Is Globalization a Zero Sum Game or a Win-Win

Situation?
When we discuss globalization, we often take into account the fact
that both countries that are partners in trade benefit from the
exchange. What this means is that a country A that specializes in
a particular good or service can trade with country B that
specializes in another good or service. In this way, both countries
stand to gain as they import the goods that are cheaper to make in
the other country and export the goods that are cheaper to make in
their countries. This is the classic version of the win-win
situation that globalization and free trade bring to the table.
However, this is a simplified explanation of the globalization
phenomenon and as the experiences of many countries show,
international trade is not linear but a complex activity that is
beset with protectionist rhetoric, subsidies to one’s farmers and
traders as well as skewed rules and regulations.
The famous cheerleader for globalization and author, Thomas
Friedman, in his book The World is Flat argues that globalization
is proceeding briskly because of the “flattening of the world”.
What he means is that with the advent of information technology
and seamless communications, any country in the world that has a
pool of educated workers can aspire to jump on to the globalization
bandwagon and benefit from the erasing of entry barriers. The point
here is that countries like India have successfully leveraged the
power of IT and communications to leapfrog the intermediate stage
of manufacturing power that is required for economies to become
fully fledged powerhouses.
However, an aspect that has been missing in Friedman’s analysis is
the fact that unless a particular person has the minimum required
education and access to IT; he or she would not be able to harness
the power of globalization. The point here is that even with the
flattening of the world, globalization works only for the
privileged and denies the benefits to the majority. This is the
counter argument to Friedman’s hypothesis about how globalization
is a win-win situation.
Of course, this is not to say that globalization has not benefited
the world at large. For instance, studies have shown that
globalization has succeeded in lifting Millions (if not a Billion)
of people out of poverty and has ensured that they live a decent
life. It goes without saying that the benefits of globalization
though a bit skewed, have nonetheless reached a large proportion
of humanity. Hence, in this context it is fair to say that
globalization has indeed been a win-win game instead of being a
zero sum game.
Finally, the point needs to be made that like any other economic
phenomenon, globalization needs a push and shove from the
governments to ensure that there is a level playing field and
hence, the process can benefit more if the governments of the world
decide to extend a helping hand to the less privileged and thereby
ensuring that they are able to climb the ladder through which they
can participate in the process.
The article is Written By “Prachi Juneja” and Reviewed By
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Globalization and its Effect on the Young Workforce in

Asia
Globalization is widely credited with bringing prosperity to Asian
countries. Because of the opening up of the global economy and the
resultant increase in opportunities for the workforce in Asian
countries, there was a boom in the manufacturing and services
sectors across Asia. No wonder that globalization is widely
credited with lifting millions if not billions out of their
underprivileged status and making them upwardly mobile.
Indeed, the best example of the way in which globalization has
affected countries like China, India, and the Philippines is to
look at the humungous number of jobs created because of
globalization. Statistics show that the employment levels of the
young and able workforces in these countries went up by nearly 30
percent. This is proof of the fact that globalization has indeed
been beneficial to these countries and other countries across the
developing world.
Of course, if a job is created in one country, then the
corresponding job in a developed country is lost. This is the zero-
sum scenario that globalization imposes on the global economy.
However, as has been discussed in previous articles, there is also
the added aspect of globalization being a win-win situation because
the jobs lost in the West can be compensated by hiring those who
were laid off in higher value adding activities. Further, the gains
in terms of costs saved by Western companies can be employed to
good use in those countries. Hence, globalization proves the adage
“A Rising tide lifts all boats” true. Especially the young and the
able employees in the developing and the developed world have been
able to reap the benefits of globalization more than the middle
aged and the old since they can adapt and learn new skills quickly
and in an agile manner.
To look at the beneficial effects of globalization on the young in
Asia, one need not look farther than the rise in ownership of
homes, consumer durables, increase in consumption that was
hitherto the preserve of the rich, and finally, the creation of an
young and upwardly mobile workforce. For those of you who are in
the twenties and thirties, you would have seen how the increase in
opportunities would have benefited you directly as opposed to those
in your parents’ generation who had to contend with incomes that
did not lend themselves to a consumerist lifestyle. Without getting
into the debate whether consumerism is good or bad, it is important
to realize that many of those in their twenties and thirties have
been able to buy homes and lead comfortable lives because of their
jobs in the services or the manufacturing sector. To put this in
perspective, one needs to look at the age in which houses were
bought in the previous generation as opposed to the age at which
the present generation and those in their thirties bought houses
and other goods.
Finally, countries like India that have always had an income trap
have significantly benefited from globalization and when one
considers the increase in job opportunities for the young
workforce, it goes without saying that globalization has been a
force for good for this segment.
The article is Written By “Prachi Juneja” and Reviewed By
Management Study Guide Content Team. MSG Content Team comprises
experienced Faculty Member, Professionals and Subject Matter
Experts. We are a ISO 2001:2015 Certified Education Provider. To
Know more, click on About Us. The use of this material is free for
learning and education purpose. Please reference authorship of
content used, including link(s) to ManagementStudyGuide.com and
the content page url.

Why We Should Not Let the Present Global Crisis Go

Waste and Make Positive Changes
The Chinese term for crisis is a combination of danger and
opportunity, which means that a crisis is a good time for
opportunity as well. In other words, whenever we are confronted
by a crisis whether it is personal or collective, we have the
chance to make serious changes in the way we use the inherent
opportunity afforded by the crisis. Therefore, we must not let
go of the opportunity that the present global economic crisis
affords us and so, we should use this as a chance to introduce
meaningful and concrete reforms to the way the global economy
works. This can take the form of introducing new regulations,
adopting a proactive approach that would preclude such crises
from happening in the future, and make the global financial
system more robust and less prone to instability. Indeed, none
other than the former White House Chief of Staff and current
mayor of Chicago, Rahm Emmanuel has said that one must not let
go of a serious crisis and waste the chance to reform the global
financial system.

Making Long Overdue Changes to Capitalism

The long overdue changes that are needed for capitalism to
rejuvenate itself can be made now which means that a blueprint
for a robust and less unstable global financial system can be
evolved. These changes include making the participants be more
ethical and more value driven instead of profits driven as well
as making the global financial system resilient and not
contingent on the actions of a few. What this means is that we
can make the global financial system more participative, spread
the benefits of global finance across the world, remove the
predators, and give more opportunities for the creators of
wealth. In other words, this is the right time to make all those
changes that have been suggested by experts all along and as the
crisis makes people more receptive to changes, we should not let
go of the opportunity to make some serious changes to the way
global finance works and to the way, the global economy is
managed. This is the most important lesson that policymakers
around the world must learn and must take a cue from the voices
emanating from all parts of the world to reform and rehabilitate
the global economy.
Transforming the Crisis into Opportunity
The metaphor of a locust and a bee is apt when one describes the
workings of the global economy. The bees are very valuable to
human civilization because they pollinate the crops and make
farmers and agriculturists happy at the beginning of the crop
season. In contrast, the locusts prey upon the crops and reduce
the yields to the farmers. Similarly, the global economy has
creators of wealth and catalysts for change like the bees and it
also has the locusts that destroy the wealth and feed off the
wealth created by others through patience and hard work.
Therefore, we must use the crisis to reduce the power of the
locusts as much as possible if not eliminate them completely and
we must give more power to the bees so that the creative aspects
are enhanced. It has been said that capitalism passes through a
process of creative destruction wherein it periodically
reinvents and rejuvenates itself. This is the best time for
capitalism to rejuvenate itself as the locusts have grown in
importance over the last few decades at the expense of the bees.
The implications for policymakers are clear and the way to go is
to introduce far-reaching changes to the way capitalism works.
Concluding Remarks
Finally, the present crisis affords us with a real opportunity
to tackle the long pending problems of the social and
environmental costs of capitalism and to address these problems;
there cannot be a better time than now. This is the conclusion
that this article reaches and it is hoped that we use this
crisis to set right the wrongs and clean up our acts so that
future generations prosper.
The article is Written By “Prachi Juneja” and Reviewed By
Management Study Guide Content Team. MSG Content Team comprises
experienced Faculty Member, Professionals and Subject Matter
Experts. We are a ISO 2001:2015 Certified Education Provider. To
Know more, click on About Us. The use of this material is free
for learning and education purpose. Please reference authorship
of content used, including link(s) to ManagementStudyGuide.com
and the content page url.P

How Globalization Affects Developed Countries

The phenomenon of globalization began in a primitive form
when humans first settled into different areas of the world;
however, it has shown a rather steady and rapid progress in
recent times and has become an international dynamic which,
due to technological advancements, has increased in speed and
scale, so that countries in all five continents have been
affected and engaged.

What Is Globalization?

Globalization is defined as a process that, based on

international strategies, aims to expand business operations
on a worldwide level, and was precipitated by the facilitation
of global communications due to technological advancements,
and socioeconomic, political and environmental developments.

The goal of globalization is to provide organizations a

superior competitive position with lower operating costs, to
gain greater numbers of products, services, and consumers.
This approach to competition is gained via diversification of
resources, the creation and development of new investment
opportunities by opening up additional markets and accessing
new raw materials and resources. Diversification of resources
is a business strategy that increases the variety of business
products and services within various organizations.
Diversification strengthens institutions by lowering
organizational risk factors, spreading interests in different
areas, taking advantage of market opportunities, and
acquiring companies both horizontal and vertical in nature.

Industrialized or developed nations are specific countries

with a high level of economic development and meet certain
socioeconomic criteria based on economic theory, such
as gross domestic product (GDP), industrialization and human
development index (HDI) as defined by the International
Monetary Fund (IMF), the United Nations (UN) and the World
Trade Organization (WTO). Using these definitions, some
industrialized countries are: United Kingdom, Belgium,
Denmark, Finland, France, Germany, Japan, Luxembourg, Norway,
Sweden, Switzerland, and the United States.

Components of Globalization
The components of globalization include GDP, industrialization and
the Human Development Index (HDI). The GDP is the market value of
all finished goods and services produced within a country's borders
in a year and serves as a measure of a country's overall economic
output. Industrialization is a process which, driven by
technological innovation, effectuates social change and economic
development by transforming a country into a modernized
industrial, or developed nation. The Human Development Index
comprises three components: a country's population's life
expectancy, knowledge and education measured by the adult
literacy, and income.
The degree to which an organization is globalized and diversified
has bearing on the strategies that it uses to pursue greater
development and investment opportunities.
The Economic Impact on Developed Nations
Globalization compels businesses to adapt to different strategies
based on new ideological trends that try to balance the rights and
interests of both the individual and the community as a whole.
This change enables businesses to compete worldwide and also
signifies a dramatic change for business leaders, labor and
management by legitimately accepting the participation of workers
and government in developing and implementing company policies and
strategies. Risk reduction via diversification can be accomplished
through company involvement with international financial
institutions and partnering with both local and multinational
businesses.
Globalization brings reorganization at the international, national
and sub-national levels. Specifically, it brings the
reorganization of production, international trade and the
integration of financial markets. This affects capitalist economic
and social relations, via multilateralism and microeconomic
phenomena, such as business competitiveness, at the global level.
The transformation of production systems affects the class
structure, the labor process, the application of technology and
the structure and organization of capital. Globalization is now
seen as marginalizing the less educated and low-skilled workers.
Business expansion will no longer automatically imply increased
employment. Additionally, it can cause a high remuneration of
capital, due to its higher mobility compared to labor.
The phenomenon seems to be driven by three major forces: the
globalization of all product and financial markets, technology,
and deregulation. Globalization of product and financial markets
refers to an increased economic integration in specialization and
economies of scale, which will result in greater trade in financial
services through both capital flows and cross-border entry
activity. The technology factor, specifically telecommunication
and information availability, has facilitated remote delivery and
provided new access and distribution channels, while revamping
industrial structures for financial services by allowing entry of
non-bank entities, such as telecoms and utilities.
Deregulation pertains to the liberalization of capital account and
financial services in products, markets, and geographic locations.
It integrates banks by offering a broad array of services, allows
entry of new providers, and increases multinational presence in
many markets and more cross-border activities.
In a global economy, power is the ability of a company to command
both tangible and intangible assets that create customer loyalty,
regardless of location. Independent of size or geographic
location, a company can meet global standards and tap into global
networks, thrive and act as a world-class thinker, maker, and
trader, by using its greatest assets: its concepts, competence,
and connections.
Beneficial Effects
Some economists have a positive outlook regarding the net effects
of globalization on economic growth. These effects have been
analyzed over the years by several studies attempting to measure
the impact of globalization on various nations' economies using
variables such as trade, capital flows, and their openness, GDP
per capita, foreign direct investment (FDI) and more. These studies
examined the effects of several components of globalization on
growth using time-series cross-sectional data on trade, FDI and
portfolio investment. Although they provide an analysis of
individual components of globalization on economic growth, some of
the results are inconclusive or even contradictory. However,
overall, the findings of those studies seem to be supportive of
the economists' positive position, instead of the one held by the
public and non-economist view.
Trade among nations via the use of comparative advantage promotes
growth, which is attributed to a strong correlation between the
openness to trade flows and the effect on economic growth and
economic performance. Additionally, there is a strong positive
relation between capital flows and their impact on economic growth.
Foreign Direct Investment's impact on economic growth has had a
positive growth effect in wealthy countries and an increase in
trade and FDI, resulting in higher growth rates. Empirical research
examining the effects of several components of globalization on
growth, using time series and cross-sectional data on trade, FDI
and portfolio investment, found that a country tends to have a
lower degree of globalization if it generates higher revenues from
trade taxes. Further evidence indicates that there is a positive
growth-effect in countries that are sufficiently rich, as are most
of the developed nations.
The World Bank reports that integration with global capital markets
can lead to disastrous effects, without sound domestic financial
systems in place. Furthermore, globalized countries have lower
increases in government outlays and taxes, and lower levels of
corruption in their governments.

One of the potential benefits of globalization is to provide

opportunities for reducing macroeconomic volatility on output and
consumption via diversification of risk.
Harmful Effects
Non-economists and the wide public expect the costs associated
with globalization to outweigh the benefits, especially in the
short-run. Less wealthy countries from those among the
industrialized nations may not have the same highly-accentuated
beneficial effect from globalization as more wealthy countries,
measured by GDP per capita, etc. Although free trade increases
opportunities for international trade, it also increases the risk
of failure for smaller companies that cannot compete globally.
Additionally, free trade may drive up production and labor costs,
including higher wages for a more skilled workforce, which again
can lead to outsourcing jobs from countries with higher wages.
Domestic industries in some countries may be endangered due to
comparative or absolute advantage of other countries in specific
industries. Another possible danger and harmful effect is the
overuse and abuse of natural resources to meet new higher demands
in the production of goods.
The Bottom Line
One of the major potential benefits of globalization is to provide
opportunities for reducing macroeconomic volatility on output and
consumption via diversification of risk. The overall evidence of
the globalization effect on macroeconomic volatility of output
indicates that although direct effects are ambiguous in
theoretical models, financial integration helps in a nation's
production base diversification, and leads to an increase in
specialization of production. However, the specialization of
production, based on the concept of comparative advantage, can
also lead to higher volatility in specific industries within an
economy and society of a nation. As time passes, successful
companies, independent of size, will be the ones that are part of
the global economy. (For related reading, see "What Is the Role of
the Nation-State in Globalization?")
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https://www.investopedia.com/articles/economics/10/globalization
-developed-countries.asp

Is globalization an engine of economic development?

Our World in Data presents the empirical evidence on global
development in entries dedicated to specific topics.
This blog post draws on data and research discussed in our entries
on International Trade, Extreme Poverty and Global Income
Inequality.
An earlier version of this blog post was published as an article
in the Spanish monographic quarterly Vanguardia Dossier.1
All people living in today’s world have experienced some of the
benefits of globalization: the expansion of foreign trade has meant
that vaccines and antibiotics produced in a handful of countries
have been widely used all over the world to eradicate diseases and
treat deadly infections. Since 1900, life expectancy has increased
in every country in the world, and global average life expectancy
has more than doubled.
Globalization has also been a key driver of unprecedented economic
growth and as a result, we now live in a world with much less
poverty.
Yet these achievements are the product of multiple forces, and
globalization is only one of them. The increasing potential of
governments to collect revenues and redistribute resources through
social transfers has been another important factor contributing to
improved standards of living around the world. Neither free market
capitalism nor social democracy alone has been responsible for
economic development. On the contrary, they often work together.
In this blog post, we discuss in more detail the evidence behind
these claims.
The rise of globalization
International trade has been part of the world economy for
thousands of years. Despite this long history, the importance of
foreign trade was modest until the beginning of the 19th century—
the sum of worldwide exports and imports never exceeded 10% of
global output before 1800.
Then around 1820 things started to change quickly. Around that
time, technological advances and political liberalism triggered
what we know today as the ‘first wave of globalization’.
This first wave of globalization came to an end with the beginning
of the First World War, when the decline of liberalism and the
rise of nationalism led to a collapse in international trade. But
this was temporary and after the Second World War, trade started
growing again. This second wave of globalization, which continues
today, has seen international trade grow faster than ever before.
Today, around 60% of all goods and services produced in the world
are shipped across country borders. (In our entry on International
Trade you find more details regarding the particular features that
characterize the first and second waves of globalization.)

The chart below shows the remarkable growth of foreign trade since
1800. The series shows the value of world exports in constant
prices—world exports have been indexed, so that values are relative
to the value of exports in the year 1913.
The broad trend in this chart is striking: Trade followed an
exponential path. Other metrics of trade, such as the share of
imports and exports in global output, tell the same story.
In just a few generations, globalization completely changed the
world economy.
The correlation between globalization, economic growth and poverty
reductions
In the period in which international trade expanded, the average
world income increased substantially and the share of the
population living in extreme poverty went down continuously.
GDP per capita is a common metric used for measuring national
average incomes. By this measure, average incomes followed a
similar growth pattern to international trade. For thousands of
years, global GDP per capita had a negligible growth rate:
technological progress in the preindustrial world produced people
rather than prosperity. Over the course of the 19th century,
however, alongside the first wave of globalization, this changed
substantially. In this period, economic growth started
accelerating and global GDP per capita has been growing constantly
over the last two centuries—with the exception of lower growth
rates during the years between the two world wars. (You can read
more about these trends in our entry on Economic Growth.)
Regarding extreme poverty, the available evidence shows that up
until 1800, the vast majority of people around the world lived in
extreme deprivation, with only a tiny elite enjoying higher
standards of living. In the 19th century we began making progress
and the share of people living in extreme poverty started to slowly
decline. This trend is shown in the chart below. As we can see,
today, two hundred years later, the share of people living in
extreme poverty2 is less than 10%. This is an achievement that
would have been unthinkable to our ancestors.
The stark trend in the incidence of poverty is particularly
remarkable if we consider that the world population increased 7-
fold over the same period. In a world without economic growth,
such an increase in the population would have resulted in less and
less consumption for everyone. And yet, as the chart shows if you
switch to the ‘absolute’ view, the exact opposite happened: in a
time of unprecedented population growth, we managed to lift more
and more people out of poverty.
Living with less than 1.90 dollars per day is difficult by any
standard—the term ‘extreme poverty’ is appropriate. However,
recent estimates show that no matter what global poverty line you
choose, the share of people below that poverty line has declined.
(In our entry on Global Extreme Poverty you can find more evidence
supporting this important historical achievement.)

The link between globalization and absolute poverty

The fact that trade and average incomes followed similar upward
trajectories in a period of unprecedented poverty reduction is of
course not proof of a causal relationship. However, both evidence
and theory suggest that what we observe is more than an accidental
correlation.
Trade facilitates efficiency gains that are materialized in
aggregate economic growth. From a conceptual point of view,
international trade contributes to economic growth by allowing
nations to specialize, in order to produce goods that they are
relatively efficient at producing, while importing other goods.
There is substantial empirical evidence backing this causal
mechanism.
If trade leads to growth in average incomes, what does this mean
for poverty? In a much-cited 2002 academic article, David Dollar
and Aart Kraay empirically showed that on average, the income of
the poorest grew one-for-one with average national incomes over
the last four decades of the 20th century.3 This means that trade
has helped raise the incomes of the poor as much as it has helped
raise average incomes. More recent articles have confirmed the
original findings from Dollar and Kraay.4
When taken together, the evidence thus tells us that globalization
has contributed to reducing poverty around the world.
The link between globalization and inequality
That globalization is good for the poor is a statement that is
true on average. In some countries and in some periods the poor
did better than average, and sometimes they did worse.
Looking at the long-run average effect is very helpful to form an
opinion regarding broad trends. However, these broad trends are
not necessarily informative about how trade has affected the
distribution of incomes generally; nor about how trade has affected
specific groups of people in specific periods.
The same economic principles that suggest we should lend serious
consideration to the efficiency gains from trade, suggest that we
should do likewise for the distributional consequences from trade.
If globalization generates growth by allowing countries to
specialize in the production of goods that intensively use locally
abundant resources, it is natural to expect that differences in
the way resources are endowed will translate into differences in
the way benefits are reaped.
If we take a look at the data, we observe that the process of
globalization and growth that led to historical achievements in
poverty reductions went along with a substantial increase in global
income inequality.

The chart below shows this by comparing the global income

distribution at three points in time: 1800, 1975, and 2015. We can
see that the world today is both much richer and more unequal than
it was in 1800.
There are two forces that can drive global income inequality:
within-country differences in incomes, and between-country
differences in incomes. Which of the two is driving the trend we
observe in this chart? The evidence suggests that it is the latter—
global inequality increased in the period 1800-1975 because the
countries that industrialized earlier grew faster.
In 1800, only a few countries had achieved economic growth while
the majority of the world still lived in poverty. In the following
century, more and more countries achieved sustained economic
growth, and the global income distribution became much more
unequal: there was a clear divergence between early-industrialized
countries (where extreme forms of poverty were virtually
eradicated) and the rest of the world. In the following decades
and up until today, early-industrialized countries have continued
growing, but the biggest changes have taken place at the bottom of
the distribution. Today, global income inequality is lower than it
was in 1975. But still, despite the ‘catch-up growth’ in recent
decades, our world today is both much richer and more unequal than
it was in 1800.
So, what does the data tell us about globalization? Over the last
century, the gains from international trade were substantial and
generally equally distributed within countries, but global
inequality increased because for a long period early-
industrialized countries had larger gains to distribute among
their citizens.
The distribution of the gains from trade
The above conclusion that globalization has not had substantial
effects on global inequality may seem paradoxical to some people—
there is substantial evidence of growing inequality in many
countries, including countries that have vehemently pursued trade
liberalization. A notable case in point is the US, where income
inequality has been on the rise in the last four decades, with
incomes for the bottom 10% growing much more slowly than incomes
for the top 10%. (You can read more about these within-country
trends in our entry on Income Inequality.)
How can we reconcile these two empirical facts? In a recent
article, Elhanan Helpman provides an answer informed by a meta-
analysis of the available evidence: factors such as automation,
technological changes, and market frictions, have contributed to
the rise of inequality more than growth in international trade
has.6
If this is the case, then why has the view that globalization is
bad for the working class captured the political debate in rich
countries? Part of the answer has to do with the fact that people
are misinformed about the evidence. But another important reason
is that, while globalization may not have been the prime cause of
growing inequality within many rich countries, it remains true
that there are specific groups of people who have not reaped many
of the benefits from globalization in recent years.
Daniel Trefler published a paper in 2004 showing that the 1989
free trade agreement between the US and Canada temporarily
increased (for about three years) the level of unemployment in
Canada.7 And David Autor and colleagues published another much
cited article in 2013 showing that imports from China had diverging
effects on employment across various geographical zones in the US,
with employment declining more in zones where industries were more
exposed to import competition from China.8
These effects on specific groups are real and need to be taken
into account, even if they do not imply that ‘globalization is bad
for the poor’. Public policies should protect and compensate
workers whose earnings are adversely affected by globalization.
And as a matter of fact, public policies in rich countries have
done this to some degree in the past. As painful as job losses are
for the affected workers, it is thanks to unemployment benefits
and other safety-net policies that we do not observe unemployment
leading to widespread extreme poverty in rich countries.
Which way forward?
Has globalization been an engine of economic development? The
answer is yes. Globalization has had a positive effect on economic
growth, contributing to rising living standards and the reduction
of extreme poverty across the world.
Can we conclude from this that we should strive for a ‘hyper-
globalized’ world economy in which there is completely free trade
with no room for public policy and regulation? The answer is no.
The point is that the worldwide historical achievements that we
can attribute to globalization are not independent of other
factors, including the potential of governments to redistribute
resources. Indeed, as the chart below shows, the process of
globalization that we have experienced in the last couple of
centuries took place at the same time as governments increased
their potential for taxing and redirecting resources through
public policies, particularly social transfers.
How much integration in global markets would be optimal? I would
be skeptical of anyone who offers a definitive answer. But it seems
unlikely that the optimal degree of integration is either of the
two extremes—neither ‘hyper-protectionism’ nor ‘hyper-
globalization’ is likely to be the answer.
Policies aimed at liberalizing trade, and policies aimed at
providing social safety nets, are often advocated by different
groups, and it is common for these groups to argue that they are
in conflict. But both economic theory and the empirical evidence
from the successful fight against extreme poverty suggests this is
a mistake: globalization and social policy should be treated as
complements rather than substitutes.
Footnotes
Available for purchase online here
The data in the chart below measures ‘extreme poverty’ as defined
by the World Bank; people are considered to live in extreme poverty
if they have to get by with less than 1.90 ‘international dollars’
per day. International dollars are a hypothetical currency that
corrects incomes for differences in price levels in different
countries as well as for inflation (explained by us here).
Dollar, David, and Aart Kraay. “Growth is Good for the Poor.”
Journal of economic growth 7.3 (2002): 195-225.
See, for example, Dollar and Kraay (2004), “Trade, growth, and
poverty.” The Economic Journal 114.493 (2004); and Dollar,
Kleineberg and Kraay (2014), “Growth, inequality, and social
welfare : cross-country evidence.” Policy Research Working Paper.
Gapminder relies on National Accounts and within-country
inequality data. You can find more details regarding their
methodology in their website, at: www.gapminder.org/news/data-
sources-dont-panic-end-poverty
Helpman, Elhanan. Globalization and Wage Inequality. No. w22944.
National Bureau of Economic Research, 2016.
Trefler, Daniel. “The long and short of the Canada-US free trade
agreement.” The American Economic Review 94.4 (2004): 870-895.
David, H., David Dorn, and Gordon H. Hanson. “The China syndrome:
Local labor market effects of import competition in the United
States.” The American Economic Review 103.6 (2013): 2121-2168.
https://ourworldindata.org/is-globalization-an-engine-of-economic-
development

Globalization and the Trickle Down Theory: Does it Work

?
The underlying premise behind globalization is that the transfer
of wealth from the developed countries to the developing countries
would eventually result in a scenario where those at the bottom of
the ladder in the developing countries would benefit from the
wealth flowing into their economies. The theory behind this is
that if a Billion Dollars were invested in a country X, it would
result in setting up of a manufacturing plant or a service sector
company, which in turn would create jobs for the locals. Even after
assuming that the jobs would increase the opportunities for the
locals, there would be trickle down effects wherein the new rise
in incomes of these members of the workforce would be spent on
consumer durables, houses, visits to hotels and malls, as well as
employing those who are not part of the formal economy like
launderers, security guards, domestic helps etc.
This is the trickle down theory, which posits the view that wealth
created at the top trickles down to the bottom of the ladder. This
is the theory that has been used to justify neoliberal policies
and globalization and is the driving force for all entrepreneurial
activities in countries like India.
For instance, the founders of the iconic Indian IT company,
Infosys, believe that when jobs are created for the middle class
or the educated, the process would also benefit the entire
ecosystem of support services for these employees since they have
to spend money on their basic necessities and everyday needs.
Moreover, the creation of wealth would not be restricted to capital
gains alone (which is anyway a good sign for a healthy economy)
but would also benefit those who produce goods and services for
consumption.
The effects of this trickle down theory can be seen in cities like
Bangalore, Gurgaon, and Pune where the presence of multinationals
and Indian service sector companies has led to a flourishing
economy for the locals. However, this theory is now being
questioned as the trickle down effects are now being held as
negligible with those at the top earning more and more and those
at the bottom earning less and less. Hence, there is now a tendency
to question the basic tenet of globalization and neoliberalism and
it remains to be seen as to which theory would ultimately stand to
gain. The point here is that the widening income inequality has
led to protests from those at the bottom since they do not see any
marked improvement in their lives even when they support the army
of educated and skilled employees of the manufacturing and service
sector companies.
However, the battle is not lost as the benefits to the local
economy outside of those who actually work are huge and it is
understood that trickle down economics might not have been very
wrong. Instead, what is needed is a greater flow of wealth to the
bottom and this can be done by equitable growth and democratic
policies that strive for betterment of all. In conclusion, true
growth manifests when all sections of the society benefit and not
only those at the top.
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