CEPR - Center for Economic and Policy Research

Globalization: It Didn't Just Happen

Dean Baker
Truthout, Aug. 31, 2006

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The new income and poverty numbers released this week confirm what most of us already knew: workers are not doing very well in the current economic recovery. Real wages for the typical worker fell by over 1 percent last year. While the economy and productivity are both rising at a healthy pace, most workers are not getting any of the benefits of this growth.

Unfortunately, 2005 is not an anomaly. Most workers have seen very little real wage growth over the last quarter century. There is not a single explanation for the upward redistribution of income over this period, but most economists agree that globalization is at least part of the story. The fact that US manufacturing workers now have to compete with workers in Mexico, China and other developing countries, who often earn less than $1 a day, puts downward pressure on the wages of large segments of the workforce.

But globalization did not have to take this form. It's true that the developing world has a vast supply of potential labor for manufacturing. But it is also true that the developing world has a vast supply of very bright individuals who could be trained to work as doctors, lawyers, accountants, and economists.

Suppose that our trade agreements over the last quarter century had been designed to facilitate free trade among highly paid professionals. Specifically, these agreements would be about setting clear and transparent education and training standards that would allow bright kids in Mexico, China, and elsewhere to study to become doctors, lawyers, accountants, and economists in the United States.

Professionals trained in these countries would have to meet educational standards set by the United States, and they would have to demonstrate their competence in tests designed in the United States (which could be administered in developing countries - by licensed test givers), but those who successfully demonstrated that they met the standards could then compete freely with professionals in the United States.

The treaties would remove all the existing barriers to such free trade in professional services, such as the current rules that require employers to first seek qualified US professionals. The federal government's prohibition of hiring foreign citizens would also be eliminated as a costly protectionist barrier.

If globalization had gone this route, the economy would have experienced enormous economic gains over the last quarter century. Lower doctors' salaries would save consumers tens of billions of dollars each year on their health care costs. Lower salaries for university faculty would bring down the cost of a college education. And, lower lawyers' fees would bring down legal costs that get embedded in the price of all goods and services.

But, the people who designed the process of globalization did not want it to take this route. They wanted to put our less-educated workers in competition with workers in the developing world, while protecting our most educated workers. This has led to the situation we see today, in which most workers do not share in the gains of economic growth.

It is standard practice in elite circles, like those inhabited by newspaper columnists and economists, to use the word "protectionist" as a term of derision. When these people talk about a "protectionist," they are referring to someone who wants to protect less-skilled workers from the full effects of international competition. However, virtually all the inhabitants of these elite circles are themselves protectionists - they have no objections to the vast array of barriers that make it difficult for educated people from the developing world to compete for their jobs.

As someone once put it, the difference between an autoworker and an economist is that the autoworker is smart enough to know that she needs protection, but doesn't have the political power to get it. The economist is too dumb to know that he needs protection, but powerful enough to get it.

The moral of the story is that globalization did not have to be a process driving down the wages of less-educated workers and leading to greater inequality. Globalization has led to greater inequality because that is how it was designed.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.