Globalization
David Ricardo (1772-1823)
Principle of Comparative Advantage
Globalization
Comparative Advantage
• If nations specialize in those goods and services where
they have a comparative advantage, and trade with other
nations, then the wealth of all nations increases.
• The principle of comparative advantage is based upon the
relative ratio of production efficiency between nations.
Note:
Comparative advantage is not the same term as “opportunity
costs.” Nations do not trade based upon different opportunity
costs, but upon relative ratios of production efficiency.
Because production seems to come from nowhere,
comparative advantage seems like magic…
But it’s not.
Globalization
Comparative Advantage
Assumptions
• No transportation costs.
• Constant costs across nations.
• No economies of scale.
• Complex “calculations” across many countries. Perfect
knowledge not possible.
• Factors of production are mobile.
• No tariffs or other trade barriers.
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Rules of Trade
General Agreement on Tariffs and Trade
• Plan for economic recovery after World War II.
• Purpose was to reduce barriers to international trade.
• Reduction of tariff barriers
• Quantitative restrictions and subsidies
• The GATT was an agreement, not an organization.
• The functions of the GATT have been replaced by the World
Trade Organization.
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Rules of Trade
World Trade Organization
• Increase international trade by promoting lower trade
barriers.
• Fundamental principles:
1. A trading system free of discrimination.
2. Few trade barriers (tariffs and non-tariff).
3. Predictable exchange relationships.
4. Promote greater competition.
5. Should be accommodating for less developed
countries, giving them more time to adjust, greater
flexibility, and more privileges.
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Wallerstein: World Systems Theory
• Rejects the notion of a “Third World.”
• There is only one world connected by a complex network
of economic exchange relationships.
• This world-system is characterized by inherent conflict
between capital and labor and the endless accumulation of
capital by competing agents.
• The world-system consists of core (wealthy,
technologically advanced) countries and host (poor, low
technology) countries.
• The core countries take actions to maintain their relative
power position in the world capitalist marketplace.
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Concerns about Globalization
1. Economic Leakage
• Primary economy
• Secondary economy
• Tertiary economy
• Profit margins move from primary to secondary to
tertiary economies.
2. Perpetual Status
• No subsidies for new industries.
3. Environmental Degradation
• Equal economic opportunities require equal
environmental regulations.
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Brecher and Costello: The Race to the Bottom
• We all benefit when competition results in lower prices for
goods and services.
• When corporations and governments lower costs by
reducing worker benefits, environmental protection, and
social welfare contributions, then the results can be
malignant.
• Mass production requires mass consumption. As each
workforce, corporation, and country lowers wages, then
less money is available for consumption and economies
become stagnant, leading to recession.
Globalization
Brecher and Costello: The Race to the Bottom
• "As each country tries to solve its own problems by
producing and exporting still more products still more
cheaply, the result is a 'downward spiral.'"
• The "new world economy" has transformed the nature of
work for employees of multinational corporations.
• The power of capital to pick up and leave for lower cost
locales undermines the ability of local people to shape their
futures through democratic processes.
• Trade agreements further weaken "local" control, even at
the level of the nation state.
Globalization
Brecher and Costello: The Race to the Bottom
• Global corporations have become powerful economic
actors.
• Global corporations have become unaccountable because
of a greater concentration of power within fewer and larger
corporations.
• Globalization engenders a destructive global rivalry that
might result in global conflict.
• Globalization and its economic effects are exacerbating
racism and extremist nationalism because of the increased
level of aggressiveness needed in an increasingly
competitive marketplace.
Globalization
Brecher and Costello: The Race to the Bottom
• Globalization is promoting global pillage rather than a
global village because the environment is being ignored for
the sake of lowering production costs.
• Globalization has depressed the real earnings of low-wage
workers, which has increased gaps between rich and poor.
• This gap between rich and poor nations is increasing
worldwide.
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Research on Globalization
The research indicates that the consequences of
globalization, overall, are:
• Higher real incomes for workers.
• Declines in income inequality within nations.
• Declines in income gaps between nations.
• Fewer persons in poverty, worldwide.
These effects reflect in part:
• Technological advances.
• Educational opportunities.
• Improvements in transportation and communication.
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Research on Globalization
These overall consequences should be examined more
carefully:
• They are influenced strongly by very high rates of
advancement in China and India.
• African nations, particularly in sub-Sahara Africa, lag
far behind in development, due in large part to high
rates of HIV infections.
• Developed nations are improving more rapidly than
less developed nations (reflecting economic leakage).
• Income gaps in the U.S. are growing,
• Mismatches between skills and needs (SF).
• Race to the bottom (MX).
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Research on Globalization
“Perpetual Status” is difficult to assess:
• The United States has been a world power only since
WWII.
• Germany “took on the burden” of East Germany in the
late 20th century.
• In the 1980’s, some thought that Japan would be a
dominate world power by the turn of the century.
• The “long run” is a history of the rise and fall of very
great, lasting empires.
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Research on Globalization
Environmental Degradation:
• When nations improve economically, they pay more
attention to their environment.
• To advance economically, nations will make sacrifices
to their environment.
• Global warming is man-made?
• The United States is cleaner now than it was even 50
years ago?