The Causes of Human Rights Violations (47): Globalization

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Human history is often viewed as a widening circle of moral concern. In the olden days, the claim goes, people cared only about their siblings and tribe. Then they started to care about their class, their nation, their religious community, their civilization, and ultimately their shared humanity. Cosmopolitanism, or the equal respect for all human beings whatever their affiliation or location, is then the end-state of morality (although some want to go further and include animals or even inanimate objects in the circle of moral concern). This end-state dovetails with human rights concerns because human rights are also the rights of all humans, whatever country, class or culture they belong to.

The widening of moral concern – if it indeed occurred as described – went in tandem with other and more familiar globalization processes, such as increased international trade, integration of different economies, the development of international law, increased communication through the internet, easier transportation, intercultural dialogue, migration etc. And all these different processes interact: communication and transportation foster trade, trade fosters communication, communication widens the circle of moral concern etc.

This story implies that globalization – of any kind – is always or unequivocally beneficial from the point of view of human rights. However, that may not be true. Let’s look at some of the pros and cons of different types of globalization.

Pros

• Increased migration is almost without exception beneficial to the prosperity and freedom of all parties involved, although the migrants obviously benefit most.
• Intercultural dialogue promotes tolerance and agreement on human rights, and this dialogue is not only fostered by new technologies but also by international trade. Better communication as well makes people care more about what happens in the world and makes it more difficult for oppressive regimes to hide their oppression. In this sense, communication and trade drive the widening circle of moral concern.
• Economic interdependence between countries creates a self-interested incentive for governments to promote rights and democracy elsewhere in the world and makes it more likely that international law can impose itself over concerns about national sovereignty. Global economic collaboration requires international regulation, and economic regulation can open the door for other types of regulation, including rights regulation. Countries that depend economically on an international institutional and regulatory system, will have a much harder time invoking their sovereignty when faced with accusations of rights violations, since they already lost a huge chunk of their sovereignty due to economic integration.
• The increasing importance of multinational companies makes it easier for consumers in one part of the world to lobby for corporate responsibility elsewhere in the world.

a somewhat far-fetched representation of the widening circles of concern

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Cons

• Outsourcing, a commonly cited aspect of globalization, can result in people losing their jobs, and the threat of outsourcing can force people to accept lower wages or inferior labor conditions. And work is a human right.
• The threat of cheap foreign labor and cheap foreign products can lead to protectionism and immigration restrictions, two major causes of poverty in developing countries.
• Globalization may erode the welfare state because a large part of the tax base – corporations, financial intermediaries and skilled workers – become internationally mobile and can thereby avoid to pay the taxes that governments need to finance their welfare systems. The tax base can also decrease because governments cut taxes in an effort to maintain the competitiveness of local businesses.
• The previous three phenomena – outsourcing, labor and product competition and pressure on the welfare state – may not only lead to restrictions on international trade and migration, but can also counteract the widening circle of moral concern: politicians and local businesses can and often do use these threats to stir up xenophobia. A xenophobic public is more likely to vote in favor of trade and immigrations restrictions. On the other hand, there’s some evidence that people’s circle of moral concern is wider in countries that are more affected by globalization.
• Globalization implies a certain degree of power deflation: states lose power vis-à-vis the market, multinationals, international institutions and each other. This in turn means that decisions affecting the well-being of people are taken by outside forces. Democratic self-government – which is a human right – is then threatened.
• The interconnectedness of international financial markets increases the likelihood that a local financial or economic crisis spreads to the rest of the world.
• A higher number of increasingly globalized multinational companies also means a higher risk that some of those threaten indigenous cultures, exploite poor workers etc.

On balance, however, I believe that globalization is good for human rights, even though I can’t quantify the pros and cons.

The Causes of Poverty (37): Lack of Trade Liberalization

I’ve argued before that doing away with trade restrictions (especially in the agricultural sector) – such as subsidies (like the EU’s Common Agricultural Policy), import duties and other protectionist measures – would be a boost to the global struggle against poverty (read more here and here). Free and unsubsidized trade reduces poverty in at least three ways:

• It brings down prices because of increased specialization, competition and comparative advantage (read more about the reasons here). Although the removal of subsidies (only one element of trade liberalization) would initially raise prices and hence also poverty levels in importing countries, over time this would be compensated by the downward pressure created by specialization, increased competition and comparative advantage. However, these importing countries wouldn’t be the poorest ones: “three-quarters of the world’s poor live in rural areas, with the majority of them depending directly or indirectly on agriculture for their livelihoods” (source). The poorest countries would benefit from initial price rises caused by the removal of subsidies. (That doesn’t mean that everyone in the poorest countries would benefit: non-farm workers may suffer).
• It opens up foreign markets for poor producers.
• It eliminates distortions of competition between local producers and foreign, subsidized products, distortions which often force local producers out of business.

All this has a positive effect on the income of the poor. There’s a new paper here arguing that the net effect of trade liberalization is a reduction of the number of poor people worldwide by 3%:

the winners from trade reform would include poorer countries and the poorest individuals within countries. Nevertheless, it is also clear that even among the extreme poor, some would lose.

Of course, and again: beware of the silver-bullet fallacy. Domestic anti-poverty policies continue to be important as well.

The Causes of Wealth Inequality (5): Globalization

Another one in our series about the causes of wealth inequality (see here, here and here). (If you want to know why we think this is a human rights issue, go here or here first).

Globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels. …

U.S. and European workers are told that … our societies can no longer afford a generous welfare state. …

Contrary to the standard framing, which presents globalization as something that no nation can escape or even attempt to shape, we can choose the terms under which we integrate capital, product, and labor markets across countries. Over the last 30 years we have indeed “chosen” a particular form of globalization in the United States – a form that benefits corporations and their owners at the expense of workers and their communities. If we had chosen globalization on different terms, however, economic integration would not have required rising inequality. Another globalization is possible. (source, source)

So globalization, as it has occurred and is occurring, causes higher inequality in the West in two ways:

• The direct competition with overseas workers who can produce at lower wages puts downward pressure on wages in the West, especially for low-skilled workers at the wrong end of inequality.
• Governments in developed countries react to this competition by restricting social safety nets because the taxes necessary for the funding of these safety nets hurts the competitiveness of local businesses, a competitiveness already under pressure from low-cost labor in the developing world. Less generous safety nets obviously also have a negative effect on inequality.

If these effects are real, perhaps they can explain the decline of manufacturing in many developed countries.

However, I’m not sure this pressure on wages is real and significant (I’ll try to find some data), and we also shouldn’t dismiss the benefits for low-wage workers in the West of cheaper products. This particular result of globalization can offset the possible negative wage effects of wage competition.

Also, I’m not sure governments in the West are actively attacking safety nets (here it says they haven’t during the last decades, but it seems that the recent economic crisis has convinced some to start cutting benefits). And finally, we should remember that inequality isn’t just a national problem. The inequality between countries is just as, if not more, important. And globalization has had a beneficial effect on inter-country inequality because it has redistributed wealth from rich countries to poor countries. For example, it’s hard to imagine how China could have had the same success in poverty reduction without globalization. The question is of course whether this redistribution had to come from low skilled workers in the West, rather than from their more wealthy fellow citizens. The fact that it did come, however, was undoubtedly beneficial to the poor in the receiving development countries.

If we put all the causes of wealth inequality discussed in different posts together, we get this tentative list:

• globalization (i.e. outsourcing, trade liberalization) and the resulting competition between low-skilled workers in the West and in development countries
• competition between low-skilled workers in the West and immigrants
• the development of technology and a decreasing demand for low-skilled workers
• the increased importance of cognitive skills relative to physical labor
• declining manufacturing employment
• shrinking unionization and fragmenting of collective bargaining
• changes in household size and composition (due to later marriage and more prevalent divorce, more and more households have just one adult, and hence only one potential earner)
• coupling between people with similar education and thus similar earnings potential (“marital homogamy”)
• “positive feedback”: wealth begets wealth.

More on income inequality. More on outsourcing. More on globalization.

The Causes of Poverty (7c): Globalization

Dani Rodrik

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Does globalization erode social safety nets? Economic theory and intuition suggest that as economies become more globalized, the ability of governments to undertake redistributive policies and to engage in social spending erodes. After all, a large part of the tax base – corporations, financial intermediaries, and skilled workers in particular – become internationally mobile and can evade taxes needed to finance those public expenditures.

… the lack of an obvious decline in the overall tax take in major advanced economies, has led many observers to think that the hypothesized decline of the welfare state has not in fact taken place. [However], as technological progress and multilateral trade liberalization have made borders less of a barrier to economic activity, the scope of redistribution policies has become smaller. Dani Rodrik (source)

Some of the evidence in support of this statement is in the chart below (comparing the ratio of foreign trade to GDP as a measure of globalization, with the amount of public social spending):

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This doesn’t mean that globalization necessarily leads to more poverty. Redistribution on the basis of taxation is only one way to fight poverty (see here and here). In this post I discussed some of the ways in which more free trade and hence more globalization can reduce poverty.

The Causes of Poverty (12): Protectionism

N. Gregory Mankiw

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Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards. N. Gregory Mankiw

Types and justifications of protectionism

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Most governments in the world apply restrictions on the international trade of goods. They limit the imports into their countries by way of different measures:

• Import tariffs (or taxes – “duties” – on imported goods)
• Regulatory legislation (e.g. public health legislation or sanitation legislation, “purity” legislation etc.)
• Quotas (limits on quantities of certain goods that can be imported)
• Anti-dumping laws (laws against selling below production cost)
• Government-imposed monopolies on the sale of certain goods
• And other measures.

They do so in order to protect local producers and farmers against foreign competition. That is where the word “protectionism” comes from. The reasons they state for introducing these measures are usually the following:

• Someone else did it first.
• Labor in other countries is cheaper, and therefore the products are cheaper.
• Labor in other countries may be forced labor, e.g. in prison camps.
• Labor in other countries may be child labor.
• Governments’ first duties are towards their own citizens.
• Countries should be self-sufficient and should protect certain important industries such as the food and energy industries, so as not to depend on foreign countries, even if the local products are more expensive than their foreign equivalents.
• It may take some time for industries to become fully operative. Before that, countries can protect these industries by shielding them from foreign competition.
• It is more environmentally responsible to consume local goods than products that have to be transported over thousands of miles.
• Free trade favors the stronger party in a deal, and hence is neocolonial. The outcome of a free deal between unequal partners means more inequality.
• Free trade encourages off-shoring and outsourcing, and hence job losses in the unprotected markets.
• Etc.

Many of these justifications are also commonly used in the debate on globalization. (I will not examine the merits of these arguments here – although I believe that some have some merit – because this post deals with the rationale of trade liberalization, not protectionism.)

Both developed and developing countries uses these measures to protect their own producers.

Another distortion of free international trade comes in the form of subsidies for the production of goods to be exported. This is also a protectionist measure because the aim is to protect industries in difficulties, industries which would have problems selling their goods abroad at normal prices.

Origins of protectionism

As is apparent from the quote above, these measures are usually not inspired by economic thought, but emanate from political concerns. Pressure groups in different industries lobby the government and try to have specific protections put in place. At the same time, however, the international community of states has been involved in trade liberalization negotiations (GATT, WTO etc.) that have been going on for decades already and that should result in the scaling down of the different protection measures. Some success has been achieved so far but the talks are still going on.

Trade liberalization and poverty

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One of the aims of these negotiations is the reduction of poverty around the world. But does liberalization of farm trade help the poor? I think it does. Free trade brings down the cost of some products, because it may be cheaper to buy these products elsewhere than to produce them yourself. The cost of producing them yourself may be higher than the cost to produce them elsewhere (e.g. because of the climate in your country, or the available knowledge etc.), even if you include the profit margin of the seller in this cost.

Also, international trade allows countries to specialize in certain products only, and specialization increases productivity and diminishes prices (see also the concept of comparative advantage).

There’s yet another reason why free trade may bring down the price of goods. Normally, if trade is free and restrictions on international trade are abolished, then competition will increase. And when competition increases, prices tend to go down.

So there are several reasons why free trade brings down prices. And when prices go down, consumers pay less. And when people pay less, they are generally less poor.

Import tariffs

Also, when import tariffs are cut in trade liberalization measures, prices for the consumers in importing countries go down, and exports in relatively poor export countries go up. So this would help the poor everywhere, the poor consumers in importing countries, and the poor producers in exporting countries.

However, when import tariffs are cut, local production in some countries will go down because local companies will have to compete with lower priced goods from abroad, lower priced because of the absence of tariffs, but often also because of cheaper foreign labor. With job losses as a consequence and hence more poverty for the people working in certain sectors of the economy. Consumers in general may be better off, but not those working in the industries that were protected by tariffs. For them, the benefits of cheaper products may be outweighed by the financial loss of losing their employment.

Furthermore, the government loses tax revenues when tariffs are cut, and therefore may be less able to provide a social safety net to cushion the adverse effects of competition.

However, most economists believe that removing tariffs and having free trade would be a net gain for society (for some evidence of this see here and here).

Import quotas

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Import quotas limit the number of foreign goods that can enter a country and be sold there. This increases the prices of the goods because the supply is limited, and also because many of the foreign goods are cheaper than the local equivalents (mostly because of cheaper labor costs abroad). Restrictions on competition push up prices as well. Eliminating quotas therefore lowers prices and benefits the poor.

However, similarly to import tariffs, quotas protect local producers because they suffer less competition from foreign producers. Quotas can save jobs and therefore diminish poverty. But the people in these saved jobs are less numerous than the total population of consumers who benefit from lower prices (and they are also consumers themselves).

Quotas, contrary to tariffs, do not generate tax revenue, so there abolition would not cut into government benefits.

Export subsidies

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Export subsidies depress prices and make it harder for non-subsidized producers, often in the poorer countries, to compete. Many local producers and workers will go bankrupted when the same products that they produce, are freely imported from countries where their production is heavily subsidized, sometimes to the extent that they can be sold below production price.

However, the initial effect of slashing export subsidies is an increase in prices of goods. Take the important example of food prices or prices for farm products. Even in rural societies, most people buy more food than they sell. Slashing subsidies would therefore hurt the poor because it makes it more expensive for them to buy food. The World Bank has estimated that slashing all farm subsidies would lead to a 5% increase in average prices. However, net food buyers are generally richer than net sellers; higher prices therefore transfer income from the rich to the poor, on average. Moreover, even the poor who buy more food than they sell (and those who do not sell at all), may benefit from higher prices for farm products because these higher prices boost demand for rural labor and push up wages for farm workers. The farm sector as a whole grows because of an increase in profitability, and this creates employment.

The World Bank has argued that the net effect of all these elements (price increases because of slashing subsidies, higher wages in farm jobs etc.) is positive for the poor. (Many of these data can be checked in the May 31st, 2008 article on the Doha Round in The Economist).

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Conclusion

Free trade helps the poor, and the ongoing trade liberalization talks in the framework of the WTO should be pursued. But at the same time it should be made clear that free trade is not a miracle solution. Poverty has many causes and many solutions and should be attacked from many fronts at the same time.

More on the correlation between economic freedom and income.

Overview

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