 |
Differences between Two Waves of Globalization
|
|
|
|
The first wave of globalization was driven by falling transportation costs and came to an end due to war and increasingly protectionist trade policies. By contrast, the second wave of globalization has been driven by a reversal of trade policies and increasing trade liberalization.
According to the data, contemporary globalization in the goods market has passed the highs of the first wave of globalization to reach unparalleled levels. By contrast, while immigration has recently increased, it has not yet reached the levels of the end of the nineteenth century. Capital markets, on this measure, are of a similar scale, size, and role to those of the first wave of globalization.
There are other differences between these two waves of globalization. In the earlier wave, trade tended to be rather simple, with raw materials and agricultural goods going in one direction and finished manufactured goods in the other. The value-added chain today is, however, far more complex and involves many more stages. To exploit the comparative advantage of different countries, firms have sliced up the production process and located different stages in different countries. As a consequence, it is estimated that around one-third of all trade is intrafirm—that is, multinational enterprises (MNEs) with production distributed across many countries shipping products at various stages of completion to different parts of the company around the world. Not only does this make the structure of trade today different from the past but the existence of MNEs and strategic alliances amongst major companies creates large and powerful economic entities that governments have to deal with.
The removal of trade restrictions, or trade liberalization, has been the subject of much criticism, and we shall review in the next section these arguments against globalization. For now we focus on the alleged advantages of trade liberalization.
Text 2
Problems of Globalization
In 1824, the English historian Thomas Macauley noted that "Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular." We have already noted the gains that lead from comparative advantage and trade liberalization, yet as trade has increased and emerging markets liberalized, there has been growing criticism of globalization and even riots on the city streets.
Distributional Impacts and Inequality
Trade has important distributional effects with some sectors expanding and others contracting. Individuals in the contracting sector will have to find jobs elsewhere, assuming a constant natural rate of unemployment. This may involve relocating, retraining, or accepting a lower wage. Understandably, groups in society will resist these changes and so resist globalization. However, comparative advantage also makes clear that although this group loses, the benefits to society overall are positive.
Globalization has also been criticized for causing inequality and increased poverty in emerging markets. The argument is that with so many countries competing amongst themselves for the foreign direct investment (FDI) of large multinational enterprises (MNEs), wages will be bid down, which will lead to increased inequality and more poverty. We have already discussed in the previous section the relationship between trade liberalization and inequality. The most recent estimates on poverty suggest that between 1970 and 1998 the percentage of the world's population living on less than $1 a day has fallen from 16% to 5% while the proportion living on less than $2 has declined from 44% to 19%. In other words, during the period when globalization advanced rapidly, the world saw a decline in poverty.
|
|
|
MNEs and FDI
One of the major criticisms of globalization is the dominant role played by multina tional enterprises (MNEs). The largest company is Wal-Mart, which ranks forty-fourth, somewhat larger than Pakistan but smaller than Chile. With companies being larger than economies, there is a danger that trading rules will be set up to benefit corporations rather than citizens. One critic of globalization, Noreena Herz, says in her book The Silent Takeover that globalization leads to "a world in which the primary service that national governments appear able to offer their citizens is to provide an attractive environment for corporations or international financial institutions."
We will consider the influence that MNEs exert on trade negotiations. The other issue to consider is whether countries and workers benefit by receiving FDI or if only MNEs do. While bank lending and equity and bond finance flows in and out rapidly, FDI is more stable. Finally, it does not seem the case that FDI encourages greater corruption. At the very least, this suggests that MNEs and related FDI bring some economic benefits to a country.
Environmental Damage
Critics of globalization fear it leads to environmental damage in two ways. First, due to the power of MNEs, governments abandon efforts to protect the environment through legislation. Second, increased levels of trade lead to greater use of fuel and more environmental damage. Further, much of this trade seems "pointless"—the United Kingdom, for instance, exports almost exactly the same number of pigs as it imports.
The need for governments to agree to global environmental standards to stop countries competing with one another along this dimension is connected to our next topic— the race to the bottom. The evidence regarding whether FDI worsens pollution is inconclusive, depending on which environmental indicator is considered. For instance, urban air pollution seems uncorrelated with FDI. Further, there is a strong correlation between GDP and environmental regulation, so that if FDI does raise GDP, it may also lead indirectly to improvements in the environment. There is also evidence that trade protectionism can damage the environment.
What about fuel arguments? That global trade leads to an increase in fuel use is undeniable. One cause of this is that airline fuel is frequently tax exempt so that the full cost of environmental damage is not paid by exporters and, as a result, trade is too extensive.
The other issue is whether or not the trade is "pointless." For instance, on average, every month Sweden imports 1305 metric tons of bottled water and exports 791 metric tons. Can this be justified? The main cost of this trade pattern is the additional transport costs—it would be cheaper for Sweden to consume its own water rather than ship it overseas and import other water. However, this cost can be offset by two factors. The first is that competition is increased through imports. This will lead to lower prices. Existing consumers of bottled water pay less. Because prices fall, more bottles are sold as consumption rises. The second benefit is that the variety of products available increases. If consumers value variety, this will also boost welfare. If the competition and variety effects are large enough, they can offset the higher transport costs.
|
|
|
Insecurity and “the Race to the Bottom”
Comparative advantage means that a nation specializes in certain sectors so that it becomes vulnerable to adverse demand or price movements in that sector. In other words, workers face greater insecurity. This insecurity is further increased by the fact that MNEs and other firms can easily relocate to other countries. It is noticeable that countries that do more trade tend to have larger levels of government transfer payments, unemployment benefits, and welfare payments, which will help to offset this insecurity and cushion the volatility of employment.
However, while globalization may increase the need for governments to protect certain sectors of the population, the fear is it will reduce their ability to do so. MNEs can choose to locate around the globe, and so countries will compete to attract them by reducing corporate tax rates and offering large subsidies. This process is called "the race to the bottom" as governments compete with one another to offer the lowest corporate tax rates. If governments do cut corporate tax rates, then unless they can increase labor income taxes, they will not have enough revenue to finance the welfare state and will have to reduce their generosity. Globalization therefore may remove the ability to protect workers at the same time as it increases the need for this protection. The same argument can be applied to government regulations concerning environmental protection, working standards, and minimum wages. One way to overcome this problem is for governments to agree to common standards. For instance, the EU has rules restricting the subsidies that its member countries are allowed to pay to firms in order to prevent a race to the bottom, and efforts to create global environmental standards such as the Kyoto agreement are ongoing.
The race to the bottom argument rests on three assumptions:
1. MNEs do not have a strong reason to locate in one country rather than another, so they are easily tempted away by subsidies.
2. MNEs do not bring substantial spillover benefits to offset the lower tax rates they pay.
3. Corporate taxes are at the appropriate level to begin with and are not too high.
What is the evidence regarding the race to the bottom? Considering the overall tax burden paid by firms, expressed as a percentage of GDP, there is little support—the corporate tax take has not declined over time. This does not invalidate the threat of the race to the bottom; it just suggests that it has not yet operated strongly.
Cultural and Political Concerns
We have focused above on the economic implications of globalization, but many of the criticisms are more politically focused. Globalization produces a greater role for markets, so naturally globalization is seen critically by those with anticapitalist views. Globalization also means that more resources are being allocated by market mechanisms and this may lack legitimacy. For instance, consider the case of a country that has banned child labor but now, because of globalization, finds itself importing textiles made using child labor. No democratic decision has been made in the importing country, yet market forces have brought about this change. This is also an example where countries begin to lose their national sovereignty—domestic rules cease to have jurisdiction. Other examples of this loss of sovereignty are connected to the power of MNEs and the rules of the World Trade Organization (WTO) that lead domestic governments to alter their policies. A loss of cultural sovereignty is also a common criticism of globalization. Globalization has led to a proliferation of global brands and an alleged homogenization of cultures—"Americanization" or "Europeanization."
|
|
|
This is a wide and varied list of criticisms of globalization. We have covered cultural change, environmental problems, inequality and poverty, the monopoly power of MNEs, instability, and insecurity. What is interesting is that these were precisely the criticisms made of industrialization in the nineteenth century as domestic markets began to grow and restructure the economy. Governments then realized that in order to bring out the best features of markets they would have to intervene to restrict industrial pollution, introduce town planning and health regulation, introduce schemes to help the poor, create government organizations to restrict monopoly abuse by firms and provide regulation and insurance to preserve stability in the banking system. In other words, in response to the growth of markets we saw the development of national governments, institutions and regulations to reduce the disadvantages of markets and support the advantages. What this argument suggests is that with the development of global markets we require national governments to agree to international standards and help construct global institutions in order to optimize the contribution that global markets make to welfare.
Text 3
|
|
|
