End of globalisation as we know it

By Bharat Jhunjhunwala
October 29, 2010

The world economy is showing some signs of revival. But this may be a false start. Globalisation has encouraged the developed countries to transfer their advanced technologies to the developing countries. They no longer have absolute control of these technologies.

As a result their erstwhile monopoly on advanced goods like computer servers, rockets and nuclear reactors has evaporated into thin air. They are getting some royalty payments from the export of these technologies. But these decline with time. It is necessary to continuously generate new technologies to maintain the stream of income from royalty payments. This does not seem to be happening. The low cost of labour provides a deep advantage to the developing countries. Developed countries will not be able to compete with hi-tech India.

This is inherent in the model of free trade on which the present model of globalisation is built. Globalisation has actually made things difficult for the developed countries. It has encouraged them to transfer advanced technologies to the developing countries. For example, American and French companies are excited about transferring advanced nuclear power reactors to India on the successful culmination of the nuclear agreement.

Globalisation removes the comparative advantage of advanced technologies enjoyed by the developed countries till recently. Say the cost of production of nuclear power is Rs 2 per unit against Rs 4 per unit for thermal power. The cost of nuclear energy in the US will be Rs 2.

On the other hand, India will have to produce thermal power at Rs 4 per unit if the US does not export the technology of nuclear reactors. Consequently the cost of production of goods in India will be more and the US can pay higher wages to its workers to that extent. But companies producing nuclear reactors will be deprived of profits from the export of their reactors. Corporations will supply advanced nuclear reactors to India, the cost of energy in India will also get reduced to Rs 2 per unit, and the US companies will not be able to compete with India. Cheaper production in India will make it impossible for the US companies to pay higher wages.

Free trade has added to the woes of developed countries in another way. The daily wage of an unskilled worker in India is about Rs 200 against Rs 5,000 in the US. It has become profitable for US companies to produce in India and export the manufactured goods to their home economy. Wal-Mart is procuring about 80 per cent of its goods from China. Production of garments, toys and footwear has practically come to an end in the US.

That has happened because China and India have got the winning combination of advanced technologies and cheap labour.

This is giving them a comparative advantage in a global marketplace.

Developed countries were protected against such competition previously.

Advanced technologies were closely guarded. For example, India virtually begged for cryogenic engines for its space missions and super computers for its meteorological applications. These were denied at that time. Such restrictions are now passé. Instead Western companies are engaged in a fierce competition as to who exports most advanced nuclear technologies first to India. Developed countries had previously insulated themselves from competition from China and India in two ways — exports of advanced technologies was prohibited and imports of goods were subject to larger import taxes. It was possible for American companies to pay higher wages to their workers behind this protective shield which has since been dismantled.

The US government made a huge $700 billion stimulus package to bailout US banks from the present crisis. It has indirectly bought these loans from crisis-ridden banks. This package was successful in lessening the immediate pain but it will wholly fail in solving the long-term crisis. The stimulus package has had the consequence of artificially maintaining high wages in the US. The cost of production of American companies continues to be more than that of Chinese companies.

The solution for developed countries will come from adopting a protectionist stance. Developed countries will be better off if they impose high import tariffs.

Such import taxes, when imposed on garments, for example, will lead to high cost of garments in the US and, accordingly, it will become possible for US companies to pay higher wages to the extent of import taxes. Import taxes will also put brakes on the penchant for exporting advanced technologies.

Presently American companies are transferring advanced technologies, in part, because they want to import the goods produced. Use of advanced technologies lowers the cost of production in China and enables cheaper import of goods into the US.

Higher import duties will lead to lesser imports and correspondingly lesser incentive for the export of advanced technologies. It is clear that present model of globalisation has reached its end because there is no solace here for workers of the developed countries.

Where did the model go wrong? My reckoning is that there was misplaced trust in continuous development of new technologies. The US left no stone unturned in having the TRIPS agreement included in the WTO. The underlying idea was that gains from exports of advanced technologies will be huge and more than compensate for loss of employment due to cheap imports. The gains were indeed huge but only as long as new technologies were being developed.

The model failed because new technologies failed to appear and the expected benefits from export of new technologies failed to materialise. The assumption that new technologies will continue to appear and provide a continuous stream of incomes to the developed countries has failed leading to the collapse of globalisation, as we know it.

bharatj@sancharnet.in