Globalisation doesn't mean equality: why the rich are getting richer

published 16 March 2006

"The Earth is flat," says Thomas Friedman (you can read more about Friedman's viewpoint below). Thanks to modern technology, the spread of American-style capitalism and the protection offered by the empire's military forces, we all, apparently, play on the same level field of global commerce. We also wear the same clothes (business suits for adults, T-shirts for the young), talk the same language (business English), share the same credit cards and worship the same God (Mammon).

We are all one people, with one idea: to get something for nothing. And on this new flat earth, we can all get rich, too. The whole world can compete, and share technology, information and opportunities. The only thing threatening this brave, new, ironed-out world, according to Friedman, is that some people don't want to go along with it backward-looking losers who think religion is more important than material progress; insurgents who defy imperial authority; protectionists who want to push a broomstick into the wheels of history.

How it is supposed to work

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A firm could grow bananas in Iceland, but if you are offered a chance to buy shares in the enterprise, you should turn it down. Better to let the Nicaraguans grow the bananas, while Icelanders concentrate on pickled herring. The economist David Ricardo called it the theory of competitive advantage'. It says that you should do what you can do best, and let others do what they do best. That is also the principle behind globalisation. It is what draws capital to Chinese factories and business to Indian call centres. Labour costs are much lower there, so they can produce more at less expense. Thus, they have a competitive advantage over similar enterprises in the West.

This theory is almost certainly correct, in that the more people do what they do best, the better off everyone is. And it is probably true that the world's output goes up as more people in Asia are drawn into the modern economy. But three billion people jumping into the planet's labour pool all at once are bound to make a splash. Someone is sure to get soaked. We are not supposed to worry about it: globablised capitalism and democracy adjust easily and painlessly.

So don't worry about the auto industry disappearing from America. Remember, the horse-carriage whip business disappeared too. More recently, Britain used to be a leader in the motorcycle industry, but that and the car industry have practically vanished as well. But so what? Our dynamic system of capitalism keeps delivering new, more sophisticated opportunities, doesn't it? But if so, here's a question for you: what sort of more sophisticated' work are the ex-carworkers freed up to do? Will they all go to work as bankers, or even journalists? Horse-carriage whip manufacturers went out of business when people stopped using horse-carriages but people are still driving around in cars; in fact, demand is rising sharply as Asians begin to afford them.

But maybe wages are just too high in North America and Britain? Perhaps car making can only be done in low-wage countries without environmental or labour protections. If that's so, why can Germany and Japan, two very high-wage countries, still build cars? And even if much of the production has to be outsourced to lower-cost areas, why didn't Anglo-Saxon entrepreneurs work it out? In other words, why are GM and Ford share prices falling? And why are real wages static or falling in Britain and America?

When the horse-carriage companies were replaced by car firms, wages soared. Each real innovation brought soaring wages. Globalisation brings rising wages too, but to India and China, where real wages have doubled in the last ten years. And they'll probably continue growing. Per capita income is $1,700 (£879) in China, $30,900 (£17,800) in Britain, and $41,800 (£24,070) in America. Since the wage difference is so great, it will be a long time before Western workers have any real bargaining power. They may not see much real income growth for the next two decades. Wages for the working class in America have gone nowhere for the last 30 years, and real household incomes have declined for the last five years. Loaded up with more debt than ever, these lower-income wage earners are going broke in record numbers.

But not all of China's workers have been lucky enough to make it into the new sweatshop economy. In China, 500 million people live in coastal cities and participate in modern commerce, but there are another 700 million who live in the countryside. While the cities grow richer, the poor in China are left behind just like Britain's industrial workers. In short, the world is not getting flatter: in many ways, it is getting steeper, with more divisive gorges. A Chinese factory worker may have more in common with a UK factory worker, but the gap between these globalised wage slaves and the capitalists who employ them is growing.

The owners of General Motors, for example, don't have to accept Detroit-style union wages. When the factories are worn out, when pension and health plans groan under the strain of carrying more retired than active workers, shareholders can sell out. They can buy shares in a Chinese car-parts maker. There, employers have hundreds of millions of workers to choose from. They can pay them a fraction of US-level wages. And back in the West, what can working men do? They have no leg to stand on. They must sit down and accept declining relative earnings. This leaves the capitalists in a great position. Corporate sales go up, but labour costs do not. Profits rise; people who had money before soon have more of it. The rich get richer. Not just rich shareholders in New York and London, but rich factory owners in Shanghai.

Why are the rich benefiting from globalisation while in the West the working classes are not? It's simple: the supply of labour has suddenly expanded, while the supply of capital hasn't. There may be billions more willing wage earners in the world economy than there were 20 years ago, but how many new firms are there that can produce cars at a profit? How many more houses are there in central London? How much more gold? People who have only their own labour to offer enter a buyer's market. People with capital, on the other hand, enjoy a seller's market. These trends aren't likely to end anytime soon. Beneath the surface of Friedman's flat earth, the pressure is growing. Sooner or later, it is bound to explode.

Bill Bonner is editor of The Daily Reckoning and author of US bestseller Empire of Debt

Friedman's compelling point of view

According to Thomas Friedman, the rule for journalism is that "if you come empty, you leave empty. You've gotta come with a point of view". He's managed to have a successful career on the back of his theory, winning three Pulitzer prizes for journalism and publishing numerous books, including The World is Flat, The Lexus and the Olive Tree: Understanding Globalisation and From Beirut to Jerusalem which was in the New York Times best-seller list for nearly a year.

Friedman was born in Minneapolis in July 1953. He went on to do an undergraduate degree in Mediterranean studies at Brandeis University before attaining a master of philosophy in Modern Middle East studies from Oxford in 1978.

Having worked in London and Beirut as a journalist, Friedman first joined the New York Times in 1981, and was promoted to Beirut bureau chief in 1982. He has been based all around the Middle East for the paper and has been its foreign-affairs columnist since 1995.

Following September 11th, he won his third Pulitzer prize for his reflections on the global impact of the attacks and his "clarity of vision, based on extensive reporting, in commenting on the worldwide impact of the terrorist threat". This confirmed his place as America's pre-eminent foreign correspondent and won him support from both those interested in Middle-Eastern affairs and those interested in globalisation. The Lexus and the Olive Tree: Understanding Globalisation was published in 1999 to great acclaim it won the Overseas Press Club Award for best non-fiction book on foreign policy in 2000.

His most recent book The World is Flat is based on the premise that as globalisation spreads, inequalities decline. However, while his musings have numerous plaudits, he also has his critics. Siddharth Varadarajan, the deputy editor of The Hindu, suggests that "If Mr Friedman had read a little business history (instead of merely talking to CEOs), he would know that cross investment and extensive trade relations have never prevented countries from going to war against each other".

How it stacks up

The richest 50 million people in Europe and North America have the same income as 2.7 billion poor people.
The total wealth of the top 8.3 million people around the world rose by 8.2% to $30trn in 2004, meaning that about 0.13% of the world's population controlled 25% of the world's assets.
In 2004, the number of people with assets of more than $1m increased by 600,000 to total 8.3 million worth $30.8trn.
The number of "ultra high-net worth individuals" also grew in 2004, up 8.9% to 77,500 worldwide.
37 million Americans live in poverty. That is 12.7% of the population the highest percentage in the developed world. This has increased by 5.4 million since 2000.
The United States has 269 billionaires, the highest number in the world.
Nearly three billion people live on less than $2 a day, 1.3 billion live on under $1.
Of the world's population, 20% consume 86% of its goods.
In 1820, 20% of the world's people in the richest countries had three times the income of the poorest 20%. By 1960, they had 30 times more; by 1997, they had 74 times as much.
A few hundred millionaires now own as much wealth as the world's poorest 2.5 billion people.
The 48 poorest countries account for less than 0.4% of global exports.
The combined wealth of the world's 200 richest people reached $1trn in 1999 seven times more than the wealth of the 582 million people living in the 43 least-developed countries.