Theorist Eric Maskin: Globalization Is Increasing Inequality

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 19^th 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.

However, if the higher skilled worker is better suited to work with an even more advanced worker (let’s say a product designer) located in an advanced economy, that worker will be incentivized to look across his or her borders.  As a result, the farmer with lower skills gets knocked out of the globalization process.

More worryingly, this situation potentially has an impact on the wages the lower skill worker can command.  The higher skilled worker, as a result of rising international demand for his or her skills, experiences a rise in wages.  The opposite can happen for the low-skilled worker.

This poses a conundrum for those concerned about inequality (and at first blush, ammunition to those cynical of the benefits of globalization).  How does one reconcile the visible benefits of globalization with the apparent downside?

The answer, says Maskin, lies in contrasting the benefits to an economy as a whole against the negative effects on a certain segment of workers.

“The right thing to do is not to try to stop globalization - that would be foolish -because globalization certainly does increase average income in all countries,” says Maskin. 

“Rather, what we want to do,” says Maskin, who confesses admiration for Ricardo’s insights, “is allow the low skilled workers of the world to share in the fruits of globalization.”

How exactly does this happen?

Maskin doesn’t have an easy solution, but proposes a path of raising skill levels by offering job training to low-skilled workers so they can match better with international opportunities.

Even if this were to be adopted as the most expedient way to tackle the challenge, a question that vexes Maskin even more is ‘who is willing to pay to improve the skills of these workers?’ The workers themselves can’t afford to, says Maskin, and companies in need of more labor won’t want to either, because that will eventually lead to a demand for higher wages.

The most viable option, argues Maskin, is for third parties like governments, multilateral institutions, NGOs and private foundations to step in.