Globalization and its Effect on Wages and Income Inequality - Research Paper Example

globalization and its effects on the united states Globalization is an international phenomenon with far-reaching consequences in the social, political and economic realms. Economic globalization, namely the spread of neoliberalism and capitalist-inspired consumerism as the dominant engine of economic growth, has both supporters and detractors. The world is becoming more and more interdependent and whether you think globalization is a good or bad thing, it is here to stay. Outsourcing, meaning the subcontracting of employment to other countries, is an increasingly common phenomenon with global ramifications. As the jobs of the first world make their way to the developing regions of the third world, the forces of globalization have had many unintended consequences. The loss of manufacturing jobs in the countries of the world and their movement to the lower paying developing “third world” has restructured the world economy. This brief assignment will explore the globalization phenomenon with an eye to outsourcing and the changes dynamics of the global economic community. We will utilize a case analysis and explore two countries which have embraced free trade and economic growth as a haven for outsourcing. China represents a unique blend of authoritarianism and capitalism leading to sustained and pronounced economic growth in one of the largest – and growing - economies in the world. Mexico represents a controversial source for many American jobs. In addition to a cross-comparative analysis of these outsourcing “source” countries, we will address criticisms of the globalization phenomenon including the rise of protectionism as a response to the flight of jobs overseas (Lee 1996). Outsourcing, Globalization and the World Globalization, as it exists today, rests largely on the shoulders of neoliberal economics and the global entrenchment of capitalism as the dominant economic system in the world. Neo-liberalism, the belief in laissez-faire economics, was best articulated by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States in the 1980s. Outsourcing is an integral component of the globalization phenomenon and a key aspect of the global division of labour. Thomas Friedman, in his immensely popular book The World is Flat (2005), describes outsourcing as an integral component of the worldwide spread of capitalism and the global division of productive labor. According to Friedman, outsourcing is primarily done in response to keep costs low and restructuring ones’ labor force in order to keep production costs at a minimum. Accordingly, while a non-skilled manufacturer in Illinois can expect to earn a minimum of $14 a hour, in a country such as India could earn less than a $1 an hour. Thus, companies who seek to maintain their competitive advantage and keep cost low, ship their productive facilities overseas where costs are significantly lower. There are also important tax advantages to outsourcing jobs overseas and as we shall see in our case analysis of China below, companies can often expect certain tax benefits when utilizing productive labor in the developing world (Friedman 2005; Bendor-Samuel 2005). The International Monetary Fund on Globalization and Job Flight The internationalization of capital and the ensuing global interdependence caused by the forces of the globalization movement have had a variety of broad ramifications for countries of the developed world such as the United States. Japanese cars are ubiquitous on our streets as are Korean cellular phones and produce from the agrarian countries of the Caribbean. In the advanced industrialized countries of the world we have witnessed a wholesale economic shift due to cross-border trade and the growth of transnational organizations who have offices, factories and labor pools around the world. Unskilled work, which came to characterize the automotive industry of the United States in the middle to the twentieth century, has shifted from places like Detroit, Michigan to Asia and there have been numerous social, economic and political ramifications. According to the International Monetary Fund, “there is no doubt that globalization has coincided with higher unemployment among the less skilled and with widening income inequality” (IMF 1997). The growing share of imports to exports helps explain the modern phenomenon of economic globalization and we now turn to some indicators provided by the International Monetary Fund on the repercussions in the developing countries of the world, including the United States, today. Accordingly, In the United States, for example, wages of less-skilled workers have fallen steeply since the late 1970s relative to those of the more skilled. Between 1979 and 1988 the average wage of a college graduate relative to the average wage of a high school graduate rose by 20 percent and the average weekly earnings of males in their forties to average weekly earnings of males in their twenties rose by 25 percent. This growing inequality reverses a trend of previous decades (by some estimates going back as far as the 1910s) toward greater income equality between the more skilled and the less skilled. At the same time, the average real wage in the United States (that is, the average wage adjusted for inflation) has grown only slowly since the early 1970s and the real wage for unskilled workers has actually fallen. It has been estimated that male high school dropouts have suffered a 20 percent decline in real wages since the early 1970s (IMF 1997). With the shift in labor market demand in the United States from less skilled to more skilled workers, income inequality and unemployment have dramatically risen. A decline in demand for unskilled labor in the United States has produced income inequality and lower wages for unskilled workers. The IMF estimates that about 70% of the overall shift in US labor demand in manufacturing was a change in skill demand within particular industries. While income gaps have widened in the United States and other developed countries of the world as a result of globalization, they have also widened in the developing world between haves and have-nots. Import competition has also affected wages within the countries of the developed world and has served drive wages down for certain unskilled positions, such as those found within the manufacturing sectors. Furthermore, “movements of labor from one country to another can also affect wages. An important issue in the advanced economies is whether immigration of less-skilled workers from the developing countries depresses the earnings of less-skilled natives ”(IMF, 1997). In the United States alone, the IMF estimates that as much as a third of the increase in American wage inequality can be attributed to immigration to the United States in the 1980s, “an effect two to three times as large as that attributed to imports of goods.” (IMF 1997). Furthermore, . The United States tends to export skilled-labor-intensive products and to import unskilled-labor-intensive products, so that the growing importance of trade in the U.S. economy has increased the effective supply of unskilled labor in that country relative to the supply of skilled labor. Analysis suggests that trade accounted for around 15 percent of the total rise in income inequality during 1980–85, but that effect diminished in later years. Further studies have shown, for the advanced economies as a whole, that trade with developing countries has led to about a 20 percent decline in the demand for labor in manufacturing, with the decline concentrated among unskilled workers (IMF 1997). Now that the consequences of globalization on American wages and income equality has been shown, we now turn to an analysis of China, a quickly developing economy and home to many formerly-American jobs. Case Study: China China has become the source for literally thousands of jobs, particularly in the manufacturing sector, which used to employ people in the developed countries of the Western world. Despite these early years of anti-capitalism in the wake of the Chinese Revolution, China has cautiously embraced economic liberalism and a capitalist economic orientation, albeit with strong authoritarian tendencies. China today has the 4th largest economy in the world behind the United States, Japan and Germany, estimated at $2,645 billion per year. With a population of more than 1.3 billion, China remains a largely rural country with 43% of its labor force employed in agriculture with another 25% in industry and 32% in the service sector. Industry, however, has driven the economic growth of this country which represents 49% of the total $2,645 billion GDP. Accordingly, the average annual growth in China over a ten year period was an astonishing 10.5% (1996-2006), largely attributed to low wages and high demand for Chinese productive labor. Much of this growth is tied to the global economy and China’s role in international economic affairs today (The Economist 2008). China and the Global Economy China has cautiously embraced the principles of economic capitalism in its efforts to stimulate development and growth while maintaining true to its revolutionary socialist credentials. Thus, while not giving up an important role for the state and the statist principles of a command economy, China has engaged in state-led development through the establishment of secure business-orientated zones (Free Trade Zones in China). These zones cater to foreign investors and large multinational corporations. Arguing that this is the most effective way to ensure quick yet far-reaching development, the Chinese government utilizes these zones to promote efficient economic development while maintaining an officially socialist political structure (Clark and Kim 1995). Seeking to address economic stagnation and underdevelopment through direct governmental intervention and the establishment of business-oriented Free Trade Zones, China employs this model as a development path. As the region’s growing economic powerhouse, China employs a form of economic development which is inherently Statist and involves direct government intervention in the economic sector to promote quick and efficient economic growth. Under this strategy of development, the state must establish a free trade zone and attract investors (generally large multinational companies or MNCs) to stimulate development. While encouraging direct foreign investment and providing a forum which attracts economic actors to help propel the development of the nation, this model of development does an excellent job of using both the private and public sectors to promote economic growth and development (Clark and Kim 1995). Based upon the principles of economic liberalism but with a strong role for the state, the Free Trade Zone model begins with the creation of attractive economic-oriented trade zones which appeal to foreign investors to stimulate national growth. Industrialization is said to begin within these zones and export-oriented principles of economic development are behind this particular model. Foreign investors are attracted to these development zones through a variety of incentives including low production costs (i.e. cheap labour), tax benefits and a variety of other economic incentives. This development model is a response to the current wave of economic globalization and is a modern attempt at harnessing the forces of global economic capitalism through state-led development. China’s leaders argue that this is the best form of development for the country because it focuses on macro-economic concerns (raising the Gross Domestic Product (GDP), decreasing the national unemployment rate, etc.) by attracting foreign investors and utilizing the resources made available by already-established multinational corporations to stimulate growth. Although this form of economic development is currently being practiced around the world, it has been particularly successful as a developmental model in Asia. As mentioned above, from 1996 to 2006, China’s annual real GDP growth was a whopping 10.5% (The Economist 2009). Although in East Asia, Taiwan, South Korea, Japan and Hong Kong remain important economic actors, "the most dynamic and rapidly growing economy of the globe after the fall of Soviet communism was that of Communist China, leading Western business-school lectures and the authors of management manuals, a flourishing genre of literature, to scan the teachings of Confucius for the secrets of entrepreneurial success" (Hobsbawm 1994). China has benefited tremendously from increased interdependence and has established a strong manufacturing centre, shifting employment away from traditional manufacturing centers in the West. China remains the major challenge to US economic control as wages continue to remain low in China and Chinese products continue to flood the world’s global marketplace. China has remained competitive, commands one of the world’s largest economies and has established a working and viable example of authoritarian capitalism. This shifting of global production centers to the East has led hurt traditional manufacturing centers in the West, exemplified by the decay felt by the once-vibrant US automotive hub of Detroit, Michigan. Protectionism Many people in developed countries argue in favor of protectionism as a result of outsourcing and the flight of jobs overseas. Outsourcing has gained credence in recent time because foreign wages are much lower abroad. The result is that jobs at home are lost as employment trends shift overseas. Protectionism is the anti-thesis to the free trade neoliberal ideology espoused by the forces of globalization today. What is protectionism and is it a threat? Protectionism is an economic policy which promotes a strong role for the state in regulating economic policy and advocates restrictions on the international flow of goods. Tariffs and restrictive quotas are important components of protectionism behavior and this concept has its roots in the early theories mercantilism, prevalent during the early years of US Independence. Aimed at discouraging imports and the prevention of foreign goods flooding domestic markets, protectionism today stands in stark contrast to free trade and the policies of economic liberalization. National barriers to global trade are enforced through protectionist policies and this phenomenon has gained new credence in an era of anti-globalization. Prior to the modern globalization phenomenon, key Asian countries such as South Korea employed Import Substitution Industrialization (ISI) as a form of protectionism to shield domestic producers from foreign competition. In today’s global economic marketplace, there are increased calls for the imposition of tariffs and other regulatory measures to protect domestic producers and jobs from foreign take-over. Although detractors exist, as has been evidenced above, many economists argue for strong international trade to provide competition and stimulate domestic producers. For example NAFTA, (the North American Free Trade Agreement), was established in the late 1980s to stem the tide of protectionism and promote the free movement of goods within the states of North America. We now explore NAFTA in context by looking at Mexico, an important NAFTA partner in free trade and a source of jobs once held by its more developed NAFTA partners, Canada and the United States (Coburn 2000). Case Study: Mexico Mexico has played an important role in the global division of labor for more than First and foremost, economic globalization has raised the standard of living in Mexico. This rings true around the world and the benefits of economic liberalization can be found in nearly all countries which have embraced free trade and economic growth. Due to the interconnectedness of global markets today, more people are employed, more money flows between countries and subsequently people’s standards of living are being raised. Mexico, a developing country which has embraced economic liberalization and is now a member of NAFTA (the North American Free Trade Agreement), has exhibited recent economic gains since joining this regional trade block. With a population of 108.3 million and a GDP of $839 billion, Mexico has benefited tremendously from economic liberalization and market-oriented growth. In response to its inclusion in NAFTA, employment has risen consistently over the past decade and a half and annual GDP growth over a ten year period from 1997 to 2007, is estimated at 3.7%. This level of steady and consistent growth over a period of 10 years is remarkable for a country which has remained underdeveloped relative to its North American counterparts since its creation nearly two centuries ago. Accordingly, as a percentage of its labour force, the average Mexican unemployment rate from 1995 to 2006 stood at a low 2.8%. Compare that with Mexico’s neighbor to the south, Columbia which still does not have a free trade agreement with the world’s largest economy, the United States, and the results are astounding. Over the same period, Columbia had an average unemployment rate of nearly 15%. The outsourcing of American jobs to Mexico has played an unparalleled role in this country’s phenomenal growth (The Economist 2009). Concluding Remarks Globalization has been propelled by capitalism and the internationalization of the capitalist economic system. The main effect of globalization is the world-wide spread of neoliberalism around the world and the entrenchment of capitalism as the dominant – some would say sole – viable economic system for the world economy. Entrenched as the dominant economic ideology across the globe, neoliberalism is the underlying force behind the current wave of globalization. Outsourcing is a key component of the global economic and represents a new international division of labor. Despite numerous detractors on all corners of the globe, outsourcing remains an important force in modern society and a key component of continued and sustained economic growth on a global scale. China represents an alternative development model than that articulated by the liberal democracies of the West, including France, the United States and Great Britain, who have espoused democratic capitalism as a model for development. China advocates an alternative developmental model and has grown its economy through strategic economic planning through low-paid manufacturing jobs, exported oriented growth in a global economy and a strong current of political authoritarianism. Due to the spread of economic globalization and free trade, China has faced pressures to democratize and open itself up to the international community. Fundamentally, economic globalization is based upon the principles of neoliberalism, free trade and unrestricted product mobility and unhindered markets. These forces promote change in both the political and economic realms. Mexico, as a new member of NAFTA and a developing country with strong economic growth over the past decade and a half, exemplifies the positive attributes of economic globalization and reinforces the argument that the forces of globalization have been positive for the countries of the developing world. Protectionism represents a backlash against the forces of globalization and is a result of the power of outsourcing today. Despite proponents, outsourcing is here to stay but remains a significant challenge in the world of business today with important ramifications on the economies of the United States and other countries of the developed world (Gat 2001). References Bendor-Samuel, P 2000, Turning Lead Into Gold: The Demystification of Outsourcing, Executive Excellence Publishing, New York. The Economist 2009, Pocket World in Figures, 2009 Edition, Profile, London. Friedman, T 2005, The World is Flat, Farrar, Straus and Giroux, New York. Hobsbawm, E 1994, Age of Extremes: The Short History of the Twentieth Century: 1914-1991, Abacus, London. Clark, GL & WB Kim 1995, Asian NIEs & the Global Economy: Industrial Restructuring & Corporate Strategy in the 1990s, Johns Hopkins University Press New York. Coburn, D 2000, Income inequality, social cohesion and the health status of populations: the role of neo-liberalism, Social Science & Medicine, vol. 51, no. 1, pp. 135-146. Gat, A, 2001, “The Return of Authoritarian Great Powers”, Foreign Affairs, July/August. Lee, Eddy, 1996, “Globalization and Employment: Is anxiety Justified?” International Labour Review, 1, pp. 135: 485 Slaughter , MJ & P Swagel 1997, Globalization Lower Wages and Export Jobs?, The International Monetary Fund, Washington. Read More