Globalisation in the dock

Ever since the global financial crisis that started in 2007, the benefits and disadvantages of globalisation at all levels have been questioned by the general public as much as by political leaders and economic experts.

The latest installment in this debate was the Brexit episode in the UK. A similar discourse forms part of the presidential election campaign in the USA, the culmination of which we will only see as we get closer to the election date (8 November 2016).   Jac Laubscher, Economic Adviser at Sanlam,  unpacks it for us.

The British vote in favour of Brexit has been described as the biggest setback yet to globalisation. Whether this is correct is debatable – after all, one of the arguments in favour of Brexit that has been put forward is that it would enable the UK to negotiate its own free-trade agreements with countries such as China and India without being constrained by the limitations foisted on it by EU membership! Furthermore, the LEAVE campaign wants to retain access to the single EU market in some yet-to-be-explained way. And that leaves aside the reality that the Brexit referendum debate was to a large extent based on misrepresentation of facts and outright ignorance.

On the face of it, it appears as if Brexit is more about regional political integration than globalisation, although it does have global implications because of the importance of the countries involved for the global economy and political balance.

What it did bring home is the truth that issues of economic integration cannot be decided clinically on the basis of economic theory because of the inevitability of the affected people being either gainers or losers  from this process. It is unrealistic to expect the losers to accept their lot without complaining and that they will not use the political system to let their voices be heard.

The argument that in the aggregate economic integration is to the advantage of the collective provides no solace to the losers. If the gainers are foreigners, as is often the case in free-trade deals, the losers will be even less susceptible to such arguments. Even mainstream US economists often argue that globalisation has resulted in job losses, in particular because of rising imports of manufactured goods from China, without weighing up the creation of new jobs in China (which has lifted millions out of poverty) against the loss of American jobs in manufacturing.

The benefits and disadvantages of globalisation can after all only be assessed at a global level as in the work of Branko Milanovic (former head research economist for the World Bank, and currently a visiting professor at the Luxembourg Income Study Center at CUNY) who recently wrote that “Large real income gains have been made by people around the median of the global income distribution and by those in the global top 1%.  However, there has been an absence of real income growth for people around the 80-85th percentiles of the global distribution, a group consisting of people in ‘old rich’ OECD countries who are in the lower halves of their countries’ income distributions.”*

What has also been brought home by the debates raging in the UK, Europe, and the USA is that the free movement of people is qualitatively different from the free movement of goods and services and capital. While the pros and cons of free capital flows across borders and free trade in goods and services can be evaluated on purely economic considerations, the free movement of people involves not only their role as economic agents (workers, consumers and taxpayers) but also matters of culture and identity that speak to people at an emotional level. Judging the advantages and disadvantages of migration purely from a labour market perspective would therefore result in the conclusions being incomplete.

South Africa cannot stand apart from these debates. In essence it is not only a beneficiary of globalisation but has a vested interest in its ongoing expansion.

As a commodity producer South Africa is dependent on the global demand for commodities and not only that from China – after all, commodity prices are determined by global demand and supply. Any event that impacts on global economic conditions and prospects is therefore relevant to its (SA’s) interests.

Because of weak domestic demand and the inability of the South African government to create an environment conducive to higher economic growth, South Africa is reliant on foreign demand (viz. exports) to support growth on the supply side. If South Africa is to be successful in its quest to move up the value chain and enable the payment of higher wages through increased productivity, it requires access to foreign  markets and global supply chains for its manufactured exports in particular. If it is to fully exploit its competitive advantage in financial services, it needs other countries, in particular in Africa, to allow South African financial institutions to ply their trade within their borders.

Because of South Africa’s low level of expenditure on research and development and lack of innovation it is dependent on the transfer of foreign technology and expertise, which often takes place through foreign direct investment.

South Africa’s chronic current account deficit and low domestic savings rate make it dependent on an ongoing inflow of foreign capital, the opportunities for which have been greatly enhanced by financial globalisation.

As for the free flow of people, South Africa has been ambiguous in its approach. On the one hand it has been reluctant to allow South African businesses to employ highly skilled foreign workers as they deem necessary, while on the other hand it has turned a blind eye to an influx, legally and illegally, of mostly unskilled people from the rest of Africa.

Like the British people, South Africans have not always been tolerant of the influx of foreigners, as evidenced by sporadic incidences of xenophobic violence. Although a sizeable percentage of migrants to South Africa has been Muslims (e.g. those from Somalia), there is no evidence of objections to their presence on religious or cultural grounds as is the case in Europe, Britain and the USA. The closest we have come to this are the complaints voiced by informal traders in Cape Town that their Somalian competitors are allegedly being assisted to set up shop by capital from the Middle East, channelled through the Muslim Judicial Council.

But then these objections are essentially of an economic nature. It should not come as a surprise that in a country where economic opportunity is lacking, South Africans see themselves as being involved in a zero-sum game with foreign migrants, and not without reason.

For example, according to Derick Blaauw of North-West University and colleagues, “Foreign migrants often enter informal employment as day labourers. They compete with South Africans for jobs in this curb-side (sic) labour market. Three surveys of day labourers working in Tshwane between 2004 and 2015 reveal two important tendencies. First, the foreign-migrant component has increased from 12% to just over 55% in 11 years. Secondly, the wages and the level of poverty of both foreign and South African day labourers have worsened in the same period.”**

What all this means is that the beneficiaries of the major changes that took place in last half-century cannot just turn a blind eye to the plight of the losers. The result of the Brexit vote shows that the hard edges of inequality need to be smoothed. In South Africa the imperative is just so much greater.

References

*Branko Milanovic: The greatest reshuffle of individual incomes since the Industrial Revolution. VoxEU. 1 July 2016

**Derick Blaauw, Anmar Pretorius, and Rinie Schenck: Day labourers and the role of foreign migrants: for better or for worse? Econ 3×3. 17 May 2016.

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