Greedy Goblin

Tuesday, April 21, 2009

Globalization trap

Globalization is the favorite idea of large scale businessmen, and their political supporters, the neoliberals. They claim that by globalization the world will be better, as everyone will be forced to perform better or become uncompetitive.

In a globalized world everyone does what he is good at, and can sell his products everywhere.

In localized markets it's enough to be the best in town, like being the best corn farmer in Alaska. If local barriers are broken down, such "locally great" businesses collapse for good. The "best farmer of Alaska" will be forced to abandon his business and join some really good business like oil drilling or lumber processing. In the same time "the best oil well of Idaho" also goes down, forcing the owner to do something useful like producing corn. It's great to have cheap oil and corn isn't it?

Globalization also forces cross-cultural connections (like the foreign owner/manager of a new factory/shop must cooperate with the local workforce), leading to better understanding therefore less cultural hate and discrimination.

I could list these "wonders" forever (whole books do that), but for some reason globalization has "less than nice" effect on poor countries. Simply speaking they fall from "poor" to "starving". The missionaries of globalization keep saying that these countries are "not globalized enough", but "further globalizing" only leads to further GDP loss.

It's no wonder that "globalization" became "evil capitalists want to rob the world" in the eyes of the leftists of the rich countries and the communist populists like Chavez.

I'm a strong supporter of market solutions, so globalization is obviously a good thing for me. Yet I want to find the reason and the solution for the terrible effects of globalization.

Well, I agree with the IMF-guys that the poor countries are "not globalized enough", however I think they miss a very large field from globalization. By not globalizing this field and globalizing everything else, the poor just become poorer, the rich is getting richer, and not because of being less/more competitive, creating worse/better products.

This field is the "M&S handling". There are two major parts of it, the social transfers (welfare) and the law enforcement (police and prisons). These fields are completely localized. Every country must handle his own scum, exporting them is impossible as no one wants to take the foreign M&S (what a miracle).

Obviously the working people of the country have to pay for the M&S handling, one way or the other (tax, costs of security services, damage suffered from thefts...). So let's see a theoretical situation with two countries A and B:
  • both have 1000000 citizens
  • both have 1-1 companies employing all workers, creating all products. (silly I know)
  • every day every citizen wants to buy 2 products
  • inactives (non-working people) get 1 product as welfare
  • the salary/product is $100, the product price is $200. (This means that the worker must craft 2 products to be able to buy one in the shop. The other one is the profit of the company.
  • One worker produces 4 products/day
  • country A has 50% inactives (non working people), country B has 60% inactives
If the counties are completely localized, the result is simple:

In country A the 500K workers buy 1M products (worth $200M), 500K inactives receive 500K welfare (worth $100M). The 500K workers produce 2M products. The cost of these products is $400M/day, this is the GDP of the country. The company profit is $400M - $200M(salary) - $100M (tax) = $100M.

In country B the 400K workers buy 800K products (worth $160M), 600K inactives receive 600K welfare (worth $120M). The 400K workers produce 1600K products. The cost of these products is $320M/day, this is the GDP of the country. The company profit is $320M - $160M(salary) - $120M (tax) = $40M.

So in country B, both the GDP and the profit is significantly lower. B is poorer than A, what a miracle.

Let's insert globalization into the picture. Now the two companies are on the same market. The company of A, seeing that its competitor is much less profitable takes a deep breath and cut prices, down to $170. Price decrease is good for the people isn't it? What happens then:

In county A, the company profit is $340M - $200M(salary is the old!) - $100M (tax is payed in money, not product, stays the same) = $40M.

In country B, $272M - $160M(salary) - $120M (tax) = $-8M. Ouch! The company of country B is creating loss! B must match the prices of A or will not be able to sell its products. The only way to do it is cutting salaries.

The workers in B see that they earn less than the workers of A. Seeing the prospect of growing, the company in A gets green card for workers of B and offers them the same salary.

Result: the worker-inactive ratio of A becomes better, while it becomes worse in B. B has to decrease its production as it lacks the workers. To pay the same tax with less products sold, it has to cut the salaries even more, making more workers apply for green card. At the end of the spiral, all workers leave B, leaving it as an inactive-ghetto.

We can see the above process all the time in WoW, when good players apply for a better guild, leaving their old one in worse and worse shape.

The real world differs from the model in only small things, like the tax is usually taken from not only the companies but from the workers too, so it's usually not the company that cuts the worker's salary, but the country. In the real world the transportation is not zero cost, this gives a little chance to B. The fact that the workers have friends and family also slows down the process, as many of them chooses to stay in B, despite worse conditions. But it can only slow the process down, as some workers chooses to leave.

So if we globalize the workers and the products but not the inactives, the country with more inactive ratio will go down, even if the companies are equally developed. There are two ways out of this trap:
  • globalize inactives. If the whole world declare that everyone is free to move wherever he wants and must recieve the same welfere there as the local inactives, the inactives will also equalize in the world.
  • decrease taxes so low, that the tax/product in the poor country is smaller than (tax+transportation cost)/product in the rich country. This way the profit in B is not so small to allow A's invasion.
PS: I used the word "inactive" for a reason. Not all inactives are M&S. The poor country has more inactive ratio, because the worse health care system leaves more disabled and the worse education system leaves more people unskilled (often illiterate) therefore unable to work any skilled jobs.


Hirvox said...

A nice post. Of course, it leaves the (literally) billion-dollar question open: What incentive does country A have to globalize the inactives? Of course, if you did know the answer to that question you might as well start making reservations for a trip to Oslo..

Hombre said...

Interesting ideas, but you're not answering your own question: why do poor countries fare worse in globalization, while rich countries fare better?

I'm assuming you're not trying to say that developing countries have a higher percentage M&S, right? But that's what it sounds like now.

Gevlon said...

@Hombre: I used the word "inactive" for a reason. Not all inactives are M&S. The poor country has more inactive ratio, because the worse health care system leaves more disabled and the worse education system leaves more people unskilled therefore unable to work any skilled jobs.

And yes, I believe the source of the poor country's problem is high inactive ratio. The globalization turns this problem into a disaster.

Yaggle said...

I agree that the basic idea of globalization is best overall for the world. The world has become more globalized but it is going slowly. Overall prosperity should increase but some people's will decrease because of competition from other parts of the world. I believe it is more humane to globalize slowly, however it is inevitable in the end. I am glad to hear somebody who does not say "globalization is bad" or "globalization is good" and actually talk about the reasons why it might be some of both. Because I am a blue-collar worker in a "wealthy" country, I would expect that globalization probably will make my standard of living decrease. It already has been going down lately. Wages do not keep pace with inflation and slowly my buying power decreases. That is alright by me as long as it is coinciding with the general state of the economy, and not my employer increasing profits more.

Anonymous said...

I think saying that problem of globalization is high inactive ratio is very narrow minded.
For example currently here in Croatia one of the globalization problems is growing of corn. There are people willing to work and are working but when they try to sell product they can't make profit, even worse they are losing money because of the import corn from other countries(where producing it is cheaper even with transportation costs).
If you loose to much money you HAVE to reduce costs, the only way to do that is to let go some workers with that you reduced your production and again your in same position until you go bankrupt.
So how do you solve this problem? You can't reduce production costs.
Migrating to other crop isn't always easy, most of the time it takes a lot of investment to do so, where to get money if you didn't make any money on it from last year and it takes time to change production.
Even worse what if your doing business where you can't so easily change what your producing.

Now if there were no globalization, the corn would be sold with profit or at least you would cover your costs, people would get payed and everybody would be happy.

Anonymous said...

You didn't go where I thought you would. In all countries, a subset of the inactives are criminals. Poorer nations could expand their "criminal handling" industries, housing these M&S at a lower cost than is possible in the more developed countries. Money would be transferred from the richer to poorer countries, and employment would grow in the poorer countries as well (guards, wardens, executioners, etc.) Once the criminal's sentence was served, they could be released on the front step of the prison, left to their own devices to get home. Note that in certain lesser developed countries, these released prisoners would have the added effect of being a food source for the local population.

Chris said...

A few people touched on my points already, but the main issues with Globalization is education, and the fact that there is not a global standard of wages.

If Chinese got paid just as much Americans to manufacture sneakers, for example, then globalization would favor whichever country created the best quality sneakers. Across other industries, countries would slowly start to specialize into what they do best, since the theoretical cost of manufacturing should be the same, and the only difference is quality.

While this process is happening, you would need a massive investment in education to train workers who otherwise have no other skills.

One could argue that true globalization requires countries to spend the biggest chunk of their wealth towards education - something that I think people on all sides of the political spectrum should agree with.

Markco said...

Globalization works best if you open up businesses in another country and let their citizens run it. You're providing work for them and still making money in the process. (Franchises)

Willowbear said...

Globalization appears good in theory, but from a practical stand point it destabilizes more than it helps.

There are too many inequities due to currency differences, cultural differences, educational differences and political differences.

To paint it as beneficial is the rhetoric of people who stand to benefit the most.

The realities are that unless ALL forms of government subsidies are removed globalization will only be a tool of leverage.

Prime example - US farm subsidies. Our large scale farming capability (eg the huge pieces of farm equipment on corporate farms) puts our agri-business at an advantage. But despite that farm subsidies still exist. Now these subsidies were designed to help the small family farmer. But in actuality the corporate farm, that doesn't need it, benefits the most.

Additionally, educational inequities need to be addressed by everyone for everyone.

Frankly the discussion here (including mine) is way to simplified to truly grasp the scope and complexity of globalization. It seems this subject is just a tautology of G's usual theme of M&S and not a real exchange of concerns and ideas.

csdx said...

I think though your scenario and globalization is like comparing apples to, well, parts of apples. The view necessarily simplifies many things, but I think it goes too far in a few areas including, removal of transportation costs, and only considering 1 directly competing industry.

Also the issue of rich get richer and poor get poorer, isn't something I'd expect you to take issue with. In a perfectly free economy (nevermind globalization issues) this is exactly the case. M&S, inactives, people temporarily unemployed are all getting poorer at the expense of others given standard economic principles of a free market. If I start with $1 million dollars and you $100, I can put in a 10th of the effort you might and still end up with a bigger gap then when we started (such is the power of compound interest). Without some sort of social 'saftey net' I see rich getting richer as a the basic modus operandi of an economic system. So my question here is why do you seem concerned with this when globalization is brought in?

Also how are permanently disabled people different from M&S to you?

csdx said...

addendum: why not carry the situation to it's conclusion?

Slowly more and more of the actives leak out of country B, depressing wages even further. Those resourceful enough save enough to move out to country A. Eventually the threshold is reached where the number of actives left just matches those on welfare in terms of expense. Once the balance tips, the state begins failing, because no amount of wage lowering can return it to profitability.

Thus they must do something drastic, either collapse as all those able to leave do so leaving only a scattering of invactives (mostly M&S anyways, as the good ones should eventually be able to 'pick themselves up by their bootstraps' and leave the country). OR the state cuts welfare, and can return to a stable position.

Either outcome seems like an acceptable goblin solution, as in the end all the M&S starve, while the I&H (intelligent and hardworking) are able to survive in either country.

You know, if this post occurred on the 1st of this month, I'd be calling shenanigans on it as the concerns seem rather opposed to the typical goblin philosophy.

Gevlon said...

@csdx: "the rich getting richer and the poor getting poorer" is NOT a healthy economy. The poor, if ready and able to work, should become richer. Maybe never as rich as the originally rich, but richer than he was.

About the "country will be forced to do something": it's not sure if it can. In a dictatorship it can. In democracy, only if the workers are in bigger numbers and ready to vote for a single "worker party". The problem is that the working people are divided by many ideological barriers (for example political conservative/political liberal/green), while the M&S is united behind one banner: more welfare.

Anonymous said...

Under your scenario, what happens is that the people left in Country B are willing to work for less. They may not be as productive as highly trained (and educated) workers in Country A, but this is reflected in their cost to an employer.

In WoW terms, it's like the tailors I used in the beginning of WOTLK. These guys had powerleveled their tailoring to be able to make Deathchill cloaks. I would buy up enough mats for cloaks, (approx 600g at the time), and tip the tailor 100g to craft the cloak. Then I would post it for 2000g. I used numerous tailors, and numerous alts to mask what I was doing. I don't think it mattered, because the tailors were not educated enough about the market to know they were missing out on 1400g of profit. Or, they couldn't come up with the 600g of capital required.

Either way, I was able to make a fortune until the market was saturated, and the margin dropped.

Now imagine if you could only sell your crafted items to guildies. Guilds would grow extremely large, or prices would rise.

csdx said...

by poor getting poorer, it doesn't mean the poor actually lose money, rather they make their money, but it relatively becomes less and less. If a poor person works for 1g/week and I can get 10g/week, we're both getting 'richer' in some sense. However, the wealth gap is increasing lowering the poors' purchasing power and thus overall wealth, hence them getting 'poorer' despite working in a functioning economy.

While the difference between 1copper and 10 copper is negligible, 100g and 1000g suddenly make a difference. Consider further that wealth tends to grow exponentially rather than linearly, and the wealth gap just becomes greater and greater. (E.g. 10 squared is 100, and 100 squared is 10,000 so by the time you make a hundred, I'd be up to ten thousand.) Hence the old saying, "it takes money to make money".

The fact that economy tends to strongly favor positive feedback loops mean that even small differences will eventually become large ones. So poor people grow wealth very slowly, while the rich grow it many times faster. Factor in such things as inflation, and it's possible for the poor to become poorer, all while having a net positive income.

William Newman said...

How strong is your evidence that globalization causes poor countries to fall into starvation?

I thought that the list of all countries fallen from poor to starving (for whatever reason) in recent decades was pretty short. And I thought that the list of poor countries which have become significantly more open to trade was longer, and not particularly concentrated in the same continent. Presumably you know I'm wrong. Could you say how, and point to a reasonably serious source of data to back it up?

Could you name a country you consider to be a particularly clear case of falling from poor to starving primarily because of globalization? From what (little) I've read of the work of Stiglitz and Rodrik, I'd expect both authors would be delighted to remind us of that country where free trade (and capital flow, and such) was as disastrous a failure as that, and so I'd've picked it up from their work. But I can't think of one offhand.

Of course, less nuanced apologists for protectionism can claim anything, especially in a format like a documentary where the core audience isn't even slightly embarrassed when it is pointed out that the the main counterevidence and counterarguments where ignored. This isn't true only for documentaries or only for protectionism, but for an example which happens to be a protectionist documentary, see Tyler Cowen's recent critique . I don't think Cowen comprehensively defends globalization here, but I do think he convincingly shows that to rely on argumentation at the level of partisan documentaries like that is to consent to be misled.

Kevan Smith said...

No one noticed the "best corn farmer in Alaska" line? Gevlon, please change Alaska to Nebraska. No on is growing corn in Alaska.

Anonymous said...

@Kevan Smith: I think you missed the point.

Gareld said...

An economy teacher I had explained globalisation using colonisation in the sail age. And I think history is simply repeating itself but on a bigger scale.

Unlike Gevlon I think the problem is that the playing field is not equal at the start and not a problem of inactive. Country A might be industrialized and country B might be a third world country. When A decides to pit itself agaisnt B in a field B is sure to loose. And capitalism dictates that A will make as much profit as possible until B decides it has enough of A. The follow up rarely happens peacefully. American independance anyone?

Sven said...

The problem with global free trade as it is actually implemented (as opposed to the correct economic meaning of the terms) is that the currently rich countries use their power to set up "free trade" terms that are anything but free. So, for example, the US is all in favour of free trade in markets where it has a comparative advantage, but utterly opposed to it in areas where other countries may win. So there is enormous pressure on poor coutries to open up their financial markets, but the rich never open up their food markets in return.

Incidentally, I'm not singling out the US as being particularly at fault here. Other rich coutries do exactly the same.

Globalisation only works the way Gevlon describes when there is true free trade, as opposed to rigged free trade.

Lupius said...

I read through half the article thinking it's about Gevlon's new theory of "goblinization".

I must be delusional..

Anonymous said...

Actually you have several faults in your reasoning about globalisation some of which have been pointed out above.

This would only work if there were true free trade. Market subsidies (farming) and import tarrifs (steel) means that no matter how well a country can do something they will always be uncompetitive with countries who use either of the above protections.

Further your demonstration of Company A and B isn't correct if the companies were true capitalists. Company A, noticing that they can produce the same goods in Country B but for a lower cost would move their manufacturing to Country B, fire all workers in Country A and make even greater profits selling to both Country A and B and Country A would then have more "inactives" than Country B.

Stick to analysing WoW and leave real world economics alone. You could have made your entire point about members moving guilds without having to refer to globalisation.

Anonymous said...

"In a globalized world everyone does what he is good at, and can sell his products everywhere."

Not really. Wage costs determine what gets produced where. Not how good someone is at it.

I could be the best corn producer in the world but unless I was willing to work for $2 a day I will never be able to compete with the rest of the world who can produce poorer quality but cheap corn.

Jeremy Keith Hammond said...

You said: "globalize inactives. If the whole world declare that everyone is free to move wherever he wants and must recieve the same welfere there as the local inactives, the inactives will also equalize in the world."

If only humans were robots - many can't and won't move - I don't think equalizing welfare around the world will equally distribute inactives. Also - this means MORE inactives from developing/third world countries will come to countries like the US and EU and I doubt many in the already developed world would tolerate that. Evidence for that is all the NIMBY people in established middle/high income neighborhoods and all those border hicks trying to kill mexicans as they cross the border.

You said: "decrease taxes so low, that the tax/product in the poor country is smaller than (tax+transportation cost)/product in the rich country. This way the profit in B is not so small to allow A's invasion."

This inhibits your first idea. Welfare is paid by taxes. How can one expect a developing country to equalize their welfare with the rich country if they're forced to lower taxes? And good luck lowering welfare in the rich country to equalize - welfare doesn't just constitute the "hand-outs" many conservatives complain about.

To equalize the welfare - safety net - bottom line of tolerable living standards - you either have to lower the riches living standards (and with plenty of willing and able people currently suffering from poverty in this country - I find that hard to expect) or raise the living standards of poor countries - not possible if you're going to remove safety nets to stimulate economic growth - growth that generally only benefits the owners of the business.

Someone else mentioned that they appreciated that you didn't just say globalization is good or bad - because they're right - it has many good and bad sides to it. Globalization does increase OVERALL economic prosperity. It allows us to become much more cosmopolitan and wordly and I think in the end it will force us to become more tolerant of other peoples' cultures and opinions as we're forced to deal with more and more of them as our planet gets smaller and smaller thanks to advances in communication and transportation technology, BUT...

A system where success is measured by economic activity and gained through competition is inherently flawed. We live in the richest (or close to richest - depending on what numbers you look at) country in the world and we've achieved that status through economic duress (Jamaica, Venezuela, Argentina, etc...) and violent expansion (Philippines, Mexico, the "West," etc...) All of it was motivated by "American Interests," cough*economic success*cough and acquired through competition a.k.a. Manifest Destiny and "Defense."