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February 04 2012 | Filed Under Economics
Globalization is the tendency of investment funds and businesses to move beyond
domestic and national markets to other markets around the globe, allowing them
to become interconnected with different markets. Proponents of globalization
say that it helps developing nations "catch up" to industrialized nations much
faster, through increased employment and technological advances, and Asian
economies are often highlighted as examples of globalization's success.
Critics of globalization say that it weakens national sovereignty and allows
rich nations to ship domestic jobs overseas, where labor is much cheaper. What
is the real story on globalization? It largely depends on your personal
perspective. In this article, we'll examine the issue from both sides.
SEE: Economics Basics
The View from the Penthouse
For business leaders and members of the economic elite, globalization is good.
Cheaper labor overseas enables them to build production facilities in locations
where labor and healthcare costs are low, and then sell the finished goods in
locations where wages are high. (For related reading, see What Is International
Trade?)
Profits soar due to the greatly reduced wages for workers, and Wall Street
rewards the big profit gains with higher stock prices. The CEOs of global
companies also get credit for the profits. Their rewards are usually generous
compensation packages, in which company stock and stock options figure
prominently. Institutional investors and wealthy individuals also take home the
big gains when stock prices increase.
The View from the Street
But globalization doesn't only affect CEOs and high-net-worth individuals.
Competition for jobs stretches far beyond the immediate area in a global
marketplace. From technology call centers in India, to automobile manufacturing
plants in China, globalization means that workers must compete with job
applicants from around the world.
Some of these changes arose because of the North American Free Trade Agreement
(NAFTA). NAFTA sent the jobs of U.S. autoworkers to Mexico, a developing
country, where wages are significantly lower than those in the U.S. A few years
later, some of those same jobs were relocated to third-world countries in East
Asia, where wages are even lower.
In both cases, the auto manufacturers expected U.S. consumers to continue
buying those products at U.S. prices. While critics of globalization decry the
loss of jobs that globalization can entail for developed countries, those who
support globalization argue that the employment and technology that is brought
to developing countries helps those populations toward industrialization and
the possibility of increased standards of living.
The View from the Middle Ground
In the globalization battleground, outsourcing is a double-edged sword.
On the one hand, low wages in foreign countries enable retailers to sell
clothing, cars and other goods at reduced rates in western nations where
shopping has become an ingrained part of the culture. This allows companies to
increase their profit margins.
At the same time, shoppers save money when they buy these goods, causing some
supporters of globalization to argue that while sending jobs overseas tends to
lower wages, it may also lower prices at the same time.
Lower-income workers also enjoy some of the benefits of stock price
appreciation. Many workers have mutual funds holdings, particularly in their
401(k) plans. When companies outsource jobs and get rewarded with rising share
prices, mutual funds with those shares also increase in value.
The Effects of Globalization
The ever-increasing flow of cross-border traffic in terms of money,
information, people and technology isn't going to stop.
Some argue that it is a classic situation of the rich get richer while the poor
get poorer. While global standards of living have risen overall as
industrialization takes root in third-world countries, they have fallen in
developed countries. Today, the gap between rich and poor countries is
expanding, as is the gap between the rich and poor within these countries.
Homogenization of the world is another result, with the same coffee shop on
every corner and the same big-box retailers in seemingly every city in every
country. So, while globalization does promote contact and exchange between
cultures, it also tends to make them more similar to one another. At the market
level, linked global financial markets propel local issues into international
problems, such as meltdowns in Southeast Asia and the 1998 Russian debt
default.
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What Lies Ahead?
Deviation from the status quo on this issue is likely to be minimal. The
massive outsourcing of U.S. manufacturing jobs that began decades ago continues
today. White collar jobs, such as call center workers, medical technicians and
accountants have also joined the outsource parade, leaving many to argue that
those profiting from the arrangement have little incentive to change it, while
those most impacted by it are virtually powerless.
Politicians have latched onto the idea of the disappearing middle class as a
political issue, but none of their income redistribution schemes are likely to
have any immediate substantial impact. (For related reading, see Losing The
Middle Class.)
The Bottom Line
Public scrutiny of CEO compensation has encouraged business leaders to begin to
see that a rising tide doesn't necessarily lift all boats. In many cases,
low-wage workers get hurt the most because they don't have transferable skills.
The concept of retraining workers is on the radar, but it's easier said than
done and decades too late for the American manufacturing industry. (To learn
more, see Evaluating Executive Compensation.)
Until a better solution is found, education, flexibility and adaptability are
the keys to survival. So far, the only answer that politicians and business
leaders agree on is the value of an educated, flexible, adaptable workforce.
(At the individual level, you can take action on this issue if you Invest In
Yourself With A College Education.)
by Lisa Smith