Globalization: Winners and Losers in Friedman’s Flattening Economy

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The three articles discussing this topic of winners and losers in globalization are:  The Opportunity trap: education and employment in a global economy by Phillip Brown (2003), the Economic globalization and democracy: An empirical analysis by Quan Li and Rafael Reuveny (2003), and Globalization and the welfare State: Testing the microfoundations of the compensation hypothesis by Stefanie Walter (2010).  Each of these articles was selected on the theme of globalization having winners and losers.   This theme is developed from chapters 8-13 of Tom Friedman's the World is Flat which discusses the losers and their options in his "flattening economy" in some detail.  

The first article discusses the theme of the opportunity trap as it applies to education in the global economy.  Brown (2003, 142) defines the opportunity trap as the ever-rising personal costs needed to realize the opportunities that society purports to offer its citizens.  It is now seen that the costs exact a type of entry fee for participation in the labor market.  This fee is seen manifested in the expenses spent on education to obtain credentials or degrees which are expected to provide an advantage over other job-seekers in a competitive labor market. However, as more people adopt the same strategies to get ahead the chance of success drops to zero. At the same time, no one can opt out of the competition because obtaining good paying jobs are essential for survival in a modern capitalist economy.  Brown argues that the opportunity trap is not restricted to the initial degree accomplishment that undergraduates experience.  Even after a worker has been in the labor market for years, the need to retrain and obtain further credentials continues.  As a result job insecurity  has become democratized.  

Brown's thesis is that the foundations of economic opportunity are unraveling in modern advanced economies.  These foundations are based on education, jobs and financial rewards.  Most problematic is the realm of education which is suffering from diploma disease.  That is, the labor market has become saturated with credentialed job applicants even though the percentage of available jobs that require credentials is much smaller than needed.  This has led to a condition called credential inflation which is quite similar to monetary inflation.  Where there is too much money the price of all goods and services inflates.  Inflation is something economic planners in most central banks do what they can to avoid.  But in education there are no restraints and so the surplus of credentialed job-seekers increases each year over saturating the labor market.  At the same time the cost of education inflates.  But the rewards do not see a compensatory improvement.  Eventually Brown predicts higher degrees will be required by employers to further differentiate job applicants.  But the process will undoubtedly repeat itself as job applicants respond by chasing this higher degree as well.  

The second article by Quan Li and Rafael Reuveny (2003) conducts a study that in their view shows that economic globalization has a weakening effect on political democracy.  The authors note that while it's commonly argued that increased economic cooperation and integration between states - including free trade and open capital markets - leads to liberal democratic political structures, they argue the opposite is the case.  In their research trade and portfolio investment are negative influences on democracy.  They also conclude that foreign direct investment (FDI) has an initial positive influence on democracy that fades over time.  They found these effects were true for both all countries and less developed countries (LDC) treated as a separate sample.  This is mainly because globalization has maximizing of economic efficiency as its only true goal and is not interested in democratic governance (Li & Reveny 2003, 53).  

Also since LDCs lack the financial resources to create strong social safety nets the affected members of the population lack any support to fall back on.  In addition, the increased capital mobility is presenting many governments with a reduced tax base from which to draw to pay for public goods.  This sharply reduces the options open to political leaders in difficult economic times and can only lead to social unrest.  

The solution they advance is not a panacea, as they see it.  Governments should put the brakes on the pace of globalization and instead design social welfare policies that compensate losers in global competition.  They should also reduce capital mobility and overdone rent seeking by transnational corporations.  In order to execute this, government should seek to coordinate regulatory policies with the private sector and non-governmental organizations.  This is to reduce the possibility that governments would re-introduce inefficiencies into the markets.  

The third article by Walter (2010) discusses the compensation hypothesis.  This is the view that globalization causes the expansion of the welfare state in capitalist economies.  This occurs as governments attempt to compensate the losers from the increased risks associated with greater economic integration and volatility in globalized economies. She found in her literature review that many scholars did not find an association with globalization and the welfare state. In her view this is because most scholars who study the subject of globalization focus on macro-level data: the level of the nation-states.  She conducted her research looking only at micro level data: the level of the individual.  

The scope of her work included three issues in what she describes as the causal chain that links globalization with the expansion of the welfare state among voters in Switzerland.  The three links are:

1. That workers express fears about their economic future.

2. That such economically insecure workers will express a strong preference for welfare state expansion.

3. That such workers will vote for political parties that also support such an expansion. In the case of Switzerland this would be the leftist Social Democratic Party 

She found a strong causal link in Swiss industries exposed to foreign competition.  But there were variances between low-skilled and high-skilled workers. Low-skilled workers experienced much greater insecurity than their high-skilled counterparts and were much more likely to support social welfare policies and vote Social Democratic.  But high-skilled workers showed little or no interest in expanding the welfare state or an increased inclination to vote Social Democratic.  This difference is possibly because high-skilled workers are better prepared to compete in the kinds of industries and professions that are exposed to globalization than low-skilled workers.  Low-skilled workers have fewer employment options when the source of their livelihood shuts down or moves overseas. 

References

Brown, Phillip. (2003). The Opportunity Trap: education and employment in a global economy. European Educational Research Journal, 2(1). Retrieved from http://www.wwwords.co.uk/pdf/validate.asp?j=eerj&vol=2&issue=1&year=2003&article=a10_Brown_EERJ_2_1.

Li, Quan & Rafael Reuveny. (2003, Jan.).  Economic globalization and democracy: An empirical analysis. British Journal of Political Science, 33(1), 29-54.  Retrieved from http://people.stfx.ca/x2011/x2011ucb/PSCI%20Artical/Economic%20Globalization%20and%20Democracy.pdf.

Walter, Stefanie. (2010, June).  Globalization and the welfare State: Testing the microfoundations of the compensation hypothesis. International Studies Quarterly, 54(2), 403-426. Retrieved from http://www.stefaniewalter.de/resources/ISQ_forthcoming.SWalter.pdf.