoming an important factor of economic efficiency and welfare gains. Stability is becoming an indispensable ingredient of the new society and therefore also a factor of economic development and progress. One should not, however, "throw the baby out with the bath water" because of the negative, "dark" side of globalisation.

Thus globalisation should not be seen merely as a feature of market forces. It creates its own new market failures, which are multiplying rapidly. In sectors where there is monopolistic competition, or where trade within transnational companies is prevailing, turnover is growing even faster than in the free market. The role of the state is to remedy those market failures. One has to be aware, however, that monopolies are not always bad. They can be beneficial, especially because they decrease the "unnecessary" transaction costs, and thereby have a positive impact on income growth. This dichotomy between globalisation as a welfare generator and a creator of market failures on one hand, and the issue of reconciling its inequitable effects with social justice on the other, are the two essential globalisation paradoxes to be addressed by policy-makers.

Globalisation is therefore a combination of bottom-up and ex ante market-driven phenomena, a result of market forces in operation with firms as the essential players, and top-down conditions regulated by states and/or international institutions, usually ex post. It may be added that one of the real and most elaborated forms of globalisation today is regionalisation — an infrastructural precondition for the expansion of IER within the common markets, created by governments. The best example is the top-down stimulated regionalisation in Europe. Establishment of the European Communities actually occurred ahead of closer economic co-operation. The latter has in fact developed, and has been stimulated by infrastructural conditions supporting such co-operation (the setting up of the internal market, introduction of the Euro).

Does Globalisation Mean the Decline of Small States?

Globalisation offers unlimited possibilities for specialisation, a precondition for the welfare-maximising division of labour. By specialising, anyone can do what he or she is specialised in. Being specialists, they can produce more and more cheaply than those who are not, and thus contribute more to the growth of global welfare. Small states have the luxury of such specialisation that large states cannot afford. There are not enough small states to produce the number (quantity) of goods that the large states require. However, the more one is specialised, the more one can benefit from international trade. Small states can thereby benefit from the advantages of economies of scale and scope, which are otherwise unattainable to the optimal extent. It is globalisation that facilitates this.

The liberalisation of IER and the abolition of tariffs (lately in the Uruguay round and a future round of liberalisation of tariffs and other measures) have reduced the advantages of large markets, and increased the advantages of access to the global market (Becker 1991). Historically, access to the global market was not free. Hence, small states had the disadvantage of small national markets. Larger states had the advantage of a large enough domestic market to attain, in their own "backyard", the economies of scale and scope. Nowadays, with access to a large number of sectors, especially those in industry that are practically free (except in agriculture, textiles, footwear production, and steel products), the situation is very different. The global market is, with falling transport and communication costs, increasingly becoming almost a domestic market to all states. The relative position of small states has therefore improved substantially.

The forces of competitiveness and wealth-creation have also strengthened the relative position of small states. Before 1960, countries competed primarily on the basis of location-specific advantages such as possessing low-cost raw materials and energy. After that, competition shifted towards low-cost labour. In the seventies, economies of scale and the corresponding capital-intensive production became more important. Technology as a source of competitiveness came to the fore in the eighties, whereas in the nineties it was knowledge and information in general. Parallel to these processes, time has become increasingly important, sometimes even decisive. The one who can produce faster, and is the first to sell a new product simultaneously in a large number of important markets, is the one who is more competitive. Even more so if the product becomes a world standard. Therefore, we may refer to globalisation’s competitive advantages being possessed by those having knowledge, information and capacities to get access to value-creating assets anywhere in the world (advantages of a global combination of production factors).

Historically, small size has presented a disadvantage in many aspects of competitiveness. In the field of knowledge, which is the essential modern comparative advantage, small states are still limited, although less than before when other factors of competitiveness were decisive. With an adequate R&D (research and development) policy, focusing on education and aiming at preparing in advance for the challenges of globalisation, small states can substantially improve their relative position. This is especially true in the conditions where knowledge is the prevailing factor in determining the position of a national economy in relation to the global one. 25

The changes that the global economy is witnessing today are strengthening the relative position of small states, provided that the latter are capable of adapting and reacting flexibly to world trends. The advantage of small organisms (and states as social mechanisms) is their capability to adapt rapidly while larger organisms tend to be slower in adaptation (Katzenstein 1985). Adaptive efficiency is, according to North (1990), more important than allocative efficiency.

Does Globalisation Cause Unemployment and Reduce Wages?

Krugman (1999b:15) argues that ‘at the heart of capitalism’s inhumanity — and no sensible person will deny that the market is an amoral and often cruelly capricious master — is the fact that it treats labor as a commodity.’ It therefore comes as no surprise that globalisation’s impact on wages and the general position of labour/employment lies at the heart of globalisation debates. Simultaneous strengthening of globalisation trends, the growth of unemployment, and the falling of wage-growth rates behind the productivity-growth rates of some workers, strengthen the belief that globalisation causes unemployment and lower wages. Although, for instance, increased global involvement of the United States coincided with the creation of additional jobs and lowest unemployment rate in that country. There must be other factors that influence the unemployment rate. Certainly one of the most important factors here is the technological progress although its impacts are quite controversial. Norbert Wiener, a pioneer in computing, went as far as to predict that computers would create unemployment on a scale that would make the Great Depression look like a picnic. Doom-mongers of today also predict a jobless future as robots and computers take over. Even those lucky enough to hang on to a job will, they say, face insecurity and low wages (Economics 1999:68).

The claim that free trade (or globalisation, which is a manifestation of world-wide free trade) destroys jobs seems persuasive at first glance. The usual argument is that every imported car means one less car produced in a country. In addition, low priced imported goods are accused of pushing wages down at the same time. The third argument is that a local company moving its plants to foreign markets with low wages means the export of jobs for the home economy. Such simplistic analyses ignore some basic economic principles and facts. ‘Trade is not about generating more or fewer jobs, but generating better jobs and a higher national standard of living’ (Burtless et al. 1998:45), in the first place.

A mistake one tends to make when studying the impact of globalisation on jobs is the same as in the case of technology; macro impacts are confused with micro ones. In micro economic terms, a new computer or machine clearly makes a certain job redundant but, at the same time, it can open up many jobs in other industries, push productivity up not only in the sector that introduced the new technology but also in other sectors of the economy. So, in the real economy, productivity growth in one sector seems to have led to job gains in the other. ‘In the USA the net balance between the loss of jobs in manufacturing and creation of new jobs in services was positive for 45 million jobs in the last 25 years’ (Krugman 1999b:21). New technology creates new demand, which stimulates production and job creation. In the past, the demand-generating effects of new technology have always outweighed the labour-displacing effects. Technology has in the end created more jobs than it has destroyed. The OECD’s Jobs Study (1994) found that those countries that had shifted the structure of their production more quickly to high-technology sectors had created the most jobs (Economics 1999:260).

The influence of international trade and globalisation on wages and employment is small and indecisive. It is true that trade might be responsible for some of this growing inequality. Namely, such increases in wages have also taken place in sectors that do not produce internationally traded goods and services. Firms operating in such sectors would take advantage of falling wages by hiring more unskilled workers. If instead such firms also cut their use of unskilled labour, it must be the case that technological change or some other development, rather than trade, is primarily responsible for reducing the demand for less-skilled workers. The most plausible explanation offered by most economists is that technological change has pushed employers throughout the economy to shed less-skilled labour. The comparison of income inequalities in trading and non-trading sectors has demonstrated that such differences, such inequality, is growing at about the same rate in industries that are most effected by trade as in all industries in the United States (Burtless et al. 1998:79-83). But on the other hand, the data for the United States show that trade was found to be responsible for less than 6 percent of the drop in United States’ manufacturing employment between 1978-90 (OECD Policy Brief, No. 6, 1998:5). Eighty to ninety percent of changes in wages and income distribution in OECD countries are the result of factors other than trade with developing countries. On the other hand, exports accounted for one-third of economic growth in the United States and one in ten civil jobs are supported by exports of goods and services. The ratio in manufacturing is one in five. Changed import prices have had only a negligible effect on employment and wages in the United States, Great Britain, France, Germany and Italy (IMF 1997:57). With regard to wages, globalisation’s only impact would be to decrease unskilled labour’s wages in developed countries, provided that there would be a simultaneous decrease in prices of the imported, standardised and labour-intensive products as compared to the prices of highly-manufactured, technologically-intensive products. An IMF study shows that only a fairly small number of indicators confirm this. How can such imports be decisive in cutting unskilled labour’s wages if they represent only ‘3 percent to 8 percent of the OECD countries’ GDP’ (IMF 1997:57-8)?

Nevertheless, globalisation has become the scapegoat for unemployment and low wages. But globalisation is not the main generator of unemployment (micro-economically, at the level of firms or a given sector); it only accelerates it and provides general "infrastructure"’ in which it becomes hard to "survive", i.e. to keep a job in a fierce global competitive battle. Even without globalisation, technological progress would bring about more social stratification at home because the more educated would profit and the unskilled would lose out. The highest price is always paid by the unskilled who ‘are first to be laid off’ (Mikesell 2000:48). The causes and consequences are, therefore, rather mixed. Burtless and his associates (1998:ix) claim that politicians are quick to blame globalisation for unpopular economic news. It is also completely wrong to say that there is a danger that developing countries will flood world markets with their cheap exports as a consequence of the dislocation of production from industrial countries to cheaper locations in developing countries. It is mathematically ‘impossible for countries to be net importers of capital and net exporters of goods. Capital flows into a country are exactly equal to that country’s excess imports over exports’ (Burtless et al. 1998:75). Krugman (1997) goes even further by stating that the ‘real complaint against developing countries is not that their export is based on low wages or sweat shops. The complaint is that they exported at all.’

Perhaps the most important issue is whether average household wages fall as a result of imports from low-wage countries? Baghwati was the first to point out how wrong the simple trade-and-wages story is.

If low-cost imports had been the cause of falling wages for the unskilled, those imports must first have lowered the relative price of the competing American-made goods. That is the channel through which, according to the plausible theory, trade would drive wages down. But as several studies have found, the relative prices of those goods have not in fact fallen (Economics 1999:181).

Such a simple trade-wage impact evaluation, not also taking into account the relative prices and differences in the productivity of workers, is completely wrong. Wages in poor countries are low because workers’ productivity in those countries is low. Therefore, when assessing the impact of imports from low-wage countries, one should also include in the analysis the differences in productivity. Secondly, one should also evaluate the relative importance of such import to a given country. In most industrialised countries, the share of imports from low-wage countries in the overall imports of these countries is so marginal that the hypothesis that such imports drive wages in a given economy down cannot be validated. In the United States, such imports constitute only 5 percent of national output (Burtless et al. 1998:68). If there is such an impact, it must obviously be very small. A similar situation is also found in the majority of other developed countries.

Let us also look at the other side — a low-cost goods exporting country. These countries increase employment in the export sector and normally pay higher wages if labour has to be shifted from other sectors to the newly created exporting one. Instead of exporting jute or coffee they ‘started producing shirts and sneakers’ (Krugman 1999b:82). The result is also higher wages in such an exporting country. The well-known Samuelson theorem tells us that international trade is bringing about the tendency of the narrowing down of relative wage differences between countries. Common sense tells us that this is, in fact, good. Firstly, the climb up the ladder of value-added activities and export industries provides new job opportunities and higher wages. If the workers have not been employed before, the impact is a net gain in jobs. In addition, as these countries become richer by exporting they will spend their export earnings on skill-intensive goods from rich countries, thereby creating new jobs in those countries. For instance, it is technological development and the way technology is used that contribute to the fall of wages for unskilled labour and the growth of unemployment of some categories of jobs but, at the same time, creating a number of other jobs, particularly in the service sector. An example would be the computer revolution. Computers did cause a loss of low-paid jobs, but they have also created a number of other, more demanding ones, which are higher up the scale of value-added activities.

Globalisation’s impacts on employment and income levels are not uniform. How can globalisation be the main generator of unemployment when, for instance, in the United States domestic employment of American multinationals has remained steady at around 74 percent for 20 years, and if employment in other countries declined in the 1977-1994 period from 7 to 6.7 million (Business Week, 6 April 1998:10)? Globalisation creates as well as eliminates jobs, increases wages for some and decreases them for others. But globalisation only accelerates such wage and employment trends, it is not their primary cause. 26

Does Globalisation Erode Sovereignty and Threaten Democracy and Stability?

There can hardly be a uniform answer to this question. Gray (1998) sees a natural tension between markets 27 and democracy. Markets can exert their full disruptive power only when democratic institutions, which are designed to protect the interests of the majority, are either absent or not functioning properly. The welfare state and progressive taxation (both now undermined) were precisely a democratic response to the inequities of 19th century capitalism. The second issue is the relationship between globalisation and sovereignty. It must be stated, first and foremost, that even the largest states are no longer entirely independent in regulating their matters. Does this mean that globalisation erodes state sovereignty and, if so, how can governments cope with these globalisation challenges? Are states in retreat or are they increasingly sharing their power with other actors like non-governmental organisations? Is the power of states shifting more to markets (Strange 1996)? What can be said is that the concept of sovereignty has altered to a large extent and adapted to the changes in the world. A detailed analysis would show that states have become too small to effectively regulate many modern problems, e.g. pollution, narcotics, crime, AIDS and other diseases, that have no respect for boundaries. By the same token, states have become too large to regulate local and regional problems. The latter type largely relates to the many social spheres that are better regulated by civil society, non-governmental organisations and other associations at a regional and even international level. Kindleberger (1984:30) established long ago that ‘the optimum economic area is larger than the nation state, the optimum cultural area smaller, and the optimum political area, based on the objective of independence, is identical with it.’

Globalisation is clearly reshaping the role of the state. But any argument that the state is withering away as a consequence of globalisation would be unwarranted. What is actually going on is the transformation of the role of government in the globalised economy. Governments are increasingly sharing their sovereignty with other governments through international agreements and international institutions (international organisations, regimes, etc.). They still influence the rules and activities of international institutions (in fact, those states that do not participate in such institutions lose out). States are not as powerless as it might appear, although not all of them are equally influential. The state is the one that creates conditions in which globalisation can develop independently, e.g. in the home "backyard" or with other states at the regional and global levels. The state (the government) is important because it creates the infrastructure, legal and other conditions for the expansion of globalisation. 28 The state also acts as a corrector of market effects caused by uncontrolled globalisation. It rectifies the effects that are socially unacceptable, compensates those deprived by globalisation, and takes from those who benefit most from it. Failing to do so may bring about

a backlash in terms of anti liberal law and order policies. But that is easier said than done. Combination of economic regulation and technical change has set forces in motion that we can no longer easily control. Global capitalism is a beast with no master and it badly needs to be reined back. We need a global system of governance — a set of social and political rules — to ensure that markets remain consistent with enduring human needs (Gray 1995; quoted in Proune 2000).

Globalisation is also changing the role of state officials, whose actions are becoming more transparent. 29 The question is really not either globalisation or the state but rather how much and what kind of state and what kind and how much of globalisation. States and globalisation have developed parallel, hand in hand. Therefore, states are not going to disappear 30 in the ever more interdependent global system. States as we know them are going to remain with us for a long time, longer than most of us think. Globalisation presents it with new, complex challenges, but also opportunities (Lerda 1996:77).

It is also difficult to agree with the thesis that ‘globalisation threatens the stability of democracy’ and that the ‘market economy is in contradiction with democracy’ (Martin and Schumann 1997:220; see also Korten 1996:6). As for democracy, technological progress both accelerates and hinders it, whilst globalisation can only be a side player in this process. In a way, globalisation may also serve to facilitate democracy. 31 That Spain and Portugal could become members of the European Communities was also because the then member-states wanted to stabilise democracy in these two countries that had suffered under years of dictatorship. Globalisation, too, contributed to the collapse of communism and continues to speed up democratic reforms in former socialist countries. Further, it is not difficult to establish that human rights and democratic institutions are those prevailing in the modern world, and that globalisation actually allows such trends to prevail. With the opening up to global information, provided by Cable News Network (CNN) and many other similar television, radio or communications groups, even those previously deprived of this information are now able to benefit from it. States are literally losing autonomy and control over their citizens. In the modern Internet economy, the state cannot prevent the individual from connecting to the net. With a phone or computer, or mere access to them, one can simply plug in. Historically, states were in a position where they could close their "doors and windows" to foreign influence. Today, this is no longer possible, and that is globalisation. In this way, the infrastructure for democratisation has been created. The citizens of states who were in the past prevented from observing the democracy around them for technical reasons have expanded their aspirations to influence their destiny. Many international organisations have not paid enough attention to these profound changes, and are unable to adapt to the new reality. Modern communications facilities have enabled people to act more rapidly.

Let us look now briefly at another accusation levied against globalisation, namely that it threatens the stability of states. According to this accusation, rapid outflows of speculative foreign capital can be detrimental to state development. On the other hand, a development-stimulating effect should also not be disregarded. Small states fear that overwhelming amounts of foreign capital inflow could jeopardise their monetary stability and have to be stabilised by central banks. Although it is true that we are witnessing global tectonic and unpredictable changes, these changes also have positive aspects such as the large FDI and portfolio investment inflows that have enabled high growth rates of host countries. Sudden outflows of portfolio investment can indeed threaten the development of a host state, as was the case in Asia. Volatility of international capital markets is certainly one, if not the main, concern that globalisation has brought about. So far, no adequate remedy has been found to curtail it. The Tobin tax proposed back in 1970 has not been accepted as a good solution, and we have already found out that protectionism is no answer either. 32 Changes in IMF policies 33 are a modest step in the right direction, yet provide no solution to the volatility problem. However, one has to ask what would have happened had there simply been no capital inflow in the first place? How high would growth rates then have been? Surely not as high, as it is impossible to achieve them only by generating domestic savings. Although the danger of sudden capital outflows does exist, its short-term negative impact is substantially lower than the positive effects of long-term inflows of foreign capital into the country. Here, the analogy with Bastiat’s candle-makers’ "proposal" of shutting up all windows, doors and cracks to prevent the penetration of sunlight can be invoked yet again.

Is De-linking a Solution/Alternative to Globalisation?

As stressed in the previous section, globalisation essentially means searching for filters that allow the positive effects of globalisation into the home economy, while screening out the negative ones. The solution is therefore not found in de-linking from the global economy, as historically claimed by many radicals such as Amin (1971; 1976), Emmanuel (1972), Frank (1967), and Cardoso (1972). The last author is the best example of a change in attitude towards globalisation. As the President of Brazil, Cardoso is vigorously defending globalisation, advocating the liberalisation of his large state and its integration into the global economy. Experience has forced him to the conclusion that de-linking from the global market is not the solution. This has also been the experience of the socialist states that initially de-linked, and only later tried to selectively and modestly slip back into the world economy. Today only a few of them, such as North Korea and Cuba, persist on very limited integration into global markets. By not being in step with industrial development in the West, these socialist countries provide an example of how de-linking actually obstructs development. Studies have clearly shown that developing countries with an outward-oriented strategy of economic development have developed faster than those maintaining an import-substitution strategy. Between 1970 and 1989, the growth rates of "open" economies 34 were 4.5 percent compared to the 0.7 percent in the "closed" ones (Sachs and Warner 1995).

It must be stated, however, that globalisation does not reach out to some areas vital to the developing countries. The liberalisation rates in areas such as agriculture, textiles, leather, or steel are not as nearly as high as those in the industrial products’ sector. Restrictions still maintained by the developed countries (tariff and non-tariff) substantially prevent the equitable integration of the developing countries into the IER, and thus the achievement of the optimal globalisation results. With regard to these sectors, the developed countries are in fact, by protecting their producers’ interests, applying the "candle-makers" approach. If the optimal level of globalisation is to be achieved, trade will also have to be liberalised in the areas that are essential to the less-developed countries. Simultaneously, it would be necessary to enable these countries to benefit from preferential treatment at times when their industry or services are developing, similar to the treatment that the developed countries enjoyed before they achieved their present level of development. One has to bear in mind, however, that the past patterns cannot be repeated. Although there still exist important arguments for the protection of "infant industries", the period of such protection is nowadays much shorter and the level much lower. By taking into consideration the interests of the less-developed and de-privileged, a so-called "user-friendly globalisation" could be achieved.

De-linking is therefore not the solution. The social costs would be extremely high. One cannot but agree with the UNCTAD Trade and Development Report (1997:12), stating that:

There should be no doubt that the burden of such international economic disintegration would once again be borne by those who can least afford it. One simply has to jump into the wild waters of globalisation and learn to swim well. And remember that the impact of globalisation on an individual country is closely related to its development strategy. Globalisation awards good policies and punishes bad ones.

Conclusion

One of the best illustrations of the nature of globalisation was given by the Deputy Treasury Secretary of the United States Lawrence Summers when he described modern financial markets as being the main ingredient of globalisation. He stated that the emergence of modern financial markets is like the invention of the jet air plane: ‘we can go where we want much more quickly, we can get there more comfortably, more cheaply and most of the time more safely. But the clashes, when they occur, are much more spectacular’ (The Economist, 14 March 1998:100). Obviously, the global economy is substantially more dangerous than an economy with less international involvement or even an autarchic economy. Vernon (1998:ix) when trying to illustrate globalisation, used the metaphor of a hurricane:

The eye of a hurricane is a quiet place, but one surrounded by turmoil. As a rule, its victims have little choice but to rebuild after the storm has taken its toll, with a new resolve to use stronger and more durable roof timbers and to study the weather reports more carefully.

This demonstrates to Vernon ‘faith that governments and enterprises will eventually find a way of reducing the risks of conflict’ (ibid.) produced by globalisation.

It is necessary to catch the winds of globalisation, improve one’s sailing skills, avoid the many reefs and gales, and continue on the outlined path while trying not to lose passengers. For such a yachting regatta to be successful, however, there have to be rules. Multilateral regimes are needed to regulate the "navigation" of international trade and investment, financial relations etc. Without them, there would be anarchy, with too many collisions between yachts. One could have a race in which all the yachts would sink, and not one would reach the finish line. There would be no winners in such a race. But it is certainly not advisable to go to the other extreme, to see a hurricane or catastrophe in a nearby cloud.

Should the yachting regatta be held in difficult conditions, less experienced sailors have to be assisted with advice, and training before or even during the race. In other words, it is essential to provide the conditions for socially responsible globalisation that goes beyond "cannibal" capitalism or social Darwinism of some sort. The positive effects of trade and FDI, together with the greater re—distributive role of states, regional and international organisations, have to board the train of progress and simultaneously compensate those who lose out for the benefit of all.

It also means paying more attention to basics such as solid macroeconomic management, good public education, a thriving private sector, a legal system that protects property rights, and a society where prosperity is widely shared. These are the kind of pro-growth policies of East Asia (Business Week 2000: 47),

employed to develop from the sweat-shop havens in the 1960s and 1970s to industrial powers. This is the correct answer rather than the populist satanisation on one hand and, indeed, the glorification of globalisation on the other. Both extremes de-stimulate sound policies which, as stated above, are crucial in designing the effects of globalisation, which are not policy-free but rather strongly policy-specific.

A realistic manifestation of globalisation is regionalisation. There is no real and omnipresent globalisation, only an increase in all forms of IER in an increasing number of states. Most international trade and investment is still conducted within individual regional groups, or within the United States — European Union — Japan triad. It is more appropriate, therefore, to speak about regionalisation. The latter is a realistic response for small states to the challenges of globalisation. At the same time it has to be stated that regionalisation is not a long-term solution. States should simultaneously strengthen their global economic co-operation. By doing so, they would reinforce their position within the region. The one who succeeds in markets beyond the region it belongs to "conquers the world". For instance, co-operation with the technologically advanced American and Japanese companies through FDI would mean being ahead of the European Union; the latter has a large technological deficit, 35 so it is important to co-operate with the technology frontrunners, wherever they are found.

The important feature of globalisation is that, besides states, there are many new global participants, such as non-governmental organisations and civil society, which all contribute to globalisation’s "human image". Even individuals can restrain multinational enterprises’ hunger for profits by purchasing certain products and avoiding others whose production involves polluting the environment, child labour etc. The most recent examples of non-governmental organisations’ influence are the unsuccessful attempt to conclude a multilateral agreement on investment, and the failure of the WTO conference in Seattle (1999). Non-governmental organisations can act as a counterbalance to globalisation, transforming it into a "people-friendly" process. It is essential to ensure that in the future more people can enjoy the benefits of globalisation. The latter is the right choice even if it means some costs, provided that those costs are lower than those of the alternatives. The outcome of the negotiations should always be evaluated against the alternatives, not with regard to the actual negotiating outcomes.

Globalisation may be a problem but it is also part of the solution. To paraphrase Schumpeter (1934), the challenge of globalisation is how to prevent the destructive forces of modern capitalism from prevailing over its creative forces (UNCTAD 1997:66). In order to do that, it also seems important to overcome the simplistic opinion that globalisation is responsible for all of today’s evils, that by eliminating globalisation Paradise will be achieved on the Earth, and to instead try to make globalisation an instrument of development not only for those who benefit the most today but to also include those others not yet benefiting from it. What we therefore need is socially responsible globalisation ("globalisation with a human face") which combines global trade and investment with global (and regional) social redistribution, global (and regional) social regulations and the global (and regional) social empowerment of citizens everywhere.

December 2000

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Endnotes:

Note *: Marjan Marian Svetlièiè is Professor of International Economic Relations at the Faculty of Social Sciences, University of Ljubljana, and Head of the Centre of International Relations.

This article is based on a presentation given at the conference Globalisation, European Integration, National Identity; Challenges to Small States, organised by the Centre of International Relations, Faculty of Social Sciences, 8 and 9 November 1999 in Ljubljana. The author is grateful to two anonymous referees for their critical comments.Back

Note 1: It is difficult to define globalisation. It has been argued that the term globalisation was used for the first time by Levitt in 1985 in his book on Globalisation of Markets (Raghavan 1997:2). Here, globalisation is defined as the world-wide integration and deepening of economic activities which create integrated and strongly interdependent production and consumption/value systems facilitated by the information-telecommunication revolution, and by liberalisation and deregulation that has facilitated the unprecedented mobility of goods, services (including technology and knowledge) and labour through which events on a certain side of the globe have produced significant effects for all states and individuals. For definitions of globalisation, see also OECD (1993), Ohmae (1994), Jones (1995), Lewis (1996), Marone (1996), Oman (1996), and Giddens (1997). Back

Note 2: It is very difficult to divide authors between critics or advocates of globalisation as is frequently done in the popular press. It would seem more appropriate to define them as: i) hyperglobalists who believe that the world is evolving into one political and social unit; ii) sceptics, convinced that the nation-state is here to stay and that globalisation is only a chimera; and finally iii) transformationalists who believe that "forces at work" and their impact are rather more complex than might have been thought by others (Kindleberger 2000:17). In addition, one could also mention the so-called populistic literature on globalisation, where authors such as Martin and Schumann (1997) or Lutwak (1999) come to one’s mind. Back

Note 3: A similar book, dealing with the predecessors of globalisation was Le defi American (1967/1969) which spoke about the "American aggressors" in the form of foreign direct investment in Europe. The epilogue of the book, however, is the following: when the author of that book, Jean-Jacques Servan-Schreiber, was president of Le Centre Mondial in Paris he sent his resignation to President Mitterand when the French Government discriminated in favour of a French producer in a tender bid to provide equipment to French schools. Later on, he became the president of an American multinational company and started warning Americans against the invasion of Japanese capital (Rubner 1990:272). So much for the long-term validity and consistency of the authors criticising globalisation and related trends in the international economy. Back

Note 4: Acquired Immune Deficiency Syndrome. Back

Note 5: The incomes of rich and poor countries continue to diverge. The share of GDP per capita of the upper third in the world increased in the period 1970-1997, the middle third decreased from 12.5 to 11.4 percent of the richest third and that of the poorest third from 3.1 to 1.9 percent (World Bank 2000:14). This occurred in spite of the fact that GDP per capita of the low-income countries increased the fastest in the period 1975-1998; 6.3 times compared to 3.9 times for the high-income countries and 2.8 times for medium-income countries (UNDP 2000:181). Rich countries have been growing faster than poor countries since the Industrial Revolution in the mid-19th century (World Bank 2000:14). Poverty is still widespread although it has recently decreased as measured by the share of the population making less than one dollar a day in the period 1990-98. With the exception of Eastern Europe and Central Asia, all other regions have reduced the share of such population from 1990 to 1998. Some, like East Asia have substantially reduced their share (from approximately 28 percent to 16 percent), others like Latin America, South Asia and Sub-Saharan Africa (the absolute share of the population living in poverty in Sub-Saharan Africa is still very high (46 percent), in South Asia it is 40 percent) only modestly (by approximately 2-4 percentage points; see Business Week 2000:43, quoting World Bank data). Back

Note 6: In East Asia growth rates were at the level of almost 8 percent in 1980-90 and 1990-98, while in Eastern Europe they were only 2.5 percent in 1980-90 and were negative in 1990-98. In South Asia, they were some 6 percent in both periods, while in Latin America in 1980-90 they were less than 2.5 percent but increased to almost 3.5 percent in 1990-98 (Business Week 2000:43). Back

Note 7: This is a solution advocated already in the sixties and seventies by neo-Marxists or supporters of the dependency school, e.g. by Frank (1967), Sunkel (1969), Amin (1971; 1976), Furtado (1974), Hymer (1972), and Mandel (1975). Back

Note 8: This is a shorter version of the actual petition, only to demonstrate the main point. Back

Note 9: Protection means in effect subsidising domestic producers. Back

Note 10: Inhumane working conditions, long working hours, unpaid overtime work, manipulating hazardous chemicals without proper protection for workers, or forbidden trade unions facilitate protests such as ‘that global capitalism has gone too far, too fast and cut corners’ or that global economy is pretty much still in the robber-baron age (Business Week 2000:43). Back

Note 11: Generally ‘European companies are ahead of their US rivals in the corporate responsibility movement’ (Business Week 2000:59). Back

Note 12: Korten (1999) addresses globalisation as a locomotive of wealth destruction because it destroys the environment, for example. He argued that GDP is not a relevant growth indicator because it includes military production and other "harmful" services (divorce lawyers’ fees, for example). He even claims that GDP would be declining and not increasing without those elements. Back

Note 13: Not surprisingly, opinion polls show, and not only in the United States, that at least half of the American population believes that globalisation does more harm than good, and that expanded trade will lead to lower wages for American workers (Burtless et al. 1998:6). Back

Note 14: Hirst and Thompson (1999:2) claim that ‘globalisation is largely a myth’ and that it is not new because it began to be generalised from the 1860s, genuinely transnational companies are rare, capital mobility is limited and concentrated in the triad of Europe, Japan and the United States and since global markets are no beyond regulation and control. Back

Note 15: This is perhaps the first time that the globe was used in such a context, which might be considered as a predecessor of the term globalisation. Back

Note 16: Only 1 percent of all foreign exchange transactions is trade related (The Economist, 18 March 2000:81). Back

Note 17: According to UNCTAD (2000), sales of foreign affiliates reached USD 13.564 billion in 1999, compared to US $ 6.892 billion in exports of goods and non-factor services in the same year. Back

Note 18: There are a number of small, usually knowledge-intensive firms, many times start-up ones, which internationalise their activities. In Israel, a number of such start-ups is estimated at 1,100 (Riskin 1999). The 41 firms evaluated by Almor (1999) are very much global in terms of markets, products and even in many cases, in terms of R&D. These firms are global from their inception. Back

Note 19: This may sound idealistic, considering that many, especially in Africa, cannot even buy food or are hours away from the nearest phone. Indeed, the number of main telephone lines per 1000 people in low-income countries is still almost 16 times lower compared to high-income countries, in spite of their increase in the period 1990-1996/98 by 6 times. Even worse is the situation with Internet hosts per 1000 people. They were hardly existing in low-income countries in 1998 (0.02 to 48.18 in high-income countries (UNDP 2000:201)). Yet before the Internet era their isolation from the world market was even greater. Back

Note 20: In fact, these economies have regained their growth momentum. In 1999, the inflow of FDI in East Asian countries increased by 80 percent. South Korea alone attracted US $ 10 billion in that year, four times its 1996 level (UNCTAD 2000:55). Back

Note 21: The calculation was made on the basis of a sample of 42 countries. Back

Note 22: Within this context, trade and globalisation can indeed be used interchangeably. Back

Note 23: For instance, FDI could push wages down if countries start racing to the bottom in terms of wages in order to attract FDI. Sometimes, the mere fact that foreigners own domestic companies or that they can easily move out of the country tends to be troubling. Back

Note 24: The share of FDI flows in gross fixed capital formation in the world was still a modest 11 percent, although it was higher in certain developing countries. The share of FDI stock in gross domestic product globally also did not exceed 13.7 percent in the same year, and was again higher in developing countries — 20 percent (UNCTAD 2000:306, 317). The biggest quantity of FDI in the world is still accounted for by the member-states of the Organisation for Economic Co-operation and Development (OECD). Therefore, if FDI was the main engine of globalisation and most FDI is taking place in developed countries then they must be the major "victims" of such inequality-enhancing impacts of globalisation if the argument were in fact correct. Back

Note 25: Human capital today constitutes namely 64 percent of wealth, natural resources 20 percent and physical capital only 16 percent (UNDP 1996:64). Back

Note 26: The latter are much more complex, the most important being the enormous technological progress. Back

Note 27: In this context, globalisation could be regarded as a market proxy. Back

Note 28: Take for instance the European Communities (European Union) and its 80,000-page-long acquis communautaire. Back

Note 29: Globalisation in fact stimulates the improvement of bureaucracy because in conditions of global transparency it is harder to conceal the incompetence of the state apparatus or its officials. Back

Note 30: One of the most outspoken exponents of the state obsolescence thesis is Ohmae (1994). Back

Note 31: Of course, globalisation may threaten democracy as well. Foreign influences that enter through globalisation channels into the domestic sphere can align with local conservative forces and thus obstruct progress. The military coup against President Allende in Chile at the beginning of the seventies is one example. However, this phenomenon is not the main characteristic of globalisation; it is only one of the possibilities from the vastly diversified spectrum of developments in new democracies. Back

Note 32: In the United States it was calculated that if liberalisation were to stop right now, the wages of skilled workers would decline by 2-5 percent and those of unskilled workers would remain the same. Imposing a 30-percent tariff on developing country exports would inflict even greater damage; it would cut the wages of unskilled workers by 1 percent and those of skilled workers by 5 percent (OECD Policy Brief, No. 6, 1998:6). Back

Note 33: They include: enhancing transparency (making data timely and reliable and so the fiscal and monetary policies), establishing new standards or codes of good practices, strengthening the financial sector (improving internal practices, upgrade supervision and managing risks), involving the private sector in preventing and resolving crises to limit moral hazard and strengthen market discipline and facilitate restructuring sovereign debt and finally by systemic improvements like contingent credit lines as new instrument for preventing crises (IMF Survey 2000:5). Back

Note 34: Beside the developed states, the group included e.g. Yemen, Indonesia, Korea, Cyprus, Jordan, Barbados, Ireland, Portugal and Malaysia. At first, when the states’ development level is low, the differences between developed and developing countries can increase. However, subsequently the real incomes of both groups of states begin to converge. Back

Note 35: The trade deficit of the EU in high-tech products in 1992 was as high as US $ 40 billion. It has increased threefold since 1980 (Business Week, 22 March 1993). Back