The world, it is frequently said, is becoming smaller as national boundaries are rendered irrelevant by the enveloping forces of globalisation. But is the phenomenon exaggerated? Huw Richards assesses the evidence.

The name of George Modelski will not mean much to most people. And you could not say that his best-known contribution to our world is a particularly attractive one. But if you read a quality newspaper or follow the more serious current affairs programmes, it is hard to go through a day without being made aware of it.

Modelski, an international affairs specialist, was looking in the early 1970s for a word to describe the process by which previously discrete societies come into contact with and influence each other. The neologism he devised was "globalisation". Too bad he didn't patent it - the profits would have been massive. For the word has spread, via the various routes provided by geographers, economists, business specialists and cultural theorists to become one of the buzzwords of the last decade.

It has also taken on a range of meanings. To geographers it implies the spectacular compression of time and space brought about by ever-more rapid and frequent movements of people and information. At a cultural level it takes the form of "McDonaldisation", with American products like hamburgers, Coca-Cola and jeans and Hollywood achieving international dominance, a triumph paralleled by the massive dominance of English/American as a world language. For economists it means the ultimate triumph of free trade, with free flows of capital and the development of worldwide corporations and markets.

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These processes interlock and feed off each other. But it is the economic process - expounded in works like Kenichio Harmi's The Borderline World, which posits the development of a world in which global flows of money and goods have made the nation-state and the national economy almost powerless - that has made most political impact.

Globalisation has immense political implications, particularly for the left. If you are Newt Gingrich or John Redwood, on the free market right, globalisation provides invaluable support for the contention that the main task of government is to maintain peace and social order, and otherwise stay out of the way of business. But on the other wing of politics it offers "the greatest threat to the existence of the progressive reformist left since 1945", according to Paul Hirst, professor of politics at Birkbeck College and Grahame Thompson, lecturer in economics at the Open University.

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The debate over globalisation, whether it really exists, how far it matters and how far it leaves governments any freedom of action, is a fundamental part of the context within which Labour is trying to devise policies that will be both electorally viable and economically effective.

The argument is a serious one, but is being carried on in a highly civilised fashion. Thompson, Hirst's partner in research, works in the same Open University faculty as David Held, professor of politics, David Goldblatt and others who take a very different view of the phenomenon. "Of course there are disagreements. But we long ago decided that we would talk to each other about the issue. Both sides are well aware that the evidence we have is limited and that you can draw sharply different conclusions from it," says Hirst.

On one side, Hirst, Thompson and Bob Rowthorn, professor of economics at Cambridge University, contend that the extent and effect of globalisation are exaggerated. Rowthorn argues that concentration on globalisation has distracted attention from a significant countervailing trend - that of regionalisation. "Far from everybody trading freely with everyone else, we are seeing the growth of regional blocs. The European Union is largely a closed system for trade," he says. Hirst and Thompson argue that the pre-first world war economy was as open and measured in terms of the proportion of national gross domestic products represented by trade or by capital flows, as that of today. One reason we are so impressed by the argument that globalisation is spreading, they suggest, is that this open economic structure broke down between the wars, sharply depressing trade. The more enthusiastic proponents of globalisation, say Hirst and Thompson, combine short memories and the failing typical of those who know no history - the assumption that current trends will continue indefinitely. "No major regime has lasted for more than 30 to 40 years and periods of considerable openness and growth have been replaced by closure and decline," they wrote in an article published recently in the journal Soundings.

Held and Goldblatt argue, on the other hand, that current developments are unprecedented. Goldblatt says: "While the overall GDP figures may suggest that there is less trade, much of the growth in GDP this century is accounted for by government expenditure, which can't be traded. The percentage of tradeable GDP which is traded is much higher than in the past."

Much debate centres on multinational companies. Those sceptical about the extent of globalisation argue that multinationals remain firmly rooted in their originating countries, with only rare exceptions. Goldblatt counters by saying that the sceptics have created an idealised model of the "global company", found genuine companies falling short of the model and underplayed the extent to which multinationals are, in fact, operating more internationally than ever before.

There is less disagreement about finance. Goldblatt points to the massive growth in the foreign exchange and government bond markets and the extent to which the major banks are to be found in almost every significant financial centre. "Everyone is everywhere," he suggests.

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But does this add up to a permanent clamp on the nation state, constrained by fears that the financial markets will pillage its currency and refuse to buy its bonds? Rowthorn argues that there is nothing new about such beliefs: "People were saying this 30 years ago". That of course was the time when Harold Wilson complained bitterly about the influence of the Gnomes of Zurich over the financial markets, blaming them for the sterling crises which led to devaluation in 1967. Some commentators have argued that Britain's latest sterling crisis, leading to departure from the ERM in 1992, was a consequence of globalisation. Rowthorn conversely suggests that this is exactly the sort of reasoning that leads people to exaggerate the phenomenon. "It had nothing at all to do with globalisation. The simple fact is that, as in 1967 and 1931, the speculators were right. The pound was overvalued and the run on it reflected that reality."

Some critics also suggest that globalisation is being widely used as a political alibi. It is too easy for politicians to cite globalisation, as a force beyond their influence, as a justification for unpleasant policies. Independent on Sunday columnist Neal Ascherson called it a myth "useful to reactionary or timid political parties, which foment the great globalisation scare to justify low wages and cuts in public spending".

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Goldblatt believes that globalisation is happening. But he sees it as reducing, not eliminating, governmental options. "It would be idle to pretend that power has not shifted between international finance and national economies. But power is relative, not absolute. Nothing is impossible. It is a matter of policymakers weighing up the changed costs and benefits of certain courses of action."

There is a broad consensus that the balance has shifted against increasing public spending to reflate the economy. David Currie of London Business School has described this, in a discussion paper for the left-leaning policy network, Nexus, as the best way to ensure losing the next election. But the argument that global forces should act as a downward pressure on wages and social benefits comes in for vigorous ridicule. Hirst and Thompson argue: "Provided an economy is competitive in the goods and services it trades, it can still choose high levels of social spending and collective consumption. There is no clear evidence that public expenditure per se undermines growth or economic performance."

Hirst points in particular to Denmark as a country which should, on some readings, be deeply vulnerable to global forces. "It is a small country with an extremely high level - 62 per cent of GDP - of government expenditure. If anywhere should be in trouble, it should be. Instead it is doing rather well. You can plot countries on a matrix according to their levels of public expenditure and their growth rate and there is no clear pattern."

Global forces have also been cited as a reason for cutting wages. Hirst argues that, aside from any issues of social justice, this is counter-productive. "A mass consumer society simply cannot survive without relatively high levels of pay and broad prosperity. The idea that you can succeed by competing with wages in Manila and Jakarta is completely nuts." Jonathan Perraton, once a member of the Open University group and now at Sheffield University, predicts that minimum wage legislation will have little impact on international competitiveness, as very few of those likely to benefit currently work in traded sectors.

And if global forces do have a greater influence than the sceptics suggest, is there any way a national government can resist them? Goldblatt argues that if governments wish to counter the perceived consequences of greater inequality between and within nations, then regional and international cooperation may be essential. Britain by itself may be relatively powerless in the face of international capital, but the entire European Union probably is not - one reason perhaps why the free-market right is now so overwhelmingly Euro-allergic. Hirst points to growing interest in the possibility of a successor to the Bretton Woods system which provided nearly 30 years of stability between the second world war and the 1973 oil shock, but argues that it is unlikely while American and Japanese trade policies conflict so strongly.

And perhaps the entire debate is being conducted from a false and rather parochial perspective. Goldblatt, a vigorous participant, nevertheless points out that "there is little purpose in trying to control the world economy if it is for the sole aim of continuing to consume at unsustainable levels. There isn't much point in the odd extra per cent of growth if it hastens environmental degradation".

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