Globalization has its winners and losers

Nagy Sándor Gyula (Universidad Técnica Particular de Loja, CC BY-NC-SA)

Globalization cannot be stopped, but we should approach it in a rational manner, acknowledging that capital has a nationality, says Sándor Gyula Nagy, an economist from the Corvinus University in Budapest.

CE Financial Observer: When you listen to the leaders of the Western world, such as Donald Trump, you get the impression that they have become alter globalists. They want to strike down free trade agreements, get out of economic communities. Are we dealing with a global retreat from globalization?

Sándor Gyula Nagy: The changes in political rhetoric are a fact; however, the process of globalization is not driven by politicians and governments, but by technology, media, businesses, and consumers. The politicians can’t stop this process through legislation, but at the most they could slow it down slightly. Well, that is unless they decide to completely sever their ties with the world, but then they would turn their country into Cuba or North Korea. People can say no to globalization on an individual level, however. You don’t want to buy foreign products? Then don’t buy them. You don’t want to watch foreign films? Don’t watch them. But how many of us would really like to limit ourselves that much?

I don’t know anyone like that.

Exactly. If everyone just bought local products, we would die out of starvation or out of boredom in the long run. This does not mean that we have to always accept globalization the way it is, and that we cannot try to shape it somehow.

Are you suggesting that globalization has negative effects after all? That would contradict what we have been told for decades.

In a simplified economic perspective, globalization only brings benefits. It leads to a more efficient division of labor, increasing specialization, and allows countries to better utilize their comparative advantages. Except that such theories belong to 19th century economics. We live in 2017, and the world is much more complex now. We also know that models in which people have complete knowledge about the world, make rational decisions, and in which their behavior is similar, and therefore predictable, are not consistent with reality. Contemporary economics says that globalization has its winners and losers, and that these two groups are not necessarily entirely separable. Sometimes one person, company or state can both gain and lose from globalization at the same time.

Could you give an example of that?

Let’s look at environmental protection and foreign investment. Every country wants to attract capital from abroad, resulting in the construction of factories and companies that provide jobs to its citizens. Often such investment does indeed provide jobs, but at the same time it has a negative impact on other levels, e.g. by harming the environment. Let’s suppose that company X determines that the US environmental regulations are too expensive, so it moves its activities to Chile. It creates jobs there, but also exports the pollution of the environment. Incidentally, until there is a global agreement on such issues, these types of processes will remain a common occurrence.

Some also include among the downsides of globalization the homogenization of culture and markets which it brings. Do you agree with that?

I happen to believe that this homogenization is not as advanced as its critics claim. Firstly, local culture is not dying out. Secondly, this imported culture also cannot be characterized as “one size fits all”. Even McDonald’s and Coca-Cola adapt their products to the local tastes.

Right, and as part of this adaptation some companies send products of inferior quality to countries with lower consumer awareness. In Poland it’s a case of household cleaning products, which had fewer active cleaning ingredients compared with the same brands produced for German market.

I don’t deny the existence of such situations. This certainly does happen. But even they confirm the fact that the processes of globalization do not lead to some total homogenization. And even if such tendencies are exhibited somewhere, so what? If someone in Africa wants to buy the same products as Europeans, should we prevent them from doing so? Why? Because we consider ourselves smarter than them?

Globalization also means the rapid spread of new technologies which disrupt entire industries. Should we consider those who lose their jobs as a result of globalization as its victims?

Such as taxi drivers?

That’s a good example.

We cannot protect ourselves against globalization, unless the democracies of the world turn into totalitarian regimes. However, we can relieve the pain of certain groups that are more susceptible to its destructive impact. How can we do that? It’s a matter of concrete political ideas. I think that politicians are not paying enough attention to this issue and this is why we have problems with the protests of taxi drivers. Nevertheless, I believe that new technologies should not be allowed to break the law just because they are new and revolutionary. If, for example, Uber violates the local regulations, these regulations should be examined, but in the meantime we should not be turning a blind eye to such violations.

You mentioned FDI and the benefits it brings. In one of his recent works, Thomas Piketty notes that the strategy for attracting investment to Central and Southeast Europe leads to a situation where these countries have become “owned by foreign capital” on their own volition. Isn’t this a scary observation?

This is primarily a very complex problem. After the fall of communism the countries of this part of Europe needed foreign capital, because they had no capital of their own. Communism simply isn’t a very good system if you want to produce something of value. And capital was needed, for example, to be able to pay retirement pensions. What choice did these countries – such as Poland and Hungary – really have? They could print money and cause great inflation. Instead, they chose the privatization of the state-owned enterprises that were attractive to buyers, sometimes for next to nothing. They also unleashed market competition. No one thought about the long-term effect of such actions, i.e. that some industries would be almost entirely bought up by foreign companies.

So was it a mistake?

No. It was a decision taken under the pressure of the time and circumstances – one of the few which could be taken. We needed money, and we needed it fast. Of course, the way in which decision-makers dealt with this situation is still the subject of discussions and economic analyses, because the Poles solved this problem a bit differently than Hungarians and the Czechs, who opted for so-called coupon privatization.

Could you give me a clear answer: is the fact that a given industry is dominated by, let’s say, German capital, something bad, good or neutral from the point of view of the economy? Or maybe this is simply a modern form of colonialism, as one commentator at Bloomberg put it?

This opinion is absolutely nonsense when referring to the countries of CSE. The fact that they are very strongly economically integrated with Western Europe is a good and not a bad thing. From the economic point of view, we should be criticizing not a situation in which a given sector is in foreign hands, but a situation in which it is dominated by a small number of entities. Of course, this is a matter governed by antitrust laws. In Hungary the automotive industry is a sector with a significant predominance of several foreign companies.

A predominance of German companies.

The strong German presence is quite natural – after all Germany is the largest economy in the region. This is important for us in a negative sense only when there is a crisis in the given company’s country of origin. In this case we inevitably suffer as well. The answer to this is not to interfere in a particular industry, as such interference could simply scare away foreign capital, but to increase the overall diversification of the economy. The more sources of income and independent drivers of GDP growth there are in a given country, the better. Such diversification could be stimulated, for example, by means of fiscal policy.

The critics of globalization point out that it is based on the myth of capital which has no nationality, while in their opinion capital has a nationality, which is revealed – as you noted yourself – in an economic crisis. One example is a situation in which foreign banks transfer the profits from their branches to the parent company instead of reinvesting them in their host country.

This is a good point, but I have doubts as to the scale of this phenomenon. Meanwhile, there is no doubt that the largest foreign investments are consulted with politicians. One recent example is the company Ford, which decided not to build a factory in Mexico due to pressure from Donald Trump. This phenomenon also exists in Europe, although it is not as pronounced. The politicians’ influence on foreign investments is rather soft in nature.

What does it look like in practice?

It’s simple. Let’s suppose that company X is considering the construction of a factory abroad and has five candidate countries meeting the economic criteria. In theory, it could build this plant in each of these countries, but instead of rolling the dice, the company’s manager meets with someone from the government and presents the situation: “Sir, we will invest in one of these five countries. Do you have any preference here as the government?” The government representative could then say: “We want to develop cooperation with country B, while country C has recently stepped on our toes. So go ahead and invest in country B”. Such discussions are a common practice in Germany.

You’re Hungarian, and we know Victor Orban’s views on foreign capital. At some point there was a lot of debate about the actions he took to reduce its influence on the national economy. Did he succeed?

Well, Hungary is still a country that is a part of the global order. Although I say this with consideration of the fact that I’m a resident of the capital city – Budapest – that is, someone who does not have everyday contact with the rest of the country, I don’t believe that we are somehow moving away from global markets and capital. Certain activities of this nature have indeed been taken, for example in banking. This is because, in general, the more regulated a given sector is, the more opportunities exist for the government to interfere with it, and this is the case with banking. However, the actions carried out by Mr. Orbán were ultimately in accordance with the European Union’s legislation, and he withdrew from those actions which were potentially incompatible. I would like to summarize the issue of foreign capital by asking: if not the Germans, the British, the French or the Americans, then who should invest in our countries? Small economies have to be a part of the global flows of capital. So who else? The Russians and the Chinese? Does anyone believe that authoritarian regimes are only guided by economic calculations in their investments? I don’t think so.

Sándor Gyula Nagy is the Director of the Institute of Foreign Affairs and Trade of the Corvinus University in Budapest, Hungary.

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