This will be a somewhat desperate and probably fruitless attempt to silence the fools. Globalization, it looks like, is in a dire need of of defense against it critics. 2016 has been a horrible year for those who think that globalization is on balance a very positive force in this world. First, we had Brexit. The British people decided to opt out of the European Union and as a consequence also the single market. While Brexit has not caused the immediate recession many expected, including me (mea culpa), this is only because the Bank of England (BoE) pursued an expansionary policy and the pound depreciated substantially to offset the negative shock. However, this depreciation, while making British goods more competitive in international markets, also made exports more expensive. As a result , inflation has already picked up and will likely exceed the BoE target of 2% in the following years. Furthermore, there is no doubt that leaving the single market will have substantial trade negative income effects in the long-run. Some estimates suggest that British GDP might be up to 2% lower in perpetuity as a result of Brexit. There are very little policies that can have such sizeable negative income effects. Restricting immigration will also come with a cost. Finally, leaving the EU might make it so much harder for young people to study and live abroad. This is really a case where the young did get screwed by older generations who disproportionally voted for leaving. Of course, one should remember that a large part of the young did not bother to vote.
Meanwhile, the U.S. has elected a racist, sexist, populist demagogue as their president. The new administration has the potential to greatly disturb the American economy and even the global economy. They accuse China of being a currency manipulator, which is true, but for the wrong reasons. This president will push for “America first” and “buy American” policies. A trade war with China or the rest of the world is not an unlikely scenario. Furthermore, the administration is pushing against migration from “undesirable” countries, such as Mexico.
Let’s remind ourselves that “America first” and “buy American” are slogans that have a striking resemblance to those of Nazi Germany, for example. Indeed, 2016 has revealed that the new global order established after the fall of the Soviet Union might be much more fragile than commonly assumed. Unfortunately, the same can be said for Western democracies. The current backlash against globalziation has striking parallels to the 1930s, which also started with a global financial crisis, followed by a global depression that lasted for years. The economic downturn led to the rise of isolationist and nationalist policies all over the world. Europe saw the rise of fascism, which led to the most brutal war the world has ever seen. It is very unlikely though not impossible that such an event will ever occur again. What is very concerning, however, is that with Brexit and the election of Trump attacks on minorities have surged. Furthermore, policies that have until recently benefitted the world as whole are likely to be reversed.
Let’s consider immigration. The real median income of a Hispanic family in the U.S. in 2012 was about 39.000 USD (at PPP) while the real median income of a Mexican family in Mexico is less than 13.000 USD at PPP. If household size of Hispanics in the U.S. is roughly equal to household size in Mexico, this means that Mexicans in the U.S. have a disposable income that is roughly 3 times larger than their fellow countrymen back home. The gains from more migration are thus potentially enormous given that immigrants in the U.S. and Europe who come from developing countries earn a multiple of what they would earn back in their home nation. Insofar as we should care about global welfare, more migration is definitely highly desirable. Furthermore, native wages do not seem to suffer that much from reasonable levels of migration because migrants and natives are often complements instead of substitutes. Unfortunately, most advanced nations are now run by politicians who have run on an anti-migration platform. This is true for Trump who has insulted Latinos, but it is equally true for Great Britain’s new administration, the European Union who finds it more desirable to bribe the low-income country Turkey to keep millions of refugees from Syria than to accommodate them, and Australia, which has set up refugee camps on small islands far away from the mainland where asylum seekers apparently live under very harsh conditions. Canada is one of the few countries at the moment, which is holding the liberal flag up high when it comes to migration as well as many other issues (gay marriage, weed liberalization, etc.). Canada currently lets about 300.000 people into the country, which represents an annual inflow of about 1% of the total population. This is quite sensational and it will benefit the country greatly in terms of future economic growth. It helps, of course, that a large part of the migrants are relatively high-skilled since Canada’s migration policy is based on a points system that rewards according to education, experience, age, etc. However, the country also has accepted sofar close to 40.000 Syrian refugees, much more than the U.S.
But migration policies alone cannot tackle the problem of global poverty. The biggest event in the last decades has been the enormous eradication of poverty around the world and globalization played a significant role. The next graph show that the number of people living in extreme poverty (with less than 2$ at PPP per day) more than halved from 1.6 billion to 800 million in between 1990 and 2010 despite a quickly growing world population. This is probably the most underappreciated fact in modern economic history. The second graph has shown that the majority of the decline can be explained by Southeast Asia, more specifically the rise of China and to a lesser extent India. China has been growing at a rate of 10% for more than two decades (see graph 3). With such a high growth rates real incomes and thus living standards double every 7 years (the rule of 72: divide 72 by the growth rate 10 to obtain roughly 7 years). Over the last years, the Chinese growth rate has been slowing down to less than 7%, but this was to be expected as the country get richer and approaches the technological frontier. Eventually, the low-hanging fruits of catch-up growth are exhausted and diminishing returns kick in as investments in infrastructure and human capital start to yield lower returns. Note, however, that we can still expect substantial catch-up growth in the decades to come as the U.S. is still 4 times richer than China while back in 1990 this ratio was about 25 to 1 (see graph 4).
Real GDP growth rates
Gross national income (Purchasing power adjusted)
Finally, the biggest gain to China has been the result of adopting foreign technologies (sometimes also labeled “copying” or “stealing”). One should bear in mind that this is exactly how Europe got rich as well. Europe’s industrialization was also based to a big extent on adopting and copying technoligies that were previously invented and put into practice in Great Britain, which was the industrial leader for most of the 19th century. Globalization is not negative sum gain or zero sum gain, but it is a positive sum gain. Every nation benefits from the fact that global real GDP per capita has tripled since the 1960s (see graph 5).
As a final note, many people do not object to the claim that globalization has been extremely beneficial to developing countries, but at the same time the middle class in advanced economies struggled as manufacturing jobs have gradually disappeared over the last decades as a result of competition from Southeast Asia. However, this interpretation while widespread does not hold up under close scrutiny. Graph 6 shows how manufacturing output in the U.S. in on an all time high while employment is on all time low. This, of course, can be explained by large productivity gains in manufacturing, less and less workers are needed to produce an even larger amount of output. It’s not China who is to blame for the loss of manufacturing jobs, but automatization. So robots are indeed destroying jobs, at least in the industrial sector. Does that mean the end of jobs? Not at all, unemployment in the U.S. is now below 5% again. The big worry is not the disappearance of work, but the replacement of well-paid manufacturing jobs with lower paid and more unstable jobs in the service sector. This is the hallowing out of the middle class in advanced economies, but it has little to do with foreign competition. The biggest struggle for governments in advanced economies in the foreseeable future will be to tackle the distributional issues that result from the replacement of manufacturing jobs with service sector jobs. In the meantime, however, it is of upmost importance to defend globalization against it critics. Not only were billions of people in developing countries lifted out of extreme poverty in recent decades, but also us Western consumers benefited a great deal from cheaply produced manufacturing goods, ranging from cars to consumer electronics. So let’s hope that Trump and Brexit are just a temporary phenomenon and that this silliness does not spread to other countries. For the rest of us, let’s please just agree that globalization full speed ahead is the way forward!