Globalization by xiangpeng



Contemporary Problems in Economics
ECON 3438W – Steve Cunningham

The Commanding Heights
  PBS Mini-series on globalization and its history.
  Commanding Heights: The Battle for the World
  Economy, is based on the book of the same
  name by Daniel Yergin, Pulitzer Prize winning
  author of The Prize , and Joseph Stanislaw, a
  leading expert on the global marketplace.
  Video clips.

   According to Kofi Annan, ―It has been said
   that arguing against globalization is like
   arguing against the laws of gravity.‖
   What is globalization?
     Definition from Levin Institute.
   The issues are:
     What are the net effects in terms of jobs, wages,
     and standards of living?
     Should we attempt to regulate or manage it?
Globalization as World Markets
   Johan Norberg, in In Defense of Global Capitalism,
   argues that influential people (the rich, politicians, et
   al.) claim ―we‖ (meaning they) lose power because of
   globalization. According to Norberg, globalization
   empowers the masses.
   Kuttner and Stiglitz characterize free-market
   advocacy as a kind of quasi-religious cult, which they
   call ―market fundamentalism.‖
   Milton Friedman, in Capitalism and Freedom, argues
   that economic freedom is a pre-requisite to political

Half Truth
   Some say that because of globalization, ―the
   rich are getting richer, and the poor are
   getting poorer.‖
     The second half is simply not true.
      • Absolute poverty is down.
      • Global misery has diminished.
     As examples, look at China and India:
      • Greater freedom of choice and trade,
      • Citizens choose their own occupations, sell their products
        as they wish.

Poverty Reduction
   Since 1965, the income of the average world citizen
   has doubled (200%).
     The richest 5th of the world’s population increase its income
     by only 75%
     Wealth of Western Countries is up 40%
     Wealth of Latin America is up 60%
     Wealth of Africa is up 80%
     Wealth of Asia is up 300%
   According to the United Nations Development
   Program (UNDP), world poverty has fallen more
   during the past 50 years than in the previous 500
Poverty Reduction (2)
   Percentage of world population living in
   absolute poverty:
     1820   – 85%
     1950   – 50%
     1980   – 33%
     2001   – 18%
   Absolute poverty in developing countries fell
   from 40% to 21%—almost half—between
   1981 and 2001!
Poverty Reduction (3)
   During the same time period, the world’s population
   grew by 1.5 billion.
     Number of those in absolute poverty fell by 480 million
   According to Amartya Sen, ―Poverty is not just a
   material problem; it is about powerlessness, being
   deprived of basic opportunities and freedom of
   Some argue that the studies supporting globalization
   reducing poverty inflate these numbers by including
   the results of other policies not related to
Health and Poverty
   Life expectancy in developing countries:
     1900 – 30 years
     1960 – 46 years
     1998 – 65 years
   Infant mortality in developing countries:
     1950 – 18%
     1970 – 11%
     1995 – 6%

  Calorie intake in developing countries has risen 30%
  per capita since 1960s.
  According to the UN, the number undernourished in
  developing countries:
    1970 – 960 million
    1991 – 830 million
    2001 – below 800 million
  30 years ago, 37% of the population in developing
  countries lived in hunger.
    Now it is 17%
    Projection for 2015 is 10%.

Hunger (2)
   In East and Southeast Asia, the number living
   in hunger has fallen from 43% to 10% since
   In Sub-Saharan Africa, the number living in
   hunger has fallen from 35% to 33% of the
   population (but this is actually more people
   than before).
   Global food production doubled during the
   past 50 years, but now food prices are rising
   Very much a gender issue: roughly 65% of those
   who are not allowed to attend school are female.
   Participation in elementary education is nearly 100%
   in most places; in Sub-Saharan Africa it has reached
   Illiteracy in developing nations (based on UN report):
      1925 – 75%
      1948 – 52%
      1970 – 20%
      About 23% of adults are illiterate today.

   100 years ago, no country had universal
   suffrage. Democracies were few.
     According to the think tank Freedom House, in
     2002 there were 121 countries living under
     democracy with multiparty systems and universal
     These countries include about 3.5 billion people,
     about 60% of the world’s population.
     Freedom House views 85 countries as ―free‖—
     democratic societies with civil rights—involving 2.5
     billion people, or 40% of the world population.

Oppression of Women
   Globalization upsets traditions and habits.
      How do you maintain a patriarchy when the children earn
      more than the family head?
      Women find information, education, and financial
      independence through globalization.
      Through the exchange of ideas, new hopes and ideals are
      disseminated. Seeing women on TV who are not housewives
      leads to women considering careers outside the home.
      After seeing the website, some Chinese
      women started to demand more autonomy and make more
      decisions for themselves.
      Gaogenxie refers to ―high-heeled shoes‖, a symbol of
      freedom in contrast to the bound feet of older Chinese
Oppression of Women (2)
   Studies have shown that gender equity is a function of wealth
   and income. (World Bank)
   Prosperity brings opportunity, democratization brings voice to
   the political body. Laws are changing.
   Today women form 42% of the world’s workforce, compared
   with 36% 20 years ago.
      Discrimination is expensive.
      The internet is blind.
      Through the internet and telephones, people can start and run
      businesses from home.
   In South Asia, Africa, and the Middle East, the proportion of
   girls attending school has doubled in the past 25 years.

Global Inequality
   A study from the Norwegian Institute shoes
   inequality declining steadily since the end of the
      Inequality declined especially rapidly from 1993-1998, when
      globalization gathered speed.
   Bhalla and Sala-I-Martin found that inequality
   between persons was at its lowest level (in 2000)
   since the end of WWII.
   According to Gini coefficients (0=complete equality,
   1=one man owns everything), the world Gini
   coefficient was 0.6 in 1968, and 0.52 now—a decline
   of more 10%.
Global Capitalism
   Price and profits serve as a signaling system, and are
   distorted by taxes or price controls.
   Markets decentralize decision making to those closest
   to the situation, and to those with the most to gain
   or lose.
   People who own property will know they reap the
   rewards and bear the costs, so use the property the
   Personal responsibility and freedom to make choices
   are essential elements of capitalism.
   Government provides rules and structure.

Societies of Privilege
   Regulated or central planned economies distribute
   privileges and monopolies to favored individuals or
   groups—those with the right contacts or position.
   Under capitalism, no one needs the approval of
   government to pursue their interests.
   Globalization disturbs power relationship, freeing
   people from local restrictions.
      This has led to the rich and powerful using the government
      to resist globalization because it threatens their positions.
      People no longer forced to buy from local sellers or work for
      local employers. (Ex: Dublin, Georgia; Epcot)
   Capitalism is the antithesis of societies of privilege.
Extent of Impact on U.S. Jobs
   What is the extent of the impact of globalization on
   U.S. employment?
      About 85% of U.S. nonfarm workers are employed in
      industries where import competition is minimal.
       • To them, imports are unambiguously good.
      About 2.2 million people work in manufacturing industries
      with import penetration of 30% or more.
       • This is less than 1% of the population.
       • Less than 2% of total nonfarm workers.
       • About ¾ of lost jobs are the result of technological and other
         factors, and not trade.
   More on this later.

Other Side of the Story?
   Between 1980 and 2003, U.S. trade deficit rose from
   $25B (1% of GDP) to $547B (5% of GDP).
      Mfg employment fell from 18.7M to 14.5M.
      Question: Are the job losses due to automation or to
   According to he Economic Policy Institute, trade
   accounts for about 1.8 million of the jobs.
   The theory: trade liberalization increases the
   incentive for firms to shift production in search of the
   lowest labor costs.

  Between 1986 and 1998, General
  Electric Co. cut its U.S. workforce in
  half, while doubling its foreign
    In 1999, GE’s CEO, Jack Welch, earned
    $141M 2½ times the pay of his
    combined Mexican workforce of 30,000!
    Worse, GE pressured its suppliers to move
    to Mexico, too.

More on Employment
  The U.S. Labor Dept. reports that 26% of laid-off mfg
  workers find new jobs that pay as well or better than
  the old jobs.
    Some argue that the new jobs are being created in the
    service sector (which some claim is lower paying).
  1990-2003, U.S. real wages grew only 7%. Some say
  this is because globalization has made it harder for
  workers to demand better wages.
    Others argue this is one reason why inflation has been held
    in check over the same period.

Employment (2)
   Is outsourcing good for American
     Outsourcing potentially increases profits by
     lowering labor costs.
     U.S. software employment dropped 16%
     from 2001 to 2004.
      • How long will we export jobs to India?
     Is globalization also creating U.S. jobs?

     1980-2002, value of exports was $2.6 trillion.
     (Largest exporter in the developing world.)
     At least 16 of the 20 cities with the world’s worst
     air pollution are in China.
      • In 2000, air pollution caused 600,000 premature deaths
        in China, 5.5M cases of chronic bronchitis, 20M cases of
        respiratory illness.
     The World Bank estimates that pollution reduces
     China’s potential GDP by 3.5-8%.

Pollution? (2)
     Air pollution from mfg doubled during
     NAFTA’s first four years.
     In 2003, 10,000 square miles of Amazon
     rainforest was destroyed, largely to grow
     soybeans for exports.

Pollution? (3)
   Blackmail: U.S. corporations use threats of
   moving off-shore to weaken U.S.
   environmental regulations as unfair barriers
   to trade.
   Increased importation of food, plants, and
   animals has led to:
     Invasion of non-native species.
     Inspections of food have not kept pace—leading
     to increased risk of illness by contaminated food.

Free Trade?
   Some argue that the successes of countries like
   China are not attributable to free trade.
     China has highly restrictive limitation on foreign investment.
     It tightly controls trade flows through quotas and export
     The Heritage Foundation gave China its lowest possible
     rating for trade openness in 2004.
   Harvard economist Dani Rodrik finds that the
   developing countries with high import barriers did
   better than those with low barriers.
     Argues that trade openness is a result of economic
     development, not the cause of it.

What about Consumers?
  No question that trade brings a greater
  variety of goods at lower cost.
    Some argue that lower prices of imported goods
    get marked up to the consumer, simply making
    corporations richer, but:
     • Prices and inflation have been lower, and
     • Corporate profits are paid out as dividends to U.S.
       shareholders. (We are they!)
    Studies have shown that in highly competitive
    industries, trade lowers prices. Less so in
    oligopolistic industries.

“The Shadow of Prosperity”
   Article appearing in The Economist, January
   20-26, 2007. ―In the Shadow of Prosperity:
   Hard Truths about Helping the Losers from
   Galax, Virginia
     A town of textile mills and furniture factories.
     Can’t compete with Mexican and Chinese
     Last year 3 factories closed.
     1800 people lost their jobs.

Shadow (2)
   Gov. Tim Kaine set up an ―Economic Crisis Task
   Force‖ for displaces workers.
     Helps people apply for Trade Adjustment Assistance (TAA)—
     this is financial support provided under a federal program for
     those who lose their jobs to foreign competition.
       • Up to 2 years unemployment benefits
       • Subsidies for medical insurance
       • For those over 50, subsidy to bring their pay up to previous
       • Retraining
       • Child care
       • Food banks

Shadow (3)
   Trade-displaced workers tend to be older and less
   educated, and tend to only have worked in one
     They take longer to find another job, and are more likely to
     see their wages fall.
     In the U.S., wages are more flexible, so the impact is more
     on wages.
       • In the U.S., in the 1980s and 1990s, 65% of those who lost
         jobs to trade were employed 2 years later, but at a lower
         wage. 25% took pay cuts of more than 30%.
     In Europe, wages are less flexible, so the impact is more on

Shadow (4)
   In the U.S., jobs lost to trade are treated
   differently than jobs lost for other reasons:
     Aid last 4 times longer
     Get more retraining
   U.S. gains about $1 trillion a year from freer
   trade; it spends about $1 billion in aid for
   displaced workers.
   Europeans spend much more, but don’t single
   out jobs lost to trade.

Shadow (5)
   The U.S. has proposed a major
   expansion of TAA:
     Not just for mfg workers
     Include service jobs off-shored
     Offer to whole industries, not just factories
   TAA was introduced by Kennedy and
   was expanded in NAFTA.

Shadow (6) Back to scope!
   In the U.S., about 20M jobs are lost involuntarily
   each year.
      About 2-3M (2%) are permanent displacements
      Only a small percentage of these can be directly attributed
      to globalization.
   According to Lori Kletzer (UCSC), 14% of displaced
   mfg workers are in industries facing intense int’l
   Based on TAA claims, fewer than 120,000 qualify (in
   2005) for TAA. Fewer in the service sector.

Shadow (7)
   Most economists argue that technology is the main
   cause of the rising gap between the low-skilled and
   high-skilled workers.
   Latest data suggest that the new competition is not
   between industries or firms, but rather at the job
   level. In this environment, how do you identify the
   ―losers‖ from trade?
   Workers are being replaced with more highly skilled
   workers, not cheaper workers.
   (Many workers complain about globalization because
   they do not want to compete.)

Shadow (8)
   Denmark Plan—Flexicurity
     Employers hire and fire at will.
     About 25% of the workforce is unemployed at some point
     every year.
     Welfare benefits are about 80% of previous average income.
     Unemployed are required to be trained and look for work.
     The EU is pushing for its members to do this.
     Denmark spends more than 5% of its GDP on the
     unemployed. Has one of the highest unemployment rates in
     the world.
     The U.S. spends 0.16% of GDP on unemployment.

Shadow (9)
   Another approach is to give displaced
   workers a subsidy if they are forced into
   a lower-paying job.
   Wage insurance?
     A proposed expansion of TAA makes any
     trade-displaced worker over 40 eligible for
     wage insurance.

Multinational Corporations
   Do large corporations move to developing
   countries to take advantage of poor people
   and lax regulation?
     Worker productivity in manufacturing is
     substantially lower in developing countries, hence
     lower pay.
     Joint ventures in the USSR
   Large corporations happen because they
   achieve economies of scale
     The problem is not size, but concentration (lack of
     competition—monopoly or monopsony)
Multinationals (2)
   In a free society with competitive markets, firms—no
   matter how big—have no power.
     You don’t have to work for them or buy from them.
   Corporations can gain power by collusion or
   corruption of leaders.
     They gain power because of lack of competition.
     Trade increases competition.
     Monopolies are usually only sustainable with the aid or at
     least permission of the government.
     Corporations that face competition only grow and succeed
     by being better than others, by maintaining superior

Multinationals (3)
     The largest corporations are bigger than
     most countries.
     The market share of the 25 biggest
     corporations has fallen consistently since
     ―Of the world’s 100 largest economies, 51
     are corporations.‖ –popularly quoted, but is
     it correct?

Multinationals (4)
     Of the world’s 100 largest economies, 51
     are corporations?
      • Compares GDP to revenue (sales).
      • A better comparison might be value-added vs.
      • Measured this way, probably 37 of the world’s
        largest economies are corporations.
      • Practically all industrialized countries are bigger
        than all corporations.

Multinationals (5)
   Countries with closed markets have received less
   investment, and have grown less than corporations.
   Measured by GDP vs. revenue, corporations have
   grown faster than countries.
      Measured by value-added, countries have grown more.
   Between 1980 and 1993, the 500 biggest U.S. firms
   saw their share of employment drop from 16% to
      The sales/GDP ratio fell from 59.3% to 36.1%.
   Half the firms operating internationally have fewer
   than 250 employees.

   Do ―invading‖ firms in developing countries
   take advantage of poor locals?
     In the poorest developing countries, the average
     employee of American-based firms makes 8 times
     the average national wage!
     In the middle-income countries, U.S. firms pay 3
     times the national average wage.
     Working conditions? Many of these firms offer the
     best and improving working conditions in the
     Local firms are forced to fall into line or no one
     will work for them.
Exploitation? (2)
   Linda Lim of the University of Michigan found that in
      The annual minimum wage was $134
      Nike workers got $670
   In Indonesia,
      Average wage was $241
      Nike paid $720
   The first round of mega-deals made in the first round
   of outsourcing are coming due for renegotiation, and
   there have been a lot of changes. (Read: wages are

New Model for the Corporation?
   Article from The Economist, April 7, 2007
   According to Sam Palmisano of IBM, the structure of
   multinationals has evolved through 3 stages:
      Multi’s began when 19th Century firms set up sales offices
      abroad to sell goods produced at home. (Parent corp and
      Later, firms created smaller ―mini-me‖ versions of
      themselves in other countries.
      Now, firms are piecing together worldwide operations,
      putting activities wherever they can best be done, ignoring
      geographic or political boundaries.
   He argues that multi’s need to shed nationalistic
IBM and Globalization
   June, 2006: IBM held its annual
   investors’ day at Bangalore Palace in
   India. (Usually held in NY)
     The Indian market has become one of the
     fastest-growing in the world for IBM, with
     revenues rising by 40-50% per year.
     IBM has more employees in India than in
     any other country except the U.S.

IBM and Globalization (2)
   Palmisano says that IBM is building a
   ―globally integrated enterprise.‖
     The firm will shape its strategy, management, and
     operations as a single, global entity.
      • Put people and jobs anywhere in the world
      • Put products were they will sell
      • Build products or product elements wherever they can be
        best built
     IBM’s investment in India is not about getting
     cheaper workers.
      • Apple left Bangalore last year when rising labor costs
        result in labor savings failing to materialize.
IBM and Globalization (3)
   IBM has a single supply chain for the
   whole company.
     IBM’s chief procurement officer moved to
     China in October 2006.
     This is the first head of a corporate-wide
     function to base himself outside the U.S.
     IBM has 330,000 employees in 170
   Is IBM ―a U.S. firm?‖

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