Tuesday, May 10, 2011

Globalization Oversold?

FLG has long been saying that when somebody uses "to compete in a global economy" as a justification it's a time for skepticism. Most frequently, FLG questions when pundits and politicians argue in favor of "more math and science education to compete in a global economy," but that's just the most common example.

Anyway, Schumpeter, over at The Economist, had a good article that questions a lot of the common wisdom when it comes to globalization:
Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP. Some of the most vital arteries of globalisation are badly clogged: air travel is restricted by bilateral treaties and ocean shipping is dominated by cartels.

FLG is sympathetic to those who think globalization is changing everything. He was once one of them. He didn't study International Economics at the Georgetown School of Foreign Service because he thought globalization was a bunch of baloney. But what he came away from that training with was a much more grounded and nuanced view of what globalization means and what is actually happening. So, he is happy to see somebody giving a good, thorough look at the common wisdom.

That being said, Schumpeter's analysis or perhaps more to the point Pankaj Ghemawat's, to whom Schumpeter is referring, is missing something critical. People don't have to cross borders for there to be cross-border effects.

For example, one key insight of the Heckscher-Ohlin model is the factor price equalization theorem. Factor price equalization is what it sounds like. If two countries trade in goods, then the price of the input factors will equal out. This, put simply, means if you trade, then wages will tend to equalize with the countries you trade with even if there is no labor mobility between the countries. (All things being equal of course, which in practice they aren't, and Americans have a whole host of advantages that make them more productive than most workers elsewhere. Consequently, they'll have a wage premium for the foreseeable future. At least according to FLG, but there are some doubters.)

FLG's guess is that 20% of world GDP being exports is large enough to have an attendant and proportionally larger impact on factor prices. That's an empirical question, but FLG is too lazy to look to see if there have been studies.


J. Otto Pohl said...

The 3% of people living outside the country of their birth surprises me. I would have thought it was much higher. It certainly is if you look at the population of rich Wetern countries like the US, Switzerland, or Germany. Having 97% of your population native seems limited among advanced economies to places like Japan and Korea.

FLG said...


You're probably correct about the populations of rich Western countries. But if we take the US ~300 million and the EU ~500 million, that's ~1/10th the world population or so?

J. Otto Pohl said...


It is not just Western countries that are way over the 3%, however. If you look at refugees, people born in one republic of the USSR that moved before the break up, and of course migrant workers in places like Dubai the numbers are also high in Africa, the former SU, and the Middle East. Here in Ghana I come across beggars from Liberia and Burkina Faso fairly frequently. It seems all the beggars here are foreigners.

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