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Spinning Wheels of Globalization!

 

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the  townspeople of any substantial municipality in any continent that  fancy or information might recommend. He could secure forthwith,  if he wished it, cheap and comfortable means of transit to any  country or climate without passport or other formality, could  despatch his servant to the neighbouring office of a bank for  such supply of the precious metals as might seem convenient, and  could then proceed abroad to foreign quarters, without knowledge  of their religion, language, or customs, bearing coined wealth  upon his person, and would consider himself greatly aggrieved and  much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. (Keynes 1920, pp.11-12)

As globalization stumbles upon us with its challenges and opportunities, we must first understand that the process itself is really not new. John Maynard Keynes’ (1920)1 description above shows the amenities available to a Londoner in the (early) 20th century as a result of globalization. To take a more distant example, as early as the year 150, Peter Brown (1971)2 explains, it was possible for an individual to travel from the eastern (Syrian) fringe of the Roman Empire to Rome while speaking in Greek during the entire journey. In other words, the empire was a world with a uniform (Greek) philosophical culture; it meant the erosion of local differences through trade and emigration; and the weakening of ancient barriers before new wealth and new criteria of status (Brown, p. 60).

Globalization refers to the way in which national economies become interconnected with one another, when national barriers against foreign goods, services, capital, and labor disappear.   Of course, the current trend of globalization, which accelerated in the 1980s and 1990s as emerging markets adopted trade-oriented polices, is somewhat different from Brown’s 150s world and Keynes’ 1900s London.

As this new wave of globalization unfolds, the attention in the U.S. has focused on the movement of jobs outside the country: outsourcing.  At first, outsourcing was a source of “amusement” in the media, as manufacturers (of shoes, cheap electronics, and toys) went roaming around the world for ever cheaper “menial” labor.  However, as the 1990s arrived, amusement turned to concern and then to desperation, as corporations began to outsource service work (e.g., processing credit card receipts and writing software code), eventually even of the sort (e.g., basic research, chip design, financial analysis, and engineering) that demands upscale professional workers. As you remember, outsourcing and Benedict Arnold corporations were an important issue in the 2004 presidential election.

Workers’ resistance to capital’s drive to cheapen labor is not a new phenomenon.  Great Britain witnessed the birth of the Luddities in 1811.  To confront the Luddities, the Parliament enacted the Frame Breaking Act, despite Lord Byron‘s best effort against it in the House of Lords; and the Act made machine-breaking a capital offense. Furthermore, to enforce the Act, the British government moved 12,000 troops to areas where the Luddites were strong.  As you navigate the waters of globalization, keep in mind that these waters have seen many sailors before.

Another area of concern regarding globalization is global inequality. Not surprisingly, many economists have tried to show us that the beauties of globalization can solve the problem. And yes, globalization is giving us beautiful things that we should appreciate. However, as the old joke goes, if you ask five economists for an opinion on any subject, you are likely to get six!  In the case of globalization, the emphasis has been on presenting its beautiful side.  Although these presentations capture the headlines, many are flawed or based on flawed data.   Firebaugh and Goesling (2004)3 are a good example of the “wonders-of-globalization” school. According to them, 1980 was a turning point. Before that year, inequality increased for about two centuries. However, after 1980, global income distribution (within and between countries) has become more equal, mainly as the result of rising average (emphasis on average) incomes in India and China thanks to globalization, or so they say. Thus, if we care about reducing world inequality, we should promote globalization.

Although the basic plot isn’t totally wrong, as you might suspect, there are serious problems with it. The main problem is that Firebaugh and Goesling (2004) rely heavily on the work of Bhalla (2002)4 and Sala-i-Martin (2002),5 which in turn rely on Klaus Deininger and Lyn Squire data set.6  Limiting the discussion to the less technical issues, one major limitation here is the use of five data points or quintiles, to approximate income distributions in entire countries.  Not only that, but since many of the quintile shares are not available for several years (and countries), both Bhalla and Sala-i-Martin are forced to assume that there was no change in the distribution of income during the “missing” years. They also treat households as if they were individuals. At the end, and after an impressive array of assumptions, the works of both Bhalla and Sala-i-Martin show that world inequality is decreasing because India and China are growing much faster than the developed world.  Although it is true that India and China are the engines of world growth today, an important missing link here is the widespread and widening inequality within these two countries.

Furthermore, as Sen (2002)7 points out, we should not celebrate progress in terms of minor changes in inequality but in terms of access to a reasonable share of world resources to the poor.   For example, according to Sala-i-Martin (2002), the world,s share of individuals living in extreme poverty decreased by almost two-thirds between 1970 and 1998 (to 6.7% from 17.2%),8 with most of the headway against poverty taking place since 1980, as mentioned before. However, more surprising than the declines in poverty are the reductions in inequality.  Remember, the 1980s was labeled the “lost decade” for the setbacks endured by many countries (especially in Latin America and Africa).  Given that this was a dark period in many developing countries, one might expect resounding increases in inequality.  Nonetheless, according to Sala-i-Martin (2002), the world distribution of income experienced (modest) improvements in the reduction of inequality (4-10 %, depending on the indicator used).  Martin Ravallion (2003,9 200410) has shown why the works of Bhalla and Sala-i-Martin are at best misleading.

To understand this story, we need to put Latina America and Africa on hold for one second and concentrate on Asia.  In the 1970s, about 40% of those living in poverty lived in China (with another 43% in other parts of Asia). In other words, Asia accounted for more than 80% of poverty in the world. Then, as you might remember, we had the Asian miracle! The share of those living on $3 a day (a standard measure of poverty) in Asia went from about 50% in 1980, to about 17% in 1998 (around 12% excluding China). Of course today (thanks to the globalization of information!), we are familiar with the impressive growth rates in China and India.  However, in other poor parts of the globe, we had a different story.  For example, progress in Latin America since the 1980s was at best stagnant, while “progress” was erased from the dictionary when describing Africa until recently. Using again the $3 a day measure, about 53% of Africans confronted poverty in 1980. However, in 1998 this share was around 63%.  While in Latin America the situation was not as depressing as in Africa, the gains in the 1990s were barely enough to compensate for the losses of the 1980s (ergo, the lost decade!).

As reported by the United Nations (2002),11 the economic conditions in the 49 least developed countries (LDCs) in the world12 was not improving. Divergence rather than convergence seems to be norm among LDCs.    However, not everything is bad news.  In their more recent report (released September 2, 2005) the United Nations Conference on Trade and Development13 describes an encouraging, albeit delicate situation. At mentioned before, China and India are still growing strong, and their impressive growth rates are bound to spill over other countries. These two countries have transformed the east and south Asian region as the new growth center of the world. However, while India and China push ahead, in other regions of the world, progress is still slow. In particular, sub-Saharan Africa, which accounts for the highest proportion of people living in extreme poverty.  Latin America has also experienced a rebound, and, as a region, Africa experienced growth rates of more than 4.5 % in 2004. However, again not even growth rates of 5% will be enough to achieve the Millennium Development Goals14 in sub-Saharan Africa.

What about US?  According to the latest report from the U. S. Census Bureau,15 real median household income showed no change between 2003 and 2004. However, both the number of people in poverty and the poverty rate increased between 2003 and 2004.  The poverty rate in 2004 was 12.7 % (up from 12.5 % in 2003).  Last year, 37.0 million people were in poverty (up 1.1 million from 2003). The number of families in poverty increased from 7.6 million in 2003 to 7.9 million in 2004.  Furthermore, both the rate and the number of people in poverty have risen for four consecutive years (to 12.7 % and 37.0 million in 2004, from 11.3 % and 31.6 million in 2000).  The poverty rate for children was higher than for those in the age groups of 18 to 64 years old and 65 and older. Children accounted for 35.2 % of the people in poverty; 52.6 % of the children under 6, living in single-female households, were in poverty. Remember that children represent our future!

Although the number of people with health insurance coverage increased by 2.0 million in 2004, 45.8 million people were without health insurance coverage (up from 45.0 million people in 2003). Furthermore, the age of people covered by employment-based health insurance decreased from 60.4 % in 2003, to 59.8 % in 2004. Finally, the age and number of people covered by government health insurance programs increased from 26.6 % and 76.8 million in 2003, to 27.2 % and 79.1 million in 2004. These increases mainly represent coverage by Medicaid, and if you really think there is a crisis in Social Security, you should not look at Medicaid!

While this was happening, we managed to push our current account to a biblical deficit of $666 billion in 2004 (about 70 % of the aggregated surpluses in the world economy). In other words, the world economy is counting on us to play the dual role of consumer and the debtor of last resort!

Should we blame globalization for our problems?  Well, allow me to give you a twisted analogy! In the movie Austin Powers Gold Member, there is a classical scene where Austin Powers (Mike Myers), Foxxy Cleopatra (Beyoncé Knowles), and Austin’s dad, Nigel Powers (Sir Michael Caine) are in need of transportation. To the rescue, Nigel Powers tells the others not to worry because his ride was available. The audience, of course, was expecting a super car with all the bells and whistles a la James Bond. To the surprise of the audience, as well as Austin and Foxxy, Nigel’s car was a Mini! To calm down his audience, Nigel replies with the classical punch line: “It is not the size of the car, mate; it is how you use it!” Likewise, globalization is just the vehicle, and it all depends on how we decide to use it. Globalization brings Fox News, CNN, NPR and Al-Jazeera to the world. Globalization also allows Wal-Mart to account for about 1% of China’s GDP.  However, and more important, globalization is a window with a spectacular view to the struggle of the human condition around the world.  Several moons ago, while in graduate school at the University of Massachusetts-Amherst, I had the opportunity to take a course in Political Economy with David Kotz (a great teacher and human being).16 I remember him reciting Marx’s celebrated phrase: Workers of the world, unite! Back in those days, my English was not my best quality (it still isn’t today!). The words of Marx in David’s mouth were so strong and powerful, and I was trying to come up with the right set of words to ask a question.  I really don’t remember what words came out of my mouth that day. However, I do remember Minqui Li and Max Fraad-Wolff (both students like me and great comrades as well) trying to help David Kotz make sense of what exactly the Puerto Rican with the funky English was trying to ask! In retrospect, I was trying to ask “How?” Today, I think globalization might be the key to Marx encouraging words!

 

1 The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe).

2 The World of Late Antiquity AD 150-750 (New York and London, W.W. Norton).

3 Accounting for the Recent Decline in Global Income Inequality. American Journal of Sociology, 110 ( 2): 283–312.

4 Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization.  Institute for International Economics. http://bookstore.iie.com/merchant.mvc?Screen=PROD&Product_Code=348.

5The World Distribution of Income. Working Paper, Columbia University.

6 http://www.worldbank.org/research/growth/absineq.htm

7 How to Judge Globalism. http://www.prospect.org/print/V13/1/sen-a.html

8 Actually, using another measure (the poverty line of $1,110 per year), he finds a more impressive decrease from 41% in 1970 to 18.6% in 1998.

9The debate on globalization, poverty and inequality: why measurement matters”, Policy Research Working Paper 3038, World Bank.

10Competing concepts of inequality in the globalization debate”, PRWP 3243, World Bank.

11 United Nations Conference on Trade and Development. The Least Developed Countries 2002 Report (Geneva).   http://www.unis.unvienna.org/unis/pressrels/2002/tad1930.html

12 http://www.unctad.org/Templates/WebFlyer.asp?intItemID=3075&lang=1

13 UNCTAD, Trade and Development Report 2005.

14 http://www.un.org/millenniumgoals/

15 http://www.census.gov/prod/2005pubs/p60-229.pdf

16 http://www.umass.edu/economics/faculty.html

 


Carlos F. Liard-Muriente is Assistant Professor of Economics at Western New England College. His forthcoming papers include “Globalization and Inequality: Some Remarks” in Equal Opportunities International (forthcoming, 2005) and (with Michael Meeropol) “A Critique of ‘Rubinism’ — Did Reduced Budget Deficits and the Brief Experiences with Surpluses Cause the Economic Successes of the 1990s?” in Proceedings of the 11th Presidential Conference “William Jefferson Clinton: The ‘New Democrat’ from Hope” at Hofstra University, New York (forthcoming, 2005).


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