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We are here to debate the new Global Economy. The globalization of the world economy is one of the most significant changes of our lifetime. It has aroused great passions. In 1999, we witnessed a virtual riot in the otherwise peaceful city of Seattle specifically over this issue. Everywhere that international organizations meet, they are met with protests, sometimes violent. Dozens of books are articles have been written, both pro and con. Each of us is going to take an extreme position, one much more extreme than we hold ourselves. I will present the extreme arguments in favor of the new global economy. Teresa will present the extreme arguments against it. Then we will open the floor to discussion. Our hope is that you will see the arguments made by both sides and be better able to form your own judgments.
But first let me define specifically what is meant by the global economy. As you see here, there are at least four changes that have made the world economy “global”. First, there is the increasing importance of international trade. There are numerous statistics one could quote to document this, as shown here. For the world as a whole, trade is 12 times the amount it was at the end of World War II (while production is only 6 times the amount). For the United States, a measure called “openness” (exports plus imports divided by GDP) is more than double what it was in 1970.Some 70% of American manufacturing companies are now subject to competition from other countries. Second, there is an increase in the movement of capital. Capital here refers to both money and to capital goods (machines, buildings, etc.) More than $1.5 trillion dollars are exchanged in foreign exchange markets every single day! People buy stocks in stock markets all over the world. Companies borrow from financial institutions of other countries on a regular basis. Governments regularly borrow from other countries or from international institutions. And companies build subsidiaries in other countries. So General Motors is the largest company in Mexico while Honda and Nissan have large auto plants in the United States. And you may have heard stories of the high tech support and tax preparation that takes place in BangaloreIndia by “Bob”, who not only knows his tech but has gone to acting school. (As just one example, in 1992, the Wall Street Journal asked its readers to name which of the following cars is made exclusively in the United States: Pontiac LeMans, Chevrolet Lumina, Mercury Capri, Honda Accord Coupe, Dodge Stealth, Mercury Tracer, or Plymouth Voyager. The answer, of course, turned out to be the Honda Accord Coupe.) Third, there has been an increase in labor migration. People in southern California are all too familiar with the issues regarding immigration, especially undocumented migrants. This is a large subject in and of itself and so will not be part of our debate. And fourth, there has been an increase in regional integration. The largest manifestation of this is the European Union in which the European countries have allowed free movement of goods and of capital, allowed the free movement of people between countries, and created a common currency, the Euro. Less grand in scope have been the free trade areas that have involved the United States. These are areas in which goods and services are allowed to be traded without restriction. The NAFTA included the US, Canada, and Mexico. The recently passed CAFTA included the United States, Honduras, Nicaragua, Costa Rica, Guatemala, and the Dominican Republic. There is a serious proposal on the table for a Free Trade Area of the Americas that would include all of North and South America.
For historical background, the world experienced considerable globalization in the 19th century. So this is not new at all. But globalization stopped completely with the beginning of World War I in 1914. It did not begin at all again until the 1950s. The world suffered greatly in this period. Andglobalization did not become an important phenomenon until the 1980s as technological revolutions in communications and in computers allowed production to take place all over the globe. While not a new phenomenon, this recent globalization is especially controversial because that it has been accompanied by the spread of the ideas of free market capitalism. It is certainly no coincidence that the rise of the global economy occurred at about the same time as the demise of socialist ideas around the world. Indeed, in order to participate in the global economy, countries are virtually forced to adopt the principles of free market capitalism. Countries have been pushed to adopt these principles by the United States Treasury Department and by the International Monetary Fund (IMF) and the World Bank, all with headquarters located in WashingtonD.C. As a result, these principles of free market capitalism have been labeled the “Washington Consensus”. Since countries have been virtually forced to adopt these principles in order to participate in the global economy, these principles have been called the “Golden Straightjacket”. They are listed here. Only the first two of these will be discussed here.
With that as an introduction, let me present the arguments in support of globalization. The first concerns the expansion of international trade. This is not the time to go into the theory of international trade. But imagine I make the following argument: I am mad at the Pittsburgh Steelers for beating us on Monday night football. How dare they? It was our 1st time on Monday night football at home in 9 years. So to show them, I insist that no San Diegan should buy steel made in Pittsburgh. We should only buy steel made in San Diego. This argument is funny because it is silly. We don’t make steel in San Diego. And we don’t for very good reasons. We have no coal or iron here. Pittsburgh with its long history of making steel, its proximity to coal and iron, its location on three rivers, and its capital goods can make steel better than we can. But no to fear – we are not poor here in San Diego. We are much better than they are at cellular phone technology, if not football. We trade with Pittsburgh and we are both vibrant, rich cities.
So it is for a country. There are several potential gains to a country from expanding international trade. First, the theory of international trade tells us that each country is best off if it exports those products that use what is relatively abundant in that country. And then each country would be best off if it imports those products that use what is relatively scarce in that country. This is known as gains from comparative advantage.Just and you and I specialize in those things we do best, it is also best for a country not to try to do everything for itself. In the United States, physical capital, skilled labor, and arable land are relatively abundant. Therefore, one would expect the United States to export goods that require a considerable amount of physical capital (such as automobiles), goods that require a considerable amount of skilled labor (such as high technology goods), and goods that require a considerable amount of good arable land (such as certain agricultural goods). In the United States, less skilled labor is relatively scarce (compared to other countries). Therefore, one would expect the United States to import goods that require a considerable amount of less skilled labor (such as textiles). Indeed, this is what we find. The theory demonstrates conclusively that each country will realize a higher standard of living by specializing in this manner.
Second, there are gains from what are called “economies of scale”. This means that if companies can sell their products around the world, they can become bigger companies. And bigger companies have advantages that allow them to produce at a lower cost. Producing at lower cost means that prices charged can be lower.
And third, there are gains due to competition. More competition forces prices to be lower for consumers. And competition from other companies forces domestic companies to become more efficient and to make better products just to be able to compete. The American automobile industry provides the best example. When there were only three American companies, the automobiles were over-priced and of laughable quality. But now, there is competition from all over the world. The automobiles are of much better quality and the profits of the companies are more reasonable.
This increase in the standard of living is the key to the benefits from globalization. According to a recent study of three economists at the Institute for International Economics, the opening of international trade since 1945 has raised the American national income by $1 trillion per year. This means that the average person in the United States has an income about $5,000 higher, and the average American household has an income almost $13,000 higher today as a result of the opening of the policies that opened trade since 1945.We in the developed world have not opened trade as much as we could, especially trade with poor countries involving their agricultural products.If we were to open ourselves to such trade, according to these economists, our national income would rise by another $500 billion per year, or another $2,000 per person.Many other similar studies have been done, reaching the same basic conclusion.
But while America as a whole gains, one must add that not all Americans benefit from the opening of trade. In the United States, less skilled workers are particularly likely to be hurt by the import competition. Companies fail, jobs disappear, and some communities wither. Therefore, those who are least able to adjust are likely to be most affected. These losses are temporary, as the workers do find other employment and as new communities form. In contrast, the gains from opening trade are permanent. One study estimates the lifetime cost of worker dislocations at an upper limit of $54 billion. This is a large number, especially when it is focused on only a relatively small number of people. But it is still only 5% of the value of the benefits from opening trade. The United States does have a program called Trade Adjustment Assistance. But we spend less than $2 billion per year on this help. It is estimated that the United Stateswould need to commit perhaps $15 billion per year to fully aid all of those who are harmed by the new global economy. Considering the great benefits from trade, this would seem to be a very worthwhile investment.
Critics frequently argue that trade costs American jobs. So I just read that NAFTA has cost perhaps 800,000 jobs (although it has created an equal number). When you hear these arguments and the numbers mentioned, keep in mind that in the United States, we have a labor market that is in a constant state of flux. On average each year from 1992 to 2004, over 32 million jobs were created while about 31 million jobs were lost. About 20% of American workers lose and then gain a job each and every year. So very few of those lose their jobs as a direct result of trade. Indeed, technological changes have had a much bigger effect on people’s jobs than trade has had. If we take all of the blue collar jobs that have been lost in the past 40 years, no more than 5% of them could have been lost as a result of trade!
We hear a great deal about goods imported from low wage countries like China. And it is true that (as of 2000) a Chinese worker on average costs only $730 a year while an American worker costs $29,000 a year. How can we compete? The answer is simple: we compete and compete well because we are much more productive. In that same year, an American worker added $81,000 a year to production while a Chinese worker added only $2,900. China will only have an advantage where those things that make Americans productive are not important. That is limited to textiles, apparel, toy assembly, and so forth. If the Chinese ever do become more productive, their wages will rise accordingly as has been demonstrated by the experience of South Korea and Taiwan.
Now let me turn to foreign direct investment. Again, this involves the ownership and control of a company in another country. General Motors of Mexico or Honda of Ohio are examples. A company doing this is called a multinational company, or a transnational company.
As you see here, there are clear advantages to the citizens of the host country. First, foreign companies bring new jobs and often bring higher wages. Second, foreign companies often bring new technologies that often spill over to local companies and allow them to produce better products or to produce more efficiently. Third, foreign companies bring new capital goods. This is especially important for poor countries that typically are very deficient in capital goods. Fourth, foreign companies bring tax revenues to the governments of the host countries. And finally, foreign direct investment may benefit local supplying companies if the foreign-owned company buys its materials in the host country. Many host countries, especially developing countries, have seen the benefits of foreign direct investment as very significant. Since the mid-1970s, they have removed restrictions on foreign direct investments into their countries and have even offered incentives and subsidies to attract foreign investors. A reasonable argument is that the countries give up too much to attract the foreign companies much as cities compete to attract the Olympic Games. But that just shows how much the countries value what the foreign companies can bring.
What about portfolio investment, the lending of money in other countries? There has been great criticism of the way this has been handled. And with good reason. There were major financial crises from 1997 to 2002. But this kind of lending allows a country access to capital that it otherwise could not have. In the past, there was a great push for increased foreign aid. But rich countries are very stingy with their foreign aid. Borrowing from the foreign financial institutions allows investment and economic growth in a developing country that the country would not otherwise be able to achieve.
Let me anticipate some of the criticisms Teresa is likely to make. One is that the corporations locate in foreign countries only because doing so allows a company to use labor that is cheaper. This argument also may have relevance for foreign direct investment into developing countries. But only 1/3 of all foreign direct investment is located in developing countries. So at least the other 2/3 of direct investment must have other motives. Studies show that most companies are more interested in a low level of corruption, the rule of law, and political stability than they are with low labor costs. And there is overwhelming evidence that multi-national companies pay their workers more and provide far better working conditions that do domestic companies. In low-income developing countries, compensation by American multi-national companies is twice the average compensation! Critics think that the alternative is that all people in the world would live as we do here in the United States. This is a delightful thought; but is a fantasy. The point is that workers in low-income countries are better-off than they would have been had the American multi-national companies not gone there!
What about American workers? Studies show that American workers who work in companies that have foreign affiliates are paid 10% more on average than otherwise comparable American workers who don’t. And that while having affiliates in another country can replace jobs formerly filled by Americans, it can also create new jobs for Americans. For example, consider the outsourcing of computer technical support jobs to India Bob in Bangalore. Americans who used to supply this service have been replaced by Indians who are cheaper and are as good. Because the computer industry is a competitive industry, the benefits of these lower labor costs are passed on to consumers as lower prices. Lower prices encourage Americans to buy more computers and even make it possible for some small businesses to afford computers who could not otherwise do so. This increase in buying creates jobs. So despite the outsourcing to India, computer related jobs are expected to increase greatly over the next few years.
Anothercriticism of foreign direct investment is that companies use it to get around the labor and environmental laws of their native country. But there is little evidence to support the proposition. Let mefocus on the environmental laws.For this argument to make any sense, the costs of meeting American environmental laws must be high in relation to the total cost of production (otherwise, it is not worth the cost of the move). And the company must be able to relocate production relatively easily. The amount of production that meets these conditions is likely to be small. Of 442 American industries studied, only 11 meet these conditions. The biggest polluters are electricity generation plants. And these have NOT moved to other countries to produce! It is usually more cost effective for a company to use the same production technology in all of its plants. So General Motors of Mexico uses the same technology it uses in Detroit. To do otherwise would be expensive. And most companies seem aware that an anti-environmental image will hurt their sales in the United States.