Introduction to Globalisation

Globalisation and the British Economy

Mr. Bentley, Head of Humanities, DBS

What do we really know?

As we know, there are known knowns; there are the things we know we know. We also know there are known unknowns; that is to say, we know there are some things we know we do not know. But there are also unknown unknowns - the ones we don’t know we don’t know.

Donald Rumsfeld, US Defence Secretary, 2003

Globalisation & Britain

• Perspectives on globalisation

• The drivers of globalisation

• The rise of the BRICs

• Growth environment scores

• How is Britain affected?

• Winners and losers from globalisation

• Remaining competitive in a globalized world

What is globalisation?

What is globalisation?

Anti-globalisation protests

What is Globalization?

• Globalisation is the integration of economies through markets across frontiers (Martin Wolf)

• Globalisation is the “death of distance” – (Frances Cairncross)

• “The international integration of markets for goods, labour and capital” (Niall Ferguson, Historian)

The expansion of world trade

Export volumes measured at constant 2000 US dollars (trillion)World Exports of Goods and Services

Source: Reuters EcoWin

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

2000

US

D (

thou

sand

bill

ions)

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

“The World is Flat”

“The ability to click, connect and collaborate” (Thomas Friedman)

Forces driving globalisation

Drivers of globalisation

Technology and the death of distance

Global shift

Largest economies in 2003

USA

Japan

Germany

UK

France

China

Italy

India

Brazil

Largest economies in 2003

Largest economies in 2025

USA USA

Japan China

Germany Japan

UK Germany

France India

China UK

Italy France

India Russia

Brazil South Korea

Largest economies in 2003

Largest economies in 2025

Largest economies in 2050

USA USA China

Japan China USA

Germany Japan India

UK Germany Japan

France India Brazil

China UK Mexico

Italy France Russia

India Russia Germany

Brazil South Korea UK

The BRICsNew central players in the world

economy

Who are the BRICs?

• Brazil

• Russia

• India

• China

The rise of the BRICs – stat attack

• 2000-05: BRICs contributed 28% of global economic growth

• 2005: BRICs had 15% share of global trade, double the level of 2001

• 2005: BRICs held 30% of global reserves of gold and foreign currency

• 2005: BRICs received 15% of global foreign direct investment and took 3% of FDI outflows

• Since 2003, their stocks markets have increased by approximately 150%

Comparing China and India

Data is for 2003 unless stated India China

2003 population (billions) 1.0 1.3

2050 population (billions) 1.6 1.4

Gross investment (% of GDP) 23.3 43.9

Foreign direct investment ($bn) 3.6 53.6

Manufacturing exports (% of total) 49.7 86.0

Service exports (% of total) 32.3 9.7

Literacy rate (% of population) 65.4 86.0

Sources: World Bank Development Report, 2005

China’s rapid march forwardAnnual percentage change in real national output

Growth Rates for selected Countries

China Euro Zone United Kingdom [ar 4 quarters] United StatesSource: Reuters EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q300 01 02 03 04 05

Per

cent

0

1

2

3

4

5

6

7

8

9

10

11

USA

Euro Zone

China

UK

Cameras and Colour TVsMonthly totals, million units per month

Production of Cameras and Colour TV Sets in China

Cameras Color TV setsSource: Reuters EcoWin

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Uni

ts (

mill

ions

)

0

1

2

3

4

5

6

7

8

9

10

11

Colour TV Sets

Cameras

China’s export performanceAnnual percentage change

China, Export performance for total goods and services

Source: Reuters EcoWin

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Per

cent

-5

0

5

10

15

20

25

Growth environment scoresGetting the conditions right

Conditions for achieving growth

GES

Economic stability

Political conditions

Technologicalcapabilities

Human capital

GES scores across countries

• High scores / ranking

• Sweden (3)

• USA (10)

• Germany (16)

• UK (21)

• China (53)

• Thailand (57)

• Russia (81)

• Brazil (95)

• India (97)

• Low scores / ranking

• Zimbabwe (170)

• Burundi (169)

• Liberia (168)

• Afghanistan (167)

• Nigeria (147)

• Pakistan (126)

• Indonesia (114)

• Turkey (112)

How does globalisation affect the UK economy?

Globalisation and the UK

• The UK is a highly open economy

• Strong trade links with other countries

• Open financial (capital) markets

– Bonds

– Equities

– Property

• We have a fairly open labour market – tolerant of inflows of workers from overseas

• Globalisation creates opportunities and threats

• The key is to be internationally competitive

Opportunities for the UK

• Cheaper imports from emerging market countries

– Keeps down inflation and interest rates

– Boosts consumer welfare

• Potential for increasing export sales

– Which markets are we best at?

• Opportunities for overseas investment

– Mergers and takeovers

– Direct investment (e.g. new factories overseas; out-sourcing)

• Opportunities arising from migration of labour

• Opportunities of rapid technological change

17%

44%39%

Out-sourcing: Marks & Spencer

54%

17%

29%

Sourcing of clothes by region (%)

04/05

05/06

Indian sub-cont Far EastUK & Europe

A world of low inflationAnnual % change in consumer prices, source: International Monetary Fund (IMF)

World Consumer Price Inflation

Source: Reuters EcoWin

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Per

cent

per

Ann

um

0

5

10

15

20

25

30

35

Threats for the UK economy

• Threats to our manufacturing industries

– Low cost competition

– Lost jobs from out-sourcing

• Threats to jobs in service sector industries

• Structural unemployment

• May cause a widening of the rich-poor divide

• Social and economic tensions from migration

• Threats to the global environment – affects us all

• Inflationary risks from higher energy prices

Global oil pricesClosing daily price, US dollars per barrel of oil

Brent Crude Oil Prices

Source: Reuters EcoWin

01 02 03 04 05 06

US

D/B

arre

l

0

10

20

30

40

50

60

70

World Oil Demand - Projections

Per cent of total 2005

USA 25

Japan 6

China 9

Russia 3

India 3

Brazil 3

BRICs 18

Source: Goldman Sachs, “The World and the BRICs dream” March 2006

World Oil Demand - Projections

Per cent of total 2005 2025

USA 25 19

Japan 6 4

China 9 16

Russia 3 4

India 3 7

Brazil 3 4

BRICs 18 31

Source: Goldman Sachs, “The World and the BRICs dream” March 2006

Cars owned per 1000 people

2000 2005

USA 480 503

China 7 15

India 5 8

Brazil 137 150

Russia 140 189

Source: Goldman Sachs, “The World and the BRICs dream” March 2006

Cars owned per 1000 people

2000 2005 2025

USA 480 503 532

China 7 15 137

India 5 8 48

Brazil 137 150 351

Russia 140 189 492

Source: Goldman Sachs, “The World and the BRICs dream” March 2006

Gainers and losers in the UK from globalisation

Some summary thoughts

Some winners

Potential Winners

Businesses Businesses with leading global brands

Business services

Niche high value manufacturers

Suppliers of energy and utilities

Individuals Consumers of low cost imports

People with strong cross cultural skills

Some winners and losers

Potential Winners Potential Losers

Businesses Businesses with leading global brands

Business services

Niche high value manufacturers

Suppliers of energy and utilities

Mass market manufacturers

Multinationals without the right local partners and strategies in a global economy

Individuals Consumers of low cost imports

People with strong cross cultural skills

Low skilled workers in tradable sectors

Low and medium skilled workers in sectors open to migrant labour

How competitive is the UK?Competing in a global economy

Productivity and jobs

80

90

100

110

120

130

USA France Germany

Source: OECD

GDP per head Employment rate

Prosperity and EmploymentComparison, 2004Index, UK = 100

The productivity gap

90

100

110

120

130

140

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: ONS

US

France

UK

Germany

GDP per workerComparison, 1992-2004Index, UK = 100

Volatility of economic growth

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Germany

France

US

UK

Volatility of GDP growthComparison, 1992-2004Coefficient of variation

Source: DTI calculations on OECD data

Volatility of interest rates

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

US

Germany

France

UK

Volatility of short-term interest ratesComparison, 1992-2004Coefficient of variation

Source: DTI calculations on OECD data Note: since 1999 Germany and France have had the same interest rate

Not enough investment?

Business investment Comparison, 1992-2004Per cent of GDP in current prices

8

10

12

14

16

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

France

Germany

US

UK

Source: OECD

Too little research?

Business Enterprise Research Comparison, 1992-2003 Per cent of GDP

0.5

1.0

1.5

2.0

2.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: OECD except for the UK which is ONS

US

Germany

France

UK