FAQ: Do U.S. manufacturers who establish facilities abroad typically seek cheap labor, provide poor working conditions and welcome lax environmental laws?
Talking Points:
Although U.S. manufacturers are anticipated to invest an increasing amount of capital in China over the next decade, overall, only a relatively small portion of U.S. FDI is invested in developing countries or countries with low-cost labor. Contrary to what many believe, in 2003 only 15 percent of U.S. manufacturing FDI was directed into developing countries, including China, according to the Deloitte research report, Growing the Global Corporation: Global Investment Trends of U.S. Manufacturers. This number is up from 7 percent in 2002, but down from 22 percent in 2001, 25 percent in 2000, and 32 percent in 1999.
“Despite what would appear to be major opportunities for FDI in emerging markets, such as China and India, most U.S. manufacturers are putting their investment bets on the developed markets... For example, U.S. manufacturing FDI into India fell to just over $50 million in 2003, down 80 percent from nearly $250 million in 1999. Investments by U.S. manufacturers into China—a hotbed of global manufacturing expansion—reached $760 million in 2003; down more than 52 percent from nearly $1.3 billion in 1999, although recovering slightly from a low of $575 million in 2002,” the Deloitte report said.
The most important determinants of capital flows are political stability, education and productivity levels, communications and transportation infrastructure, the rule of law, proximity to market and the ability to repatriate profits. This is why developed countries, which pay the highest wages and have the strongest environmental laws, are the destinations for the vast majority of foreign direct investment. This also is why foreign companies operate in the United States—companies that employed 5.4 million Americans with a U.S. payroll of $307 billion in 2002.
Although exceptions exist, many anti-globalist organizations would have you believe that, as a whole, U.S. manufacturers investing abroad seek low-cost facilities that provide sweatshop-like working conditions. If this were correct, investment would be flowing to underdeveloped countries with the poorest labor standards and environmental records. In reality, as demonstrated above, the opposite is true. Although the intentions of these anti-globalist organizations are good, their logic is flawed.
American manufacturers who do invest in developing countries typically offer higher wages and better working conditions than local employers. This makes jobs at U.S. facilities highly prized and, over time, leads to improved environmental and worker protection at all levels. In fact, U.S. companies operating abroad act as agents for change. Through their operating standards, business practices, values and principles, U.S. companies often serve as role models, charting a path for other foreign and domestic companies to follow. This strategy, which is good for business, results in greater employee loyalty, less absenteeism, higher morale and increased productivity.
Procter & Gamble is a case in point. From 1991 through 2002, the company invested $85 million in a Czech Republic consumer products company that produces detergent and liquid cleaners. By applying P & G’s worldwide environmental standards, the facility was able to reduce boiler emissions by 99 percent and solid waste by nearly 6,000 metric tons. In addition to environmental improvements, P & G introduced a competitive compensation program and unique employee benefits, such as loans to renovate apartments and houses, supplementary income payments during illness, maternity leave, and language studies. In 2002, it was reported that P & G also donated $120,000 annually to the development of local education, health care, environmental protection, and social institutions. So impressed with these practices, Czech Republic former President Vaclav Havel said P & G “could serve as a model for other investors.”
Other American corporations investing in facilities abroad typically promote similar ethical and responsible behaviors. Reported in 2002, Nike, the Oregon athletic attire and shoemaker, paid about double the prevailing wage at its contract factories throughout Southeast Asia and scrupulously met all local environmental and occupational safety and health laws.
Studies show that after a country’s per capita income reaches about $5,000, environmental improvement becomes a higher national priority. Why? As living standards rise, the population becomes better educated, more politically aware and sophisticated. In turn, greater pressure is put on government to establish and enforce stricter environmental regulations and allocate more resources to environmental quality. And, as incomes rise, more families can afford to send their children to school rather than to work. Thus, research indicates that child labor declines sharply as the level of economic development increases. Many forget that the United States and every other developed nation followed this path.
FAQ: Have trade and globalization harmed developing countries or the poor?
Talking Points:
From 1970 through 2001, world infant mortality rates decreased by almost half, adult literacy increased more than a third, primary school enrollment rose and the average life span shot up 11 years. And from 1990 through 2002, the number of people in low and middle income countries with access to improved water sources and sanitation facilities also increased, according to the World Bank. Looking forward, from 2002 through 2025, worldwide life expectancy is projected to rise from 64 years to 69 years, and from 62 to 68 in less developed countries, according to the U.S. Census Bureau.
Progress also has been made in reducing poverty. For example, in the short span of 1990 through 1998, the number of people living in extreme poverty in East Asia and the Pacific decreased 41 percent—one of the largest and most rapid reductions in history. And between 1990 and 1999, the average proportion of people in developing countries living on less than a dollar per day fell from 32 percent to 25 percent, the World Bank says.
Today, 24 developing countries representing about 3 billion people, including China, India and Mexico, have adopted policies enabling their citizens to take advantage of globalization. The result: their economies are catching up with rich ones. Over the last two decades ending in the late 1990s, these 24 countries, the World Bank indicates, achieved higher growth in incomes, longer life expectancy and better schooling. During this period, the incomes of the least globalized countries, including Iran, Pakistan and North Korea, dropped or remained static. What distinguishes the fastest growing developing countries from the slowest growing developing countries is clear: their openness to trade.
For many of the world’s poorest countries, the primary problem is their inability to participate in the globalization process. Contrary to anti-globalist doctrine, globalization benefits poor nations and the less privileged, as well as wealthy nations and the affluent. According to the 2000 WTO report Trade, Income Disparity and Poverty, “Trade liberalization (the removal of trade barriers) helps poor countries catch up with rich ones... this faster economic growth helps to alleviate poverty.” In fact, the report concludes, trade “is essential if poor people are to have any hope of a brighter future.”
The WTO study concurs with the World Bank report Growth Is Good for the Poor. Studying data from 80 countries over four decades, Growth Is Good for the Poor confirms that “Openness to foreign trade benefits the poor to the same extent that it benefits the whole economy.” Globalization, Poverty and Inequality, published in 2000 by the Progressive Policy Institute, contends that “less globalization is generally associated with less development.” Similar to other studies, the report concludes that anti-globalists are wrong.
According to this report, “No country has managed to lift itself out of poverty without integrating into the global economy.” And who would know this better than former Mexican President Ernesto Zedillo, who said: “In every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment and technology—that is, by participating in globalization.” Even former sociologist Fernando Henrique Cardoso, who spoke out against aspects of global dependence, promoted—not resisted—globalization as president of Brazil.
Similar conclusions have been reached by Jeffrey Sachs and Andrew Warner of Harvard University. They contend in their report Economic Convergence and Economic Policies, published by the National Bureau of Economic Research, that developing countries with open economies grew by 4.5 percent a year in the 1970s and 1980s, while those with closed economies grew by 0.7 percent a year. At this rate, open economies double in size every 16 years, while closed economies double every 100 years.
If remaining world merchandise trade barriers are eliminated, potential gains are estimated at $250 to $650 billion annually, according to the International Monetary Fund and World Bank. About one-third to one-half of these gains would accrue in developing countries. Removal of agricultural supports would raise global economic welfare by an additional $128 billion annually, with some $30 billion going to developing countries.
“Globalization has helped reduce poverty in a large number of developing countries but it must be harnessed better to help the world’s poorest, most marginalized countries improve the lives of their citizens,” states the 2002 World Bank report, Globalization, Growth and Poverty: Building an Inclusive World Economy. “This is especially important in the wake of September 11,” the World Bank says.
Globalization may not be a panacea for all economic ills, but it certainly helps alleviate them. However, it has had negative consequences on some developing countries with distorted economies or a lack of sound legal or financial systems. As a result, anti-globalists with good intentions but bad policy recommendations often make globalization the scapegoat for many of the world’s problems.
In the end, the facts don’t lie. According to authors John Micklethwait and Adrian Wooldridge, “In 1960, the average wage in developing countries was just 10 percent of the average manufacturing wage in the United States; in 1992, despite all that terrible globalization, it had risen to 30 percent... globalization helps the whole pie get bigger.” In fact, there are numerous examples of this principle. As stated by Micklethwait and Wooldridge, “Deng Xiaoping’s decision to open China’s economy in 1978 helped some 800 million peasants more than double their real incomes in just six years, arguably the single greatest leap out of acute poverty of all time.”
FAQ: Is there a relationship between globalization and terrorism?
Talking Points:
Yes, but for the opposite reasons many would expect. Stated above, the primary economic problem poor countries incur is not too much globalization, but instead, their inability to participate in it. Take the Middle East for example. It is replete with totalitarian regimes that use trade barriers to isolate themselves from the world, as well as each other. This has resulted in virtually no economic growth in the Middle East and North Africa since 1965. In addition, from 1980 through 2002, the Middle East’s share of world trade and investment, excluding Israel, fell by about 75 percent.
Why does global integration hold such promise for the Middle East? Look at the facts. East Asia and the Pacific, a region that has welcomed global integration, generated an average annual growth rate of 5.6 percent from 1965 through the end of the century, and 7.5 percent throughout the 1990s. Plus, in the short span of 1990 through 1998, the number of people living in extreme poverty there decreased 41 percent—one of the largest and most rapid reductions in history.
If free market reform—which is promoted by globalization—is accepted in the Middle East, the region will be positioned to absorb new ideas, technologies and a myriad of other benefits from the world trading community. This will help the region diversify its exports toward agricultural goods and higher-value manufactured products, and in turn, create new jobs. Furthermore, the U.S.-Jordan Free Trade Agreement, signed in 2001, will continue to serve as a model for economic integration for the entire region. Importantly, it will foster the development of a fair and impartial legal system as well as strengthen democratic institutions.
The Middle East would be well advised to adopt free market policies that globalization—which has lifted millions out of poverty—promotes. As trade and investment increase, the incomes of ordinary people also will rise. This will lead to higher living standards and a better-educated and politically-involved population. In turn, despair and hopelessness, characteristics commonly found among terrorists or their supporters, will slowly turn to hope.
Thomas Barnett, senior strategic researcher at the U.S. Naval War College and author of The Pentagon’s New Map: War and Peace in the Twenty First Century, says that if we map out U.S. military responses since the end of the Cold War, we find an overwhelming concentration of activity in the regions of the world that are excluded from globalization’s core. Barnett argues that regions or countries isolated from globalization or lacking economic and cultural connectivity with the rest of the world are those countries where you will find instability, threats to the international system and terrorist networks. As a result, Barnett notes that the U.S. military shut down roughly 150 military bases in the United States, Europe and developed Asia and established new ones near the non-integrating countries.
This section appeared in Part III: Frequently Asked Questions and Talking Points of the book Grasping Globalization: Its Impact and Your Corporate Response, 2005.
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