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.
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
Some say that because of globalization, ―the
rich are getting richer, and the poor are
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.
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
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
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%.
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
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 Gaogenxie.com, 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.
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%.
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
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
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.
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
The World Bank estimates that pollution reduces
China’s potential GDP by 3.5-8%.
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.
Blackmail: U.S. corporations use threats of
moving off-shore to weaken U.S.
environmental regulations as unfair barriers
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.
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
“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
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.
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
• Child care
• Food banks
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
• 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
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
Europeans spend much more, but don’t single
out jobs lost to trade.
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
About 2-3M (2%) are permanent displacements
Only a small percentage of these can be directly attributed
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.
Most economists argue that technology is the main
cause of the rising gap between the low-skilled and
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.)
Employers hire and fire at will.
About 25% of the workforce is unemployed at some point
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 U.S. spends 0.16% of GDP on unemployment.
Another approach is to give displaced
workers a subsidy if they are forced into
a lower-paying job.
A proposed expansion of TAA makes any
trade-displaced worker over 40 eligible for
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
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)
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
The largest corporations are bigger than
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
Of the world’s 100 largest economies, 51
• 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.
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.
Linda Lim of the University of Michigan found that in
The annual minimum wage was $134
Nike workers got $670
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
IBM’s investment in India is not about getting
• 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
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?‖