A Better Approach to Globalization

Research repeatedly demonstrates that globalization delivers prosperity through trade and jobs, new technologies and ideas, cooperation and peace. But many individuals fear open societies, change and competition. Innovative technologies, especially robotics and artificial intelligence, compound the worries and some politicians heighten the anxieties even though resisting globalization actually hampers the competitiveness of their constituents. Koichi Hamada, professor emeritus of economics at Yale University, explains the dilemma: “If political leaders advance globalization, it may worsen the income-distribution problem that in turn triggers public dissatisfaction. The government may react to the dissatisfaction by restricting trade, not only impairing growth but endangering democracy as a result. On the other hand, political leaders that slow globalization in order to avoid political consequences may sacrifice long-term objectives such as human rights and worldwide liberty.” He urges world leaders to address inequality and failure to enforce laws ranging from immigration to taxation as well as encourage foreign investments that expose communities to diversity, innovation and new comforts. – YaleGlobal

A Better Approach to Globalization

Idealism and political realism must reach compromise on globalization, or the world can expect less wealth and more war
Koichi Hamada
Thursday, October 4, 2018

Consumers in Hungary examine motorcycles; and abandonedauto plant in Detroit
Winners and losers: Investment in Japanese automobiles and motorcycles is popular in Hungary while a US automobile plant in Detroit is abandoned

NEW HAVEN: Some argue that globalization delivers great benefits to the world, increasing wealth with trade, movement of people and goods, and information sharing. Globalization also contributes to improvement of the welfare of developing nations and brings a diversity of ideas that promote innovation. Along with its economic benefits, globalization improves justice in terms of gender equality and human rights. Globalization indeed works to help keep world peace, and during the post war period, multinational organizations like the United Nations and the World Trade Organization contribute to the trend of international cooperation.

Therefore, those who advocate globalism argue that current problems stem not from globalism but from its critics. In conceiving the world order with open societies, globalism is advocated as an idealistic goal. On the other hand, in the real world, the progress of speedy globalization has created an anti-globalization phobia. Take migration, for example. Migration between the United States and Mexico works towards equalizing wages of workers of identical skills across national borders unless there are some restrictions of movement – one reason that the US government has worked to keep control of the number of migrants across the Mexican border. Under current conditions, wages across the border will not literally equalize. Nevertheless, workers on the US side who enjoy higher wages and a better lifestyle may feel threatened if the barrier to labor movement decreases.

 

Similarly, trade theory tells us that trade of commodities tends to reduce cross-border wage differences, if not as directly as in the case of labor movement. The equalizing tendency itself, and even the accompanying worry, triggers resistance of workers within a richer country. Imagine those workers who came to the United States centuries ago, struggling to settle and thinking their descendants’ lives were secure, and learning that their livelihood could be threatened by new immigrants and trade. Naturally many would want protection.

This trend is reinforced by the technical progress in the United States where automation and robots not only take the jobs of simple skilled workers – but deliver superior performance. Foreign direct investments alone are the least objectionable form of globalization, probably because domestic competitors are already fairly successful in sectors with technical development and well paid.

While people who work for Wall Street or Silicon Valley have enjoyed a rapid increase in wages and salaries, those who work in the so-called “Rust Belt” have had to endure stagnant wages for many years. As economist Jeff Sachs emphasizes, the relative impoverishment of unskilled workers is a root of deep dissatisfaction.

Incidentally, supporters of Donald Trump and former presidential candidate Bernie Sanders, while belonging to different social groups and are under contrasting political influences, may be protesting from similar sentiment – a frustration with the status quo in the labor market. Also in many European countries, for example, Austria, Hungary and Poland, the antipathy toward immigrants has generated support for politicians who campaign against globalization and, unfortunately, against democracy as well. Similar political movements were seen in France and Italy, and the Brexit vote demonstrated British dissatisfaction with open migration policies in the European Union.

Here is the dilemma. Globalization is, in the long run, beneficial to the world in terms of economic gain and the pursuit of international public goods like democracy and human rights. However, globalization hurts a substantial part of a participating nation, at least in the short run. The protests from neglected portions of each country are genuine.

Traditional economists once argued that, since globalization benefits the total population, there should be a combination of the free trade policy and the corrective income redistribution that would to a better state for all citizens. This solution is wishful thinking if not hypocritical. In almost any country, such redistribution policies do not take place because of political objections.

The more serious and unfortunate difficulty is that leaders elected by globalization’s discontents are assuming more authoritarian and suppressive attitudes towards democracy and protection of human rights. For example, the Trump administration responds to the needs of those who lose by globalization, including workers in the nation’s Rust Belt where factories closed due to foreign competition, yet on the other hand, neglects the wellbeing and human rights of immigrant children.

 

Those who criticize the costs of migration and globalization do not properly consider the benefits of globalization in a larger picture. Globalization supported the enhancement of racial equality among American workers. Globalization through the European Economic Community and European Union achieved peace for more than 60 years after World War II. If many countries fall under authoritarian politicians who reject the long-range benefits of globalization for their own political purposes, the world can expect more wars.

To recapitulate the dilemma: If political leaders advance globalization, it may worsen the income-distribution problem that in turn triggers public dissatisfaction. The government may react to the dissatisfaction by restricting trade, not only impairing growth but endangering democracy as a result. On the other hand, political leaders that slow globalization in order to avoid political consequences may sacrifice long-term objectives such as human rights and worldwide liberty.

The political reality is that globalization tends to endanger the people’s support for democratic leaders, and this tendency seems to be hard to rewind. As an economist, I offer these modest considerations:

• Globalization’s challenges stem from the world where inequality is left unaddressed. Thus in developed as well as developing countries, public policy should focus on equality issues. The already proposed Tobin tax on a small portion of Wall Street trade activities would resolve some of the problem. The carbon tax will give firms incentives to clean the environment and may correct the inequality between wealth holders and workers. Thus economists have developed tools to reduce income equality, but the political will is missing.

• Public dissatisfaction varies depending upon the form of globalization, and governments could consider moderating the pace of immigration. In the United States, for example, governments and employers could exercise precise observance of the existing law. Exceptions might include individuals brought to the country while they were children and free from the threat of deportation under the Deferred Action for Childhood Arrivals policy. Protection of human rights should absolutely supersede other objectives of law.

• Likewise, government could moderate globalization of trade while avoiding protectionist tariff policies that could create trade war provoking disastrous retaliation – as happened with the 1930 Smoot Hawley Tariff Act, which exacerbated already high US tariffs. The Trump administration should learn that the current account of trade is determined by the gap between national expenditures and national income and difficult to correct by levying tariffs.

• Public reaction to foreign direct investment is more than positive, and such investment should be encouraged. Incidentally, I have traveled to Nebraska where Japanese investment in trading companies that export farm products was popular and Hungary where Japanese investments in automobiles are highly welcomed. Foreign investments are great ways to expose the world to diversity and innovation.

There is no magic bullet to solve the quandary over globalization. But idealism and political realism must find a way to shake hands with each other, or the world will suffer the consequences of less wealth or even war.

Koichi Hamada is professor emeritus of economics at Yale University and a special adviser to the prime minister of Japan.

© 2018 YaleGlobal and the MacMillan Center

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