Globalisation: The Devil’s Bargain

by Mike Newland.

The biggest single change to the economy during the last decades has been globalisation.

A revolution has taken place. What was once a great manufacturing country bursting with skills and training has become an importer of nearly everything including a torrent of foreign labour.  How did this come about and how were we persuaded that it would enormously benefit us – since this has been the siren song sung endlessly?

The story really begins in the early 19th century when economists – notably David Ricardo – observed correctly that if one country – say – had a good climate for making wine and another for producing wool then it would in principle pay both of them to specialise in the areas they were most efficient at. Each country could obtain the things they were no longer making by trading the things they were good at. Beneficial for all.

Now this idea is correct in so far as it goes but there are a number of assumptions that have to be made for the process to be quite the free lunch for all it at first appears to be.

Firstly, those employed in the relatively inefficient areas of the economy who lose their occupations have to move into something else as good or better for them. This is unlikely to happen. A skilled say wine maker is not likely to easily make up his loss of occupation. More likely he will end up in a lower paid job perhaps in a service industry and that is, of course, a familiar feature of Britain during the last decades as industries collapsed.

Secondly, there is a huge assumption that everyone displaced manages to find work in the first place. If there was full employment before the revolution it’s a big leap to suppose everything will adjust to the same situation afterwards.

Thirdly, what happens to the division of the cake between workers and capital? If profits and management’s cut increases that may well wipe out benefit to ordinary workers from cheap imports.

Fourthly, it’s assumed that the ‘capitalists’ – the people who provide the plant and equipment – turn it to other uses within the same country rather than upping sticks and setting up their operations elsewhere. That is of course exactly what has happened on a huge scale. Workers can’t produce in modern economies unless someone else provides the apparatus. Few live on their own cabbage patch. Firms now can almost as easily run their factories abroad as here.

Phew! That’s quite a list of caveats concerning something which at first appears simple and obvious and beneficial.

What has actually happened is certainly that many goods can be imported cheaply – CD players and the lower priced end of clothing for example – but everything else has been adverse.

We have become a country of permanent mass unemployment and low-paid service jobs often doing what economists like to describe as ‘taking in each others’ washing’. Where a family once cooked its own food it now purchases takeaways while the labour once put into cooking is hired out cleaning the nail parlour whose owner once did his own cleaning. Suddenly people are earning money and are counted as adding to output in the economy when in fact they are not doing any more work or producing more than they did before. It’s simply that paid work is counted and unpaid is not. The politicians boast about growth! It’s a beautiful trick.

Worse, even much of this work can and is being undercut by importing yet more low-skilled labour. So the worker’s original real job disappears and even any inferior replacement. What a way to run a chip shop! Anyone visiting a supermarket can see how the system works with foreign ‘students’ filling the positions.

The idea that the displaced skilled soon learn equivalent new skills is all too often simply wrong. There has been a massive downskilling as industry disappeared. A people who 50 years ago could fix their car engines now all too often even can’t even install a 13a plug. Training collapsed as industry collapsed.

If challenged about loss of skills the system would usually claim that what was being exported was merely donkey work leaving the skilled well-paid jobs here. One idea was that the factory might have moved but the design and engineering would remain in the West. Quite a bit of hubris there. The developing countries turned out to be a lot more capable than expected once they had got the hang of technology.

Since prosperity is all about skills in the long-run this is a disaster. It’s a far cry from the fluffy vision of the Western worker relieved of drudgery and moving up to more interesting and better paid work. Like security work and deliveries.

It’s also the case that the division of the spoils has moved towards benefiting the better off. Insane bonuses in the financial industry have become institutionalised. Supposedly these are rewards for exceptional skill when the operators actually produce nothing. There is a clue here about why the politicians and their richer supporters and funders are so keen to sell us internationalisation.

On top of all of this there has been a massive migration of capital abroad. The factory floor and its equipment is simply boxed up and moved to where nimble fingers can be hired more cheaply.

All of this is a far cry from the happy insight Ricardo and others had into swopping products made in countries whose natural circumstances favoured particular forms of production.

What has actually happened in a big picture painted in primary colours?

Undeveloped countries had little that developed countries want in most cases outside raw materials while their populations would very much like to enjoy Western goods like Mercedes cars and washing machines and radios. What they did have in abundance was those nimble fingers and lots of fingers too which could be hired for little in the way of cars and washers and so on. The exchange rate was highly favourable to Western countries in terms of the cost of labour is the technical way of putting it.

What then happens if the Western manufacturer shifts his gear to a poor country? He can employ a lot of labour far more cheaply than in Britain. People used to manual skills will soon adapt to factory work and they have done. Nothing to do with some countries being better placed to produce certain things because of their local environments. A plot of land in China for a factory is no different to a plot of land in Wigan. Half of US imports from China are from factories offshored by US businesses.

The manufacturer undercuts his competitors who remained at home and seizes the market. He takes a nice slice of the extra pie as extra profits. Before long no one can remain in business at home. How often have we heard that from industrialists! The workers are stranded as the mill shuts and go on benefits – often officially encouraged sick benefits since that helps to hide unemployment. The Tories pioneered the tactic during the 1980s.

We should not omit to mention the intervening stage which took place particularly in the 1950s and 1960s when cheaper labour was imported rather than the factories moving to where the cheaper labour originated. Ironically, many of the imported soon found themselves stranded as the occupations they moved into half a world away disappeared.

Free trade as an evident and obvious benefit to all has been sold politically to conceal what it really is as now employed – a machinery mainly to satisfy the greed of the powerful. There is mostly no economic basis for it in terms of a valid claim to national advantage in the case of Britain in particular.

Who are the big winners and losers? The powerful would not have backed the scheme unless someone emerged a winner. Certainly international capital. But developing countries are also hugely benefiting from the new arrangements.

A popular misconception is the ‘dollar a day’ worker in developing countries. The fallacy here lies in that the dollar is what the worker would get if he swopped his wages into US currency and travelled abroad. That does not represent his spending power at home due to what is called the ‘Balassa Samuelson effect‘. Local goods like housing and food are much cheaper in relation to tradables in poor countries than they are in rich ones. Yes the workers in poor countries are poor but not quite as poor a claimed or they would be dead. Nor would they be swarming into industrial areas if things were not better there. Above all the workers in developing countries are learning the skills needed to further develop. Plenty of gain there.

China, in particular, has enjoyed such a spectacular growth in output that it has been able to suppress its own consumption and lend to the West. The West in turn increased its consumption – on tick – which masked its deteriorating position. It’s easy to feel things are good on the never never.

In the West, there have been huge gains to the better off but for large sectors of the population the life they could once have enjoyed with a single bread winner supporting the family in reliable employment has been supplanted on a vast scale by temporary low-paid work or the benefits queue.

Yes they do enjoy cheap DVDs and flat screen tellies but the bargain overall has been the devil’s own for Britain.