NEW DELHI — The debate in the aftermath of the WTO meeting in Seattle continues with the assumption that globalization fundamentally benefits the world’s people. It is forgotten that globalization also implies that wages will become equalized on a global scale. If this occurs, an abundant supply of labor in the developing world means global wages would move closer to the level of those in poor countries. As a result, standards of living in the industrial countries would decline while those of the developing countries would increase only a little. Only through protectionism can industrialized countries provide higher wages to their workers. Since most industrial countries embrace democracy, they will find it increasingly difficult to persuade their voters to accept free trade (and accompanying lower wages). Either globalization will survive or democracy. The two are not compatible.
Free trade will lead to enhanced demand for products that reflect each country’s comparative advantage. Increased demand and investment will boost labor productivity and lead to increased demand for labor which, in turn, will lead to increased wages. This last step is where the problem lies. Wages are determined not by demand alone, but by supply as well. If the supply is elastic, an increase in demand will not result in an increase in wages. The number of jobs may increase, but not wages. The beneficial impact of globalization can be entirely nullified by an inexhaustible supply of labor.
Perhaps an historical example would make the point. In ancient Greece, labor productivity increased many times following the introduction of iron tools. Such technological developments were no less exciting than those surrounding the Internet today. It was also an era of globalization, with Alexander the Great’s empire stretching across Asia. But did these developments lead to an increase in wages? No, writes J.D. Bernal in his seminal work, “Science in History”: “The beauties of the Greek cities, temples, statues and vases blind us to the fact that the way of life for most people in civilized countries at the fall of the Roman Empire was much what it had been 2,000 years before when the old bronze age civilization had collapsed.”
Globalization brought no improvement in the conditions of Greek labor. What gives us the idea that present era will be any different?
There is evidence that the same process is afoot today. Washington’s Economic Report of the President, 1998, acknowledges that labor productivity in the United States has increased at an average rate of 1.1 percent between 1988 and 1997 but that wages declined by 0.3 percent in the same period. If increases in productivity and demand were sufficient to secure an increase in wages, then what accounts for the decline?
The technological developments in transport will actually make things worse. The difference in wages paid to an Indian steelworker and a U.S. steelworker are determined by the cost to transport steel. As this cost is reduced, so will the wage differential. No wonder U.S. steelworkers registered their protest at Seattle by dumping a bicycle made from Asian steel into the sea. The woes of U.S. software engineers can be attributed to the satellite technology that enables engineers based in India to work for American corporations.
The U.S. demand for the inclusion of labor standards into the WTO agenda emanates from the inability of U.S. corporations to compete with cheap imports from Asia. The reluctance of the European Union to dismantle farm subsidies emanates from its desire to prevent a reduction of incomes of EU farmers.
It is only by heavily taxing cheap Asian steel imports that U.S. steel makers are able to pay high wages. It is protectionism, not free trade, that enables citizens of industrial countries to maintain high standards of living.
That, of course, does not hold for the businesses of the industrial countries. They may benefit from the opportunities of investment that will open up across the globe, but higher profits will not translate into higher wages because of the global equalization of wages.
The industrial countries have so far succeeded in persuading their people to vote for globalization by stressing that new jobs will be created in high-tech industries. This situation is similar to the high standards of living enjoyed by the citizens of Athens thanks to their production of iron weapons, which only lasted until other countries caught up with Athens’ technology. History tells us that technological advances occur in spurts followed by long periods of virtual stagnation. In such periods it is possible for innovators to pay high wages. But as soon as other countries catch up, wages in the pioneer economies come down.
American software engineers and steelworkers are realizing that while they are losing their jobs, not many employment opportunities are being created in “frontier” technologies. The pressure for protectionism, therefore, will mount. If democracy survives, people of the West will demand protectionism, not free trade. It would not be surprising if Seattle proves to be the beginning of the end of the WTO.
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