Globalization Issues

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The Political Economy of Globalization

The process of globalization had already begun in the late nineteenth century. Before World War I, trade and foreign investment were fairly globalized. Because of low political obstacles to international migration, labor markets actually were more globalized at the beginning of the twentieth century than at its end. The two world wars and the Great Depression between them interrupted the process of global market integration for about half a century. Thereafter, the process regained force and speed. Now, inexpensive, fast, and reliable communication and transportation enable producers of goods and some service providers in low-wage countries to challenge high-cost producers in rich countries on their home turf, but technological innovation resulting in falling prices and rising speed of intercontinental communication and transportation is not the only determinant of globalization. Political decisions in rich and poor countries alike contribute strongly to globalization, too. Tariffs and, to a lesser degree, nontariff barriers to trade have been reduced. Many countries try to find and exploit their comparative advantage, to realize economies of scale and gains from trade by looking for buyers and sellers everywhere. If trade between countries is truly free, then it promises to enrich all nations.

Since the publication of Adam Smith’s Wealth of Nations ([1776] 1976), we have known that the size of the market limits the division of labor and that the division of labor boosts innovation and productivity. In principle, globalization is the logical endpoint of the economic evolution that began when families switched from subsistence farming and household production to production for the market. As long as globalization is not yet completed-and it certainly is not yet-gains from trade remain to be realized by further market expansion. Because globalization adds to competitive pressure, however, it causes resentment, and...
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