K E Y P O I N T Econometric evidenc

K E Y



P O I N T

Econometric evidence suggests that increased openness to trade does raise the long-run rate of economic
growth, although it is difficult to accurately isolate the impact that trade policy alone has on GDP. Although
on average, trade liberalization boosts growth, success is not guaranteed.




9.3




Problems of Globalization

In 1824, the English historian Thomas Macauley noted that “Free trade, one of the
greatest blessings which a government can confer on a people, is in almost every coun-
try unpopular.” We have already noted the gains that lead from comparative advantage
and trade liberalization, yet as trade has increased and emerging markets liberalized,
there has been growing criticism of globalization and even riots on the city streets. In
this section we focus on some of these criticisms and their validity.

DISTRIBUTIONAL IMPACTS AND INEQUALITY
As explained above and in Chapter 8, trade has important distributional effects with
some sectors expanding and others contracting. Individuals in the contracting sector
will have to find jobs elsewhere, assuming a constant natural rate of unemployment.
This may involve relocating, retraining, or accepting a lower wage. (See Chapter 7 for a
discussion of the natural rate of unemployment and the impact of trade on inequality.)
Understandably, groups in society will resist these changes and so resist globalization.
However, comparative advantage also makes clear that although this group loses, the
benefits to society overall are positive.
Globalization has also been criticized for causing inequality and increased poverty
in emerging markets. The argument is that with so many countries competing amongst
themselves for the foreign direct investment (FDI) of large multinational enterprises
(MNEs), wages will be bid down, which will lead to increased inequality and more
poverty. We have already discussed in the previous section the relationship between
trade liberalization and inequality. The most recent estimates3 on poverty suggest that


3


Sala-i-Martin, “The Disturbing Rise of Global Income Inequality,” NBER Working Paper 8904

(April 2002).