Globalization and Income Distribution:

First, I would like to reiterate my belief that globalization will lead to higher overall growth rates for almost all economies and that there will not be a trade-off between faster growth for some and slower growth for others.   Where distributional problems arise they are within income classes or between different skill levels but not between economies which grow more or less rapidly as result of the international economy, with obvious exceptions of countries that are disadvantaged by poor structures.  For example, special measures would be needed to assist the poorest landlocked countries which do not have an objectively difficult time keeping up with world economic growth.  On the whole, however, the developing countries have a good chance of achieving convergent growth rates.  In addition, if the developed countries called the right policies, that is if they have flexibility, moderate rates of taxation and the like-something which is eluding most of Western Europe right now-they might also benefit from global economy by being able to export their differentiated high technology products to a much larger world market.  In sum, the issue of distribution centres, not on whether some countries gained and others lose, but rather on income distribution within societies.  This is my first point.

 My second point concerns the division of income between capital and labor.  I would guess that the post tax income, of capital is privileged relative to the post tax income of labor as a result of globalization and especially globalization that leads to openness of financial markets and not just of trade.  For example, both the evidence and the theoretical logic to make it quite clear that union wage premia are driven down by the openness of the world financial system and that the ability of capital to move offshore really does pose limits on the wage-setting or wage-bargaining strategies of trade unions which are restrained in their wage demands by the higher elasticity of labor demand.  Similarly, I think that, overtime, the evidence would show that the burden of taxation falls increasingly on labor and less and less on capitol as a result of these changes given that taxation inevitably falls on the fixed factor and is, as inevitably, escaped by the highly mobile factor.  At the end of the day, the fact that labor cannot move into the low capital income taxation countries suggests that we will find in implicitly, both in terms of the incidence, and in terms of choice of tax system, a movement towards a heavier burden on labor taxation and away from capitol taxation and taxation of factor incomes.  Capital can still be taxed, not directly as a tax on capital, but indirectly through a tax on overall income or consumption.  For example, movements towards progressive consumption taxation may be constant and other mechanisms to tax capital income, if I am correct in assuming that the burden of the corporate income taxation is likely to diminish given the increased ability of the capital to escape taxation through international mobility.  This is purely conjectural because the data has yet to be closely examined, but is not inconsistent with existing evidence.  It is also true, I hasten that add, that the direct evidence of income going to capital as against labor in the national accounts shows modest, rather than large, shifts in the direction of the share of labor falling and that of capital rising.  My guess is that if one were to look at post tax capital and labor income, one would find this trend even more strongly evident in the data.

The third distributional shift is within labor itself, between skilled and unskilled workers.  Economic theory suggests that increased globalization will lower the relative wage of unskilled labor in the advanced countries and raise their relative wage of unskilled labor in the developing countries when these two groups began to trade with each other after a period of autarky.  This is the famous Stoker-Samuelson theorem, or rather an implication of it, or more correctly, of so-called factor price equalization.  We now find ourselves in a very odd situation with respect to this most standard and central of all economic theories in that many of the leading theorists who propound it doubt that it is actually applicable to present circumstances.  I have my doubts about their doubts.  After studying international trade theory, including factor price equalization, with Professor Bhagwathi, I confess that I cannot just dismiss it.  Although he contends that it does not apply at all to the international scene, my own feeling is that it does. 

To begin, let me mention quickly the major caveat to the theory.  If the developed and the developing countries have such unequal endowments-so much skilled labor in the advanced countries and so much unskilled labor in the developing countries-that they actually specialized, then factor price equalization cannot follow.  Indeed, and set cases of specialization, being outside the cone of factor price equalization would mean that the increased export capacity of the developing countries would simply raise all incomes in the developed countries by bringing in the goods in question more cheaply.  Thus, in terms of trade, the rich countries would enjoy an improvement that was a pure consumer gain for everyone.