Feb. 21, 2002
Vol. 21 No. 10

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    Johnson, economic development expert, discusses globalization and its benefits

    By Josh Schonwald
    News Office

    D. Gale Johnson

    D. Gale Johnson, the Eliakim Hastings Moore Distinguished Service Professor Emeritus in Economics, has studied the globalized economy for most of his more than 50-year academic career at Chicago. In recent years, Johnson, one of the world’s leading experts on China’s economy, has observed the rapid growth of the antiglobalization movement and the violent protests against the World Trade Organization. He has heard “globalization” increasingly blamed for a range of the world’s ills––from domestic job loss and environmental problems to cultural conflict and the proliferation of “sweatshops” in the Third World. Last September, Johnson published a response to the antiglobalists, “Globalization: What Is It and Who Benefits?”

    Many globalization critics fear that free-trade policies will result in massive job loss. U.S. corporations, they argue, will simply move to Third World countries to dramatically reduce labor costs. You argue, however, that this byproduct of free trade––job loss––is a function of growth. Please elaborate on this and the case for losing jobs in the interest of growth.

    I don’t want to argue that imports never reduce employment opportunities in a country. If the skill involved is one that can readily be learned, and if the capital required is not too great, then production that was formerly undertaken in an industrial country will be replaced by imports. Since, in the long run, exports will approximately equal imports in value, the industrial economy will expand its exports, and in doing so it will increase employment in the particular sectors involved. True, this causes short-run disruption and perhaps hardship for older workers who find it difficult to shift to other types of employment. But these shifts in employment are modest compared to those required by economic growth due to the differences in the income elasticities of demand among products and services. Somewhat more than 100 years ago, 50 percent of our labor force was engaged in farming; today, only a little more than 2 percent are. This huge adjustment was caused by economic growth, not by globalization––the income elasticity of demand for farm products is very low. Actually, without globalization, fewer than 2 percent would be engaged in farming––the output of four acres of cropland is exported.

    In addition to concerns about displacing workers, some antiglobalists charge that unrestricted trade will enable corporations to exploit workers in poor countries. In these countries, without unions or worker protections, they argue, corporations will pay employees poorly. What do you think of the economic logic behind this charge?

    Clearly, the conditions under which most people work in a high-income industrial country are very different than where most people work in a low-income developing country. It’s also true that the conditions under which people now work in industrial countries is far different than what existed 100 or 200 years ago––most industrial establishments at that time would now be classified as “sweatshops,” whether in England, Germany or the United States. People who are paid $10 to $20 per hour simply don’t work under the same conditions as those who earn $1 or $2 per day. And indeed, by our standards, these wages are shockingly low. But that is not the appropriate comparison. The appropriate comparison is with wages similar workers earn in locally owned enterprises. In China, the average rural worker earns about $420 per year. That’s $35 per month, or about 22 cents per hour for a 40-hour work week. In China, foreign firms do pay more, quite a bit more than local firms. Firms from Hong Kong, Taiwan and Macau pay 25 percent more than state-owned firms; other foreign firms pay 50 percent more. In evaluating the wages paid by foreign enterprises, the appropriate comparison is not with the wages in the home country, but how the wages compare with other wages in the developing country. If they are the same or higher, I do not believe the firm can be accused of exploiting the local workers.

    A central charge of antiglobalists is that free-trade policies will only benefit the corporations in wealthy countries.

    Globalization and free trade open up the markets of a country to competition from all over the world. Ask the U.S. auto industry or the steel industry if they have received substantial benefits from the opening up of the U.S. market. The auto industry responded by improving the quality of their autos and increasing their efficiency of production while still paying nearly the highest wages in the United States. But, the steel firms did not improve their production efficiency enough and now find themselves bankrupt. The biggest gainers from globalization are consumers, not the corporations or workers. The consumers gain because globalization means a wider variety of goods at lower prices. In heavily protected markets, such as the food market in Japan, consumers pay several times as much for a calorie as do consumers in the United States, or even in the European Union. And Japanese farmers do not have higher incomes than Japanese industrial workers. They are simply high-cost producers.

    Antiglobalists charge that free trade will aggravate an already rising inequality of income in the world. You have written that this inequality is not a bad thing because, while the rich are getting richer, the poor are not getting poorer. Could you elaborate on this idea––why isn’t growing inequality necessarily a bad thing?

    To say that inequality is a not a bad thing is not quite the same as saying it is a good thing. Inequality would be a bad thing only if the rich got rich by exploiting the poor. Rich countries do some things that harm the poor countries, but what they have done is exactly what the antiglobalization people want the rich countries to do. The European Union and the United States have protected some of their high-cost industries, such as textiles and oranges and sugar and butter, to save jobs in their own countries, or, in other words, to protect them from globalization. The restrictions on trade necessary to protect these sectors come at the expense of producers and workers in developing countries, who have much lower incomes than workers whose jobs are being protected. Inequality has increased among nations when measured by real income per capita, but is this bad? If it had been accompanied by the incomes of the poor declining, I would agree that it was bad. But that’s not the case.

    Antiglobalists often cite a fear that corporations, given the option, will leave countries with stringent and costly environmental regulations. What do you think of this?

    The distribution of direct foreign investment among the countries of the world does not support the conclusion that investors choose low-income countries because they have limited environmental laws. In 1999, for instance, low-income countries that had 41 percent of the world’s population received only 1 percent of the foreign direct investment, and middle-income countries with 44 percent of the world’s population received only 19 percent of the foreign direct investment. Who was the largest recipient? The United States, with 30 percent of the total. The second, third and fourth largest were the United Kingdom, Germany and France. I wish that more of the direct investment went to low-income countries, but apparently the potential for having few environmental restrictions, if that were true, is not enough to provide a return on investment that is competitive with what can be earned elsewhere.

    The intention of the free trade opponents is idealistic––to reduce poverty in the underdeveloped world, fight hunger, cure disease. Accepting, as you have explained, that their approach is a misguided and potentially damaging way to achieve their idealistic goals, what is the alternative? How can we fight disease, cure poverty and develop poor countries?

    A World Bank report from last year is instructive: If you divide poor countries into those that are “more globalized” and those that are “less globalized”––with globalization measured simply as a rise in the ratio of trade to national income––you find more-globalized poor countries have grown faster than even rich countries, while less-globalized poor countries have actually seen income per person fall. The GDP in more-globalized poor countries has risen by 5 percent since 1990; in less-globalized poor countries the GDP has dropped by between 0 and 1 percent. Also, this idea, that more trade helps poor countries, is well supported by historic evidence. Less than 200 years ago, 75 percent of the world’s population lived on less than $1 per day (1993 prices); today, the percentage is 20. Economic growth has lifted the large majority of the world’s population out of severe poverty. More should be accomplished and more will be if countries are able to have sustained economic growth. South Korea, for example, which was a very poor country in 1950, now has less than 2 percent of its population living on $1 per day. In Zimbabwe, with negative economic growth in recent decades, 36 percent of the population live on less than $1 per day. Even more striking evidence that the poor have benefited from globalization is the increase of life expectancy from about 30 years to 64 years in developing countries during the past century. This increase was due primarily to ideas and products developed in industrial countries and to the income increases that have occurred in the developing countries.