This is an article I read a few months ago and have been meaning to post for some time. I hope some of you also find it interesting


Globalisation and the rise of inequality
Rich man, poor man
Jan 18th 2007
From The Economist print edition

A poisonous mix of inequality and sluggish wages threatens globalisation

GLUERS and sawyers from the furniture factories in Galax near the mountains of Virginia lost their jobs last year when American retailers decided they could find a better supplier in China. At the other end of the furniture industry Robert Nardelli lost his job this month when Home Depot decided it could find a better chief executive in his deputy. But any likeness ends there. Mr Nardelli's exit was as extravagantly rewarded as his occupation of the corner office had been. Next to his $210m severance pay, the redundant woodworkers' packages were mean to the point of provocation.

That's the way it goes all over the rich world. Since 2001 the pay of the typical worker in the United States has been stuck, with real wages growing less than half as fast as productivity. By contrast, the executive types gathering for the World Economic Forum in Davos in Switzerland next week have enjoyed a Beckhamesque bonanza. If you look back 20 years, the total pay of the typical top American manager has increased from roughly 40 times the average—the level for four decades—to 110 times the average now.


These are the glory days of global capitalism. The mix of technology and economic integration transforming the world has created unparalleled prosperity. In the past five years the world has seen faster growth than at any time since the early 1970s. In China each person now produces four times as much as in the early 1990s. Having joined the global labour force, hundreds of millions of people in developing countries have won the chance to escape squalor and poverty. Hundreds of millions more stand to join them.

That promises to improve the lot of humanity as a whole incalculably. But in the rich world labour's share of GDP has fallen to historic lows, while profits are soaring. A clamour is abroad that Mr Nardelli and his friends among the top hundredth—or even the top thousandth—of the population are seizing the lion's share of globalisation's gains. Meanwhile everyone else—not just blue-collar factory workers but also the wider office-working middle class—shuffles along, grimly waiting for the next round of cost-cuts. They are not happy.

Signs of a backlash abound. Stephen Roach, the chief economist at Morgan Stanley, has counted 27 pieces of anti-China legislation in Congress since early 2005. The German Marshall Fund found last year that, although most people still say they favour trade, more than half of Americans want to protect companies from foreign competition even if that slows growth. In a hint of labour's possible resurgence, the House of Representatives has just voted to raise the federal minimum wage for the first time in a decade. Even Japan is alarmed about inequality, stagnant wages and jobs going to China. Europe has tied itself in knots trying to “manage” trade in Chinese textiles. The Doha round of trade talks is dying.

What is to be done about this poisonous mix? If globalisation depends upon voters who, as workers, no longer think they gain from it, how long before democracies start to put up barriers to trade? If all the riches go to the summit of society and that summit seems beyond everybody else's reach, are the wealth-creators under threat?


Should you blame China or your computer?
The panic comes in part from a rush to lump all the blame on globalisation. Technology—an even less resistible force—is also destroying white- and blue-collar tasks in a puff of automation and may play a bigger role in explaining rising wage inequality and the sluggish growth of middling wages. The distinctions between technology and globalisation count, if only because people tend to welcome computers but condemn foreigners (whether as competitors or immigrants). That makes technology easier to defend.

For economists, the debate about whether technology or globalisation is responsible for capital's rewards outpacing those of labour is crucial, complicated and unresolved. One school, which blames globalisation, argues that the rocketing profits and sluggish middling wages of the past few years are the long-lasting results of trade, as all those new developing-country workers enter the labour market. This school says that technology helps workers by increasing their productivity and eventually their wages. The opposing school retorts that technology does not increase wages immediately, and some sorts of information technology seem to boost the returns to capital instead (think of how much more a dollar's worth of computing power can do these days). And it questions whether Western incomes will remain flat: recent wage rises in America and pay claims in Europe and Japan may start to reverse the balance back away from capital.

In practice, it is hard to parcel out the blame between technology and globalisation, because the two are so intertwined. Ask IBM, which is hastily shipping bits of its services arm to India; or the call-centre worker who sees off the threat of his job going abroad by settling for only a tiny pay rise. And from a policymaker's point of view, it matters little what is causing the pain: the remedies are broadly the same.

The first rule is to avoid harming the very miracle that generates so much wealth. Take for instance the arguments about high executive pay. Some say this is simply a matter of governance—and forcing company boards to work better. If only it were that simple. High pay is, by and large, the price needed to attract and motivate gifted managers, as our special report argues in this issue. The abuses of companies such as Home Depot obscure how most high pay has been caused not by powerful bosses fixing their own wages, but by the changing job of the chief executive, the growth of large companies and the competitive market for talent. Executive-pay restrictions would not put that horse back in its box, but they would harm companies.

If the winners are difficult to curb without doing damage to your economy, the losers are tough to help. Doling out aid for the victims of trade makes sense in theory; but in practice it is increasingly hard to do (see - ONLY REGISTERED AND ACTIVATED USERS CAN SEE ALL LINKS - CLICK HERE TO REGISTER). When the jobs going abroad are not whole assembly lines, but bits of departments, how exactly do you pick out the person who has lost his job to globalisation from the millions of people changing jobs for other reasons? And, hardhearted though it may sound, most of the gains from trade and technology alike come from the way they redeploy investment and labour to activities that create more wealth. That, like all change, can be painful; but it is what makes a country richer. A policy locking people into jobs that could be better done elsewhere is self-defeating.

The same goes for protectionism—especially now that the victims of globalisation are so scattered throughout the rich world, not camped in embattled industries. Trade has always created losers and it has always been in their narrow interest to seek protection (even if it hurts everyone else). But if many workers across many different industries were to demand protection at once, the selfish appeal of such a shield would fade.

Because hardship from globalisation is so difficult to distinguish from hardship in general, it would be open season to put up trade barriers in industry after industry. Widespread protection would surely meet with retaliation from abroad. Even if people gained as workers they would lose as consumers, investors and future pensioners. Moreover, the protection of jobs and pay would be short-term, because it would gradually lead to companies losing competitiveness as rivals in India and China innovated (see - ONLY REGISTERED AND ACTIVATED USERS CAN SEE ALL LINKS - CLICK HERE TO REGISTER).
Paradoxically, therefore, the greater the number of people threatened by globalisation, the less each of them is likely to gain from getting their governments to stand in its way.


The limits of redistribution
If protectionism will not help the losers, what about using the tax system? Some argue that redistributing more cash from the Nardellis to the Galaxians would not just make society less unequal; it would also buy middle-class support for globalisation. In fact the two arguments should be kept separate.

This newspaper has long argued that a mobile society is better than an equal one: disparities are tolerable if combined with meritocracy and general economic advance. For decades America has shown how dynamic economies are better than equality-driven ones at generating overall prosperity. That still leaves plenty of room to debate how progressive to make taxation (some of George Bush's tax cuts were needlessly regressive), or how lavish to make public services (American welfare is hardly generous). But a society would want compelling evidence that the social contract had been torn up before flexing the tax system to offset what may turn out to be only temporary fluctuations in relative incomes. And it makes little sense for free-traders to use taxes to buy off people from voting for protectionism, when doing so would in any case be against their interests.


Active, not reactive
Instead, the way to ease globalisation is the same as the way to ease other sorts of economic change, including the impact of technology. The aim is to help people to move jobs as comparative advantage shifts rapidly from one activity to the next. That means less friction in labour markets and a regulatory system that helps investment. It means an education system that equips people with general skills that make them mobile. It means detaching health care and pensions from employment, so that every time you move your job, you are not risking an awful lot else besides. And for those who lose their jobs—from whatever cause—it means beefing up assistance: generous training and active policies to help them find work.

None of that comes cheap—and much of it takes years to work. But an economy that gains from globalisation can more easily find the money to pay for it all. The businesspeople and politicians gathering on their Swiss Alp next week should certainly spend more time worrying about the citizens of Galax; but they also need to be far more courageous about defending a process that can do so much good even if its impact can sometimes appear so cruel.

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Thanks for posting Rob. Globalization is always a touchy subject in society today. A lot of people I've encountered have said its rubbish or that job protection is of the utmost importance for their elected leaders. But for decades economists have measured the effects of trade and the benefits it brings to its participants. The article makes an important point about comparative advantage. Globalization is not a zero sum game. In most cases it has brought wealth and prosperity to the poorest of regions and continues to enrich some of the wealthiest.

The problem here is the human cost in the transition stages of the economy. Its long and painful and if you ask a sociologist, its probably not worth it (any sociology majors here?).

Interesting article you posted there Rob... a subject which can lead to a wide range of issues.

I'll put my opinion forward and say that some of the salaries the top-executives is rather.. umm.. eye-opening to the average Joe. But the other part of me (the pro-glo-balisation side) accepts the arguement presented in this article about managers operating in a much more challenging and dynamic business environment which calls for greater skills in managing everything from the global direction of the business to what their competitors down the road are doing. On top of that there's also the risk of getting it wrong and possibly putting the company in ruins (no need to mention the host of corporations that have gone belly-up due to poor/criminal management). It's not globalisation that caused these companies to falter, but rather the pressures placed upon managers in not falling behind in the pursuit of global competitiveness. So in say that, I guess I can understand the millions being thrown at these top-exec's.

I agree with the article that protectionism is not the answer. It's counter-productive both in terms of company profits and more importantly it's counter-productive to the benefit of innovation that competitive pressures bring.


Nice theory... but if only labour was that mobile. Competitive advantages can change very quickly as company's focus on providing something unique yet valuable to the consumer. This can change in a matter of days if need be, ...but it's certainly not possible to shift people from job to job that quick. And even if workers within an organisation could be shifted from one line of work to another, you can guarantee that their level of specialisation in their new job will be low. It will take time for them to become highly productive as workers, and time is also a key drawback in terms of training. By the time these workers do become specialised in their tasks, the HR manager will very quietly post a message on the company intranet stating these workers will again be changing their job description to fulfill a new corporate direction.
Mass redundancy will also not work due to the cost of the undertaken, and then the time and monetary cost of hiring new workers and training them as well as instilling a sense of organisational culture.


Sounds like the government will be paying a lot of money to fund these theoretical ideals. .. and how does the article propose the government pay for all this? ..ah yes,... increasing TAXES. But wait, there'll be public outcry and groaning when a tax hike is announced, so eventhough it's for the peoples' benefit, society's not willing to pay for it.


Also, this idea of spreading money more evenly between the rich and poor via taxes.. well as much as we'd like the poorer people of society to improve their standard of living, the average Joe likes the fact that they are a class above other people (even if average Joe doesn't admit it, it's a psychological form of self-satisfaction, even a sense of self-achievement).

Globalisation is a fact of life nowadays. Blame it on the internet, blame it on profit-maximizing transnational corporations, or just go on and blame it on President Bush.... it doesn't matter who/what you point the finger at, this is the world we live in, and the quicker people accept that the boundaries between countries are continually diminishing, and that economic prosperity is good for all citizens, the sooner they'll realise that globalisation has many positives to offer them.

The best way to solve all this bitterness against globalisation is realisation. Explaining to people what globalisation can bring them could well be the key .. but I will admit that I follow a more business/economic line of thinking.


I look forward to others discussing in this thread..

Like any other thing globalization also has several advantages & disadvantages.

It seems globalization is a win-win situation for all parties:

companies entering new markets, opening branches / factories in developing countries due lower labor costs (and often also lower taxes) - gaining higher profits, developing countries increase their BDP, people there got jobs & earn money, consumers in Western World got many goods for less money than ever before.

But ...

Due cheaper labor costs in developing countries (often due no social security & unfair work conditions) Western middle class is losing its jobs in their own countries - since production is migrating to developing countries.

The problem that arises here is: if companies are no more interested in offering new jobs in developed countries that means no jobs for middle class -> less money for general consumption -> less demand -> lower prices -> lower profits -> lower BDP etc.

The poorest class in both regions remains intact, the wealthiest class gains the most, while middle class in Western countries gains benefits in the short run (lower prices due eg. Made in China goods) yet in the long run they are loosers (losing thier jobs due migration of production to developing countries), while middle class in developing countries gains more (jobs + lower prices).

Also: it seems nobody is quite aware that some resources are limited. Imagine China & India being fully developed -> billions of people being able to buy & consume goods & services that are now inaccessible to them. This will result in abnormal rise of demand for raw materials & energy (incl oil, gas & petrol). So since these kind of things are limited in supply, their prices will explode!
And when this happens everybody will be losers.

We in the Western countries are not much aware that good living standard for somebody always has its price: usually resulting in lower standard for some other guy (eg. in 3rd World country, or even for one on the other end of your own hometown).


IMO globalization is driven & been forced by large multinational corporations - and they gain the most from globalization. While the other gains or losses for other parties are just collateral damage - and often not important to corporations, yet big concerns for the states / countries and their governments.

Yes, at this moment I personally can enjoy all the benefits of globalization, yet tomorrow I can lose my job, face higher prices, high social & health security costs etc - all making my life a living hell.

So, the solution is to open my own business & transfer all the operations in China or India. Anybody interested in investing in my new business?

Eni.. you make it sound like there won't be any jobs for the middle class. This certainly is not and will not be the case. Only the most basic jobs are being moved to cheaper labour nations such as China, India or African nations (eg: Nike). Sure we hear about call-centres and factories being moved to these nations, but I can bet that more people are being made redundent due to company restructuring rather than corporations moving part of their operations to cheap-labour countries. By restructing I'm referring to instances where company's have become too large for their own good (eg: current situation at Ford America).


Possible counter arguments:

1. Cheaper products due to globalisation -> Greater level of disposable income since good are cheaper than before -> more spending -> greater demand

or..

2. Using your argument of increasing unemployment of middle class: Increase in unemployment -> Decrease in inflation (due to lower levels of spending) while wages remain fairly constant -> More affordable goods -> Increase in demand

3. You say that lower demand -> lower prices which may well occur, but lower prices will very quickly bring demand back up as consumers act positively (and quickly) to lower prices. Ofcourse I undertand your point that demand cannot pick up since the middle class is unemployed, but like I explained earlier, the entire middle-class will not become unemployed in a flash, otherwise the economy itself will implode.


The economy runs in cycles, so either way it will pick up. If one business feels the pinch of decreasing profits due to the economy, you can be sure that their competitor's are feeling it too (assuming that particular company isn't losing money for some reason other than an econominc downturn, that is: implying some form of mis-management). With peoples' level of disposable income for general expenditure decreasing, we tend to save rather than spend. Soon enough this trend to saving will increase consumer's level of disposable income, and then again push up demand and spending activity.

I am most pleased that you guys find this subject interesting ....I was hoping it would stimulate some discussion ....and I can see it already has. Thank you for your very intelligent contributions.

Not all the goods follow such pattern. You are forgetting about price elasticity ... Some goods / prices are elastic some are not.

And like I said earlier: some materials (like raw metal eg. iron, aluminum, copper etc, and eg. oil & gas, coal etc) are in limited quantity. So, prices will be high because demand will be high.

Also: not all countries are like USA. Some (eg. all European countries) even have nationwide social & health security available! So, bigger social & health expanses -> higher taxes -> higher prices.

I'm not saying entire middle class will suffer from globalization, but some segments definitely will. I can see middle class slowly shrinking in the Western countries -> some migrating in lower classes, some in higher (depending on situation), while in developing countries yet non-existent middle class will arise.

So, some sort of redistribution. Lower standard for some in the West, higher fore some in the East.

But like I said: imagine Indian & Chinese (combined population: 2.5 billion), - and add some other East Asian countries here - middle class explosion. All buying cars, other consumer goods , using services etc.

The demand for raw materials & energy will explode! And so will prices since the supply is very limited. And consequently all the other products & services will be more expensive, and life in general will become more expensive. Worldwide.

I'm not talking luxury goods & services here, yet the essential ones!

Yes, there will be cycles - they always are in economic systems, yet the trend will move towards more expensive life -> lower living standard.


Also do not forget about bigger pollution due more developed industry -> impact on environment -> health problems, climate change, imbalances in ecosystems etc. -> more expenses to repair the damages etc

You know, I can live with higher prices of cameras, TV sets, MP3 players, Adidas snickers, Armani suits, BMWs etc but higher prices of health care, food, water, heating / air conditioning, electricity, gas / oil / petrol will definitely affect my standard.

So, I'm quite concerned about globalization ... in the long run. Maybe ... with a bit of luck I'll be dead already when the most unpleasant things happen in the future.

Thanks for posting this and starting the debate, Rob.

I'm sounding like a broken record and I'm not singling out this article, but I am absolutely disgusted by the way the media likes to portray executive salaries. Where does the term "Beckhamesque salary" come from? It comes from a certain mediocre footballer! Has anyone ever called his "Beckhamesque salary" excessive? Probably not, because he can kick a ball. The article says executives are getting Beckhamesque bonanzas, but damn it so is Beckham! Why are successful executives are criticized for getting bonanzas, while Beckham and other metrosexual celebrity types are not? They contribute far less to the world than executives. Although the article later makes an acceptable point about exec pay, I just think the media excessively denigrates the contribution executives and companies make to society. If you want to see vulgarity, take a look at Forbes List of Highest Paid Celebs and imagine the outrage if executives earned those sums.

Secondly, fair and equal are different things! Fair is not equal. Equal is not fair! Companies and major stockholders will benefit more from globalization than their workers. That is not equal, but it is fair! It is absolutely fair! Companies own the assets and provide the capital. Without them, workers don't have jobs. It is not the role of business and commercial enterprises to distribute the wealth they create to anyone other than their stockholders. Likewise, it is not the duty of western governments to redistribute tax, aid, economic grants for the benefit of other countries in the developing world. They should not act as Santa Claus.

I am not sold on the commodity price explosion theory. Commodity prices go up and down. During the first oil crisis in the 1970s, analysts all thought oil prices would stay up forever. They fell. When oil spiked again in the early-1980s, again people thought prices would stay high. GM and the other American carmakers even downsized their cars in anticipation of permanently high oil. Remember the 1985 Cadillac Deville and Fleetwood Sixty Special and how "small" they were? Guess what happened after oil stabilized? Oil fell sharply! Commodity prices go in cycles. When everyone expects them to rise forever, they fall. Of course, some Wall St. analyst will grandiosely predict that "it's different this time."

Every stock market analyst and fund manager expects oil prices to remain or rise from these levels. Do you know why they think that? Because they are like sheep that fall in with the rest of the herd. That is why most mutual fund managers are rubbish and cannot consistently beat the average. The public is undaunted and keeps believing these idiots and their so-called "expert" analysis. As a result, the public generally thinks oil and commodity prices won't fall.

Finally, the west has some crazy ideas about wage inequalities driven by globalization. Chinese, Indian and other emerging markets' wages will never be what the western world judges to be "fair" and "ethical", but that does not make them unjust! Different countries have different standards. The west cannot impose their concept of wage equity on any other country. Rob has mentioned that Chinese wages are taking many workers out of poverty. I would just like to add that the alternative to Chinese workers making "low" wages would likely be farming. They would have to survive feast or famine on their own. Despite earning "low" wages, Chinese workers have benefited from globalization, but in a way that the west does not accept. The western media's idea of benefitting economically is probably closer to the way the American middle-class lives - that is, beyond their means using massive amounts of debt to pay for all the frivolous consumption and lawsuits that they can't afford.

Regarding oil & other raw material prices: they will rise in the long run since natural resources are limited in supply. That's a fact. Limited supply + higher demand = higher prices. A fact.

Regarding working conditions in eg China: in many cases they are far from being humane. Not talking about salaries here. In the Westerns world the legislation requires some standards to provide proper working conditions - eg. safe working environment, protective clothes for workers etc to name some ... And to provide such standards companies faces quite high costs, while in eg. China such legislation is milder or even non-existent, so its cheaper to run production there - even regardless the salaries. Of course salaries in China won't be as high as in eg USA or Germany. But working conditions (some relevant standards) should be same - not that in some countries (eg China) slavery is de facto legalized (working for 16 hours in awful conditions for a lousy salary). And gaining competitiveness with a help of such awful acts (ie de facto slavery & inhumane treatment of workers) is beyond fair & tasteful.

And vice versa. Without human working force companies are dead. Human work is added value! Remember that! Being that CEO or a simple man behind production line. Capital & human working force are dependent on each other. Capital can't live without working force, and working force can't operate without capital. So claiming capital is everything is a bit naive.


There is another trap of globalization - not an economical but cultural one: cultural dominance of the Western values. Being that in particular American, French, English, etc it doesn't even matter. Sometimes this goes beyond sick.

Globalization is new the colonization. Yet this time not the countries are the colonists but the big corporations take colonist role. Not the monarchs are the rulers this time, but the moguls & tycoons.

As has been said throughout history, "all civilizations rise and fall". This time around I'm not so sure the people are willing to let it fall, especially in a mostly democratic, globalized society. Man has overcome many an obstacle, this is yet another, of the like we've seen before just in a different way; history repeats itself - that I've heard many a time too.