Proponents of globalization, who point to the boon that results from the trade in goods and services between countries, argue that global integration increases average income within countries, and also reduces inequality.
The antecedent for this view is typically attributed to 19th century British economist David Ricardo, who came up with the notion of ‘comparative advantage’ between countries. Witnessing firsthand the benefits of trade as a result of industrialization and cheap transportation (steamships and railways), Ricardo recommended that nations concentrate solely on those industries in which they are more competitive relative to other nations, and trade with other countries for all other products. Industry specialization and international trade, theorized Ricardo, always make countries better off.
Looking at the current wave of globalization, Nobel Laureate Eric Maskin of Harvard University arrives at a different conclusion. Maskin theorizes that while average income has been rising as a result of more trade and global production, so has inequality within countries.
Inequality resulting from globalization today is often viewed as existing in two varieties, one ‘less worse’ than the other.
In the ‘less-worse’ version, inequality is tolerated as a necessary side-effect of increased economic growth within a country. Through globalization, goes the argument, the wages of a segment of the work force increase, but the same doesn’t happen for other segments, so the gap in between increases.
In the ‘worse’ version, the wages of a segment of the work force (usually low-skilled and low-wage workers) drop as a result of less demand for their skills, while the wages of higher-skilled workers increase.
Maskin, who was discussing his alternative theory (developed in collaboration with Michael Kremer) at the 2014 Annual Bank Conference on Development Economics, worries about this ‘worse’ version.
Globalization today, says Maskin, is a phenomenon wherein the very production of goods and services has become international, as in the case of the iPhone, which is designed in Palo Alto, but physically manufactured in a range of countries, including China, Japan and Germany.
How skills match between workers, says Maskin, lies at the crux of understanding why globalized production leads to an increase in inequality. The better the match in skills between workers, the less the inequality.
Furthermore, whether that match happens within a country or across countries, matters.
If an individual with a higher skill level (let’s say someone working in a food processing plant) matches better with someone with a lower skill (a farmer), the lower-skilled worker will benefit (for example, through the transfer of ideas and work ethics) from working with the higher skilled worker.