The Downside of Globalization

The negative effects of growth driven by globalization are now being felt.

Over the last two decades the shift of production capacities from developed to developing countries has driven the growth of the global economy. The rise of the global model has undeniably provided benefits, but data shows that globalization has actually constricted growth in developed nations. One indicator is the ratio of global trade to GDP elasticity. From 2011 to 2018 the elasticity of global trade with respect to income (measured as the ratio of the average growth rate of imports of goods and services to average GDP growth) has hovered above 1%, when in the 1990s and 2000s it was nearly twice that level.
 
In developed economies globalization’s benefits have come in large part at the cost of the middle class. This has significant implications — political, social, and stability — which will continue to be felt in the coming decades.

What Happened?

Put simply, in economic terms globalization is the process in which corporations, governments, and other organizations around the world increasingly interact. The system — its modern form took shape in the 1970s — has promoted worldwide growth in trade, increases in capital and innovation, and the spread of cultural, social, and political values.
We can measure globalization several ways, but most important to us here is the “trade-to-GDP” ratio, which measures how important global trade is to a national economy. We derive trade-to-GDP by dividing the combined value of imports and exports of a country by its gross domestic product over a certain period of time.
 
When large economies outsource production capacity, the percentage of imports consumed in those countries rises and domestic production decreases. An increase in import consumption correlates with decreases in jobs for the middle and lower classes.
 
And indeed, over recent decades the share of imports in domestic consumption has increased for many developed countries. For instance, from 1995 to 2014 in Germany, it rose from 12% to 19.1% (consumption of intermediate products increased from 15% to 24%); in Japan it rose from 3.7% to 10.1%; and in the United States it climbed from 6.2% to 7.7% (estimates are based on WIOD national input-output tables). We saw the largest increases — both in the world in general and developed countries specifically — in industrial sectors such as chemical production, the machine industry, mining, and primary processing.

Employment is inherently political, so we shouldn’t be surprised at the political response to this shift. The response has recently taken the form of stronger barriers in international trade, devaluation “wars,” and other actions aimed at restricting competition. For instance, in 2018 the U.S. implemented tariffs on steel and aluminum because high import shares in the domestic market posed a perceived threat to the financial stability of several industries as well as to national security. In addition, the U.S. also raised tariffs on targeted goods imported from China, the largest source of imported goods for the United States.

“Value-added growth in developed countries became concentrated in limited groups of the population more or less connected with the activity of transnational corporations.”

The key result is that this system redistributed revenues from among countries to among corporations. This shift — which started the 1970s — resulted from increases in productivity, which created massive profits that corporations held while letting wages stagnate. Value-added growth in developed countries therefore became concentrated in limited groups of the population more or less connected with the activity of transnational corporations.
 
Unsurprisingly these populations were usually among the wealthiest. For example, in the U.S. the share of income of the wealthiest 10% of the population rose from 27.6% in 1991 to 30.6% in 2016, while the share of income held by the bottom 10% fell from 1.9% to 1.6%. A Pew Research Center study found the population percentage of the middle class dropped from 61% in 1971 to 52% in 2016 (though virtually the same since 2011). The same study found that only high-income households saw their median income increase from 2000-2016, while middle-class incomes stayed essentially unchanged and low-income households saw decreases. These numbers reflect growth in income inequality. (To be clear, this is income, not wealth, which ubiquitous reporting points out has stratified more extremely.)
 
After looking at these trends, then, we might anticipate that social stability in developed nations could be affected in large part by how governments develop new channels to redistribute excess corporate profits to households.

Opportunities

Large developing countries that continue on this path can increase domestic revenues by further shifting production capacity to less developed countries, where resources are cheaper. Paradoxically, though, the increase in efficiency also increases social differentiation, which can potentially limit growth. Developed economies can thrive if they have the capacity to build stable new value-added chains, but this applies only to countries that can wall off domestic growth from the growth of transnational industrial and financial groups. Less developed nations will have to depend on their relationships with third-world countries, which in turn will have to industrialize to join the global economy.
 
We can therefore see that the main differentiator between developed and developing countries is that the first possess key technologies and an accompanying economic infrastructure that allow them to shape the global system to work in their interests. This hamstrings developing countries to the point where it becomes virtually impossible for them to significantly reduce the gap. The only real way to effect qualitative change is to create a special sector for developing technologies, but, again, that’s only possible for economies that have the resources to support R&D independent of transnational corporations.
 
When we zoom out, we can see these disparities arise out of the fundamental winner-take-all nature of the current global system. Wealthy countries are getting wealthier and wealthy people are getting wealthier, both trends that come at the expense of the poor, who comprise a plurality of the population. Such a system is primed for instability.

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References:
Gusev M. et al. (2018) “Global Trends of Restructuring Production and Income Worldwide and in Russia”. Studies on Russian Economic Development, Vol. 29, No. 6, pp. 607–616

Accuracy In Macroeconomic Forecasting

The negative effects of growth driven by globalization are now being felt. Over the last two decades the shift of production capacities from developed to developing countries has driven the growth of the global economy. The rise of the global model has undeniably provided benefits, but data shows that globalization has actually constricted growth in …