The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [39]
The labor effect refers to the fact that China’s opening to global trade in 1978 was tantamount to bringing hundreds of millions of low-skilled workers into a globally integrated labor pool. The world’s total supply of relatively low-skilled workers thereby soared, pushing down the wages of low-skilled workers around the world. Of course, that didn’t happen all at once. At the start of China’s opening to global trade, most of China’s potential manufacturing workers were still peasants on farms in the rural areas of the country. They lacked the education, skills, complementary technologies, business capital, and physical proximity to ports to be much of a threat to apparel workers in North Carolina. Yet, over time, their skills were raised by a determined educational push led by the Chinese government and by the efforts of the ambitious and hardworking Chinese themselves.
The technologies and capital to employ these new industrial workers were mostly imported from abroad, as foreign investors set up operations in China’s coastal cities that were designated “special economic zones.” The physical proximity to the new work was created as around 150 million Chinese workers left the countryside and migrated to the cities, where they could find better employment in the new manufacturing enterprises.9 Thus education, skills, technology, capital, and physical proximity came together in places such as Shenzhen, China, the coastal city that lies just north of Hong Kong, which grew from a small fishing village of some 20,000 residents in 1975 to around 9 million residents in 2010.10
The mobility effect refers to a basic asymmetry of globalization: the difference between internationally mobile capital and immobile labor. When capital becomes internationally mobile, countries begin to compete for it. They do this by offering improved profitability compared with other countries, for example, by cutting corporate tax rates, easing regulations, tolerating pollution, or ignoring labor standards. In the ensuing competition among governments, capital benefits from a “race to the bottom,” in which governments engage in a downward spiral of taxation and regulation in order to try to keep one step ahead of other countries. All countries lose in the end, since all end up losing the tax revenues and regulations needed to manage the economy. The biggest loser ends up being internationally immobile labor, which is likely to face higher taxation to compensate for the loss of taxation on capital.
Income Inequality and the New Globalization
In principle, the new globalization can ultimately be beneficial for the entire world. The rising productivity of China, India, and other emerging markets, and the falling transportation and communications costs worldwide, can raise incomes around the world.11 Clearly, the emerging economies can win in a big way, as they are able to boost productivity through technology inflows, attract internationally mobile capital, and raise real wages as workers are hired in new export industries. This success has been borne out in practice. Globalization has permitted China, India, and some other emerging economies to achieve the fastest economic growth rates in history.
The high-income countries, including the United States, Europe, and Japan, can also be winners. The newly emerging economies produce a wide variety of low-cost goods and services that we desire, and in turn we can export a wide variety of goods and services to the emerging economies. Sectors that have strong economies of scale will benefit from the expanded reach of the global market. This includes high-tech companies engaged in cutting-edge innovation (such as pharmaceutical companies and information technology companies)