The Antithesis of Globalization?

Get ready: US economic policy may soon make a complete u-turn and bump into several obstacles along the way. Hopefully it does not, but economic professionals may surprisingly pave the way for such a misguided point of view.

Recent and methodical analysis suggests that the effects of globalization are doing more harm than good for the individual. This is actually the conclusion of the latest report by the International Monetary Fund (IMF), one of if not the most long time celebrated supporters of globalization and its heralded contributions to the progress of mankind.

According to the report, the rapid rise of globalization throughout both rich and poor countries has improved their overall incomes, but at the same time increased income inequality among individuals. However, this larger gap between the earnings of more and less skilled workers represents a good consequence of globalization and not a bad one.

Over the past two decades, this inequality gap is attributed to the faster growth rates of incomes for the more skilled in greater quantities than the less skilled and means that “inequality has risen in all but the low-income country aggregates” (“Income and Inequality”). As countries in Latin America, Asia, and Eastern Europe have liberalized their economies, the level of income between rich and poor has widened. The surprising exception is sub-Saharan Africa where the income gap has diminished, but the IMF does not offer any clues as to why this anomaly occurs.

To understand why this spread in inequality may in fact be benevolent, one must first question what portion of this rise in inequality is in fact due to globalization and how much is due to other factors “such as the spread of technology and domestic constraints on equality of opportunity." The IMF found the effects of greater globalization are best grouped into three factors: “increased trade openness, an increase in foreign direct investment, and increased technological change” that have all increased per capita incomes of developing and developed countries (“Income and Inequality”).

However, the role of technology in increased globalization has most strongly created the inequality gap observed by the IMF. Since technological change favors those with higher skills such as using a computer, modern technology “exacerbates the skills gap” and “adversely affects the distribution of income in both developing and advanced economies by increasing the premium on skills and automating relatively low-skill inputs” (“Income and Inequality”). Further, newer technology favors those with better access to education and reinforces the skills gap.

Foreign direct investment also increases the “rewards for higher-value-added activities” and creates greater demand for the more skilled. On the other hand, increased trade openness has had the opposite effect and reduced income inequality according to the IMF. However, “the main factor driving the recent increase in inequality across countries has been technological progress” (“Income and Inequality”)

Thus, one must determine if these three variables effect upon the widening of the inequality gap is a positive result of globalization. Certainly greater inequality is a bad thing. However, the increased income gap by education “means that the returns on investments in schooling increased” (Becker-Posner). In other words, investment in human capital is paying off more and more as economies become more productive. This is certainly not a bad phenomenon, but it requires better access to education throughout the world.

Additionally, “although foreign direct investment is associated with greater income inequality over the period of this study, it is associated with higher growth overall” (“Income and Inequality”). The IMF thus believes that over a longer period of time, the effects of this factor of globalization would reduce income inequality.

Lastly, the IMF concludes that “trade globalization is not found to have a negative impact on income distribution in either developing or advanced economies” (“Income and Inequality”). Consequently, increased trade has actually diminished income inequality.

The report’s findings are summarized as follows: “Inequality has been rising in countries across all income levels, except those classified as low income” (“Income and Inequality”). Thus, while politicians from countries such as Africa and Latin America may condemn globalization, they misunderstand the problem. Their countries lack the greater access to education required to decrease income inequality.

Without doubt, this statement is of little comfort to the children of third world countries whose schooling systems are rudimentary at best. However, as the IMF report confirms, their problems are not the result of globalization. Instead, such countries must make increased access to education a key point on their policy agenda and not reduce foreign direct investment or suppress technological change. Hopefully the congresswomen and men in Washington agree with this assessment and do not scapegoat globalization as an easy way out of our problems.