Competing in a Complex World: Brian Easton Analyses the Economics and Politics of Globalisation

By Easton, Brian | New Zealand International Review, January-February 2006 | Go to article overview

Competing in a Complex World: Brian Easton Analyses the Economics and Politics of Globalisation


Easton, Brian, New Zealand International Review


Analysis of globalisation must take the long view, accepting that it is a process that is almost two centuries old. The process is driven by the falling costs of distance, which encompass not only transport costs but also the costs of storage, security, timeliness, information and intimacy. These falling costs can have a huge impact on national economies, with immense political, social and cultural consequences. New Zealand must accept that globalisation is going dramatically to affect its economy. Its best course of action is to engage with the process--for which it needs a sophisticated understanding of its nature. Old theories must be set aside.

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The Royal Society of New Zealand awarded me a Marsden Fund grant to study globalisation. The study is a continuation of my earlier research programme, especially that which is summarised in my book In Stormy Seas with its central message that the fate of New Zealand will be largely a consequence of what happens overseas, together with our ability to seize the opportunities and manage the problems those events create.

My study is founded on five themes:

* Globalisation is the economic integration of economies--regional and national economies.

* Globalisation began in the early 19th century, so the phenomenon is almost two centuries old. Since globalisation is an historical phenomenon, focusing on the last few decades throws away a rich source of insights.

* Globalisation is caused by the falling cost of distance: transport costs, plus the costs of storage, security, timeliness, information, and intimacy. This gives a driver for the globalisation process.

* Globalisation is not solely an economic phenomenon. It has political, social and cultural consequences.

* The policy issue is not being for or against globalisation, but how to harness it to give desirable outcomes.

The programme first develops the economic analysis, and then explores political and social consequences such as nationalism, sovereignty, policy convergence, cultural convergence, and diasporas.

Much of New Zealand economic thinking is trapped in economic models which have been superseded in the last 30 or so years. This does not mean the old theories are wrong, so much as that they can be advanced. Many of the policy stances that are derived from the superseded theories are still valid, but the current understandings are richer and more nuanced. In particular, I know of no reason to abandon the strategy of global connectedness, which is one of the principles of the government's growth and innovation framework.

The new analysis focuses on economies of scale and the costs of distance, phenomena that are largely ignored by the superseded theory. Their interaction generates outcomes that can be quite different from the standard theory without costs of distance and only diminishing returns. Sometimes the outcomes are not obviously intuitive to the well trained economist.

Distance costs

The costs of distance are more than transport costs. They include storage, security, timeliness, information, and the loss of intimacy that separation causes. A paper 'Trade Costs', by James Anderson and Eric von Wincoop, calculates that the average American manufacture has a markup of 55 per cent from the factory door to the final domestic retail price. The price of an export involves a 170 per cent markup, or 74 per cent more than the domestic sale.

Analytically the costs of distance (or trade costs) may be treated as a tariff. (Recall that costs of difference are sometimes called 'natural protection'.) Total costs of distance far exceed tariffs. Moreover, they are coming down. In 1855 it took around three months to get from New Zealand to Britain, whether it was sending a package, a person or a message. Today it takes only a month to get to Britain by ship. That is because ships are faster, and they can go through the Panama Canal.

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Competing in a Complex World: Brian Easton Analyses the Economics and Politics of Globalisation
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