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April 04, 2007

Globalization: Boon or Gloom?
by Hans F. Sennholz

Globalization has numerous political and economic implications. Its design and structure, its gradual increase in foreign trade and relations, are basic to all civilized orders. New features that made their appearance in recent decades are the explosive expansion of world trade and the appearance of new trade partners. According to International Fund estimates, international trade of goods and services in 1990 amounted to some $5 trillion a year. Since then it has more than doubled, soaring to some $14.5 trillion last year.

It is rather remarkable that world trade is expanding faster than economic production. During the 1990s, trade was estimated to have grown some 6.5 percent annually, more than double the growth rate of economic production which barely reached a three percent rate. This intensification of international trade primarily resulted from the economic integration of "developing countries," especially China, which was joined also by India, other Asian countries, and the large countries in Latin America. Their global trade has risen significantly, which has made them important driving motors of the world economy. Per capita income in China has doubled in less than ten years, which took the old industrial countries, like Great Britain, France, and Germany, half a century. But a vast army of unemployed workers acts to keep Chinese wages down. Some hundred million are squatting in coastal towns looking for work, and countless millions are working in rural areas, many in low-paying farm work. Yet, according to official data, Chinese per capita income in 2006 was $1,740, U.S. income was $36,800.

Rapid expansion of the developing countries invariably generates a rising demand for resources and energy. Emerging countries now consume some 50 percent of global energy production, which may keep energy prices rather high in coming years. Emerging manufacturers have also learned to build highly technical products that compete effectively in world markets. Some 50 percent of all computers are built in China.

In the old industrial countries, manufacturers are under severe pressure to compete by developing ever new products and methods of production and taking them to international markets. They also are tempted to move some of their production abroad. American corporations moved some of their operations to China and other developing countries in Asia and South America; European companies prefer to move their production to former Soviet-bloc countries in Eastern Europe, such as Poland, Hungary, and the Czech Republic. German corporations, which had avoided practically any relationship with Eastern Europe, now are investing heavily in those countries. The primary incentive of such investments obviously is the reduction in costs, which not only may endanger some employment at home but also increase corporate profits. As profits tend to rise, they may even create new employment opportunities at home.

Globalization may not affect all domestic industries, but it acts on some enterprises, industries, and locations that may suffer growing pressure of foreign competition; their rates of unemployment may rise. In our age of labor legislation and labor unions, all political parties usually call for protection by law and decree. They advocate various forms of protection, old and new, such as protective tariffs and administrative trade restrictions, limitations of labor mobility, minimum wage legislation, subsidies to threatened companies, special protection of important national industries, or even establishment of regional "free trade zones" with protective outside walls. But such policies merely may delay the loss of employment; they do not improve the ability to compete internationally. Protectionist policies boosting the costs of production may keep inefficient producers alive temporarily by postponing unavoidable readjustment.

Globalization exerts an ever greater pressure on labor markets, requiring continuous adjustments. The global market now offers large quantities of low-cost labor which in many countries causes rising differences in personal incomes and, in case of labor immobility or inflexible wages, rising unemployment. The rates usually are double-digit in France, Germany, Italy, Spain, and other old industrial countries, but these countries invariably enjoy large black markets where illegal wage rates give illegal employment to countless eager workers. A few countries, such as Great Britain, Denmark, Ireland, and the Netherlands, managed to render their labor markets less rigid and restrictive, which cut their rates of unemployment in half.

Unskilled labor, the costs of which tend to exceed its productivity, is condemned to chronic unemployment. In many countries it amounts to a large percentage of labor, subsisting either on unemployment benefits granted by government or on black market activity and earnings, or on both. Plans and programs that would lower employment costs frequently are viewed as grave threats to wage rates, working conditions, and jobs; political parties and labor unions usually distrust the unhampered market order.

Globalization has increased the pressures on poorly qualified workers; but it is not the primary cause of their unfavorable employment condition. The greatest employment risk for unskilled workers always is the low level of their productivity. Technological progress requires ever greater labor education and qualifications; workers who fail to learn and adjust may find it ever more difficult to find employment.

Globalization is lowering migration barriers in many parts of the world. In Europe, the European Union has opened the gates to millions of workers from formerly communist countries where labor productivity was rather low. Their migration usually improves working conditions in the countries they leave and strains them where they appear. It creates adjustment costs that affect several classes of people rather unevenly. Workers who lose their jobs obviously are the victims; its immediate beneficiaries are consumers, who enjoy larger offers of goods and services at lower prices. Globalization actually keeps rates of inflation much lower than they otherwise would be.

Globalization can work for all. Surely, it is no easy task; it requires continuous changes in economic structure and adjustment processes. Labor markets need freedom and flexibility in order to create ever new employment opportunities that offset unavoidable job losses. Workers must have the opportunity and incentive to acquire knowledge and ability needed in a globalized economy. General education and vocational knowledge are becoming ever more important as are entrepreneurship, research, and development. But above all, the economic future of many businesses in a globalized economy greatly depends on the margin of political and social freedom they enjoy.

Hans F. Sennholz
www.sennholz.com

Copyright © 2002-2007 Hans F. Sennholz

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