4.4: At Home and Abroad - If Globalization is the Answer, then Why are So Many People Still Poor?

Learning Objectives

By the end of this section, you will be able to:

• Analyze how outsourcing has impacted both wealthier and poorer countries.
• Understand how technology has potentially exacerbated global inequality.
• Use t-shirt production as an illustration.

Introduction

If globalization is the answer, then why are so many people poor? A good answer might be that while there has been an increase in global wealth, it has largely been concentrated amongst the top income earners, something that was touched upon in the beginning of this chapter. For example, economists have traditionally used the 80/20 rule, or the Pareto Principle, where 20 percent of countries control 80 percent of global income. Conversely, 80 percent of countries owned 20 percent of global income. Globalization has shifted this understanding. In 2023, the World Inequality Database reports that the top 10 percent control nearly three-quarters of the world's wealth, while half of the global population has little to no wealth at all. While income and wealth are different, as discussed earlier in this chapter, the picture is still quite clear - that a large proportion of income and wealth are in the hands of a global few. According to the Brookings Institute, the already-high level of inequality is likely to persist or, worse, increase without some kind of responsive policy intervention. This type of intervention often includes taxing wealth, with the most prominent being the inheritance tax, which is defined as the tax someone pays on assets inherited from a deceased person, such as a relative.

So why is this case? Why is most income and wealth production going to just a small percentage? Why isn't wealth more evenly distributed? The simple answer is that wealth is needed to create more wealth, particularly if countries want to develop and grow economically. Since wealthier countries have more resources to invest, they benefit the most from these investments. For example, companies in wealthier countries outsource their labor through foreign direct investment, or in other words, move manufacturing to countries with cheaper labor costs in order to save money. This comes in the form of factories in those less developed economies that produce the items that were once made in the corporation's home country. This scenario is popular in countries that have adopted strong neoliberal policies, such as the United States and the United Kingdom, and to a lesser extent, Australia, Canada and New Zealand. China has been the biggest beneficiary of outsourced production, though other countries, such as India, Mexico, Brazil, Poland, and Vietnam, have also profited as well.

While outsourcing can benefit low-wage workers in those countries by bringing in marginally higher-paying jobs, as well as consumers through a reduction in production costs that are sometimes reflected in pricing, there are clear winners and losers. The winner is the transnational corporation, which absorb the majority of the productivity gains from moving manufacturing overseas. Not only do they save on salaries, but other costs savings can also include not having to comply with environmental and labor laws, such as waste management, or provide healthcare and retirement benefits. Another cost savings that has been widely criticized are those related to workplace safety. There have been a number of highly publicized accidents and catastrophes involving low wage factory workers, such as the Dhaka garment factory fire in 2012, which led to the deaths of at least 117 people. Indeed, the clear loser in outsourcing is the industrial working class, both those in the home country and abroad. Workers who see their jobs outsourced often barely earned a living wage, what one must earn to cover the cost of their family's essential basic needs, and so the outsourcing of their jobs can leave them, and their families, at financial risk.

Has Technology Exacerbated Global Inequality?

While there is no doubt that advancements in technology have led to positive developments within societies, such as advances in life-saving medical care, there have also been some serious drawbacks. Some of the positive developments can be seen everyday. For example, the dramatic increase in access to information across the world is only possible by expanding access to the Internet. As you can see in your own classroom, students and faculty can readily access much more information than what was available 30 years ago (you are probably reading this textbook on the internet right now). Indeed, most people did not have an email address until the late 1990s and early 2000s. In fact, the United Nations has suggested that access to the Internet should be a human right, and should not be denied to anyone. Internet sophistication has impacted many areas of life. For example, grocery shopping has become much more convenient moving online. Many people, especially in the developed world, relied on online groceries when in isolation during the COVID-19 pandemic. Others have used the internet and particularly social media, entrepreneurially, where they have monetized their actions. For example, some people stream their video game playing online, whereas others have become Instagram influencers. Simply put, advanced information technology has created more economic opportunities for individuals.

Yet, even though many technological advancements should rightly be celebrated, they have also contributed greatly to labor income inequality. For example, new technologies, such as automation, have reduced or eliminated many low-skilled and unskilled labor positions. While automation in a given production sector can require large initial investments upfront, the long-term cost savings are often worth it to the companies and their investors. Robots and automated machines speed up the production process, resulting in more efficient productivity. However, automated production is often owned by transnational corporations, who are often unwilling to share their technology. In addition, local firms where production is now located have not benefited from technology transfer, or the process of transferring results from scientific and technological research to the marketplace and broader society, including the related skills and procedures. If anything, these firms have become less competitive while society has become more reliant on those industries. It has given transnational corporations immense power in certain countries, at times eclipsing that of the government itself. A good example is in the Democratic Republic of the Congo, where the foreign mining companies that employ local Congolese to mine for cobalt, are far more powerful than local government, whose officials are often bribed to look the other way. In short, technological advancement may inadvertently exclude countries and people, who are already disproportionally experiencing the consequences of global inequality, from economic opportunities.

Improvements in telecommunications and transportation infrastructure are another area that can effect global inequality. Once the purview of larger transnational corporations, medium and small size enterprises have also been able to take advantage of these improvements to seek overseas production and investment opportunities. That souvenir t-shirt that you bought on vacation from the small gift shop was probably made in Vietnam, and made a larger profit for the owners of that shop than if they had used local services. In addition, ordinary people can even avoid physical shops and purchase goods and services globally. For example, many Americans order products from Amazon, an American company, but receive the ordered items from China directly to their door. Digitization, or the process of converting information into a digital format is another technology that has dramatically impacted commerce. Money can now be transferred instantly between people, utilizing services such as Venmo, whereas before it would require the services of a bank teller. Prescription orders can be filled out in a phone application and patients have the option of having their medications shipped directly to their home, directly bypassing the need to talk to a pharmacist. All of this can serve to expedite services for consumers. However, there can also be negative impacts. Think about self-checkout lines at a grocery store. Instead of hiring five to six employees to staff the checkout lines, supermarkets now just need one person to help customers when they need it. Similar self-service systems have been implemented in fast food restaurants, parking garages, libraries, and even in our educational institutions. As a result of technological advancement, automation, and digitalization of services, a profound income gap between high-skilled and low-skilled workers has been created. This trend holds true even when a country is experiencing a rise in the number of highly educated and trained workers. While technology might make out lives easier, it can have the unintended consequence of widening the gap of income inequality.

Why is Your T-Shirt Produced Overseas?

A good example of the interconnectedness of global labor is t-shirt production. Many of the t-shirts sold in the U.S. are made in China (and in other countries, such as Vietnam and Bangladesh), where labor costs much lower. In her book, The Travels of a T-Shirt in the Global Economy, Rivoli (2005) notes that countries such as China are competitive as they embrace a 'race to the bottom' in terms of manufacturing costs. This strategy involves prioritizing their competitive advantage, often by lowering manufacturing costs at the expense of product quality or sound economic decision-making. This may involve government deregulation of certain economic sectors, usually by foregoing labor protection, both in salary and safety.

Rivoli points out that the cotton used to produce the t-shirts in China comes from the northern Texas city of Lubbock. On the surface, this sounds illogical. Cotton is produced in Texas, then shipped on large containers to China. Then, the cotton is used to produce t-shirts in Chinese factories, which are then transported back to the U.S. in large oceangoing vessels. How is this possible? How can material be shipped halfway around the world, processed into a product in a foreign factory, and then shipped back to American markets and still be cheaper than producing them at home?? There are two explanations. First, is the steep decrease in wages paid to manufacturer workers in developing economies. For example, the minimum wage in Bangladesh is $114 a month, whereas the average salary is $245 a month. In the United States, the minimum wage is $1,218 a month, whereas U.S. monthly earnings stood at $4,802. While living costs are dramatically lower in Bangladesh in comparison to the U.S., thus in a way justifying these lower wages, in the end it still represents a cost savings for the t-shirt manufacturers. 

The second explanation provided by Rivoli is that U.S. cotton is competitively cheap due to subsidies that are poured into the cotton industry. Subsidies are a form of financial aid provided by a government so that the cost of production is offset, resulting in a competitive price for the goods/services produced. Subsides are inherently a political tool that interfere with market competition. In the case of cotton, the subsidies are so generous that U.S. cotton prices out-compete countries with much lower labor costs. Thus, a policy decision was made here to protect cotton growers in Texas, usually through interest group lobbying of the U.S. Congress. However, t-shirt industries in the United States were negatively affected by the outsourced labor used to produce the final product.

 

Figure \(\PageIndex{1}\): Book cover of The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade, by Pietra Rivoli. (Source: Rivoli, P. (2014). The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade. Wiley.)

 

This movement of the manufacturing process has provided millions of jobs in China, helping to lift hundreds of millions out of poverty. Yet, the areas where many of the factories are located suffer from negative environmental impacts, as part of the lower costs of production involve much looser environmental regulations. In sum, U.S. taxes subsidize cotton which lowers its cost. This lower cost allows clothing companies to export the cotton and shift more production to overseas factories, thereby allowing for even cheaper t-shirt manufacturing. The proceeds of these cheaper t-shirts pay the lower salaries of factory workers in China, who are paid less than similar workers in the United States. The American consumer benefits, the clothing company benefits, but the American worker is out of a job and the Chinese worker will most likely face poor working conditions. Going back to how this section started, the affluent become more affluent, and those on the bottom of the economic pyramid remain stagnant.