“Spirited Conversations”, Nelson, April 27.
Keywords: Globalisation & Trade;
Introduction
The Royal Society of New Zealand has awarded me a grant from the Marsden Fund to study globalisation. What I am going to do this evening is set down the framework economists use when we study that globalisation.
First their definition: Globalisation is the economic integration of economies – regional and national economies. It is accepted that globalisation is not solely an economic phenomenon. It has political, social and cultural consequences.
Many people treat globalisation as if it is a particular phenomenon, such as brands, or the World Trade Organisation, or foreign investment. But different people think of different phenomenon, whereas the economists’ approach is to proved an overall framework, into which each can be fitted. I have not time tonight to deal with every possible phenomenon so the aim is to introduce the framework to you, with some illustrations, in the hope that you can use it to explain a problem which is puzzling you.
Second, economists think globalisation began in the early nineteenth century, so the phenomenon is almost two centuries old. I use lots of history to illustrate the framework. I’ll do so tonight.
We forget is that we are the children of globalisation. That’s why we are here, for the New Zealand we know is an consequence of it. Our non-Maori ancestors came here as a part of the process of globalisation. The shape of the economy is the consequence of refrigeration which reduced the cost of sending meat and dairy products and apples to Britain from prohibitive to negligible. New Zealand might have been the Falklands of the South Pacific without it.
Because human’s are naturally conservatives, each generation accepts the globalisation which has happened in the past, and yet is apprehensive about what is happening now and in the future. History provides some comfort that our grandchildren will think the same.
Third, globalisation is caused by the falling cost of distance: transport costs, plus the costs of storage, security, timeliness, information, and intimacy.
To see how these costs have fallen, consider how 150 years ago, it took about three months to get from New Zealand to Britain, whether you were send a package and person or a message. Lets represent the time by a line across the page:
***********************************************
Today it takes only a month to go to Britain by ship. That is because ships are faster, and they can go through the Panama Canal. That line now looks like:
**************
But a person can fly to Britain in a couple of days, while the holds of the planes carry goods with high value to weight ratios. That line looks more like
*
But today one can send information in vast quantities almost instantaneously via the world wide web. On the same scale that time is represented by something smaller than the full stop which ends this sentence.
Distance costs continues to fall. Did you know that our third to biggest export port by value is the Auckland International Airport? It is also the second biggest import port. And those calculations do not include our single biggest export earner – tourism. The US sends as much by air as by sea.
The final general point is the policy conclusion. The issue is not being for or against globalisation. It is how this force shapes the world economy and the societies in which we live, and how it can be harnessed to give desirable rather than detrimental outcomes. That will be my final theme.
This is a very compact summary of a lot of economic thinking. The best I can do this evening is give you a sense of the how some of these principles develop.
What The Falling Costs of Distance Means to a Region
In order to see the complexity of issue, I am going to look at the impact of a local change in distance, leading to a greater integration of two regions.
Suppose a state highway was built between Hamner and Tophouse along the already existing a route. It would reduce the road travelling time between Nelson and Christchurch by over two hours, turning to what is close to a full day trip to a half day one. What would be the effect of this closer distance be on the two regions?
Let’s put aside collateral impacts on other regions such
– Maruia Springs and Murchison would experience a loss of custom;
– travellers on the Picton to Christchurch road would suffer less congestion, because Nelson travellers would not use it;
– Residents of Hamner might be quite divided between those who like the extra custom and those who dislike the extra traffic through the town;
– and so on.
But the collateral effect reminds us, that on the world scale third countries and regions may be affected. For instance the airports of Shannon in Ireland and Gander in Newfoundland at first thrived as the jumping off points for cross-Atlantic air travel, and then suffered when aircraft range increased and the planes overflew them.
So how would the road impact on the two regions. My list includes
– some goods would now be supplied to Nelson from Christchurch businesses, and the previous Nelson suppliers would close down or change;
but also
– some Nelson businesses would start supplying goods or more goods to Christchurch.
Meanwhile
– the Nelson tourism in all its various facets would flourish because more Christchurch and overseas visitors based from Christchurch would come.
Would all that result in more or less jobs in Nelson? I dont know.
One source of new jobs would be that some Nelson exporters would pack airfreight containers of fresh and just-in-time products, and road them down to Christchurch International Airport (which is seventh as an export goods port, and sixth as an import goods port although it will be going up the rankings). In order to survive New Zealand will have to export more high value to weight ratio goods. Moreover new long range planes will soon be able to fly New Zealand-New York and New Zealand-India so our share of the world to be supplied by air freight is going up, and we gotta seize the opportunity. Nelson producers are among those who might seize them, creating more added value and more jobs in the province.
Incidentally, the port of Nelson is already a smaller value export and importer than Christchurch airport (12th and 13th in 2003), and it is possible it would lose business to Lyttelton if the Hamner-Tophouse road was in place. There could be more, or there could be less, flights between Nelson airport and Christchurch.
So would Nelson be worse or better off if there was the road? What we do know is that some people in Nelson will be better off and some may be worse off. Many of those initially worse off will be better off in the long run as they move to new jobs, but those jobs may not be in Nelson.
The conclusion that some people will be better off and some worse off may at first seem a weak one, but it is central to understand the globalisation debate. Those who are worse off from some aspect of globalisation say they are agin it, and those who are better off say they are for it. They are both correct, about themselves, but they lack an overall perspective. That is why the globalisation debate is so confusing. We are talking about a very complex phenomenon, which lacks simple yeses or nos.
Consider refrigeration. Was that a good thing for every New Zealander. (It was a bad for English hill farmers who found their business undercut by cheap New Zealand lamb.) It is so long ago it is hard to remember that some of the big New Zealand sheep stations specialising in wool found themselves at a disadvantage when their workers went off to start up their own farms. And they lost political power too. (The biggest losers happened to be the North Island Maori who had their underutilised land taken in order to settle Pakeha farmers on it.)
Before looking at the international parallel, there is another phenomenon I want to spend a little time on. Given a Hamner-Tophouse road, I am fairly sure you would find more Christchurch people buying second homes in Nelson, driving up on Friday evening and returning at the end of the weekend or longer holiday. Some permanent Nelson dwellers would benefit: builders, local shops for instance. You would have out-of-towners paying a share of your local authority rates – probably more than the share of resources they would use. Moreover, those of you who have a Nelson house you want to sell would have more interested buyers, so you would get a better price.
But are the higher prices a good thing for Nelson as a whole? Waterfront prices would go up most, and Nelson locals would find it harder to live by the sea. The higher house prices would also impact on the poor, who would be less able to buy their own houses, and their rents would probably be higher. And to complicate things, here were more jobs for the poor the poor.
Same story as I was telling you before. Some people would be better off and some people would be worse off. Again we can argue the balance, knowing there is no simple scientific method which tells us whether the region is better or worse off. What is important about this extension, is that it involves investment by outsiders, which also happens internationally.
You might say that it is one thing to have Christchurch people crowding out the housing: it is quite another thing to have foreigners. After all, you may quite like Cantabrians –even be a Crusaders fan – and you may have lived there once yourself or friends and relatives do. On the other hand, you may not. And in any case, the outsiders may vote differently on matters of local importance. Again there is no simple answers.
What Falling Costs of Mean Internationally
There are a couple of important differences between the regional and international responses to falling costs of difference.
The first is whatever one’s view of the people of Christchurch, you think you have more of common with them than with those overseas. Moreover if you job closes down and moves to Christchurch you may be able to follow it. There will be an upheaval, but it is not impossible. On the other hand if a the extended range planes (or the internet) means your job moves to New York or Bangalore. it is not only very difficult for you to follow, but migration restrictions may not let you anyway.
There is also a matter of fiscal redistribution. If a job moves to Christchurch the government is likely to redistribute some of the additional taxation it gathers in Christchurch back to Nelson, especially to cover transition costs such as unemployment benefits. That wont happen if the job moves to New York or Bangalore.
Related to this is the notions of nation and sovereignty. We have to be very careful when we are discussing these notions, for they are often idealise beyond the practicalities. Yet there is a sense that we New Zealanders are a nation. But it is not hard to see that both nation and its ability to act in its on interests are changing. Nostalgia says things are getting worse. Historians would remind us that they always have been – nostalgia is not what it use to be. Economists would remind us that usually any loss of sovereignty is a tradeoff for other benefits. I have written on this elsewhere – two papers are on my website. We could talk about the issue later, if you like.
Falling Cost of Distance as a Driver
Perhaps the most important difference from my local example is that Nelson is not going to have a lot of influence on the falling costs of distance generally. If Nelson does not want the Hamner-Tophouse road it wont be built. If Nelson does not want extended range planes, the local feelings will will not make one iota of difference to whether they are built or not. We can, of course, ban them. A ban from Nelson airport would not make a lot of difference, but New Zealand could ban them from all our airports. In which case New Zealanders would fly to New York via Sydney (at a cost of a few extra hours of flying time): a way can often be found round prohibitions on new technologies.
Will the costs of distance continue to fall? They may rise. Oil prices may go up, terrorism could restrict transportation. The cost lifts, however, would probably have to be enormous. Were the avgas price to double, because of the improved efficiencies of planes, air travel costs would only go back to where they were in 1990. But even were there to be no new physical technologies, the indications are that new soft technologies – managing and organising the hard technologies better – will continue to press down on the costs of distance.
There is quite a debate about offshoring in the information technology and communications industry. (Offshoring is outsourcing that goes overseas, deriving from the dramatic reduction in costs of moving information. In effect it makes part of the service industry as internationally mobile as manufacturing.) I am struck by how clumsy are current management practices of offshoring, with the expectation that as they improve the costs of offshoring will come town, even if the wages in the offshored industry continue to rise.
Insofar as globalisation – the closer integration of national and regional economies – is driven by the falling costs of distant – and given that they are likely to fall – for some products anyway – the pressures from that extraordinary force which we call globalisation will persists for some time, and so will the consequences. So what are we going to do about it?
So What Are We Going to Do About Globalisation?
History provides some guidance. In the nineteenth century globalisation and industrialisation were intimately connected. Manufacturing processes, once performed at home, moved to increasingly larger factories, as the falling costs of distance made possible the reaping of their economies of scale. Our ancestors moved from their villages into the slums of Britain and Europe. There was an extraordinary destruction of the environment, as dark satanic mills’ polluted air and water, and the urban crush created cesspools. Deteriorating conditions caused many to travel from their homes to the other side of the world. Economic historians still debate whether living standards rose or fell over the nineteenth century. They probably rose for some, fell for others. Yet if the industrialisation caused much personal trauma to those involved. their descendants of today benefited, although not all of the environmental damage has been reversed.
Over time, mankind learned to harness the new technologies by creating social institutions which regulated them.. Factory Acts prevented the use of child labour, regulations, Public infrastructure dealt with the disposal of waste and public hygiene. Public income support protected the weakest. Workers’ compensation started in Germany as a response to factory accidents and was copied in New Zealand in 1901. So gradually the capitalist tiger unleashed by nineteenth century technological change was tamed – in part anyway. Mankind learned to control the forces and make them work in our interests.
At an early stage of nineteenth century globalisation and industrialisation, a major dispute took place between philosophers of the political Left. On one side was the French anarchist, Pierre-Joseph Proudhon. Appalled by the human costs of the changes, he argued for a reversion to the way of life which preceded these changes, with a nostalgia for an Arcadia which never existed, but which he hoped could be recreated. Another version of the Arcadian nostalgia was in some of the reasons people came to New Zealand. They thought they could escape the trauma of European industrialisation by coming to a green and pleasant land, starting afresh to create a utopia (not, one adds, always sensitive to the indigenous people already here).
The best-known opposition to Proudhon came from Karl Marx, a man we often see through the perspective of his twentieth century followers, many of whom misrepresent him. Marx argued that industrialisation and globalisation were essentially progressive forces. The processes, he said, was unstoppable, even though they caused misery to the worker caught up in the transformation. But, Marx went on to argue, ultimately the outcome would benefit workers with the creation of a communist state, in which they would enjoy the fruits of their labour.
With hindsight we can see that Marx was broadly correct. Sure, we have not reached any communist state – Marx himself was a bit vague about what he meant by the notion. But ultimately the workers of the world are better off by the industrialisation. Had they retreated to the nostalgia of Proudhon’s Arcadia, they would not be, for they would be isolated from the benefits of the technology which drove globalisation and industrialisation. Admittedly there has not been much equity in the sharing of the fruits of the transformation. Among those who have benefited least were those in the continents of Africa and Asia. But even they are probably glad to be here today, rather than in the pre-globalisation economy of 1800 (HIV-Aids aside).
For no matter how awful some of the effects of nineteenth century industrialisation were, our ancestors, informed more by democratic socialism than by the ideas of Marx or Proudhon, learned to control it and to benefit from it. That is the challenge and the prospect for this bout of globalisation too, to harness the forces of globalisation, not to deny them or petend we can reverse them.
Marx famously wrote “philosophers have only interpreted the world in various ways; the point is, to change it.” But first we have to understand the implications of the reductions in the costs of distance. I am most fortunate that the Marsden Fund has made that possible for me, and I’m glad to be able to share my understanding with you.