Schweizerische Zeitschrift für Politikwissenschaft
Revue suisse de science politique
Swiss Political Science Review
The Consequences of Economic Globalization for Switzerland
Alois Bischofberger,
Economic Advisor to the Credit Suisse Group Executive Board and Chief
Economist of Credit Suisse
From the economic point of view, I define globalization as the increasing intensification and interconnectivity of flows of goods, services, capital and people between countries and regions in all parts of the world. This process is driven by the desire to make production as cost effective, efficient and close to consumers as possible. Interconnectivity is being facilitated by the liberalization of the business environment and of the goods and financial markets, and is being accelerated by advances in information and communications technology.
The internationalization of national economies is nothing new, but the speed of the process and the large number of countries involved are unprecedented. Since the start of the nineteen seventies, cross-border trade flows have grown twice as fast as the worldwide production of goods and services, which itself has increased by more then 100 percent in real, inflation-adjusted terms. Cross-border direct investment by businesses has risen four times as quickly as aggregate world output. Since 1990 alone, flows of private capital in the emerging economies have increased six-fold.
Globalization and the Credit Suisse Group
Globalization has had a major impact on the evolution of a corporate actor such as the Credit Suisse Group. A few figures help understand the extent of change. First, between 1990 and 1997 the percentage of the company's balance sheet accounted for by foreign assets went up from 62% to 73%. Second, during the same period, the percentage of staff working in Switzerland fell from 55% to 46%. This is not to say that headcount in Switzerland has gone down; in fact it has risen by 14% to over 28'000. However, staff numbers outside Switzerland have grown much faster: by 65% to almost 34'000. Third, last year, three-fifths of the company's gross earnings were generated outside Switzerland. Half of the current Group Executive Board are non-Swiss whereas only a few years ago, everyone on the board was a native of Switzerland. Finally, the mergers and takeovers of the last few months – Winterthur Insurance with its heavy involvement in the European market, BZW with its broad-based Asian business, and Brazil's Banco de Investimentos Garantia – all reflect the accelerating pace of internationalization.
Over recent decades, broad swathes of the world's population have seen their living standards rise to unprecedented levels. Despite occasional setbacks, per capita income has risen in every emerging country which has sought to apply the principles of market economics. Modern technology has made communication simpler and cheaper. The dismantling of monopolies has led to greater consumer choice. Many attractive jobs have been created. Nevertheless, as a GfS survey commissioned by Credit Suisse at the end of last year shows, globalization has also awakened certain fears. All over the world books have been written criticizing the phenomena of globalization; some of these have even found a place on the best-seller lists. The major points of criticism are as follows: a) globalization causes job losses and a reduction in real wages; b) globalization is leading to a hollowing out of industry in the developed world; c) it accelerates the pillaging of natural resources; d) globalization leads to concentration in the corporate sector. Competition is once again being compromised by monopolies and oligopolies. If the market is dominated by a handful of large companies, the forces of competition will once again be distorted.
These fears need to be addressed and I will discuss effects of globalization on labor markets and economic structures later on. Regarding natural resources, the framework for a sustainable environmental policy has to be anchored within the WTO, but in such a way that environmental policy cannot be used as a protectionist barrier against emerging economies. The WTO must also formulate and police competition rules. In time it may be necessary to have a global competition commission.
Globalization, Markets and Policy-Making
In the following pages, I would like to discuss six major points pertaining to the evolution of the economic and political contexts of corporate behavior.
First, globalization will intensify competition between different business locations. This applies to the industrial nations just as much as to the emerging markets. In Europe, left-wing and center-left governments have abandoned or at least diluted their prejudices against free markets. All around the world efforts are being made to create liquid financial markets, improve the quality of labor forces, introduce business-friendly tax systems and improve conditions for research and development. The emerging markets are providing stiff competition for the industrial nations in the fight to attract direct and portfolio investment. In the industrial world we are seeing more and more companies relocating their operating sites, particularly when business conditions in their home countries are less than favorable.
This has been the case in Switzerland, for example, where the business community suffered from overvaluation of the franc up till the end of 1995, uncertainty about future research policy (though this was removed at the start of June), tax disadvantages, which were exacerbated by the corporate tax reforms, and a lack of specialized personnel. But companies don't just relocate production facilities as a defensive measure. Instead, such moves can, for example, reflect a company's desire to establish a direct presence in a rapidly expanding market where the middle class enjoys a healthy purchasing power. The fact remains, however, that attractive conditions on the domestic market will help secure foreign direct investment and make investment by domestic companies even more worthwhile. Switzerland's main difficulty remains its lack of specialist workers. This is a serious problem because in all the surveys about quality of location, the availability of specialists is given as the most important factor. Over the medium term this problem can be made less acute by a training offensive – reforms to the content and style of training – and a new policy on foreign workers. Switzerland must abandon its dirigiste policy on foreign workers and replace it with free movement of labor in line with market forces.
Second, in this environment of increased competition between locations, new trump cards will take the trick. The traditional competitive advantages still apply. Excellent infrastructure, political and social stability, low interest rates and good transport connections continue to be significant factors when businesses are looking for production sites. But there are also some new trump cards in the pack: close links between industry and higher education and other research centers, legislation which allows rapid and unbureaucratic decision making, the best possible environment for exploiting the latest IT and communications technology, a positive attitude towards risk-taking and competition. Technical progress will benefit SMEs and new businesses more than most, because microelectronics and new communications technology enable improved productivity for small batch production and make it cheaper to move into international markets.
Modern information technology promotes the cross-border exchange of services quite independently of location. Sales, consultancy and knowledge transfer can all be handled via the Internet from any location on earth – and often much more cost effectively than in the local market. The nature of service markets is thus changing dramatically: there is more transparency, supply monopolies are being broken and price pressures are increasing.
All this has another consequence: until now taxation of services has contributed greatly to overall inflation because services were tied to specific localities and were thus less exposed to competition. This will be less and less the case in future, which will help to keep overall inflation down and reduce the volatility of short-term interest rates. This could and should be a key incentive for corporate investment.
Third, labor markets will be faced with great challenges, particularly in the developed economies. Wage differentials will become more pronounced. The difference between earnings for unskilled and highly skilled jobs will grow. We will see a decline in real wages for unskilled labor; though given the global explosion in knowledge and the greater ease with which this knowledge can be exploited as a factor of production, even skilled workers will find that their jobs and income levels are not completely secure. Uncertainty about jobs and income will have a great influence on the propensity to save and consume, even when the economy is doing well.
There is some dispute about just how much low qualified workers will lose out as a result of globalization. In a recently published study, Professor Berthold (1997) comes to the conclusion that the increased integration of the world economy will put a great amount of pressure on the income of less qualified employees in the highly developed economies. He gives the following reasons for this:
the greater integration of goods and factor markets is accelerating the structural shift from the industrial sector to the service sector and reducing the demand for unskilled labor;
In the past, industrial production has been capital intensive. Since real capital and unskilled labor stand in a complementary relationship with one another, unskilled labor was also relatively productive. In the service sector, unskilled labor has a subordinate function. It is more important in the service sector to have a lot of general and job-specific human capital;
In previously protected sectors too, unskilled labor is more exposed to the cold wind of international competition. What is more, there are fewer and fewer protected sectors;
More integrated goods and factor markets make it easier and quicker to transfer real and human capital, as well as technological skill, around the world. Even small differences in costs will prompt companies to change their production locations. Employees have to change jobs more often. Less qualified workers are not in such a good position as their better qualified colleagues when it comes to transferring the job-specific skills they have acquired to a new position.
By contrast, a 1997 study by the International Monetary Fund (Slaughter and Swagel 1997) stated that international trade only had a modest effect on wages and income inequality. The average estimate of the effect of trade on wages and employment is certainly lower than what might be expected from purely anecdotal evidence. This assertion was backed up by the argument that other influences on wages and wage differentials, including the mobility of capital and labor markets and technology exchange, were being underestimated.
Whatever the specific arguments, however, no one disputes that less skilled workers are disadvantaged. Jobs, and even whole professions, are no longer guaranteed for life, which means that employees must be prepared to train and retrain. Businesses have to support initiatives which make this possible and thus make a contribution to the employability of their staff.
Fourth, the intensification of competition and the steep decline in communications costs require companies to radically rethink their strategies. Companies have to think carefully about their core competencies, prioritize key activities and jettison any ballast. Divestment of non-essential divisions will accelerate. On the other hand, we will also see many mergers and acquisitions in the next few years as companies aim to achieve critical mass, lower costs and, above all, more comprehensive market penetration. This M&A activity should center on firms where there are plenty of synergies to be exploited – though has not always been the case during the recent merger craze.
Domestic and cross-border mergers will increasingly involve SMEs seeking to gain cost advantages and improve sales opportunities. As this trend takes hold, these small and medium-sized enterprises will find that they face an additional challenge. Earnings considerations have previously not played as an important role for them as for big companies. Good, almost family-like, relations with workers and customers and the excitement of developing new products have frequently been more important motivating factors than profitability. However, today's rising costs and increased pressure to make a decent return have put a greater premium on earnings power and the ability to generate profits. This is prompting changes in management style: technical aptitude will increasingly be accompanied by financial management skills, while the workforce will be seen more from the point of view of cost effectiveness than has previously been the case. Meanwhile, more and more large companies are coming under the stewardship of managers who emphasize corporate value creation and shareholder value. This is a trend which has taken hold in Switzerland as quickly as anywhere else in the world.
Fifth, globalization will make the corporate sector more dynamic and more Anglo-Saxon". The growing significance of telecommunications and the outsourcing of activities such as IT, advertising, translation, security and buildings management has led to the formation of many new companies. Switzerland, for example, is currently experiencing a boom in new company start-ups. In 1997 nearly 30'000 new businesses were entered in the commercial register, almost 10% more than in the previous year. Many of these start-ups are not in high added-value industries and will, for various reasons, fail. These days, less than half survive the first five years of operations: the increased dynamism of the economy is also reflected in a rising number of bankruptcies. Nevertheless, the new companies do bring with them the potential for new job creation. On the labor markets, increased dynamism will see wage negotiations become more decentralized, most often being held at company level. In addition, the performance-related component of people's pay packets will become more significant.
Sixth, and finally, globalization could widen the divide between the general populace, politicians and domestically oriented firms on the one hand, and internationally active companies on the other. This is partly because of the factors we have already mentioned, such as job insecurity and the rapidly changing nature of job specifications.
Another cause can be added to these. The structural changes triggered by globalization in the industrial world do not lead immediately to faster growth and job creation. In fact the initial phase is characterized more by company mergers and closures, shifts in production location, job reductions and depressed labor markets. Employees and companies operating in protected markets, and the politicians that represent these people and firms, try to protect themselves from the abolition of cartels, the opening of borders and greater competition.
In Switzerland, we have been living through this initial phase for the last seven years. It is not quite over yet, but we are now starting to move into the second phase, which will be characterized by greater competitiveness in the international arena, higher growth and the creation of skilled jobs. Today we are better prepared for the challenges of globalization than many of our competitors, and we can approach these challenges with a good deal of self-confidence. Our starting position is better than the average.
References
BERTHOLD, Norbert (1997). Der Sozialstaat im Zeitalter der Globalisierung. Tübingen: Walter Eucken Institut.
SLAUGHTER, Matthew and Phillip SWAGEL (1997). Does Globalization Lower Wages and Export Jobs. Washington (DC): International Monetary Fund. (Economic Issues, 11).