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DOĞU ERGİL

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DOĞU ERGİL
March 17, 2013, Sunday

A new phase in globalization

Globalization is perhaps the most pronounced concept in the economic and political lexicon of the past decade. There were limits to everything that moved -- people, goods, technology and money. Liberalization lifted national boundaries and rendered the world flat.

In the globalized market system, developed countries left more labor-intensive sectors behind and relied on more technology-intensive production, the most lucrative being the information technology. Sectors with less value-added were transferred to less developed countries that are nowadays called emerging countries.

Indeed, in the past two decades more technology-intensive production gradually shifted towards developing/emerging countries mainly due to lower labor and other production costs. This critical shift of gravity led to setbacks in the production sector of developed countries.  Investment returns in many developing countries exceeded the amounts of many developed countries.

It seems that following or with the effect of economic crisis in developed countries, some of them, including the United States, are reclaiming their offshore manufacturing industries in order to create more employment and vitality at home. There are two more factors for the reversal of offshore manufacturing: wages in less developed countries are increasing as their income per capita and living standards rise and the cost of energy, especially oil prices, have gone up. The latter have increased transportation costs.

When a tug of war on currency initiated by the central banks of some countries led to exchange rate instabilities and technological innovations made manufacturing and production technology more localized or individualized, offshore production lost its lucrative edge.

New manufacturing technologies that are invented in post-industrial societies are bound to shape the whole globalization versus localization debate. The recent economic crisis that has affected multiple continents has shown that the market economy has entered a new phase where national states have become more visible in the repair of economic and fiscal damage incurred in the system with no boundaries. Globalization is now considered to have limits.

The need for market regulations, correction of wage differences and stabilizing energy costs all call for an able hand and new rules. Does this mean less overseas production? This trend is locally reinforced when countries such as China take action to reduce pollution in its cities where manufacturing industries have concentrated. Moving some of the established industries out of urban centers is costly. Some manufacturing lines are hazardous and health insurance demands of local workers also contribute to the lowering of the difference in labor cost between more and less industrialized countries.

Recently a new mode of production called “additive manufacturing” has made an impact in high-tech manufacturing. One part of production is realized in one corner of the globe and added on to another part making the end product. This more cost efficient method does not necessitate the transfer of production abroad as before.

As wealth increases globally, the production of customized products increases in tandem. More developed countries specialize in production for high income groups while developing countries mainly produce for populations who are newly becoming consumers thanks to their increasing incomes. Could this phenomenon lead to a structural change in the world economy? It is too early to tell but there will always be a difference between countries who invent and develop new technologies and those who produce while using them.

Energy will always be in high demand. The never-ending demand for energy seems to encourage shale oil and gas extraction in addition to conventional sources. The world has produced about 1 trillion barrels of crude oil to date. Over the next century, approximately 2 trillion barrels more are expected to be produced from conventional, proved reserves and undiscovered conventional oil. Additional supplies will be produced from unconventional oil resources, such as oil sands and shale rock.

Oil shale is an organic-rich, fine-grained sedimentary rock containing kerogen from which liquid hydrocarbons called shale oil can be produced. It seems that shale oil and gas will, on the whole, be available to be extracted in virtually every corner of the world. This phenomenon may make domestic production more cost-effective than offshore production.

Change is always surprising, but to follow and to understand it is even more so.

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