globalisation and the uk economy

Introduction

The UK has one of the most open economies in the western world. Twenty years ago, foreign exchange controls were abolished and our financial markets have been gradually deregulated. Trade with other countries assumed a high and rising percentage of total national output.

Clearly, the globalisation process impacts significantly on the British economy – some examples include

• High levels of foreign direct investment (both inwards and outwards). The UK economy has been a favoured venue for overseas direct investment. Many factors explain this trend – including improvements in the supply-side performance of the economy, a favourable tax system and a much improved record on industrial relations

• Rising level of import penetration – particularly in those industries where Britain’s previous comparative advantage has been eroded such as textiles and clothing and the manufacture of lower-valued added electronic products

• Globalisation increases the importance for Britain of continuing to develop a competitive advantage in industries with major growth-potential as a means of improving living standards in the long term. Globalisation has involved a speeding up of the process by which comparative advantage can change over time – not least because of the faster diffusion of technological progress. Greater investment is needed in high value goods and services – for example in high and medium-high technology manufacturing and in knowledge-intensive service sectors

• Structural change in industries – for example the long-term loss of output and employment in industries such as textiles and other manufacturing sectors. This creates problems where factor resources are occupationally and geographically immobile

• The current wave of globalisation places increasingly heavy emphasis on the importance of human capital as a factor determining long run economic growth. The UK has probably lost forever its comparative advantage in producing relatively low-value added manufacturing products. Whereas the global demand for high skill services and high value-added manufacturing output remains strong. This will require a substantial improvement in the skills and flexibility of the workforce

• The impact of globalisation on the British government – for example in changing the corporate tax regime and reforming labour markets and the welfare system. Some economists believe that globalisation reduces the ability of governments to levy business taxes – because corporations can move their production to countries offering the lowest tax base and the taxation of knowledge products transmitted across international boundaries becomes ever-more difficult. But this issue ignores the fact that many complex factors influence business location decisions (including proximity to markets) and relative tax burdens between different countries are often not the decisive factor in determining where capital flows to

• Globalisation has increased competitive pressures on British businesses in tradable goods industries. Has this helped to improve the trade-off between unemployment and inflation? Cheaper prices for many international commodities and finished manufactured goods have certainly helped to control inflation in recent years and therefore reduce inflationary expectations