As already noted, the ‘multiplicity’ label groups together the various phenomena or stylized facts linked to globalization in the age of ICT. Given the rather complex links between ICT and globalization, use of the label seems apt. The notion of globalization clearly goes beyond the mere freedom of exchange. It implies, for example, an increase in the number of actors and competitors involved as well as a diminution of the barriers to the cross-national flow of products, factors, values and ideas, not just lower tariffs.1 As a result, it also stimulates technological progress. In turn, ICT is a key factor in the creation of a global society (see e.g. Talalay, et al. 1997:1; Audretsch 2000:64). In what follows, we shall focus mainly on the interaction between globalization and ICT.
However, we will make reference to globalization only for descriptive purposes; in other words, we do not assume a one-way causal relationship between the two. Indeed it is more accurate to regard them as ‘twin forces’ (e.g. Audretsch 2000:65) of mutual influence, whose interaction gives rise to a number of phenomena of interest.
It should be clear that globalization is not a new phenomenon. According to some economic historians, in many respects the degree of global integration before the First World War even exceeded that of the late 1990s (see e.g. DeMartino 2000:2; Kaplinsky 2001:60–1).2 More in general, at the root of globalization we can find those legal and institutional changes, such as liberalization of markets, anti-monopolistic laws, trade agreements and exchange rate regimes, which allowed the ‘creation’ of transcontinental and intercontinental markets in past decades (see DeDunning 2000:11; Long and Summers 2001:40).
It seems difficult to deny, however, that the NE implies some kind of acceleration of this phenomenon. Indeed the current stage of globalization is characterized by a stronger propensity of various economies towards international openness, as well as greater mobility of resources (e.g. capital, labour, money) and integration of real and financial markets than in the past. For instance, growth in trade since the Second World War has far exceeded growth in economic output;3 another example is the recent spectacular growth of cross-border financial flows: gross foreign assets have risen to about 50 per cent of world GDP (up from 20 in 1900–14) (see e.g. Basu and Taylor 1999:47;
DeMartino 2000:2; Dunning 2000:11).4
It is almost beyond doubt that this acceleration of globalization creates both ‘winners’
and ‘losers’. But economists differ as to which side deserves greater emphasis. Some regard globalization as having mainly positive effects on the stability of the world economy, because it helps unify markets and fosters greater integration between the key participants. Others believe that, overall, the new globalization tends to create a more unstable world economy. For example, it can be seen to undermine the autonomous decision-making of individuals and national economies alike and to encourage the fragmentation of economic and social reality. In what follows, we shall not evaluate these stability claims, nor shall we ask why some effects are bound to prevail over others. This
is what we are going to do in Part V in the light of the basic theoretical frameworks.
Instead, our purpose here is simply to take stock of the various stability and instability factors, placing the emphasis on signs of acceleration or differences between recent trends and those of past decades.
A new division of labour
Globalization in the age of ICT may reduce cyclical instability for a number of reasons.
For example, it brings about changes in the division of labour between nations—or what Audretsch (2000:64) called ‘spatial revolution in terms of the geography of production’—which seem beneficial for all countries in terms of production, aggregate demand and employment. In advanced economies, globalization is accelerating the process of creative destruction, that is, the progressive crowding-out of production which is more vulnerable to international competition from emerging low-cost economies and their substitution with new production in more advanced sectors of the economy (i.e. the more knowledge-intensive asset-augmenting activities) with potential positive net effects in terms of reduction of unemployment rates (e.g. Audretsch 2000:65). On the other hand, thanks to international trade, emerging economies may sustain higher levels of aggregate demand in the world economy as they are now able to advance beyond the first stage of economic development—based on raw materials and low labour costs—and participate as competitors over the whole range of goods and services.
This change in the division of labour is also gaining impetus from the new technologies (see e.g. Audretsch 2000:64; Dunning 2000:9–10).5 Not only does ICT reinforce positive external effects by helping the R&D effort of one firm spillover and affect the stock of knowledge available to all firms both at the national and international levels (see e.g. Audretsch 2000:66; Stiroh 2000), but it also makes production more easily transferable from one country to another. In particular, by improving communications and reducing communication costs, ICT enables firms to implement an
‘outsourcing’ strategy across borders. This represents a new, highly flexible and adaptable ‘cross-national production system’ which both permits and results from an increasingly fine division of labour between firms and nations alike (see Cohen et al.
2000; DeMartino 2000:12–13; Dunning 2000).6
Market unification
Another reason why the recent form of globalization may reduce cyclical instability is that some key factors, such as liberalization of international trade and investment and ICT, improve the efficiency of markets and the functioning of the price mechanism. In particular, the Internet is playing a significant role in bringing about changes that may dampen fluctuations and grant swift adjustments of economies to external shocks. By creating a tightly woven tapestry of national economies and societies around the world, the Internet has made commodity, time and space ultimately traversable as never before.
By making more information available faster and cheaper, lowering transaction costs and reducing barriers to capital flows, the Internet has eliminated previous constraints of time
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and geographical location in buying and selling,7 facilitated comparison pricing, cut out the middlemen between firms and customers, reduced barriers to entry and therefore generated more contestable markets (see e.g. Blinder 2000; Comor 2000:107; Dunning 2000:14; the Economist 1–4–2000; Cullemberg et at. 2001:8).8
Finally, the current stage of globalization may reduce cyclical volatility by acting as a safety valve for large industrialized countries. Not only does it reduce their dependence on domestic demand and enlarge the supply of raw materials, but it also contributes to keeping their inflation down, despite high domestic aggregate demand, by favouring a higher penetration of imports from low-cost producers (see e.g. Zarnowitz 1999; the Economist 28–9–2002:10).
Strictly speaking, as noted by Blanchard (2003:169), the competitive pressure induced by globalization does not imply the disappearance of the unemployment-inflation relation, although it may actually reduce unemployment for at least two reasons: first, greater competition reduces monopoly power and mark-ups; second, de-location of production favours firms in collective bargaining.
Negative externality effects
Although globalization in the age of ICT may reduce cyclical instability, it can also bring about increased vulnerability. This may happen mainly because it generates two forces working in opposition to one another. On the one hand, by inducing growing interdependence, global factors tend to undermine the decisional autonomy of individuals and national economies alike; on the other, they create new structural conditions that induce fragmentation of economic and social reality. Let us start with individuals. It is not difficult to see that, thanks to the combined effect and ICT, they have to process an increasing quantity of information even more rapidly and to take more variables into account in their decision-making process than in the past. The result is a growing interdependence between individuals, with potentially negative effects on the stability of the economy. Why? It can be argued that in order to act in the new global context, individuals are compelled to simplify their decision-making process. One way to achieve this is by relying more and more on conventional practice. For example, they refer to compendiary ‘general’ information about the behaviour of large aggregates or the economy as a whole, instead of looking for detailed ‘specific’ information concerning particular events. This practice is potentially destabilizing, because it leads individual agents to act and form expectations in a very similar fashion and thus tends to amplify their reactions to any change in the news. In particular, as Brock and Colander point out, the more tightly interconnected relevant actors’ expectations are, ‘the more likely is a
“surprise” burst of expectations revision that may be hard to reverse as well as effects that would be hard to forecast with conventional tools’ (2000:88).
One instance is the formation of a highly volatile aggregate, such as ‘business confidence’, which can serve as an important channel through which recession can spread from country to country. Another instance is herd behaviour on the stock exchange, often leading to unmotivated waves of optimism or pessimism and, therefore, to what Zarnowitz (1999:70) calls ‘shared errors’ in private financial investment decisions. It should be clear that if globalization accelerates, as in the NE, this source of instability
becomes more serious because of the higher correlation between markets and the increasing numbers of investors and traders involved.
Fragmentation of structural conditions
It would be wrong to conclude, however, that globalization simply generates greater homogeneity in individual behaviour. In the age of ICT, it is also likely to contribute to the creation of a rising heterogeneity or fragmentation of structural conditions, especially in the US and other major economies, which makes use of generalized abstractions, such as ‘the consumer’, ‘the firm’ or aggregate concepts, appear increasingly less realistic. As noted by Pryor (2000:65–6), for example, the population in these countries is becoming increasingly heterogeneous according to such criteria as age, family structure, ethnicity, income, wealth and occupation. Similarly, production units are becoming more heterogeneous in size, type of production and location. In particular, export specialization goods—produced by networks of firms often clustered in a few subnational regions, known as ‘industrial districts’, due to the fact that knowledge spillovers are spatially restricted—have recently increased in major developed countries (see e.g. Storper 2000:48–9).9 Indeed,
an irony of globalization is that even as the relevant geographic market for most goods and services becomes increasingly global, the increased importance of innovative activity in the leading developed countries has triggered a resurgence in the importance of local regions as a key source of comparative advantage.
(Audretsch 2000:77) This aspect of the NE also has significant implications for macroeconomic stability, especially in mature economies. If it is true that globalization in the age of ICT is likely to favour the expansion of firms in the more specialized sectors of the economy, this expansion is not without possible negative consequences, especially on the employment levels in these economies. On the one hand, the loss of jobs in more traditional or mature sectors may be severe because they are relatively labour intensive. On the other,
‘districts’ may not be as labour intensive and the firms composing them generally fail to grow beyond a certain size. Moreover, it is erroneous to regard particular districts as necessarily permanent or long-lasting drivers of national income. While it is true that
‘such clusters are capable of technological learning and the resulting ongoing product differentiation continuously renews their competitive advantages, outrunning their imitators’ (Storper 2000:49), it is also true that the knowledge embedded in such products or services is only ‘temporarily unique’ (ibid.). On these grounds, it can thus be argued that, although technological learning makes immediate imitation and diffusion rather difficult, the combined effect of ICT and globalization is to reduce the period of the competitive advantage exploitable by firms and thus favour the shrinking of manufacturing industry in advanced countries.10
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Reduced autonomy of national economies
Similar remarks apply to national economies as well. In general, it is true that globalization also reduces the decisional autonomy of a country, whose economic conditions (interest rates, fiscal regimes, regulations for environment protection or anti- monopolistic laws or consumer protection) cannot diverge too much from those prevailing in other countries. Exposure to world markets sets a limit to deviant behaviour of governments and public institutions of a country (see e.g. Dunford 2000:166; Kitson and Michie 2000:13; Turner 2001). The adoption of structural policies producing higher costs to firms (even if they could be justified by positive long-run effects) could push them to move to different countries where there are fewer limitations and constraints.
Similarly, powerful investors in global financial markets may ‘hijack monetary policy’
(DeMartino 2000:17) Indeed, the adoption of an expansionary monetary policy to stimulate growth may be
sabotaged by a flight of assets in the domestic currency as investors pursue the higher rates of return that are available abroad. This may depress the value of the nation’s currency, raise inflation and (in the short run) lead to a deterioration in its balance of trade…
(ibid.)
In addition, by increasing the degree of international openness and, thus, the interdependence of various economies, globalization also increases their exposure to external shocks. This means, for example, that a reduction in the level of economic activity or the effects of financial crises in any one of them can be transmitted more easily to the others and, thus, tend to be amplified—with obvious negative effects on global stability.11
Although such instability problems are not new, many researchers suggest that the recent acceleration of the globalization process is likely to exacerbate them. In principle, globalization can help stabilize economies if they are at different stages of the cycle.
However, this is only true up to a point, beyond which the very forces of global integration are likely to synchronize economic cycles more closely, with the result that downturns in different countries are more likely to reinforce one another. In other words, the acceleration of global economic integration in the NE also means that business cycles are becoming more closely correlated over time so that, for example, ‘a demand shock in one country will have wider international effects than in the past’ (the Economist 28–9–
2002:31). Moreover, in the NE, financial markets are becoming a more important channel for transmitting shocks across borders. Indeed, one can observe a closer correlation between the stock markets in the US and Europe than in the past because of the formation of truly global equity markets following the increase of cross-border trading and the rise of a large number of more global firms.
Instability due to the plurality of models
It would be wrong, however, to draw the conclusion that modern societies are simply converging to a unique model of economic and social organization. As pointed out by Dunning, the extent, form and pace of globalization is not uniformly spread across the planet, nor across different value-added activities (2000:13). On the one hand, the way the NE takes shape in each country even seems to defy the view that there is something like a ‘national economy’ as a distinct and homogenous entity. While this notion was appropriate for a relatively closed-economy world, it seems to be less realistic now. As noted, for example, by Jameson (1992) contemporaneous social reality is organized in a
‘cellular’ way, that is, it is characterized by heterogeneity, difference and fragmentation (see also Kumar 1995: ch. 6). It can be classified and analysed in various and overlapping ways, but defies simple aggregation.
On the other hand, in so far as the term ‘national economy’ is still acceptable, one can see that a number of different types of national systems continue to exist in the NE.
Indeed ‘globalization does not eliminate national systems of production but creates a system in which an increasingly global market coexists with enduring national foundations of distinctive economic growth and corporate strategies’ (Rennstich 2002:164). It is clear, for example, that while the US, France, Germany and Japan are all rich capitalist market economies, each has distinct patterns of corporate governance, labour relations and social welfare as well as a peculiar cultural background (see e.g.
Cohen et al. 2000; Viskovatoff 2000).12
Now it can be argued that in a context of free international markets this variety of national arrangements, or models, is a source of global instability. For example, it tends to create tensions within each national system between those who defend a particular national model and others who advocate the adoption of foreign models that seem more attractive in some historical period, in other words, what we can call the ‘leading nation model’. This tension is not new; it has been around for quite some time, although the leading model has changed in the course of time in relation to the various stages of economic growth and macroeconomic performance of individual countries. In just a few decades, for example, we have witnessed the popularity of a number of different leading models, such as the British, the Swedish, the Japanese, the German and the American model (see Kitson and Michie 2000:18–19; Boyer 2004).
It seems likely that the recent wave of globalization exacerbates this source of instability. Given the strict link between the success of the NE and the US, it leads many to believe that, as remarked by Stiglitz (2002b), the American model based on deregulation and free markets as key mechanisms for prosperity and welfare is the only possible ‘right’ model and needs to be exported throughout the world. It is such an export strategy that is creating additional instability, especially because it underestimates the peculiarity of the US model which makes it difficult to imitate.
Let us, for example, focus on the trend to accelerate liberalization, which many countries have pursued in the 1990s to match this model. As several economists point out, it is the fact that such accelerated liberalization has been excessive or too rapid or implemented in countries with inadequate institutional backgrounds that is responsible for the recent growing destabilizing volatility of international financial markets and the very negative macroeconomic performance of several countries, especially in Asia and
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Latin America in the late 1990s (see e.g. DeMartino 2000:8–9; Davidson 2002:482, 490;
the Economist 28–9–2002; Stiglitz 2002a, b).
Problems in the governance of the world economy
The NE also aggravates instability associated to the governance of the world economy. It must be noted that to solve the problems mentioned in the previous section coordinated efforts on the part of all countries in the shape of some mutually agreed-upon international rules, such as those concerning a new exchange rate system, could be, in principle, very helpful.13 It was in this spirit that the Bretton Woods agreement was signed in 1944. However, it is difficult to believe that these rules will be implemented in the foreseeable future. This has been a major problem since the end of the Bretton Woods era in 1971, although it does not mean that the world economy is likely to collapse tomorrow. The point is that, in the absence of such a system of international rules, there are mechanisms based on tacit agreement or simple political and economic power that somehow regulate the world economy.
In practice the key regulating mechanism today is represented by one country, the US, which plays the role of the engine of growth. Its currency, the dollar, is the global liquid store of value par excellence. These two aspects are strictly linked. As noted by Davidson (2002), for example, the world has not fallen into recession because of the US trade deficit in recent years. On the other hand, since the dollar is the key reserve currency, the US can undertake national macro policies to maintain high levels of aggregate demand internally, without fear of a balance of payment constraints (see also Viskovatoff 2000:149).
While this mechanism appears to be an effective surrogate for spontaneous cooperation and agreed-upon rules, it does not necessarily grant stability to the world economy. First of all, it does not eliminate the possibility of international financial crises caused or exacerbated by flexible exchange rates and free capital movements. Second, as it ties the health of the world economy to the macro-economic performance of just one country and the strength of just one currency, it is, intrinsically, fragile and vulnerable.
The NE has clearly accentuated these potential sources of instability. By strengthening the correlation between financial markets and business cycles in the leading economies, it has increased the central role of the US in today’s world economy. Witness to this fact is the rapid increase in net inflow of foreign capital into the US in the 1990s owing to the fact that foreigners, like US investors, believe that the NE has increased the expected future return from US corporate capital (see Baily 2001:243). In so doing, however, the NE clearly exposes the world economy to unprecedented risks linked to possible weaknesses and imbalances of the US economy.
One weakness of the US economy has been illustrated by the analysis of the so-called
‘jobless recovery’, which took place mainly in 2003. As Roach (2003) emphasizes, the limited expansion of employment in the face of income growth is not merely due to higher productivity but to globalization and ICT, which involves some collateral damage.
The point is that they allow outsourcing both in manufacturing and (for the first time in history) in non-tradeable services, which accounts for the shrinking of the US productive basis (with finished goods accounting for only 28.8 per cent of their GDP).