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Globalization

Contemporary Problems in EconomicsECON 3438W – Steve Cunningham

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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.

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Introduction

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?

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Globalization as World MarketsJohan 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 freedom.

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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.

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Poverty ReductionSince 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 years!

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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!

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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 people.

According to Amartya Sen, “Poverty is not just a material problem; it is about powerlessness, being deprived of basic opportunities and freedom of choice.”Some argue that the studies supporting globalization reducing poverty inflate these numbers by including the results of other policies not related to globalization.

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Health and Poverty

Life expectancy in developing countries:

1900 – 30 years1960 – 46 years1998 – 65 years

Infant mortality in developing countries:

1950 – 18%1970 – 11%1995 – 6%

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HungerCalorie intake in developing countries has risen 30% per capita since 1960s.According to the UN, the number undernourished in developing countries:

1970 – 960 million1991 – 830 million2001 – 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%.

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Hunger (2)

In East and Southeast Asia, the number living in hunger has fallen from 43% to 10% since 1970.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 again.

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EducationVery 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 75%.

Illiteracy in developing nations (based on UN report):

1925 – 75%1948 – 52%1970 – 20% About 23% of adults are illiterate today.

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Democratization100 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 suffrage.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.

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Oppression of WomenGlobalization 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 tradition.

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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.

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Global InequalityA study from the Norwegian Institute shoes inequality declining steadily since the end of the 1970s.

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%.

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Global CapitalismPrice 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 best.Personal responsibility and freedom to make choices are essential elements of capitalism.Government provides rules and structure.

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Societies of PrivilegeRegulated 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.

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Extent of Impact on U.S. JobsWhat 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.

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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 imports?

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.

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Example

Between 1986 and 1998, General Electric Co. cut its U.S. workforce in half, while doubling its foreign operations.

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.

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More on EmploymentThe 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.

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Employment (2)

Is outsourcing good for American workers?

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?

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Pollution?

China1980-2002, 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%.

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Pollution? (2)

MexicoAir pollution from mfg doubled during NAFTA’s first four years.

BrazilIn 2003, 10,000 square miles of Amazon rainforest was destroyed, largely to grow soybeans for exports.

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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.

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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 licenses.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.

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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.

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“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 Globalisation.”Galax, Virginia

A town of textile mills and furniture factories.Can’t compete with Mexican and Chinese competition.Last year 3 factories closed.1800 people lost their jobs.

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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 level• Retraining• Child care• Food banks

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Shadow (3)

Trade-displaced workers tend to be older and less educated, and tend to only have worked in one industry.

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 employment.

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Shadow (4)

In the U.S., jobs lost to trade are treated differently than jobs lost for other reasons:

Aid last 4 times longerGet 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.

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Shadow (5)

The U.S. has proposed a major expansion of TAA:

Not just for mfg workersInclude service jobs off-shoredOffer to whole industries, not just factories

TAA was introduced by Kennedy and was expanded in NAFTA.

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Shadow (6) Back to scope!

In the U.S., about 20M jobs are lost involuntarily each year.

About 2-3M (2%) are permanent displacementsOnly 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 competition.Based on TAA claims, fewer than 120,000 qualify (in 2005) for TAA. Fewer in the service sector.

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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.)

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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.

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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.

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Multinational CorporationsDo 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)

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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 productivity.

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Multinationals (3)

Facts:The largest corporations are bigger than most countries.The market share of the 25 biggest corporations has fallen consistently since WWII.“Of the world’s 100 largest economies, 51 are corporations.” –popularly quoted, but is it correct?

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Multinationals (4)

Facts:Of the world’s 100 largest economies, 51 are corporations?• Compares GDP to revenue (sales).• A better comparison might be value-added

vs. GDP.• Measured this way, probably 37 of the

world’s largest economies are corporations.

• Practically all industrialized countries are bigger than all corporations.

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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 11.3%.

The sales/GDP ratio fell from 59.3% to 36.1%.

Half the firms operating internationally have fewer than 250 employees.

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Exploitation?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 country.Local firms are forced to fall into line or no one will work for them.

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Exploitation? (2)Linda Lim of the University of Michigan found that in Vietnam,

The annual minimum wage was $134Nike workers got $670

In Indonesia,Average wage was $241Nike 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 skyrocketing!)

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New Model for the Corporation?Article from The Economist, April 7, 2007According 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 subs)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 cultures.

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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.

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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.

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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 countries.

Is IBM “a U.S. firm?”