Thursday, August 20, 2009

Making People Richer: The Benefits of Globalization

Everywhere you look in this day and age you will see the results of a global economy.  From the car you drive, to the television you watch, from the coffee you drink, to the instrument you play, we are fully engrossed in the fruits of a world economy.  

Over the years in America, however, there has been a public outcry against the looming threat of increased globalization.  Many called for closed economies to protect American jobs from outsourcing or protectionism of certain sectors from foreign investors.  Others have stated that overseas factories exploit lower-income nations by enslaving their populations in sweatshops to churn out goods for American consumption.  These people paint the picture of the American businessman getting rich while dancing on the backs of the poor.  I feel, in the interest of fairness, that it is important to address these concerns through the lens of how global economics works and address the root causes for the problems faced by the upper-income and lower-income nations alike.

Let us address the first concern of globalization eroding away the American workforce.  The notion is based in fear-mongering because free trade with other nations has shown to make the American citizen richer on the whole.  Abraham Lincoln had famously remarked that buying a coat in America keeps the coat and the money here in America but buying one from England brings the coat here but sends the money to England, effectively removing it from our economy.  What this misguided argument failed to address is that when any product is purchased with our currency, that currency eventually makes its way back to our country when foreign consumers purchase American products.  It is simple mathematics.  

So when governments push for tariffs on foreign goods--for example taxing a foreign car as an incentive to buy a domestic car instead--they are essentially taxing American consumers and limiting their choices.  Taxation certainly does not make the American consumer richer.  Even if those consumers decide to buy domestic cars only, the Detroit autoworker is the only one who truly benefits from the transaction.  The rest of the country actually becomes collectively poorer.  

The same applies to the protection of jobs.  Union operatives will wax poetic about the benefit of buying domestic products helps keep Americans employed but fails to address the inefficiency in protecting industries in the first place.  If people stopped wanting to buy American automobiles, it is a horrible waste of resources to continue producing the product.  It would be tantamount to the government protecting the horse-and-buggy industry over the automobile industry just in the interest of keeping cartwrights employed.  In a free market, when one sector of industry produces something undesirable, the resources of labor and capital are shifted to something that is desirable.  And everyone is better off for it.  Additionally, the outsourcing of jobs to foreign countries where labor is cheaper makes the cost of production a fraction of what it was in the United States, thus dropping the prices of the items in question, making those products available to more people, regardless of their individual income.  It also increases the dividends and investment returns to shareholders in those corporations, of which 50% of the American population is involved with on some level or another.

On the other side of the globalization coin, what about the exploitation of poorer nations at the hands of greedy capitalist interests?  Well, let us break down what goes on in an overseas factory.  In lower-income nations, government bodies tend to have less stringent policies regarding entrepreneurship or property rights.  Without an incentive to get people to innovate and produce, that nation's people are sitting on resources they cannot really use.  Instead of letting their resources rot on the vine or languish in the mine, the citizens instead trade these resources to foreign bodies who can make use of it.  Since prices are generally determined by the supply of the resources versus the demand for it, these items are generally acquired cheaply.  Even so, according to the principle of voluntary exchange, both parties in the transaction are better off for it.  

And what of sweatshop labor?  The common outcry against outsourcing is that foreign workers are put to work in unsafe environments for long hours and paltry wages.  What many fail to ponder are the alternatives.  While child labor or uncompensated overtime are fundamentally deplorable, they are still better options than what the citizenry had available in the first place: starvation or selling themselves into sexual slavery in an underground economy.  Because of lower-income nation's despot-driven policies of government-sanctioned larceny and loose property rights, the people have few choices available to them to produce.  In fact, studies have shown that countries with foreign investment have citizens that, on the whole, enjoy a higher standard of living than those without, with some of their children going to college for the first time in their family's history.  Refusing to engage in trade with these poorer countries just contributes to them staying poor.  While the conditions are far from what westernized nations feel are acceptable, one cannot overlook the fact that industrialization in our own country started out much the same way and put us on the path of prosperity.  As people become more empowered, social change inevitably results, and convergence becomes all the more possible.

In summary, a free global economy is far more capable of improving the lives of everyone involved than the oppressive hand of government protectionism and closed economic policies.  So long as the principle of voluntary exchange is practiced between trading parties, everyone in the global economy walks away better off than when they started.  And every little bit brings up the standard of living for everyone involved.


  1. What's wrong is that "voluntary exchange" isn't what happens in outsourced labor. Many people that do this go to these factories because, yes, it may be better than what they are getting, but they are still fully taken advantage of. Their governments keep people down. We make trade deals with the government and then it keeps production by the people stuck within a cycle of being under their government's thumb which is under the U.S.'s or whichever other country's thumb. These corporations are not looking for what is best. They look for what is cheap. It may be easy to say that we started out being oppressed, so why shouldn't other less fortunate people not go through the same blood and sweat-filled endeavors that we did. I would argue that they have gone through plenty more and they would be go through less if their resources taught to be used by them rather than stolen from them.

  2. The trade deals, however, are actually a great leveraging tool, though. I don't remember off the top of my head (it may have been Mises) who said that free trade between nations is the surest path to a peaceful world. Here's why:

    Opening up industrialization in emerging economies is the first step toward freeing them from a purely agrarian economy. Access to technology improves efficiency and productivity and opens the door for stronger stock in *human* capital. In other words, their educational attainment goes up and with it their standard of living. But I don't need to posit theory, I'll give some concrete examples from my academic papers:

    "The many successes in Asia--Hong Kong, South Korea, Indonesia, Malaysia, Taiwan, and Thailand have all outpaced the United States and Western Europe since WWII in real GDP growth--are proof positive that dropping trade barriers and improved access to technology as well as foreign investment has contributed to this sustained growth. Unlike Africa, real wages in these countries have sometimes doubled in just the last ten years while productivity has increased almost four-fold. Levels of education from 1960 to 1990 increased in countries like Taiwan from 25% for secondary and higher education to nearly 70%.

    Hong Kong's adoption of free market principles might be among the most telling. Hong Kong enforced strong private property rights, opened trade freely with other markets while avoiding the implementation of minimum wage, capital controls, tariffs, or complicated tax systems of any kind. Public debt was zero. Their real wages doubled in 20 years, GDP rose steadily and quickly--at one point sustaining a 7% rate of growth for nearly 25 years--standard of living across all classes improved, and all this growth occurred independent of any global recessions."

  3. As for Africa, we see the converse (also from my globalization paper):

    "Sub-Sahara Africa provides some wonderful examples of what happens when trade restrictions, loose (or non-existent) property rights, and incentives against economic development cause. Beyond Botswana's successes (which helps us realize that demography, geography, or history are not the big economic inhibitors some people want to think they are), Africa has been in dire circumstances for a long time, despite the fact that they actually have a comparative advantage agriculturally than most other parts of the world. But the successes of Asia in the last half-century show us that the "poverty trap" is largely a myth perpetuated by well-meaning but grossly misinformed social activists.

    So what IS Africa's problem then? First off political instability and poor governance do not create an environment where A) the citizens of those countries have an incentive to innovate, B) have access to the means of production or personal improvement or C) generate confidence in foreign investors to set up operations in their countries. African nations have some of the biggest import tariffs in their world (up to four times higher than the U.S. or Europe) which keeps access to technology out of the hands of its own citizens while allowing the price of domestic goods to stay high.

    The political corruption of African governments prevents richer nations from successfully even sending aid to those countries; such aid tends to be squandered by the political elite who wield absolute power and take everything they can from their own citizens. Who would ever feel inclined to produce more than needed for their own basic survival if the government could just take everything you produced? Not many.

    One thing the U.S. could do is to drop agricultural trade barriers and stop subsidizing its own agricultural industry. When the prices drop to natural market levels, it will be become cheaper for us to import some of these goods and more financially viable for African nations who have the comparative advantage in agriculture to produce them. Us freeing up trade policies in regard to them will motivate them to do the same, allowing African nations to have better access to things of which they do not have a comparative advantage in producing. Emerging markets with freer trade policies grow much faster than those who do not.

    To drive that point home, according to the refereed published study "Economic Reform and the Process of Global Integration", during the last few decades, Closed Industrialized Countries (places like Soviet-era Russia and its satellites) had an average growth of 0.74%, Open Industrialized Countries (The U.S. and Western Europe) had an average growth rate of 2.29%, Closed Developing Countries (most of Africa) had an average growth rate of 0.69%, and Open Developing Countries (the aforementioned Asian countries) had an average growth rate of 4.49%. The numbers tell a clear story here.

    So Asia and Africa, which suffered from very much the same exact economic problems, have grown in completely different ways with Asia opening up trade and Africa continuing to restrict it. What's even more troubling is that Africa is much more resource-rich than many Asian nations. Nigeria earned $350 billion in oil revenues yet quality of life in Nigeria has stayed about the same for 50 years. Who got all this money? Not "evil foreign capitalists" but their own corrupt politicians. Even when the politicians themselves aren't pocketing the profits, resources in such countries are almost always seized by the government and then applied to unproductive ends and excessive government spending, very little of which actually ends up in things like infrastructure, education, or other things that would at least benefits their own citizens. But without property rights or free enterprise, none of the citizens can actually efficiently procure these resources and produce anything of value in which to trade in markets--foreign or domestic.

  4. To top it all off, the macroeconomic implications of that government exploitation leads to far more boom/bust cycles in their respective economies than anywhere else. Look at Zimbabwe right now: the last I looked their rate of inflation is 89 sextillion percent. That is 89,000,000,000,000,000,000,000% and that's from the government printing money to pay its bills when their sources of revenue dried up. That doesn't happen in a truly free market. Ever.

    And what about all that aid we already have sent to Africa? Over the last 50 years rich countries have poured $2 trillion dollars (in today's dollars) in aid to poor countries. Certainly this money is well-meaning in the fact that we gave it freely to attack poverty, improve education, improve healthcare, improve access to water and infrastructure, and improve political stability. If this money actually accomplished any of that, then cries of debt forgiveness and more aid would be justified. Unfortunately the exact opposite can occur; at best it engenders dependency (just like welfare can do here) and at worst it perpetuates political corruption. For some of these countries up to 15% of their GDP is in the form of free money from outside entities. This can help push up wages but it doesn't actually promote any further productivity. When that happens, it actually makes exports from those countries less competitive because it artificially overvalues its currency. So it becomes less of a true economic stimulant and more of liability. And all the while we have been pouring aid in Africa their per capita income has ultimately fallen. Aid is obviously not the true answer to their problems. In fact, GDP growth in developing countries is inversely proportionate to the amount of aid they receive: Asian emerging economies have received much less aid than African nations and yet their growth rate has been historically much higher. All our aid is really doing is reinforcing African dictatorship and political corruption by rewarding it. If rich countries are hellbent on helping the poor countries (and as humans we certainly should feel some need to help our fellow man) they should do it by targeting that aid toward creating incentives for them develop their economies and set economic and political goals for themselves. The "give them a fish/teach them to fish" proverb is appropriate here.

    The good news is some African nations (like Botswana, Mozambique, Namibia, South Africa, and Uganda) are starting to get their economic houses in order and see a stronger pace of growth. And they're doing it by freeing up trade. It's certainly not the sole factor in their gradual emergence but its definitely a big one."

    So we can continue painting people as greedy capitalists looking out for number one or we can actually look at the data and understand everything that is going on. You help people most by empowering them, not by holding their hand. I couldn't think of anything more degrading myself.