3.4.2 The Globalisation of Wealth Creation
The globalisation of wealth creation – moving work to where it can be most cheaply done – is disruptive, but it fuels economic growth.
Many products are the result of activities by more than one company, in multiple layers of wealth creation. The supply chain involved in building a car involves mining industries, steelmakers, component manufacturers, carmakers and distributors. People are acquiring wealth in each of these activities, which may be distributed across the world – increasingly using the Internet to connect with their customers.
Whilst settlements may have developed in a particular area for historical reasons associated with the need for labour, or for the availability of land to feed people, there are many cases where the economic situation has changed. And it continues to change. The endless search for lower costs and the emergence of new technologies lead to a movement of wealth creation activity.
The globalisation of wealth creation is determined by resources, costs and markets. Resources are unevenly distributed across the planet:
● Food production depends on the availability of agricultural land and the supply of water. These are not necessarily located close to the people who consume them – and selling food to city-dwellers is a significant part of global trade. Some countries are now leasing their farmland to other countries, as an alternative to producing and selling food, in what was described by The Economist on 23 May 2009 as Outsourcing’s third wave.
● Geographic imperatives also affect other activities. Tata Steel has a major plant located in Jamshedpur: The City of Steel in Southern India, for example, which was chosen for its proximity to iron ore, coal and water; a new city was needed to house the employees, because the chosen site was in the jungle. In other examples, industries might locate themselves close to suitable sources of labour, or close to customers.
Many types of wealth creation activity can be carried out anywhere, so employers may choose to move the work to a lower-cost area – by sub-contracting the work or by setting up new facilities elsewhere. Everybody is familiar with stories of call-centres and software development being moved to India, and high-volume manufacturing moving to China for example. Businesses need to take a holistic view of cost:
● The cost of labour is largely determined by wage levels and productivity in the labour market (3.3.3).
● Taxes must be taken into account. Multinational companies can (legally) choose where to pay tax, depriving some countries of tax revenue (and giving those companies a competitive advantage over their smaller local rivals). This became a political issue in Britain, for example, as reported in a BBC article: Starbucks, Google and Amazon grilled over tax avoidance.
● Compliance with government regulations forms part of a business’s costs (3.3.1).
● Tariffs and subsidies may affect costs (3.3.7).
The location of some wealth creation activities is affected by where the customers live:
● Cost of delivery to the customer has to be taken into account.
● It is essential to be close to customers for some services, like window cleaning for example, and it is helpful for any business where face-to-face contact can play a part.
● Cities become natural magnets for wealth creation; they attract people who are looking for jobs and those people then become customers, attracting more wealth creation in a spiral of urban growth. “The average population of the world’s 100 largest cities has increased dramatically: 9.7 million in 2020 compared with 2 million inhabitants in 1950 and 184,270 in 1800”, according to the report: The world’s 100 largest cities from 1800 to 2020, and beyond. This has brought both problems and benefits, as reported in an Economist article: Cities and growth.
The globalisation of wealth creation does not wholly align with the geography of political control or economic regulation. Wealth is generated by businesses, not governments and, although some are predominantly small and local, bigger businesses often transcend national borders. Wealth creators interact directly with each other, and they are increasingly mobile.
Globalisation has benefited many people. According to an Economist article, Towards the end of poverty:
“Nearly 1 billion people have been taken out of extreme poverty in 20 years…”
“Most of the credit …must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.”
It has also reduced the cost of many products, thereby benefiting consumers.
In rich countries it has created jobs overall, but in different activities: manufacturing jobs have been lost, but service industries have grown – which is contentious, as reviewed later (3.5.4).
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/342c.htm.