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Globalization; Boom, Bust and Inequality

Historical Background
Globalization was an unknown word to the public until it came to be more widely used in the late '90's, i.e., 1990's (not 1890's) although globalization was practiced to some degree during the late 19th century. The question most had was "How will it affect me?" Economists proselytized that globalization, the free movement of goods, services and capital would improve (mostly) everyone's lives.

The claims to success are that it has lifted hundreds of millions out of extreme poverty. Unfortunately, it has also impoverished many, as well, and much of it in the West. And although the claimed millions have been lifted out of "extreme" poverty, there are still billions left poor, mostly bypassed by globalization. In the West, many who were middle class have moved lower either from loss of jobs, reduced wages or stagnant purchasing power. Multi-national companies, once an integral part of many communities, have left for the "greener" pastures afforded by out-sourcing and off-shoring, and personal and corporate tax havens. Some of those tax havens are located in the West; not all are in charming locations in Europe, Asia or the Caribbean.

The Theory of Globalization
The essential idea underlying globalization is that when anyone buys a product or a service, we want to pay what that good and service is worth without adding the costs of tariffs used by governments to limit external competition (i.e., mostly non-domestic). Tariffs prices can vary over a wide range, from 2% to 25% or 50% (Trump imposed tariffs on Canadian steel and aluminum) or higher. When tariffs are 0%, we have free trade. Governments usually collect these tariffs, sometimes these are shared with the "harmed" domestic suppliers and others who have inveigled themselves.

Up to WWII, industrialization had occurred in nominally three main regions; the USA / Canada, Europe (Western, Northern, Central) and Japan. Of course, there were other countries which had industrial capability but not to the extent and intensity of these three regions. That changed after the Second World War when institutions and mechanisms were installed to rebuild the destruction of that conflict and develop and distribute global wealth more equitably, precluding future wars. Of course, several more relatively large scale conflicts did occur, others narrowly avoided but many local conflicts still initiating and continuing. What is humanity without conflict?

GATT (General Agrement on Tariffs and Trade, 1948) and the succeeding WTO (World Trade Organization, 1995) provide the legal framework for international trade in goods, services and capital. By many accounts (mostly economists) it has been a success. A few economists disagree; while it has been of a benefit to some, not so for many others, economists such as Joseph E. Stiglitz politely critique that globalization has been mismanaged. Stiglitz is a Nobel laureate in economics; he refers to himself as an economics theorist. In his latest book Globalization and its Discontents Revisited he repeats his complaints made in his prior book of similar title and rails against the mechanics and outcomes of globalization.

Comparative Advantage
This concept is embedded explicitly in the WTO rules; the notion being that if two countries make a product, one country will be "better" at making the product than the second country. But the second country may make another product "better" than the first country. Hence each country should make the products it is "better" at and trade with each other. This leads to economic efficiency with benefits accruing to the consumer. When multiple countries and multiple products are traded freely, then "global free trade" is implemented. When services and capital are included then globalization is whole. The development of super container ships and the internet enabled cost effective globalization.

Absolute Advantage
For some reason, the WTO does not mention the role of absolute advantage which occurs when a country is better at providing either of all the products, all the services, all the capital "better" than the second country or all the other countries. And tipping the scales significantly, that country, by WTO rules, does not need to provide regulations governing the environment, labor, health & safety or human rights or democracy.

What is obvious is that comparative advantage describes the trade between developed and advanced economies such as Western Europe, USA/Canada, Japan and Korea. Germany and Japan produce, arguably, better vehicles than the USA/Canada; Germany is known for specialized & high-quality machinery, the USA for passenger aircraft, mass entertainment; Korea is an electronics and shipbuilding powerhouse; Europe and Japan for high quality steel and alloys. Purchasing power in these developed countries is nominally equivalent.

Surprisingly, the developed & advanced countries of the USA, Australia and Canada are dominant suppliers of commodities such as oil & gas, coal, mining, forestry and agricultural products through their comparative advantage of land, climate and productivity.

Why did globalization go off-the-rails in practice when the theory was sound?

In the last twenty years, some developing countries have been able to challenge the developed countries across all products and services. In the past several years, that advantage is now extended to capital. The basis is the absolute advantage of wage cost. When wages are $0.35 to $5.00 per hour and there is a sufficiently trainable and educable workforce, then advantage in primary and secondary products is assured; and services and capital follow. When workers wages do not rise, as should occur in a free market response, the advantage is maintained. At first it is the unskilled & low-skilled manufacturing and service workers in developed countries that are impacted, later even skilled workers are impacted. At that point, since profit from globalization passes to the extreme capitalists in both the "developing" and "developed & advanced" countries, wealth inequality increases.

The Mismanagement of Globalization
Globalization is justified on the basis of comparative advantage. Stiglitz's major complaint is that the rules of globalization, although written by the West (primarily the USA), it wasn't government writing these rules but multi-national corporations and special interest groups. Stiglitz is not just a grumpy old guy, he was economics adviser to Bill Clinton, and a vice-president and chief economist at the World Bank. In his book, he recounts the decline of his home town Gary, Indiana, as globalization took hold. Gary was home to the largest integrated steel mill (United States Steel Corporation) in the world and reached its peak in the mid-1950's. In 1901, Gary's population was 16,800, peaking at 178,320 in 1960. Today, it is 76,000; USSC employed 30,000 in 1970 but only 5,000 in 2015 (just before another round of layoffs).

Closer to home; plants operated by Atlas Steels, Stelco, Union Carbide, John Deere, Columbus McKinnon, General Motors, Ford have left entirely or reduced substantial their presence in Canada for low-cost areas of Mexico and Asia.

Professor Stiglitz is very gracious in his descriptions of the architects of the WTO; while acknowledging the improvement in living standards for hundreds of millions in the world's developing countries, he bemoans these consequences as foreseen for the developed West and developing countries,too. What was not specifically not foreseen was the rising disparity in wealth between the 1%, and in particular, the 0.1% and the rest. He attributes this to the explicit greed of the multinationals and the callousness and neglect of a number of Western governments.

Stiglitz opines that the intent of globalization was to move unskilled and low-skilled labor jobs off-shore; displaced workers would apply their skills elsewhere or be re-trained. They would be taken care of by the West's system of social democracy; except employers did not retrain or redepoly those workers and Western government's found that lost revenue from the unemployed, tax cuts for the wealthy left their public treasuries short and political will conveniently restrained by legislation. As Western economies de-industrialized, jobs created in the service sector did not pay as well, and even many of those jobs went off-shore. Globalization means free movement of labour so where feasible, service sector jobs (banking, insurance, payroll, backroom IT, customer service) could be moved off-shore (workers were hired at greatly reduced cost in less developed countries).

The reality that resulted is that service sector jobs in the West now mean fast food and grocery store cashier jobs; jobs that do not pay like manufacturing jobs. Financing paid well but that was restricted to Wall Street where (predatory) capitalism rules. During the financial collapse of 2008, one designed, nurtured and reaped by Wall Street, bankers received 100% on the dollar for their failures courtesy of the US taxpayer (Troubled Asset Relief Program, TARP; suddenlty the money was found). The architect for this program was Hank Paulsen, US Treasury Secretary whose previous employment was as CEO of Goldman Sachs. Apparently, the US Congress did not see the conflict of interest; perhaps, dollar blindness? Banks and near banks paid their executives hundreds of millions of dollars individually for the bumper years; after the near-collapse, the Wall Streat executives were paid more millions in retention awards. Apparently, this expertise could not be found elsewhere; lucky, for elsewhere.

In developing countries, workers work the jobs of displaced Western workers for $0.35 per hour, and are fortunate to receive $1.00 per hour. The 1% in the developing countries got most of the gain with millionaires and billionaires soon emerging. This is what is probably meant by economists when referring to "emerging economies". The theory was that those wages would rise as globalization took hold. Unfortunately, after 70 years of "free trade" workers in Bangladash still make $0.35 per hour; in China, the average wage is apparently about $5.00 per hour and much better than the $25.00 per day for a worker in Mexico. However, those workers do not have access to a social safety net; if they complain, if they get hurt they are replaced as there are millions more in poverty in those countries who will take those jobs at those low wages. That outcome was inconveniently foretold should proper protections not be included in these trade agreements as early as the 1940's by a very few economists.

In the 21st century, automation and artificial intelligence [AI] is displacing further the prospects of a return to large scale employment in Western manufacturing and in-sourced service sector jobs. Even Stiglitiz states that automation and productivity would account for much of the loss of Western manufacturing regardless of globalization. What this infers is that any job which can be done anywhere else, will be done in the cheapest location possible. Historically, this has happened for the past 270 years (since the start of industrialization) and has always caused turmoil.

That leaves certain jobs protected for workers in a very narrow population; government, academic, health, finance and corporate executives. Three of those jobs are public sector jobs with job protection, rising wages and secure pensions. The top positions in finance and corporate executives write their own cheques.

Free and fair market conditions would dictate that wages would eventually equilibrate but that has not occurred since free and fair markets do not exist; unregulated capitalism, state capitalism and autocracies have captured globalization for the benefit of an elite group.

Developing countries continue to drive their economies to higher GDP, austensibly to increase the living standards for their populations while telling Western economies that they must meet their CO2 and total GHG gas emissions commitments. Should the developed economies not meet commitments of the Paris agreement, there will be no reprieve from the predicted worst effects of global warming. The trajectories, at initial glance, appear to indicate this. But, both the EU and the USA are reacting positively despite popular media reporting. More comprehensive discussions need to had than those of the past and currently being pursued by the Parties.

Figure 1 Comparison of Select GDP's

Figure 2 CO2 Emmissions Contributions

Please feel free to contact the author with your critique or suggestions for adding value to our thesis.