Globalization means the increased international economic interdependence and the rapid integration of several emerging economies into global trade and production networks that we have experienced in recent decades. However, it also includes the growing inter nationalization of financial markets and capital movements, a phenomenon which has intensified since the mid-1990s. Globalization brings clear benefits to the economy, but at the same time poses significant challenges.
Globalization has it’s share of positives. First, it leads to trade liberalization and globalization enables an economy to obtain the cheapest products on the world market, and may, in turn, exert downward pressure on domestic prices through lower import prices, thereby increasing the real wealth of the importing economy. Globalization implies welfare gains by having a dampening effect on consumer prices, while allowing producers to substitute cheaper intermediate goods, thereby increasing profit margins or improving their price competitiveness.
Second, globalization has certainly helped to stimulate competition in domestic markets and to increase and diversify trade linkages. In 1995, two-thirds of extra-euro area manufacturing imports came from industrialized, high-cost countries, whereas in 2005 their share had declined to around 50%. The decrease is distributed among the traditional major euro area trade partners (the United Kingdom, Japan, the United States), while the shift towards emerging, low-cost economies is mainly accounted for by increased imports from China and, to a lesser extent, the new EU Member States.
Third, and most importantly, globalization impacts on productivity through trade, capital mobility and the inter nationalization of technology and R&D, which can lead to a reallocation of production processes. Trade increases incentives to specialize in higher- productivity sectors, produce economies of scale and encourages innovation. Inward and outward foreign direct investment implies opportunities to learn and adopt technologies and productivity-enhancing practices from abroad. At the same time, the inter nationalization of R&D supports domestic innovation and technological progress. Immigration may also help to increase the matching efficiency of labour markets.
The positive impact has been especially large for emerging market economies, which have made increasing use of the available foreign knowledge and technology to boost their innovation capacity and labor productivity growth. For instance, over 2004–14, knowledge flows from the technology leaders may have generated, for an average country-sector, about 0.7 percentage point of labor productivity growth per year. This amounts to about 40 percent of the observed average productivity growth over 2004–14. We find that one important factor behind the build-up of innovation capacity in emerging market economies has been their growing participation in global supply chains with multinational companies, though not all firms have benefitted as multinationals sometimes reallocate some innovation activity to other parts of the global value chain.
However, it is also true that globalization presents challenges. In order to reap its potential gains, globalization requires economies to adjust to the reallocation of production and the new competition from emerging markets in certain sectors. The tremendously increased supply of products from emerging markets may induce a reorganization of production in euro area countries. This strengthens the need for occupational mobility and the capacity to also absorb low-skilled labour in new sectors. The restructuring of the economy may lead to an at least temporary decrease in productivity, which would be more protracted the ‘stickier’ the economy and less able to overhaul traditional production structures. This may imply that those countries where the pace of reforms has been slow may find themselves, paradoxically, in a worse position than in the past. Economies with uncompetitive product markets and rigid labour markets not only fail to adjust to technological change, but are also more vulnerable to shocks associated with the globalization process.
It is important to recognize that while trade and international integration tend to increase the overall economic pie, the distribution of the larger pie may be very uneven. In fact, slices for individual groups may shrink. Some workers—particularly those in industries that are less able to compete and whose skills have become less relevant—can be hurt and find it difficult to adjust. This often requires individuals to change industries and to relocate to different regions. So, while trade is almost always a win for a country’s economy, not everyone within that economy will be a winner. This is especially the case where there are no policies to cushion the negative consequences of trade and to facilitate adjustment.
Effects are also country- and industry-specific, and depend on initial endowments and conditions. Low-income workers in emerging markets, for example, may find it more difficult to adapt given weaker safety nets and less financial resources available to deal with adverse economic shocks. The bigger the adjustment process, the more the gains from trade will tend to be eroded.
While the rise in the skill premium from trade liberalization has been well established for both developed and developing countries, determining the aggregate impact of trade on jobs has been more challenging. To date, the evidence has been mixed. We need further research in this area to determine with more confidence a reasonable range of estimates for these employment effects. Although evidence on the extent to which jobs have been lost due to global trade is inconclusive, job losses that are attributed to trade tend to be viewed differently. That is, they are seen as having been “lost to foreigners” and are often viewed as a consequence of the policy decision to liberalize trade in the first place.
Having said that, the challenge of adjusting to open trade is a serious issue that has not received the degree of attention it fully deserves. This may partly reflect the fact that the burden has been borne unequally and spread out over a long time period. It also may reflect the fact that the winners from trade have often tended to have a stronger voice than those who have been the losers.
Research has documented that the effects on individuals of job dislocation—including those resulting from trade—can be significant and long lasting. Older workers tend to suffer larger earnings losses, and may face larger transition costs. Displaced workers may not have the appropriate skills to find good jobs in other areas of the economy, including in growing export sectors. When the affected industry represents a large share of the local economy, the damage is often magnified. In this case, the burden is more widespread because wages across the community are likely to be hit as well. And, this doesn’t begin to capture the full human toll—including the impact on workers who have lost confidence in the future and the poorer health outcomes that occur because of increased stress. For too many individuals in the United States, for instance, the American dream has been put at risk, with parents increasingly pessimistic about whether their children will have the opportunity to do better than they did.
The over-standardization of products through global branding is a common criticism of globalization. For example, the majority of the world’s computers use Microsoft’s Windows operating system. Clearly, standardizing of computer operating systems and platforms creates considerable benefits, but critics argue that this leads to a lack of product diversity, as well as presenting barriers to entry to small, local, producers.Large multinational companies can also suffer from diseconomies of scale, such as difficulties associated with coordinating the activities of subsidiaries based in several countries.The increased power and influence of multinationals is also seen by many as a considerable disadvantage of globalization. For example, large multinational companies can switch their investments between territories in search of the most favourable regulatory regimes. MNCs can operate as local monopsonies of labour, and push wages lower than the free market equilibrium.Critics of globalization also highlight the potential loss of jobs in domestic markets caused by increased, and in some cases, unfair, free trade. This view certainly accounts for the some of the rise in nationalist movements in many developed economies; along with the push for increased protectionism .Globalization can also increase the pace of deindustrialization, which is the slow erosion of an economy’s manufacturing base.
Rather than protectionism, a better policy would be to help domestic workers and companies compete more effectively, rather than compete less. We need additional mechanisms that allow us to more fully capture the benefits from liberalized trade and to more proactively mitigate its costs. Ideally, policy should also better address job losses and income inequality from automation and other technological advances.
How we respond should depend on regional and industry circumstances. These include the nature of trade impacts, the skill sets and location of the workers that have been affected, and the amount of resources that can be mobilized to facilitate adjustment.
Increasing specialization brings real economic benefits, but can also leave workers more exposed to shifts in demand for their services, potentially on short notice. These issues are not going away, especially as emerging market economies take on a larger role in the global economy and automation continues apace. If we are to maintain a more open trade regime, globalization must be socially and politically sustainable. For that to be the case, we have to provide greater support to those who are hurt by trade.
Policies should include more assistance with job retraining, help with job search and mobility, and broader unemployment support. We need to do more research into what measures have been effective in economies around the world, and we should encourage greater experimentation with new approaches. Getting the balance right between providing assistance and making sure that individuals hurt by trade can get back on their feet and achieve their earning potential will be a challenge, and we need a better understanding of what actually works.
More generally, we need to do a better job positioning our workforce to cope with globalization and technological change. This will involve improvements across a range of areas, including not only education and training, but also the business regulatory environment and infrastructure investment that could support greater worker mobility. These measures would also promote higher productivity growth. While the scope and scale of issues differ substantially by country, many of these policy areas may also be relevant in India.
Lastly, there are various measures available in current trade agreements, such as antidumping measures and countervailing duties for dealing with “unfair” trade, as well as escape clauses that provide safeguards for industries that face a sudden surge of imports. Again, the challenge is to ensure that such measures are effective, that they help facilitate rather than retard adjustment, and that they are not abused so as to avoid foreign competition. But, both sanctions and temporary relief have been provided for in global trade rules. We should be willing to use them when their use would lead to more equitable outcomes and would help sustain political support for a more open trade regime.
Free trade is a concept that remains compelling but periodically will be tested by economic change. That is an inescapable fact of life and is a good thing because it requires the economics profession to articulate anew the value of a liberalized world trade regime. While the value from trade is very high, the associated adjustment costs can be significant and will require greater attention if globalization is to work for all of us.
