Discussing the Elephant in the Room
In today’s world we have got used to the fact that our clothes are made in East Asia, we have the ability to easily explore Europe and after graduation we might start working for a multinational company. This reality hasn’t always been the case and has been result of further integration of economies through trade deals and supranational organizations. On the other hand, a backlash to globalization seems to be developing and is apparent in the form of Brexit, the election of Donald Trump and resurgence of populism on continental Europe. It is difficult to precisely quantify this development and what the true drivers are. On the macrolevel GDP per capita growth has been consistent in both mature and developing countries.
Lakner and Milanovic (2016) also noticed this but decided to graph the cumulative real income growth on a world scale from 1988-2008 which can be seen in the figure below. The graph shows huge gains for the 10-70th percentile of the world which represent incomes in East Asian countries who, industrialized and gained from expanded trade. Unfortunately, the 70-90th percentile meaning 20,000-100,000$, which encompasses mainly the middle class of developed economies, saw negligible real income growth. Finally, finishing the elephant is the top percentile which almost saw exponential growth. The inequity of income growth suggests that globalization may produce unforeseen externalities. Is globalization slowing down as a result and how can policies be introduced to alleviate the externalities? This article will first discuss the concept of globalization, then discuss the benefits and externalities and finally produce some insight as to what the future might bring in terms of globalization.
The inequity of income growth suggest that globalization may produce unforeseen externalities.
Globalization
As mentioned earlier, globalization is not only a development of today but has been seen historically. The first wave of globalization started in the late 19thcentury till 1914. It was characterized by the industrial revolution of the UK and saw world imports/exports increase to 10%, a level that was reached again in the late 1970s. After 1914 nationalism and protectionist politics emerged, and the world entered three decades of de-globalization. From 1945 till 1989 through technologies of e.g.: the plane and car, we saw the second wave of globalization. The world was then divided by the iron curtain and was not fully globalized. Once it fell, we entered into globalization 3.0 from 1989-2008. This period was characterized as globalization on steroids with the creation of the global supply chain, the sky was the limit. It was cut off by the great recession and the world entered Globalization 4.0, which we are still in. Global exports per GDP have now come to a halt and are even declining slightly. In addition, a power struggle seems to be going on between the two leading nations: the USA and China.
Globalization 3.0 created the global middle class and uplifted people from abject poverty.
Benefits
Global middle class
Returning back to Lakner and Milanovic (2016) income graph, we see that in the third wave of globalization a huge part of the world saw their incomes increase in real terms. Globalization 3.0 created the global middle class and uplifted people from abject poverty. They represent the fastest growing income groups and are for 90% located in Asia. On a macro level, high growth phenomenon was described by Jones (2016) as, emerging countries catching up to their steady-state growth level. This was especially apparent in China which, through trade openness, increased GDP per capita and uplifted its citizens out of poverty.
Less market barriers, thus lower prices
For this, I would like to focus on the aviation market of Europe. Before 1992 there was no internal market for aviation. Airlines used to be a country’s national pride, mostly unprofitable and highly priced. The creation of the market struck down barriers and forced state owned monopolies to become more efficient. As of today, flying is affordable for almost everyone and the market inefficiencies have decreased.
Free movement of labor
Freedom of movement of labor within the European Union is another form of taking down barriers but in the labor market. With the iron curtain gone and further integration, a huge population group got the opportunity to work in the west and seek opportunities that are there.
Since 1997 yearly CO2 emissions increased by 56% to today’s level.
Externalities
Job polarization
In Reijnders et al. (2017), job polarization of the labor market in emerging and developing market is investigated. Job polarization is defined as simultaneous expansion of the both the high and low-wage occupations at the expense of the middle. Part of the reason for this development is technological change. Another aspect is the emergence of the global supply chain. Some middle wage jobs were relocated out of advanced economies towards emerging ones. The latter is an externality of globalization that put further downward pressure on wages of the middle class.
Inequality
Perhaps a result of this job polarization has been the negligible income growth of the middle class of developed economies. It’s not possible to outsource a cleaner or food preparer but a factory worker can be. He can be either outsourced abroad or replaced by technology. In addition, the bargaining power of unions is diminished if companies can just relocate their operations.
Environment
Climate change has been an issue the world has known for a long time. In order to combat this the Kyoto protocol was established in 1997. Sadly, since 1997 yearly CO2 emissions increased by 56% to today’s level. Economic development usually goes hand in hand with increased emissions. Economist Kuznets developed a curve for this, which shows emissions increase up to an optimum after which economies become developed and emissions taper off. In the globalized economy this may be different since polluting industry in developed economies could be outsourced abroad. With the establishment of the global supply chain, products that were previously produced locally could now be produced cheaply abroad with little regard for the environment. Having the problem of pollution be out of sight for developed economies increased CO2 pollution by more than half while emissions were supposed to be controlled.
A mix of policies is probably best, so the externalities are addressed and benefits shared.
The Future
It is difficult to say what the future will bring. Currently, global exports are stalling, and some governments are becoming protectionist. However, this is partly an effect of policies by elected governments that can easily change. In terms of addressing the externalities, we could pursue international agreements to alleviate this. If we create global labor standards the chances of workers losing out is less great. Within countries, people who are left out because of the changing skilled job market, could be supported in re-education to increase productivity. Tax measures that take benefits from the 90th percentile and redistribute it can also be considered. A mix of policies is probably best, so the externalities are addressed and benefits shared. Finally, globalization has gone up and down historically and has in recent years created a global middle class. World poverty is down, and development is up with globalization as the driver. Externalities have also emerged and should be addressed in order for the world as a whole to continue to prosper.
