Globalisation's Impact on Rising Inequality

Rising levels of inequality in the developed world are primarily the result of globalisation." Discuss.

Introduction

Globalisation has been defined as “a complex range of processes driven by a mixture of political and economic influences…creating new transnational system and forces”.[1] The word of significance in the definition is ‘complex’ because globalisation is truly a complex phenomenon. Definitions on globalisation can focus on social, political, cultural or economic implications. The impact of globalisation can also be studied from any of these perspectives. Therefore, globalisation is a complex phenomenon. Although, this essay focusses on the economic implications of globalisation, it is worthwhile to understand that globalisation as a phenomenon transcends boundaries.

The impacts of globalisation have been studied on many aspects but the economic impacts or consequences of globalisation continue to drive the debate on this point.[2] This essay considers the impact of globalisation on developed economies, in terms of rising levels of inequalities between the rich and the poor of the developed nations.

Recent research has suggested that there is a growing income disparity between the middle class and rich on one hand and poor in the advanced economies of the world, where the gap is the highest that it has been in decades.[3] By comparison the inequality trends in the developing or emerging economies are mixed and some economies have shown that the gap between rich and poor has actually declined.

Globalisation has been argued to be the cause for the increasing poverty in the developed countries. This essay accepts the argument and by using the example of deindustrialisation of the developed countries, the essay seeks to show how globalisation is adding to the widening income inequality gulf in the advanced economies of the world. The principal thesis of the essay is that globalisation has created a greater disparity between the rich and the poor of the developed world due to the process of deindustrialisation and outsourcing of manufacturing to the countries with cheaper labour. This has led to loss of jobs in the developed economies and has contributed to the growing chasm of disparity between the rich and the poor of the developed economies.

Globalisation: Meaning and issues

Although globalisation can be defined from various perspectives, for the purpose of this essay, a definition that relates to the economics of globalisation is required. Economic globalisation may be defined as a growing interdependence between the different economies of the world, which is also seen in the rise of “cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. It reflects the continuing expansion and mutual integration of market frontiers, and is an irreversible trend for the economic development in the whole world at the turn of the millennium. The rapid growing significance of information in all types of productive activities and marketization are the two major driving forces for economic globalization.”[5] This definition reflects the aspects of globalisation that are of relevance to this essay. The increasing interdependence that has led to more transnational trade, has also seen an integration of markets and productive activities. This is of particular significance for the off shoring of manufacturing that has happened from developed countries.

Economic globalisation has been driven by trade in goods and services and this has had an impact on the structuring of economic equalities in developed nations. One direct impact of globalisation in this respect has been the deindustrialisation that has been witnessed in the developed economies of the world. Developed countries in the world are in the midst of a premature deindustrialisation.[6] This may be because countries in general are running out of industrialization opportunities at faster rates and this has a bigger impact on the developed economies, which show the most indicators of deindustrialisation.

In context of this essay, deindustrialisation has led to employment loss, which is particularly seen in the low-skill type of employment.[8] As globalisation has allowed the easier movement of goods and services across the nations, markets have opened and off shoring to labour-rich nations has become the norm.[9] Added to this is the use of labour-saving technological progress in developed countries. This has allowed the manufacturing companies in the developed economies to continue to dominate the global markets with an increased output, without compromising on the cost competitiveness of their products.

Ultimately, for the low-skill type of labour in the developed countries, the changes described above, driven by globalisation have led to negative impacts. Therefore, it is essential to understand the impacts of deindustrialisation and its inter-relationship with increasing income inequality in the advanced economies.

The increased trade interaction between the developed and developing countries has had a decided impact on the growing disparity between domestic manufacturers and workers of the developed countries. Where trade interaction and globalisation has allowed access to markets around the world for the developed countries’ manufacturers, the same processes have also allowed the manufacturers to outsource the manufacturing into countries where labour is cheaper than that in the developed world. This has allowed the manufacturers of the developed nations to outsource manufacturing to countries with cheap labour (thereby reducing costs); and to export manufactured products to different markets at lower tariffs (thereby increasing revenue). Therefore, the manufacturing output has not really changed as far as the developed countries are concerned. The developed countries continue to demonstrate a high manufacturing output, which can be attributed to the processes of globalisation.[10] At the same time, as the manufacturers outsource the manufacturing, the workers of the developed world are increasingly losing their jobs or having to compete with the cheaper labour in the third world nations. This has led to a situation of obvious disparity between the manufacturers and the labourers or workers. Therefore, there is a decided impact of globalisation on the widening of the gulf between the rich and the poor.

A recent study on the impact of globalisation in the occupational exposure on American workers, led to some significant findings on the point.[11] The study used data on industrial trade and offshoring and compared the same with individual-level worker data for the period between 1984 to 2002. It was found that occupational exposure to globalisation had effect on wages as globalisation led to a downward pressure on worker wages. The impact was felt more as the workers were increasingly relocated from their earlier higher-wage manufacturing jobs into other sectors, which was a direct consequence of sourcing labour to other countries providing cheaper labour.[12] There was significant evidence of switching of occupation and the real wage losses of this phenomenon for the period under study was 12 to 17 percentage points.[13] When this is translated to the real wage loss for individual workers across America, the impact of globalisation is immense.

A study has studied the impact of globalisation on income inequality by using data from over 50 countries over period between 1981 to 2003.[14] The study found that there is a significant increase of income inequality in the advanced economies. Two independent studies, one from America[15] and the other from the UK[16], show that there is an increase in inequality, especially on the upper part of distribution. The increase in income inequality is seen in middle and high-income countries, such as the United Kingdom and the same cannot be said of low-income countries.[17] The factors of trade openness and financial openness are usually extended to explain this phenomenon. These are discussed in the next section of this essay.

As a word of caution it is necessary to admit that it is difficult to measure impacts of globalisation because globalisation is a phenomenon that is multi-faceted and has many variables that interact within the same larger concept. This can be explained as follows:

“Globalisation is a multi-faceted phenomenon, and each facet may have different effects on employment, varying by country, time, industry, policies and the like. It comes as a part of large array of economic, technical, social, legal and policy changes, each with interactions and feedbacks, making is difficult to separate the effects of globalisation.

Globalisation, deindustrialisation and growing inequality in developed economies

The impact of globalisation in driving the income inequality between the middle class and the rich and the low-income workers in the developed economies has been a subject of interest. Although, there may be several explanations of this phenomenon, this essay uses the rising levels of deindustrialisation, off shoring and loss of jobs to explain the rising levels of inequality between the rich and the poor. This has to be seen also in the contexts of trade openness and its effects on the developed economy workers, as well as the impacts of technological change on the workers of the developed economy.

The Stopler-Samuelson theorem[19] has been used to explain the different impacts of increase in trade openness on developing and developed nations, which is of significance to the present essay. This is explained as follows. If trade openness and its impact on inequality are seen in the context of a two countries using a two-factor framework, then the higher trade, which is resultant of tariff reduction would have different effects in a developing country as compared to developed country.[20] In a developing country, labour that is low-skilled, would benefit from the trade openness by seeing an increase in his wages. At the same time, the income of the high-skilled workers will see a reduction. Income inequality will also see a reduction as the income of low skilled workers will rise, while the income of high skilled labour will decrease.[21] On the other hand, an advanced economy will show a reverse trend because of the abundance of high-skill factors leading to higher inequality.

Another factor that is responsible for the decreasing jobs and wages for the low-skilled workers is that of technological change. Technological change favours workers that have higher skills as opposed to workers with low-skills. This leads to a widening of the “skills gap.”[23] The distribution of income is impacted by this as between the high skill labour and low skill labour as there is a reduction in the demand for lower-skill activities.[24] As per this argument, the increase in the income disparity is due to the technological change factor and not trade openness. However, research does show that there is a change in industrial wage inequality, with the low skilled labour losing jobs to off shoring as well an increase in household income inequality indicators that show that there is an increase in income inequality of developed nations.[25] Therefore, there is a strong case made out for deindustrialisation as a factor responsible for rising levels of income inequality.

The interaction between deindustrialisation and poverty has been the focus of research. This research is scattered across different regions and economy and as everything related to globalisation, the findings are complex and are reflective of different aspects of globalisation’s impact on domestic workers and poverty. For instance, a research set in post-industrial Chicago shows how in a deindustrialised city, a complex and permeating impact was that of wage inequality.

The rise of deindustrialisation has been a cause of concern since the 1990s, when the first effects of the phenomenon were noted and debated on by scholars and academicians. One of the question that was consistently raised within these debates was whether increased trade with the developing or third world countries had an adverse impact on the workers of the developed and advanced economies of the world.[27] Three labour market developments in the developed countries were also noted during this period, which led to concerns about losing manufacturing, unless the developed world nations responded to these developments. First, the wage disparities between skilled and unskilled workers in the UK and North America were observed during this period. Second, unemployment in many European nations grew substantially. Third, contraction in manufacturing employment was observed.[28] Indeed, the process of deindustrialisation was a response by manufacturing companies in developed economies to the processes of globalisation which meant that the developed manufacturing companies could continue to have higher output with lower labour costs, simply by outsourcing manufacturing to the developing countries. The UK, under Margaret Thatcher was one of the first countries to exhibit actual symptoms of deindustrialisation.[29] For the manufacturers and the policy makers, globalisation has been seen as a boon which has allowed increased revenues by sourcing to cheaper nations. This is explained as follows:

“Sourcing is stimulated by exploiting lower production costs in a foreign country relative to the country of origin. Especially during the last decade, with the opening up of the Eastern European and the Chinese market, the global economy has created huge potentials for gains from such trade.

Therefore, the process of globalisation is seen in a positive light by the manufacturers of the developed world as this has created a pipeline through which cheaper labour can be provided to the domestic manufacturers of the richer nations. On the other hand, the impact of globalisation has been negative for the workers of the domestic manufacturers in the developed nations. Due to the availability of cheap labour in the third world nations, workers in the developed nations have lost their jobs or have suffered significant wage losses. This has led to the rising levels of income inequality in the developed economies.

Conclusion

The processes of globalisation have led to decided impacts upon the workers of the developed and advanced economies of the world. The increasing trade openness and integration of production processes have led to the off shoring of labour jobs to developing or third world countries. The impact of this has been that workers in the developed economies have either lost jobs or suffered wage reductions. At the same time, the manufacturing output has remained at a constant or even improved. The high skill labour is also as well paid now as it was before. Therefore, the loss of income has not been felt by the middle and high income groups. This has led to widening gulfs between the rich and the poor in the developed nations. Therefore, the processes of deindustrialisation have not adversely impacted the rich, but it has impacted the poor working class. Thus, it would be correct to say that rising levels of inequality in the developed world are primarily the result of globalisation.

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