This somewhat contradictory, in historical terms, price picture is probably partly due to developments in China, where on the one hand the vigorous industrial expansion has led to a marked increase in the demand for commodities, while on the other hand the plentiful supply of low-wage labour has meant  2  BIS Review 21/2004  that production of cheap goods for the world market is accelerating rapidly. This clearly illustrates one of the conditions of globalisation, namely the increasing specialisation and increased utilisation of comparative advantages. These factors, among others, provide better resource allocation, increased productivity and greater efficiency, which in turn have a subduing effect on prices. The increasing strong international economic activity and the upturn in commodity prices indicate that international price pressure will increase gradually in the future. However, the globalisation process may mean that price increases remain moderate over the coming years, despite the economic upturn. China and India together have more than 2 billion inhabitants, which corresponds to one third of the total world population. So far, only around 10 per cent of the Chinese population is estimated to be affected by the modern economy. This means that there is a very large unutilised labour reserve that could contribute to keeping down price increases for a long period of time.
A study by Catherine Mann at the Institute for International Economics shows that trade and global production accounted for 10-30 per cent of the price fall on hardware products in the United States during the 1990s. This led to growth being approximately 0.3 percentage points higher each year between 1995 and 2002 than it would otherwise have been. Today, expenditure on software is increasing at twice the rate as on hardware, and this process has scarcely begun in large areas of the economy. If prices for software also begin to fall, thanks to globalisation, the second wave of productivity gains can be even greater than the first, particularly within the services sector, which has the greatest potential. We have seen that globalisation of trade and production patterns has led to more operators, who also have lower costs, participating in the world economy. This has led to international competition becoming stiffer and prices being pushed down. Similarly, the increasing trend towards deregulation and privatisation over the past two decades has contributed to making production more efficient and raising productivity, which in turn has had a subduing effect on price trends. The question of how globalisation and structural changes may affect the future path of inflation will probably attract increasing attention in central bank circles. If, on the one hand globalisation and new  BIS Review 21/2004  3  technology have led to economies having a lower inflation propensity, it may be possible to achieve a higher level of resource utilisation without inflation accelerating.