Poverty has fallen so sharply in China over the past 25 years, while at the same time inequality has risen so fast, writes economist Richard Freeman, that China is "arguably the best case for trickle down economics in the world."
Freeman's having a little fun. He's no Reaganite supply-sider. He's a Harvard labor economist who has written extensively about the necessity for international labor standards to go hand in hand with globalization. And he has just published an excellent new paper on globalization and workers, "Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories?" that is being featured today at a Federal Reserve Bank conference on "Global Imbalances." (Thanks to the Wall Street Journal's David Wessel for the pointer.)
The paper is an excellent introduction to one of the crucial questions of globalization: whither the world's workers? Freeman's basic observation is undeniable: the addition of Chinese, Indian and ex-Soviet Union workers to the global economy (which Freeman dubs "the Great Doubling") has "changed the balance between labor and capital." And it's done so in a fashion contrary to what was predicted by free trade theorists, who assumed that the comparative advantage of the North and South would remain essentially the same as it has historically been: i.e., developing nations would take advantage of low wages to gain an edge, while the developed nations would maintain their hold on the commanding heights of technology innovation and highly skilled workers.
That's not what's happening. India and China, to take just the most obvious examples, are simultaneously competing in low-wage industries and making huge inroads into the domain of high-wage, high-technology sectors. The Northern advantage is crumbling.
"In 1970 approximately 30 percent of university enrollments worldwide were in the U.S.," observes Freeman. "In 2000, the U.S. proportion of university enrollments worldwide was 14 percent. Similarly, at the Ph.D. level, the U.S. share of doctorates produced around the world has fallen from about 50 percent in the early 1970s to a projected level of 15 percent in 2010."
The developed world still has huge advantages, and the U.S. is not going to plummet to third-world status anytime soon. Still, the squeeze is on. But Freeman isn't opposed to globalization. In the long run, the emergence of a global economy is a healthy thing. "The triumph of global capitalism has brought modern technology and business practices to most of humanity. Barring disaster, the world is on an historic transition to a truly global economy and labor market that should produce rough income parity among nations and 'make poverty history.'"
Making poverty history is a good thing, provided that "income parity" doesn't mean that 99 percent of the world's workers earn barely enough to survive, while 1 percent live like kings.
But it may well take 50 years for a country such as China to reach parity with the West. In the meantime, unless policymakers proceed wisely, the road ahead will be bumpy.
Freeman's summation is to the point: "The way the transition proceeds will have immense consequences for workers throughout the world. Workers in the new entrants to the global economy should do better since capital will flow to them, raising wages and modern sector employment. Developing countries where wages exceed those in China and India face a big problem as these countries will have to find their place in the global economy without engaging in head on competition with the giants in low wage industries. Workers in the U.S. and other advanced countries will benefit from the low prices of goods from China and India but will suffer from enhanced labor market competition."
The question, as always, is what is to be done?
Freeman believes the time has come for government to tip in favor of labor. "Capital," he notes drily, "ought to be able to take care of itself in a global economy with twice as many workers, many available at low wages."
The "tip" could take the form of international pressure to improve global labor standards, or bolstering the safety net that supports workers -- National Health Plan, anyone? But the bottom line is that some kind of redistributive mechanism is going to be necessary. Globalization has resulted in tremendous growth: "a key policy issue should be to find ways to distribute that growth beyond the superwealthy who have benefited most from the past two or so decades of growth."
After at least 25 years of government tipping away from labor in the United States, Freeman's prescription may seem a bit unrealistic. But pendulums do swing. The remaking of the global economy has been so vast, and has so fundamentally changed the global terms of trade, that new choices will have to be made, and new directions will become possible.