Distinguishing Tyler Cowen from Alex Tabarrok
Belle Sawhill and the Economic Mobility Project

Income Distributions Pulled Apart in Both Rich and Poor Countries

Bob Davis, John Lyons, and Andrew Batson write:

Globalization's Gains Come With a Price: Hermenegildo Flores was supposed to benefit from Mexico's decision to open its economy to foreign trade and investment in the 1990s. For a time, he did. As U.S. companies boosted purchases from Mexican factories, Mr. Flores's salary nearly doubled to $68 a week in 2001. Then foreign competition from places like India, Pakistan and El Salvador intensified.... Today, Mr. Flores is unemployed, having accepted a $900 buyout in April after the company switched to new machines.

A decade ago, the globalization of commerce promised to be a boon to low-wage workers in developing nations. As wealthy nations shed millions of jobs making apparel, electronics, and other goods, economists predicted that low-skilled workers in Latin America and Asia would benefit because there would be greater demand for their labor.... [G]lobalization delivered as promised. But there was an unexpected consequence... the gap between economic haves and have-nots has frequently widened... in wealthy countries... [and] in poorer ones like Mexico, Argentina, India and China as well.... [T]he biggest winners by far are those with the education and skills to take advantage of new opportunities....

"While globalization was expected to help the less skilled...in developing countries, there is overwhelming evidence that these are generally not better off, at least not relative to workers with higher skill or education levels," write economists Pinelopi Koujianou Goldberg of Yale University and Nina Pavcnik of Dartmouth in the spring issue of the Journal of Economic Literature.

And I want to call an intellectual foul here. There is compelling evidence that globalization--export-led and import-fueled industrialization in emerging market economies--has paid enormous dividends and made many poor people much better off. It has led to a much less unequal world. But it has led to more unequal countries. The poor are not better off relative to the rich in their own countries. The poor are better off relative to the rich in the world. And the poor are better off *relative to their own (and their parents' own) well-being i the past.

Goldberg and Pavcnik need to phrase what they say more carefully.

Davis, Lons, and Batson continue, and say this.

Globalization deserves credit for helping lift many millions out of poverty and for improving standards of living of low-wage families.... [G]lobalization... has created a vibrant middle class that has elevated the standards of living for hundreds of millions of people.... particularly... in China.... The poor in countries like Vietnam and elsewhere in Southeast Asia have also benefited greatly....

But... how much [within-country] inequality [can] countries... bear[?]... [C]ould [these gaps] ultimately produce a backlash that will undermine trade and investment liberalization around the world[?]... From 2000 to 2005, per-capita income of the bottom 10% of urban households in China rose 26% while those at the top saw gains of 133%.

While Mexico hasn't experienced the spectacular growth of China, wages of those at the bottom 10th percentile of urban full-time workers increased 12% between 1987, when the country first took steps toward opening its economy, and 2004. Since 2000, the percentage of Mexicans living in extreme poverty also has fallen below 20%.... In 2004, urban full-time workers at the top 10th percentile earned 4.7 times more than those at the bottom 10th, compared with four times as much in 1987, according to Columbia University economists Eric Verhoogen and Kensuke Teshima.... Growing inequality also feeds the populist argument that globalization is a sucker's game that benefits only the elites. In Latin America, that sense of alienation has powered populist presidential candidates who won in Ecuador, Bolivia, Nicaragua and Venezuela and came close to carrying Mexico last year. In China, the ruling Communist Party worries that support for liberalization could crumble. The government needs to "safeguard social fairness and justice and ensure that all of the people share in the fruits of reform and development," said Chinese Premier Wen Jiabao in March....

[I]nternational competition forces local firms to add skilled workers who can handle newer technology and shed workers who can't. Foreign firms bring new technology to developing nations and boost demand there for skilled workers.... Access to education also plays an important role.... The effects of globalization are vividly on display in Puebla... between... Veracruz and Mexico City.... During the 1970s, those [trade] barriers helped produce rapid economic growth, but the system collapsed in a debt crisis and deep recession that swept through Latin America in the 1980s.... Towel-maker Industrias Cobitel SA picked up two big new U.S. customers after Nafta and doubled the number of production workers to 250 by 2000. Exports accounted for 40% of the company's sales in 2000, about triple the percentage before Nafta. Business was so brisk that many employers didn't care whether new hires had much schooling. But foreign investment and competition also prompted a big demand for skilled labor. Local companies that had gotten by with outmoded machinery either upgraded or closed.

Volkswagen AG, the city's largest private employer, has had an especially large impact on the local economy.... VW ratcheted up the demands on its work force. The company started building the new Beetle in Puebla in 1998 and followed with other models aimed at hard-to-please U.S. buyers. New machinery was imported. Now welds are done by lasers. Robots paint the exteriors of cars for an even finish.... VW slashed its Puebla work force by about 15% since 2000 to 14,000... outsourced production of seats, steering wheels and wire harnesses to factories... outside... workers at those factories are paid about one-third the $225 a week VW line workers make....

For Poblanos, as Puebla natives are called, with the right education, globalization has also opened opportunities that were absent in Mexico just a decade ago. Victor Pasilla, the 30-year-old son of a hospital security guard, makes $600 a week designing oxygen sensors for a Puebla start-up, Biomedica Integral SA.... In the once-poor south of the city, housing developments of small, brightly colored homes, each topped with water tanks, have opened for young families who have become eligible for mortgage financing. There are also two new shopping malls with international clothing stores, including Zara and Massimo Dutti. Low-paid textile or auto-parts workers don't shop at Zara, although many now frequent the local Wal-Mart.... Low-wage workers live as they have for many years, in cramped urban tenements ringed with razor wire....

Mr. Flores, the unemployed tailor, has two brothers who have decamped for the U.S. but says he doesn't want to follow suit because he doesn't want to leave his wife and daughter. Instead, Mr. Flores is looking for work as a day laborer, building homes for Puebla's surging new middle class. "I have a fight in front of me trying to find work," he says.