Comparative
Advantage:
"Nobel
laureate Paul Samuelson (1969) was once challenged by the mathematician
Stanislaw Ulam to "name me one proposition in all of the social sciences
which is both true and non-trivial." It was several years later than he
thought of the correct response: comparative advantage. "That it is logically true need
not be argued before a mathematician; that is is not trivial is attested by
the thousands of important and intelligent men who have never been able to
grasp the doctrine for themselves or to believe it after it was explained to
them."
"What did David Ricardo mean when he coined
the term comparative advantage? According to the principle of comparative
advantage, the gains from trade follow from allowing an economy to
specialise. If a country is relatively better at making wine than
wool, it makes sense to put more resources into wine, and to export some of
the wine to pay for imports of wool. This is even true if that country is
the world's best wool producer, since the country will have more of both
wool and wine than it would have without trade. A country does not have to
be best at anything to gain from trade. The gains follow from specializing
in those activities which, at world prices, the country is relatively
better at, even though it may not have an absolute advantage in them.
Because it is relative advantage that matters, it is meaningless to say a
country has a comparative advantage in nothing. The term is one of the most
misunderstood ideas in economics, and is often wrongly assumed to mean an
absolute advantage compared with other countries."
"The
basis for trade in the Ricardian model is differences in technology
between countries. Below we define two different ways to describe technology
differences. The first method, called absolute advantage is the way most
people understand technology differences. The second method called
comparative advantage is a much more difficult concept. As a result even
those who learn about comparative advantage often will confuse it with
absolute advantage. It is quite common to see misapplications of the
principle of comparative advantage in newspaper and journal stories about
trade. Many times authors write comparative advantage when in actuality they
are describing absolute advantage. This misconception often leads to
erroneous implications such as a fear that technology advances in other
countries will cause our country to lose its comparative advantage in
everything. As will be shown, this is essentially impossible."
"Absolute Advantage: A country has an
absolute advantage in the production of a good relative to another
country if it can produce the good at lower cost or with higher
productivity. Absolute advantage compares industry productivities across
countries."
"Opportunity
Cost: Opportunity cost is defined generally as the value of
the next best opportunity. In the context of national production, the
nation has opportunities to produce wine and cheese. If the nation
wishes to produce more cheese, then because labor resources are scarce
and fully employed, it is necessary to move labor out of wine production
in order to increase cheese production. The loss in wine production
necessary to produce more cheese represents the opportunity cost to the
economy."
"
Comparative Advantage: A country has
a comparative advantage in the production of a good if it can produce
that good at a lower opportunity cost relative to another country.
"The
theory of comparative advantage is perhaps the most important concept in
international trade theory. It is also one of the most commonly
misunderstood principles." The sources of the misunderstandings are easy to
identify. First, the principle of comparative advantage is clearly
counter-intuitive. Many results from the formal model are contrary to simple
logic. Secondly, the theory is easy to confuse with another notion about
advantageous trade, known in trade theory as the theory of absolute
advantage. The logic behind absolute advantage is quite
intuitive. This confusion between these two concepts leads many people to
think that they understand comparative advantage when in fact, what they
understand, is absolute advantage. Finally, the theory of comparative
advantage is all too often presented only in its mathematical form. Using
numerical examples or diagrammatic representations are extremely useful in
demonstrating the basic results and the deeper implications of the theory.
However, it is also easy to see the results
mathematically, without ever understanding the basic intuition of the
theory.
The early logic that free trade could be
advantageous for countries was based on the concept of absolute advantages
in production. Adam Smith wrote in
The Wealth of Nations,
"If a foreign country can
supply us with a commodity cheaper than we ourselves can make it, better
buy it of them with some part of the produce of our own industry,
employed in a way in which we have some advantage. " (Book IV, Section
ii, 12)
The
idea here is simple and intuitive. If our country can produce some set of
goods at lower cost than a foreign country, and if the foreign country can
produce some other set of goods at a lower cost than we can produce them,
then clearly it would be best for us to trade our relatively cheaper goods
for their relatively cheaper goods. In this way both countries may gain from
trade.
The original idea of comparative advantage
dates to the early part of the 19th century. Although the model
describing the theory is commonly referred to as the "Ricardian model",
the original description of the idea
can be found in an
Essay on the External Corn Trade
by Robert Torrens in 1815. David Ricardo formalized the idea using a
compelling, yet simple, numerical example in his 1817 book titled,
On the Principles of Political Economy and Taxation.
The idea appeared again in James Mill's
Elements of Political Economy
in 1821. Finally, the concept became a key feature of international
political economy upon the publication of
Principles of Political Economy
by John Stuart Mill in 1848.
David Ricardo's Assumptions
[Assumptions implicit within Ricardo's model are as follows:
The Ricardian model is
constructed such that the only difference between countries is in
their production technologies. All other features are assumed
identical across countries. Since trade would occur and be
advantageous, the model highlights one on the main reasons why
countries trade; namely, differences in technology.
Although most models of
trade suggest that some people would benefit and some lose from free
trade, the Ricardian model shows that everyone could benefit from
trade. This can be shown using an aggregate representation of
welfare (national indifference curves) or by calculating the change
in real wages to workers. However, one of the reasons for this
outcome is the simplifying assumption that there is only one factor
of production.
This interesting result
was first shown by Ricardo using a simple numerical example. The
analysis highlights the importance of producing a country's
comparative advantage good rather than its absolute advantage good.
The Ricardian model
shows the possibility that an industry in a developed country could
compete against an industry in a less developed country even though
the [competing] industry pays its workers much lower wages."
Comparative Advantage Illustration:
Here is a rather straightforward comparison of comparative advantage.
REMEMBER, comparative advantage means that a country should specialize in
trade that minimizes opportunity costs!
|
Comparative
Advantage Illustration
“David
Ricardo, working in the early part of the 19th century, realised
that absolute advantage was a limited case of a more general
theory. Consider Table 1. It can be seen that Portugal can
produce both wheat and wine more cheaply than England (ie it has
an absolute advantage in both commodities). What David Ricardo
saw was that it could still be mutually beneficial for both
countries to specialise and trade.
Table 1
|
Country |
Wheat |
Wine |
|
|
Cost Per Unit In Man Hours |
Cost Per Unit In Man Hours |
|
England |
15 |
30 |
|
Portugal |
10 |
15 |
In Table 1, a unit of wine in England costs the same amount to
produce as 2 units of wheat. Production of an extra unit of wine
means foregoing production of 2 units of wheat (ie the
opportunity cost of a unit of wine is 2 units of wheat). In
Portugal, a unit of wine costs 1.5 units of wheat to produce (ie
the opportunity cost of a unit of wine is 1.5 units of wheat in
Portugal). Because relative or comparative costs differ, it will
still be mutually advantageous for both countries to trade even
though Portugal has an absolute advantage in both commodities.
Portugal is relatively better at producing wine than wheat: so
Portugal is said to have a COMPARATIVE ADVANTAGE in the
production of wine. England is relatively better at producing
wheat than wine: so England is said to have a comparative
advantage in the production of wheat.
Table 2 shows how trade might be advantageous. Costs of
production are as set out in Table 1. England is assumed to have
270 man hours available for production. Before trade takes place
it produces and consumes 8 units of wheat and 5 units of wine.
Portugal has fewer labour resources with 180 man hours of labour
available for production. Before trade takes place it produces
and consumes 9 units of wheat and 6 units of wine. Total
production between the two economies is 17 units of wheat and 11
units of wine.
Table 2
|
C o u n t r y |
Production |
|
Before Trade |
After Trade |
|
Wheat |
Wine |
Wheat |
Wine |
|
E n g l a n d |
8 |
5 |
18 |
0 |
|
P o r t u g a l |
9 |
6 |
0 |
12 |
|
T o t a l |
17 |
11 |
18 |
12 |
If both countries now specialise, Portugal producing only wine
and England producing only wheat, total production is 18 units
of wheat and 12 units of wine. Specialisation has enabled the
world economy to increase production by 1 unit of wheat and 1
unit of wine.
The simple theory of comparative advantage outlined above makes
a number of important assumptions:
|
"A
country is said to have a comparative advantage in the production of a good
(say cloth) if it can produce cloth at a lower opportunity cost than another
country. The opportunity cost of cloth production is defined as the amount
of wine that must be given up in order to produce one more unit of cloth.
Thus England would have the comparative advantage in cloth production
relative to Portugal if it must give up less wine to produce another unit of
cloth than the amount of wine that Portugal would have to give up to produce
another unit of cloth.
All
in all, this condition is rather confusing. Suffice it to say, that it is
quite possible, indeed likely, that although England may be less productive
in producing both goods relative to Portugal, it will nonetheless have a
comparative advantage in the production of one of the two goods. Indeed
there is only one circumstance in which England would not have a comparative
advantage in either good, and in this case Portugal also would not have a
comparative advantage in either good. In other words, either each country
has the comparative advantage in one of the two goods or neither country has
a comparative advantage in anything.
Another way to define comparative advantage
is by comparing productivities across industries and countries. Thus
suppose, as before, that Portugal is more productive than England in the
production of both cloth and wine. If Portugal is twice as productive in
cloth production relative to England but three times as productive in wine,
then Portugal's comparative advantage is in wine, the good in which its
productivity advantage is greatest. Similarly, England's comparative
advantage good is cloth, the good in which its productivity disadvantage is
least. This implies that to
benefit from specialization and free trade, Portugal should specialize and
trade the good in which it is "most best" at producing, while England should
specialize and trade the good in which it is "least worse" at
producing.
Note that trade based on comparative does not contradict Adam Smith's notion
of advantageous trade based on absolute advantage. If as in Smith's example,
England were more productive in cloth production and Portugal were more
productive in wine, then by we would say that England has an absolute
advantage in cloth production while Portugal has an absolute advantage in
wine. If we calculated comparative advantages, then England would also have
the comparative advantage in cloth and Portugal would have the comparative
advantage in wine. In this case, gains from trade could be realized if both
countries specialized in their comparative, and absolute, advantage goods.
Advantageous trade based on comparative advantage, then, covers a larger set
of circumstances while still including the case of absolute advantage and
hence is a more general theory."
Economies of Scale:
Another concept related to "comparative advantage" is the concept of
"economies of scale." Economies of scale can be conceptualized in the
following way. "When more units of a good or a service can be produced on a
larger scale, yet with (on average) less input costs, economies of scale
(ES) are said to be achieved. Alternatively, this means that as a company
grows and production units increase, a company will have a better chance to
decrease its costs. According to theory, economic growth may be achieved
when economies of scale are realized.
Adam Smith identified the division of labor and specialization as the two
key means to achieve a larger return on production. Through these two
techniques, employees would not only be able to concentrate on a specific
task, but with time, improve the skills necessary to perform their jobs. The
tasks could then be performed better and faster. Hence, through such
efficiency, time and money could be saved while production levels
increased."
"Just like there are economies of scale, diseconomies of scale (DS) also
exist. This occurs when production is less than in proportion to inputs.
What this means is that there are inefficiencies within the firm or industry
resulting in rising average costs."
"Alfred Marshall made a distinction between internal and external economies
of scale. When a company reduces costs and increases production, internal
economies of scale have been achieved. External economies of scale occur
outside of a firm, within an industry. Thus, when an industry's scope of
operations expands due to, for example, the creation of a better
transportation network, resulting in a subsequent decrease in cost for a
company working within that industry, external economies of scale are said
to have been achieved. With external ES, all firms within the industry will
benefit."
The "Liberalized Trade"
Philosophy
Authors of the text Environmental Law & Policy (Salzman & Thompson, 2003)
are critical of "liberalized trade" (which is to say global free trade)
fearing that it will result in the overuse of natural resources, the
creation of excessive and unnecessary waste, and the ultimate weakening of
environmental standards. An alternative perspective is presented by the
Washington Business Roundtable:
"An honest and intelligent
debate about the impact of trade and investment liberalization on the
United States requires the separation of fact from fiction.
MYTH: Liberalization
undermines environmental protection laws and harms the environment.
TRUTH:
-
Trade agreements do
not dictate U.S. environmental law or undermine U.S.
environmental laws. International trade agreements require the
United States only to apply the same standards to imported
products that it applies to domestic products. Trade agreements
do not prevent other countries from applying the same
environmental standards to U.S. goods that they apply to their
own goods.
-
To achieve
environmental sustainability, countries need good environmental
laws and effective enforcement of those laws. Liberalized trade
produces higher incomes and economic growth that make it
possible for countries to improve their environmental laws and
law enforcement.
-
The U.S.-Singapore
and U.S.-Chile Free Trade Agreements require the governments of
the United States, Chile and Singapore to (1) effectively
enforce environmental laws, (2) ensure that they do not weaken
their environmental laws to encourage trade or investment, and
(3) ensure that violations of their respective environmental
laws are subject to sanctions by legal procedure.
-
Liberalized trade
helps improve environmental protection by lowering the barriers
to the sale of environmental technologies; enabling new
investments in environmental infrastructure; and making it
easier for environmental scientists, engineers and technicians
to provide services to developing countries.
MYTH: Liberalization
undermines protection for labor.
TRUTH:
-
Trade agreements do
not require the United States to change its labor laws or
undermine U.S. laws protecting labor rights.
-
Trade liberalization
does not undermine worker rights. In fact, the opposite is true.
In a study of 44 developing countries that engaged in
significant trade liberalization, the Organisation for Economic
Co-operation and Development (OECD) found that “there was
notably no case where the trade reforms were followed by a
worsening of association rights” and that freedom-of-association
rights improved in 32 of the countries after trade
liberalization.
-
The U.S.-Singapore
and U.S.-Chile Free Trade Agreements require the governments of
the United States, Chile and Singapore to (1) effectively
enforce labor laws, (2) work to ensure that International Labor
Organization (ILO) principles are protected by their domestic
laws, (3) ensure that they do not weaken their labor laws to
encourage trade or investment, and (4) ensure that legal
proceedings are available to sanction violations of labor laws.
MYTH: Trade
agreements undermine U.S. sovereignty by giving international
bureaucrats the power to strike down U.S. laws.
TRUTH:
-
Only the U.S.
Congress and the U.S. president can make U.S. law, no
international institution or foreign country can change U.S.
laws.
-
Decisions by the
World Trade Organization (WTO) and the North American Free Trade
Agreement (NAFTA) dispute panels cannot override U.S. law. Those
panels can only issue recommendations, and these recommendations
have no force in the United States. Only the Congress and the
president can decide whether to implement a panel
recommendation. They can (1) revise U.S. law, (2) compensate a
country harmed by a U.S. law through reductions in tariffs or
other trade barriers, or (3) do nothing — and accept the risk
that the other country may retaliate by raising tariffs or other
barriers to U.S. exports.
-
The United States
may withdraw from the WTO, NAFTA, free trade agreements and all
other trade agreements at any time.
MYTH: Trade
liberalization increases U.S. trade deficits.
TRUTH:
-
The United States
had trade deficits before the WTO existed and would have them if
there were no WTO. The merchandise trade deficit generally grows
when the economy grows and shrinks when the economy shrinks.
-
The trade deficit is
a result of American prosperity. The strength of the U.S.
economy means U.S. consumers are able to purchase a wide variety
of goods and services, including imports.
-
Imports help keep
inflation low by ensuring that U.S. consumers have access to a
variety of competitively priced goods and that producers have
access to low-cost inputs.
MYTH: Trade
liberalization causes good U.S. jobs to move overseas.
TRUTH:
-
Trade creates good
jobs in the United States. Ten percent of all U.S. jobs
(approximately 12 million) depend on exports. One in five
factory jobs depend on international trade. Jobs that depend on
trade generally pay about 13 to 18 percent more than the average
U.S. wage.
-
U.S. plants that
export increase employment 2 to 4 percent faster annually
compared to plants that do not export. Exporting plants also are
less likely to go out of business.
-
U.S. firms that are
deeply integrated in worldwide markets are more likely to
succeed in generating good jobs at home. Such jobs pay an
average wage in the United States of $15,000 more than jobs in
firms that are less globally integrated, or $50,000 versus
$35,000.
-
Contrary to the
predictions of a “giant sucking sound,” NAFTA has created good
jobs in the United States. In the first eight years of NAFTA,
the number of U.S. jobs supported by merchandise exports to
Mexico and Canada grew from 914,000 to 2.9 million. Between 1993
and 2000, U.S. employment grew by 20 million. Real hourly
compensation in the U.S. manufacturing sector increased by 14.4
percent in the 10 years following NAFTA implementation, as
compared to 6.5 percent in the 10 years prior to NAFTA."
"Race to the Bottom"
According to the World Bank in its report entitled "Is
Globalization Causing a 'Race To The Bottom' in Environmental Standards?"
(part four of a set of
World Bank briefing papers on this topic) the concern regarding a "race to the
bottom" resulting from lax environmental standards produced by free global
trade is unfounded. The authors of this report present their position as
follows:
"It
is argued that increased international competition for investment will
cause countries to lower environmental regulations (or to retain poor
ones), a “race to the bottom” in environmental standards as countries
fight to attract foreign capital and keep domestic investment at home.
However there is no evidence that the cost of environmental protection
has ever been the determining factor in foreign investment decisions.
Factors such as
labor and raw material costs, transparent regulation and protection of
property rights are likely to be much more important, even for polluting
industries. Indeed, foreign-owned plants in developing countries,
precisely the ones that according to the theory would be most attracted
by low standards, tend to be less polluting than indigenous plants in
the same industry. Most multinational companies adopt near-uniform
standards globally, often well above the local government-set standards
. This suggests that they relocate plants to developing countries for
reasons other than low environmental standards. Paradoxically, pollution
[as] an effect may be more important within the national boundaries of a
developed country than between rich and poor countries. Within a
national boundary many of the other locational factors are less
important, and so local environmental regulations might matter more."
"Countries
do not become permanent pollution havens because along with increases in
income come increased demands for environmental quality and a better
institutional capacity to supply environmental regulation. One World
Bank study of 145 countries identified a strong positive correlation
between income levels and the strictness of environmental regulation.
Indeed the so-called "California Effect" in the US demonstrates that
there is nothing inevitable about a ‘race to the bottom. After the
passage of the US 1970 Clean Air Act Amendments, California repeatedly
adopted stricter emissions standards than other US states. Instead of a
flight of investment and jobs from California, however, other states
began adopting similar, tougher emissions standards. A self-reinforcing
“race to the top" was thus put in place in which California helped lift
standards throughout the US.
[Some researchers
attribute this phenomenon] to the "lure of green markets" - car manufacturers were
willing to meet California's higher standards to avoid
losing such a large market and once they had met the standard in one
state, they could easily meet it in every state."
The
World Bank also attributes the penchant for some to associate a "race
to the bottom" mentality with a general (and widespread)
misunderstanding of what is entailed with globalization. Accordingly, the
World Bank describes "Globalization"
in the following fashion:
"Globalization is one of the most charged issues of the day. It is
everywhere in public discourse – in TV sound bites and slogans on
placards, in web-sites and learned journals, in parliaments, corporate
boardrooms and labor meeting halls. Extreme opponents charge it with
impoverishing the world's poor, enriching the rich and devastating the
environment, while fervent supporters see it as a high-speed elevator to
universal peace and prosperity. What is one to think?
Amazingly for so widely used
a term, there does not appear to be any precise, widely-agreed
definition. Indeed the breadth of meanings attached to it seems to be
increasing rather than narrowing over time, taking on cultural,
political and other connotations in addition to the economic. However,
the most common or core sense of economic globalization surely
refers to the observation that in recent years a quickly rising share of
economic activity in the world seems to be taking place between people
who live in different countries (rather than in the same country). This
growth in cross-border economic activities takes various forms:
International
Trade:
A growing share of spending on goods and services is devoted to
imports from other countries. And a growing share of what countries
produce is sold to foreigners as exports. Among rich or developed
countries the share of international trade in total output (exports
plus imports of goods relative to GDP) rose from 27 to 39 percent
between 1987 and 1997. For developing countries it rose from 10 to
17 percent. (The source for many of these data is the World Bank's
World Development Indicators 2000.)
Foreign Direct
Investment (FDI).
Firms based in one country increasingly make investments to
establish and run business operations in other countries. US firms
invested US$133 billion abroad in 1998, while foreign firms invested
US$193 billion in the US. Overall world FDI flows more than tripled
between 1988 and 1998, from US$192 billion to US$610 billion, and
the share of FDI to GDP is generally rising in both developed and
developing countries. Developing countries received about a quarter
of world FDI inflows in 1988-98 on average, though the share
fluctuated quite a bit from year to year. This is now the largest
form of private capital inflow to developing countries.
Capital Market
Flows.
In many countries (especially in the developed world) savers
increasingly diversify their portfolios to include foreign financial
assets (foreign bonds, equities, loans), while borrowers
increasingly turn to foreign sources of funds, along with domestic
ones. While flows of this kind to developing countries also rose
sharply in the 1990s, they have been much more volatile than either
trade or FDI flows, and have also been restricted to a narrower
range of 'emerging market' countries.
Overall Observations
about Globalization:
First, it is crucial in discussing globalization to
carefully distinguish between its different forms.
International trade, foreign direct investment (FDI), and capital market
flows raise distinct issues and have distinct consequences: potential
benefits on the one hand, and costs or risks on the other, calling for
different assessments and policy responses. The World Bank generally
favors greater openness to trade and FDI because the evidence suggests
that the payoffs for economic development and poverty reduction tend to
be large relative to potential costs or risks (while also paying
attention to specific policies to mitigate or alleviate these costs and
risks).
It is more cautious about
liberalization of other financial or capital market flows, whose high
volatility can sometimes foster boom-and-bust cycles and financial
crises with large economic costs, as in the emerging-market crises in
East Asia and elsewhere in 1997-98. Here the emphasis needs to be more
on building up supportive domestic institutions and policies that reduce
the risks of financial crisis before undertaking an orderly and
carefully sequenced capital account opening.
Second, the extent to
which different countries participate in globalization is also far from
uniform.
For many of the poorest least-developed countries the problem is not
that they are being impoverished by globalization, but that they are in
danger of being largely excluded from it. The minuscule 0.4 percent
share of these countries in world trade in 1997 was down by half from
1980. Their access to foreign private investment remains negligible. Far
from condemning these countries to continued isolation and poverty, the
urgent task of the international community is to help them become better
integrated in the world economy, providing assistance to help them build
up needed supporting institutions and policies, as well as by continuing
to enhance their access to world markets.
Third, it is important to
recognize that economic globalization is not a wholly new trend.
Indeed, at a basic level, it has been an aspect of the human story from
earliest times, as widely scattered populations gradually became
involved in more extensive and complicated economic relations. In the
modern era, globalization saw an earlier flowering towards the end of
the 19th century, mainly among the countries that are today developed or
rich. For many of these countries trade and capital market flows
relative to GDP were close to or higher than in recent years. That
earlier peak of globalization was reversed in the first half of the 20th
century, a time of growing protectionism, in a context of bitter
national and great-power strife, world wars, revolutions, rising
authoritarian ideologies, and massive economic and political
instability.
In the last 50 years the
tide has flown towards greater globalization once more. International
relations have been more tranquil (at least compared to the previous
half century), supported by the creation and consolidation of the United
Nations system as a means of peacefully resolving political differences
between states, and of institutions like the GATT (today the WTO), which
provide a framework of rules for countries to manage their commercial
policies. The end of colonialism brought scores of independent new
actors onto the world scene, while also removing a shameful stain
associated with the earlier 19th century episode of globalization. The
1994 Uruguay Round of the GATT saw developing countries become engaged
on a wide range of multilateral international trade issues for the first
time.
The pace of international
economic integration accelerated in the 1980s and 1990s, as governments
everywhere reduced policy barriers that hampered international trade and
investment.
Opening to the outside world has been part of a more general shift
towards greater reliance on markets and private enterprise, especially
as many developing and communist countries came to see that high levels
of government planning and intervention were failing to deliver the
desired development outcomes.
China's sweeping economic
reforms since the end of the 1970s, the peaceful dissolution of
communism in the Soviet bloc at the end of the 1980s, and the taking
root and steady growth of market based reforms in democratic India in
the 1990s are among the most striking examples of this trend.
Globalization has also been fostered by technological progress, which is
reducing the costs of transportation and communications between
countries. Dramatic falls in the cost of telecommunications, of
processing, storing and transmitting information, make it much easier to
track down and close on business opportunities around the world, to
coordinate operations in far-flung locations, or to trade online
services that previously were not internationally tradable at all.
Finally, given this
backdrop, it may not be surprising (though it is not very helpful) that
'globalization' is sometimes used in a much broader economic sense, as
another name for capitalism or the market economy.
When used in this sense the concerns expressed are really about key
features of the market economy, such as production by privately-owned
and profit-motivated corporations, frequent reshuffling of resources
according to changes in supply and demand, and unpredictable and rapid
technological change. It is certainly important to analyze the strengths
and weaknesses of the market economy as such, and to better understand
the institutions and policies needed to make it work most effectively.
And societies need to think hard about how to best manage the
implications of rapid technological change. But there is little to be
gained by confusing these distinct (though related) issues with economic
globalization in its core sense, that is the expansion of cross-border
economic ties.
Conclusion.
The best way to deal with the changes being brought about by the
international integration of markets for goods, services and capital is
to be open and honest about them. As this series of Briefs note,
globalization brings opportunities, but it also brings risks. While
exploiting the opportunities for higher economic growth and better
living standards that more openness brings, policy makers -
international, national and local – also face the challenge of
mitigating the risks for the poor, vulnerable and marginalized, and of
increasing equity and inclusion.
Even when poverty is falling
overall, there can be regional or sectoral increases about which society
needs to be concerned. Over the last century the forces of globalization
have been among those that have contributed to a huge improvement in
human welfare, including raising countless millions out of poverty.
Going forward, these forces have the potential to continue bringing
great benefits to the poor, but how strongly they do so will also
continue to depend crucially on factors such as the quality of overall
macroeconomic policies, the workings of institutions, both formal and
informal, the existing structure of assets, and the available resources,
among many others. In order to arrive at fair and workable approaches to
these very real human needs, government must listen to the voices of all
its citizens."
Traditional
versus Sustainable Economics:
Many
policy analysts (such as Salzman and Thompson) are not impressed by the
arguments of the World Bank and are troubled by the increasing orientation
of the world economy toward "liberalization" and
"globalization." Their concerns are primarily based upon their
pessismism regarding the future of so-called "conventional"
economic models that, among other things, does not routinely include the
replacement costs for natural resources or a full accounting of
"waste" production into their economic models. These analysts tend
to argue for the replacement of "conventional,"
"traditional" or "capitalist" models with what they call
"sustainable economies."
According
to the Center
of Economic Conversion economics can be conceptualized in a variety of
ways. For instance, "Subsistence economies, which prevail
in the more remote and less industrialized areas of the world, place much
value on ecology and living in harmony within the natural limits of
their environment. Capitalist and Socialist economies both share the goal of
generating material wealth but differ in their approach. Capitalist
economies emphasize individual freedom while Socialist
economies emphasize social equality. The Buddhist
economic system, as described by E.F. Schumacher and lived by
some Eastern countries, is centered on the goal of human fulfillment
and the development of character."
In
the interest of understanding what is meant by the ideal of a
"sustainable economy" Daniel
O'Connor, in his article
"Sustainable
Growth: Irreconcilable Visions?" published on the web-based
Economics Roundtable,
presents two separate visions of economic systems. In the first system (see
illustration below)
O'Donnell
conceptualizes an ecological economic system as one whose growth is
contained and limited by the resources of the ecosystem. By comparison, a
classical economic system (such as the one depicted below) operates as if
there are no ecological constraints to growth.
Such
classical formulations of economics would appear to be unrealistic given
what appears to be the inherent finite nature of natural resources.
Consequently, based upon this comparison, a sustainable economy could be
defined (as it has been by the Ecosystem
Health program at the University
of Western Ontario) as an "Economic system in which the number of
people and the quantity of goods are maintained at some constant level. This
level is ecologically sustainable over time and meets at least the basic
needs of all members of the population."
Sustainable
economies are by definition more complex that traditional economic models as
they attend to a variety of indicators beyond those "growth"
oriented indicators narrowly associated with supply and demand. The table
below makes a cogent presentation of these economic indicators and how
"traditional" and "sustainable" economic models construe
each indicator:
Clearly,
the move toward a "sustainable" economic model entails much more
complexity and government involvement in regulatory affairs, both
economically as well as socially and environmentally. The prospects of
such a model being widely adopted, while heralded by many as necessary for
the survival of human beings on the planet, is also decried by others. For
an interesting alternative opinion on the merits of sustainable economies
read Jacqueline
R. Kasun's thoughtful article "Doomsday
Everyday: Sustainable Economics, Sustainable Tyranny."
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