Wealth Destruction – The Dark Side of Globalization

Written on:December 8, 2013
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The most significant economic development of the last thirty years has been the trend known as
globalization. It is characterized by the removal of national barriers to the movement of goods and capital within a worldwide financial system. The result has been the transfer of economic activity to countries of “lowest cost” in terms of wages, work practices and environmental impact

Globalization has been “sold” to all concerned on the ground of economic efficiency. The free movement of goods, technology and money was to result in the maximum production at the lowest price, ushering an era of global prosperity. It seemed to be so during the last decades of the 20th century, but after 2000 warning signs began appearing, and in 2006/2007 the “financial crisis” struck.

Five years later, despite huge government deficits and continuous money printing by the Federal Reserve, we are still stuck in a “fragile”, low-growth economy. Jobs are scarce, and those that have been “created” since the crash are mostly of the low-pay, no-benefits, part-time variety.  Workforce participation is at a 30-year low, and a large part of the population subsists on various forms of welfare. The (official) unemployment rate is dropping only because discouraged workers are no longer counted in official statistics.

So, was globalization a defective product sold through deceptive advertising?

To understand one must look at the typical case: a U.S. plant when production is shifted to a “low-cost” country.

Such factories used to pay high wages, which were spent or invested in the local area. The plant supported suppliers, supermarkets, schools, shops, clinics, lawyers and other professionals. Their income in turn was invested in inventories, buildings and real estate, creating valuable assets.

When the plant closes incomes vanish and assets lose much of their value. Shops close, home prices drop, high-income jobs move away. A thriving economic ecology becomes a dead zone.

Income and assets are not simply transferred somewhere else. They actually disappear: the plant built in the “low-cost” country is worth less: less safety features, simpler amenities, little or no environmental protection.  Lower wages mean that the surrounding economic zone will be smaller and poorer.

This script, repeated thousands of times in various forms, makes the U.S. – and the world – poorer.

True, we are now importing a lower-priced product, but the income of the laid-off workers has dropped even more, so the lower price is a fictitious benefit. The net result of the transaction is a loss. The “low-cost” country (for instance China) has grown richer. The “high-cost” country (the U.S.) has become poorer. But the Chinese gain is smaller than the American loss. Wealth has been sucked into a black hole and disappeared.

The corporation owning the plant and transferring production has, for a limited time, increased its profits. It has also destroyed part of its domestic market. If many corporations follow that route the market for the product will disappear. What is left is a low-income, high unemployment population, increasingly dependent on welfare. This is the situation towards which the U.S. is now heading.

The loss of income and assets has further consequences:

Credit loss – Assets and or income are collateral for credit. When they vanish credit dries up, and so does purchasing power. In a consumer economy this means regression or stagnation.

Investment shortage – Investment capital goes preferentially to the “low-cost” areas, domestic investment is assumed to be non-competitive. Corporations and banks stop lending and sit on mountains of unproductive cash.

Concentration, cartels and monopolies – Large multi-nationals have an inherent advantage in the new environment. Smaller corporations fail or are absorbed, until three or four giants dominate each industry.

Inequality – 
The (temporarily) increased profits benefit the very top of the income scale, while the larger population goes down the economic ladder.

Finally there is the corrosive effect of massive and sudden wealth, including corruption at all levels; the blending of interests between large businesses and government; the uncontrollable growth of welfare with the resulting deficits; and the loss of national sovereignty in an environment where the main players are unaccountable.

As international institutions now recognize, the global economy is heading towards ever slower growth. The glow of globalization is fast fading. A different approach – one that will restore the country’s growth prospects – is urgently needed.

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