Chapter Outline

The Globalization Debate: Prosperity or Impoverishment?

Is the shift toward a more integrated and interdependent global economy a good thing? Many influential economists, politicians, and business leaders seem to think so. They argue that falling barriers to international trade and investment are the twin engines that are driving the global economy toward greater prosperity. They argue that increased international trade and cross-border investment will result in lower prices for goods and services. They believe that globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global trading system.

The arguments of those who support globalization are covered in detail in Chapters 4, 5, 6, and 8 of this book. As we shall see, there are good theoretical reasons for believing that declining barriers to international trade and investment do stimulate economic growth, create jobs, and raise income levels. Moreover, as described in Chapters 5 to 7, empirical evidence lends support to the predictions of this theory. However, despite the existence of a compelling body of theory and evidence, globalization has its critics.29 Here we briefly review the main themes of the debate. In later chapters we shall elaborate on many of the points mentioned below.

Globalization, Jobs, and Incomes

One frequently voiced concern is that far from creating jobs, falling barriers to international trade actually destroy manufacturing jobs in wealthy advanced economies such as the United States and United Kingdom. The critics argue that falling trade barriers allow firms to move their manufacturing activities offshore to countries where wage rates are much lower. D. L. Bartlett and J. B. Steele, two journalists for the Philadelphia Inquirer who have gained notoriety for their attacks on free trade, cite the case of Harwood Industries, a US clothing manufacturer that closed its US operations, where it paid workers $9 per hour, and shifted manufacturing to Honduras, where textile workers receive 48 cents per hour. Because of moves like this, argue Bartlett and Steele, the wage rates of poorer Americans have fallen significantly over the last quarter of a century.

Supporters of globalization reply that critics such as Bartlett and Steele miss the essential point about free trade--the benefits outweigh the costs. They argue that free trade results in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods that they cannot produce as efficiently. When a country embraces free trade, there is always some dislocation--lost textile jobs at Harwood Industries, for example--but the whole economy is better off as a result. According to this view, it makes little sense for the United States to produce textiles at home when they can be produced at a lower cost in Honduras or China (which, unlike Honduras, is a major source of US textile imports). Importing textiles from China leads to lower prices for clothes in the United States, which enables consumers to spend more of their money on other items. At the same time, the increased income generated in China from textile exports increases income levels in that country, which helps the Chinese to purchase more products produced in the United States, such as Boeing jets, Intel-based computers, Microsoft software, and Motorola cellular telephones. In this manner, supporters of globalization argue that free trade benefits all countries that adhere to a free trade regime.

Supporters of globalization do concede that the wage rate enjoyed by unskilled workers in many advanced economies has declined in recent years. For example, data for the Organization for Economic Cooperation and Development suggest that since 1980 the lowest 10 percent of American workers have seen a drop in their real wages (adjusted for inflation) of about 20 percent, while the top 10 percent have enjoyed a real pay increase of around 10 percent. Similar trends can be seen in many other countries. However, while globalization critics argue that the decline in unskilled wage rates is due to the migration of low-wage manufacturing jobs offshore and a corresponding reduction in demand for unskilled workers, supporters of globalization see a more complex picture. They maintain that the declining real wage rates of unskilled workers owes far more to a technology-induced shift within advanced economies away from jobs where the only qualification was a willingness to turn up for work every day and toward jobs that require significant education and skills. They point out that many advanced economies report a shortage of highly skilled workers and an excess supply of unskilled workers. Thus, growing income inequality is a result of the wages for skilled workers being bid up by the labor market, and the wages for unskilled workers being discounted. If one agrees with this logic, a solution to the problem of declining incomes is to be found not in limiting free trade and globalization, but in increasing society's investment in education to reduce the supply of unskilled workers.

Globalization, Labor Policies, and the Environment

A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. Globalization critics often argue that adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace vis-a-vis firms based in developing nations that do not have to comply with such regulations. Firms deal with this cost disadvantage, the theory goes, by moving their production facilities to nations that do not have such burdensome regulations, or by failing to enforce the regulations they have on their books. If this is the case, one might expect free trade to lead to an increase in pollution and result in firms from advanced nations exploiting the labor of less developed nations. This argument was used repeatedly by those who opposed the 1994 formation of the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States. They painted a picture of US manufacturing firms moving to Mexico in droves so that they would be free to pollute the environment, employ child labor, and ignore workplace safety and health issues, all in the name of higher profits.

Supporters of free trade and greater globalization express serious doubts about this scenario. They point out that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations. Because free trade enables developing countries to increase their economic growth rates and become richer, this should lead to tougher environmental and labor laws. In this view, the critics of free trade have got it backward--free trade does not lead to more pollution and labor exploitation, it leads to less. Supporters of free trade also point out that it is possible to tie free trade agreements to the implementation of tougher environmental and labor laws in less developed countries. NAFTA, for example, was passed only after side agreements had been negotiated that committed Mexico to tougher enforcement of environmental protection regulations. Thus, supporters of free trade argue that factories based in Mexico are now cleaner than they would have been without the passage of NAFTA.

Supporters of free trade also argue that business firms are not the amoral organizations that critics suggest. While there may be a few rotten apples, the vast majority of business enterprises are staffed by managers who are committed to behave in an ethical manner and would be unlikely to move production offshore just so they could pump more pollution into the atmosphere or exploit labor. Furthermore, the relationship between pollution, labor exploitation, and production costs may not be that suggested by critics. In general, a well-treated labor force is productive, and it is productivity rather than base wage rates that often has the greatest influence on costs. Given this, in the vast majority of cases, the vision of greedy managers who shift production to low-wage companies to "exploit" their labor force may be misplaced.

Globalization and National Sovereignty

A final concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization, the European Union, and the United Nations. As perceived by critics, unelected bureaucrats are now able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. In this manner, claim critics, the national state's ability to control its own destiny is being limited.

The World Trade Organization is a favorite target of those who attack the world's headlong rush toward a global economy. The WTO was founded in 1994 to police the world trading system established by the General Agreement on Tariffs and Trade. The WTO arbitrates trade disputes between the 120 or so states that are signatories to the GATT. The WTO arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT regulations. If the violator refuses to comply with the ruling, the WTO allows other states to impose appropriate trade sanctions on the transgressor. As a result, according to one prominent critic, the US environmentalist and consumer rights advocate Ralph Nader:

Under the new system, many decisions that affect billions of people are no longer made by local or national governments but instead, if challenged by any WTO member nation, would be deferred to a group of unelected bureaucrats sitting behind closed doors in Geneva (which is where the headquarters of the WTO are located). The bureaucrats can decide whether or not people in California can prevent the destruction of the last virgin forests or determine if carcinogenic pesticides can be banned from their foods; or whether European countries have the right to ban dangerous biotech hormones in meat . . . At risk is the very basis of democracy and accountable decision making.

In contrast to Nader's inflammatory rhetoric, many economists and politicians maintain that the power of supranational organizations such as the WTO is limited to that which nation-states collectively agree to grant. They argue that bodies such as the United Nations and the WTO exist to serve the collective interests of member states, not to subvert those interests. Moreover, supporters of supranational organizations point out that in reality, the power of these bodies rests largely on their ability to persuade member states to follow a certain action. If these bodies fail to serve the collective interests of member states, those states will withdraw their support and the supranational organization will quickly collapse. In this view then, real power still resides with individual nation-states, not supranational organizations.