Globalization, Poverty, and All That: Factor Endowment versus Productivity Views

Neoclassical growth models of trade and factor flows based on differences in factor endowments give clear predictions as to how globalization affects inequality. Models in which productivity differences between countries drive trade and factor flows gave more ambiguous predictions. Unfortunately, productivity differences seem necessary to understand many, though not all, globalization and inequality episodes. The factor endowment predictions help give us insight into how the North Atlantic economy achieved decreasing inequality between countries in the last five decades. They also give us insight into the Great Migration of Europeans from the land-scarce Old World to the land-abundant New World in the late 19 and early 20 century, accompanied by the predicted movements in land rental/wage ratios. The factor endowment view of an earlier movement of Europeans to the colonies of the New World and southern Africa help us understand the origins of different levels of country inequality based on land/labor ratios. However, productivity differences appear to be an important facet of many globalization and inequality episodes. In the Old Globalization era, they seem to be crucial to understand the lack of convergence between North Atlantic economies, the Great Divergence between rich and poor countries in that same era, and the bias of capital flows towards rich countries. In the New Globalization era, productivity differences are important to capture the very different performance of poor country regions in recent decades, the flow of all factors of production towards the rich countries, the low returns to physical and human capital in many poor countries, and the “perverse” behavior of within-country inequality in reaction to trade and capital flows. Even within the “globalized” economy of the US, productivity differences seem necessary to comprehend the pattern of labor migration. 1 I am grateful for comments from Ann Harrison, Aart Kraay, Don Davis, and participants in the NBER Globalization Workshop. Comments on related work at the Brookings Trade Forum were also helpful. Globalization causing poverty is a staple of anti-globalization rhetoric. The Nobel prizewinner Dario Fo compared the impoverishment of globalization to September 11: "The great speculators wallow in an economy that every year kills tens of millions of people with poverty—so what is 20,000 dead in New York?” 2 The protesters usually believe globalization is a disaster for the workers, throwing them into “downward wage spirals in both the North and the South.” Oxfam identifies such innocuous products as Olympic sportswear as forcing laborers into “working ever-faster for ever-longer periods of time under arduous conditions for poverty-level wages, to produce more goods and more profit.” According to a best-selling book by William Greider, in the primitive legal climate of poorer nations, industry has found it can revive the worst forms of nineteenth century exploitation, abuses outlawed long ago in the advanced economies, including extreme physical dangers to workers and the use of children as expendable cheap labor. Oxfam complains about how corporate greed is “exploiting the circumstances of vulnerable people,” which it identifies mainly as young women, to set up profitable “global supply chains” for huge retailers like Walmart. In China’s fast-growing Guandong Province, “young women face 150 hours of overtime each month in the garment factories – but 60 per cent have no written contract and 90 per cent have no access to social insurance.” Women at the bottom of these global supply chains must work “at high speed for low wages in unhealthy conditions.” 5 2 Quoted by David Levy and Sandra Peart, The Secret History of the Dismal Science: Parasite Economics and Market Exchange, December 2001, http://www.econlib.org/library/Columns/LevyPeartdismal5.html 3 http://www.oxfam.org.uk/what_we_do/issues/trade/playfair_olympics_eng.htm 4 William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism, Touchstone Books: New York, 1997, p. 34 5 http://www.oxfam.org.uk/what_we_do/issues/trade/trading_rights.htm