globalization

Increased Standard of Living
Economic globalization gives governments of developing nations access to foreign lending. When these funds are used on infrastructure including roads, health care, education, and social services, the standard of living in the country increases. If the money is used only selectively, however, not all citizens will participate in the benefits.
Access to New Markets
Globalization leads to freer trade between countries. This is one of its largest benefits to developing nations. Homegrown industries see trade barriers fall and have access to a much wider international market. The growth this generates allows companies to develop new technologies and produce new products and services.
Widening Disparity in Incomes
While an influx of foreign companies and foreign capital creates a reduction in overall unemployment and poverty, it can also increase the wage gap between those who are educated and those who are not. Over the longer term, education levels will rise as the financial health of developing countries rise, but in the short term, some of the poor will become poorer. Not everyone will participate in an elevation of living standards.
Decreased Employment
The influx of foreign companies into developing countries increases employment in many sectors, especially for skilled workers. However, improvements in technology come with the new businesses and that technology spreads to domestic companies. Automation in the manufacturing and agricultural sectors lessens the need for unskilled labor and unemployment rises in those sectors. If there is no infrastructure to help the unemployed train for the globalized economy, social services in the country may become strained trying to care for the new underclass.

1. International Journal of Business and Social Science Vol. 2 No. 23 [Special Issue – December 2011] Globalization and its Impacts on the World Economic Development Muhammad Akram Ch. (1), Muhammad Asim Faheem (2) , Muhammad Khyzer Bin Dost (2), Iqra Abdullah (3)(1) Additional secretary higher Education Department, Punjab, Lahore(2) Lecturer, Hailey College of Commerce, University of the Punjab, Lahore, Pakistan(3) MS Scholar Department of Management Science COMSATS Institute of Information Technology, LahoreAbstractThe question whether the Globalization is beneficial for the World or harmful, is still unsolved and verycontroversial. Besides all of its disadvantages, it is an accepted reality that globalization is expanding veryrapidly throughout the world. This paper is an attempt to find out what is the true sense of Globalization? How itis affecting the International Trade, FDI, and Economic Developments of overall word? This paper is mainlyfocusing on measuring how the Globalization is affecting the fastest growing industries of World.Key Words: Globalization, Economic Development of World, Fastest Growing Industries of World.IntroductionHave you ever noticed that how close the different nations of the world are, in this era? If you visit a Super Storeof Dubai, you will find all the commodities, imported from other countries. Only some commodities are there thatare actually manufactured in United Arab Emirates. You will find the Electronic items made in Malaysia. Mobilephones made in India. Food items as fruits, rice etc are imported from Pakistan. This situation is not only limitedto UAE, but the whole world is facing the same scenario.Volume of goods, services and investments is transferring the national borders very rapidly. Now a dayapproximately $1.5 billion foreign exchange transactions are taking place daily. Statistics show thatapproximately $8.9 trillion of goods are transacted across borders and $2.10 trillion of services are providedacross the borders (Hill, 2009). As far as the definition of Globalization is concerned, it is still a controversialtopic. So far there is no consensus on a single definition of Globalization between all disciplines of life.Economics focuses on transfer of goods, services and funds in overall world. Political Science focuses on the roleof UNO, WTO, GATT and similar kind of International Institutions. Some other disciplines such as anthropologyand sociology concentrate on the interconnectivity of different cultures.In nut shell we can say globalization can be applied is a movement, a phenomenon and a force. And the scope ofthe globalization is increasing as the time is passing (EuroStat, 2007).One most common definition of globalization states that Globalization is a process of integrating different worldeconomies. Globalization is integration among the people, government and companies of different countries(Rothenberg, 2003).The primary purpose of this paper to find out; how the Globalization is affecting the Economic Development ofWorld? The concept of economic development refers to the process of improvement in the economicopportunities, and quality of human lives; and reduction in the poverty. Better health facilities, better education,clean environment and better utilization of resources are the important components of Economic Development.Moreover the justified distribution of goods and services is also the part of economic development. A gooddistribution network that includes the good transportation system results in not only better delivery of goods andservices but the improvement of labors mobility (Henderson, 2007).According to (Bell, 1987), “Economic Development is a field of economics which is related to the process ofdevelopment. It not only focuses on ways of enhancing structural change and economic growth but alsoimproving the potential of the mass of the population; for instance, through education, health and workplaceconditions”. Globalization has changed the picture of World Economy, by increasing the cross-border trade,exchanges of currency, free flow of Capital, movement of people and flow of information. Globalization hasintroduced the concept of border-less and integrated world economy. Globalization has given a new thought to thebusinesses worldwide. A lot of Strategic changes have been occurred in the businesses. Now target market forbusinesses is not only their home land, but the overall world (Intriligator, 2003). 291
2. The Special Issue on Arts, Commerce and Social Science © Centre for Promoting Ideas, USAWorld Economy is composed of many sectors. Globalization has affected each sector of world Economy, directlyor indirectly. To discuss each and every sector in one research paper is quiet impossible. So we will focus only onthe major sectors of the world economy.Literature ReviewWhat, Why and How Globalization is?A lot of work has been done in the past on globalization but its effects on the economic development have notbeen discussed in detail.Globalization is not a new concept. In past people use to travel to other places for gaining control on others lands,for finding out the better living style, for finding out the new places and to earn profits by selling in differentregions. These activities were carried out even thousands of years before. But it is said that the earliest form ofGlobalization was started from Greek, Roman, Egyptian, and Babylonian Empires. In the regime of Mongols, thefamous Silk Road connected the Central Asia and Europe (Wikipedia, 2011).Statistics indicates that Globalization is expanding very rapidly World Wide. Data gathered from WTO showsthat economy of the world is expanding since 1950. Till 2004, the volume of merchandise traded has expandedabout 7.5 times (Farrell, 2007).According to one Author Globalization refers to the Political, Economical, Social and Technological links indifferent countries (Hamilton & Webster, 2009). Globalization is a contested concept that refers to shrinkage oftime and space (Steger, 2009). According to another definition “globalization is the diminution or elimination ofstate-enforced restrictions on exchanges across borders and the increasingly integrated and complex global systemof production and exchange that has emerged as a result (Palmer, 2002)." Apart from those mentioned above,many more definitions can be found in the literature.Economic Development and its Different AspectsEconomic development refers to the improvements in quality of human life. According to a widely acceptabledefinition, Economic Development means the changes in local economies’ capacity of wealth creation (Kane &Sand, 1988). According to traditional view, Economic Development refers to the Economic System that might bea mean to increase the absolute size of, for instance, capital or annual production regardless to the size ofpopulation but in the modern sense, economic development is used in relation to the movement in real income perhead and to potential in this respect (Robbins, 1968).Economic Development comes into different steps.According to an American Economist Rostow, Economic Development comes into five steps that are as follow:  Traditional StageIn this kind of stages are exchanged as in barter system. Agriculture is considered the major sector and resourcesare regulated through the different ways of production.  Transitional StageIn this stage surplus production is generated. So transport infrastructure get advance and trading activates boostup.  Take Off StageIn this stage industrialization sector start growing. And at the same time political and social institutions are getstrengthen.  Drive to Maturity StageAt this stage investment opportunities are increased along with technological advancements.  High Mass Consumption StageAt this stage industries are more authoritative and customer focused.(Rostow, 1960).We can utilize number of economic indicators to measure the economic development of a country or whole world.Some of the major economic indicators or performance indicators are following:  GDP: Gross Domestic Product- total value of goods and services produced in a country  GNP: Gross National Product- market value of all products and services produced in a year by the residents and labor.  Per Capita Income: Aggregate of all sources of income divided by the size of population (Wikipedia, 2011).292
3. International Journal of Business and Social Science Vol. 2 No. 23 [Special Issue – December 2011]How Globalization is affecting the World Economic Development?Effects of globalization can be discussed in the following different ways:  Global MarketsAccording to (Hill, 2009) Global Market refers to the “Merging of Historically Distinct and separate NationalMarkets into one huge global market place.” With the expansions of global markets liberalize the economicactivities of exchange of goods and funds. Removal of Cross-Border Trades barriers has made formation ofGlobal Markets more feasible.  International InstitutionsSome of the forces in the world are in the favor of a government that governs the entire world. Now theinstitutions like United Nations Organization, International Monetary Fund, World Trade Organization and WorldBank are near to the concepts of those groups because they are regulating the relationship between differentcountries and governing issues of Justice, Human relations or political factors (IMF Center, 2005). As the primarypurpose of WTO is to unionize the world trading system. Till 2005 148 countries were the members of WTO. Theprimary purpose of IMF is to regulate the world monetary system. United Nation Organization’s primary purposeto bring the piece in all over the World, about 191 countries is the members of UNO (Hill, 2009).  Changes in World Trade PictureBefore the phase of Globalization, United States of America was dominant in world export. After the advent ofglobalization, Germany, Japan, South Korea and China have seriously challenged the position of America.(Hill, 2009)  Changes in Foreign Direct InvestmentForeign Direct Investment is considered as signification indicator of economic development.According to (Salvotore, 1998) investment in form of lands, capital good, inventories and factories are the realinvestments. Direct investment is in shape of when one firm is controlling a firm or establishing a subsidiary.Foreign direct investment must be strong enough to control parent company and foreign host company. Controlmeans that parent firm must own at least 10% stock of subsidiary. Lower than this limit of shares are consideredas portfolio investment (International Monetary Fund (IMF), 2008). Global FDI Inflow, average 2005-2007 and 2007-2010 (Billion of Dollars)(Nations, 2011) 293
4. The Special Issue on Arts, Commerce and Social Science © Centre for Promoting Ideas, USA  Corporation ChangesIn the present global competitive environment it is a necessary to use the information technology innovatively andskillfully. Globalization has increased the trend of Multi National Companies in all over the world. Before theGlobalization phase USA was dominant in MNCs. But after the expansion of globalization trend, many differentnations entered in the race of MNCs. In 1973 share of US in MNCs was about 48.5% and in 2002 it was 28%.  Technological EffectsBy the development of technologies specifically related to Telecom as internet, telephones, wireless technologies,undersea fibers, a global technological infrastructure has been developed so information can be moved moresmoothly across the borders. Laws regarding Copyrights, patents and international agreements can be easilyapplied. Through information technology, awareness and application of criminal laws have become easier. Fraudsin International Trade and in society can be easily detected (Ogunsola, 2005).The below given graph shows that how the telecommunication sector has progressed in developed and developingnations:  Effect on the Standard of Living:294
5. International Journal of Business and Social Science Vol. 2 No. 23 [Special Issue – December 2011]As mentioned above that the major effect of globalization is in the shape of expansion of trade and investment.It is evident that poverty rate has decreased in the regions, where investment and trade is expanding. If weconsider the different examples of countries then we can prove our point of view. India is a country where the FDIis increasing rapidly and as a result poverty rate is declining. Mexico has overcome the Macroeconomics crisisbetter than its neighbors. Similarly Zambia, Columbia and Poland have gained a lot by falling of prices (Harrison,2006).(International Monetary Fund, 2007)  Effect on EmploymentAfter the advent of globalization, it was an apprehension that the job will shift to developing countries formdeveloped and advanced countries. But Supporters argue that this shift will result in the long term benefit to thecountry. Critics argue that Globalization will result in inequalities and insecurity about the Jobs. And willultimately causes the changes in employment structure and labor demand will fall. The below given graph showshow the unemployment has increased in the world:(Geoff Riley, 2006)  Industrial EffectsGlobalization has also affected the Industrial sector of the world. Now in this era of globalization, the focus ofindustries is to produce foreign commodities and to facilitate the consumers in all over the World. For Example,Coca Cola produces the beverages according to the taste that is acceptable in all over the world. The below givengraph shows how the different industries are affected during different time horizons:Ranking of Manufacturing Activities from 1975-2000 295
6. The Special Issue on Arts, Commerce and Social Science © Centre for Promoting Ideas, USA(Teal, 2007)  Cultural ChangesThrough the development of Globalization world is getting into an identical culture that is understood by everynation, we may call it intermixing of the cultures. People of world especially people of rich countries are gettingless conscious about their nations cultures and they have started emerging in world culture. Globalization hasresulted in increasing the diversity and boosting telecom and tourism sector of the world (Nigam, 2009).  Environmental EffectsOn the one hand globalization has resulted in making the man more interested toward its planet in which he isliving and its ecology i.e. its environment through the technological advancements. But on the other hand it isconsidered that with the growth of Transport has resulted in destruction of Ozone layer and many species on theearth. For the economic development every country has to pass from the dirty stage of industrialization whichresults in the extraction of poisonous material and harmful wastes that are dangerous for the human’s health. Butit is considered that these things are necessary to come along with the developments in living standards of humans(Nigam, 2009). But in spite all these adverse facts, Globalization has become an unavoidable necessity forEconomic Development.ReferencesAngell, N. (1911). The great illusion; a study of the relation of military power in nations to their economic and social advantage. New York, London: G. P. Putnams Sons.Bell, C. (1987). Development Economics. In M. M. John Eatwell, The New Palgrave: A Dictionary of Economics (Vol. 1, pp. 818, 825). Lindau, Germany: Pelgrave Mcmillian.Crystal, D. (2004). English as Global Language. Cambridge: Cambridge University Press.EuroStat. (2007). Euro Indicator, Selected Readings, Focus on: Measuring Globalization. Luxembourg: Eurpoean Commission.Farrell, R. R. (2007, February 23). The Future of Globalization. Retrieved September 26, 2011, from Website of The Real Truth, Magazine: http://www.realtruth.org/articles/070223-001-globalization.htmlFiredman, T. L. (2008). The Dell Theory of Conflict Prevention. In T. L. Friedman, The World is Flat (p. 49). Boston: Bedford: Emerging A Reader. Ed. Barclay Barrios.Geoff Riley, E. C. (2006, September 1). A2 Macroeconomics / International Economy. Retrieved September 27, 2011, from Tutor 2 u: http://tutor2u.net/economics/revision-notes/a2-macro-globalisation-effects.htmlHabib-ur-Rehman. (2010). PAKISTAN ECONOMIC SURVEY 2009-10 . Islamabad: Ministry of Finance, Government of Pakistan.Hamilton, L., & Webster, P. (2009). The International Business Enviroment. New York: Oxford Univeristy Press.Harrison, A. (2006). GLOBALIZATION AND POVERTY. Cambridge: NATIONAL BUREAU OF ECONOMIC RESEARCH.Henderson, D. R. (2007). The Concise Encyclopedia of Economics. Califronia: Liberty Fund.Hill, C. W. (2009). International Business. New York: McGraw-Hill.Horowitz, S. (2004). Restarting Globalization after World War II; Structure, Coalitions, and the Cold War. Comparative Political Studies , 37, 127-151.Imade, L. O. (2003, August 01). Globalization. Retrieved August 09, 2011, from Web Site on Globalization: http://globalization.icaap.org/content/v3.1/01_imade.htmlIMF Center. (2005). Ten Basic Questions about Globalization. Washington D.C.: International Monetary Fund.International Monetary Fund (IMF). (2008). Glossory of Foreign Direct Investment Terms. Geneva: IMF.International Monetary Fund. (2007). World Economic Output; Globalization and Inequality. Washington D.C.: Interantion Monetary fund; World Economic and Financial Surveys.Intriligator, M. D. (2003). Globalization of the World Economy: Potential Benefits and Costs and A net Assessment. Los Angeles: Milken Institute.296
7. International Journal of Business and Social Science Vol. 2 No. 23 [Special Issue – December 2011]Kane, M., & Sand, P. (1988). Economic Development: what works at the local Level. Washington D.C.: National League of Cities.Nations, U. (2011). Global Investment Trends. New York: UNCTAD.Nigam, M. (2009, August 4). Impact of Globalization. Retrieved September 26, 2011, from Article Base Web Site: http://monikanigam.articlesbase.com/science-articles/impact-of-globalization-1095770.htmlOgunsola, L. A. (2005). Information and Communication Technologies and the Effects of Globalization: Twenty- First Century "Digital Slavery" for Developing Countries--Myth or Reality? ELECTRONIC JOURNAL OF ACADEMIC AND SPECIAL LIBRARIANSHIP , 2, 1-2.Palmer, T. G. (2002). Globalization is Great ! Washington: Catos Letter.Ravillion, M. (2003). The debate on globalization, poverty and inequality: why measurement matters. International Affairs 79 , 739-753.Robbins, L. (1968). The Theory of Economic Developement in the History of Economic Thought. London: Macmillan.Rostow, W. (1960). The Stages of Economic Growth: A non-communist manifesto. Cambridge: Cambridge University Press.Rothenberg, L. E. (2003). Globalization 101 The Three Tensions of Globalization. New York: The American Forum of Global Education.Rourke, K. o. (2007). The Cambridge Economic History of Modren Europe. Dublin: Cambridge University Press.Salvotore, D. (1998). International Economics. West Sussex: John Wiley & Sons, Inc.Siochrú, S. Ó. (2004). Social consequences of the globalization of the media and communication sector: Some Strategic Consideration. Geneva: International Labour Organization.Steger, M. B. (2009). Globalization: A Very Short Introduction. Hampshire: Oxford Univeristy Press.Teal, M. E. (2007). Extent and causes of global shifts in manufacturing. Center for study of African Economies,. U.K.: Oxford University Press.Todaro, M. P., & Smith, S. C. (2001). Economic Development. Essex: Pearson Education Ltd.Varghese, N. (2011). Globalization and cross-border Education: Challenges for the development of higher education in Commonwealth countries. Kuala Lumpur: International Institute for Educational Planning (IIEP).Wikipedia. (2011, May 13). Economic indicator. Retrieved August 4, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Economic_indicatorWikipedia. (2011, June 2). History of Globalization. Retrieved September 26, 2011, from Wikipedia: http://en.wikipedia.org/wiki/History_of_globalizationWTO: 2011 PRESS RELEASES. (2011, April 1). Trade growth to ease in 2011 but despite 2010 record surge, crisis hangover persists. Retrieved August 7, 2011, from WTO Site: http://www.wto.org/english/news_e/pres11_e/pr628_e.htm 297

The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.

Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbors to the east and is trying to sell herself as a safe and profitable destination for FDI.

Globalization has many meanings depending on the context and on the person who is talking about. Though the precise definition of globalization is still unavailable a few definitions are worth viewing, Guy Brainbant: says that the process of globalization not only includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, growing importance of MNCs, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution. The term globalization refers to the integration of economies of the world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it also contains free inter-country movement of labor. In context to India, this implies opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity in India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import liberalization programs by switching over from quantitative restrictions to tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in India.

The Important Reform Measures (Step Towards liberalization privatization and Globalization)

Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was flying out of the country and we were close to defaulting on loans. Along with these bottlenecks at home, many unforeseeable changes swept the economies of nations in Western and Eastern Europe, South East Asia, Latin America and elsewhere, around the same time. These were the economic compulsions at home and abroad that called for a complete overhauling of our economic policies and programs. Major measures initiated as a part of the liberalization and globalization strategy in the early nineties included the following:
Free trade- Basically, the argument is that everyone benefits when countries specialize in the type of production at which they’re relatively most efficient. Consider this analogy with the family: No family tries to make everything that it eats, wears, and enjoys. If it’s cheaper to buy something or have someone else do something, that’s what a family does. Then individual family members can concentrate on becoming good at their jobs in order to pay for what they buy.
A nation is no different. If it costs less to make certain products abroad than it does in the U.S., then it’s difficult to argue that U.S. consumers and U.S. companies should pay more for those products from U.S. producers. Instead, it makes sense to purchase those products more cheaply from abroad, whether they’re hard goods, like VCRs, or services, like call centers. Then we can devote our resources to producing and exporting those goods where we have a relative advantage. The result is a twofold benefit—greater efficiency and lower costs for U.S. firms and consumers.
What are “outsourcing” and “offshoring”?
In its broadest sense, outsourcing is simply contracting out functions that had been done in-house, a longtime U.S. practice. When a car manufacturer in Michigan buys brake pads from an intermediate supplier in Ohio rather than produce them in-house, that’s outsourcing. When a company replaces its cleaning and cafeteria workers with an outside contractor who does the same services more cheaply, that’s outsourcing. When a company contracts out its payroll, accounting, and software operations, that’s outsourcing. Clearly, outsourcing can result in job losses if the outside supplier is more efficient and uses fewer workers.
Offshoring has been referred to as the global cousin of outsourcing. Instead of turning to domestic providers, firms may decide to purchase a good or service from overseas providers because of lower costs. Offshoring, too, has a long history in U.S. manufacturing; for example, firms in Mexico supply seat covers and wiper blades to Detroit automakers. What appears to be new about offshoring is that it’s affecting workers in the service sector who never expected to see foreign competition for their jobs—data managers, computer programmers, medical transcriptionists, and the like.
How much offshoring is going on? That’s difficult to say. We don’t have official statistics, and there are a lot of unsettled measurement issues. But a couple of estimates that have gotten some press recently both suggest that the U.S. lost 100,000-170,000 jobs to foreign workers between 2000 and 2003. Those numbers sound high until you put them in the context of all the job turnover that occurs every year in the U.S. Each year, some 15 million jobs are lost for all kinds of reasons—voluntary employment changes, layoffs, firings, and so on. And in a growing economy, every year even more jobs are created.
Is globalization a threat or an opportunity for the U.S. economy?
The answer to this question will focus on three important issues that are sometimes neglected in the discussion. First, globalization means that economic activity flows in both directions; although we may lose jobs to foreign workers, we also may gain jobs and boost economic activity. For example, data suggest that, in terms of office work, the U.S. insources far more than it outsources; that is, just as U.S. firms use the services of foreigners, foreign firms make even greater use of the services of U.S. residents. “Office work” refers to the category of business, professional, and technical services that include computer programming, telecommunications, legal services, banking, engineering, management consulting, call centers, data entry, and other private services. In 2003, we bought about $77 billion worth of those services from foreigners, but the value of the services we sold to foreigners was far higher, over $130 billion.
Here’s another set of interesting numbers. Between 1991 and 2001, U.S.-based multinationals created close to 3 million jo bs overseas. But they also created 5-1/2 million jobs inside the U.S.—an increase of about 30% in payrolls. That’s a significantly faster rate of job growth than purely domestic companies generated. And it shows that you can’t assume that a job created overseas necessarily means one isn’t created here. For example, expanding an overseas network frequently means you have to hire more workers in the U.S., too—people in management, logistics, research and development, and international IT.
Here’s a final set of numbers. According to the Commerce Department, even as the U.S. “loses” jobs when our companies send operations offshore, we also “gain” jobs as foreign corporations invest here. Specifically, foreign firms employed almost 6-1/2 million workers in the U.S. in 2001—up from about 5 million in 1991; these workers included highly paid Honda and Mercedes-Benz workers in the auto industry. There are plenty of other examples. In 2006, Toyota will employ 2,000 people building cars in San Antonio. Samsung is investing $500 million to expand its semiconductor plant in Austin, Texas. And Novartis is moving its R&D operation from Switzerland to Massachusetts.
My second point is that open trade creates opportunities in the U.S by helping foreign economies become stronger. As incomes grow in other countries, so does their demand for goods and services, many of which those countries will not be able to produce—just as the U.S. does not. This rise in foreign demand for imports is an opportunity for U.S. firms to compete to provide those products. And it would be a shame to miss that opportunity because of trade barriers our policymakers erected. It would mean lost export sales and lost jobs in those sectors.
Finally, globalization can help increase productivity growth in the U.S. The example of offshoring’s effect on the spread of IT in the U.S. and, therefore, on our economic growth illustrates the point. According to one estimate, the globalized production of IT hardware—that is, the offshoring of computer-related manufacturing, such as Dell computer factories in China—reduced the prices of computer and telecommunications equipment by 10%-30%. These price declines boosted the spread of IT throughout the U.S. economy and raised both productivity and growth.
Offshoring offers the potential to lower the prices of IT software and services as well. This will promote the further spread of IT—and of new business processes that take advantage of cheap IT. It also will create jobs for U.S. workers to design and implement IT packages for a range of industries and companies. Although some jobs are at risk, the same trends that make offshoring possible are creating new opportunities—and new jobs—throughout the U.S. economy.
I’ve mentioned productivity several times so far, and I want to focus on it briefly, because I think it plays a significant role in the discussion about jobs in the U.S. Over the past two years, U.S. productivity in the nonfarm business sector has grown at a 4.8% annual rate. In the short term, this increased productivity has let businesses satisfy the demand for their output without having to hire new workers on net. So, it appears that this extraordinary surge of increased efficiency in our economy explains much more about the jobs situation than offshoring, outsourcing, or globalization does.
Although, clearly, productivity creates pain for workers who are displaced, most economists agree that higher productivity is a good thing for the economy. Why? Because, in the long run, higher productivity is the only way to create higher standards of living across the economy. The American worker’s ability to produce more goods and services per hour has been the key to the U.S. economy’s surprising success throughout its history. Consider the manufacturing and agricultural sectors, where more output can now be produced with fewer workers. The same trend has occurred in services: the U.S. used to have lots of elevator operators, telephone operators, bank tellers, and gas station attendants, but now technological advances have taken over many of these jobs. Likewise, the Internet has taken over many routine tasks from travel agents, stock brokers, and accountants. And, with high-speed data links, a lot of office work can be done more cheaply abroad.
What happens to the displaced workers? They move into other sectors of the economy as new jobs emerge. For example, by one estimate, about a quarter of today’s labor force is in jobs that didn’t even exist in 1967.
This emergence of new jobs and workers’ ability to move into them are the hallmarks of a flexible economy—that is, an economy in which labor and capital resources move freely among firms and industries. And such flexibility is a significant strength of the U.S. economy. We operate in competitive markets, and competition, whether from domestic or foreign competitors, induces change. To adapt to that change, and to ease the burden of adjusting to it, flexible labor and capital markets are critically important.
What can policies do to help U.S. workers?
In terms of the overall economy, appropriate monetary and fiscal policies can ensure that aggregate demand keeps the economy on a sound footing, which helps generate jobs to replace those that have been lost.
But words about aggregate demand can seem like cold comfort to the individual workers whose offices and plants are closing because their jobs are going overseas. And concern for these workers, of course, is why there’s interest in trying to restrict trade with tariffs, quotas, or other barriers. Indeed, such measures may actually succeed in slowing job losses in affected industries temporarily. But, as I hope I’ve illustrated, in the end, they impose significant costs on the rest of the economy that are much higher than any benefits.
That’s why I believe it’s far more appropriate to have policies that focus on protecting the people at risk, not the jobs. Such policies should aim to do two things during difficult transitions: help workers get through the hard times and help workers become more flexible so they can adapt when they do face these kinds of changes. In fact, we have policies like these—unemployment insurance, for example. We even have policies specifically for manufacturing workers who have lost jobs to foreign competition. These trade-adjustment assistance programs offer both financial support for a time and the opportunity for training, so that workers can retool their skills and find new jobs. So, in order to help the service workers who have lost their jobs because of outsourcing, it might be appropriate to extend these programs to them.
I realize there’s some debate about how effective the programs are, but the concepts they’re built on are, to my mind, right on target—giving workers a safety net and giving workers the training and tools to qualify for the jobs being created in the U.S. In fact, such programs also could be appropriate for workers who have lost jobs in the wake of the technology-driven productivity surge.
In the long-run, of course, the solution is simple to state, but difficult—and costly—to implement. And that solution is improving the performance of the U.S. education system. Education is the bedrock of our current edge in technology and productivity. It’s the key to producing workers with the flexibility to learn new skills as market conditions evolve. And it’s the hope and promise we must provide for future generations of Americans.