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Globalization Contemporary Problems in Economics ECON 3438W Steve Cunningham The Commanding Heights PBS Mini-series on globalization and its history. – PowerPoint PPT presentation

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Title: Globalization

  • 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
  • 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.

Half Truth
  • Some say that because of globalization, the rich
    are getting richer, and the poor are getting
  • 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 worlds 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
  • 1820 85
  • 1950 50
  • 1980 33
  • 2001 18
  • Absolute poverty in developing countries fell
    from 40 to 21almost halfbetween 1981 and 2001!

Poverty Reduction (3)
  • During the same time period, the worlds
    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.

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 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
  • Global food production doubled during the past 50
    years, but now food prices are rising again.

  • 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 75.
  • Illiteracy in developing nations (based on UN
  • 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 worlds population.
  • Freedom House views 85 countries as
    freedemocratic societies with civil
    rightsinvolving 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 tradition.

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
  • Today women form 42 of the worlds 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 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 (0complete
    equality, 1one man owns everything), the world
    Gini coefficient was 0.6 in 1968, and 0.52 nowa
    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 best.
  • 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 groupsthose with the right contacts or
  • 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

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
  • 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 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.

  • Between 1986 and 1998, General Electric Co. cut
    its U.S. workforce in half, while doubling its
    foreign operations.
  • In 1999, GEs 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
  • 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 workers?
  • Outsourcing potentially increases profits by
    lowering labor costs.
  • U.S. software employment dropped 16 from 2001 to
  • How long will we export jobs to India?
  • Is globalization also creating U.S. jobs?

  • China
  • 1980-2002, value of exports was 2.6 trillion.
    (Largest exporter in the developing world.)
  • At least 16 of the 20 cities with the worlds
    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
    Chinas potential GDP by 3.5-8.

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

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 paceleading 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 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.

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.
  • Cant 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 level
  • 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 employment.

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 dont 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

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 intl competition.
  • 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 PlanFlexicurity
  • 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
  • Wage insurance?
  • A proposed expansion of TAA makes any
    trade-displaced worker over 40 eligible for wage

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 competitionmonopoly or monopsony)

Multinationals (2)
  • In a free society with competitive markets,
    firmsno matter how bighave no power.
  • You dont 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.

Multinationals (3)
  • Facts
  • The largest corporations are bigger than most
  • The market share of the 25 biggest corporations
    has fallen consistently since WWII.
  • Of the worlds 100 largest economies, 51 are
    corporations. popularly quoted, but is it

Multinationals (4)
  • Facts
  • Of the worlds 100 largest economies, 51 are
  • Compares GDP to revenue (sales).
  • A better comparison might be value-added vs. GDP.
  • Measured this way, probably 37 of the worlds
    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
  • Measured by GDP vs. revenue, corporations have
    grown faster than countries.
  • Measured by value-added, countries have grown
  • 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 Vietnam,
  • 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 skyrocketing!)

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
  • Multis 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
  • He argues that multis 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
  • IBMs investment in India is not about getting
    cheaper workers.
  • Apple left Bangalore last year when rising labor
    costs result in labor savings failing to

IBM and Globalization (3)
  • IBM has a single supply chain for the whole
  • IBMs 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?