Question

Essay question: Through the 1990s the IMF, World Bank and most economists pushed for open trade and open capital markets as components of the Washington Consensus. These elements have been important characteristics of economic globalization. Now that you have seen contagion of crises-both financial and trade shocks- do you think globalization is a good thing? Do you think globalization makes crises more frequent, more deep? Discuss.

Answer 1

The short-term effects of globalization are often very disruptive. Production tends to shift to wherever it’s cheapest. That means that people in more developed economies will lose jobs to people in less developed economies. The benefit for the developed economy is that the people there will be able to buy the foreign-manufactured products more cheaply than domestically produced ones.

Unfortunately, these gains and costs aren’t evenly distributed. The fact that Americans can buy a shirt for 10% less at Walmart doesn’t console the Americans who lost their jobs making shirts. At the same time people are losing their jobs, business owners often increase their profits by offshoring. The combination worsens income inequality, which is linked to a host of societal ills.

These problems are exacerbated the faster that globalization occurs, for the simple reason that it takes time for people to find new jobs and for new industries to emerge. If a major new trade deal leads to a flurry of jobs leaving a country, some of the people who wind up unemployed may never find career-quality employment again, instead having to work temporary or part-time jobs because it’s all they can find.

Long-term, the effects of globalization should be generally positive. Globalization makes economies more efficient, by eliminating the barriers that keep work in places where it doesn’t make sense. After a wrenching period of adjustment, either industries should become more efficient will die out in certain countries, freeing up workers to do other things.

The biggest downside remains the worsening of income inequality that I mentioned earlier. Even in the long run, globalization tends to benefit business owners over employees. For it to really benefit the population at large, governments need to make policies that ensure that economic growth translates into benefits for the population at large. In general, this means taxing business profits and using that revenue to strengthen safety nets like welfare and disability, social programs like education, etc.

The United States has done a poor job of translating globalization-related economic growth into benefits for citizens. China has done a somewhat better job, but still not a good one, with many citizens literally cheated out of their homes while a class of well-connected business people becomes staggeringly rich.

The bad side of globalization is all about the new risks and uncertainties brought about by the high degree of integration of domestic and local markets, intensification of competition, high degree of imitation, price and profit swings, and business and product destruction. Corporations that previously have been enjoying the benefits of globalization, now face unstable and unpredictable demand and business opportunities and their products quickly become commodities, leaving them little or no pricing power and under constant pressure by new competitors that undermine profitability.

The bad side of globalization is also about tight credit, deleverage, and declining money flows across local and national boundaries, as creditors tighten credit to both good and bad borrowers, depressing aggregate demand; setting the world economy into a vicious cycle of income and employment declines; and euphoria is succeeded by pessimism and a burst of asset bubbles, perpetuating the downward spiral of the world economy