What is globalization? Simply, it is the growth of international trade and of the number and scope of institutions which, like firms, non-governmental organizations and governments, conduct transnational transactions. Globalization is also the integration of international markets - the reduction of barriers to trade between nations.
How can we measure globalization? One measure of globalization is the ratio of world exports to world Gross National Product (GNP). According to this measure, the world economy today is more global than ever. Is globalization good or bad? Should it be encouraged? These are the questions at the heart of the globalization debate. The two sides are well known. There are those who support globalization. They argue that the benefits outweigh the costs and everyone gains. Then there are those that argue against it. They point to child labor, and the ever-increasing income gap between the rich and the poor as a sign that the costs of globalization outweigh the benefits.
So who is right? Let us first consider the arguments in favor of globalization. Given perfect competition and free-flowing information and technology, the Standard model of international trade predicts that, other things being equal, a rise in a country's terms of trade increases welfare. A country's term of trade is the price of exports relative to imports. The argument is that trade increases a country's terms of trade, because it forces countries to allocate their limited resources more efficiently. In order to maximize their gains from trade, countries will want to produce and export goods in which they have a comparative advantage. They will want to specialize in the production of goods where the cost of producing those goods, instead of other goods, is lower relative to other countries.
Thus the argument is that trade is good because it increases the overall amount of wealth. It increases the size of the communal pie. It says nothing, however, about the distribution of the pie. But does that matter?
In my opinion, it does. Distributional issues must be addressed. Economic inequity is a problem because it leads to other types of inequality. Among others, it affects the likelihood that one will succeed in school and later in the job market. In addition, inequalities in wealth, once in place, tend to perpetuate themselves. Thus, I would argue that a central issue of the globalization debate is over the distribution of the benefits of trade.
Is the increase in international trade responsible for the increasing gap between the rich and the poor? According to the Hecksher-Ohlin model, which again assumes perfect competition and free flow of information and technology, owners of a country's abundant factors gain from trade while owners of a country's scarce factors lose. A country's abundant factor is a resource of which a country has a relatively large supply, while its scarce factor is the resource of which a country has a relatively small supply. Consider two countries: the United States and Vietnam. The United States is abundant in high skilled labor and scarce in low skilled labor, while Vietnam is abundant in low skilled labor and scarce in high skilled labor. The United States will export goods which require highly skilled labor while Vietnam will export goods which require low skilled labor. As a result, we should expect the wage of unskilled labor in America to decrease and that of skilled labor to increase. In Vietnam, the opposite will be true. The wages of low skilled workers will increase while the wages of high skilled labor will decrease. Consequently, this model predicts that the income gap in Less Developed Countries (LDCs) will lessen as international trade expands. In fact, it predicts the world income gap should decrease as well.
Thus, international trade should benefit LDCs and any harm done to low skilled labor in more developed countries should be offset by redistributing the benefits of trade. But is that really a possibility? Are people really willing to raise taxes in order to help those who are adversely affected by globalization?
Some will argue that such increases in taxes are unnecessary. After all, people can improve their socio-economic position through education. Everyone can do it, it's the American way. But in some cases, the short-term benefits of skipping school in order to work and survive exceed the discounted long-term benefits from education. In these cases, it seems that, unless society is willing to help its poorer members, differences in wealth will perpetuate themselves.
So in the end, who is right? Well, it depends. As we saw, economic theory tells us that a rise in the level of international trade will lead to a net increase in overall levels of wealth. So even though some will inevitably lose as others gain, we are justified in pushing for globalization since in the end everyone could benefit if adequate distribution of wealth takes place.However, as we saw, our economic models are based on strong assumptions - perfect competition and the unrestricted flow of information and technology across borders. It is clear that in reality, some of these assumptions are lacking. Does this mean that globalization should not be endorsed? No, it means that the benefits of globalization are not as evident as they might seem and this increases the importance of a government's social policy when assessing the benefits from trade. Government policy is a reflection of what society values and prioritizes. Thus, whether globalization is deemed good or bad is not a question of whether trade is beneficial, but rather a question of whether we agree with the way our society is dealing with the effects of increased international trade.
