In 1981, when Ronald Reagan became U.S. president, 44 percent of 4.5 billion people on the planet lived on less than $1.90 a day. In 2015, only 9.6 percent of the world’s 7.3 billion people lived in extreme poverty. Put differently, the number of extremely poor people declined from 2 billion to less than 700 million in spite of the global population increase of 62 percent. Poverty declined on every continent, including sub-Saharan Africa, and nowhere was it more pronounced than in East Asia, where extreme poverty declined by an incredible 95 percent. According to Laurence Chandy and Geoffrey Gertz of the Brookings Institution, “[The] rise of emerging economies has led to a dramatic fall in global poverty …. Poverty reduction of this magnitude is unparalleled in history: never before have so many people been lifted out of poverty over such a brief period of time.” See figure 1.
Human progress was not limited to a decline in global poverty. Over the past two and a half decades, Johan Norberg estimates, hunger declined by 41 percent, child mortality by 53 percent, illiteracy by 56 percent and pollution by 61 percent. Many, if not all, of these improvements were connected to economic expansion in the developing countries. That is particularly true of China – population of 1.4 billion. Consider the following historical perspective: Between 1980 and 2010, average annual income per capita in China rose by 657 percent. It took the United States more than a century (1900-2010) to see its average annual per capita income grow by 645 percent. See figure 2.
There can be little doubt that globalization, rather than foreign aid, was behind the rapid growth of the Asian economies. Once again, consider China. In the 32 years after economic liberalization (1978), Chinese incomes rose by 721 percent. In the 32 years before liberalization, they grew by 101 percent. Similarly, in the 19 years after economic liberalization (1991), Indian incomes rose by 158 percent. In the 19 years before liberalization, they grew by 57 percent. Both countries received a minimum amount of foreign aid – especially when compared to sub-Saharan Africa, which received much more aid, yet performed worse with regard to growth and poverty alleviation. See figure 3.
Last, but not least, researchers including Xavier Sala-i-Martin of Columbia University, Surjit Bhalla of the Rand Corporation and Paolo Liberati of the University of Rome have found that rapid growth in developing countries led to the closing of the income gap that emerged at the dawn of industrialization, when the West took off and left much of the rest of the world behind. Global inequality, in other words, is declining.
I started with a reference to Ronald Reagan because it is his presidency that is generally considered the start of the current period of globalization. But what is globalization? The Organization for Economic Cooperation and Development defines globalization as “an increasing internationalization of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries. Amongst other things, this gives rise to increased mobility of capital, faster propagation of technological innovations and an increasing interdependency and uniformity of national markets.” There are many definitions of globalization, of course, but they all seem to agree on the centrality of global trade.
Why do people trade? Trade improves global efficiency in resource allocation or, to put it differently, it provides a superior way of delivering goods and services to those who value them most. An expanded market allows traders to gain from specializing in the production of those goods and services that they do best (i.e., the law of comparative advantage, which David Ricardo discovered exactly 200 years ago). Trade allows consumers to benefit from more efficient methods of production. Without large markets for goods and services, it would not be economical to separate production into specific operations and plan large production runs. Large production runs, in turn, are instrumental to reducing the cost of a product. The reduction of the cost of production leads to cheaper goods and services, which increases the real standard of living.
Trade is such a powerful engine of human progress that the current wave of globalization is merely the latest of many. The trade links between the Sumer and Indus Valley civilizations go back to the third millennium BC. Then there was the Silk Road between Europe and Asia, and European voyages into India and the Americas. And who can ignore the globalization of the second half of the 19th century that ended with the outbreak of the Great War and that was so beautifully described by John Maynard Keynes in The Economic Consequences of the Peace:
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could dispatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference.”
The benefits of trade are not limited to economic gains. The “capitalist peace theory,” for example, holds that interdependence, which trade encourages, lessens the likelihood of military conflict between trading parties. The philosophical roots of the theory can be traced back to Immanuel Kant, who in his 1795 essay Perpetual Peace argued that “the spirit of commerce . . . sooner or later takes hold of every nation, and is incompatible with war.” Today we know that trade cannot guarantee a perpetual peace. The belligerents in the Great War were each other’s main trading partners (e.g., Great Britain accounted for 12 percent of German trade, which was more than German allies, including Austria–Hungary, Bulgaria and the Ottoman Empire, combined). But we also know something else. We know what happens when trade ceases and industrialized nations go to war. It is precisely the memory of the Great War and the subsequent horrors of the 20th century that make the capitalist peace theory relevant today.
Speaking of peace and prosperity, the recently concluded U.S. presidential election, which saw both Republican and Democratic candidates for America’s highest office embrace protectionism, is a cause for concern. The victory of Donald J. Trump, many people fear, could lead to a trade war with China, with negative consequences for world trade and, consequently, global growth. But what are we to make of Trump’s claim that thanks to globalization, “Americans don’t make anything anymore”? First and foremost, American manufacturing output has been rising and is at an all-time high. True, the sector accounts for a smaller share of the American economy than it used to, but that is because services have been growing faster than manufacturing. The reason why so many goods in American stores say “Made in China” is not because America has stopped “making things,” but because U.S. manufacturers have shifted toward high value-added products, like aerospace equipment. See figure 4.
Trump is on more solid ground when he commiserates with Middle America, which saw “manufacturing jobs disappear.” The struggles of these people are real enough – as the Nobel Prize-winning economist Angus Deaton showed by looking at the spiking opiate addiction and suicide rates among poor whites. Contemptuously, Hillary Clinton called many of these people “deplorable,” and it was they who turned out in large numbers and put Trump over the top in America’s “rust belt.” However, Trump is wrong to ascribe the disappearance of manufacturing jobs to globalization in general and China in particular. The U.S. manufacturer employs fewer Americans than it once did because of technological advancement, which has led to efficiency gains. The main culprit of job losses in the manufacturing sector, in other words, is automation, not trade. And isn’t the ability to make more, while using less, the key to productive growth?
A protectionist trade policy intended to “bring back American jobs,” would hurt the U.S. economy. American tariffs on manufacturing inputs, such as Chinese hot-rolled steel, for example, protect American workers making hot-rolled steel, but they harm American welders and construction workers who use hot-rolled steel as I-beams and railroad tracks. Put differently, cheap inputs lead to cheap outputs and that makes America’s exports more competitive. Moreover, a tariff on Chinese imports would lead to reciprocal Chinese tariffs on imports from America, thus harming the U.S. workers even further. Logically, therefore, solutions to the misery in America’s hinterland must lay elsewhere. While beyond the scope of this article, let me suggest a few reforms that would actually help the American workers:
- Education reform that brings competition and accountability to America’s schools would make the American worker more knowledgeable and productive.
- Cheap energy facilitated by the deregulation of the energy sector would cut production costs in America’s private sector.
- Restraining the EPA’s and DOL’s overreach would also help in reducing costs and encourage business creation.
- Tax reform that cuts the high corporate tax rate, while making it more egalitarian and less arbitrary, would also stimulate the economy.
It is easy to blame foreigners for the woes of the American economy. In reality, most of the enemies of the American worker reside not in Beijing, but in Washington, D.C.