Saturday, May 03, 2008

The Globalization fallacy

My undergraduate and postgraduate dissertation students all write their essays on "The Economics of Globalisation". This tends to be a popular choice.

One common fear is the extent to which globalisation is the cause of job losses in the developed world. The initial hurdle to overcome is to define what we mean by "globalisation".

The complex nature of the relationship between falling trade barriers, trade, jobs and technology are discussed in this recent NY times opinion piece by David Brooks. This article links back to the "The World is Flat" book by Thomas L. Friedman (an excellent read).

The Cognitive Age [NY Times]

If you go into a good library, you will find thousands of books on globalization. Some will laud it. Some will warn about its dangers. But they’ll agree that globalization is the chief process driving our age. Our lives are being transformed by the increasing movement of goods, people and capital across borders.

This is a reasonable start and why this topic can spawn a 1000 essays. Brooks then goes on to describe the political backdrop to the usual globalisation pub conversation.

New dynamos like India and China threaten American dominance thanks to their cheap labor and manipulated currencies. Now, everything is made abroad. American manufacturing is in decline. The rest of the economy is threatened.

What is truly scary is how globalisation is being dragged into the race for the White house. How much of this does Clinton really believe and how much is pandering to the "people" and their media driven misconceptions.

Hillary Clinton summarized the narrative this week: “They came for the steel companies and nobody said anything. They came for the auto companies and nobody said anything. They came for the office companies, people who did white-collar service jobs, and no one said anything. And they came for the professional jobs that could be outsourced, and nobody said anything.”

The same could be said of the UK. No steel industry left, ship building clinging on by an oar and the coal industry all but gone. The decline in the number of manufacturing jobs is what tends to hit the headlines with China and India getting the blame.

Brooks next two paragraphs begin to get a little hazy although the basic premise is correct:

Globalization is real and important. It’s just not the central force driving economic change. Some Americans have seen their jobs shipped overseas, but global competition has accounted for a small share of job creation and destruction over the past few decades. Capital does indeed flow around the world. But as Pankaj Ghemawat of the Harvard Business School has observed, 90 percent of fixed investment around the world is domestic. Companies open plants overseas, but that’s mainly so their production facilities can be close to local markets.

Nor is the globalization paradigm even accurate when applied to manufacturing. Instead of fleeing to Asia, U.S. manufacturing output is up over recent decades. As Thomas Duesterberg of Manufacturers Alliance/MAPI, a research firm, has pointed out, the U.S.’s share of global manufacturing output has actually increased slightly since 1980.

Now this is where I begin to disagree and in a sense Brooks already knows the issue I will raise:

The chief force reshaping manufacturing is technological change (hastened by competition with other companies in Canada, Germany or down the street). Thanks to innovation, manufacturing productivity has doubled over two decades. Employers now require fewer but more highly skilled workers. Technological change affects China just as it does the America. William Overholt of the RAND Corporation has noted that between 1994 and 2004 the Chinese shed 25 million manufacturing jobs, 10 times more than the U.S.

The point here is correct but the key is the sentence "hastened by competition...". This is precisely why the benefits of globalisation are overlooked. This competition is a result of globalisation itself. Each and every country learns from the other because trade barriers have come down and trade has gone up (and of course hastened by technological progress). This is an endogenous process. Globalisation leads to technological improvements which leads to productivity growth which leads to more trade and so on and so forth.

The problem is that Brooks gives globalisation none of the credit and instead plumps for "skills". Again, this statement is true but WHY are they forced to become more skilled - clearly it is a result of competitive pressures that are a result of globalisation.

The central process driving this is not globalization. It’s the skills revolution. We’re moving into a more demanding cognitive age. In order to thrive, people are compelled to become better at absorbing, processing and combining information. This is happening in localized and globalized sectors, and it would be happening even if you tore up every free trade deal ever inked.

His concluding statement gets closer to the real issue. They are by no means contradictory and I would argue that they are not even different paradigms. It is time for globalisation to get a little more credit.

It’s not that globalization and the skills revolution are contradictory processes. But which paradigm you embrace determines which facts and remedies you emphasize. Politicians, especially Democratic ones, have fallen in love with the globalization paradigm. It’s time to move beyond it.


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