The heated debate in the economics world about whether expanded trade and investment has worsened income inequality in wealthy countries like the United States often obscures the equally heated debate over globalization’s effects on developing countries. Many left-of-center critics of current U.S. policies in particular charge that current the current world trade regime has worsened the rich-poor gap within low-income economies and left entire third world countries behind.
The Economist magazine deserves credit for bringing this neglected debate to the mainstream media, and spotlighting new work from Nobelist Eric Maskin of Princeton University and Michael Kremer of Harvard University presenting a new explanation for this development, and for how it does or doesn’t fit into conventional trade theory. (Their paper itself, can be read here.) But actually, their findings tear a much bigger rent in the theoretical basis for the current version of globalization to an even greater extent than The Economist, most trade policy critics, and even the authors recognize.
As the magazine notes, worsening income inequality within developing countries and for much of the third world as a whole matters not only because it indicates that current world trade policies are exacting a major (and possibly needless) human toll, but because the prevailing economic wisdom tells us that exactly the opposite is supposed to happen.
Maskin and Kremer speculate that what’s been missed by the founding fathers of trade theory was how the explosion of global commerce was likely to foster what the authors call international worker “matching.” Today’s wide open global economy, they contend, enables higher-income economies to access relatively high-skill workers in developing countries by investing in new factories and labs their multinational companies build offshore. Therefore, they create unprecedented economic opportunities for those skilled workers while leaving their less-skilled compatriots up the creek.
As is clear to anyone who closely follows the globalization debate, Maskin and Kremer leave out another significant impact of this worker matching – how it harms relatively lower-skill workers in high income countries by plunging them into competition with much less expensive third world counterparts.
If they did discuss this unmistakable result of current U.S. trade policies and their foreign counterparts, they might have recognized how this relatively new form of worker matching strongly undercuts the uber claim of mainstream theory that trade liberalization is ultimately a winner for the entire world. First world corporate investment in high-value facilities and jobs in third world countries means nothing less than that productivity itself – assumed by mainstream economics to be what’s called a fixed factor of production – is actually mobile. Efficiency-creating knowhow can be transferred across borders as easily as goods and capital.
Not that this is exactly news. My book The Race to the Bottom and many other studies have extensively documented how it’s become routine for multinational corporations to engage in capital- and technology-intensive work in developing countries as well as in labor-intensive work.
One crucial implication of this finding is debunking the (still) widely accepted claim that liberalized trade threatens mainly low-skilled and poorly educated countries, and that this competitive heat should actually be welcomed because it encourages wealthier economies to get those disadvantaged portions of their populations up to speed, and move them into higher value industries and jobs. If this higher value work can be sent to much lower-cost countries just as easily as less advanced work, then reeducation and retraining claims become much less convincing.
But as the work of Maskin and Kremer underscores, high-value offshoring to low-income countries entails not just the export of industrial machinery and laboratory equipment. It also entails the export of technical expertise and corporate culture – of all the intangibles that produce corporate — and supposedly national competitive — success. As a result, it also entails the export of all of the social and cultural values and experiences – or at least their fruits – that over time have contributed to these intangible assets. In other words, it entails the export of productivity.
Supporters of the globalization status quo seem to assume that productivity can’t be exported, at least not readily. Indeed, despite the proliferation of high value offshoring, they seem confident that both its historically developed ingredients and its operational end product will remain uniquely American advantages, especially if government policies remain fundamentally supportive, and avoid creating unnecessary obstacles. But in their work on skill matching, Maskin and Kremer strongly (if inadvertently), suggest that even if public policy remains perfect, this confidence is misplaced.
But in addition to undercutting the theoretical case for current globalization policies, the factor mobility of productivity also undercuts the macroeconomic case. It greatly strengthens the idea that high-income countries – especially the United States – keep sending valuable production and employment to countries whose wages will long remain too low (largely because of their enormous populations) to permit them to consume and import remotely what they can produce and export. As long as these practices continue unabated, the U.S. and other high income governments will keep being tempted to fill the resulting income gaps for most of their people with cheap credit – and keep running the risk of reflating dangerous domestic and worldwide bubbles.
I’d feel a lot more confident that policymakers will promptly put this crucial two-and-two together if this challenge didn’t keep eluding prominent economists like Maskin and Kremer.