Tuesday, July 26, 2005

Is the World Still Round?

How about another post not tax related? In a very interesting article called The World Is Still Round, Robert J. Samuelson (published in the Washington Post last Friday, 22 July) talks about globalisation and its effects. I would challenge you to take a break of tax and read it.

You can click here or read below:

The World Is Still Round
"One of the unheralded contrasts of our time is this: Everywhere we see the increasingly powerful effects of globalization, and yet the single most important reality for the economic well-being of most people is their nationality. The idea that we're all being swept along by the impersonal forces of globalization seems intuitively logical and instinctively menacing. The older and less-noticed truth is that nations usually remain, for better or worse, the decisive force in determining the economic condition of their citizens.

The United States, Europe and Japan offer an object lesson. All face, generally speaking, the same opportunities and threats from globalization. But results vary dramatically. Since 1995 American economic growth has averaged 3.3 percent; Europe's, 2 percent; and Japan's, 1.3 percent. (Europe refers to the 12 countries using the euro.) Even in Europe, stark contrasts emerge. Ireland's growth averaged 7.9 percent over the decade; Germany's, 1.3 percent. Somehow national policies, culture and business overshadow globalization.

Why? It's not because globalization is a myth. In his highly readable and informative book "The World Is Flat," New York Times columnist Thomas Friedman describes an economic system of transnational supply chains, foreign "outsourcing" of services and intensifying international competition. He asks Dell to describe geographically how his laptop was made. Here's the abbreviated answer: Engineers in Texas and Taiwan designed it; the microprocessor came from one of Intel's factories in the Philippines, Costa Rica, Malaysia or China; memory came from Korean, German, Taiwanese or Japanese firms with factories in their countries; other components (keyboard, hard-disk drive, batteries, etc.) came from U.S., Japanese, Taiwanese, Irish, Israeli and British firms with factories mainly in Asia; and the laptop was assembled in Taiwan.

What Friedman means by "the world is flat" is that everyone increasingly competes with everyone else on everything. Adam Smith wrote that "the division of labor is limited by the extent of the market" -- meaning that larger markets spawn more specialization. Now markets seem universal; national borders seem to crumble. The Internet is a global auction block. Someone mistakes me for a business, so I receive occasional e-mails from Asian and U.S. Web sites to buy industrial goods. Last week it was forklifts. But, of course, the world is not flat. Borders, though battered, survive and have economic meaning. National markets do exist. One big difference is their vigor in creating local demand and jobs. Europe's sluggishness may reflect more than high taxes and restrictive regulations. Some Europeans blame attitudes: Because Europeans fear the future more than Americans, it's said, they spend less and save more. Even if the argument is wrong -- and who knows? -- the larger point is right: National markets are defined by psychology as well as politics.

It's easy to exaggerate globalization. Yes, some computer, software and engineering jobs have already moved to India, China and other low-cost countries. More will follow. But the process is limited. The McKinsey Global Institute says that 750,000 U.S. service jobs have been "offshored" out of about 140 million total U.S. jobs. Perhaps 9 percent of U.S. service jobs might theoretically migrate abroad, McKinsey says, but "it is unlikely that all these . . . jobs will move offshore over the next 30 years." There are practical obstacles: language differences, management resistance or computer incompatibilities. Similarly, it's easy to overrate trade's impact on factory jobs. A study by economists Martin Baily of McKinsey & Co. and Robert Lawrence of Harvard University attributes roughly 90 percent of manufacturing's recent job losses to domestic forces.

Localization usually trumps globalization, though countries seem to succeed more when they encourage globalization. In 1990 per capita incomes in Ireland were 28 percent lower than in Germany, reports the Organization for Economic Cooperation and Development (OECD). In 2004 the Irish were 26 percent higher. One reason that Ireland grew faster is that it eagerly welcomed foreign investment. Half of Ireland's manufacturing employment comes from foreign multinationals, compared with Germany's 6 percent, says the OECD.

The real question about globalization is whether all these nations -- each with its own psychology and each pursuing its self-interest -- can fashion a system that works for everyone. If too many national economies are weak, then the global economy will be weak. If too many countries try to manipulate the system to their advantage, then the global economy may become unstable or succumb to mutual suspicions. These threats already exist. Europe and Japan are weak; many Asian countries, including China, strive for permanent trade surpluses through undervalued currencies. (China's small revaluation yesterday is a start in reversing that.)

Globalization is not preordained to advance inexorably, driven by constant improvements in communications and transportation. It's vulnerable to economic and political setbacks. The irony is that its fate rests heavily on the behavior of that supposed economic relic -- the nation-state."


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