The New Shape of Globalisation

Andrea Milan, Department of Economic and Social Affairs

In 2006, Richard Baldwin wrote a very interesting paper called “Globalization: the great unbundling(s)”(1) on what he defined as the old and new paradigms of globalization. He explained that the old “unbundling” took place from 1870 to 1914 and from 1960 to 1995 and it consisted of a separation of production and consumption; the main cause of that separation was the sharp decrease in the cost of trading goods. On the other hand, the new unbundling consists of the separation of the individual of the production process and an increase in trade; its main cause is the decrease in the cost of communications and the improvement in information technologies. The production process of a product is no longer linear and localized but dispersed and globalized.

As a consequence, goods can be produced in China, using a Korean software and Brazilian root materials and it can be sold in Europe; moreover, the firm selling the product can have its call centres in India and its Research and Development Department in the United States and so on. The competition that used to be at the level of firms and sectors is now at the level of the single tasks(2) in the productive process, its individual components. The sector nations had specialized in because of their cheap domestic costs, their comparative advantage(3), change suddenly and unpredictably. This economic system might be the most efficient system to our knowledge (from a purely economic point of view) but it is becoming very unstable; this lack of stability was also highlighted, in the last years, by the food crisis and the economic and financial crisis.

Economic stability is necessary not only for society but also for the economic system itself: for example, people might be more reluctant to invest if the market becomes unstable and the financial system stops working properly. How can banks and financial institutions predict who is going to be solvent(5) in the case of very high labour turnover(6) and high business unpredictability?

Most scientists agree that climate change poses serious threats to the future of our planet and scholars and politicians now recognize that we cannot afford the current patterns of production and consumption forever; globalization will somehow change in the near future and the Copenhagen Summit is the first important step towards a new global economy.

The “new unbundling” of globalization can be dangerous for the future of our planet as international trade is increasing at unprecedented levels and transporting goods around the world can be very damaging for the environment. Only great advancements in green technologies and substantial investments on them can allow us to improve the environmental efficiency of this kind of transportations.

We do not know whether we will see a greener “unbundling”, maybe we will only pay a bit more attention to the impact of our action on the environment.

A new “unbundling” would probably lead to a new international economic system with sustainable development at its heart; for example, in deciding whether to produce goods or to import them, we would take into account the environmental price the planet pays for the transportation of the good. We would also see a more ‘human’ economy that would put the social dimension at the heart of economics.

It seems that, at the moment, there is no international leadership for a greener globalization; however, as Kindleberger once said, “cooperation depends on positive leadership; the leadership role often goes un-applauded but, particularly in a time of crisis, the hallmark of leadership is the willingness to assume responsibility”.
We have challenging years ahead.


FOOTNOTES:
(1) Unbundling: Separation of production, distribution and consumption process and/or of the single segments of the production process.
(2) Single tasks: the competition at the level of single tasks comes from the dispersion of the production process: nowadays, even the most basic part of the production process can be purchased from an outside supplier.
(3) Comparative advantage theory: This theory explains how trade can create advantages for two countries even when one of the countries produces all goods at lower costs. It is called “comparative advantage” because, in theory, countries will specialize in the production of the goods that are the cheapest for them to produce, no matter if the costs of production are higher than in the other country.
(5) Solvent: An economic agent is solvent if it is able to meet its financial obligations.
(6) Labour turnover: Refers to the number of employees that change in a firm in a specific amount of time.

Further info:
Richard Baldwin, “Globalization: the Great Unbundling(s)” http://www.graduateinstitute.ch/webdav/site/ctei/shared/CTEI/Baldwin/Publications/Chapters/Globalization/Baldwin_06-09-20.pdf