Globalization, the increasing integration and interdependence of domestic and overseas markets, has three sides: the good side, the bad side, and the ugly side. The good side of globalization is all about the efficiencies and opportunities open markets create. Business can communicate efficiently and effectively with their partners, suppliers, and customers and manage better their supplies, inventories, and distribution network. Local producers can sell their products in distant markets with the same ease and speed as in their home country. Sony Corporation (NYSE:SNE), for instance, can sell its TV and game consoles with the same ease in New York as in Tokyo. Likewise,
Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), and Cisco
(NASDAQ:CSCO) can sell their high tech gear with the same ease in Tokyo as in New York. The good side of globalization is also about easy credit and rising leverage, as money flows easily across local and national boundaries, and creditors fail to distinguish between good and bad borrowers, boosting aggregate demand; setting the world economy into a virtuous cycle of income and employment growth; and easy credit and leverage fuel financial bubbles that feed into a euphoria that perpetuates the virtuous cycle. The bad side of globalization is all about the new risks and uncertainties brought about by the high degree of integration of domestic and local markets, intensification of compe tition, high degree of imitation, price and profit swings, and business and product destruction. Corporations that previously have been enjoying the benefits of globalization, now face unstable and unpredictable demand and business opportunities and their products quickly become commodities, leaving them little or no pricing power and under constant pressure by new competitors that undermine profitability.
The bad side of globalization is also about tight credit, deleverage, and declining money flows across local and national boundaries, as creditors tighten credit to both good and bad borrowers, depressing aggregate demand; setting the world economy into a vicious cycle of income and employment declines; and euphoria is succeeded by pessimism and a burst of asset bubbles, perpetuating the downward spiral of the world economy. The ugly side of globalization is when nations and local communities try to escape the vicious cycle of income and employment declines through simultaneous currency devaluations; and by raising trade barriers that in essence put an end to globalization and a beginning to trade wars, as was the case in the 1930s. In the last quarter of the century and for the most part of the first decade of this century, the world has seen the good side of globalization. In the last four years, the world has seen the bad side of globalization. We do hope and pray that the world won’t see the ugly side of it.
What Is International Trade? By Reem Heakal
If you walk into a supermarket and are able to buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade. International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. It is the reason why you can pick between a Japanese, German or American car. As a result of international trade, the market contains greater competition and therefore more competitive prices, which brings a cheaper product home to the consumer. What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall.
A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments. Increased Efficiency of Trading Globally Global trade allows wealthy countries to use their resources whether labor, technology or capital more efficiently. Because countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries.
If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade. Let’s take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).
But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their
opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well. Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. Other Possible Benefits of Trading Globally International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity offoreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily become competitive economic participants.
For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues. Free Trade Vs. Protectionism As with other theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories: a laissezfaire approach, with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth, because market forces will do so automatically.
In contrast, protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies and quotas. These strategies attempt to correct any inefficiency in the international market. The Bottom Line As it opens up the opportunity for specialization and therefore more efficient use of resources, international trade has the potential to maximize a country’s capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change, and, as it develops, so too must all of its participants.
The world’s poorest regions ‘in countries you wouldn’t expect’ Poverty measures reported at the national level don’t provide a full picture of where the world’s poorest live. New research from the Oxford Poverty and Human Development Initiative (OPHI), University of Oxford has revealed that nearly 60 per cent of people living in the world’s poorest regions are actually not in the least developed countries. Measuring the different things that people are deprived of, researchers have identified subnational regions of the world where the poorest people live. The global Multidimensional Poverty Index (MPI) reflects the combined simultaneous disadvantages poor people experience across different areas of their lives, including education, health and living standards. If people are deprived in at least onethird of ten weighted indicators, they are identified as multidimensionally poor.
This poverty measure, MPI, complements income poverty measures. Using the January 2015 updates of the MPI released today, the study team looked at more than 230 regions of countries where multidimensional poverty is at least as high as the 25 poorest Least Developed Countries (LDCs), identified by the United Nations (Economic and Social Council). They found that nearly 60 per cent of the 678 million multidimensionally poor people in these subnational regions live in countries that are not classified as LDCs, and all but one nonLDC region were in countries classed as middleincome: India, Nigeria, Pakistan, Cameroon, Cote D’Ivoire, Ghana, Namibia and the Republic of Congo. The findings show that pockets of deprivation are missed in aggregate statistics. For example, in Doula, the largest city in Cameroon, 6.7 per cent of people are multidimensionally poor; yet elsewhere in the same country, in the ExtrêmeNord, nearly 87 per cent are measured as MPIpoor.
The researchers say the striking disparity would be hidden if we only relied on the figure for the national average which shows that 46 per cent of the population in Cameroon are MPIpoor. While Niger has the highest percentage of MPIpoor, with 89.3 per cent of its entire population found to be living in multidimensional poverty, using the same MPI measure the five poorest regions in the world are in Chad and Burkina Faso. The OPHI researchers found that the very poorest region of all the 803 regions studied is Salamat in Chad, where nearly 98 per cent of its 354,000 inhabitants are measured as multidimensionally poor.
Dr Sabina Alkire, Director of OPHI, said: ‘The MPI enables us to examine poverty within regions of a country as well as nationally, and compare the interlocking deprivations people experience. It can reveal experiences across rural and urban areas, and across different ethnic populations. We measure different types of deprivation together – such as malnutrition, poor sanitation, a lack of housing or schooling – and every person matters.’ ‘Our findings highlight the value of having good quality, uptodate and detailed survey data to reveal what life is really like for the poorest section of populations. I’m particularly glad that of the 30 low income countries covered, we can analyse MPI in detail in areas within countries for all but one.’
The United Nations has stressed the need to identify where the poorest live in order to ‘leave noone behind’. The researchers argue that the MPI is essential to accurately target resources and policies where they are needed most. The updated global Multidimensional Poverty Index now covers 110 developing countries, and 803 regions in 72 of these countries. The analysis is of data ranging from 2002 to 2014, mainly collected by UNICEF’s Multiple Indicators Cluster Survey and USAID’s Demographic and Health Survey.
Moneymetric indicators of poverty are a powerful tool to understand human deprivation. However, as the measurement of moneymetric poverty lends itself to a wide range of definitions, theories and methodologies, there is often little agreement, even among poverty experts, on basic questions such as: How many poor people are there in the world today? Have developing countries been successful in reducing poverty? This paper addresses those two questions. First and foremost, the authors argue that the choice of an appropriate poverty line is a crucial prerequisite for sensible measurement of moneymetric poverty. A poverty line can be held constant over time and across countries, as has been the practice in the specialised literature (e.g. the World Bank’s famous US$1 per day per person purchasing power parity (PPP) poverty line). However, PPPs do not equate purchasing power across countries.
Thus, as argued elsewhere,1 the cost of the same bundle of goods and services of similar quality will generally be higher in richer countries even in PPP terms. In that case, the $1.25 line (and indeed any fixed poverty line) cannot serve as a reliable measure of poverty outside the poorest countries. A more sensible approach for international comparisons, as argued in this paper, would need to allow the poverty line to be related to changes in the standard of living between countries. To that end, it is important to note that we accept the World Bank’s basic idea of relying on national poverty lines to construct a globally comparable poverty measure. However, we reject the assumption that this measure should be constant, or that it should be based on the national poverty lines of the poorest countries only.
Rather, we argue that an internationally comparable poverty line should be based on wellestablished stylised facts regarding the relationship between national poverty lines and average per capita expenditure (in 2005 PPP) across all developing countries. Once established, this poverty line can then lead to a more realistic estimate of global poverty. Three steps are required to reach this new poverty estimate. First, using data from over 300 household surveys covering 107 countries, we establish a robust regression equation between both variables. Second, we use the regression equation to estimate our countryspecific poverty line. Third, we apply these poverty lines to the World Bank POVCAL dataset to calculate new poverty rates. The main finding, shown in the table, is that developing countries may be significantly poorer than conventionally thought, with hundreds of millions more people living in poverty.
More alarmingly, with only a 14.4 per cent reduction in poverty since 1990, the world may be far less successful in its fight against poverty and as such may be missing the target of halving poverty by 2015. The regional story is also quite different depending on the poverty measure used. Our methodology leads to the conclusion that Latin America is the leader in poverty reduction among developing regions, followed closely by East Asia. Conversely, South Asia and Arab regions had the slowest pace of poverty reduction. This outcome can be explained in part by slower growth and sharply rising inequality in both regions, which the authors conclude is the case based on comparing survey and national accounts data for both regions.
Note: 1. See, for example, Reddy, S. (2009). ‘The Emperor’s New Suit: Global
Poverty Estimates Reappraised’, SCEPA Working Papers 200911. Schwartz Center for Economic Policy Analysis (SCEPA). The New School
Source: The National Bureau of Economic Research
Globalization Reduces Child Labor in Vietnam
“Households appear to have taken advantage of higher income after the rice price increase to reduce child labor despite increased earning opportunities for children.” In the ongoing debate about the wisdom of deliberately seeking a globalized marketplace, a recurring criticism is that for poor developing countries, integration inevitably will lead to an increase in child labor. The argument holds that globalization, by boosting demands for cheap exports from poor countries, provides an incentive for children to enter the workplace by either increasing their wages or expanding opportunities for their employment. Yet in Does Globalization Increase Child Labor? Evidence from Vietnam (NBER Working Paper No. 8760), authors Eric Edmonds and Nina Pavcnik show that globalization in fact may be having the opposite effect. They conclude that Vietnam’s efforts to become a significant player in global rice markets are linked directly to a decrease in child labor. Furthermore, their findings suggest that using trade sanctions to combat child labor in developing countries could be counterproductive.
Edmonds and Pavcnik focus on the impact of Vietnam’s decision in 1993 to begin lifting export restrictions that, in the interest of domestic food security and suppressing domestic prices, had constrained the ability of rice farmers to sell their crop abroad. This liberalization allowed Vietnamese rice exports to more than double between 1993 and 1998, with the demand from global markets contributing to a 30 percent rise in the price of Vietnamese rice. Given that so many Vietnamese households are involved in rice production, rather than inducing more parents to put their children to work, the extra income produced by the price increase appears to have provided them with the means to take them off the job. Edmonds and Pavcnik discovered that a 30 percent increase in the price of rice was associated with a 9 percent drop in child labor. Overall, the authors note that between 1993 and 1998, 2.2 million children stopped working in Vietnam. They assert that almost half of that decline, the exit from the labor market of about 1 million children, can be attributed to the exportfueled rise in rice prices.
“Greater integration into international markets, at least in this case, is associated with less child labor,” they conclude. The positive effects of rice price increases were most pronounced for those children who bore the largest burden of household work: older girls. For girls 14 to 15, the 30 percent price hike resulted in a dramatic increase in school attendance. However, overall child labor rates actually increased in urban areas where the higher cost of rice placed additional burdens on household incomes without providing any benefits. By linking trade liberalization with such a large overall decline in child labor, Edmonds and Pavcnik say their study has “several implications for the policy debate on globalization and child labor.” First, they point out that while globalization’s critics generally assume that in de veloping countries, an increase in earning opportunities provides an incentive to put more children to work, in Vietnam “households appear to have taken advantage of higher income after the rice price increase to reduce child labor despite increased earning opportunities for children.”
Edmonds and Pavcnik also believe their results should give pause to globalization opponents and trade policymakers who believe the best way to fight child labor is for rich countries to use trade sanctions to pressure poor countries. “These trade measures are likely to lower the price of the exported good, so our results suggest that sanctions could instigate more rather than less child labor,” they write. Finally, Edmonds and Pavcnik acknowledge that trade liberalization could have “different implications for child labor” if the result is cheaper imports flowing into developing countries that displace domestic products and the household incomes they generate. However, the authors assert that in “poor, relatively unskilled, labor abundant economies” such as Vietnam, most people work in either nontraded sectors or exportoriented sectors. And “integration leads to higher prices in the export sectors,” they note, which in Vietnam produced additional household income that “appears to be associated with a substantial reduction in child labor.” Matthew Davis
Bangladesh tragedy exposes need for responsible globalization As capital moves to find the cheapest locations for production in a race to the bottom, the ugly side of globalization is brought home to the world through horrific pictures of the tragic collapse of the Bangladesh textile factory. Poor regulations and standards are widespread in sweat shops across the developing world. Brand name buyers hide behind the fact they are unaware of the working conditions under which their cheaply sourced products are being produced. The Bangladesh tragedy shows how costly it is to ignore safety and working condition standards, when thousands are packed into unsafe buildings in order to reduce costs and increase profits. The government is now considering allowing unionisation and raising the minimum wage.
Working in a textile sweat shop was a way out of rural poverty for thousands of Bangladeshi women, as is the case in many other parts of the developing world. But can we not do better by ensuring a minimum safety and decent working conditions for such workers? A few cents extra for the clothes we buy in fancy department stores is a price worth paying for those who died in Bangladesh and for the millions who toil under very harsh conditions in similar factories around the world. Dumping of chemical pollutants and unsafe and unprotected working conditions are a common problem, and display a complete disregard for the health of workers and people living in neighbourhood communities. Most major river systems in the developing world are so badly polluted that their water is unusable.
The chances of factory owners getting caught for flouting environmental regulations are low and even if charged they can often get away with a small fine or a bribe. Globalization is not just a matter of finding the cheapest, least regulated part of the world to source products, and claim that jobs are being created. The deaths of the Bangladeshi workers should wake us up to the urgent need for more responsible globalization; the need for a model of capitalism that is not just about less regulation but also the necessary amount of adequate regulation – whether it be financial, labour, safety or environmental.
Why globalisation is not reducing inequality within developing countries Aug 23rd 2014 | From the print edition
DEFENDERS of globalisation often say that, whatever distress it may cause for richworld workers, it has been good for poor countries. Between 1988 and 2008, global inequality, as measured by the distribution of income between rich and poor countries, has narrowed, according to the World Bank. But within each country, the story is less rosy: globalisation has resulted in widening inequality in many poor places. This can be seen in the behaviour of the Gini index, a measure of inequality. (If the index is one, a country’s entire income goes to one person; if zero, the spoils are equally divided.) SubSaharan Africa saw its Gini index rise by 9% between 1993 and 2008. China’s soared by 34% over 20 years. In few places has it fallen. Economists are puzzled: the data contradict the predictions of David Ricardo, one of the founding fathers of their discipline. Countries, said Ricardo, export what they are relatively efficient at producing.
Take America and Bangladesh now. In America the ratio of highly skilled to lowskilled workers is high. In Bangladesh it is low. So America focuses on products requiring highly skilled labour, such as financial services and software. Bangladesh focuses on downmarket products such as garments. Comparative advantage predicts that when a poor country starts to trade globally, demand for lowskilled workers will rise disproportionately. That, in turn, should boost their wages relative to those of higherskilled locals, and so push down income inequality within that country. The theory neatly explains the impact of the first wave of globalisation. In the 18th century, Europe had a high ratio of lowskilled workers relative to America. When EuroAmerican trade took off, European inequality duly tumbled. In France in 1700 the average real incomes of the top 10% were 31 times higher than the bottom 40%. By 1900 (admittedly after several revolutions and wars) they were 11 times larger.
But growing inequality in developing countries leaves Ricardo’s disciples befuddled and suggests the theory needs updating. Eric Maskin of Harvard University has attempted just this at the Lindau Meeting on Economic Sciences, a gettogether of economists in a Bavarian lakeside town featuring many Nobel laureates. (Mr Maskin won his in 2007 for his work on the design of market mechanisms, which economists use to improve regulation schemes and voting systems.) Mr Maskin’s theory relies on what he calls worker “matching”. Unskilled workers can be more productive when matched with skilled ones—that is, when they work together. Assigning a manager to a group of workers can do more for total output than just adding another worker. He places workers into four classes: skilled workers in rich countries (A); lowskilled workers in rich countries (B); highskilled workers in poor countries (C); and lowskilled workers in poor countries (D). Crucially, he thinks lowskilled workers in rich countries (the Bs) are likely to be more productive than highskilled workers in poor ones (the Cs).
Before the current wave of globalisation started in the 1980s, skilled and unskilled workers in developing countries—the Cs and Ds—worked together. Mr Maskin gives the example of a rural Indian man, fluent in English, who helped local farmers understand modern agricultural methods. Wage growth of highskilled workers (Cs) was weak, because poor transport and communication links made it hard for them to work with skilled workers in rich countries. But lowskilled workers (Ds) did well: their interactions with the Cs boosted total output, which let them demand higher wages, so pushing down inequality. The latest bout of globalisation has jumbled the pairings: highskilled workers in poor countries can now work more easily with lowskilled workers in rich ones, leaving their poor neighbours in the lurch. Take “intermediate goods”, the semifinished products that account for about twothirds of world trade. The production processes outsourced by big companies in factories or callcentres are by richworld standards unskilled. But when jobs are sent offshore, they are snapped up by C workers, the relatively
skilled ones. According to research from Cornell University, the typical callcentre employee in India has a bachelor’s degree. Globalisation in its latest guise means such workers come into more regular contact with lessskilled people in the rich world. The Anglophone Indian cited by Mr Maskin may go to work in an export factory where he meets tight deadlines laid down by its American owners. The Cs work with Bs and end up being more productive. The Ds are left by the wayside. Dgraded workforce The result of booming trade in intermediate goods is higher demand and productivity for skilled poorcountry workers. Higher wages ensue: multinationals in developing countries pay manufacturing wages above the norm for the country. One study showed that in Mexico exportoriented firms pay wages 60% higher than nonexporting ones. Another found that foreignowned plants in Indonesia paid whitecollar workers 70% more than locally owned firms. Globalisation, though, does not boost wages for all.
The least skilled cannot “match” with skilled workers in rich countries; worse, they have lost access to skilled workers in their own economies. The result is growing income inequality. Mr Maskin’s approach is not entirely satisfying. He does not offer data to back up his theory (such is the privilege of the Nobel laureate). “We need microdata on matches between firms in developing countries to examine whether skilled workers benefit through the mechanism Mr Maskin suggests,” says Pinelopi Goldberg of Yale University. But if he is right, he poses a challenge to globalisation’s advocates: figuring out how to reap its rewards without leaving the leastskilled in poor countries behind.
Poverty Not always with us
The world has an astonishing chance to take a billion people out of extreme poverty by 2030 IN SEPTEMBER 2000 the heads of 147 governments pledged that they would halve the proportion of people on the Earth living in the direst poverty by 2015, using the poverty rate in 1990 as a baseline. It was the first of a litany of worthy aims enshrined in the United Nations “millennium development goals” (MDGs). Many of these aims—such as cutting maternal mortality by three quarters and child mortality by two thirds—have not been met. But the goal of halving poverty has been. Indeed, it was achieved five years early.
In 1990, 43% of the population of developing countries lived in extreme poverty (then defined as subsisting on $1 a day); the absolute number was 1.9 billion people. By 2000 the proportion was down to a third. By 2010 it was 21% (or 1.2 billion; the poverty line was then $1.25, the average of the 15 poorest countries’ own poverty lines in 2005 prices, adjusted for differences in purchasing power). The global poverty rate had been cut in half in 20 years. That raised an obvious question. If extreme poverty could be halved in the past two decades, why should the other half not be got rid of in the next two? If 21% was possible in 2010, why not 1% in 2030?
Why not indeed? In April at a press conference during the spring meeting of the international financial institutions in Washington, DC, the president of the World Bank, Jim Yong Kim, scrawled the figure “2030” on a sheet of paper, held it up and announced, “This is it. This is
the global target to end poverty.”