The Benefits of Globalization: An Economic Perspective

[1] Introduction. The process of globalization of the world economies has recently generated severe protests from many quarters, including on the pages of this journal (Moe-Lobeda, 2001; Yutzis, 2001). Among these critics, almost every social ill from poverty to pollution to pestilence seems to be caused by globalization and the evils of capitalism. In this paper we shall argue that the increased openness of economic life around the globe has generated great benefits to vast numbers of people. To be sure, not everybody has gained from globalization, or gained equally, but never have so many people in so many countries lived so well. Furthermore, we contend that globalization and the extension of freer markets to the world’s people offer the best hope for sustained progress around the world. Government solutions of the sorts supported by those opposing globalization will consign millions of the world’s poorest people to continued squalor.

[2] What is Globalization? For the purpose of discussion, we use the term globalization to refer to the trend toward increased trade in goods and services, increased capital mobility, and increased/faster/cheaper communication and transportation.

[3] Although there have been periods of significant international trade and investment, most notably in the years leading up to World War I, the recent trend towards greater openness began after World War II. Since 1947, The General Agreements on Tariffs and Trade (GATT) helped reduce barriers to trade and investment. GATT has now evolved into a World Trade Organization (WTO), which seeks to reduce barriers to trade and investment and resolve disputes. As a result of GATT and the natural reductions in the cost of transport, the volume of trade flowing around the globe has dramatically increased. Among 90 countries for which complete data were available between 1970 and 1998, there was a 394% increase in the total volume of imports and exports (in real terms). (World Bank, 2001.)

[4] The benefits of trade. Economics teaches that voluntary trade is a positive-sum exercise. That is, people trade because they gain by trading – this is true for both the buyer and the seller. Notice that after buying something at a store, both parties to the exchange often say “thank you” because both parties have improved their situation in life through the exchange. To an economist, it is difficult to describe any voluntary trade with the term exploitation.” Most often, “exploitation” means someone is paid less (or is paying more) than he or she would like. Much of the literature on this subject that comes from a religious perspective (Duchrow, 1996) implicitly assumes, usually along Marxian lines, that all economic relationships are power relationships characterized by aggressors and victims. They assume that economic life is zero-sum, where there must be winners and losers. But the economist rejects this. In fact, voluntary economic arrangements are positive sum games with winners and winners (though it is true that some people may win more than others). The entire basis of economic life, unlike political life, is to better your own condition by doing good things for others. This principle was best espoused by Adam Smith (1776) himself with his famous “invisible hand” metaphor.

[5] Furthermore, we would not expect the benefits of trade to stop at national borders. These borders were drawn for political reasons, not economic reasons. And it should be noted that countries do not trade. Only people trade; individuals gain by trading across national boundaries just as they gain from trade within a single country. Why should trade be good between Ohioans and Kentuckians, but harmful among people of different colors, between people who speak different languages, or because the people live under different political regimes? Much of the debate about international trade is characterized racism, nationalism, and talk of them and us. Again, religious thinkers must understand that trade between people is a fundamentally enriching exercise for all involved.

[6] Trade allows specialization. The primary way in which trade works to improve our lives, and ironically the target of much criticism from opponents of globalization, is through specialization. International trade takes place when one group of people can produce a product cheaper than another group. For example even though it would be possible to grow oranges in Alaska (using greenhouses), Floridians can grow oranges far cheaper than Alaskans. By contrast, Alaskans produce salmon cheaper than Floridians could ever imagine. On the basis of these differences in costs of production, it makes sense for the people in Florida to grow oranges and for Alaskans to produce salmon, and then for the Floridians to trade some of their oranges to the Alaskans for salmon. In so doing, both the Floridians and the Alaskans will have more oranges and more salmon than it would be possible to have if they each tried to produce both products. That is, their standards of living will improve through this specialization and trade.

[7] An economic policy of self-sufficiency would cause Floridians to waste precious resources raising salmon themselves even though the salmon raised by Alaskans would be cheaper. Likewise, self-sufficiency would cause the Alaskans to build costly greenhouses to grow oranges instead of buying cheap Florida oranges.

[8] This principle has been recognized by economists since the time of Adam Smith. Smith (1776) pointed out that Scotland could grow grapes and even make wine, but that this would take more resources than would be needed to pay for wine from other countries. This principle that specialization and trade leads to higher living standards is one of the most powerful, and least controversial, of all economic facts. And churches frequently back policies of sustainable development which incorporate principles of self-sufficiency into their design.

[9] Ugandan farmers have found that they can earn money by producing flowers for Europe instead of continuing with subsistence farming. By doing this they can buy more food and clothing than if they try to produce what they consume for themselves. If we prevent Ugandan farmers selling flowers to Europe in the name of “sustainable development,” we are condemning the people to hunger and poverty. As the Economist points out: AGrowing flowers is hard work, but no more so than subsistence farming, which is the alternative; and it pays better.@ (June 1 2002, p. 68)

[10] We all know that the factory workers in poor countries do not get paid as much as workers in the U.S. We hear stories of children making soccer balls in Pakistan. We also read that workers rights and environmental regulations are not as well developed as in the U.S. We might remember that children worked on American farms and in American factories when the U.S. was in the early stages of development. Wages were low, pollution controls were weak, and workers rights were minimal. As the economy grew, these problems were reduced. Many countries of the world are in the early stages of development. They cannot afford to live up to the standards of a rich country. Globalization is the path to higher incomes, and with higher incomes comes the willingness and means to deal with environmental problems. Antweiler, Copeland and Taylor (2001) show that free trade is on net good for the environment.

[11] Trade restrictions. How would opponents of globalization have us slow globalization? The answer usually entails trade restrictions, or increased regulations related to labor standards, the environment, and so on. How do these policies change the fundamental problem of low productivity? The answer is that they don=t. Such policies may even make poor people poorer.

[12] The problem facing the developing world is not free trade; the problem is that the international trade system is not free enough. Poor and rich countries alike often levy high tariffs to protect local, politically influential industries. Many Asian countries employ massive tariffs and quotas on automobiles to prop up a domestic car industry, for instance, even though it is cheaper to buy a car made in Japan or the U.S. When the people of a country are already poor, forcing them to pay more for imports reduces their real income further. Consumers are not the only group affected. Producers in poor countries are often hurt because tariffs raise the price of imported goods they use in the production process. While some producers do gain, the evidence clearly shows that overall production, including the production of exports, suffers when countries adopt isolationist policies. (See Krueger, 1985 and 1995.)

[13] The U.S. is a part of the problem here as well. The recent 30% tariff on imported steel is a travesty. Similarly, the recent farm bill will provide billions of dollars of support to American farmers, encouraging them to overproduce food for export markets, thus harming farmers overseas. American tariffs or quotas on imported agricultural products that poor countries can produce, such as sugar, cotton, and peanuts, prevent people in poor countries from doing what they are good at. For example, export subsidies have pushed U.S. cotton exports to 35 percent of the world market in a product that is produced and exported by many poor countries. (IMF, 2002.).

[14] It might illuminating to ask: Who benefits from trade restrictions? Trade restrictions reduce competition and help inefficient domestic companies survive. American workers calling for restrictions on imports to promote better workers= rights in foreign lands may be more interested in protecting their own incomes than in the rights of foreign workers. Where is the justice in a policy that impoverishes people in other countries in order to provide more money to comparatively rich American workers?

[15] Small, poor countries cannot produce everything they need. If they are cut off from international trade, the people will be poorer and have a narrower range of goods. It is often suggested that poor countries cannot trade because they lack resources. Not every country can produce every good, but even a country with lots of people and no resources can enjoy a reasonable standard of living if it trades. For example, at the time that China regained sovereignty over Hong Kong, the median income in Hong Kong was higher than the median income in Britain. Hong Kong=s only significant resource is its people. Japan’s natural resources are insignificant compared with its population and their standard of living.

[16] International capital flows. Poor (and rich) countries often need international investment to finance projects. International aid sometimes helps, but government-financed development projects have been a dismal failure. Unlike the critics of globalization, we do not believe that the failures of international aid are a reason to increase aid or to forgive debts. Foreign aid has propped up inefficient, often corrupt governments whose interventionist economic policies have led to so much misery. Even the World Bank (2002a, 2002b) has come to realize that building market-oriented institutions is critical if international aid efforts are to succeed.

[17] Money flowing into a country may finance new projects directly, or enter the savings pool from where it can be borrowed and used to finance investments. If capital flows are restricted, fewer projects will be financed. It is that simple. And poor countries have little capital to begin with. Private capital flows to developing are four natoins to five times larger than official capital flows. Even if official flows were increased dramatically, private flows would be vital for poor countries. (See World Bank, 2002c).

[18] Concern about foreign ownership of capital is a red herring. In Marysville near Columbus, Ohio, (where we live) there is a Honda plant. It provides good non-union jobs for 6,500 people. No rich country would turn down the possibility of such a plant. Poor countries are desperate to attract such investments. People in rich countries may denounce multinational firms, but politicians of almost every party around the world recognize that these companies produce jobs and votes. Even the Cuban government is desperate for the country to be freed from restrictions so that it can attract more foreign investment. If multinationals are so detrimental to economic health, why does every country in the world seek their business?

[19] We would never claim that all multinational companies at all times have behaved perfectly. Nor would we make that claim for the companies of any country. We do believe that investment by multinationals helps alleviate shortages of capital, spreads technology between countries, and provides employment and income for the workers.

[20] Empirical evidence. Numerous recent studies by economists (Vamvakidis, 2002; Bhagwati and Srinivasan, 2002) have shown that the pattern of economic progress around the globe reflects, among other things, a country’s willingness to jump on the globalization train. Krueger (1995) makes a forceful case that globalization is important for developing nations. Recent evidence on global economic policy provided by Gwartney and Lawson (2002) provides powerful evidence of the benefits of trade. Gwartney and Lawson rate countries’ openness to foreign trade on a zero to ten scale based on a range of factors such as tariffs, quotas, and other trade restrictions.

[21] Table 1 shows the basic relationship between trade openness and various measures of economic and social progress. The most open quartile of countries (i.e., the most open 25% of the world) had an average income level of $22,012 compared with the least free quartile of countries with a $3,402 average level of income. The rate of per capita economic growth is faster in open economies, with the top quartile growing at 1.95% per year in the 1990’s and the bottom quartile growing at just 0.38%. Moreover, the prosperity that openness brings is shared throughout the income distribution. The poorest tenth of the population actually receives a larger share of national income in the most open economies than in the closed economies. Furthermore, the poorest tenth are much richer in more open economies than in less open economies. Contrary to the claims of globalization=s opponents, there is simply no statistical evidence that globalization is contributing to a narrower distribution of income.

Table 1. Openness to Foreign Trade and
Measures of Economic and Social Progress

Gross National Income per capita, US$,
2000 GDP per capita % growth,
1990-2000 Life Expectancy at Birth,
1999 Under Five Mortality per 1,000,
1999 Lowest 10% Share of Income Lowest 10% Level of Income, US$,
Quartile $22,012 1.95 75.52 14.21 2.99 $6,401
Quartile $8,453 1.66 68.82 32.82 2.43 $2,355
Quartile $6,653 1.00 66.07 50.62 2.51 $1,624
Quartile $3,402 0.38 56.93 124.37 2.51 $484

[22] Economists are often unjustly accused of being interested only in money. This is certainly not true, but the image persists. In our table, we also present the relationship between the Gwartney and Lawson openness measure and other indicators of “social” progress. Table 1 also shows that infant mortality is much lower and life expectancy is over 14 years greater in more open economies compared with comparatively closed economies.

[23] Another line of argument frequently advanced by opponents of globalization is that free trade may lead to higher incomes but it is a threat to democracy, as nations consider the interests of global capital markets and multinationals instead of the interests of local citizens. We argue that the free flow of goods and services and with it the free flow of information is the best pro-democracy strategy one can employ. This is true for two reasons. First, openness leads to higher incomes, as we have shown above. And people with higher incomes often demand greater political and civil liberties. This dynamic has certainly played out in Taiwan and South Korea. Second, globalization increases the flow not just of goods and services around the globe but of information. When people in repressive societies find out about the political and civil freedoms in other places, they have a natural desire to want the same things for themselves. The fax machine may have done more to bring down the oppressive Soviet Union than all the ICBM’s in the U.S. arsenal. Of course, this is why repressive political regimes try to restrict the citizenry’s access to outside information.

[24] Table 2 below shows the same trade openness measure from Gwartney and Lawson as it relates to the measures of political freedom and civil liberties constructed by Freedom House (2001). Clearly, more open economies also enjoy greater civil liberties and political freedoms. Anti-globalists who care about such matters are wrong to oppose free trade.

Table 2. Openness to Foreign Trade and
Measures of Civil Liberties and Political Freedoms

Openness Freedom House Rating of
Civil Liberties
(1=Free . . . 7=Not Free) Freedom House Rating of
Political Freedom
(1=Free . . . 7=Not Free)
Quartile 1.93 1.60
Quartile 3.07 2.39
Quartile 3.41 3.55
Quartile 4.11 3.96

[25] Conclusion. When we buy goods from people in poor countries we help them live. Restricting imports from such countries would deprive those people of the income that they need. The workers may be poorer than those in the U.S., but at least they have jobs, even if they are at low wages. Removing those jobs by restricting trade, when there are few other ways that the people can feed themselves, is tantamount to starving them. Is it not contradictory to say that we care about the material welfare of other people, and yet to argue for less trade, which reduces their material welfare?

[26] You can contribute to Oxfam or buy a soccer ball from Pakistan. Either way you help feed a person. Given the unfortunate scarcity of altruism in our world, the former option is not likely to help much. But international trade has in fact lifted millions out of poverty. Anti-globalists who care about poverty should rethink their position.

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Gwartney, James and Robert Lawson, 2002. Economic Freedom of the World: 2002 Annual Report. Vancouver: The Fraser Institute.

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Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, New York, Modern Library College Editions, Random House, 1995.

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