Development Economics Term Paper

Paper analysed: The failures of Globalisation by Joseph Stiglitz

Authors: Ria Kaur Sethi, Simar Singh, Sargun kaur
Date: 20/03/2019

Introduction
We live in a world that seems to be shrinking, where one society/nation/organisation is
affected by the functioning of another society/nation/organisation. We have been engulfed by
the process of globalisation and we are still trying to make sense of it, while trying to answer
questions like whether globalisation is a positive or negative concept, or does it make the state
obsolete, or is it merely the latest stage of capitalism etc. The global picture somehow brings
the world back to Marx’s thought that, accumulation of wealth at one pole is, therefore, at the
same time accumulation of misery, agony of toil, slavery, ignorance and brutality at the
opposite pole.” What’s even more intriguing is that Globalisation was sold to the world by the
so-called liberal economies, but today, globalisation has not been responding well even in the
most liberalised, most globalised, most market-oriented economy – The United States.
To manoeuvre through all these intricacies and questions, we have undertaken the analysis of
Joseph Stiglitz’s paper- The Failures of Globalisation.

Exploring the process of globalisation

Since time immemorial we’ve been listening to the unhappiness with globalisation on display
by the developing world. This was the part of the world with 85 % of the people but only 39%
of the wealth. Now the new opponents, to have joined the discontent with globalisation
include the middle and lower classes of the advanced industrial countries. This becomes, a
particularly remarkable claim as, the US and other advanced countries wrote the rules of
globalisation, and run organisations that govern it. Yet, the claim that the very trade
agreements and other institutions were unfair to America, is interesting and worth examining.
If the developing countries had been complaining for the past 20 years, and now that
developed countries have joined the league, who has actually benefitted from this
phenomenon.

We begin to discuss point by point how the benefits of globalisation have been overstated, and
how the entire world has been engulfed in its propaganda.
Let’s trace the advent first, through our economics textbooks - Paul Samuelson, shows how a
country as a whole is better off as a result of trade liberalisation, by an increase in national
income. This expanded the argument of David Ricardo about the gains from trade that arise
when each country produces what it does relatively well, and that of Adam Smith, about the
gains from trade that arise when each country specialises and gets better and better at what it
does. Globalisation shot to fame standing tall on the following fallacies, we aim to debunk
each step by step –

1) Trade creates jobs

If exports create jobs, then imports destroy jobs. Over the long term, trade usually balances
out. The goods advanced countries export, use less labour than the products they import. They
import textile and apparel, both labour intensive industries, and export airplanes. If US
expands imports and exports by $100, new imports destroy more jobs than are created by the
new exports.
Hence, on a net, trade destroys jobs. But if monetary and fiscal policy do their jobs, economy
expands, creating higher paying export jobs than the import jobs lost. This increase in
productivity, leads to a higher standard of living, but this doesn’t always pan out and the
economy doesn’t stay at full employment.

2) Lower Growth, Increased Unemployment

The starkest opposition to globalisation comes from its contribution to unemployment. This
happens when job destruction outpaces job creation and is a successor to monetary and fiscal
policy not working as they should and leads to a scarcity of jobs which in turn leads to
episodes of recession. An example is the 2008 crisis, that spread to Europe, and undermined
faith in both the efficiency and stability of markets.
3) Increased Risk
A lot of risk owing to the factors stated below, made the stakes involved unimaginable –
● Oversimplified models of the economy to guide policy, that assumed full employment
never saw unemployment as a problem.
● The assumption of perfect competition and perfect information made no provision for
bubbles and recessions.
● Most of the macroeconomic risk a country faces comes from outside the country and
hence with these imperfect risk markets made all individuals worse off, as these risks couldn’t
be insured against or shared across society.
● Economists presume that humans are always and everywhere fully rational, however
this fallacy has been proven wrong time and again. This leads to market failure, in the sense
when there is a failure to “price” the risk of global warming in the long run, and leads to
irreversible climate change.

4) Imperfect Competition
Standard models assumed perfect competition, but corporate behemoths like Walmart used
market power in China to drive down producer prices and use this in other developing
countries like India – to drive small producers out of the market. However, these effects have
been ignored, so that different interest groups do not start asking for protection.

5) Dynamic Comparative Advantage

The short-sighted companies saw China’s present comparative advantage in labour and shifted
base. They coupled their advanced technology with China’s cheap and well-trained labour.
But what China did and was followed by other east Asian economies was that they developed
their own technological capacities, and led to a rise in wages. As all production shifted from
USA to China, external economies of scale took place and China mastered the art of
production at low costs. China has a historical advantage now, and even if production was to
be brought back to USA, it will be based on a new and different technology like Robots,
which wouldn’t be able to create a lot of jobs.
6) Impact of Exchange Rates
The low value of Chinese Renminbi worked in its favour, while the high value of the dollar
led to lower exports. However, the reasons for the same, were complicated enough. US ran
large fiscal deficits and to finance the same took in huge inflow of funds, this led to strong
dollar, which made US manufacturing uncompetitive, especially as advanced technology was
free flowing to China.

7) Competing with Cheap Labour and low Labour and Environmental Standards
Trade based on advantages arising from an absence of environmental regulations or charges
for greenhouse gas emissions is very distorted. Also, market power in the labour market –
gives firms the impunity to exploit workers and provide them substandard working conditions.

8) Winners and Losers- The Distributive Consequences OF Trade

The corporations got more than 100% of the gains- all the growth and then that part of the pie
that had belonged to other – this made globalisation lucrative for them but less attractive to
the rest of society.
Actually, honest academics always pointed out that when globalisation worked well, the
winners would gain enough so as to compensate the losers, but they didn’t. With imports of
goods from China, Unskilled wages in the US went down, contributing evermore to the
inequality present.

9) Weaker bargaining power

Workers’ wages lowered due to an attack on unions and change in labour legislation. Also,
now they could threaten to move this factory elsewhere. Workers were forced to accept lower
wages and worse working conditions. Even the tax system became more regressive, with
corporate welfare giving unwarranted subsidies to our banks and corporations.

10) Not free trade but managed trade

The globalisation we were made to believe in was not based on free trade but manged trade –
managed for special corporate interests. The Congress never supported a true free trade
agreement that would have eliminated both the overt agricultural subsidies and the more
covert subsidies for fossil fuels.

11) ​The role of trade agreements

Trump complained about how the worst deals were signed by USA, for example, NAFTA,
even though Mexico decreased its tariffs by 10 %, while USA only budged by 4 %. There was
talk about huge trade deficits with Mexico, and combatting it by building a really expensive
wall.
However, one shouldn’t really look at the deficits or surpluses between two countries- but
focus on multilateral trade deficit. Like the USA has a trade deficit with Mexico but a trade
surplus –on the inclusion of services with Canada.

Conclusion
Globalisation is as badly managed and tempered as it was in 2001. Until then, trade
agreements pitted producers of various countries against each other, and hence resulted in
lower tariffs, which would eventually make consumer the winner. But now producers believe
that they can sell better in a country if the government got rid of all regulations on emissions
of pollution etc. But while consumers in both countries gained when prices were lowered, in
this case, citizens in both countries lose from the weakening of important protective
regulations, thus, corporations win. International Trade becomes the ally of corporates to
argue for the kind of world they seek, but couldn’t get domestically, as society balanced out
the costs and benefits of these regulations. We seem to be moving in a race towards the
bottom- where countries compete in every possible way to attract business- lower wages,
weaker regulations, reduction in taxes. Globalisation has become a negative sum game where
the corporations are the only winners and the rest of society – in both the developing and
developed worlds, the clear loser.