GLOBALIZATION DISCUSSION OUTLINE
(Note: where you see “B/C?” or “AND?” you are expected to provide the economic
reasoning or connection. E.g., I give the causes below in B and afterward have “AND?”
indicating that you are to explain how these things lead to globalization.)
GLOBALIZATION DISCUSSION TABLE
In the following discussion, it is useful in explaining what is going on to keep this table in
mind: (Note: About a third of the countries of the world are poor but not actively
involved in globalization. So they do not fall in any of the following categories.)
Country
Income
Primary GDP
Levels____
Relative Abundance of Indicated Factors
Growth Sector
Unskilled
Labor
Skilled
Labor
Low
Hi-Tech
Capital
Low (e.g.,
Vietnam or
Cambodia)
High
Medium Low
(e.g., China)
Medium (e.g.,
South Korea
or Brazil)
High
Medium
Medium
Medium
High (e.g.,
US, EU,
Japan)
Low
High
High
Low
Low
Low
LoTech
Capital
Low
Agriculture
Medium Manufacturing
(Generic goods)
High
Manufacturing
(Capitalintensive goods;
e.g. memory
chips)
Medium Services (e.g.,
education,
health care,
travel) and HiTech Capital
intensive (e.g.
CPUs)
A. Definition: Globalization refers to the increase over time in economic
interdependence of the nations of the world (in S&S’s term, the economies are
becoming more “open”). In particular, with respect to perceived problems, it refers to
the increase in trade, cross-(national) border production, migration, and investment;
particularly with respect to interdependence between developed (high-income) and
developing (low and middle income) countries.
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B. Why is it occurring?: The primary proximate causes are:
1. The end of colonialism and of the Cold War.
2. Reductions in transportation costs and communication costs (especially because
of the Internet and lower hardware costs [including personal computers and fiberoptic systems to transmit information globally]) AND?
3. Reductions in national-government barriers to trade, migration (to some degree),
and investment (DUE TO?). AND?
4. Saturation (= zero or negative firm profits) of domestic markets
C. What economic problems, apparent or real, does it cause for developed (highincome) countries (e.g., US)? The focus is on the decline in the manufacturing sector
in these countries. (In the following discussion, G stands for “Globalization related;”
NG for “not primarily related to globalization;” GT&S for the gains-from-trade-andspecialization story, FP for the factor-proportions story, and EofS for the economies
of scale story.)
1. What are the principle reasons for manufacturing decline?
a. Demand side
(i) (NG) Domestic demand in the high-income countries is shifting away
from goods (manufacturing) toward services. B/C? (see table above)
(ii) (G) Foreign demand for goods, in high-, middle-, and low-income
countries has been growing slowly. B/C? (see table above)
b. Supply side. Saturated domestic markets for goods (e.g., auto industry) due
to increased competition among developed economies (G) for the slowly
rising demand for goods
(i) creates pressure on firms to cut costs, which leads:
(a) to technological improvements (primarily NG) to increase labor
productivity (e.g., just-in-time inventory management; robots to weld,
paint, etc.)
(b) (G) and, when combined with lower transportation costs and trade
barriers, to outsourcing parts of the production process to developing
countries (By FP, which specific parts?)
(ii) and causes MNCs (multinational corporations) to expand sales and
production for sales in foreign markets (to keep ahead of, or up with,
competition). B/C? (vs EofS) (e.g., there are only a few, large car
companies that sell and/or produce in almost every country where they are
allowed to do so.) Which, in turn, leads to MNC shifts in direct
investment to other countries (=FDI). B/C? (see FDI discussion) So, even
when manufacturing is increasing, it is increasing elsewhere; particularly
in emerging markets.
2. What are the effects of manufacturing decline on:
a. National Income?
(i) Since the decline is due to reduced barriers and lower transactions costs,
by the GT&S (=?) national income increases, not declines, as firms shift
to services and to hi-tech, skilled-labor-intensive goods. (B/C? including
FP point.)
b. Employment?
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(i) Because of the increased labor productivity and the drop in domestic
demand, manufacturing employment has been falling in developed
countries.
(ii) However, by the GT&S, overall employment in developed countries has
not declined. B/C? (give both an income and a trade effect) (Note: in
general, there is no strong statistical evidence that globalization has any
impact, other than, perhaps, in the short-run, on national employment.)
c. Factor income. By the FP,
(i) the income of skilled workers and hi-tech-capital owners rise (B/C?)
(ii) but income of unskilled workers falls (B/C?)
D. What economic problems, apparent or real, does it cause for developing (low- and
middle-income) countries (e.g., China, India, and Brazil)? (Note: 1/3rd of the
countries are poor and not developing (stagnant). They are not part of globalization.)
1. (Idiot’s guide to) the recent economic history of these countries.
a. Prior to World War II, most were under the economic control of developed
economies which restricted imports from these countries primarily to natural
resources and agricultural products not widely available from domestic firms
in the developed countries (B/C?).
b. After World War II, almost all of them acquired economic independence and
so could set their own development strategies.
c. However, given their experience with capitalism and given the political
incentives of the Cold War, most were strongly opposed to allowing free
markets. They viewed the GT&S as a capitalist ploy to keep them down.
d. From their view, success in achieving economic growth depended on
acquiring the major industries (mostly large-scale manufacturing; e.g., steel,
autos) and using the production processes (capital-intensive B/C?) that were
prominent in the developed countries.
2. Initially, therefore, they attempted an industrial policy of developing their own
manufacturing sector at the expense of their original export industries.
a. Given that the manufacturing they were copying was capital-intensive and
large-scale (and that their infrastructure—roads, electricity, etc.—was
underdeveloped), they had higher costs for these products than did the
developed countries B/C? (use FP and EofS)
b. So to assure survival of their manufacturing sector, they had to block imports
of all goods, especially consumer goods, except for natural resources or hightech capital goods that they did not possess or could not produce. Also, they
discouraged FDI by MNCs in their countries.
c. This policy of high barriers to imports and FDI combined with non-market
control of production to force development of domestic manufacturing firms
and discourage competition is referred to as the Import Substitution strategy.
d. The basic economic rationale for this was the infant-industry argument (=?).
e. The outcome of this strategy was largely stagnation. B/C? (use GT&S [no
imports = ?], FP, and EofS)
3. Eventually, many of these countries realized that their strategy was not working
well. Four of them (the “Asian Tigers:”Hong Kong, Singapore, South Korea,
and Taiwan), shifted to an Export-Oriented strategy, which they adapted from
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what Japan was doing. (Japan was a developed country before World War II, but
had most of its capital stock blown up in the war; so it was initially poor, but
recovered rapidly.)
a. The general Export-Oriented strategy is for the government to continue to
direct which industries develop; not necessarily by preventing the market
system from operating internally, but by focusing on financing infrastructure
and acquisition of capital in the favored sectors. The sectors they concentrated
on were the ones where they had a comparative advantage (primarily naturalresource extraction, agriculture, and certain types of manufacturing [by FP,
which ones?]).
b. Thus, the strategy consisted of removing barriers to import of capital goods,
even the more generic ones, needed for infrastructure or export production but
keeping high barriers on consumer-goods imports (e.g., India allowed import
of personal computers and satellite communications equipment to support
their outsourcing production of back-office activities for firms in high-income
countries.). (B/C?) If not FDI, at least joint ventures (=?) were encouraged.
4. Effects of moving to the Export-Oriented strategy
a. National income: Given that this strategy switched production toward their
comparative advantage, as determined by the market, and it opened them to
more trade (at least other than in consumer goods) and investment, it lead to a
more rapid growth in national income. B/C (GT&S and EofS)?
b. However, there are persistent problems that reduce the rate of growth of the
developing economies.
(i) One of their major areas of export, commodities (agricultural goods and
natural resources), is subject to major fluctuations in prices over time (e.g.,
oil prices), making appropriate development of their infrastructure much
more difficult.
(ii) Growth in export sales (especially in some areas of agriculture and in
labor-intensive manufacturing) is slowed by high trade barriers imposed
by the developed (and other developing) countries, where protectionist
policies are implemented in support of the import-competing firms in
those countries.
c. Furthermore, growth for individual countries has slowed due to increased
competition (and therefore lower profits in the export goods) as more
developing countries, particularly China, switch to the export-oriented
strategy.
d. Thus, many of these countries are trying to find more profitable export niches
by switching to more capital- and skilled-labor-intensive products, which
requires large capital inflows (which, in turn, reinforces the export-oriented
strategy), including FDI (particularly to acquire high-tech capital B/C?), and
significant government investments in their educational infrastructure. So
many have switched to Open Economies which have very few restrictions on
trade or investment.
5. Why should the developed countries care about how fast the developing countries
grow?
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a. Higher incomes in the developing countries lead to more demand for skilledlabor- and high-tech-intensive goods and services that are exported by the
developed countries. B/C? (And recall that the developed economies are faced
with saturated domestic markets.)
b. There are possible economic, social and political problems caused by those in
the developing countries and affecting developed countries that might be
reduced by more economic growth in the developing countries. Examples:
(i) Low-income countries refuse (at the WTO and other negotiations) to
remove their own barriers to imports from the high-income countries
unless the high-income reciprocate (=?). B/C?
(ii) Too-rapid immigration into the developed countries could be reduced by
faster economic development in the developing ones. B/C? (Think about
factor-flows as substitutes for trade and the factor-price implications of
FP.)
(iii) Terrorism problems might be reduced if disaffected groups in the
developing countries share in the economic growth.
E. Social and Political Effects of Globalization. (Note: In terms of the rational-choice
story, social and political problems can be interpreted as efficiency problems due to
market failures [associated with externalities and public goods provision]. While I
shall mention the connection, you will not be asked to use the market-failure story to
explain the effects.)
1. Globalization may contribute to decreased effectiveness of the Social Safety Net
(SSN) (In which countries, high-income or low-income? B/C?)
a. Definition: SSN refers to the public (or group) provision of certain goods and
services (e.g., minimal levels of food, clothing, shelter, and health care) to
those unable to provide these for themselves in a market system.
b. Note that in a market system, for a person to be able to consume at least
minimum levels of food, health care, etc., they, or those providing for them,
must have sufficient income to buy those things.
c. However, the very young, the very old, the sick, and those unemployed or
earning very low wages for extended periods of time might not be able to
provide the required levels themselves (particularly if they are in low-income
families).
d. So, each of these groups rely on family (primarily), firms, and the government
to provide support.
e. However, each of these provider groups, at least in high-income countries,
could be faced with a reduced ability to provide as a result of globalization.
(i) Families: Those who rely on the sale of unskilled labor tend to have low
wages (B/C?) and by the FP (=?) their income falls with globalization
(B/C?).
(ii) Firms: Increased competition from exporting firms in low-income
countries (which provide almost no SSN beyond what families provide),
particularly in manufacturing, reduces the willingness of firms in highincome countries to provide SSN functions. (E.g., reduced provision of
health insurance or retirement plans).
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(iii) Government: The government has to collect taxes. But this becomes
more difficult to do from the low-income families and companies for the
reasons given above (=?). Particularly companies, because of the switch
to cross-border production (outsourcing), are tempted to threaten to move
their production out of the country if faced with higher taxes. Of course,
by our story, there is more than enough income to tax to provide for
continued support for the SSN (B/C? use the GT&S), but there is strong
political resistance, at least in the US, by the middle and upper-income
groups to increases in their taxes. Particularly this is so if there are strong
cultural perceptions that it is “their own fault” that the poor are poor.
2. Globalization may contribute to other social problems. For example:
a. National cultural and social identity (e.g., France and its farmers and cuisine)
may be threatened by imports of products from other countries (e.g., the US or
low-income agricultural exporters).
b. Pollution problems may worsen, at least initially. Manufacturing, which tends
to be a major source of pollution, is expanding most rapidly in low-income
countries, which have very weak pollution regulations (B/C?). Further, as
indicated above, attempts by the governments of high-income countries to
increase pollution regulation, might lead firms to increase the shift of their
production of goods to countries with weak pollution regulation.
3. According to economists, what should be done about these problems?
a. Do nothing:
(i) The problems are not that big. (e.g., There is a lot of statistical evidence
that governments continue to be able to raise the revenues necessary to
support SSN, if they choose to do so.)
(ii) Free trade will solve the problems in the long-run by increasing national
incomes in the developing countries. (B/C? Note: as national income
increases, there is more political support for things such as the SSN and
pollution control)
b. If doing something is mandated, trade restrictions are not the way to go
because there are other, more direct solutions to these problems that cause
smaller efficiency losses. This is so by the specificity argument: It is less
costly to control a problem directly that to do so indirectly because indirect
control imposes costs on activities that do not create the problem. ( A NG
e.g.: If drunk driving is the problem, then it is more direct to penalize those
that drive while drunk than to prohibit sale of alcohol in general because that
stops pleasurable activities that do not lead to auto accidents.)
(i) For example, with SSN, trade restrictions create deadweight losses that do
nothing to improve the ability of the society to provide SSN. (income is
lower in general) It may be more efficient to, e.g., subsidize firms for
providing health insurance or training programs to raise the skills of
unskilled workers. (B/C?)
(ii) Or with pollution problems, international treaties to impose costs directly
on creation of pollution are much more specific than countries trying to
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restrict imports from high-polluting countries as an indirect way of cutting
the production processes that create the most pollution. (B/C?)
Revised: 4/28/11
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