At the BNPP AM Investment Forum, Richard Baldwin, Professor of International Economics at the Graduate Institute in Geneva [video], pointed out that for 800 years prior to the industrial revolution, activity was primarily agricultural; production and consumption clustered together and there was little difference in the value of output between one part of the world and another. With the number of people governing aggregate value produced, the most populous nations – China and India – dominated global GDP, as they do today.
From the 1820s to 1990, however, as the industrial revolution allowed western Europe and then America to greatly increase production, the share represented by the G7 soared from 20% of global GDP to over 60% and the share of China fell commensurately from 50% to 5%. China’s dramatic economic growth over the last 30 years has rebalanced the scales, with China and India now accounting for 20% and the G7 for less than 40%.
What is next after offshoring and outsourcing?
So far, globalisation has unfolded in two waves.
- The first wave was driven by a sharp decline in relative transportation costs. This allowed production and consumption to be separated, so that goods could be produced where the comparative advantage was largest and be consumed where demand for the goods was highest. Trade exploded, global incomes rose and the economic benefits were widely distributed.
- The second wave was driven by developments in information and communication technology. This allowed for intellectual capital and production to be separated through outsourcing and offshoring to more efficient, lower-cost production centres. The benefits were more narrowly distributed, with companies and capital share gaining the most.
Redefining forces: global telecommuting and ‘tele-migration’
In the third stage, digital technologies and robotics allow face-to-face labour services to be provided across borders, with people sitting in one country and working in a (virtual) office in another, Baldwin says:
The economics of this way of working – global telecommuting – are compelling given the substantial cross-border salary differences. Machine translation will help bring down language barriers.
The ramifications of this ‘tele-migration’ are far-reaching and unpredictable; sectors such as education, medical services and law may be severely disrupted, not only by the arrival of cross-border services, but also as a result of the pressure on costs as international competition increases.
Such disruptive forces will redefine industries, force innovation and bring about new risks for the incumbents. Emerging markets are likely to gain versus developed countries, given their widespread openness to globalisation, their desire and agility to benefit from the opportunities that globalisation brings and a growth potential that outstrips that of developed markets. By contrast, many developed markets face popular opposition to globalisation amid concerns over jobs and the threat to their leading position – economically and politically – posed by rising powers.
Winners and losers from lasting globalisation
The winners and losers of this stage will be an important subject of research for us in the months and years ahead. Investment opportunities could arise from mispricing in the form of market discounts on quality growth companies (resulting from a focus on fads and hypes) and on trade-focused companies (resulting from overblown concerns over global trade). Industry consolidation could also create opportunities.
We believe that globalisation is irreversible given the world’s reliance on outsourcing for manufacturing and services. The benefits and efficiencies that have been and are to be associated with globalisation are here to stay. While digital technologies may face more and more regulation, this is unlikely to stop the flow of data and information across borders. Equally, talent is being sourced globally and will continue to be so.