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Karl Aiginger Director Austrian Institute of Economic Research (WIFO) Karl Aiginger

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Karl Aiginger Director Austrian Institute of Economic Research (WIFO) Karl Aiginger Karl Aiginger Director Austrian Institute of Economic Research (WIFO) Karl Aiginger How Globalization Works: Seventeen Theses on Its Impact on Trade, FDI, Income and Welfare 1 Definition and Dimensions ature, these regions are often called We tentatively define globalization as developed versus developing coun- the extension of the horizon of ac- tries, or North versus South. tion. Economic strategies, but also While globalization has been an social relations, knowledge, and cul- important topic for a long time, there ture cease to be limited by national are several new aspects, as stressed in borders; they become international Pichelmann and Vengelers (2005): and finally global. – the weak economy in the EU ver- Within the economic realm, glo- sus the buoyant growth of the balization implies a larger horizon for world economy1 trade, production and sourcing as – the emergence of new players, with well as for physical and financial in- especially large labor forces and vestment. The origin of goods con- relatively high technical capaci- sumed widens, also for intangible ties activities and services, specifically – information and communications information, technology, organiza- technologies, which allow knowl- tion, culture and finally for the socio- edge to be codified, boosting the economic model. The choice of the tradability of goods and services location for living and working – a and causing vertical fragmenta- topic covered by the term “mobility” tion; there is a specialization ac- within an integration area and by the cording to Ricardo for segments of term “migration” outside – is espe- the production cycle instead of for cially important. complete goods In comparison to the related con- – the extension of the division of cept of integration, globalization by labor to services – considered definition refers to regions which are nontradable until recently; this very different from each other, not includes audiovisual, cultural, only because they are far apart, but business and training services; because they have different cultures, services are easier to relocate, economic systems, and income levels. since they require fewer resources, If we want to discuss the impact less space and less equipment of globalization on incomes and – greater migration and labor mo- wealth, it is important to distinguish bility between impacts for all countries, the – the imposition of changes on world (W), and then separately for farmers, workers and firms by the the poorer countries (P), and for the Doha round and WTO developed countries (R). In the liter- 1 In the five years from 2002 to 2007, the world economy will have expanded by 25% (including the predicted value for 2007), while European growth will only have amounted to 10% . ◊ 83 Karl Aiginger 2 The Advantages of in all countries. Disequilibria may re- Globalization sult in the short run (unemployment Economic theory tells us that global- rises in sector A, labor is not trans- ization – in parallel to all forms of in- ferred into sector B), and unemploy- tegration and openness – will increase ment may become persistent under incomes in both (P) and (R) regions specific circumstances (rigidities). and a forteriori also in the world (W). Theory states that the losers can The driving forces are the following: be compensated, since gains are larger (i) an increasing variety of products, than losses (“net welfare increases”). inputs, sources, (ii) the diffusion of Usually, however, compensation does technologies and best practice, (iii) not take place. the convergence of per capita in- comes, and (iv) risk diversification 4 Disadvantages of (inputs, outputs, and assets). Further- Globalization: more, welfare increases more than Asymmetric Cases Most critiques of globalization start from the assumption that some coun- tries reap the advantages of globaliza- tion while others suffer. Interestingly, people in the rich countries often claim that R are the losers, while the arguments for unbalanced globaliza- tion tend to hint at necessary condi- tions for poorer countries to make globalization beneficial for P. GDP or incomes, due to cheaper in- “Unfair” advantages of R might be puts, increasing variety and choices. the following: – asymmetric trade and investment, 3 The Disadvantages of giving firms in R a first-mover Globalization: advantage A Symmetric Case – multinational firms usually have It makes sense to analyze first the case their headquarters in R, and the of countries which are more similar, economic and political interests or where the trade effect is rather bal- of location of headquarters shapes anced. Even in the balanced case the outcome there are winners and losers in R and – firms with headquarters in R ex- in P. In the rich countries, the high- tract rents in P and transfer prof- skilled groups win, while the low- its to R, giving rise to arguments qualified tend to lose; in the poor re- about expropriation and unfair gions the opposite happens. This is prices due to fact that the original scarcity – the poor countries specialize in of low-skilled labor is reduced, since low value added goods, with a low labor-intensive goods will be im- income elasticity (development trap) ported in R. – social dumping (child labor etc.) Second, the speed of change and and environmental degradation its implied short-run burden increases occur in P 84 ◊ Karl Aiginger Unfair advantages of P or nonacceptable they want to lure firms by low taxes pressure on labor in R might be come and subsidies. from Third, the volatility of the devel- – dumping, undervaluation of cur- opment might increase, as the experi- rency ence of financial crises in Asia, Mex- – “unfair, prolonged, policy-depen- ico, Argentina and Turkey demon- dent” wage advantages strates. – possible subsidization of labor-in- tense sectors in R (export promo- 6 The Empirical Evidence 2: tion) Intracountry Income – wage pressure on R (the “are- Differences wages-set-in-Beijing debate”) Inequality within countries is increas- Therefore, interestingly often both R ing. This holds for P, for rural incomes and P believe that they are the losers versus cities. This development might of globalization, even if both are prob- not follow from globalization alone; it ably in the long run net winners. The is aggravated natural disasters or civil reason for this is that the negative wars and stems from the lack of edu- consequences of globalization tend to cation and bad domestic policies. The be visible and concentrated, while the burden of change imposed asymmet- benefits are dispersed and the origin rically on regions and persons, how- of the advantages is not attributed to ever, adds to existing inequalities and globalization, but to innovation, man- might further destabilize regions. agement and prudence. The rising inequality holds for poor countries, it might even be seen 5 The Empirical Evidence 1: as typical or indispensable in takeoff Cross-Country Income periods (unequal development hy- Differences pothesis). However, it also held for It is not easy to summarize the huge most R in the 1990s. As to the causes literature on equality and inequality in rich countries, rising inequality of nations and persons in a few sen- may come from globalization (pro- tences. My reading, however, is that duction and exports of labor-inten- the inequality of per capita incomes sive and low-skill goods is lost in R) across countries is decreasing. This or from technology change. This is an process is slow and nonlinear, but sig- intensive and controversial debate in nificant. There is one important ex- economics. ception: Africa is falling back instead The trend toward rising inequal- of catching up. ity seems to have leveled off in late Second, profits rise relative to the 1990s or since, and may have been wage bill. The reason for this is that reversed in some countries lately. capital is more mobile and more pow- erful. It has a large and increasing 7 The Empirical Evidence 3: bargaining power. Globalization in- Openness and Growth creases the options, and capital can More open countries tend to grow use it for threats (to relocate firms), faster. This is specifically the case which governments want to preempt; for GDP. The results for per capita ◊ 85 Karl Aiginger income might be less, if high growth omy. This has to be compared with attracts migration. There is, however, 10% due to integration within also the opposite claim that net im- Europe. The remaining 70% stem migration and abundant labor stimu- from increased production (use of late growth (more GDP, less GDP resources). per capita). 9 The Growth Evidence: 8 Globalization Impact: 2002–2007 (Including Empirical Results for Forecast) the EU The growth experience among re- In summarizing the impact of global- gions has become surprisingly differ- ization on Europe, we follow Pichel- ent over the past five years. We cal- mann and Veugelers (2005). culate figures for the five years from The EU has by and large defended 2002 to 2007, including the current its world market share (in contrast to WIFO prediction for 2007: its share in world GDP). EU-trade is – the world economy is growing by balanced, leaning to the positive 4% per annum (cumulative over specifically for the EU-15. The EU five years: 28%) generates a trade surplus of 1% of – Europe is growing by 2% per an- GDP in business services (where out- num (cumulative: 8%) sourcing is suspected). – China is growing by 9% per an- There is no significant outflow of num (cumulative: 68%) investment into low wage countries. – the new Member States are grow- Employment is increasing somewhat, ing by 4% per annum (cumula- with losses occurring in manufactur- tive: 27%) ing. Inward FDI in EU is increasing – the U.S.A. is growing by 3% per slightly in the EU-15 and more in the annum (cumulative: 20%) EU-10. In the long run, the U.S.
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