Globalization of The World Economy

The economist magazine, published on 1^st of October 2016, has a special report on the world economy i.e. globalization. In my opinion, the main story line is not new but the magazine provides the world’s recent data and news to make that story line. In brief, the magazine suggests not to move backward from globalization. The harm caused by the globalization was indeed undermined but what we have to do
now is to compensate the harm. The ongoing discussion on why countries should stop opening their economy has many faults, some alleged losses due to liberalization are caused by other things.

Due to globalization, labor-intensive industries move to places where labor is cheap. This decreases the welfare of the areas left by the industries. People in those areas have to shift to other industries that they are good at. This may end up that they reach a welfare even higher than before, but this is certainly not the case of all areas. Likewise, with the free capital mobility, the EU periphery countries like Greece and Portugal received many credits from the EU core countries like Germany. However, when crisis hit the continent, these periphery countries suddenly lost their hot money. This put their economy into calamity that they need financial assistance from European Central Bank. This caused relationship problems between the core and the periphery.

In addition to those two stories, the magazine also quotes McKinsey’s finding that two-thirds household in the 25 advanced countries have stagnant real income for the period 2005-14. This is very low compared to 2% for the previous decade.

All these explains the recent loud voices to roll back globalization. These include politicians in developed countries such as Donald Trump, the US Presidential Candidate.

The effect of globalization that is highlighted in the magazine is the worsening income distribution due to technological change. In an open economy, high-skilled workers earn higher income as they understand and/or create a more advanced technology whereas low-skilled workers lose their job as their job functions are replaced with the new technology.

Another vast phenomenon that one cannot miss when talking about globalization is the emergence of China as the world’s economic power. Massive jobs have been shifting from advanced countries to China as it opens its economy and has the comparative advantage of low wage.

Capital Mobility

As part of the world economy series, the magazine writes an article of capital mobility. The article exposes the trouble from the enormous short-term capital flow. The short term capital inflow creates a sudden increase in wealth but at a certain point, just like bubbles bust, the wealth turns into crisis. When there is a huge capital inflow, local currency will appreciate. This may deteriorate its export-oriented local industries as the currency appreciation will make the export goods less attractive. This is a phenomenon called as Dutch Disease.   

The article pays special attention to the countries’ competition of lowering corporate tax rate in order to attract foreign investment. For instance, Ireland applies so low rate of corporate tax that many big multinational companies are purchased by small Irish companies in order to be registered in Ireland. Although this practice contributes to Ireland’s 26% GDP growth in 2015, this kind of footloose investment is not desirable.

Then, the article reviews several ways to control the short-term capital flow. For example, an entry (Tobin) tax to incoming capital to hold domestic currency’s appreciation, as applied by Brazil since 2009. Another example is a more permanent control such as China’s control on its nominal exchange rate. Nevertheless, it seems that there has not been a solution to control the footloose investment due to the competition of lowering corporate tax.

In short, blaming globalization is the easiest thing losers of globalization will do. In fact, as long as there are losers from opening the economy, as it is always the case, there will always be globalization’s opponents. Therefore, losers’ voices should not stop globalization to roll on as compensation to losers can always be thought of.