Profits over people
Sep 27th 2001
From The Economist
print edition
Critics argue that globalisation hurts workers.
Are they right?
THE
liberty that makes economic integration possible is desirable in itself. In
addition, advocates of globalisation argue, integration is good for people in
material terms—that is why free people choose it. Sceptics disagree on both
points: globalisation militates against liberty and democracy, they say, and
while it makes some people who are already rich even richer, it does this by
keeping the poor in poverty. After all, globalisation is merely capitalism writ
large. A later chapter of this survey will deal with the implications of
globalisation for democracy. But first, is it true that globalisation harms the
poor?
In a
narrow sense, the answer is yes: it does harm some of the poor. Free trade and
foreign direct investment may take jobs from workers (including low-paid
workers) in the advanced industrial economies and give them to cheaper workers
in poor countries. Thanks to the North American Free-Trade Agreement (NAFTA), for instance, there are no tariffs or investment
restrictions to stop an American manufacturer closing an old factory in the
United States and opening a new one in Mexico.
Sceptics
score this strategy as a double crime. The rich-country workers, who were
probably on low wages by local standards to begin with, are out of work. That
increase in the local supply of labour drives down other wages. Meanwhile, the
poor-country workers are drawn into jobs that exploit them. How do you know
that the poor-country workers are being exploited? Because they are being paid
less, often much less, than their rich-country counterparts got before trade
opened up—and in all likelihood they are working longer hours in shabbier
premises as well. The only gain from this kind of trade, the indictment
continues, accrues to the owners of the companies who have shifted their
operations from low-wage factories in industrialised countries to poverty-wage
factories in the south.
Some of
this is true. Trade displaces workers in the industrialised countries; other
things equal, this will have some depressing effect on the wages of other
workers; and pay and conditions in developing-country factories are likely to
be worse than in their rich-country counterparts. But whereas the displaced
rich-country workers are plainly worse off than they were before, the newly
employed poor-country workers are plainly better off. They must be, because
they have chosen to take those jobs.
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As for
profits, yes, that is the spur for moving production to a lower-wage area. But
no company can expect to hang on to this windfall for long, because it will be
competed away as other companies do the same thing and cut their prices. That
lowering of prices is crucial in understanding the broader benefits of the change.
It is what makes consumers at large—including poor consumers—better off,
raising real incomes in the aggregate.
What
about the rich-country workers who are not displaced, but whose wages may
nonetheless come under downward pressure? It is hard to generalise. On the one
hand, their wages may fall, or fail to rise as quickly as they would have done
otherwise; on the other, they benefit from lower prices along with everybody
else. On balance, you would expect that some will lose, some will gain, and
some will be about as well off as they were before. In developing countries,
the labour-market side of this process will tend to work in the other
direction. The increase in demand for poor-country labour ought to push up
wages even for workers who are not employed in the new trade-related jobs.
So
capitalism-globalisation is not mainly concerned with shifting income from
workers to investors, as the sceptics maintain. Rather, it makes some workers
worse off while making others (including the poorest ones of all, to begin
with) better off. And in the aggregate it makes consumers (that is, people with
or without a job) better off as well. Altogether, given freer trade, both
rich-country and poor-country living standards rise. That gives governments
more to spend on welfare, education and other public services.
Changing gear
Note
that all this counts only the so-called static gains from trade: the effects of
a once-and-for-all shift in the pattern of production and consumption. Modern
economics also emphasises the importance of dynamic gains, arising especially
from the economies of scale that freer trade makes possible. The aggregate
long-term gain for rich and poor countries alike is likely to be far bigger
than the simple arithmetic would suggest.
Moreover,
few displaced rich-country workers are likely to be permanently out of work.
Most will move to other jobs. Also, new jobs will be created by the economic
opportunities that trade opens up. Overall, trade neither reduces the number of
jobs in the economy nor increases them. In principle, there is no reason to
expect employment or unemployment to be any higher or lower in an open economy
than in a closed economy—or, for that matter, in a rich economy as compared to
a poor economy. Still, none of this is to deny that the displaced rich-country
workers lose out: many, perhaps most, of those who find alternative work will
be paid less than they were before.
In
thinking through the economic theory of liberal trade, it is helpful to draw a
parallel with technological progress. Trade allows a country to shift its
pattern of production in such a way that, after exporting those goods it does
not want and importing those it does, it can consume more without there having
been any increase in its available resources. Advancing technology allows a
country to do something very similar: to make more with less. You can think of
trade as a machine (with no running costs or depreciation): goods you can make
cheaply go in at one end, and goods that would cost you a lot more to make come
out at the other. The logic of protectionism would demand that such a
miraculous machine be dismantled and the blueprint destroyed, in order to save
jobs.
No
question, technological progress, just like trade, creates losers as well as
winners. The Industrial Revolution involved hugely painful economic and social
dislocations—though nearly everybody would now agree that the gains in human
welfare were worth the cost. Even in far milder periods of economic
transformation, such as today's, new machines and new methods make old skills
obsolete. The Luddites understood that, which made them more coherent on the
subject than some of today's sceptics, who oppose integration but not
technological progress. Logically, they should oppose both or neither.
Politically,
of course, it is essential to keep the two separate. Sceptics can expect to win
popular support for the view that freer trade is harmful, but could never hope
to gain broad backing for the idea that, so far as possible, technological
progress should be brought to a halt. Still, it might be better if the sceptics
concentrated not on attacking trade as such, but on demanding help for the
workers who suffer as a result of economic progress, whether the cause is trade
or technology.
Winners and losers
So much
for the basic theory. What does the evidence say? For the moment, concentrate
on the prospects for workers in rich countries such as the United States (the
next section will look in more detail at workers in poor countries). By and
large, the evidence agrees with the theory—though things, as always, get more
complicated the closer you look.
A first
qualification is that most outward foreign direct investment (FDI) from rich countries goes not to poor countries at
all, but to other rich countries. In the late 1990s, roughly 80% of the stock
of America's outward FDI was in Canada, Japan and Western
Europe, and nearly all of the rest was in middle-income developing countries
such as Brazil, Mexico, Indonesia and Thailand. The poorest developing
countries accounted for 1% of America's outward FDI
(see table 1). Capital is hardly flooding to the world's poorest
countries—more's the pity, from their point of view.
The
notion that outward FDI reduces the demand for labour in the
sending country and increases it in the receiving one needs to be revised as
well. It was based on the assumption that when rich-country firms invest in
poor countries, rich-country exports (and jobs) are replaced by poor-country
domestic production. In fact, evidence from the United States and other
countries suggests that outward FDI does not displace exports, it
creates them: FDI and exports are, in the jargon, net
complements. This is because the affiliates of multinationals trade with each
other. Figures for 1995 show that America's exports to its foreign-owned
affiliates actually exceeded its imports from them (see table 2).
Before FDI, the companies exported finished goods. After FDI, they ship, let us suppose, a mixture of finished
goods and intermediate goods. The intermediate goods will be used to make
finished goods in the FDI-receiving country. The corresponding
increase in exports of intermediate goods outweighs the fall, if any, in exports
of finished goods. Overall, then, exports from the FDI-sending
country rise. At the same time, the sending country's imports rise as well,
partly because the affiliate sells goods back to the sending country. Exports
rise, which increases the demand for labour; and imports rise, which decreases
the demand for labour.
What
does all this mean for the labour markets of the rich, FDI-sending
countries? Jobs are created in exporting industries which will tend to be
relatively high-paying, but overall employment will not rise, for reasons
explained earlier. For every job created, another one somewhere else will be
destroyed. The jobs that go will tend to be in industries that compete with
imports. On average, studies suggest, those jobs pay lower wages.
On
balance, then, you could say that the economy has gained: it now has more
higher-paying jobs and fewer lower-paying jobs. A policy which attempted to
resist a shift like that would be difficult to defend on its merits.
Unfortunately, though, the people getting the higher-paying jobs are not
necessarily the ones who have lost the lower-paying jobs. Because of the boost
to exports, the overall effect of outward FDI
on jobs and wages in the sending country is more benign than the simple theory
suggests—but some people still lose.
Another
implication of the shift in the demand for labour in the rich, FDI-sending countries is a possible widening of income
inequality. In a country such as the United States, the combined action of
trade and capital flows is likely to raise the demand for relatively skilled
labour and lower the demand for relatively unskilled labour. Some hitherto
low-wage workers may succeed in trading up to higher-paid jobs, but many others
will be left behind in industries where wages are falling. In this scenario,
high and average wages may be rising, but wages at the bottom may be
falling—and that means greater inequality.
You
would expect to see a similar pattern in an economy that was undergoing rapid
technological change. So in the United States, which fits that description
better than most in the 1990s, you could say that economic integration may have
added to the already powerful pressures that were acting to increase
inequality. Since those same pressures were raising living standards in the
aggregate—not just for the very rich—it would be a misleading summary, but not
a false one.
Explaining inequality
Of
these two unequalising forces, economic integration and technological progress,
which is likely to be more powerful? If it were the latter, that would raise
doubts over the sceptics' focus on globalisation as the primary cause of social
friction. The evidence suggests that technology is indeed much the more
powerful driver of inequality. One study, by William Cline, estimated that
technological change was perhaps five times more powerful in widening
inequality in America between 1973 and 1993 than trade (including trade due to FDI), and that trade accounted for only around six
percentage points of all the unequalising forces at work during that period.
That is just one study, but it is not unrepresentative. The consensus is that
integration has exerted a far milder influence on wage inequality than technology.
Mr
Cline's study in fact deserves a closer look. It found to begin with that the
total increase in the ratio of skilled to unskilled wages in the two decades to
the early 1990s was 18%. This was the net result of opposing influences. An
increase in the supply of skilled labour relative to the supply of unskilled
labour acted to equalise wages, by making unskilled labour relatively scarce.
By itself, this would have driven the wage ratio down by 40% (see table 3). But
at the same time a variety of unequalising forces pushed the ratio up by 97%,
resulting in the net increase of 18%. These unequalising forces included not
just trade and technology, but also immigration, reductions in the real value
of the minimum wage, and de-unionisation.
Two
things strike you about the numbers. First, trade has been relatively
unimportant in widening income inequality. Second, this effect is overwhelmed
not just by technology but also by the main force operating in the opposite,
equalising, direction: education and training.
This means that globalisation sceptics are missing the point if they are worried mainly about the effect of integration on rich-country losers: trade is a much smaller factor than technology. Some people in rich countries do lose out from the combination of trade and technology. The remedy lies with education and training, and with help in changing jobs. Spending in those areas, together perhaps with more generous and effective help for people forced to change jobs by economic growth, addresses the problem directly—and in a way that adds to society's economic resources rather than subtracting from them, as efforts to hold back either technological progress or trade would do.