Johnson, economic development

expert, discusses globalization and

Feb. 21, 2002
its benefits
Vol. 21 No. 10
By Josh Schonwald
current issue News Office
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D. Gale Johnson, the Eliakim
contact
Hastings Moore Distinguished
Service Professor Emeritus in
Economics, has studied the
globalized economy for most of
his more than 50-year academic
career at Chicago. In recent years,
Johnson, one of the world’s
leading experts on China’s
economy, has observed the rapid
growth of the antiglobalization
movement and the violent
protests against the World Trade
Organization. He has heard
D. Gale Johnson
“globalization” increasingly
blamed for a range of the world’s ills––from domestic job loss
and environmental problems to cultural conflict and the
proliferation of “sweatshops” in the Third World. Last September,
Johnson published a response to the antiglobalists,
“Globalization: What Is It and Who Benefits?”

Many globalization critics fear that free-trade policies will

result in massive job loss. U.S. corporations, they argue, will
simply move to Third World countries to dramatically reduce
labor costs. You argue, however, that this byproduct of free
trade––job loss––is a function of growth. Please elaborate on
this and the case for losing jobs in the interest of growth.

I don’t want to argue that imports never reduce

employment opportunities in a country. If the skill
involved is one that can readily be learned, and if the
capital required is not too great, then production that was
formerly undertaken in an industrial country will be
replaced by imports. Since, in the long run, exports will
approximately equal imports in value, the industrial
economy will expand its exports, and in doing so it will
increase employment in the particular sectors involved.
True, this causes short-run disruption and perhaps
hardship for older workers who find it difficult to shift to
other types of employment. But these shifts in
employment are modest compared to those required by
economic growth due to the differences in the income
elasticities of demand among products and services.
Somewhat more than 100 years ago, 50 percent of our
labor force was engaged in farming; today, only a little
more than 2 percent are. This huge adjustment was caused
by economic growth, not by globalization––the income
elasticity of demand for farm products is very low.
Actually, without globalization, fewer than 2 percent
would be engaged in farming––the output of four acres of
cropland is exported.

In addition to concerns about displacing workers,

some antiglobalists charge that unrestricted trade will
enable corporations to exploit workers in poor
countries. In these countries, without unions or worker
protections, they argue, corporations will pay
employees poorly. What do you think of the economic
logic behind this charge?

Clearly, the conditions under which most people work in a

high-income industrial country are very different than
where most people work in a low-income developing
country. It’s also true that the conditions under which
people now work in industrial countries is far different
than what existed 100 or 200 years ago––most industrial
establishments at that time would now be classified as
“sweatshops,” whether in England, Germany or the United
States. People who are paid $10 to $20 per hour simply
don’t work under the same conditions as those who earn
$1 or $2 per day. And indeed, by our standards, these
wages are shockingly low. But that is not the appropriate
comparison. The appropriate comparison is with wages
similar workers earn in locally owned enterprises. In
China, the average rural worker earns about $420 per year.
That’s $35 per month, or about 22 cents per hour for a 40-
hour work week. In China, foreign firms do pay more,
quite a bit more than local firms. Firms from Hong Kong,
Taiwan and Macau pay 25 percent more than state-owned
firms; other foreign firms pay 50 percent more. In
evaluating the wages paid by foreign enterprises, the
appropriate comparison is not with the wages in the home
country, but how the wages compare with other wages in
the developing country. If they are the same or higher, I
do not believe the firm can be accused of exploiting the
local workers.

A central charge of antiglobalists is that free-trade

policies will only benefit the corporations in wealthy
countries.

Globalization and free trade open up the markets of a

country to competition from all over the world. Ask the
U.S. auto industry or the steel industry if they have
received substantial benefits from the opening up of the
U.S. market. The auto industry responded by improving
the quality of their autos and increasing their efficiency of
production while still paying nearly the highest wages in
the United States. But, the steel firms did not improve
their production efficiency enough and now find
themselves bankrupt. The biggest gainers from
globalization are consumers, not the corporations or
workers. The consumers gain because globalization means
a wider variety of goods at lower prices. In heavily
protected markets, such as the food market in Japan,
consumers pay several times as much for a calorie as do
consumers in the United States, or even in the European
Union. And Japanese farmers do not have higher incomes
than Japanese industrial workers. They are simply high-
cost producers.

Antiglobalists charge that free trade will aggravate an

already rising inequality of income in the world. You
have written that this inequality is not a bad thing
because, while the rich are getting richer, the poor are
not getting poorer. Could you elaborate on this idea––
why isn’t growing inequality necessarily a bad thing?

To say that inequality is a not a bad thing is not quite the

same as saying it is a good thing. Inequality would be a
bad thing only if the rich got rich by exploiting the poor.
Rich countries do some things that harm the poor
countries, but what they have done is exactly what the
antiglobalization people want the rich countries to do. The
European Union and the United States have protected
some of their high-cost industries, such as textiles and
oranges and sugar and butter, to save jobs in their own
countries, or, in other words, to protect them from
globalization. The restrictions on trade necessary to
protect these sectors come at the expense of producers and
workers in developing countries, who have much lower
incomes than workers whose jobs are being protected.
Inequality has increased among nations when measured by
real income per capita, but is this bad? If it had been
accompanied by the incomes of the poor declining, I
would agree that it was bad. But that’s not the case.

Antiglobalists often cite a fear that corporations, given

the option, will leave countries with stringent and
costly environmental regulations. What do you think
of this?

The distribution of direct foreign investment among the

countries of the world does not support the conclusion that
investors choose low-income countries because they have
limited environmental laws. In 1999, for instance, low-
income countries that had 41 percent of the world’s
population received only 1 percent of the foreign direct
investment, and middle-income countries with 44 percent
of the world’s population received only 19 percent of the
foreign direct investment. Who was the largest recipient?
The United States, with 30 percent of the total. The
second, third and fourth largest were the United Kingdom,
Germany and France. I wish that more of the direct
investment went to low-income countries, but apparently
the potential for having few environmental restrictions, if
that were true, is not enough to provide a return on
investment that is competitive with what can be earned
elsewhere.

The intention of the free trade opponents is idealistic––

to reduce poverty in the underdeveloped world, fight
hunger, cure disease. Accepting, as you have explained,
that their approach is a misguided and potentially
damaging way to achieve their idealistic goals, what is
the alternative? How can we fight disease, cure poverty
and develop poor countries?

A World Bank report from last year is instructive: If you

divide poor countries into those that are “more globalized”
and those that are “less globalized”––with globalization
measured simply as a rise in the ratio of trade to national
income––you find more-globalized poor countries have
grown faster than even rich countries, while less-
globalized poor countries have actually seen income per
person fall. The GDP in more-globalized poor countries
has risen by 5 percent since 1990; in less-globalized poor
countries the GDP has dropped by between 0 and 1
percent. Also, this idea, that more trade helps poor
countries, is well supported by historic evidence. Less
than 200 years ago, 75 percent of the world’s population
lived on less than $1 per day (1993 prices); today, the
percentage is 20. Economic growth has lifted the large
majority of the world’s population out of severe poverty.
More should be accomplished and more will be if
countries are able to have sustained economic growth.
South Korea, for example, which was a very poor country
in 1950, now has less than 2 percent of its population
living on $1 per day. In Zimbabwe, with negative
economic growth in recent decades, 36 percent of the
population live on less than $1 per day. Even more
striking evidence that the poor have benefited from
globalization is the increase of life expectancy from about
30 years to 64 years in developing countries during the
past century. This increase was due primarily to ideas and
products developed in industrial countries and to the
income increases that have occurred in the developing
countries.