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International Connections and Productivity: Making Globalisation Work for New Zealand - TPRP 09/01

International trends and New Zealand characteristics

International trends

Globalisation

612 million
Size of China's urban middle class by 2025
Source: McKinsey Global Institute (2006)

From an economic point of view, globalisation can be characterised as two main trends: rapid growth in developing countries, particularly Asia, and greater economic integration of economic activity.

Recent decades have seen more countries involved in the world economy, and greater global flows of people, capital, trade and ideas. The result is greater worldwide competition, greater mobility of capital and labour, and shifts in countries' existing comparative advantage.[5] A growing global middle class will demand higher value goods and services.[6] More economic weight will shift towards Asia, bringing implications for geopolitical power and the development of multilateral institutions.

500%
Real growth in world trade from 1980 to 2007
Source: IMF (2007)

Parts of the value chain will be increasingly separated, often across borders, leading to ‘trade in tasks' rather than ‘trade in goods'.[7] Global integration also brings interdependence, and new global issues will emerge, such as the current global financial crisis.

Resource pressures

Development and population growth[8] will intensify pressure on natural resources, especially greenhouse gas emissions and water. By 2025, large parts of the world will be in conditions of water scarcity.[9]

1.8 billion
Number of people living in countries or regions with absolute water scarcity by 2025
Source: UN (2007b)

The long-run trend in most real commodity prices is a steady decline,[10] though demand-side pressures may dominate over the medium term to see historically relatively high levels in some commodity prices, despite falls from the peaks reached in 2008.

Technological change

The fast pace of technological change is likely to continue, making knowledge transfer critical. Higher skilled jobs will command a premium, with a tendency to increase inequality in income and wealth.[11]

Technology will allow previously non-traded sectors to become traded, reinforcing global economic integration and increased competition as more parts of the value chain are traded across borders.

Demographics

21.8%
Proportion of world population aged 60+ in 2050, compared with 10.3% in 2005
Source: UN (2007a)

Developed countries will see significant demographic change, from an ageing population and from immigration. The developed world has been transitioning from a high fertility/high mortality state to a low fertility/low mortality state,[12] bringing far-reaching social, economic, fiscal, and political consequences.

Immigration from developing countries has also been steadily increasing,[13] with implications for social capital[14] and potentially beneficial linkages with developing countries.

Notes

  • [5]Economist Willem Buiter, writing in the Financial Times, put it as follows: “rapid growth in key emerging markets…undermines established patterns of comparative advantage. Not only did new suppliers of goods and services that were potentially importable into the US compete with domestic US suppliers, the new competitors also competed with established US exporters in Europe, the Far East and other emerging markets.” (Buiter, 2008)
  • [6]McKinsey Global Institute (2006, 2007) forecasts rapid growth in Chinese and Indian middle classes over the next 20 years, in the order of hundreds of millions of people. Spending patterns will shift from mainly necessities of food and clothing to discretionary spending in healthcare, transport, recreation, and so on.
  • [7]Baldwin (2006) describes this feature as ‘unbundling’ of the value chain, where the old paradigm of trade in final goods has shifted to a new paradigm of trade in tasks, where individual steps in creating a final product can be separated and performed in different firms and different countries.
  • [8]The United Nations (2007a) projects that “the world population will likely increase by 2.5 billion over the next 43 years, passing from the current 6.7 billion to 9.2 billion in 2050.”
  • [9]The United Nations Food and Agriculture Organisation (2007b) find that “By 2025, 1.8 billion people will be living in conditions or regions with absolute water scarcity, and two-thirds of the world’s population could be living under water stressed conditions.” The International Water Management Institute comments that “To sustain [the needs of countries with absolute water scarcity], water will have to be transferred out of agriculture into other sectors, making these countries or regions increasingly dependent on imported food.”
  • [10]Cashin and McDermott (2002)
  • [11]The IMF (2007) commented that “To the extent that technological change favors those with higher skills and exacerbates the “skills gap,” it could adversely affect the distribution of income in both developing and advanced economies by reducing the demand for lower skill activities and increasing the premium for higher-skill activities and returns on capital.”
  • [12]Lee (2003) described how “the total dependency ratio in the More Developed Countries is projected to rise sharply over the next 50 years as their low fertility increasingly affects labor force size and the baby boom generations move into old age.”
  • [13]The OECD (2007a) found that “since about the [1970s] oil crisis, however, the net migration rate within the OECD has been increasing, with international migration contributing more and more to population growth, compared to natural increase (the excess of births over deaths) with each passing year.”
  • [14]Putnam (2007) found that “In the long run immigration and diversity are likely to have important cultural, economic, fiscal, and developmental benefits. In the short run, however, immigration and ethnic diversity tend to reduce social solidarity and social capital.”
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