Globalization for Economics

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Globalization and the British Economy

Globalization and Competitiveness

Tutor2u Economics

Autumn 2002

An introduction to the process of globalization. There is no single

definition of the term but globalization is affecting the daily lives andwork of everyone and will bring about fundamental changes in many

major industries and markets.

This revision presentation considers how globalization may affect the

pattern of trade between Britain and other countries in the years ahead.It also focuses on the need for the British economy to improve itscompetitiveness in the face of the increasing challenges brought about by

globalization


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It is the increasing integration of the international economy

The Economist described it as the The Death of Distance

Deregulation of world product, capital and labour markets designed to increasefinancial and factor mobility and movement of goods and services

Expansion of multinational activity there are more than 60,000 transnationalcompanies with an estimated 800,000 affiliates

A trend toward looking at economic and financial issues, and policy instrumentsfrom a worldwide rather than a single-country viewpoint

Globalisation involves fundamental changes in economic geography includingthe spatial division of different stages of production

The geographical separation of manufacturing from research and development

The expansion of global sourcing

Increased specialisation in particular goods and services and faster shifts in the

balance of comparative economic advantage

A reduction in the economic power of governments e.g. to raise taxes?

Greater global economic interdependence

What is Globalization?


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Factors Behind The Rapid Expansion of Global Trade

Fall in Sea

Transport Costs

Declining AirFreight Costs

Fall incommunicationscosts

Decline in tariffand non-tariffrestrictions Rising Real

Living Standards

Liberalisation ofDomestic

Markets


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Development of Global Production Networks

Multinational Enterprises (MNEs)

Ownership of Proprietary Technology

Management Know-How

Global Brands

Global Distribution

Economies of Scale

Local Enterprises

Low Labour Costs

Local Market Knowledge

Domestic Distribution Network

Opportunities for MNEs

Direct Ownership of Local Businesses

Joint Ventures

Licensing Systems

Franchising OptionsSupplier Agreements


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The Expansion ofWorld Trade

WORLD RADE ROWTH ULTIPLES 1950 2000

36

19

6 6

2.3

0

5

10

15

20

25

30

35

40

Exports of

Manufactured Goods

Total exports of

visible goods

Agricultural exports World Production World Population

Sour : IMF,OE D, U i ions

GrowthMultil

World trade now accounts for 25% of global GDP

There are now 142 members of the World TradeOrganization with 30 other nations applying to join


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GLOBALISATION AND CHANGES IN

BRITAINS PATTERN OF TRADE

The long term impact of the globalization process is likely to cause further

changes to our patterns of trade in goods and services. Where will Britains

comparative advantage lie in an increasingly competitive, global economy?


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The Impact of Globalization on UK Trade

Increased use of global outsourcing (e.g. Dyson moving to Malaysia,Zurich Financial Services opening a call centre in India, Marks andSpencer sourcing its garments from Asia)

Rising import penetration from relatively cheaper manufactured

products produced overseas (e.g. textiles, steel, semi-conductors)

Rapid expansion of trade flows between developed industrialised

countries particularly those within regional trading blocs

UK transnational companies will seek to establish a global tradingplatform in markets where they have a significant position

Fast growth of exports of high and medium-high technology goods

Rapid growth of trade in high-valued knowledge-based services

International technological alliances between firms


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UK Comparative Advantage?

Long term (structural) trade deficit in goods widening to over33 billion in 2001

UK remains a net oil exporter but this may finish by the middleof the current decade

UK retains a comparative advantage in chemicals

High trade deficits in semi finished and finished manufacturing(particularly low valued added products)

Relatively stronger position in international trade in services particularly financial services

But weakness in travel & tourism and aviation

Trade is well balanced with the European Union and the UnitedStates but heavy deficits with the Asian economy


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Distribution of UK Trade By Global Region (2000)

UK Geogra " hical Distribution of Trade in Goods in 2000

Valu # Per Cent Per Cent

million

Expo $ ts Impo $ ts Balance Ex% & rts ' m % & rts

Eu ( op ) anUnion 107,142 108,976 1,834 57.3 50.5

Oth0 1

W0

st0 1

nEu1

op0

7,475 13,172 5,697 4 6.1No 2 th Ameri 3 a 33,823 33,637 186 18.1 15.6

Other OECD countries 10,926 18,093 7,167 5.8 8.4

Oil-exporting countries 6,048 4,289 1,759 3.2 2

Restofthe world 21,717 37,775 16,058 11.6 17.5

Total 187,131 215,942 28,811 100 100


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SHIFTING THE GROUND

We should no longer be trying to compete ininternational markets on the basis of low cost, low

value-added manufacturing, but rather throughinnovative, high technology products and processes

CBI Policy Statement on Manufacturing andGlobalization, March 2002


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INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

INNOVATION CAPITAL INVESTMENTTECHNOLOGICAL PROGRESS

RELATIVE INFLATION

EXCHANGE RATE

ENTRE-PRENEURSHIP

PRODUCTIVITY

LABOUR MARKETPERFORMANCE


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How Big is the Productivity Gap?

GDP per worker and per hour workedG5 compar on, 2000Index, UK=100

0

20

40

60

80

100

120

140

160

US France* Germany Japan*

GDP perw or er

GDP perhourw or ed

(*GDP perhourfor1999)Source: National Statistics


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Factors Behind The Gap

Deficit in Physical Capital UK is under-invested

Deficit in Human Capital

Skills deficit

Labour market failure? Government failure?

Other Factors

Limited exploitation of economies of scale

The Pace of Innovation

Success at applying knowledge and turning it into higher

productivity

Competitiveness (contestability) of markets? perhaps a relatively

minor factor


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UK Competitiveness Summary

Since 1995, the standard measure of competitiveness (relativeunit labour costs) has worsened by 40%

3/5 of this is due to the continued strength of the exchange rate

2/5 due to the slower productivity growth and faster growth ofwages and earnings (leading to rising unit wage costs)

Some aspects of our competitiveness have improved Low inflation

Rising level of business investment

But it takes a tremendous amount of time for supply-side

improvements to fully work their way through

Globalisation will intensify the need for the British economy to

become more competitive in price and non-price terms


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A Shift Towards Knowledge Based Services

Exportsof owl sedservi esG7 o pa on, 1991 - 1999

e ent of tota e e e po t

0

10

20

30

40

50

60

1991 1992 1993 1994 1995 1996 1997 199 1999

ou e: I

Japan

anada

Ita

Ge an

an e


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And Towards High Technology Manufactured Goods

Exports of High and Medium-High Technology GoodsG7 comparison, 1981-2000Per cent of total goods exports

0

5

10

15

20

25

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Source: UN

US

UK

Canada

Japan

Germany

Italy

France


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Surf the Web: Globalisation Special Reports

The World Bank


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Guardian: Globalisation Special News Reports


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Surf the Web: The Jubilee Plus Foundation

Globalization for Economics

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