The growing pains and gains of globalization

As capital moves from higher-cost, less competitive regions to emerging economies, there will be losers as well as winners in the short term.

There are few more polarizing issues than the globalization debate. What is more important, local variety or global homogeneity? Drinking Coke used to make you part of a global world. Now Coca-Cola and other brands are trying to be “glocal” – global but with a local twist.

The world’s capital markets and multinational corporations have benefited from acting globally. They can allocate capital, almost instantly, to the most business- friendly, cost-efficient jurisdiction, improving competitiveness and returns.

As capital moves from higher-cost, less competitive regions, unemployment rises and wages decrease in what were some of the world’s wealthiest communities. For much of the developing world, capital re-allocation has led to job creation, as countries which previously had few resources become manufacturing powerhouses.

Jobs created in emerging (or re-emerging) economies can be low paid, with poor standards of health and safety and employment rights, but are often seen as better than nothing. However, as prosperity grows, so does disparity of income, which can lead to civil unrest. Where families stepped in to support unemployed relatives, people look to government to bridge the gap. Countries that survived on low levels of tax collection must pay for this growing demand. Corruption, previously unnoticed or unreported, becomes apparent as societies strive to be fairer. The wealth that businesses transport around the world stimulates, but does not provide, the social infrastructure needed to underpin economic growth. Companies which provide corporate social responsibility initiatives are not the norm.

TOM ALBANESE TALKS ABOUT THE NATURAL RESOURCES SECTOR

The 2015 Conference Board CEO Challenge report listed customer relationships as the second most important challenge facing global CEOs today, after human capital. Whether in the business- to-business or business-to-consumer market, CEOs acknowledge a burgeoning “experience economy” where customers, of products and services, want the experience of purchasing, as well as the quality of the deliverable itself, to be pleasurable. To prosper, companies find themselves focusing more on what their customers are trying to achieve, than on what they are selling.

With cheaper sources of supply, consumers often gain a lower-price product, or access to a service not previously available, but it’s generally purchased at that new Big Box store out of town, or via the internet. Does this matter? It’s questionable how easy it is to deliver a pleasurable purchase experience via these methods.

Also,  out-of-town/internet purchases don’t support Main Street US or High Street Europe. Even where purchases are still ostensibly local, geographically, the way they are delivered is stimulating structural change and concern.

I’ve thought about this debate from the vantage of being a former CEO of an OECD-based multinational, and now as CEO of an Indian-based multinational, living in India. I’ve seen the impact of job compression from high wage jurisdictions, with fewer jobs bringing the benefit of high per unit productivity, but with people having to work harder. I have also seen the importance of job growth, albeit at lower wages, in India, where many still live without electricity and with basic sanitation. Employment guarantees food on the table at least. A growing adherence to global standards of safety, environmental, and community rights, and a need to benchmark worker productivity against best standards is creating convergence, although it will take time, and progress will not be uniform. In developed nations, employment standards bring higher costs, making companies vulnerable to lower-cost competition from emerging economies. In developing nations, initial gratitude for a job at any price will provide less of a cost advantage over time, as global employment standards are imported.

I understand those who say, “Why can’t things stay as they are?” How can we give the world’s poor an opportunity to see each generation live better than their parents, without disadvantaging those who have already attained middle-class lifestyles? But the world can’t stand still. Market forces will naturally lead capital to the geographic and market locations that bring the highest returns. And those returns will be eroded over time, as first mover advantage always is. Surely every individual has the right, whatever their background or nationality, to seek self-improvement? Progress and technology inevitably bring societal change.

Everyone has aspirations to live better than their parents. I don’t see this march slowing, and the world is probably better for it. But it’s not without winners and losers; the debate will continue, ideally with recognition of the multiple lenses through which it should be viewed. I hope the East will benefit from the West’s technology, creativity, best practice, and emotional intelligence skills and the West from the East’s demographic inflow, youth, energy, and strong IQ quotient. I can’t take sides but I can speed up the integration, working towards the world becoming more level.

Tom Albanese is CEO of Vedanta Resources.