Globalization and its Discontents (with apologies to Stiglitz)

There is no shortage of debate about the effects of globalization. It is one of the most interesting debates in the fields of international business, development economics, and public policy. And the main issue of contention centers on the gains from globalization. Scholars have long tried to figure out whether, and how, countries (both their firms and their citizens) benefit from the opening of markets to global trade and investment.

Academic research has highlighted the role that open economies can play in allowing nations to specialize in its areas of comparative advantage, and how globalization leads to the exchange of knowledge across borders. The argument is that each country possesses differing stocks of knowledge, capital, and labor, and that globalization and free trade allow for the most efficient employment and allocation of those resources. Moreover, interaction through trade and investment encourages the spread of knowledge across countries, thereby allowing countries to catch-up (economically and technologically) with their trading/investment partners. Although there is some evidence that increased globalization leads to greater specialization, reduced costs for parties involved, and greater information exchange, it remains an open question whether developed or developing countries benefit more from the cross-country interaction brought about by globalization.

On one hand, theory suggests that developing countries should benefit disproportionately from globalization. Those who subscribe to this view argue that investment in developing countries by firms in developed countries raises wages in host countries and, as such, the standard of living; that foreign competition imposes discipline upon local firms through intense competitive pressure, thereby raising the competitiveness of surviving local firms; and that foreign entrants provide a means for local firms to gain insight into the advanced technological knowledge that they lack. Similarly, engaging in trade (either through export or import) with developed countries allows firms in developing countries to learn from sophisticated foreign buyers, suppliers, and competitors. For all these reasons, scholars argue, globalization should provide real economic benefits for developing countries, and those who subscribe to this view therefore see globalization as a means of promoting equality and social welfare.

On the other hand, however, are reasons to question the supposed benefits of globalization to developing countries. For one thing, there is scant evidence to support the view that developing countries benefit disproportionately from globalization. In fact, some research even finds evidence that developed countries benefit more from globalization. This might be the case if foreign competition net-net displaces more jobs than it creates, thereby limiting benefits to a small minority of the population, or if economic openness leads firms from developed countries to invest, subcontract, and export their low-value-added activities to developing countries. If developed countries can dump their low-growth, labor-intensive businesses onto developing countries, they may focus their efforts on innovation – developing new technologies to exploit high-value-added activities for which the prospects for growth are considerably greater. In this sense then, we might plausibly expect growth to be greater for developed countries than developing countries as a result of globalization. Supporters of this view do not see globalization as welfare enhancing, but rather as an insidious force that marginalizes the poor and propagates exploitation. But even in this case, the developing country benefits through increased growth and better standards of living. It just so happens that the developed country benefits more.

In any event, while it may be some time before we are able to accurately parse out and gauge the precise gains from globalization (and I think we’re doing a good job and we are getting pretty close), unfortunately the debate is marred and distorted by political ideology (and a good dose of political reality) that is difficult to separate from the phenomenon itself. For example, one of the concerns that we read about with increasing frequency has to do with the supposed outsourcing of jobs from the U.S. to other countries. Factory closures make headlines, as do the shut down of call centers that have been moved overseas.

The problem is that the losses associated with globalization are concentrated and its gains are diffuse. When factories shut down, hundreds, and sometimes thousands, of employees lose their jobs in one geographical area (let’s say Youngstown, Ohio). However, an equivalent (or perhaps a greater) number of jobs may have been created. But those offsetting jobs created are not geographically concentrated. Jobs may be created in the service sector in Northern California, Boston, DC, etc. and the human capital may be redirected toward other, more value-added, activities in those disparate locations. This is a positive economic outcome of globalization that improves social welfare. We only hear about the job losses in Youngstown, Ohio though because a collective of concentrated people make more noise than a dispersed, unconnected set of people. Those folks in Youngstown, Ohio therefore get the attention of lawmakers, …and the public.

In all fairness to the politicians, it’s got to be difficult to go to Youngstown and try to extol the virtues of globalization to a constituency that just lost its jobs. Those folks who lost their jobs are looking for some explanations, and often someone to blame. And oh yeah, they also vote. If they are, or were, part of a union, those job losses carry even greater political influence. Politicians (in an effort to preserve their position and remain in office) often will take action in order to show their constituents that they are on their side. And in many cases, this can lead to protectionist overreactions.

I am afraid that this is happening with the current administration’s dealings with China. It’s no surprise too that in addition to all that, it’s much easier to blame someone else for your problems rather than taking a difficult look inward. With the U.S. economy slowing and the manufacturing sector currently in recession, it’s much easier to blame China than to recognize the benefits provided by integrating China into the global economy through its accession to the WTO.

I do not believe that introducing protectionist policy helps us in the near term or the long run. It can only instigate reactionary policy by China, and any other trading partner against whom we seek protection. With respect to China, I sometimes think it might be better to let China collapse under the weight of its U.S. foreign reserves as the dollar depreciates. Basically, China lent us lots of money to buy its cheap goods in order to artificially inflate exports. As the dollars they collect in exchange for those exported goods decrease in value, it’s like watching those loans slowly approach default. If China wants to be in the business of giving away its products, well then by all means, why not oblige?

Anyhow, China-specific policy is a little too far afield from the original intent of this blog, and I’m not a China expert. Rather, the intent of this blog is to discuss the effects of globalization more generally. As an international business scholar, I’ve studied, and have been fortunate enough to witness first hand, the benefits that globalization and free trade can provide economies that become more integrated in the global economy. Sure, it can be tough, really tough, for those folks in Youngstown that lose their jobs. And it would suck to have to face those folks to explain this when they’ve lost everything. However, I do not think that resorting to protectionism is the right way to go. Rather, I think that a well-developed, and well-administered, trade adjustment assistance (TAA) program represents a more effective way to respond to the challenges posed by globalization.

Globalization is coming whether we like it or not. We can either respond by adopting distorting protectionist policies, or by allowing our economy to do what it does best – respond flexibly to changes in the external environment – coupled with the implementation of TAA programs that aids both manufacturing and service workers displaced by foreign competition re-train and re-deploy in the next best alternative use. Personally, I prefer the latter.

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One Response to Globalization and its Discontents (with apologies to Stiglitz)

  1. Niron Hashai says:

    Nice one Rob.
    2 things to keep in mind. One is that in developing countries (contrary to developed ones) in many cases the wealth that was generated through globalization in unevenly split in the society so that only a small fraction of the population gets to have most of the benefits. This by itself is enough to create resistance to globalization as people are usually more concerned with comparative than with absolute terms.
    The second issue is the question weather all the forces that we see resisting globalization will become strong enough to slow it down or even to reduce its level. This has happened before in the early days of the 20th century (and not only because of the world wars). Academics, politicians and practitioners have to offer solutions how to prevent to such a scenario.

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