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Who’s Afraid of Globalization?
Globalization means a world of opportunity and a world of danger. We rush to Wal-Mart for the basics, but we know that many of them are made in China or some other low-wage country. We want low prices at Best Buy and Circuit City on digital cameras and ﬂat-panel TVs, but we fear that our good fortune as consumers costs jobs at home. We like to be able to place orders on the telephone twenty-four hours a day, but when we hear strange accents on the other end of the line, we wonder where on earth the operator sits. We realize when we think about it that the rise out of poverty of more than 2 billion Chinese and Indians must be good for the world; we question whether it’s good for us.
We celebrate the fact that American success is built on innovation and rising productivity, but we wonder whether the new technologies and products will create enough jobs and if our children will live as well as we do. Surveys in the United States and Europe ﬁnd very mixed opinions about globalization, often reﬂecting these conﬂicting feelings within individuals themselves, rather than simply the rifts between supporters and opponents of globalization. A majority of Americans and Europeans think globalization raises their standard of living; a majority also believe that it is bad for employment and job security.(1)
For the questions about who wins and who loses in the new global economy and the uncertainties about whether the opportunities are worth the risks, there is no one right answer. People disagree about deﬁnitions of globalization, its causes, and its consequences. Many simply wonder whether any job in America is safe. By mid-2004, about 1,000 stories a month on outsourcing and offshoring were appearing in the U.S. print media, with such titles as “Is Your Job Going Abroad?”(Time, March 1, 2004), “Is Your Job Next?”(BusinessWeek, February 3, 2003), and “Is Your Job Coming to India? Get Used to It” (William Pesek Jr., Bloomberg.com, October 5, 2004).(2) One consulting ﬁrm predicted in September 2003 that 1.4 million American jobs would move overseas over the next twelve years, and that the real wages of 80 percent of the population would fall.(3) But a McKinsey study conducted a month earlier concluded that offshoring jobs was a “win-win” for both the United States and developing countries like India, as many low-skilled jobs would move overseas, raising incomes there, and U.S. ﬁrms would become more productive and proﬁtable and better able to expand higher value-added operations at home.(4) Despite their optimism, however, McKinsey researchers did acknowledge that 55 percent of those reemployed after losing a job because of import competition or offshoring end up earning less than 85 percent of their old wages in the new job. Many take even bigger pay and beneﬁt cuts.
Other studies claim that outsourcing low-end jobs leads to more job creation at home. Matthew Slaughter, an economist at Dartmouth, analyzed government data on U.S. multinational corporations and found that for every job offshored, a company created almost two in the United States.(5) Catherine Mann at The Brookings Institution showed that by lowering the cost of information hardware, production abroad has raised
U.S. productivity and generated $230 billion of additional GDP between 1995 and 2002. Furthermore, an open economy in which U.S. companies can create jobs abroad is also one in which foreign companies can create jobs in the United States. Between 1986 and 2001, the number of jobs that foreign businesses established in the United States actually
doubled, while the number that moved offshore grew only by 56 percent. The private services work (like legal services, programming, banking, and consulting) that the United States sells to foreigners exceeds by over $50 billion the services Americans buy from foreign companies.(6) Similar ﬁndings are reported for Europe. Oxford University researchers found that while U.K. companies are buying more services from ﬁrms abroad, U.K. exports of business services have grown even faster.(7)
Mainstream economists like Alan Greenspan, the chairman of the Federal Reserve Board, and N. Gregory Mankiw, former chairman of the Council of Economic Advisors, assure the public that outsourcing work raises productivity and the standard of living in the United States. Free trade, they argue, ultimately creates more and better jobs in the United States than it destroys. Historically, Mankiw explained, innovation has always generated good new employment opportunities:
It is hard to predict what changes American ingenuity will bring to the
U.S. economy. For example, over the past half century, new technology has led to great advances in farm productivity. As a result, the number of Americans working on farms has declined from almost 20 percent of the workforce in 1940 to about 2 percent today. In 1940, no one could have predicted that some of the grandchildren of farmers would become website designers and CAT scan operators. But they did, and at much higher wages and incomes.(8)
The economists base their optimism about globalization and jobs on standard trade theories of comparative advantage. These theories predict that as developing countries with large populations move into activities that use a lot of unskilled and semiskilled labor, the United States and other advanced countries will gain advantage in activities requiring more intensive use of capital and well-educated workers. Some of these neoclassical economists now, however, are having second thoughts. Paul Samuelson, Nobel Prize-winning economist at MIT known for his contributions to modern trade theory, published an article in fall 2004 in which he shows how even skilled workers in the advanced countries could lose out as China upgrades its economy.(9) Globalization should increase the world’s total income and its average standard of living, but there’s no reason to think that any particular country or region’s advances will outweigh its losses. As Samuelson points out, worldwide gains will only be “cold comfort” for losers.
Some think that in an open global economy, government can no longer regulate or buffer citizens against strong economic tides of change. In The Borderless World (1990), one of the ﬁrst books on globalization, Kenichi Ohmae, a well-known management consultant, claimed that “[the global economy] is becoming so powerful that it has swallowed most consumers and corporations, made traditional national borders almost disappear, and pushed bureaucrats, politicians, and the military toward the status of declining industries.”(10) Thomas Friedman, the New York Times op-ed writer, describes globalization as a race of Formula One cars.(11) If you’re worried about drivers smashing into the walls, you can give them driving lessons and improve the skills of the ambulance technicians. But, says Friedman, you can’t put bales of straw around the walls of the racetrack to buffer the accidents without ruining the race. “If you don’t want to do all these things, then you should forget about Formula One racing and become a jogger. But be careful, because as a jogger in this world you will be run over by a Formula One Car.”
Ohmae and Friedman are enthusiastic about globalization’s impact in shrinking the role of government in the economy, thereby allowing people to develop their talents without hindrance from the bureaucracy. Critics of globalization, though, see a world “running out of control toward some sort of abyss.”(12) They regard the World Trade Organization, the International Monetary Fund, the World Bank, the G8 summits, and the Davos World Economic Forum as arms of multinational capitalism: institutions bound on destroying the safety nets that once cushioned economies, rather than organizations working to moderate and regulate the international system. Starting with the huge demonstrations against the World Trade Organization in Seattle in 1999, massive protests against globalization have been mounted at virtually every important international meeting. At Seattle, the “turtle and Teamster” alliance of environmentalists and union members showed the glimmerings of a new politics building on anxieties about the global economy.
In countries around the world today, political movements are organizing around these issues. Politicians have climbed on the bandwagon, too. In the U.S. 2004 presidential election campaign, Democrats accused managers who offshore jobs of being “Benedict Arnold CEOs,” while Republicans claimed that savings from outsourcing created more jobs than were lost. But are the new jobs in the economy as good as the ones that are disappearing? The Democrats proposed to remove tax loopholes for companies who invest abroad. But are tax breaks really a major factor driving offshoring? To these and other basic questions about the impact of globalization, the politicians provided little in the way of convincing evidence to back up their positions.
The contradictory claims about globalization and its effects led a group of us who are researchers at the Industrial Performance Center (IPC) at the Massachusetts Institute of Technology to launch a systematic investigation into the large-scale changes in the international economy that have occurred over the past twenty years and their effects on the organization of economic life. Globalization may be the single most important change in our lifetime, yet virtually everything people think they know about its consequences comes either from opinions, anecdotes, or very general economic theories. Analyses based on hard evidence from the experience of societies dealing with these pressures are few and far between. While facts alone will not necessarily force anyone to reach one conclusion or another about the effects of glo...