We have seen how globalization increased the need for government assistance: large numbers of workers needed help, some form of social protection or assistance in retraining. But just when governments needed more money to cope with the effects of globalization, globalization made raising revenues more difficult. Taxation under globalization compounded insult with injury—American firms didn’t have to pay taxes on profits earned abroad until they were “repatriated” (brought back home).20 Tax laws enabled them to manipulate the numbers, so that they could claim that most of their profits originated abroad—in the case of Apple, the satellite offices in Ireland were supposedly responsible for much of that firm’s immense profits. Then they figured out how to borrow to pay dividends, and the escape was complete: now there was in fact no reason to ever repatriate profits.
As part of this race to the bottom, firms threatened to leave the country unless taxes were lower: there was no patriotism among these multinationals.21
The promise of globalization had been corrupted. In the absence of cooperation among countries in taxation, the burden of taxation has to be shifted to those that are immobile, who can’t take advantage of globalization to move to where they pay little or no taxes—and unskilled workers are the least mobile. They thus suffered thrice—from lower wages, from the shift of the relative burden of taxation onto them,22 and from the cutback in government services that results when corporations escape paying their fair share of taxation. It is no wonder that many workers are less than enthusiastic about globalization.
INTELLECTUAL PROPERTY RIGHTS: WHO OWNS YOUR GENES?
So far, I have discussed two of the critical aspects of globalization—the movement of goods and services and of capital across borders. But there are two more—the movement of ideas and people. While the globalizers were pushing for freer movement of goods and capital, there was much less enthusiasm for the free movement of ideas and people.
Indeed, a major global effort of the United States and other advanced countries has been to restrict the free movement of ideas—or at least to make sure that those who make use of ideas generated in the advanced countries pay the advanced countries. While in the years after World War II the focus was on how to increase the flow of capital from developed to developing countries, this new focus has had exactly the opposite effect. Royalties for the use of intellectual property rights received by high-income countries from low- and middle-income countries were very high. The United States alone obtained over $20 billion in 2012,23 which is about the same amount that America gave in economic assistance to poor countries through its development agency, USAID (approximately $18.2 billion in fiscal year 2012).24
Not surprisingly, as we move toward a knowledge economy, intellectual property rights have become more important since GAID was first published in 2002. The debate is not whether there should be intellectual property rights, but about the design of those rights. Intellectual property rights are a social construction, and we should try to construct them to encourage innovation by protecting the fruits of such innovation. But we also want to ensure that those who might engage in follow-on innovation are not stymied. We want the rules of the game to be designed so that small and medium-sized firms can easily get patents—not just large corporations. We want knowledge to be constructively used and not wielded in ways that increase monopoly power, as another instrument for rent-seeking in grabbing a larger share of the economic pie.25
The economic rules of the game—whether regulation or, as here, intellectual property rights—are increasingly being determined not so much within the country itself but globally, and especially through what are called trade agreements but are in fact agreements that go well beyond trade. One might ask: why are intellectual property rights (IPR) being determined in trade agreements? And especially so since there is already an international body concerned with intellectual property, the World Intellectual Property Organization (WIPO), established in 1967 and headquartered in Geneva. Besides, what do trade ministers know about research and innovation? The answer is simple: they know very little. In designing the provisions governing IPR under the WTO, the USTR did consult the Office of Science and Technology Policy in the White House—but paid little attention to what it said. The USTR was not concerned with maximizing innovation, with what would be good for the progress of science and technology. The USTR had one objective: to maximize the profits of the large American firms which had so much influence over it. The reason that IPR are in trade agreements is that these agreements give the governments of the advanced countries a sledgehammer to enforce their rights: the ability to impose trade sanctions.
Thus, globalization pushed a particular set of views on IPR—that what is good for large corporations is good for innovation and society, that the stronger the IPR the better, and that there was a one-size-fits-all set of rules—the rules that worked for the United States were those that were appropriate for a developing country trying to catch up. All three of these propositions have been shown to be wrong, in ways which are particularly harmful to developing countries.26 But increasingly, it has become clear that ordinary citizens in the United States and other advanced countries also suffer as a result of this corporate-driven agenda, sometimes in ways that are dramatic, sometimes less so.
Consider, for instance, the idea that the stronger the IPR the better. Patents can be a matter of life and death. While a global effort was underway to decode the human genome, a Utah firm named Myriad Genetics rushed to get a patent on two specific genes (called the BRCA genes), and then developed a test to see if a woman has these genes. If a woman has these genes, she has a very high probability of getting breast cancer—hence the interest in having an affordable and accurate test. Meanwhile, Yale University developed a far better test, and through the generosity of those concerned with public health, it was made available at low or no cost. Myriad blocked it in an effort to maintain its monopoly; it knew the value of the data that it was gathering. So what if many women might die as a result? It was a matter of profits above all. A coalition of forces including the American Civil Liberties Union sued27 and eventually prevailed in the Supreme Court (reaching a decision similar to the views on intellectual property in some other countries): naturally existing genes cannot be patented.
More broadly, a key issue in recent trade agreements has been access to generic medicines and other provisions that have the effect of raising drug prices. Americans without adequate insurance may find they simply can’t afford drugs they need for their very survival. In countries where the public picks up the tab, with more money going to the drug companies, there is less left around for everything else.
Not surprisingly, the corporate-driven IPR agenda benefits large corporations at the expense of small firms—which was why the former president of BlackBerry, which began as a small Canadian firm, turned against the IPR provisions of TPP, the aborted trade agreement that Obama pushed so hard for.
In the long run, ordinary citizens will be the loser from any IPR system that makes follow-on research more difficult, which fosters the strengthening of firms with market power, like Microsoft, which leads to higher prices and less competition. Higher prices lower their real income just as much as the lower wages that result from the weakening of their bargaining power in labor markets.
IMMIGRATION
Both in Europe and America, immigration—the movement of people across borders—has proven to be the most controversial aspect of globalization, more controversial even than trade. Much of this is due to the gap between facts and perception, between reality and Trump’s “alternative facts.” In America, Trump has painted a picture of a tsunami of Mexicans crossing the border. The reality is that in recent years, the net flow from Mexico into the United States has turned negative.28 Clearly, Trump and like-minded people in other countries are exploiting latent racism and fears—a long-established tradition of dividing people by turning “us” against “them.”
Here, I discuss only the economic aspects of
the issue, which are themselves complicated and somewhat controversial. Like other aspects of globalization, immigration has effects on the national economy as well as on income distribution. And as with other aspects of globalization, it is not immediately clear what the right economic model might be to best analyze immigration’s effects. The standard “perfect markets” model—which has proven so influential in economics—may again provide uncertain guidance.
In a world in which knowledge and goods moved freely across borders—in which everyone had the same technology, and countries differed only with respect to resources like skilled and unskilled labor and capital—there would be only limited need for immigration.29 Wages of unskilled workers would, as I noted, be equalized.30
In the real world, trade moves wages in the direction predicted, but it doesn’t ever equalize wages. This is partly because knowledge doesn’t move freely, but it’s also partly because institutions matter—having, for instance, good legal institutions enables businesses to execute contracts that can actually be enforced. Even with a clear vision for what makes good institutions, it’s not easy to create them. As a result, those living in some countries—whatever their skill level—may enjoy a higher income than someone with the same skill in other countries. There is an income premium associated with citizenship (or more accurately, residency—but citizenship gives rights of residency). Naturally, individuals would want to live in a location with a higher wage, and this gives rise to immigration pressure.31
But typically, there are diminishing returns. That is, if more unskilled workers move into a country in which there is an unskilled worker premium, unskilled wages fall and immigration pressure decreases. Sometimes, migration occurs so vigorously and markets adjust sufficiently slowly that there is an increase in unemployment. In either case, the original unskilled residents of the country feel that that they are bearing a cost to migration: lower wages or a harder time getting a job.
Of course, in many cases, the migrants are accepting jobs that others would not have accepted. In other cases, the migrants come with skills that those who are unemployed within the country don’t have. The skilled programmer from India is not taking away a job from an auto worker who is unemployed. Indeed, the extra taxes paid by the skilled worker immigrant may help pay for the public services drawn upon by the displaced auto worker. But whether rational or not, resentments arise. And when there are linguistic and cultural differences, these differences reinforce economic arguments against migration.
When we consider the costs of, say, immigration by any category of workers, however, we also need to consider the benefits to other groups in society. Take the case of immigration of unskilled workers. The lower wages of unskilled workers lower the costs of nontraded goods that require these unskilled workers. Taxes on immigrants and the profits they generate for those for whom they work help defray the costs of public goods.32 In short, even if unskilled workers are worse off as a result of the immigration of competitive unskilled workers, other groups may be better off. So different groups in society may have different views of whether such immigration is desirable. If we only consider the aggregate view of the country’s existing inhabitants, we could simply ask, “Are they better off?” There is a broad consensus that the United States—a country based on immigration—is unambiguously better off. Indeed, it could not function without the many hardworking immigrants who have come to the country to seek a better future. The Trumpian vision of American immigrants is totally wrong. But in recognizing that the country as a whole is better off, we must simultaneously recognize that there are groups or locales that may suffer from immigration, and just as in trade, some of the benefits that the country as a whole receives from immigration should be channeled to help those who are adversely affected.
The United States (and many other countries) face an additional immigration problem: what to do with the undocumented workers, including those who entered as children—who know no other home—but whose parents entered illegally. These young people, inhabiting a kind of limbo, face enormous barriers to pursuing the American dream. It is easy for unscrupulous employers to exploit undocumented workers, paying them below-minimum wages or providing unsafe and unsanitary working conditions, knowing that these individuals cannot appeal to the legal system for protection. And the fact that they can be so easily exploited drives down wages and worsens working conditions for other workers. There has to be a quick path to full citizenship for these individuals.33
THE FAILURE TO MAKE GLOBALIZATION WORK
In this and the preceding chapter, I’ve tried to explain why globalization, in each of its aspects, has led to so many new discontents, including in advanced countries like the United States and those in Europe. We’ve explained why there may well be many losers in globalization—perhaps a majority of the population.
The Political Economy of Globalization
In the standard narrative of globalization, the recognition that there may be so many losers in globalization is something that came only recently. And these “harms” were merely the unintended collateral damage to a globalization that was supposed to make everyone better off. But here I want to suggest that this narrative may be fiction.
Focusing on trade, that narrative has exporters valiantly fighting protectionists in the import-competing sector to ensure that the country’s true comparative advantage is realized, in global deals that benefit citizens in all countries. It is the battle of the enlightened reformers against vested interests, in which trade ministries (in the case of the United States, the USTR) are firmly on the side of the reformers. But for more than a quarter century, I’ve watched these battles up close, and they don’t look anything like this battle portrayed as one between good and evil. Indeed, it’s never even clear that the USTR knows what the undistorted comparative advantage of the United States might be. America is a big exporter of agricultural products, like cotton; but without massive subsidies, the country probably wouldn’t export cotton at all. Some agricultural products benefit from hidden subsidies, including for water—rice would probably not even be grown in the Sacramento Valley of northern California, for example, without massive engineering interventions. Another big export is aircraft, a beneficiary (as Europe rightly points out) of help from the U.S. Defense Department.34 The U.S. auto industry was helped by a large bailout. America’s high-tech/Internet sector got its start with government research programs, even to the point that the first browser was largely financed by the U.S. government.35
One of the big fights in recent trade negotiations has been over access to generic medicines. One of the reasons that the United States has done so well in pharmaceuticals is the large government support provided to research in this industry. The role of U.S. trade negotiators in this area may be emblematic. It is not about creating jobs in America. Much of the drug production of U.S. companies occurs outside the United States, and there is nothing in the trade agreements that encourages U.S. production. It is not about increasing U.S. tax revenues. The drug companies are notorious for their prowess in tax avoidance. The agreements could have been used to ensure that the drug companies pay taxes on the intellectual property for which the USTR was fighting so hard. But on this they were silent. The USTR was simply enriching the coffers of the drug companies, with no benefit to America’s workers, and at considerable cost to its consumers and taxpayers (because the U.S. government picks up about 10 percent of the tab for drugs,36 and the USTR’s trade agreements drive up the prices).37 The explanation for these provisions is simple—it is testimony to the political clout of the industry, with key congressmen threatening to vote against any trade agreement that provides less than what the pharmaceutical industry demands.38
There is, I think, an alternative narrative that places what I characterized earlier as “collateral damage” at the core of the trade liberalization agenda. Adam Smith in his 1776 Wealth of Nations provides some insights concerning this alternative interpretation: “People of the same trade seldom mee
t together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Elsewhere in that book, he wrote:
Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. [. . .] Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy.
The quotes remind us that when our business leaders get together urging a particular policy (as they did in the case of globalization) it would be foolish to think that they had not thought of the consequences—including the impacts on the cost of labor. Globalization provided a powerful indirect means to accomplish this long-sought end. The lowering of wages was thus not an “accidental” and unfortunate collateral consequence—it was the objective. Besides the widely touted benefits of opening up new markets, employers benefited doubly, from outsourcing to cheap foreign labor, and from the lowering of wages at home. Thus, the advocates of globalization included not so much exporters seeking to be able to exploit their comparative advantage as retailers, like Walmart, seeking to source what they sold at as low a price as possible, and manufacturers looking to outsource as much of their production to low-cost producers abroad as possible. In short, trade agreements are not about expanding the production of goods in the United States in which the United States has a “natural” comparative advantage.
Conviction that this is right is bolstered by the efforts business leaders were making at the same time to weaken workers’ bargaining power through changes in the rules governing unions, and the resistance of the Republican Party, closely allied with the business community, to efforts to provide assistance to workers displaced by trade, repeatedly voting down provisions to provide such support or, when such support is given, curtailing its size and scope. Knowing that the government will help them should they lose their job would increase workers’ resolve in bargaining.39
Globalization and Its Discontents Revisited Page 10