The Trilemma of Globalisation: Free Trade, Fair Trade or Fear Trade
Ken Costa Chairman: Europe, Middle East and Africa UBS Investment Banking Department 2 Finsbury Avenue London EC2M 2PP Cass Business School 2 March 2006 EMBARGO UNTIL 19:30pm 2 March 2006 The Trilemma of Globalisation: Free Trade, Fair Trade or Fear Trade In discussing the challenges presented by today’s diverse global environment few topics can be as important as the issue of globalisation. It is at the heart of the structural change that has taken place in our generation as borders have shrunk, technology changed and communications enhanced.
Economists believe – almost universally, which says something(! ) that globalisation is a net benefit. But, if recent examples are to go by, there seems to be a growing doubt gnawing at its foundation. Globalisation faces a trilemma. Which is to be master? Free Trade, Fair Trade or Fear Trade. Free Trade For globalisation to succeed there needs to be a common acceptance of the frictionless flow of capital across borders and the determination to eliminate 2 impediments to the free movement of resources and products.
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Free trade is the pillar on which the argument for globalisation is founded.
For the last decade we have lived with the prevailing sense that the globalised environment is here to stay. There has of course been a vigorous debate about how the benefits should be shared, the implications of the growing technology divide and the sustainability of regional development. But by and large the foundations have been in place. What has become disquieting recently has been the realisation that some of the most basic premises of globalisation are far from secure. The case for globalisation still has to be made. Globalisation still needs to be nurtured as a beneficial system and hown to be demonstrably favourable to all participants in the global market place. This is an argument that needs to be advanced and argued for and can not merely be assumed. Fear Trade But free trade seems to have been supplanted by fear trade. The recent actions in the United States to prevent the completion of the acquisition by the Dubai Ports World of the US ports previously owned by P&O underlines the serious challenge to the argument. Here we have the US, the major exemplar of modern capitalism, wishing to restrict the take-over by one foreign company of another foreign company with operations in the United States.
This action is unfortunately not an isolated example, it comes sharply on the heels of the decision to prevent CNOC, a Chinese company, from acquiring Unocal in the US. The ports case has become a testing place for the future direction of globalization. At issue is ownership. There are after all in any market regulations that govern ways in which corporations 3 act. In any event these ports will overwhelmingly be run by and managed, as they have been in the previous foreign owners’ hands, by US citizens. Of course there are arguments for national security.
That would be true in any country. But it is of deep concern when these concerns are deployed selectively discriminating between one foreign owner and another. Friends of the United States, and I count myself as one, will do the country the highest favour by lobbying actively against these barriers. Not only on their merits but also because of the sign that is given. Free trade flourishes in a climate of reciprocal openness and mutual advantage, fear trade now seems to be an underlying assumption lurking not only in this decision in the United States but in other countries as well.
Security, national interest, cultural preservation and other nationalist reactions can easily stoke these fears. Italy have complained about protectionist activities within the European Union, but recently, albeit unsuccessfully, Italy attempted to prevent nonItalian acquisitions of domestic banks. In France, the Prime Minister has attacked “fragmented share capital” as being a risk to independence and is looking to bolster the barriers to takeover activity in France. These trends will grow if the strongest and freest markets continue to act in a protectionist way.
Those committed to developing sustainable and responsible flows of capital worldwide have a full task to remain vigilant to promote vigorously the need to have a competitive and sustainable global economic order. 4 All participants in the global economy, Government, business, consumers, will need to find a common language to prevent misunderstanding and actions that could easily lead to disastrous protectionist decisions similar to those in 1914 or the 1930’s. Protection can grow rapidly fuelled by job losses, eroding cultural influence, security concerns and ultimately the visceral reaction against foreigners.
The openness of markets to trade and to the acquisition of assets lies at the centre of the future prosperity for all. There are risks if this protectionism grows unchecked. Inflation will creep back because the benefits of globalisation will not be felt, interest rates will therefore inevitably hedge higher with a sell-off in the bond markets, pressure on the equity markets and the inevitable liquidity problems could lead to capital controls. A dark scenario and one which I believe is avoidable.
But it does require a concerted effort to win both the economic argument but also the ethical ones. Fair Trade Fair trade has therefore emerged in the debate. Unfortunately the concept seems to have been colonised by particular single interest lobby groups seeking to address for example levels of sub-economic activity in Africa and arguing for an increase in the price structure of consumer goods in the developed world. In the end the fairest trade will still be the freest provided the benefits are seen to be shared equitably.
Globalised markets have to, and above all be seen to, benefit all: the strongest and the weakest. When the strong economies wish to exclude access to them by emerging economies the very base of the argument is eroded. For this reason, and in a different 5 sphere it remains a moral affront to those who are committed to future global prosperity that the WTO is unable to reach agreement to allow access, without the burden of duties, by the developing world to the markets of the economically prosperous world.
The diverse global environment raises questions of standards and sustainability of economic activity. These are moral issues. They should be tackled as such. But that does not mean that they are not economic ones too. Take for example one of the questions that is posed by globalisation. Is the move away from regulated markets to unregulated ones simply a means of avoiding the high hurdles of regulation in the developed world? Take the tobacco industry for instance.
Do the global tobacco companies seeking entrance into new markets do so in order to evade the onerous restrictions of the major OECD markets? Similarly polluting factories in third world countries where the desire for employment places pressure on local governments to allow activities which would be frowned on in the home countries of multi-national corporations. Low labour costs have brought huge advantages to consumers in the Western world but at what cost to the emerging markets in which they operate?
But the moral debate is not a one way street. The clash of civilisations was a debate in ancient Rome and Greece long before Huntingdon raised the topic, but globalisation now means that people find out much more about each others’ cultures much more rapidly. It is true that many international corporations have seen their numerators expand as the top line has grown through sales to emerging markets. Similarly, the 6 denominators of the P & L have benefitted as costs have shrunk through outsourcing and manufacturing at lower costs.
But on the other hand many emerging markets have also benefitted as their standards of living have increased and transparency has grown. If we wish to make poverty history and I profoundly hope that this objective remains at the forefront of every global citizen then it will come about by working with the grain of capital flows, by recognizing the reward for risk and through supportive actions by Government creating the climate for enterprise to flourish. We work on the natural assumption that it is a good thing to understand each other’s cultures, aspirations and diversity.
However we do have to work on one unfortunate fact of human life. It is not good news but bad news that travels fastest. The Danish cartoon incidents and the activities of radical minorities are flashed across our screens and soon become representative of the cultures being depicted. Every global business will need to develop the necessary training programmes not only to enable the free flow of information to work effectively but to determine how globalising information could bring together incompatible elements of culture.
Essentially this is a political question – how can free speech and cultural sensitivities be reconciled? But ultimately it will be on the ground an important issue for businesses who try to create core values for global workforces. Will education of itself lead to greater tolerance? This is a topic too large for this address. But suffice it to say that education and prosperity will not of themselves eliminate global tensions though they are essential pre-requisites. 7 8 Diversity Diversity is important to this process.
Diversity enhances competitiveness enabling the most innovative, creative solutions to be advanced as perspectives, eclectically drawn across cultures, countries, products, markets are pooled to provide answers to the issues of the day. For example, UBS needs talented people who can efficiently and effectively work across multiple cultures and time zones. Diversity is therefore not an issue merely of gender or ethnicity but it reflects an open and flexible culture which tries to understand the motivations and aspirations of different people and their points of view.
These dialogues above all are integrated into the day to day operations of the firm. To respond to the pressures and to come up with innovative solutions requires close co-operation and the working together of a very disparate group of people with a very common set of values and a common desire to understand and appreciate the ways in which common goals can be achieved whilst recognising diverse and local aspirations. There is I believe an even more fundamental issue that will require addressing. There is strong evidence that in a young and mobile workforce material satisfaction is not sufficient to retain their commitment and motivation.
There is a deep hunger, almost spiritual, that is diffused and not traditionally expressed but which needs addressing. There is a desire among young people across the globe that there is more to life than the pursuit of material prosperity. Concern for the environment, for just practices in the workplace and for a balanced working life are key themes in this emerging generation. Traditionally this has been a “no go” area. After all religion and work do not mix. But any desire for a values-based organisation will require 9 careful attention to be given to a much deeper understanding and respect for he religious beliefs, cultural and spiritual aspirations of this new global workforce. A new dialogue of understanding faith in business space is rapidly becoming a global imperative for business. Securities Industry Having made these general remarks it is worth looking at trends in the financial industry. ?
Expansion of the Business: Financial sector activities are likely to experience substantial growth over the next decade. Two reasons can be singled out: Deregulation and liberalization mainly in emerging markets, and wealth accumulation and retirement provisioning all over the world. Over the past few decades, the trend towards deregulation and liberalization in financial services has contributed significantly to the industry’s expansion. This process is well advanced in many countries, mainly in the mature markets, but further liberalization is, however, likely in emerging market countries where domestic markets are still highly protected. In general, further liberalization of financial markets is expected to benefit investment banking and securities firms which are positioned to 10 ake advantage of any further opening of individual domestic capital markets. Global asset managers could benefit from the facilitation of cross-border mutual fund business, and possibly from a trend towards harmonized pension fund regulation. • Especially in mature markets, but basically to a global extent, financial sector activities are also likely to gain further importance, mainly due to two trends: On the one hand, wealth accumulation is likely to increase as a result of the shift from labour-intensive production to more capital-intensive activities.
We see a clear secular trend towards wealth accumulation that is likely to continue over the next decade. On the other hand, the fact that in the coming decades, most developed countries will be confronted with significant demographic shifts leads to a trend that pension reform is on the agenda of many governments around the world. Although each country will follow its own regulatory agenda, we believe a gradual shift from public unfunded to private funded pension schemes is likely to take place. Institutional asset management will be the sector most impacted by this trend. ?
Increasing Diversity of the Business: Financial market products are getting increasingly diverse and sophisticated with the main characteristics being securitisation, equitisation, and corporate restructuring. 11 • The transformation of financial services over the last years has been driven primarily by the increasing de-emphasis of traditional lending activities combined with the increasing importance of securities trading and financial markets. Corporations are frequently in a position to directly finance their funding needs by accessing the capital markets, expanding corporate bond markets.
At the same time, an increase in bank assets has fueled growth in the securitisation of these assets. We expect these trends to continue, as increasing transparency will further facility financing by way of the securities market. • Despite the bursting of the new economy bubble, the underlying trend towards an increasing role of equity finance and equity investments remains intact. Institutional and individual market participants will tend to invest a greater share of their assets into equity products and the corporate sector will increasingly rely on equity financing. We see long-term secular trends pointing towards an ongoing demand for advice on corporate restructuring, as trade liberalization and technological progress will increase global competition for corporations, pressuring them in turn to restructure and consolidate their business.
At the same time, cross-border consolidation in some industries has just begun. ? Further internationalization of business and new markets: It is crucial for financial sector firms to have at the same time both a strong 12 footprint in mature markets and expand actively into emerging markets. Economic growth is a key indicator of the potential for financial services in different regional markets. We expect the largest absolute GDP increase over the next 10 years to occur in North America, followed by Asia and Western Europe. Even though North America is set to grow at a slower rate than Asia, the absolute GDP increase will be higher. This demonstrates the importance of having a significant presence in the US and other mature markets. • At the same time, emerging markets, especially emerging Asia, have a huge potential.
GDP growth in China averaged more than 9% since 1979, and India is on track to achieve a high sustainable growth path in the foreseeable future. Other markets in the region are benefiting from the increased demand in the region and globally, increasing the attractiveness for global financial firms. Another important emerging area is the Gulf region, driven by sky-high oil prices and some first steps towards a further diversification of the countries’ economic structure. Based on remarkable macroeconomic stablisation efforts in recent years, Latin America finally seems to have overcome its historical volatility, providing interesting nvestment opportunities. 13 ? Alternative Asset Managers: Hedge funds and buyout groups are raising ever increasing sums of money to be deployed principally cross border. The current size of the hedge fund market is estimated at US$ 1. 2 trillion and will expand significantly in the years ahead. Highly liquid and mobile capital should not be seen as restless capital. Opportunities for long term foreign direct investments in the emerging markets continue to grow as infrastructure projects absorb capital and new investment opportunities allow for petro dollars and other pools of investment funds to help grow these economies. Challenges
An international presence in diverse global environment creates substantial challenges. Global firms have to integrate diverse cultures, strike the balance between global reach and local presence, match the structure and characteristics of its international workforce with functional and regional business needs, and establish infrastructure and processes to provide global communication and co-operation means. ? Integrating cultural diversity: A global firm’s clients and employees are generally, at least to a significant extent, not global in their nature and characteristics, but are based and anchored in their respective home countries.
This determines a broad variability of cultural and religious habits, business styles and customs, and consumptions models and needs a global firm is confronted with on a day by day 14 basis. In order to achieve long-term profitability and growth, this variability has to be managed and integrated into the firm. ? Striking the balance between global reach and local presence: In order to be perceived as a global player, global firms have to establish a global strategy and business model.
At the same time, due to the cultural diversity mentioned above, specific market and customer orientation has to be focused along country-specific needs. This is true for the products offered to the customers, the communication employed to establish and strengthen links with clients and stakeholders, and for every other interaction between the firm and the outside (local) world. ? Finding and strengthening a diversified workforce: Especially in the area of service providers, well-skilled staff is crucial for the long-term success of the company. International mobility and intercultural skills have to be ade core value of every corporate culture. Therefore, human capital management and attracting best people is crucial, especially as the international competition for skilled workforce becomes harder and more intense. Especially in the financial sector, specialist knowledge is required and decides on success in a specific region or business area. Hence, if companies wants to achieve continuous success, it has to establish internal talent development and management processes to ensure that employees are promoted in their personal and professional development.
To distinguish itself from its competitors, firms have to offer their staff unique development opportunities, thereby attracting current and future leaders. 15 ? Managing critical resources: Internal processes, corporate communication and IT face considerable challenges in a diverse global environment. As such, it is challenging to guarantee a consistent appearance in terms of brand, strategy and communication. In addition, doing business all over the world is especially challenging for the IT infrastructure and for know-how sharing on a global level. Yet, this offers economies of scale and synergies at the same time, e. g. y streamlining the brand and the public appearance, by having one integrated IT and know-how sharing platform and by reviewing internal processes re duplications, potential for improvements inefficiency and for streamlining and simplifying processes. UBS manages these challenges and makes them opportunities ? One Firm: We firmly believe our integrated business model creates more value than our businesses would as stand-alone units. Our clients all over the globe should effortlessly be able to access all the services our firm can provide, where and when they are required, and regardless of what combinations of teams lie behind the solutions.
This “one firm” approach facilitates cross-selling through client referrals and the exchange of produces and distribution services between businesses and thus contributes significantly to our revenue flows. The integrated business model and our “one firm” approach enable us to combine global reach with local sensitivity. 16 ? Innovative products: As one of the leading global financial services groups, UBS actively shapes the future development of financial markets.
As such, challenges emerging from today’s diverse global environment are converted into opportunities by meeting emerging cultural and business needs with innovative products tailored to specific cultural requirements. Another example is the growing importance of hedge funds on international financial markets, where UBS offers products and services specifically targeted at these clients. ? Managing and promoting diversity: • To UBS, diversity means recognizing and appreciating multiple backgrounds, cultures, and perspectives within its organisation.
UBS builds on these differences to produce cross-cultural teams that generate new ideas and creative solutions for our increasingly diverse clients. • Diversity consists of a broad range of aspects that vary in their degree of visibility going from gender over ethnicity, age, disability, sexual orientation, religion, nationality to though. • In addition, senior management takes the topic seriously and is often participating in meetings and employee forums on the topic. ? Corporate Social Responsibility: UBS makes responsible behavior an important part of its culture, identity and business practice. As a 7 leading global financial services firm, UBS wants to provide our clients with value-added products and services, promote a corporate culture that adheres to the highest ethical standards, and generate superior but sustainable returns for our shareholders. In order to retain the trust society gives to UBS, UBS conducts its business responsibly and at the same time engages in the communities that it is part of. Socially Responsible Investments In additional to financial considerations, UBS provides expertise in incorporating environmental and social aspects into our research and environmental activities.
Advice on social investments not only have to take into account financial considerations but also environment, social and ethical criteria. Human Resources To remain at the cutting edge of the rapid changes in the diverse global economy requires an enormous investment in leadership training talent management and attention to cultivating an environment within which entrepreneurial spirit can flourish. The handling of outsourcing, one of the most dynamic developments in the global economy, has become an important part of the HR process. It emains a challenge when developing outsourcing plans to minimize the impact on existing employees, to plan the transition with meticulous 18 execution and to ensure that the benefits are understood and communicated well before the plans inevitably leak out. Managing declining morale and performance of remaining employees is vital as they often suffer anxiety, envy and a last gasp of invigorated competitiveness. Any outsourcing activity is a time of upheaval and it is important therefore to underline not only what is changing but also what is not.
Conclusion Let me conclude by saying that global organizations face an unprecedented opportunity to grow their worldwide businesses. With this comes increased prosperity and therefore the need to ensure the attractions of globalisation are well understood by all participants; that the benefits of increased profitability are seen to be in the interests of all stakeholders not only the shareholders; and that the barriers to the flows of capital are removed as often as they are erected. Fear trade has no place in a fair and free globalised world.