commentary

(Washingtonpost.com)

December 21, 2006

Globalization's Unequal Discontents

by William H. Overholt

Protectionists who characterize free trade as almost treasonous are on a crusade to build new barriers around America in an effort to keep jobs in and imports out.

Some have built careers around denouncing the evils of globalization. CNN commentator Lou Dobbs, for example, criticizes free trade on a regular basis on his nightly show and in his book "Exporting America: Why Corporate Greed is Shipping American Jobs Overseas." A promo for the book on the CNN Web site states: "The shipment of American jobs to cheap foreign labor markets threatens not only millions of workers and their families, but also the American way of life."

The most serious critique of globalization is the charge that it promotes inequality, driving down U.S. wages while enriching millionaire corporate executives. This charge is partly true, but mostly false.

The true part is that within many countries, globalization has enhanced the wealth of business owners and managers while providing proportionately less wage growth for ordinary workers. It has done so by expanding the workforce participating in the modern world economy to include much of the populations of Eastern Europe, China and India.

As a result, millions of workers in the U.S. and Western Europe now face more competition than ever before from others willing to work for far lower wages. Capital has not experienced a proportionate increase in competition, so the share of corporate profits has risen and the share of wages has fallen. The rich get richer, while incomes of workers as a whole go up as well, but more slowly.

Some manufacturing workers in the United States — such as those who labored in huge factories making basic steel — have suffered as they've seen their jobs leave America for low-wage countries. But for workers as a whole, the truth about globalization and inequality is the opposite of what the protectionists claim. There are three caveats to the steel worker's story and two larger perspectives on inequality.

One caveat is that protectionists enormously exaggerate the negative effects of globalization by attributing virtually all manufacturing job losses to competition with China. We are told by union leaders and some politicians that America is exporting millions of jobs to China. This is absolutely untrue.

Scholarly studies show that most job losses in the United States are attributable to domestic causes such as increased domestic productivity. A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers. Protectionists who blame China for such job losses are being intellectually dishonest. In fact, both China and the U.S. have lost manufacturing jobs due to rising productivity, but China has lost ten times more — a decline of about 25 million Chinese jobs from over 54 million in 1994 to under 30 million ten years later.

A second caveat is that there are two ways to increase people's standard of living. One is to increase their wages. The other is to decrease prices so that they can buy more things with the same amount of money.

The ability to buy inexpensive, quality Chinese-made shoes and Japanese-made cars at lower prices disproportionately benefits lower income Americans. The Wall Street banker who pays $350 for Church's shoes benefits relatively little, but the janitor who buys shoes for $25 rather than $50 at Payless or Target or Wal-Mart benefits greatly.

Lower prices due to imports from China alone — ignoring all other similar results of globalization — probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished.

A third caveat is that the protectionists never mention the jobs created and saved by globalization. If General Motors avoids bankruptcy, as seems likely, one important reason will be the profits it has made by selling cars in China. The vast China market, and the ability of American corporations to expand and refine their operations though a division of labor with China, creates many high level jobs in U.S. operations ranging in diversity from Motorola to IBM to Caterpillar to Boeing to farming.

The first of the larger perspectives on globalization is that open economies adjust faster to their real competitive advantages, allowing them to employ their own people. The most recent U.S. unemployment rate was 4.4 percent. France, along with other relatively protected economies, typically has twice as high a proportion of the population unemployed because their workers are stuck in inappropriate jobs.

Still more protected economies, like many in Latin America, often run much higher rates of unemployment — up to 40%. Economies more open than the U.S. — like Singapore and Hong Kong — historically run lower rates of unemployment.

The worst inequality is between families whose breadwinners have jobs and those who don't. Globalization minimizes that problem.

Globalization has brought countries with about 3 billion people from subhuman conditions of life into modern standards of living with adequate food, basic shelter, modern clothing rather than rags, and life spans that are over 60 rather than under 45. (In the early 1950s China's life expectancy was 41 years, in 2005 it was 72.7 years. This is the greatest reduction of inequality that has happened in human history.

In East Asia, this reduction of inequality has resulted from a wave of economic growth that has swept through Japan, Taiwan, South Korea, Thailand, Malaysia, and much of Indonesia. It is rapidly spreading across China, is well on the way in India and Vietnam and is coming to other countries around the world.

The world's fastest growth is occurring in some of its poorest countries, notably India, China and Indonesia. The middle income countries are growing faster on average than the rich countries. In other words, global inequality is declining fast.

It is not surprising when workers in industries undergoing adjustment complain about the pain of change. For many families, prolonged unemployment can wipe out their savings, cost them their homes and turn their lives into a nightmare. The suffering of these families can't be ignored.

But sound economics is based on facts grounded in objective analysis, not on emotion. Sometimes, what seems like a "common sense" solution is not really very sensible at all, as is seen with the arguments of the protectionists. Even the best of intentions can, in the end, bring about the worst of outcomes. The protectionists' proposed policies would sharply increase the agony of unemployment.

America will not benefit if an increasing number of opinion leaders and elected officials use exaggerated, partial views of inequality to try to lead us into a future of slower growth, higher unemployment and greater world tensions.

Instead, America and its leaders should focus on how the nation can use the rapidly expanding economy to assist individuals who have suffered from globalization to get the education, training and opportunities in new industries they need to benefit rather than suffer from globalization.


William H. Overholt is Director of the Center for Asia Pacific Policy at the RAND Corporation, a nonprofit research organization.

This commentary originally appeared in Washingtonpost.com on December 21, 2006.