Financial Dependence: The Other Side of

Globalisation

In this essay I aim to establish that despite globalisation’s much discussed positives it
has contributed considerably to a wide-spread debt in many countries with a trade
deficit - a debt that quite possibly will continue to spiral out of control, and based on
recent indicators will try to postulate on the short and long-term future using three
examples, Portugal, the USA and the People’s Republic of China (PRC).

The pursuit of happiness is something all people have in common, either for themselves
or for others. Most people invariably want more and more which increases demand for
basic and luxury goods, and where there is an increase in demand an increase in supply
usually follows. Post-war developments such as commercial air travel, television and
internet have had a huge impact on the modern world, with the resultant “time-space
compression” exponentially speeding up economic and social processes and exchanges1,
greatly contributing to a truly global supply and demand chain.
If we consider the five types of cultural exchanges to be money, people, commodities,
images and ideologies2 then there is little doubt that the United States played a key role
in the second half of the twentieth century. It represented about 25% of the world’s
GDP during this time, 60% of the world’s reserves were in US dollars, it was
responsible for 20% of the worlds exports3, and its control over television has continued
to allow it to ship images and ideologies that have become common worldwide, for
example the use of jeans. Much of this American culture and ideology has been
absorbed and incorporated worldwide becoming truly global, with some traditions
having been lost (although others have been revived as a reaction to this cultural
invasion). It is therefore not surprising that with the advances in technology and the
increase in demand for good quality services, consumer and luxury goods, globalisation
has helped international trade to flourish, increasing from an estimated $80 billion US
dollars in 19534 to $12 trillion US dollars in 20095.

Multi-national companies have taken advantage of this “time-space compression” to

produce their goods in third world countries where wages are lower, materials are
cheaper and regulations laxer, selling them at much higher prices thereby greatly
increasing their profit margin. Although this is a part of capitalism it is ironically also a

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confirmation of one of the Marxist economic theories 6 – on a global scale the working
classes are being kept at a subsistence level as multi-nationals are forever shifting their
manufacturing base to countries with lower wages. The capital of these companies is
concentrated within the upper management and within the company itself. The growth
of the American economy for example is not a direct reflection on the wages and
standard of living for most American workers. Large companies set up the manufacture
of products in developing countries, taking advantage of the economic need that is
present there. Then these companies take this product from this country and bring it
back to places like the United States to be marketed. The economic benefits are then
reaped by the company. The American public played no role in the manufacture of the
product thus their purchase does not support the circulation of capital within the United
States economy and is given specifically to the company. The company then takes the
capital and reinvests the money into the company and in foreign industry and the money
is not re-circulated within the economy that created it. This theory of “capital
movement”7 is what produces the economic growth of the economy as a whole but the
workers and middle class of that economy do not see that growth. As a result the labour
market has changed dramatically in the past three to four decades. The unskilled labour
work force has shrunk over the last few decades; this change has come due to the
expansion of technology within many industries. Those at the highest levels of
companies are the only ones to have really gained from this change. The middle
management has been almost eradicated from the present economy by technology and
“re-structuring”, essentially combining the position of clerks and middle managers and
taking greater advantage of software. The disparities in wages have become enormous.
In 1960 the annual compensation of the average CEO of a major US company was 40
times that of the average production worker. In 2007 it was 344 times as much. After
taking into account inflation the CEO’s pay increased almost 300% whilst the workers
only increased 4,3%8. The loss of worker power is in part due to the decline in union
power, signalling the shift of the United States from a high-wage to a low-wage
economy.
From 1990 to 2007 the profits of the Standard and Poor’s 500 largest corporations grew
an average of 20% a year. Stock prices were at record highs9. Thus the role of the
middle class has been diminished largely in the new growing globalization of economy.
The 1990s have been a prime example of the growth of economy and technology and
the downfall of the middle class. The middle class is becoming less and less necessary

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within the globalised economy. The skilled worker is not necessary due to technological
advancements and the movement of industry from countries like the United States to
developing countries. The developing countries are used for their large and willing
unskilled worker population whilst the need for specific talent and training is becoming
more and more necessary within developed countries. This creates an international
division of labour within the global economic market system, contributing to the human
capital flight (“brain drain”) phenomena existent in developing countries10. Not only
does this create a divide but affects the capacity of many developing countries to get out
of poverty.

Most countries are not blessed with an abundance of natural resources, and even those
that are like Angola and Nigeria are often afflicted with problems such as the ‘dutch
disease’ and mismanagement of resources, often growing even slower than the former 11.
In general internally produced goods often can’t compete with the low prices of
imported goods produced in developing countries, and to be able to satisfy the growing
demands of its population, one that as seen above increasingly works in the service
sector, many countries have got into trade deficits. In fact, out of 181 countries, about
140 countries have significant trade deficits12. To be able to finance these transactions
these countries have consistently taken out substantial loans. As discussed above, the
economy as a whole may grow but this is not necessarily due to an increase in internal
production. Loans have interest rates attached to them, and the payment of interest has
become a considerable part of most countries government budgets. In 2009 Portugal had
an estimated external debt of 507 billion US Dollars (representing 223% of its GDP),
The USA 13.450 billion US Dollars (98% of its GDP) whilst China, the world’s second
largest economy after the USA had an estimated external debt of only 347 billion US
Dollars (7% of its GDP), and is also the country in the world with the highest trade
surplus, whilst both Portugal and the USA have large trade deficits13. Even though there
exist many arguments that consider trade deficits as not being harmful and even positive
reflections of a successful economy, expressed for example by Frederic Bastiat and later
by Milton Friedman (theories based on the idea that devaluation of a currency occurs
when imports are high therefore improving exporting conditions as a result14), there is
no doubt that debts reaching 100% or more of a countries’ GDP are major reasons for
concern, especially in countries like Portugal with relatively low production. In
countries such as these government receipts do not rise sufficiently over time to

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counterbalance the increase in expenses due to the raise in debt repayments and the cost
of social programs. Given this situation they have few choices available, one of these
being to borrow more money. If for whatever reason the projected growth of a country
is not enough to pay off the new loans the country takes out even more loans. As this
situation progresses interest rates increase due to speculation that the country is
incapable of paying its debts further compounding the problem, producing a “debt trap”
that continues to reproduce itself. According to a UBS report based on OECD findings,
both the USA and Portugal find themselves in this situation, although Portugal’s case is
far more worrying, ranking in third place just behind Ireland and Greece15.

One of the main reasons for the projected GDP increase not having been greater than
the cost of loaning in recent years and leaving many countries more indebted than
anticipated is the global credit crisis which started in 2008. Some of the main causes of
this crisis were the lack of regulation of investment banks, predatory lending, the
bursting of the US housing bubble (due to over-lending in the sub-prime sector – the
issuing of mortgages to clients with a bad credit history) and excessive speculation
based on the continued growth of the latter, coupled with an upturn in interest rates once
earlier fears of deflation had subsided. This led to many homeowners being unable to
repay their loans which in turn led to a huge decrease in home value which in turn
greatly decreased bank solvency. This lack of solvency affected market confidence
decreasing share values and made access to loans much harder, leading to slower
growth as there was less capacity for financing. What is notable about this crisis, and
which has often been compared to the Great Depression of the 1930s (although with
different origins) is its global effect. Few indicators corroborate globalisation’s effect on
the world as well as the way the global markets have all reacted in the last few years in
response to what can be considered to be a relatively local initial crisis, and the
impressive speed at which the crisis became truly global16.

The current crisis has also served to emphasise the increase in power of the emergent
economies, especially that of the PRC. Although the crisis has affected the entire world,
it’s arguably the strength of emergent economies such as the Indian, Brazilian and most
notably the Chinese economy that has prevented it from escalating, illustrating a certain
amount of global elasticity, again contributed to by globalization and in sharp contrast
to the effects of the Great Depression.

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The PRC has the largest population in the world, the second largest GDP (and has had
the greatest average growth in the world in the last decade), it’s the world’s greatest
exporter, and has the greatest trade surplus (more than $200 billion US Dollars). The
PRC's success has been mainly due to manufacturing as a low-cost producer. This is
attributed to a combination of favourable government policy, good infrastructure, cheap
labour, relatively high productivity, medium level of technology and skill, and a
purposely undervalued exchange rate. This exchange rate has helped keep the currency
weak therefore boosting exports, and in an interesting sign of recognition of the PRC’s
growth has become a major source of dispute between the PRC and its major trading
partners – the US, EU, and Japan. This surplus has allowed the PRC to invest in other
economies, and its foreign reserves are now the largest in the world, being for example
the largest foreign holder of US public debt. There is no doubt that globalisation has had
an undeniable affect on the PRC - for example since the economic reforms of 1978
poverty rates have decreased dramatically to an estimated 10%, and 93% of the
population are literate when compared to 20% in 195017. It is ironic that globalisation,
one of the USA’s greatest weapons, is being used so well by its rivals that the so called
Post-American world suggested by Fareed Zakaria18 and others is soon becoming a
reality.

Trying to predict the future is usually foolhardy, but there is little doubt that
globalisation will continue to be a key part of the modern world, a force that is driven
primarily by financial reasoning and is unstoppable. It is probable that many of the
current developing countries will continue to develop until their workforce is
demanding enough to make companies jump to less developed countries. Many
countries that have been through this experience, like for example Portugal, not only
have a relatively demanding workforce but also do not have enough production to be
able to finance themselves. Their only options are to continue to finance themselves by
selling their debt and incurring loans with the inherent dangers discussed above, or to
increase taxes and decrease social spending. The latter are almost always unpopular
measures, and are often not successful enough if not thoroughly thought out
(notwithstanding any social injustices that may occur). Again using Portugal as an
example, the recent increase in VAT without a corresponding effort to increase the
efficiency at which it’s collected and accounted for will further contribute to the divide

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between the rich and the poor (as business owners too frequently pocket the VAT),
something globalisation has already played its part in.

Another potential option is that of increased tariffs, an option recently adopted by Brazil
and one that is likely to be taken onboard by a number of other countries. This ironic
return to protectionism will make internally produced goods more competitive again,
although it goes against the idea of free market trade and creates friction with those
nations that have more exports.

None of the problems mentioned above are truly inevitable though and with efficient
resource and budget management can be attenuated. However, it’s probable that many
countries will continue to increase their external debt, and in a potentially perilous
fashion will persist in selling its debt, and quite possibly as a result, its very own
independence to other countries.