Some critics believe that Globalisation leaves the poor behind, others think that it offers opportunities to expand legality and liberty. Here is a non-exhaustive list of some pros and cons of Globalisation:
- Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage. Living standards can go up faster.
- Global competition and cheap imports keep a lid on prices, so inflation is less likely to derail economic growth.
- An open economy spurs innovation with fresh ideas from abroad.
- Export jobs often pay more than other jobs.
- Unfettered capital flows give the U.S. access to foreign investment and keep interest rates low.
- Millions of Americans have lost jobs due to imports or production shifts abroad. Most find new jobs–that pay less.
- Millions of others fear losing their jobs, especially at those companies operating under competitive pressure.
- Workers face pay-cut demands from employers, which often threaten to export jobs.
- Service and white-collar jobs are increasingly vulnerable to operations moving offshore.
- U.S. employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home.
Global value chains are lighter and smarter than ever
Ask someone to describe what globalisation looks like:a critic might describe a scene straight out of Bangladesh’s Rana Plaza—sweatshop workers sewing T-shirts for pennies—while a booster like Thomas Friedman might try to connect the dots of GE’s or Dell’s far-flung supply chains. Neither is quite correct, according to McKinsey, which in April published a study chronicling significant developments in global value chains over the last decade (measured between 2002 and 2012). During that time, cross-border flows of goods, services and finance reached $26trn, according to McKinsey, equivalent to 36% of global GDP. That figure could triple by 2025 to make up nearly half of GDP if businesses are willing to create new value instead of lowering costs in emerging markets and if policymakers will lower regulatory barriers to help. Many believe that globalisation is primarily concerned with goods, from T-shirts to iPhones to locomotives. But the contents are changing—and dematerializing. Trade in knowledge-intensive goods such as electronics, pharmaceuticals or jet engines is rising 30% faster than both capital-intensive commodities and labor-intensive goods like clothing. This trend can be seen in the steady rise of intermediate products, which are now 55% of all traded goods and 70% of imported services, as global supply chains continue to proliferate and specialise. For example, GE’s next generation jet engine uses partners or suppliers from thirteen nations besides the United States, while 90% of sales are to airlines overseas. These chains are also being transformed by data and communication. Virtual goods increasingly substitute for physical ones (e.g.e-books for printed matter) or else increase their value via a “digital wrapper ” of new services, to borrow McKinsey’s phrase. (Think of such wrappers as the sensors embedded in those jet engines, relaying vital diagnostic information to the ground.) Digitisation has also enabled everything from the ongoing boom in e-commerce to crowdsourcing, crowdfunding and cross-border collaboration, to name just a few, thus enabling the rise “micromultinationals”—the individuals and small- and medium-size enterprises increasingly able to find a niche in global value chains. All of this has been to the gradually increasing benefit of emerging markets, which have quadrupled their share of trade amongst themselves since 1990 to nearly a quarter of trade overall. Their participation still lags trade between developed nations in terms of both communication and knowledge-intensive flows, McKinsey found, but their incipient integration gives the world economy its greatest opportunity if companies and policymakers can get it right. First, companies based in developed nations must change how they think about emerging nations and begin to move from considering them only as far-flung markets and low-cost production centres to true partners for value creation. A 2010 study of 100of the largest multinationals found that they derived just 17% of revenue from emerging markets, despite these markets comprising 36% of global GDP. This must change. One hopeful sign is that flows of foreign direct investment (FDI) to emerging nations has increased since the 2008 recession. Second, digitisationwill help firms find new platforms for collaboration and for creating shared value. Examples such as InnoCentive, KickStarter, and Quirky all offer models for collaborative research, funding, production and sales between large firms and individuals—models that can be adapted to fit local conditions. For instance, China’s Alibaba has digitally knit a nationwide e-commerce distribution network that delivered 5bnpackages last year. Even as it invests $16bn in building out that platform, Alibabais making it available to new entrants such as the US-based ShopRunner . Finally, policymakers will have to rethink how their cities and nations fit into global value chains, including what skills, trade and immigration policies are needed to encourage participation in flows. Hong Kong, Singapore and Dubai have all flourished, for example, in their roles as light-touch entrepôts, while Germany sits astride the most global value chains thanks to the knowledge-intensive goods exporters of the Mittelstand. Another example, Estonia, has reinvented itself as the Silicon Valley of the Baltic, pursuing e-government initiatives friendly to tech start-ups. The nations closer to these new value chains may see approximately 40% more GDP growth than those on the periphery, McKinsey found. There has never been a worse time to be the weakest link.
GLOBALISATION has made the planet more equal. As communication gets cheaper and transport gets faster, developing countries have closed the gap with their rich-world counterparts. But within many developing economies, the story is less rosy: inequality has worsened. The Gini index is one measure of inequality, based on a score between zero and one. A Gini index of one means a country’s entire income goes to one person; a score of zero means the spoils are equally divided. Sub-Saharan Africa saw its Gini index rise by 9% between 1993 and 2008. China’s score soared by 34% over twenty years. Only in a few places has it fallen. Does globalisation have anything to do with it?
Usually, economists say no. Basic theory predicts that inequality falls when developing countries enter global markets. The theory of comparative advantage is found in every introductory textbook. It says that poor countries produce goods requiring large amounts of unskilled labour. Rich countries focus on things requiring skilled workers. Thailand is a big rice exporter, for example, while America is the world’s largest exporter of financial services. As global trade increases, the theory says, unskilled workers in poor countries are high in demand; skilled workers in those same countries are less coveted. With more employers clamouring for their services, unskilled workers in developing countries get wage boosts, whereas their skilled counterparts don’t. The result is that inequality falls.
But the high inequality seen today in poor countries is prompting new theories. One emphasises outsourcing—when rich countries shift parts of the production process to poor countries. Contrary to popular belief, multinationals in poor countries often employ skilled workers and pay high wages. One study showed that workers in foreign-owned and subcontracting clothing and footwear factories in Vietnam rank in the top 20% of the country’s population by household expenditure. A report from the OECD found that average wages paid by foreign multinationals are 40% higher than wages paid by local firms. What is more, those skilled workers often get to work with managers from rich countries, or might have to meet the deadlines of an efficient rich-world company. That may boost their productivity. Higher productivity means they can demand even higher wages. By contrast, unskilled workers, or poor ones in rural areas, tend not to have such opportunities. Their productivity does not rise. For these reasons globalisation can boost the wages of skilled workers, while crimping those of the unskilled. The result is that inequality rises.
Other economic theories try to explain why inequality in developing countries has reached such heights. A Nobel laureate, Simon Kuznets, argued that growing inequality was inevitable in the early stages of development. He reckoned that those who had a little bit of money to begin with could see big gains from investment, and could thus benefit from growth, whereas those with nothing would stay rooted in poverty. Only with economic development and demands for redistribution would inequality fall. Indeed, recent evidence suggests that the growth in developing-country inequality may now have slowed, which will prompt new questions for economists. But as things stand, globalisation may struggle to promote equality within the world’s poorest countries.