Contemporary Crises

Exploring modern societal challenges

Globalization: Addressing the Plight of Those Left Behind

The world has made tremendous progress in reducing poverty over the last 50 years. The progress has been based on international co-operation in support of development through economic assistance and private capital flows; and the establishment of a multilateral trading system with rules that favor developing countries manufacturing exports, even some like China which no longer need it, while protecting developed country agriculture. Increased trade and improved technology embodied in the flows of capital are key elements of globalization, a process with three main dimensions: economic, technological and cultural with many interconnections among the three. The most recent wave of globalization was precipitated by revolutionary advances in information and communication technology, which made it possible to organize complex production processes in value chains often geographically separated. They led to massive expansions of trade and private capital flows in the 1990s and the early years of the twenty-first century with trade reaching and exceeding 50% of global GDP.

Although globalization has been spreading at the same time as global poverty has been declining, discourse about it has been mostly fearful. There is a general unease that globalization will benefit only a few countries or groups while moving forward at a faster pace than institutions can cope with. At the same time, there is awareness that exogenous forces involving technological change are pushing globalization inexorably forward, and hence there is fear of being left behind--of becoming further marginalized.

Studies of the relationship between globalization and poverty show that the links are complex and country specific:

  • The poor are more likely to share in the gains from globalization when there are complementary policies in place, such as policies that increase labour mobility and technical knowhow or provide farmers with credit and other inputs.
  • Foreign aid can be helpful in reducing poverty if a host of donor and recipient policies are in place.
  • Globalization produces both winners and losers among the poor but is also associated with greater inequality within countries.
  • Over the period 1988-2008, for the world as a whole, income growth was greatest for the middle classes of global income as well as the very rich, while it was stagnant for the globally very poor and the lower income groups in developed countries.  

Most of the early voices of concern focused on the perceived impact of globalization on poverty in the South. But none of these voices were loud enough to stymie the globalization onslaught. In retrospect, the turning point was the financial crisis that hit the developed world in 2008. The deep recession that followed laid the ground for increased protectionism and the rise of the anti-globalization forces in the US and Europe. And it was not the charitable concern about globalization’s impact on the poor in developing countries that started to turn the tide, but its impact on a relatively small but vocal group of lower middle class losers in the North.

In doing so they directed attention to an old problem that has afflicted developed economies and especially the US: the lack of effective policies for those who lose jobs through technological change and through competition from imports and foreign outsourcing, which are important elements of globalization, but often not the main source of their economic difficulties. Recently, the problem has become worse because of the reduction in both occupational and geographic labor mobility. Whole communities have become wastelands of unemployed and unemployable groups full of resentment for their plight, directing their anger, not to the invisible forces of technological progress, but to the foreigners who have stolen their jobs.

The challenge is to develop constructive responses to real problems as opposed to apparently appealing solutions that may help a small minority in the short run at great costs to the majority, and the global institutions that have underpinned worldwide progress in the last 50 years. But the institutions themselves have to change to respond to the new realities that globalization has created in all humanity. Unless they are responsive to the plight of those left behind, they are in danger of losing legitimacy, which would undermine the validity of the principles of economic liberalism on which they were founded.

Addressing the Problems of those Left Behind

The first thing to acknowledge is that trade liberalization can have local victims as well as general benefits. The costs of saving jobs in a particular US industry are typically six to ten times the benefits in wages of those that would be protected. Bilateral deals such as those proposed by the current US administration are no better. Unilateral US action raises the specter of trade wars that hurt everybody. Moreover the costs of protection are borne more heavily by the poor in the US and Europe because a larger share of their income is spent on imports of items like shoes, clothing and toys. But unless the problems of the victims are addressed, trust is eroded in the economists’ arguments about the benefits of globalization.

What must follow is a diverse set of policies as there is no one-size-fits all strategy. There is usually a need for a combination of passive labor market policies such as unemployment insurance and social protection policies with active labor market programs. Benefits under the Trade Adjustment Assistance in the US and the European Globalization Adjustment Fund are too small to matter much. Other US programs, including social security disability and unemployment benefits are far more important in offsetting earnings losses for people losing manufacturing jobs. The anti- trade voices in Europe have been less strident partly because the social support systems have been far more effective. In many developing countries such systems do not exist at all. Social safety nets need to be strengthened throughout the globe. In addition:

  • Active labor market programs demand early and frequent engagement with displaced workers, requiring them to participate in interviews with employment counselors, formulate individual plans, accept offers of suitable work and attend training programs, if necessary. This is best done on the job and involves establishing strong ties between the programs and the private sector.
  • Regional development policies may also be needed in some cases when job losses in manufacturing affect the rest of the community and lead to the creation of newly depressed areas.
  • A variety of other policies are needed to address problems of geographical and functional mobility and its impact on employment. In the US house ownership is high among older workers but housing prices are depressed in communities where unemployment is soaring due to technological change or to competition from imports: a housing allowance may be needed as an incentive to relocation.
  • Education policy as a whole needs to be reconsidered in order to equip individuals with skills which increase flexibility in getting jobs in the face of rapid technological change which destroys jobs.
  • More generally there is a need to maintain a stable and growing economy with increasing employment opportunities. The angst about the impact of globalization has increased since the 2008 crisis and the subsequent slow economic recovery which was accompanied by anemic employment growth.

Finally, there is a need for policy flexibility. Governments at all levels should be responsive to efforts of communities to help themselves. The decline of the US steel industry in the Pittsburgh area has not been prevented by occasional tariff hikes; but Pittsburgh is no longer relying on the steel behemoths for its employment growth. Instead it has developed a thriving IT industry that is the main driving force of its economy. And Holywell, a small town in Wales which, according to a recent report (NYTI May 22) was gutted by e-commerce, has been installing a new card reading technology to turn local businesses back from the brink.

Globalization is here to stay. It behooves everybody to try to find ways to give it a human face.

C. Michalopoulos has been a Visiting Scholar and Adjunct Professor of Economics at the Johns Hopkins University, USA, since 2012. He is author of Aid, trade and Development: 50 Years of Globalization.