GLOBALIZATION: THE CONVERGENCE ISSUE

EDITION 16 ~ APRIL 2008 (Updated 11/01/08 and 1/26/09) 
By
Bruce Sundquist
bsundquist1@windstream.net

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Reference citation format, e.g. (98C2), cites a document published in 1998 by a lead author whose last name begins with "C". The final integer (2 in this example) is a running index.
Previous Editions:
Ed. 3 - 7/03 // Ed. 4 - 9/03 // Ed. 5 - 10/03 // Ed. 6 - 2/04 // Ed. 7 - 5/04 // Ed. 8 - 7/04 // Ed. 9 - 3/05 // Ed. 10 - 4/05 // Ed. 11 -8/05 // Ed. 12 - 11/05 // Ed. 13 - 3/06 // Ed. 14 - 7/06 // Ed. 15 -11/06 //

~ TABLE OF CONTENTS ~
~
ABSTRACT ~
~ SUMMARY ~

(1) ~ INTRODUCTION ~
(1-A) ~ Physics of Globalization ~
~ ~ ~ ~
[1A1]~Mobilities, [1A2]~Driving Forces, [1A3]~The Debate,
(1-B) ~ Historical Background of "Free Trade," ~
~ ~ ~ ~
[1B1]~19th Century Globalization, [1B2]~20th Century Globalization,
~ ~ ~ ~ [1B3]~21st Century Globalization,
~ ~ ~ ~ [1B4]~Applying the Theoretical Basis of Free Trade to 21st Century Globalization
(1-C) ~ Current Status of the Globalization Process, ~
~ ~ ~ ~
[1C1]~Scale and Growth of Globalization-Related Economic Parameters,
~ ~ ~ ~ [1C2]~Privatization of the World's Water Supplies and Other Public Utilities,
~ ~ ~ ~ [1C3]~Global Competitiveness of US Food- and Fiber Producers
(1-D) ~ Our Bipolar World - The Context of Globalization ~

(2) ~ DOES GLOBALIZATION PRODUCE CONVERGENCE? ~
(2-A) ~
Can Non-mobile Factors Prevent Convergence? ~ [2A1]~Human capital, [2A2]~Labor Productivity, [2A3]~Consumer Mobility, [2A4]~Tariffs, [2A5]~Other Mobility Issues, ~
(2-B) ~ So is there a Faustian Bargain?

(3) ~ THE CONVERGENCE PROCESS ~ (Top of the second file of this document)
(3-A) ~ Economic and Social Effects of Trade Deficits,
~ ~ ~ ~
[3A1]~Employer-sponsored health-care benefits, [3A2]~Retirement benefits, [3A3]~Wages,
~ ~ ~ ~ [3A4]~Hours worked, [3A5]~Returns to work after layoffs, [3A6]~Severance pay,
~ ~ ~ ~ [3A7]~Welfare and unemployment benefits, [3A8]~Part-time and temporary employment,
~ ~ ~ ~ [3A9]~Savings, debt and bankruptcy, [3A10]~Stress-related issues,
~ ~ ~ ~ [3A11]~Poverty-related issues, [3A12]~Work-force population shifts,
~ ~ ~ ~ [3A13]~Economic polarization, [3A14]~Sustainability issues, [3A15]~Housing,
~ ~ ~ ~ [3A16]~Dropping Out, [3A17] The Deflation/ Inflation Vise, [3A18]~Jobs,
~ ~ ~ ~ [3A19]~Financial Capital, [3A20]~A Caste System for the Developed World?,
~ ~ ~ ~ [3A21]~The lag between US labor productivity and US wages,
(3-B) ~ Effects of Trade Deficits on the US Economy ~
(3-C) ~ Policies for Dealing with Globalization ~
~ ~ ~ ~
[3C1]~Protectionism, [3C2]~Semi-Protectionism, [3C3]~Labor/ Environmental Standards,
~ ~ ~ ~ [3C4]~Convergence, [3C5]~Hindsight, ~

(4) ~ EFFECTS OF, AND RESPONSES TO, CONVERGENCE ~
(4-A) ~ The Subsistence-Level Labor Pool Constraint ~
(4-B) ~ Some Optimistic Studies
~ ~ ~ ~
[4B1]~A World Bank Study, [4B2]~A Harvard University Study,
~ ~ ~ ~ [4B3]~Intrinsic Biases in Studies of Globalization Economics,
~ ~ ~ ~ [4B4]~Escapes from Extreme Poverty, [4B5]~A Rand Study,
(4-C) ~ Some Case Histories of the Links between Globalization and Economic Well-Being ~
~ ~ ~ ~
[4C1]~The Arab World, [4C2]~Viet Nam, [4C3]~China, [4C4]~Chile, [4C5]~Ethiopia,
~ ~ ~ ~ [4C6]~India, [4C7]~Russia, [4C8]~Southeast and Eastern Asia, [4C9]~Latin America,
~ ~ ~ ~ [4C10]~Japan's Experience in Resisting Globalization,
~ ~ ~ ~ [4C11]~The EU's Experience with Globalization,
~ ~ ~ ~ [4C12]~The Developing World's Experience with Globalization,
~ ~ ~ ~ [4C13]~The 50 Least Developed Countries, [4C14]~Cambodia,
~ ~ ~ ~ [4C15]~South Korea's Experience with Globalization, [4C16]~Conclusions,
(4-D) ~ Some Non-Optimistic Studies ~ [4D1]~The Clark-Mander Study, [4D2]~The Weisbrot et al Study, [4D3]~A Recent IMF Study, [4D4]~The Milanovic Study, [4D5]~An Emerging Picture
(4-E) ~ The Out-Sourcing-In-Sourcing Issue
(4-F) ~ Blaming Globalization or Blaming Its Context ~ And Does it Matter? ~

(5) ~ FINANCIAL CAPITAL CONSTRAINTS ON CONVERGENCE (Top of the third file of this document) ~
(5-A) ~ The Role of Population Growth Rates ~
(5-B) ~ Cost/ Time Frame for Reducing the Developing World's Financial Capital Problem ~
(5-C) ~ The Role of Capital-Intensive Agriculture ~
(5-D) ~ Capital-Intensive Agriculture: A Route to Developed World Status? ~
(5-E) ~ The Role of Foreign Investments, Loans and Development Aid ~

(6) ~ NATURAL CAPITAL CONSTRAINTS ON CONVERGENCE
(6-A) ~ Footprint Analyses ~
(6-B) ~ Net Primary Production Analyses ~
(6-C) ~ Neglected Issues ~

(7) ~ THE CONVERGENCE POINT

(8) ~ STRATEGIES FOR LIVING WITH GLOBALIZATION ~
(8-A) ~ The Threats Posed by Deflation ~
(8-B) ~ Capital Utilization Efficiency ~ A Partial Cure for the Ills of Globalization ~
(8-C) ~ Natural Capital Utilization Efficiency and Conservation ~ Another Partial Cure ~
(8-D) ~ Reducing Population Growth ~ The Crucial Issue ~
(8-E) ~ The Time-Frame Issue ~
(8-F) ~ Demographic Bonus Investment Options, ~
[8F1]~Sub-Saharan Africa, [8F2]~India and Southeast Asia, [8F3]~Irrigation, [8F4]~Non-Irrigated Croplands,
(8-G) ~ Other Strategies ~ [8G1]~Wild Fisheries, [8G2]~Immigration Policies, [8G3]~Raids on Human Capital,
(8-H) ~ The Limited Potential of Available Options ~ [8H1]~Historical and Geographical Fundamentals, [8H2]~Religious Constraints,

(9) ~ POLITICS OF GLOBALIZATION - déjà vu ~
(9-A) ~ Old Rules and New Rules ~
(9-B) ~ The New Environment ~
(9-C) ~ Polls ~

(10) ~ REFERENCES (in a separate file)

APPENDIX B ~ DRIVING FORCES FOR GLOBALIZATION ~

TABLES OF THE FIRST FILE OF THIS DOCUMENT (Chapters 1 and 2):
(1A-1)~Ratio of key Economic Parameters characterizing the developed and developing worlds
(1A-2)~Important Developing World characteristics that distinguish it from the developed world
(1C-1)~World Exports plus Imports
(1C-2)~Market Share of US High-Tech Industries
(1C-3)~World Share of High-Tech Exports
(1C-4)~Percent of Imports into the U.S. from Low-Wage Countries
(1C-5)~US Annual Imports and Exports
(1C-6)~Net private Capital Flows to Emerging Market Economies
(1C-7)~US Trade Deficit in Goods and Services
(1C-8)~US Current Accounts Deficit
(1C-9)~Regional distribution of FDI inflows and outflows

(2A-1)~Trends in Average Years of Schooling in Developing Nations
(2A-2)~India's Software Exports
(2A-3)~College Degrees Awarded in Trade-related Fields
(2A-4)~ Undergraduate Degrees in Engineering Granted Annually
(2A-5)~Number of Applications to bring Foreign Professionals into the US
(2A-6)~Average Annual Growth Rate of World Exports by Technological Intensity
(2A-7)~Output per hour and real Compensation per hour in U.S. non-farm businesses
(2A-8)~Productivity, Wages, and Unit Labor Costs relative to Total U.S. manufacturing,1990
(2A-9)~Change in Payroll Employment in the US (May 2001 to May 2003)

TABLES OF THE SECOND FILE OF THIS DOCUMENT (Chapters 3 and 4):
(3A-1)~Percentage of Firms with more than 200 Employees that Offer Retiree Health Benefits
(3A-2)~Magnitude of Pension Plan Deficits
(3A-3)~Degree to which Single-Employer Pension Plans are Under-Funded
(3A-4)~Percentage of Working-Age Households that are at risk of being unable to maintain their Pre-Retirement Standards of Living in Retirement, by Age and Income
(3A-5)~Effect of Educational Attainment on U.S. Wages and Wage Growth
(3A-6)~Credit Card Delinquencies as a percent of Total Loans
(3A-7)~Comparison of Median Household Debt Outstanding to Median Household Income
(3A-8)~New Jobs Created in Various Pay Ranges
(3A-9)~The Premium Employers pay for workers with 4-year College Degrees over those with High School Degrees
(3A-10)~Assets under Management by Hedge Funds in the U.S.

(4-1)~Some Constraints Hindering Convergence at Developed-world Standards of Living
(4C-1)~Monthly wages in Japan and China
(4C-2)~The Informal Economy as a Percent of the Official GDP in 1999-2000
(4D-1)~Some Key Changes in Global Social/ Economic Indicators, 1960-2000

TABLES OF THE THIRD FILE OF THIS DOCUMENT (Chapters 5-9):
(8D-1)~Effect of Population growth rate on the probably of civil conflict ~

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ABSTRACT

No significant non-mobile factors exist that could prevent convergence of the economies of the developed and developing worlds and the corresponding elimination of high labor price differentials. Although some global convergence of labor prices has occurred, the bulk of this convergence must result from some sort of rapid, instability-related process. The developing world’s extreme shortages of financial capital, caused largely by its high population growth rates and its limited natural capital, require that labor prices converge close to those of the current developing world. Damage control options exist but are limited, difficult, and require a time frame of decades. The globalization process is shown (Chapter 3 Section [A]) to be playing a significant role in the global economic meltdown of 2008 and beyond. From this analysis it is possible to show how future economic meltdowns could be avoided, and how the US might extricate itself from its current economic meltdown.

SUMMARY

Economic globalization is a direct result of high degrees of global-scale mobility of every input to, and output from, economic activity - capital, people, labor content, natural resources, entrepreneurship, technology, information, goods and services. Contributions to any Gross Domestic Product (GDP) are growing increasingly replaceable by contributions of like form generated almost anywhere else in the world. Even prices of contributions not readily replaceable are being determined to an ever-increasing degree by the global marketplace. These high, and rapidly growing, mobilities are being imposed on a world of huge gradients in wealth, income, quality of life, education, human rights and social-, political-, economic-, and military stability. These gradients are of concern because gradients in parameters determined entirely by mobile influences must tend toward zero at a rate proportional to the relevant mobilities and to the size of the gradient. All this implies the potential for large-scale global changes in economies and cultures, as the world grows less bipolar. This has produced vociferous debates. Some proponents of trade agreements promoting increased globalization ("free trade") tend to argue that non-mobile factors (e.g. "labor productivities" or "human capital") will insure that conditions characterizing the developed- and developing worlds do not converge. Other proponents argue that conditions in the developing and developed worlds will converge toward conditions as good as, or better than, those currently characterizing the developed world. Opponents of globalization believe neither argument. Opponents also see Faustian bargains in the public perception of globalization providing consequence-free opportunities to buy cheap imported goods. They see a convergence point well below developed-world conditions.

Chapter 2 of this document argues that global-scale convergence (economic and otherwise) is the inevitable end-point of globalization. Arguments that "non-mobile" factors (e.g. labor productivities or human capital) will prevent convergence are shown to be weak or erroneous.

Chapter 3 summarizes developed-world data showing trends that one might have predicted for early stages of the convergence process. Convergence-related trends started to become clear around 1980 and are now proceeding rapidly. They already impose risks to the US economy. Options for dealing with these risks are evaluated in Chapter 8.

Chapters 4-7 estimate the convergence-point conditions that are expected to define the culmination of globalization. Extreme shortages of financial capital, and limited opportunities for expansion of agriculture in the developing world play crucial roles in determining the convergence point. The conditions characterizing the culmination of globalization are concluded to be close to conditions (living standards) that characterize the current developing world. Thus the developed world is engaging in a Faustian bargain - Buy low-cost developing-world goods, but gradually join the labor pool that produces these goods. Obliviousness to this Faustian bargain and its trade-offs appears to be due to intractable analyses of jobs lost or gained, exaggerated perceptions of non-mobile components of economic activity, and grossly erroneous cornucopian views of the untapped potential of the world's natural capital to sustainably support economic activity. This document focuses on the basic physics of globalization, convergence-related analyses, and the untapped potentials of the world's natural capital to sustainably support economic activity.

Chapter 8 outlines options for raising the convergence point. Quick fixes requiring less than several decades do not exist. Thus strategies are needed to slow globalization and reduce the risks involved. The developing world must overcome its dire shortage of financial capital. This shortage appears to be a result largely of the high capital cost of the infrastructure growth necessitated by high population growth rates. Thus support of international family planning seems crucial to any strategy. Enhancing food/ fiber productivities of developing world agriculture is also essential. Increasing the utilization efficiency of capital facilities in the developed world could also play a significant role in any strategy.

CHAPTER 1 ~ INTRODUCTION ~

(1-A)~Physics of Globalization [1A1]~Mobilities, [1A2]~Driving Forces, [1A3]~The Debate ~
(1-B)~Historical Background of "Free Trade", [1B1]~19th Century Globalization, [1B2]~20th Century Globalization, [1B3]~21st Century ~
(1-C)~Current Status of the Globalization Process ~
(1-D)~Our Bi-Polar World - The Context of Globalization ~

SECTION (1-A) ~ PHYSICS OF GLOBALIZATION ~ [1A1]~Mobilities, [1A2]~Driving Forces, [1A3]~The Debate ~

Part [1A1]~ Mobilities ~
Globalization of the world's economies is a direct result of the high global-scale mobility of every component of economic activity. The mobilities of all inputs to the production of goods and services - capital, people, labor content, natural resources, entrepreneurship, technology and information - are doubling every decade or two. For example, a call from New York to London that would have cost $1 in 1950 cost 6 cents as of 1990 (04K3). Mobilities of goods and services themselves are also seeing rapid growth. High global-scale mobilities of both input- and output components of economic activity imply the growing replaceability of almost any contribution to a Gross Domestic Product (GDP) by a contribution of like form from almost anywhere else. Some key components of mobility growth are:

World trade has been tripling (in constant dollars) every decade for the past 3-4 decades to over $6 trillion (exports + imports) in 1990 (IMF data) and $13.3 trillion in 1997 (00W1). Compare these numbers to a global GDP of $29.9 trillion in 1997 (00W1). Even human cultures are being globalized as a consequence of such things as emigration, films, recordings, tourism, the Internet, and other influences that are making English the language of global-scale communications.

Declining Cost of Transportation and Communication, 1920-1990 (I.M.F. data)

Year

Sea (a)

Air (b)

Phone Call (c)

Computers (d)

1930

60

0.68

245

-

1940

63

0.46

189

-

1950

34

0.30

53

-

1960

27

0.24

46

12,500

1970

27

0.16

32

1,947

1980

24

0.10

5

362

1990

29

0.11

3

100

(a) Average ocean freight- and port charges per ton ($US)
(b) Average revenue/ passenger-mile ($US)
(c) 3 minutes: NY/ London ($US)
(d) Index, 1990=100

Global Air Transportation: 1950-1998

Year

People

Freight

Year

People

Freight

Year

People

Freight

1950

28

0.7

1975

697

19.4

1987

1,589

48.3

1960

109

2.0

1977

818

23.6

1989

1,774

57.1

1967

273

6.5

1979

1,060

28.0

1991

1,845

58.6

1968

309

8.2

1980

1,089

29.4

1992

1,929

62.6

1969

351

9.8

1981

1,119

30.9

1993

1,949

68.4

1970

460

12.0

1982

1,142

31.5

1994

2,100

77.2

1971

494

13.2

1983

1,190

35.1

1995

2,248

83.1

1972

560

15.0

1984

1,278

39.7

1996

2,426

89.2

1973

618

17.5

1985

1,367

39.8

1997

2,570

99.8

1974

656

19.0

1986

1,452

43.2

1998

2,621

99.0

People = Billions of passenger-kilometers . . . Freight = Billions of tonne-kilometers

Source: Vital Signs 1999, Worldwatch Institute

Part [1A2]~ Driving Forces ~

Controversies over globalization arise largely from the huge gradients in wealth, income, quality of life, education, human rights and social-, political-, economic-, and military stability in the world. These gradients translate into price differences that can be thought of as driving forces for changes that reduce these price differences and the corresponding gradients. Rates of change are proportional to the pertinent mobilities and to the magnitude of the driving force. Non-mobile influences, e.g. tariffs, can slow or stop this price convergence since the rate of a process tend to be controlled by the slowest step (the factor of lowest mobility) in the overall process.

Table (1A-1), below, gives some ratios of some key economic parameters characterizing the developed and developing worlds. These ratios measure the huge driving forces for convergence of the economies and cultures of the developed and developing worlds. (The population ratio provides insights as to what would be involved in convergence.) Appendix B tabulates more driving forces.

Part [1A3]~ The Debate ~
The debate over globalization centers largely on trade agreements that have been, and are being, worked out among various groupings of nations. These agreements are the products of negotiations aimed at reducing tariffs, over-ruling other national (and state) laws and regulations that impact trade among nations, and capital account liberalization (removal of restrictions on international investment flows). US courts have ruled that these international agreements are not treaties. Therefore they do not come under the US Constitution's requirement of a 2/3 vote of the US Senate to pass. Yet, these trade agreements can nullify treaties, or portions thereof, if they inconvenience international trade.

Table (1A-1) ~ Ratio of some key economic parameters characterizing the developed and developing worlds (All data except population are per-capita.)

Parameter

Developed World/ Developing World

Standard of Living

9.6 (02W1) #3

GDP

17.9 (00W1) #3

Wages

10.

Energy Consumption

6.

Meat Consumption

3.1-4.6 (02M2)#2 (98W3)

Cereal Consumption

2.2-2.5 (98U2) (99B1) (98D1) #1

Population (2000)

0.20 (02U1)

#1 Due more to less-direct consumption patterns in the developed world than to direct caloric intake. (Cereals provide about 2/3 of all human caloric intakes (98D1).)
#2 (1998 data) (North America is taken as a proxy for the developed world in Ref. (02M2).)
#3 On average, it required 19 workers in the developing world (exclusive of the world's 50 least developed countries that contain 10% of the world's population) to produce what one worker produces in developed countries in 2002-2003 (06P4). However it takes far less financial capital for developing nations to produce what they do. This probably explains the bulk of difference between the standard-of-living and the per-capita GDP in the table above.

Proponents of trade agreements offer a menu of arguments.

Opponents of trade agreements argue that these trade agreements promote a convergence of living standards of the developed and developing worlds. They see the eventual point of convergence being well below developed-world living standards. This implies that the low prices on the growing flood of imported goods that the developed world enjoys are a Faustian bargain. Table (1A-2) lists some important parameters that characterize the differences between the developing and developed worlds. These parameters are not independent of the topic at hand. As economic conditions worsen, struggles for resources becomes more desperate and bloody; human life grows cheaper, government, justice, education and infrastructure become harder to provide and/or administer, and the risks involved in making capital investments and loans become prohibitive. All this creates positive-feedback loops of ever worsening conditions (08S5), a few of which are listed in Table (1A-2).

Table (1A-2)~ Some important developing-world characteristics that distinguish it from the developed world

Opponents of trade agreements also protest the departures from sound economics and the needless violations of national sovereignty that appear frequently in trade agreements (Chapter 9).

The differences between proponents and opponents of trade agreements are clearly huge. The stark differences between conditions at the culmination of globalization as envisioned by these adversaries give good reason for believing that globalization is extremely important in terms of the future of mankind. But public perceptions give little recognition to this. Ambivalence to globalization, relative to its potential effects, appears to be primarily due to:

This document focuses first on the question of convergence - Yes or No? Then it attempts to estimate the conditions characterizing the point of convergence that globalization is likely to produce. Then it examines the degree to which these conditions might be improved.

SECTION (1-B)~ HISTORICAL BACKGROUND OF "FREE TRADE" ~ [1B1]~19th Century Globalization, [1B2]~20th Century Globalization, [1B3]~21st Century Globalization, [1B4]~Applying the Theoretical Basis of Free Trade to 21st Century Globalization, ~

Part [1B1]~ 19th Century Globalization

19th century globalization began around 1815 and ended with the First World War, according to Bello (04B3). Milanovic refers to this as the "British-led" globalization and alludes to an even earlier globalization - the "Roman-led" globalization (06M2). This may seem strange, but it will become apparent that there are a disturbing number of similarities between the "Roman-led," the "British-led," and the current "American-led" globalization. Susan B. Stanton, economist with A. Gary Shilling & Co, contends that only twice in history has free trade had powerful advocates -first when Britain reigned supreme in the 19th century, and, second, in the decades following WWII when the US did. In each case, one country was in a peculiarly powerful position to pursue its own particular political and economic goals that free trade happened to suit. During the 19th century, growth in economic mobility and hence trade was also fueled by declining transportation costs following establishment of navigable waterways (e.g., the Erie Canal), the debut of the steamship, the introduction of the railroad, and the development of mechanical refrigeration (00O3). Early in the 19th century, protectionism was the norm as many countries prohibited imports of manufactured goods. But then Britain took advantage of its "industrial head start" and liberalized its trade in aggressive searches for markets for its greatly increased production (93M1).

While there are parallels between the globalization of the mid-to-late 19th century and the globalization after World War II in terms of rapidly expanding mobilities, principally falling transportation- and communications costs (albeit with different technologies), the same cannot be said of tariffs. They fell very little in the Atlantic economies between the 1870s and World War I, i.e. during the globalization of the mid-to-late 19th century (00O3). (Reference [93M1] disagrees with this.) Thus globalization during the decades prior to WWI had a very small "free trade" or "trade liberalization" component and was almost entirely mobility-driven. The huge increases in mobilities of several key components of economic activity were typified by a shift from wooden sailing ships to steel steamships, which resulted in large declines in trans-Atlantic transportation costs, and faster, more reliable connections. During 1850-1913, overseas transportation capacities increased by more than 500% (03S2). Twentieth century globalization, by comparison, was driven by both expanding mobilities (and of a far broader range of components of economic activity) and by strong support of "free trade," (tariff reductions and elimination of subsidies for exports).

The first theoretical case for "free trade" was made in the early 1800s by British economist David Ricardo and his principle of "comparative advantage" - the idea that the interests of overall economic benefit would be best served by each nation specializing in what it does best, and trading with others for other needs (04S1). Obviously this theory was ignored during the globalization of the mid-to-late 19th century, but it was taken to heart during the post-WWII globalization. Ricardo's theory is described and analyzed in greater detail in Section (1-B) Part [B4]. Altruism has never been more than a superficial justification for globalization anyway. Even during periods of globalization, undercurrents of protection have never been far below the surface. These protectionist sentiments easily broke through to return when the pressures of competition and economic problems weakened the powers of the world's leader. (See discussion, below, of the change of British attitudes on globalization immediately following WW I.)

World Bank economist Branko Milanovic has elaborated on Stanton's views (02M1). He draws a number of interesting parallels between 19th century globalizations and the current globalization (1980 onward). The 19th century globalization was accompanied by "wild global capitalism with ... unbridled competition and exploitation" (02M1). The last decades of the 18th century and the early 19th century saw the "land enclosure" process in England and Scotland in which pheasants were burned out of their homes by landowners eager to increase wool production for the rapidly expanding global wool trade. Economic historian Karl Polyani has called this period "a revolution of the rich against the poor" (44P1). Some nations (e.g. Japan, China, Tunisia, Egypt and Zanzibar) were globalized at gunpoint. Other nations were globalized by being colonized. Millions of people were "globalized" by being taken into slavery. Ten million people died in the genocide in the Congo. The Dutch East Indies Company pillaged 7.4-10.3% of Indonesia's national income during 1868-1930. The rules of "free trade" were stacked in favor of industrial interests (02M1) whose concept of "free trade" entailed anything but freedom (e.g. China's Boxer Rebellion of 1900). For example, colonies had to live under the following mobility-reducing rules imposed by European governments at the behest of industrial interests:

An account of 19th century globalization by Williamson and Lindert (99W1) never mentioned colonialism or slavery.

The non-internalized costs of 19th century globalization extended far beyond the abuses heaped on the Chinese, slaves taken out of Africa and English/ Scottish pheasants, the looting of colonial economies and the US Civil War. Below are a few more non-internalized costs that have close parallels with modern-day globalization.

With the end of WWI, many nations increased tariffs, arguing that higher protection would help rebuild domestic industries that had suffered during the war. France, Germany, Spain, Italy, Yugoslavia, Hungary, Czechoslovakia, Bulgaria, Romania, Belgium and the Netherlands all raised import tariffs to pre-war levels. Even the UK, a "free trade" nation, declared that "new industries since 1915 would need careful nurturing and protection if foreign competition were not again to reduce Britain to a technological colony" (03S2). John Maynard Keynes wrote in 1933 "I was bought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law." Yet even in that 1933 essay, Keynes started to question some of the assumptions supporting free trade (04S1). In the US, the anti-globalization Republican Party took back Congress in 1919 and the White House in 1921. They raised tariffs sharply in 1922 and passed the Smoot-Hawley Tariff in 1930 that raised 890 tariffs.

Thus what was previously billed as sound economic policy in the developed world became increasingly revealed for what it really was - a convenience of the moment for the politically influential. The question today is whether the case for free trade made two centuries ago is now undermined by the orders-of-magnitude increases in mobility now evident in a modern global economy plagued by massive (and frequently increasing) gradients in wealth, income, external debt, environmental conditions, financial-, human- and natural capital, and stability of social-, economic-, political-, agricultural- and military systems.

According to Neil Ferguson, history professor at Harvard University, the original era of globalization lasted from 1880 to 1914 when WWI began. It harnessed the powers of global communications and swift transport to link the world economically. This first era was marked by "a dominant but financially over-stretched global power, rival powers that defined themselves only in opposition to the dominant power, new regional powers with global aspirations, a proliferation of "failed states" and state-sponsored armed groups." Ferguson notes numerous striking similarities between the current era of globalization and the first era of globalization, a few of which are listed above (05S6). The first era involved a struggle over access to India; the current era involves a struggle over access to Saudi Arabia (05S6). The anti-western armed organizations in the 19th century followed the teaching of Karl Marx; those in the current period follow Osama bin Laden (05S6). For another historical view of globalization, see Ref. (02T1).

Part [1B2]~ 20th Century Globalization ~

A major stimulant to increasing economic mobility, and hence trade, in the past half-century has been the use of containers for ocean transport and the advent of jet engines and cargo aircraft. Transportation costs for sea freight transport have been relatively stable since 1960 and air travel since 1980. However, shipping times have fallen markedly as transportation methods shifted to faster ocean vessels and jet aircraft. During 1965-98, the share of US imports arriving by air increased from 6 to 25% (02I3). Another major stimulant for the US to pursue a policy of greater trade openness after WWII is probably because, at the end of WWII, the US found itself with a well-developed industrial base, while much of the rest of the developed world was in shambles as a result of the war. Recall that the 19th century globalization was instigated by England finding itself in a particularly economically advantageous to benefit from greater trade openness at that time. The Roman globalization was almost certainly instigated by Rome finding itself in an economically advantageous position for its particular version of "trade openness." One should therefore not read too much into altruistic-sounding arguments centered on economic efficiency maximization and consequent economic benefit maximization for all.

One consequence of WWI and the vindictiveness of the winners and the economic wretchedness of some losers, most historians believe, was an environment that caused various totalitarian ideologies to come to the fore. These probably produced WWII. These three events produced a massive reduction in the movement of capital between countries, i.e. the end of 19th century globalization (George Soros, writing in the Atlantic Monthly in February of 1997). Soros seems to imply that 19th century globalization had a role in causing WWI and hence its two aftermaths, but it is not clear that this was the case. 20th century globalization began gradually after the end of WWII but only became an important issue around 1980. Hence one sometimes sees the end of WWII given as the start of 20th century globalization.

Useful perspective can be gained from the economic policies of the developing world just prior to the globalization that became obvious around 1980. They help to understand the changes that globalization bought on. For much of the 1950s and 60s, import-substituting industrialization (ISI) was the policy of the day. It was based on the idea that domestic investment and technological capabilities can be spurred on by providing home producers with (temporary) protection against imports. This argument is still controversial. Some later argued that ISI policies caused problems in subsequent decades when ISI nations opened up their economies (01O2). Others (97R2) (02H3) noted that ISI worked reasonably well in raising domestic investment and productivity. Numerous economies in Latin America and the Near East recorded robust growth under ISI policy regimes (03S2). In general, the 1950s and 1960s were decades of some of the fastest economic growth ever.

Rodrik (01R2) argues that no country has ever developed simply by opening itself up to foreign trade and investment, and that practically all of today's developed countries embarked on their growth behind tariff barriers. Bello (04B3) argues much the same viewpoint. Some case histories outlined in Section (4-C) give added support to this viewpoint. Countries, worldwide, reduced the level of protection of their industries only subsequently. China and Viet Nam are two notable examples (03S2) (See Section (4-C) below). In Latin America as a whole, globalization has failed to match the economic benefits of pre-globalization times. The income gap between rich and poor in Latin America has grown to about twice as wide as it is in the US or Europe. Regional economic growth has slowed to an average of 1.3%/ year since 1999 (04L1). This would suggest that per-capita economic growth has been negative in this period. In 1980, Mexico's real per-capita income, adjusted for the differential price level between Mexico and the US, was about 33% of that in the US. Today it is about 22% (06M2). Ghana, a country often touted as an African success case, had a per-capita income 50% that of Spain in 1957 (when it gained independence). Today Ghana's per-capita income is 10% that of Spain's (06M2).

Many countries insulated their economies from world markets to help their industries advance to global competitiveness. This was done by:

  1. Protective tariffs and subsidies for key industries;
  2. Requiring foreign corporations to employ native workers in skilled positions;
  3. Requiring foreign corporations to purchase inputs from domestic producers;
  4. Restricting capital flows.

Policies (2) and (3) promoted technology transfer. Policy (4) encouraged foreign corporations and citizens holding lots of domestic currency to invest within the country. Policy (4) also stabilizes currency (see below).

Globalization destabilized local currency, in part by eliminating restrictions on capital flows. Efforts by the US treasury and the IMF to push the rest of the world into globalizing too quickly helped to create the economic meltdown in East- and Southeast Asia and much of Latin America in 1997-98. The massive misery and economic hardship it imposed on the people of these regions was largely a consequence of local currencies being destabilized by globalization (02S5) in an economic environment lacking "safety nets." Some Southeast Asian countries now seek to change the rules of globalization to reduce the risks of future currency meltdowns. The concerns of developing world leadership over the increased risks of economic instabilities being caused by financial integration with the global economy are thus well founded. A major International Monetary Fund study (03P1) of the economic effects of globalization on developing countries found that, while there is no robustly significant effect of financial integration on economic growth, financial integration increases economic instability. This volatility takes the form of recessions following devaluation (or large depreciations) of currency. Such recessions are much deeper in developing economies than in developed economies. The absence of functioning safety nets greatly exacerbates the social costs of such crises and can lead to catastrophic consequences (02K2) (02A1).

The Brazilian currency crisis of 1998 precipitated the greatest inflow and outflow of speculative capital ever experienced by a developing country. The Brazilian government lacked sufficient currency reserves to stabilize its currency and was forced to borrow from the IMF. The rescue package called for drastic spending cuts, including a two-thirds reduction in Brazil's already inadequate environmental protection spending (99U3) (03L2). As will be noted later in this document, these "Structural Adjustment Programs" (SAPs) caused (and continue to cause) needless and massive hardships to people throughout the developing world - people who lived economically marginal existences even before SAPs.

Developing countries that have a high degree of financial integration with the global economy tend to have more volatility of consumption (economic instability). Consumption volatility declined in the 1990s in industrial and less-financially integrated economies, but it increased for the most-financially-integrated economies during the same period (See Table 4 of Ref. (03P1)). Some reasons for this are (03P1):

Empirical evidence supports all of these hypothesized effects (03P1).

Efforts by the US treasury and the IMF to push the rest of the world into globalizing too quickly also led to disastrous premature attempts to privatize state-owned enterprises in Russia (02S5). Jobs offered by multinational corporations in developing nations often do little by way of promoting technology transfer, and focus on benefiting from local (subsistence-level) wage scales and effectively infinite pools of subsistence-level labor. China is now allegedly pirating technologies found in local factories of multinational corporations to promote technology transfers. Clearly the prices that have been paid by developing nations to gain jobs producing for global markets were huge. Meanwhile, a clear statement that identifies any large-scale benefits in physical terms remains elusive.

Milanovic (02M1) and Weisbrot et al (01W1) noted that the globalization of the 1980s and beyond has been far less successful in terms of overall growth and income convergence between poor and rich countries than the preceding two decades. (Comparison with the previous three decades would show an even greater worsening.) The 1980s and 1990s also saw marked worldwide decreases in the rates of improvement of a broad range of social welfare indicators relative to the 1960s and 1970s when globalization was a far less important factor. Indicators examined by Weisbrot et al (01W1), based largely on World Bank data, include total life expectancy, mortality (infant-, child- and adult), public spending on education, literacy rates, and school enrollments (primary, secondary and tertiary) (See Table (4D-1)). Some might suggest that this degradation reflects the effects of stiffening requirements for access to foreign credit by the International Monetary Fund (IMF) and the World Bank. Examples of these requirements include contractory monetary policies (high interest rates and tight credit), public spending cuts, privatization of public enterprises, increasing foreign reserve requirements, "user fees" for primary education and health care, and elimination of government subsidies (01W1). All this is taking place when many poor and medium-income countries have been facing historically unprecedented levels of foreign debt and debt service. It might be argued that the same social indicators also characterize developed nations where access to foreign credit is usually immaterial. However citizens of these developed nations face massive increases in competition from subsistence-level labor in developing nations.

Milanovic (02M1) notes that during the period between the end of WWII and the 1980s, national capitalisms became "civilized". This bought about unemployment benefits and pensions, paid vacations, 40-hour work-weeks, guaranteed- and free education, health care for all, union protection of workers' rights - and the largest rate of economic growth in history. During the 1980s to the present, globalization started to change all that. Benefits characteristic of the 1960s and 1970s began to be eaten away in both the developed world (Section (3-A)) and the developing world (01W1) (Table (4D-1)). "Wild global capitalism with unbridled competition and exploitation" is again replacing "civilized" capitalism and taking on the same characteristic of globalization that it had in the mid-19th century. Globalization's rules are once again being stacked heavily and needlessly in favor of multinational corporate interests with each new trade agreement. For example,

Chapter 9 examines these issues. Proponents of today's globalization have tended to defend globalization in terms of altruistic, economy-wide, society-wide, worldwide long-term benefits. The above list of globalization's rules would seem to make markets no more "free" than before globalization; the subsidies involved in violation of the basic philosophy, spirit and intent of globalization are certainly no less numerous. They are just stacked in favor of a single beneficiary -multinational corporations.

It would seem that there is no more altruism, or breadth to the pool of beneficiaries, motivating globalization rules today than in the globalization of the mid-19th century.

One opponent of globalization, Patrick J. Buchanan, has also provided some historical insights on free trade issues. The US became a free-trade nation after adoption of the Kennedy Round of tariff reductions in 1967, phased in over 5 years. Prior to eliminating these tariffs, the US had run trade surpluses for 74 consecutive years. Despite US trade surpluses, the Smoot-Hawley tariffs were instituted (by a Republican-led government) 8 months after the stock market crash of 1929. Some have contended that these tariffs caused the Great Depression. Buchanan disputes this. He notes that imports in 1930 were 4% of GDP, and 2/3 of that came in free. Thus Smoots-Hawley represented a marginal tax hike of 1.3% on GDP - hardly a likely source of a 46% contraction of the US economy, 25% unemployment, and a wipeout of 85% of stock values (00B1). Buchanan also notes the following. All four presidents on Mt. Rushmore were protectionists. The greatest era of industrial expansion in America, when US workers saw the greatest rise in their standard of living, was during 1860-1914 when America protected her industries behind a tariff wall. During that half-century, US exports rose 700%, while imports rose only 500% (94B1). By 1914 US workers were earning 50% more than the English and more than twice what Germans and French made. No nation has ever risen to preeminence through free trade (94B1). Britain before 1848, America and Germany from 1865-1914, Japan from 1950 on all practiced protectionism (94B1). Since 1973 the US has run a trade deficit almost every year. The real (inflation-adjusted) wages of American workers have declined 14% since 1970, despite steady increases in worker productivity (98K1).

In the past, Americans competed in world trade on the basis of superior technology, rather than lower production costs. Today's competition is largely among technological equals whose competition is based on production costs, rather than technology (87T1). The reason for this is the high mobility of technology, information and capital.

Part [1B3]~ 21st Century ~

One commentary (91H1) in the early 1990s noted that, since 1945, the global market economy effectively included 800 million people in 25 industrialized nations (Canada, Japan, Australia, New Zealand, South Africa, and countries in Western Europe), plus 400 million people living in less developed "satellite" economies with large export sectors. That commentary projected that the population within the global market economy would quadruple by the early 2000s, with nearly all the added 4000 million people now living in developing-world poverty. Nearly three billion people live in rural areas of developing countries (03D1). The World Bank also predicted (Pittsburgh Post Gazette (6/30/95)) that by 2000, more than 90% of the world's labor force would be working in countries with strong links to the global economy. These projections turned out to be off. In the early 2000s the total population within the global market economy is probably on the order of 2000 million, with 4000 million still waiting in the wings. About 1000 million of these are in China where the remaining 250 million Chinese are now within the global economy. The 1000 million Chinese outside the global economy are considered by some to be "suddenly available for use with capital", along with 500 million people of the former Soviet Union (93Z2). The timing of these predictions may have been off, but probably not the inevitability.

Today's globalization is occurring during a time of rapid and major changes in developing nations and their largely subsistence-level economies. Three simultaneous processes are driving the three billion people still on the land in Asia, Africa, and Latin America into teeming slums ringing developing world cities (94B3) and from there into the "informal" economy (08S1).

The net result of all this is an essentially infinite supply of unskilled labor seeking jobs paying subsistence-level wages. It is unlikely then that labor prices in developing nations could ever increase much above subsistence levels. Absorbing even a small fraction of this ever-expanding pool of surplus labor into the global economy would produce huge, destabilizing and ever-increasing trade deficits in developed nations. The number people living in urban slums worldwide is forecasted to double to 2 billion in less than 30 years - almost entirely in the developing world (03U2). The UN contends that the number of people living in urban slums is expected to triple to 3 billion by 2050 as a result of growing poverty and urbanization (Statement by the head of the UN's housing agency Habitat, 4/4/05, Al-Jazeerah/ Agence France-Presse (4/4/05) ). In some developing country urban areas, slums are even now so pervasive that the rich must segregate themselves behind gated enclaves (03U2).

Even though China limits migration from rural areas to urban areas involved in export industries, millions migrate to these areas annually. The registered "floating" population in China's Guangdong province has reached 21 million. Some 90% are looking for work in the Pearl River Delta. About 7.7 million migrant workers reside just across the border from Hong Kong, while 5 million live in neighboring Donghuan, with 3 million in Guangzhou and 2.1 million in Foshan. The four cities form the backbone of China's textile and light industrial base. Migrant workers come from all parts of China. Guangdong has been the destination of 10 million workers annually since 1993. In Guangdong the average age of a migrant worker is 25. Guangdong is known for some of China's worst labor abuses and sweatshops where workers toil long hours under harsh conditions (03U3). These and related problems are analyzed in Chapters 5-7. The gradients in wealth in China between the coastal and inland provinces and between rural and urban areas are skyrocketing to the point where they could have disastrous consequences in the event of a political transition (06M3). In India, inequities between western Indian states and eastern India are also skyrocketing (06M3). One result has been a Maoist insurgency in eastern India that is extending southward along the Indian coast and northward to Nepal. That insurgency is evolving into a civil war (08S6).

Part [1B4]~ Applying the Theoretical Basis of Free Trade to 21st Century Globalization ~

As noted earlier, the first theoretical case for "free trade" was made in the early 1800s by British economist David Ricardo who developed his principle of "comparative advantage." The argument was that the interests of overall economic welfare would be best served by each nation specializing in what it does best, and trading with others for other needs (04S1). For example, Canada would be better off buying bananas from Honduras than growing its own bananas in a vast expanse of Canadian greenhouses and imposing tariffs on bananas imported from Honduras. Ricardo's theory was apparently ignored during the globalization of the mid-to-late 19th century, but it is being taken to heart during the current (post-WWII) globalization.

Ricardo's principle probably made sense in environments characterized by the relatively low mobilities of the overwhelming bulk of Ricardo's "factors of production" typical of the late 1800s where there were large numbers of "comparative advantages" in evidence. But as mobilities increase by orders of magnitude across an ever-widening spectrum of "factors of production," nearly all "comparative advantages" (other than those dependent on low-mobility items like climate, soils, and supplies of cheap labor) tend to vanish and become harder to identify. Ricardo's theory is now in the process of becoming increasingly moot. For example, one might note the "comparative advantage" that was once provided to Japan by its natural supply rare earths needed to produce lens-quality glass. But today, the multinational owners of these rare earths can quickly and cheaply transport them anywhere -probably to where labor far cheaper than Japanese labor (the world's highest-paid labor) can do the glass alloying, lens grinding, and optical systems construction. The Germans invested large sums of money into developing the world's best ovens for food preparation. Today the multinational owners of this sophisticated technology can quickly and cheaply transport it (or the financial capital needed to build it) to any desired part of the globe -probably to where labor far cheaper than German labor (among the highest paid in the world) can build and market these ovens.

How about the "comparative advantages" provided by the only marginally mobile "factor of production" otherwise known as cheap labor? The problem with this factor of production is that it is available in great overabundance in about 80% of the world. Cheap labor makes up for its marginal mobility by its already broad dispersion throughout the globe. China did very well by investing lots of resources into education and building port facilities and other transportation infrastructure to compliment its essentially infinite supplies of cheap labor. But this strategy can be replicated almost anywhere there are adequate supplies of financial capital. Most developing world nations are desperately short on financial capital due the demand on capital needed to create the infrastructure demanded by population growth. But fertility rates are plummeting almost everywhere, meaning that China will ultimately face a virtually unlimited number of competitors - and a customer base that is increasingly wracked by massive, destabilizing trade deficits.

A rapidly shrinking supply of "comparative advantages" is not the only problem with trying to apply Ricardo's theory to a world of exploding mobilities of just about every known "factor of production." There are far more fundamental and serious problems that can best be seen by examining some alleged "comparative advantages" a bit more carefully. Western Europe has the world's best system of agriculture. It guards diligently against soil erosion and keeps its soil chemistry in good shape by applying lots of organic matter (manure) to counteract the tendency of large amounts of chemical fertilizers to convert productive temperate soils into low-fertility soils more suggestive of tropical soils by reducing organic matter contents. All this costs money, but in the long run it pays off. Most civilizations last only a few centuries before their soils are so degraded by either erosion or salt buildup that the civilizations collapse. This probably will not happen to Western Europe providing that populations can be kept in check. Ricardo's theory would suggest that, because agriculture is more expensive in Western Europe than elsewhere, Western Europeans ought to convert their fields to factories, and buy their food from somewhere else where agriculture is cheaper (and less sustainable). The utter stupidity or this seemingly logical conclusion ought to be obvious to all. Western Europeans are smart, so they make up for their higher-cost agriculture by subsidizing agricultural exports and imposing tariffs on agricultural imports. The IMF, the World Bank, and the WTO are not as smart, so they constantly regale against these "anti-globalization" measures. Fortunately for mankind, Western Europeans have been able to resist this lack of forethought. It is examples like these that are the origins of often-heard characterizations of globalization as a "race to the bottom."

Later in this document information is presented that support the contention that the IMF, World Bank and the WTO contributed to making the agricultural systems of Ethiopia and India dysfunctional, causing massive and needless hardships and deaths by starvation. Those same agencies pressured heavily indebted developing nations to adopt policies that needlessly produced "informal" economies in which hundreds of millions of people wound up in situations where their day-to-day survival is amazing. The likelihood that these heavily indebted nations will ever repay their external loans was reduced, not increased, as these agencies had expected. Given this background, it is not surprising then that the ill-conceived ideology of these agencies would attempt to push Western Europe into policies that would make its agriculture dysfunctional and non-sustainable also.

SECTION (1-C)~ CURRENT STATUS OF THE GLOBALIZATION PROCESS ~
[1C1]~Scale and Growth of Globalization-Related Economic Parameters,
[1C2]~Globalization of Water Supplies,
[1C3]~Global Competitiveness of US Food- and Fiber Producers

Part [1C1]~ Scale and Growth of Globalization-Related Economic Parameters ~

Some figures below give insight as to the scale and growth rate of some of the key economic parameters defining the globalization process.

Table (1C-1) ~ World Exports plus Imports (trillions of US dollars) (International Monetary Fund data except for 1992 (95W1)) (from a plot)

Year

1950

1955

1960

1965

1970

1975

1980

1985

1989

1992

Amount

0.1

0.2

0.25

0.4

0.6

1.7

3.9

3.8

5.9

7.5

For perspective, global GDP in 1997 was $25 trillion (00W1).


Table (1C-2) ~ Market Share of US High-Tech Industries
(in percent) (Council of Competitiveness data) (Wall Street Journal (1/28/91))

Year

1980

1988

Fiber Optics

73

42

Semiconductors

60

36

Supercomputers

100

76

DRAMS

56

20

Machine Tools

18

7

Table (1C-3) ~ World Share of high-tech exports (Sources: National Science Foundation and the American Association for the Advancement of Science). (Emerging Asian includes China, South Korea, Taiwan, Singapore, Hong Kong, and India.)

Region\ Year

1980

2001

U.S.

31%

18%

E.U.

43%

34%

Japan

15%

10%

Emerging Asian

~7%

25%

Other

~4%

13%

Total

100%

100%

Table (1C-4) ~ Percent of Imports into the US from Low-Wage Countries (04S4)
(Data for 2011 are projections)

Category

2001

2011

Leather Goods

61

87

Apparel

42

67

Misc.(e.g. toys, Jewelry)

43

65

Furniture

33

57

Plastics and Rubber Products

30

42

Stone and Concrete Products

22

36

Textiles

22

32

Printing

18

31

Fabricated metals

17

30

Electronics

18

28

All Manufacturing

15

24

Source: "Facing the Dragon: Prospects for US Manufacturing in the Coming Decade"

Table (1C-5)~ US Annual Imports and Exports ~
(trillions of US dollars) (US Department of Commerce data)

Year

1992

1994

1996

1998

2000

2001

2005

Imports

0.65

0.80

0.95

1.10

1.43

1.35

2.00

Exports

0.61

0.70

0.85

0.93

1.05

1.00

1.27

Table (1C-6)~ Private capital flows to emerging market economies ~
($billions) (Wall Street Journal (12/9/02)) (Source: Institute of International Finance) (from a chart)

Year

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Amount

5

11

13

16

40

70

115

199

185

225

Year

1996

1997

1998

2000

2001

Amount

330

260

145

190

120

(1997 was the year of the economic meltdown in Southeast Asia that produced rapid withdrawals of foreign capital and extreme economic hardship.)

Table (1C-7)~ U.S. Trade Deficit in Goods and Services ~
(
from charts) (Wall Street Journal (3/2/99), (3/11/04) and others) (US Commerce Department data)

Year

1992

1994

1996

1998

1999

2000

2001

2002

2003

2005

2006

$Billions

40

100

105

165

260

379

358

435

490

726

764

% of GDP

-

-

-

-

-

-

-

-

-

5.8

-

Table (1C-8)~ U.S. Current Accounts Deficit *# (billions of $US and % of GDP (from a chart) (US Commerce Department data) (Wall Street Journal (4/22/02) and (3/17/05))

Year

1991

1993

1995

1997

1999

2000

2001

2004

$Billions

-10

80

120

140

320

*445

410

666

Percent

0.0

1.0

1.5

1.6

4.5

-

4.2

6.3

* Pittsburgh Post Gazette (12/13/01)

*# Trade in goods and services + investment flows + foreign aid.

Table (1C-9)~ Regional distribution of FDI inflows and outflows (billion US$) (03S2) ~

Region /Nation

FDI inflows

FDI outflows

1989 -1994

2000

1989-1994

2000

Developed Countries

137.1

1005.2

203.2

1046.3

- - EU

76.6

617.3

105.2

772.9

- - Japan

1.0

15.8

9.0

32.9

- - United States

42.5

8.2

49.0

139.3

- - Other

17.0

363.9

40.0

101.2

Developing Countries

59.6

240.2

24.9

99.5

- - Africa

4.0

8.2

0.9

0.7

- - Latin America/ Caribbean

17.5

86.2

3.7

13.4

- - Asia

37.9

143.8

20.3

85.3

- - Other

0.2

2.0

0.0

0.1

- - Central/ Eastern Europe

3.4

25.4

0.1

4.0

World

200.1

1270.8

228.3

1149.9

UN, Promoting linkages. World Investment Report New York, Geneva (2001)

 

Part [1C2]~ Privatization of the World's Water Supplies and Other Public Utilities ~
NOTE: This document is found elsewhere on this web site. Find the link to it in the home page of this web site.

Part [1C3]~ Global Competitiveness of US Food- and Natural Fiber Producers ~
One occasionally hears that the US has a highly mechanized, very efficient system of agriculture that produces massive surpluses in agricultural commodities. Also, the federal government heavily subsidizes US agriculture and US agricultural exports. As a result, the US is commonly believed to be able to counterbalance its huge trade deficits in manufactured goods by trade surpluses in agricultural commodities. That may have been partially true once, but no more. In 2004 the US ran a trade deficit in agricultural commodities as well - for the first time in decades. This leaves only the US trade surplus in services to counteract trade deficits in both manufactured goods and agricultural commodities. Of course not all food and natural fiber is part of agriculture, but no matter. The US has also run trade deficits in forest products since 1914 (76B1), and in fishery products for many years even though the US government heavily subsidizes both commodities (07S6) (07S7). For example, the US Forest Service sells huge amounts of timber from Alaska's Tongass National Forest at below-cost prices, in essence paying Japan to take these massive trees off our hands (07S6). All this would be easier to understand had the US lost WWII to Japan. The US Forest Service has lost money on its timber sales every year since it was founded early in the 20th century.

All this non-competitiveness is in spite of the fact that US agricultural labor is already a pretty wretched lot, being largely exempt from minimum-wage laws. The problem is that the developing world easily undercuts even these US agricultural labor costs. Agricultural labor costs in the developing world are probably a good bit less than 40 cents/ hour, typical wages of manufacturing labor. Also there are an estimated 27 million slaves in the world (05A2). UN estimates give 12 million people worldwide being forced to work against their will in a $9.5 billion a year industry ("Slavery Alive and Well," CNN-Anderson Cooper 360 Degrees (2/16/07).) The fraction of those 12-27 million slaves that is engaged in agriculture for global trade is not known but it is probably a large fraction. These figures do not count the 132 million de facto slaves -- children 5-14 years of age who are forced to work agricultural lands under often unhealthy and hazardous conditions while being deprived of an education (UNFAO data of June, 2007). Slave-produced agricultural commodities keep prices low in the developing world. Slaves also help to keep labor prices near subsistence level in the developing world. Both effects make agricultural products produced in the developing world more competitive in the global marketplace. The developed world counters these effects by granting huge subsidies to developed world exporters of agricultural products. The absurdity of considering the global market for agricultural commodities as a "free market" should, by now, be clear to everyone.

SECTION (1-D) ~ OUR BI-POLAR WORLD ~ THE CONTEXT OF GLOBALIZATION ~

Today's world is perhaps the most bi-polar world that globalization has ever occurred in. Standards of living in the developed world are roughly a factor of ten higher than those in the developing world (Table (1A-1) ). Previous globalizations have also taken place in bipolar worlds. Contrary to what would be expected in theory, the degree of bipolarity never fell significantly during the 19th century globalization process. Some of the "rules" of 19th century globalization (See Section (1-B) [1B1]) can explain why. Any globalization process occurring in a mono-polar world would have been barely noticeable, and probably would not have been controversial. It is the element of extreme bi-polarity that causes the fear, dread, and controversy over globalization.

Because of the extremely bipolar context of modern-day globalization, it becomes important to distinguish three types of globalization processes. This is because the characteristics of these three types of globalization processes are so extremely different from each other. Giving one name to all types of globalization processes would only result in confusion. This document uses the following terminology.
Type A Globalization refers to the increasingly rapid growth of the rate of international movements of all elements of economic activity* completely within the developed world.
Type B Globalization refers to the increasingly rapid growth of the rate of international movements of all elements of economic activity* between the developed world and the developing world.
Type C Globalization refers to the increasingly rapid growth of the rate of international movements of all elements of economic activity* completely within the developing world.
* Goods, services, capital, technology, information, entrepreneurship and labor content (jobs)

When the term "globalization" is used in this document without specifying type, it pertains to all types of globalization or to globalization in general.

Benign Globalization: Types A and C globalization tend to be benign and non-controversial. If Type B globalization did not exist, and if Types A and C globalization processes were allowed to run their courses to states of complete convergence, the changes taking place during the convergence process would be minimal. Minor changes would occur in the composition of economic activity, and minor changes in prices and wages within any given nation. There would be little need for price supports, tariffs, and export subsidies since producers on both sides of each transaction would have similar characteristics, and would be operating in similar environments, so it would be easy to negotiate an end to these restraints on trade in trade agreement negotiations.

Controversial Globalization: Type B globalization is the source of all the controversies. It involves convergence processes that offer the potential for such drastic changes as to risk extreme social, political and economic instabilities and upheavals (Chapters 2 and 3). Developing nations suffer from such extreme shortages of financial capital and hence human capital that about all they have to offer international commerce is subsistence-level, unskilled labor. The small, but growing, amounts of human capital that they do have, however, are sufficient to cause large-scale (and increasing levels of) outsourcing of even skilled jobs from developed nations. Developing nations' extreme shortages of financial capital are not consequences of readily correctible errors such as "bad government" or "bad leadership" (08S5). Instead they result from a combination of:

All of the above offers a bizarre mix of lucrative opportunities and nightmare scenarios to the developed world with its abundance of financial capital and hence human capital, technology, information, entrepreneurship, and relatively high-wage labor. All these are, in large part, consequences of a mix of low population growth rates and good quality agricultural resources. The word "Convergence" thus implies countless opportunities for financial growth to those who offer the use of financial capital to the GDP. But on the other hand "convergence" implies nightmare scenarios of 90% reductions in wages and benefits to those who provide labor and human capital to the GDP-thus the controversy. There would be even more controversy if the glib, often-painted visions of the point of convergence being at developed-world living standards were to be seriously examined. A brief introduction to this neglected examination is found in Chapter 6 where it is shown that the capacities of global resources to sustainably support such cornucopian visions are not even remotely possible. There would be less controversy if the rapidly expanding problems of current account deficits in developed nations were to be taken seriously, and if the risks of serious social, economic and political meltdowns inherent in severe reductions in living standards could be considered seriously (Chapter 3).

Go to the Table of Contents of this entire document (top of Chapter 1) ~
Go to top of Chapter 2 ~ Does Globalization Produce Convergence? ~
Go to top of Chapter 3 ~ The Convergence Process ~ (top of the second file of this document)
Go to top of Chapter 4 ~ Effects of, and Responses to, Convergence ~
Go to top of Chapter 5 ~ Convergence - Financial Capital Constraints ~ (top of the third file of this document)
Go to top of Chapter 6 ~ Convergence - Natural Capital Constraints ~
Go to top of Chapter 7 ~ The Convergence Point ~
Go to top of Chapter 8 ~ Strategies for Living with Convergence ~
Go to top of Chapter 9 ~ Politics of Globalization - déjà vu ~
Go to Chapter 10 ~ References ~ (in a separate document)
Go to Appendix B ~ Driving Forces for Globalization ~
Go to the home page of this web site ~

CHAPTER 2 ~ DOES GLOBALIZATION PRODUCE CONVERGENCE? ~

(2-A)~ Can Non-mobile Factors Prevent Convergence? ~ [2A1]~Human capital, [2A2]~Labor Productivity, [2A3]~Consumer, [2A4]~Tariffs, [2A5]~Other Mobility Issues ~
(2-B)~ So is there a Faustian Bargain?
~

The basic process of economic globalization is operating under the following conditions:

Under these conditions, it is becoming increasingly difficult to deny that labor prices, too, must converge on globally constant values, and with increasing rapidity. As noted in Chapter 1, defenders of free trade agreements use one of two basic arguments to fend off fears of labor price convergence:

  1. Non-mobile factors (e.g. "labor productivities" or "human capital") insure that labor prices in the developed- and developing worlds do not converge.
  2. Type B globalization will cause labor prices in the developing and developed worlds to converge toward those in the developed world.

Avoiding the Faustian bargain alluded to in Chapter 1 depends on one of these arguments being correct. Section (2-A) takes up non-mobile factors (Argument 1). Chapters 4-7 address Argument 2.

SECTION (2-A) ~ CAN NON-MOBILE FACTORS PREVENT CONVERGENCE? ~ [2A1]~Human Capital, [2A2]~Labor Productivity, [2A3]~Consumer Mobility, [2A4]~Tariffs, [2A5]~Other Mobility Issues

Part [2A1]~ Human Capital ~

The issue of human capital is an important determinant of world trade patterns. Further, its importance has been increasing dramatically over the past four decades. A number of studies of the dependence of inward foreign direct investment (FDI) on measures of human capital resources during the 1960s and 1970s found no dependence. (Parameters like literacy, school enrollment and the availability of technical and professional workers were used as proxies for level of human capital.). This all changed in the 1980s and 1990s. Then, numerous studies showed significant effects of human capital levels and growth on rates of inward FDI. The reasons for this become clear when one examines the changes in character of world trade over time. In the 1960s and 1970s, world trade concentrated on primary goods and natural-resource-based manufacturing, so issues like natural resource availability and cheap, unskilled labor supplies determined trade patterns. In the 1980s and beyond, the trend in world trade was strongly in the direction of high technology manufacturing and information- and communications technology - areas where the issue of human capital played a far stronger role in defining world trade patterns. All this might sound good for the developed world, but it turns out that the human capital gap has become inadequate to protect the developed world and its labor from huge trade deficits and growing job outflow. Further, the human-capital gap is shrinking rapidly as developing nations (both their governments and their people) increasingly recognize the economic importance of human capital and devote more financial resources to it. This is examined below. Ref. (03M2) offers a comprehensive analysis of the above-mentioned trends and issues involving human capital.

Defenders of trade agreements of the past decade argue that developed world workers are more educated and skilled than their counterparts in the developing world. Therefore, at least the more educated, highly skilled workers in the developed world have little to fear from foreign competition. Evidence for this is seen in US wage trends in recent decades. Real wages and benefits of better-educated US workers have been growing in the 1980s and 1990s (though more slowly than in the previous few decades), while real wages and benefits of less educated workers have been shrinking (93Z2). [Note: 75% of Americans lack a bachelor's degree (00M1).] But this observation appears to be an artifact of a time lag in skill-development rates of developing world workers. Evidence indicates that even the better-educated workers in the developed world are coming under increasing pressure from their counterparts in the developing world (Section (3-A)). Singapore and five of its neighboring Asian nations beat the US in a recent math assessment test of eighth graders internationally (04H3). This suggests that the time-lag benefit that technically educated American workers enjoy is likely to be shorter-lived than many would like the American public to believe.

Further evidence on this point comes from a recent survey of more than 200 multinational corporations on their research center decisions (06L1). About 38% said they planned to "change substantially" the worldwide distribution of their research and development work over the next three years, with China and India attracting the greatest increase in R&D projects. These 200+ multi-nationals represented 15 industries and were from the US and Western Europe. There was no statistically significant difference between the decisions of the US and Western European countries. The number of companies in the survey that said they planned to decrease research and development employment in the US and Western Europe exceeded the number of companies that planned to increase employment there (06L1).

Part of the reason comes from trends in average years of schooling in the developing world (Table (2A-1) While the rates of change in these trends have slowed during globalization (1980 - 2000) relative to pre-globalization (1960-1980), they are still impressive.

Table (2A-1)~ Trends in Average Years of Schooling in Developing Nations (01C2)

Region

1980

1990

2000

East Asia and Pacific

4.3

5.4

6.4

South Asia

2.6

3.1

4.3

Latin America and the Caribbean

5.3

6.7

7.6

Middle East and North Africa

2.7

4.3

5.9

Sub-Saharan Africa

2.1

3.0

3.9

By contrast, such trends in the developed world have largely stagnated. If one examined trends for the top 20th percentile of years of schooling in the developing world (enough people to replace every developed world high school graduate holding an internationally mobile job) the difference between the developed world average and the developing world top 20th percentile would be far smaller than suggested above.

India's software industry provides further evidence of the shrinking human-capital gap between the developed- and developing worlds (Table (2A-2)).

Table (2A-2)~ India's Software Exports (in millions of dollars) (from a graph) (data from India's National Association of Software and Service Companies) (Marcus W. Brauchli, Wall Street Journal (1/6/93))

Year

1987

1988

1989

1990

1991

1992

1993*

Exports

20

25

35

60

85

150

225

* Estimate

Note the doubling time - about 1.5 years - when extrapolating the trend in Table (2A-2) to the present. India has almost 1700 engineering colleges, technical institutes and polytechnic schools, giving India the world's second-largest bank of English-speaking technicians in the world (94C1). Indian software engineers make about a third of what their developed-world counterparts make. But in India, this is a princely sum. (India's middle class typically makes $1200/ year (Appendix B).) Software salaries in India are less than 25% of US levels, and there is pressure to maintain or widen that gap because Bangladesh, Pakistan and China are pressing India on the low end to get a piece of the software business (03D2).

In 2003, US multinationals employed 344,000 workers in China, up from 252,000 in 2000. They employed 131,000 workers in India, up 71,000 from 2000. Combined, India and China amounted to 1.6% of total employment of US multinationals. By way of perspective however, Canada was home to more than 3 times as many workers for US multinationals as China. The UK was home to about 9 times as many workers for US multinationals as India. For each (US multinational) job in low- or mid-wage countries in 2003, US (multinational) companies employed more than 10 workers in the US (05H1). 74% of all output by (US) multinationals was produced in the US in 2003 (down from 78% in 2000). In 1977, (US) multinationals produced 75% of their total output at home (05H1). Manufacturing employment fell at US plants and their foreign affiliates in 2003. This suggests that increased use of technology (improved productivity) and economic cycles also influence the manufacturing employment picture (05H1).

US professionals are also starting to see job opportunities vanish as employers look for engineers and programmers in Ireland, Russia, Malaysia and Singapore where there are surpluses of well-educated, low-paid professionals (93Z2). A series of articles (93Z2) argues that global competition is transferring both high- and low-paying jobs overseas. Surveys show that US companies of all sizes are relocating a greater number and a greater range of service jobs to foreign nations. The positions once limited to call centers and other low-level processing work, now includes stock analysis, accounting, tax returns and insurance-claim processing (03S4). A number of mass-media articles have appeared about US software engineers moving to software jobs in South Dakota - at a 50% cut in pay. Computer programmers in India now routinely perform high-skilled software development while Indian engineers design microchips, jobs previously limited to higher-paid workers in more advanced economies (03E1) (04K3).

Trends in awarding of college degrees (Table (2A-3)) offer evidence of the increasing ability of workers in nations where wage scales are well below those in the US to handle highly technical work. In 2002, 60,000 engineers graduated from U.S. colleges. China and India graduated about 300,000 engineers (04H3). Myanmar (Burma) has 156 universities (2004) compared with 32 in 1988 and women enjoy full equality ("Myanmar's Population Hits 53 Million", Xinhua General News Service, 7/13/04.).

Table (2A-3) ~ College Degrees Awarded in Trade-related Fields (93Z1):

Year

1980

1990

Singapore

-

-

Engineering

2030

5327

Science

285

1278

Business

170

533

Ireland

(1981)

(1991)

Engineering

591

1142

Science

919

1732

Business

535

1470

Table (2A-4) ~ Undergraduate Degrees in Engineering Granted Annually (04C1): (Sources: U.S. Census Bureau; NASSCOM)

China

195,354

India

129,000

Japan

103,440

Russia

82,409

U.S.

60,914

South Korea

45,145

American professional now increasingly face the same job erosion from global competition as less-skilled workers. US companies are increasingly hiring highly skilled workers in Asia, the former Soviet bloc and Europe to perform jobs once reserved for American professionals (Table (2A-5)).

Economists and elected officials in the US are frequently heard arguing that all the US needs is a robust retraining effort for laid-off workers. It is becoming increasingly apparent that this is not workable since almost the entire range of "knowledge jobs" can now be done overseas, and whatever gap remains is shrinking rapidly. This non-workability is even clearer for jobs at lower skill levels, e.g. manufacturing. Another commonly heard recommendation is that of offering tax incentives to companies that keep American jobs at home. The enormous wage differentials driving jobs offshore and the impossibility of distinguishing real threats to move offshore from empty (subsidy-seeking) threats would make the cost of such tax incentives prohibitive.

Table (2A-5)~ Number of Applications to bring Foreign Professionals, Defined by the INS as "Specialty Occupations" into the US, in thousands (93Z1).

Year

1988

1989

1990

1991

1992

Number

77

90

100

118

120

China, with its essentially infinite supply of labor, and its cultural high regard for education, is getting into the act. About 37% of China's university graduates in 2000 were engineers, vs. 6% in the US (02W1). Dalian, a port city in northeastern China, has 22 universities and colleges with over 200,000 students. More than half of these students graduate with engineering or science degrees. Those who don't are directed to spend a year studying Japanese or English and computer science (Thomas L. Friedman, "Doing our homework", Pittsburgh Post Gazette (6/25/04)). Only about 20% of China's labor force is presently involved in world trade, but this far larger than a decade ago. Chinese currently working in new global-trade-related factory jobs will likely be investing their savings in professional-level education.

The breakdown of the former Soviet Union (500 million people) and the subsequent economic malaise created huge surpluses of highly skilled technical and managerial people, and this region is growing increasingly active in world trade.

"Human capital" may not be as mobile as the other components of economic activity, but the high mobilities of information, technology, capital, etc. are making it increasingly easy for multinational corporations in the developing world to grow their own "human capital." Developing world export-oriented corporations seem to have no trouble running high tech production facilities. E.g. factories in Dongguan China produced 37% of the world's disk drives and 10% of its computer monitors in 2001 - plus tens of millions of scanners, printers and DVD players (02I2). The high and growing percentage of high-tech products used in developed nations, but imported from developing nations, offers evidence of this. When multi-national corporations want to set up shop in a developing nation, they export their sophisticated business/ management/ policy structure cookie-cutter-fashion to the developing nation, train locals to run it, with little or no need for high-wage, developed world labor. When only one element of economic activity is significantly less mobile than the rest, it becomes easy for high-mobility elements to work around the low-mobility element.

A common misconception is that working in a high tech manufacturing operation requires extensive education and skills. This is certainly true for the research and development people and upper level management. But this is only a very small fraction of high-tech employment. A huge majority of the millions of developing world high tech employees just pull levers, push buttons, solder, read dials, etc., and after only brief periods of employer-provided training. For the developing world, the financial capital invested in this human capital is small - just learning reading, writing, and a modest amount of math. The financial capital needed to create high-level thinking/ decision-making human capital in export-oriented businesses is affordable to the developing world because the required number of such people is such a small fraction of the developing world's population.

The process of international expansion of pools of high-level thinking/ decision-making human capital has been on-going for at least a century. The US physics community can trace its intellectual origins back to a group of US citizens who attended graduate school in German universities many decades ago. The Japanese physics community can trace its intellectual origins to a group of Japanese who went to graduate school in the US some time after their mentors returned from Germany. Today, developed-world grad schools in science, engineering and business are filled with foreign students sent by their governments, their employers (often with funds from foreign investments), or by their upper-class families. About half of graduate students in the physical sciences and engineering in the US come from abroad (03C1). A survey by the National Council for Education Statistics found that more than 50% of the roughly 3000 students earning graduate degrees in economics in the US come from foreign countries. Forty years ago, the figure was above 20%. A 1996 survey of 500 of these students found they came primarily from prominent, well-educated families, and a large number planned to return home eventually to work in government, business or academia (02H2).

The relatively small amount of high-level thinking/ decision-making human capital needed by developing nations, combined with the ever-widening range of sources of financial capital available for conversions to human capital, suggests that the developing world's export-oriented businesses are likely to become increasingly less constrained by a lack of high-level human capital. This, and the student composition of developed world graduate schools, indicates that, within a few decades:

The argument that the developed world has a huge "human capital" advantage seems, in any case, to be obsolete at best. In the 1960s and 1970s, world trade was largely in the areas of primary goods and resource-based manufacturing (03M2). In the 1980s and beyond, the trend has been strongly in the direction of high-technology manufacturing and information- and communication technology (Table (2A-6)). If there were a human-capital gap defending the developed world, the technology trend in trade would be more pronounced in developed world exports than in developing world exports. In fact, Table (2A-6) shows the opposite to be the case.

Table (2A-6) ~ Average Annual Growth Rate of World Exports by Technology Intensity

Technological Intensity

Developed
World

Developing
World

Primary Goods

4.0%

3.0%

Resource-based Manufacturing

6.5%

5.5%

Low-technology Manufacturing

6.5%

11.5%

Medium-technology Manufacturing

7.5%

12.5%

High-Technology Manufacturing

11.0%

19.5%

Information/ Communications Technology

12.5%

21.5%

Source: UNCTAD (2002) World Investment Report 2002, Fig. VI.4, p. 146


Part [2A2]~ "Labor Productivity" ~

Prior to 1980, a close correlation between wages and labor productivity in the US existed for many decades. A portion of this correlation can be seen in Table (2A-7) below. But note that, since around 1980, compensation has been falling increasingly behind productivities. Extrapolating the trend to 2002 would suggest that US wages in 2002 were about 24% behind productivity. Labor productivity in the US rose steadily during 2003-2006, but the median inflation-correct wage declined 2% during that period. Between 2000 and 2005, labor productivity rose 16.6% but median total compensation for workers rose 7.2% (06G2). After a long period in which it seemed that the information revolution (computers, etc.) was having no impact on (labor) productivity, an acceleration of the annual rate of productivity increase began in 1995 and has not been slowed by the post-2000 economic downturn (04K3). Data on trends in the earnings of labor do not appear to show any acceleration during the period between 1995 and the present. Thus the extrapolation noted above showing US wages lagging behind productivity trends by about 24% in 2002 could be a significant under-estimate, i.e. the actual lag could be significantly greater.

Table (2A-7) ~ Output per hour and real compensation per hour in the US non-farm business sector (Data are relative to an index for which 100 represents the situation in 1977.) (Data are from "The Economic Report of the President, 1986".) (87T1)

Year

1960

1965

1970

1975

1977

1979

1981

1983

1985

Output

70.5

83.0

89.5

96.

100.

99.

100.

103.

105.

Compensation

71.0

81.5

90.5

96.

100.

99.

96.

98.

98.

Many proponents of trade agreements argue that there is nothing to fear from low developing world wages, since "labor productivities" there are lower than in the US (96G1). The basic fallacy in this argument is the hidden assumption that "labor productivity" has little or no mobility. In reality, "labor productivity" is largely a misnomer dating back to a bygone era when "labor productivity" was determined mainly by how dedicated, hard-working, well-educated and well-trained labor was. Today, "dedicated" and "hard-working" probably tilt the playing field in favor of developing world labor. These two attributes should be at least partially replaced by attributes like "desperation" and "fear", since developing world workers are so much closer to subsistence-level living standards. Also they have fewer protections in terms of laws, regulations, unions, unemployment benefits, welfare benefits, savings accounts, etc.

"Well-educated" still tilts in favor of developed-world labor, but to decreasing degrees. (See previous section on "human capital".) US students tend to fare poorly in science and math tests relative to much of the developing world. Even poor developing nations, e.g. India and China, are loading up on technical training centers and sending their brightest to developed world colleges and graduate schools. Be careful not to judge the issue by the average levels of education in the developed and developing worlds - just by the number of educated people. The developing world has five times the population of the developed world. Their educated people are going first into businesses exporting to the developed world because customers there consume more, and can afford to pay more.

"Well trained" probably favors no region today. Why should the world's 60,000 multinational corporations train their Indonesian workers any less thoroughly than their Indianapolis workers? The training manuals for each job probably differ only in the language they are printed in. Since workers do not normally pay their training costs, there is no reason why global gradients in training levels should be significant.

Today, "labor productivity" depends, to a large and ever-increasing degree, on the size of the financial capital investment per worker and on technology. These are both highly mobile elements of economic activity. "Labor productivity" is thus becoming increasingly mobile, even though labor itself is highly immobile. Some data and analyses, below, provide further insight.

The obvious disparity between wages and productivity, above, has several explanations. The Mexican government uses armed forces to intimidate (shoot) workers. It also establishes "business associations" to fix wage rates, kept low to attract foreign capital. Hence there is little reason for Mexican wages to correlate with "labor productivities", as trade agreement proponents would suggest (93F1). Most of Mexico's maquiladora workers are young, between 16-25. Their hours are so long that their youth passes without seeing the sun (04M2).

Table (2A-8)~ Productivity, Wages, and Unit Labor Costs relative to the US, total manufacturing, 1990 (96G1) (from a chart)

Country

Productivity

Wages

Unit Labor
Costs*

India

0.05

0.05

1.05

Philippines

0.07

0.08

1.10

Malaysia

0.10

0.10

1.00

Mexico

0.25

0.20

0.70

South Korea

0.50

0.40

0.70

Japan

0.85

1.00

1.15

US

1.00

1.00

1.00

* Unit Labor Cost = Wages/ Productivity.

Table (2A-8) (above) indicates that wages vary, globally, with productivity such that unit labor costs (Column 4) vary far less than wages, globally. The author of the source (96G1) has argued that US workers therefore have little to fear from low developing-world wages. This argument calls for closer analysis. "Labor productivity" is increasingly a function of the financial capital, technology, and information invested in a given job site. All these are mobile quantities. Why then does productivity vary so much on a global scale if virtually everything that determines productivity is mobile? The reason is that "labor productivity" contains an ever-increasing component of capital productivity. Capital productivity costs money - financial capital invested in capital goods, financial capital invested in human capital, plus depreciation costs associated with both capital goods and human capital. It may well be worthwhile to invest large amounts of financial capital to supply highly paid workers with advanced robotic apparatus, computers, etc. But for low-paid workers, such capital investments and their associated capital costs and the associated depreciation costs are less justifiable. Thus productivities of low-paid workers may be low, but the annual financial capital costs and depreciation costs associated with these workers are far lower than the financial capital costs associated with highly paid workers. Thus while "unit labor costs" may be the same for each worker, annual financial capital costs and depreciation costs associated with low-paid workers are far less.

By way of perspective, the average financial capital investment in a job site in the US is roughly $50,000, and the average financial capital investment in the human capital associated with the average job site in the US may be another $50,000. (75% of Americans lack bachelor's degrees (00M1).) If interest rates are 5% and the depreciation rates on both workplace capital equipment and human capital are 5%, there is an annual capital cost of about $10,000 associated with the average job site in the US. In a developing nation, a low-tech approach might be used to produce the same product, and this might involve an annual capital cost of only, say, $3000. The $7,000 difference in capital costs, plus the wage difference, must come out of the increased productivity of the US job site. If this is not the case, the low-tech option may be the best. This should give a pretty good understanding of the utter absurdity of stating simplistically that US workers are more "productive" than workers in developing nations, and therefore need not be concerned about foreign competition.

Do a thought experiment. Consider a US worker earning ten times more than his counterpart in China. But, by virtue of a far large capital investment in the US worker's workplace "unit labor costs" are identical. Assume both work for the same multinational corporation. Now assume that the employer ships a carbon copy of the capital equipment to the Chinese worker so that the capital costs and labor productivities associated with each worker become identical. The only remaining difference then becomes the wages, which vary by a factor of ten. The only reason why the employer would not carry out the above-mentioned capital equipment investment is because profits would be thereby reduced. So if US workers want to assess the magnitude of the threat represented by their Chinese counterparts, they should still consider an amount mathematically equal to the factor-of-ten wage differential. The "amount" just has a new name: "capital-cost differential". Clearly the conclusion of the author of Table (2A-8) is false.

Part [2A3]~ Consumer Mobility ~
Consumer mobilities on a global scale are zero, but this is a special issue. For most economic activity involving manufactured items or services that can be moved by ship, air, truck, or satellite, consumer mobility is irrelevant, because the goods and services move from producer to consumer by mobile means. But some economic activities do not involve transportable manufactured items or services. For these, infrastructure must be built close to the consumer, and many services must be rendered to the consumer on a personal-contact, or close-proximity, basis. In these cases, global-scale consumer mobility is effectively zero. This suggests that globalization might never produce convergence for the entire global economy. One might imagine an eventual steady-state global economy composed of the developing world producing all of the world's transportable goods and services, with multinational corporations providing all the financial capital for facilities in the developing world that produce transportable goods and services for export, and with the developed world exporting some its food and natural resources to the developing world. This is the direction in which the world is headed.

One might believe then that labor prices for occupations like schoolteachers and nurses might never converge on a global scale. There are two problems with this view: (1) the lack of options for dealing with trade deficits and (2) the fungibility of labor. These problems are discussed below.

Trade Deficit Options One result of Type B globalization, so far, has been huge, and rapidly increasing, developed world trade deficits that are becoming so large as to pose significant risks to the developed world (Section (3-B).). This has happened with only a small fraction of the developing world's reserves of subsistence-level labor being drawn into the global economy. There is no reason to expect that these reserves will ever shrink to the point where developing world labor prices will begin to rise above subsistence level. The developed world thus has only one option in the face of rapidly increasing trade deficits, and the risks these pose. Since labor productivities, human capital etc. are controlled entirely or largely by mobile factors, and essentially all other components of economic activity are mobile, developed world labor prices must drop close to developing world levels. Otherwise there is no reason for developed world consumers to be interested in purchasing locally produced, transportable, manufactured goods and services instead of imports. This translates into no reason, other than falling labor prices, why trade deficits should stop rising.

Labor Fungibility Is it really possible for developed-world manufacturing labor to earn $1000/ year while school teachers, nurses etc. earn $50,000/ year?

Table (2A-9)~ Change in payroll employment in the US (May 2001 to May 2003) (03H1)

Jobs that can go overseas

Jobs that cannot (Directly)

Manufacturing

-1,935,000

Education

+212,700

Air Transport

-108,800

Health

+709,400

Part [2A4]~ Tariffs ~

Tariffs, export subsidies and related non-mobile factors have been primary strategies used by nations to "protect" their industries. The numerous trade agreements of recent decades have sought to achieve "free trade" by bargaining to reduce tariffs, export subsidies and related strategies. This does not mean however that tariffs etc. are relicts of a bygone era. Export subsidies, that serve much the same purpose, have the advantage that they can be concealed more easily that tariffs. Also they give a handicap to developed nations which have the wealth needed to provide these subsidies. Below are some key data on current tariffs that will give an idea as to how much further future trade agreements have to go. Data on export subsidies are harder to come by.

Tariffs and Export Subsidies on Manufactured Goods

Tariffs and Export Subsidies on Agricultural Commodities:

All this provides insight for the question of how much protection US labor is getting from US tariffs on manufactured imports (which apparently keep shrinking with each new trade agreement). US tariffs on developing-world manufactured imports (about 5%) are far less than developing world tariffs on imports from the US (about 40%). So US labor has a double burden: its high wages (perhaps 10 times higher than developing-world wages) plus a global tariff structure that imposes a net bias of about 35% against US labor-content in manufactured goods.

Even if developing-world tariffs drop to zero, how much benefit would a 5% US tariff on imports from the developing world protect US labor prices? The labor content of US manufactured goods is about 60% of total production costs (87T1), so a 5% tariff protects 5-8% of labor earnings - a small fraction of the factor-of-ten labor-price differential.

Part [2A5] ~ Other Mobility Issues ~
One flaw in the argument at the bottom of [2] is the hidden assumption that the safety of capital is the same in the US as it is in China. For that analysis to be accurate, the difference between the risks to capital would need to be factored in. However China's eagerness to be actively involved in global trade are forcing it to improve its banking system and its laws regarding foreign investments so as to increase the safety of capital in China to that in the developed world. Safety of capital, like labor productivity, is becoming just another highly mobile component of economic activity. The cost of bribes to developing-world officials can be viewed in the same way.

Reference (96G1) notes that, "Even with the increasing ease of technology transfer and capital mobility, other factors can hold down productivity in poor countries, such as low levels of human capital (e.g. education) and poor public infrastructure and transportation services." Human capital has been discussed above. Poor public infrastructure and transportation services no doubt do influence productivities, but probably minimally. India ships its software to the developed world via satellite, so infrastructure and transportation issues are largely irrelevant. Most other developed nations actively involved in global trade have their factories on or near the coast and good harbors (e.g. China). So what little transportation is involved becomes a minor issue. Also, China's highways may be worse than US highways, but Chinese truck drivers earn far less than US drivers. This probably makes up for any differences in highway quality. In China, container trucks zip along modern superhighways to high-tech ports where cargo is loaded onto ships 24 hours per day (02I2).

Another example of mobility-related misconceptions noted in the mass media is "What counts most in a modern global economy isn't the cost of labor, but the level of organization and automation (93G1)." The misconception here is that level of organization and automation are implicitly assumed to be immobile elements of economic activity. In fact, entrepreneurship ("level of organization") is extremely mobile. The world's 60,000 multinational corporations, with 800,000 foreign affiliates and $15 trillion in annual sales (02F2) (01U4), can replicate portions their organizational structure with cookie-cutter precision and whisk it all over the world. Automation (a mix of technology and capital) is also highly mobile.

One natural resource - water - is highly immobile on a global scale, and this could create problems. However, 70% or more of water consumption in the world is via irrigation (97W1). Manufacturing facilities and urban areas have no difficulty in outbidding irrigation farmers for water resources - in both the marketplace and the political arena. Also, the US is draining its rivers and aquifers about as fast as elsewhere in the world (07S4). So there is little likelihood that the US will ever enjoy a competitive advantage against a water-starved developing world.

SECTION (2-B)~ SO IS THERE A FAUSTIAN BARGAIN?

The analysis above indicates that, today, there are no significant non-mobile components of economic activity that could sustain significant global variations in labor prices. This means that prices of all forms of labor must ultimately converge upon globally constant values. Prices of virtually all non-labor components of economic activity have already done this, or at least are much further advanced toward convergence than labor prices. The rates of convergence of labor prices in this environment seem unlikely to do anything but increase.

This does not lead directly to the conclusion that the "Faustian Bargain" alluded to in Chapter 1 must become a reality. This conclusion also requires a demonstration that labor prices, globally, must converge upon values significantly lower than those now encountered in the developed world. This demonstration is in Chapters 4-7. First, however, some would argue that, if this convergence process is on-going, evidence of it should exist today. This evidence is in Chapter 3. All this should not be taken as fatalism. Granted, globalization and convergence (if anyone can still find any difference between the two terms) are probably impossible to stop. But Chapter 8 suggests strategies for raising the converged global prices of labor to values above the prices found in today's developing world.

Regardless of what the convergence point turns out to be, the issue has massive implications for the future of all mankind. One might presume then that convergence would be the subject of huge studies involving expert economists and government financing. In actuality, the issue has rarely attracted public discourse above the levels of idle conjecture and analyses of limited data.

Go to the Table of Contents of this entire document (top of Chapter 1) ~
Go to top of Chapter 2 ~ Does Globalization Produce Convergence? ~
Go to top of Chapter 3 ~ The Convergence Process ~ (top of the second file of this document)
Go to top of Chapter 4 ~ Effects of, and Responses to, Convergence ~
Go to top of Chapter 5 ~ Convergence - Financial Capital Constraints ~ (top of the third file of this document)
Go to top of Chapter 6 ~ Convergence - Natural Capital Constraints ~
Go to top of Chapter 7 ~ The Convergence Point ~
Go to top of Chapter 8 ~ Strategies for Living with Convergence ~
Go to top of Chapter 9 ~ Politics of Globalization - déjà vu ~
Go to Chapter 10 ~ References ~ (in a separate document)
Go to Appendix B ~ Driving Forces for Globalization ~
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