TLP 05-7

Teaching and Learning Paper Series IRREC

Globalization - Is it a Benefit or a Threat?

by Linda Holland Rucks, P.J. van Blokland, Jackie K. White and Jane L. Bachelor

Teaching and Learning Paper TLP 05-7

December 2005

The goal of the Teaching and Learning Paper Series is to improve, enhance, and enrich the teaching and learning environment in the department, college, university, and profession through the publication of papers on teaching philosophies and techniques, curricular issues, and case studies. Papers are circulated without formal review by the Food and Resource Economics Department and thus the content is the sole responsibility of the faculty author or co-author.

Food and Resource Economics Department Indian River Research and Education Center Fort Pierce, Florida 34945-3138

Globalization Is it a Benefit or a Threat?

by Linda Holland Rucks, P.J. van Blokland, Jackie K. White and Jane L. Bachelor

Linda Holland Rucks is a candidate for a Bachelors of Agribusiness Degree, P.J. van Blokland is Professor of Finance and Programme Director, Jackie K. White is Coordinator of Economic Analysis and Jane L. Bachelor is a Business and Human Resources Specialist and Lecturer, all at the Ft. Pierce Campus of the University of Florida.

University of Florida Food and Resource Economics Department Indian River Research and Education Center Fort Pierce, Florida 34945-3138

Globalization is a complicated issue. Each person interprets it differently. Whether the topic is economic, political or cultural; the one thing agreed upon is that there are some Americans who are happy with the impact of globalization. Some see it as a benefit to all countries while others see globalization as a threat to democracy and the American way of life. Whatever the individual feeling, the fact is its too early to tell. The scales of balance are continually moving, and thus, it is difficult to tell with certainty, whether the overall impact on the world will be a benefit or a detriment. The world as we know it is getting smaller. We can no longer overlook the fact that what happens in one hemisphere will have a direct impact in another. The tragedy of September 11, 2001 rippled through the core of the economic world. The magazine, Foreign Policy (www.foreignpolicy.com), measures global integration by international travel, telephone traffic and Internet servers. After 9/11, the pace of international economic activity changed radically. Regions around the world responded differently to the destruction of one of the icons of Western capitalism (Kearney). Global markets continued to have confidence in the US while Western Europe saw a drop in global integration. Foreign Direct Investment exchanges from the United Kingdom dropped by more than 75% and in Germany by 70%. France, Finland and Spain all experienced a drop in economic integration. Ireland, however, was ranked the worlds most global country for the second year in a row. The investments in high-tech industries and strong capital flows strengthened the countrys integration with the rest of the world. Switzerland ranked second through the volume of receipts from overseas investments and Sweden ranked third in globalization. Swedens strength was seen in a strong Internet infrastructure and in Finnish companies that acquired shares of Swedish utilities. Canada ranked as the most globally- linked economy in the Western Hemisphere after Panama. The United States was among the top ten for the first time. The US had the most Internet hosts and secure servers per capita (Kearney). 1

While the rankings by the Globalization Index can be somewhat confusing, it does provide a lot of insight into the various stages of global integration. Tracking the growth of a countrys - - economic, political and social integration is critical to anticipating how things are likely to evolve. Kym Andersons discussion paper has some interesting facts. Using the Global Trade Analysis Project (GTAP) as a model, Andersons research indicates that 48% of the economic gains for 2005 will come from agricultural and processed food policy reform in the Organization for Economics and Co-operation and Development (OEDC) countries. The GTAP study found that full liberalization of rich-country farm policies would boost the volume of global agricultural trade by more than 50% but would cause real international food prices to rise by only 5% on average . (Anderson) There is more to liberalization of trade than the obvious economic impact on agriculture and the related industries. Information Technology (IT) is rapidly shifting to globalization. There are dramatic moves in job locations as the next round of globalization begins to take shape. Upscale jobs are moving offshore. Basic research, chip design, engineering, credit card receipt processing and financial analysis are just a few of the services headed to India, China, Manila, Shanghai and Budapest. The World Wide Web is just that worldwide. Electronic transfer of data has opened the door to the financial industry. Asia can process insurance claims, sell stocks and analyze companies at one-third the cost that it can be done in the United States. Architectural work can be done by engineers and draftsmen in the Philippines, Poland and India earning $3,000 to $4,400 a month while working via the Internet in real time with U.S. and British engineers who are making up to $90,000 (Engardio). In India, outside New Delhi, all four floors of Wipro Spectramind Ltd.s sand-stone and glass building, are buzzing at midnight with 2,500 young college-educated men and women. They are processing claims for a major U.S. insurance company and providing help-desk support 2

for a big U.S. Internet service provider all at a cost up to 60% lower than in the U.S. (Engardio, et. al.) According to a joint study by McKinsey and Company and Naascom, an Indian software association, by 2008 IT work and service exports will generate $57 billion in revenues, employ four million people and account for seven percent of the Gross Domestic Product (GDP) of India (Engardio). True enough, there are some good things that have come from free trade and globalization. The World Trade Organization (WTO) members insist that agricultural reform must continue in the new century without pause. Developing countries see this as a development of major importance to their continued progress. According to the World Development Indicator (WDI) 2004, Poverty has declined significantly in developing countries over the past twenty years, but progress has been uneven. GDP in all developing countries rose by 30% during the same time period. China saw approximately 400 million people rise from absolute poverty. SubSaharan Africa has not experienced this improvement, where the number of people living in poverty continues to rise. Eastern Europe, Central Asia and Latin America have shown little improvement as well, while the Middle East, North Africa and South Asia have seen a decrease in the number of poor [7]. After much research, it is easy to see the benefit to other countries as well as to the United States. Countries that are the most globally integrated are those whose residents live healthier lives, enjoy longer lives and where women relish the strongest social, educational and economic progress. However, a stepping-stone for one country may be a stumbling block for another. Among the first rounds of globalization were the openings of trade barriers in many countries. The North American Free Trade Agreement (NAFTA) and the WTO began to show their influence in the United States economy. The most feared result was that opening trade with lesser developed countries would threaten U.S. agricultural competitiveness in the production 3

and sale of food and commodities both domestically and internationally. Agricultural trade is a vital segment of the U.S. economy. Almost one-third of U.S. cropland produced material for export in 2002. Agricultural exports in the United States generated income, employment and purchasing power in both the farm and non-farm sectors. Each farm export dollar earned stimulated another $1.61 in business activity in calendar year 2002. The $53.1 billion of agricultural exports in 2002 produced an additional $85.4 billion in economic activity...Agricultural exports also generated 841,000 full-time civilian jobs, which included 425,000 jobs in the non-farm sector. Farmers purchases of fuel, fertilizer, and other inputs to produce commodities for export spurred economic activity in the manufacturing, trade, and transportation sectors. (Economic Research Service) The United States exported more than 50% of food grain production, almost 20% of feed grains and more than 35% of oilseeds. Export-related employment peaked in 1981 when bulk and processed agricultural exports provided jobs for 1.2 million workers. In 2002, exports generated $138.5 billion in business activity - $53.1 billion from exports and $85.4 billion from supporting activities. Net agricultural exports in 2002 contributed $11.2 billion to the overall U.S. trade balance, a decrease from $14.3 billion in 2001. (Economic Research Service) Many Americans felt the agricultural industry in the United States took a life-threatening blow when trade was opened. The cry from the growers was that opening free trade would cost them their businesses, put thousands of workers in the unemployment lines and breach the food safety controls established by the United States Department of Agriculture (USDA), the Environmental Protection Agency (EPA), the Food and Drug Administration (FDA) and other entities influencing consumer and worker protection. Growers fought long and hard to influence these agencies to keep their rules and regulations at a tolerable level of implementation. Even so,

American agricultural businesses spent a fortune meeting the imposed limitations and guidelines. These costs were passed along to the consumer. As supply and demand proves, increased prices influence the consumer to shop for better prices, opening the door for competition from other than U.S. producers. The Florida citrus industry enjoyed an improved market in the mid-to-late 1990s only to find itself faced with competition from low-cost importers such as Brazil, which had a 76% increase in shipments [6]. The simple fact is that other less-developed countries can produce food and commodities with cheaper labor and inputs than growers in the United States. Foods grown in other countries cost less for the consumer. Paying less for fruits and vegetables has suddenly become more important than having a food supply grown to the stringent regulations of the U.S. agencies looking out for the safety of Americas food supply. Consumers want greater variety in their choices, and they want to pay less. Globalization has provided these wants for the consumers, but at what cost? Opening our doors to a food supply from other countries can be like opening a Pandoras Box. America has already seen outbreaks of e-coli, listeriosis and salmonella typhi that were attributed to imported food supplies. The FDA has established a web-site concerning food safety and offers answers to questions consumers might ask when determining how to make sure their food is safe for their families. While stricter standards may be perceived as technical barriers to trade, they are crucial to the safety of the worlds food supply as well as to maintaining the integrity of the benefit to the growers. The FDA is trying to tighten the rules on imported foods, but this is proving to be no easy task. There have been many failures. The crux of the problem is that American consumers, driven by unlimited wants, are demanding greater variety of food and produce; and because of limited resources, consumers want to pay as little as possible. Opening the floodgates for free trade has provided just that for the consumer along with a flood of regulation problems. Is the American consumer really willing 5

to trade the confidence of a safe food supply for variety? Perhaps the time has come to reevaluate our priorities. Concern about the enforcement of regulations is being felt by countries other than developed ones. Farmer groups from many developing countries along with the European Union met in Geneva in October 2002, and signed a declaration calling on WTO members to acknowledge that agriculture cannot be treated in the same way as industrial sectors because farming fulfills a multitude of functions .(Anderson) The United States is not the only country suffering from lower domestic prices of farm produce. Farmers are among the poorest people in China. Lower domestic prices for them only makes their poverty worse. However, at the same time unskilled laborers who actually purchase the food are better off because of lower prices and increased demand for workers. Increased demand should lead to increased wages. Workers are in a catch-22 situation. Can they be better off if farm owners and producers are driven out of business because of lower prices? Watching as domestic industries dissolve under the stress of competition and jobs move to countries with a competitive advantage is not easy. In another era, the farriers and blacksmiths were put out of work as automobiles moved into the American way of life. One cant help but sympathize with those displaced; but at the same time, there is no desire to return to the horse and buggy. Progress will always have a two-fold affect. Some are hurt, some are helped. Cultural globalization might seem to be easier to achieve. Political globalization can be very challenging to those who are close-minded to the ideas and beliefs of other countries. But the driving force behind political and cultural globalization is economic globalization. Few things can make people change their ideas more quickly than economic incentives. If big layoffs start to occur, Washington should be prepared for a backlash from voters. Surprisingly, that is exactly what happened in India where supporters of corporate globalization were voted out of 6

office in the most shocking political upset in the countrys history. In India, where the poor vote the same as anyone else, the question was, What did the common man get? The boom in the economy didnt reach them, and their anger over the partiality was decisive (Nichols). Economists cannot agree on whether or not the United States will be better off with globalization. Economist, Robert E. Lipsey from City University of New York said, Our comparative advantage may shift to other fields, and if productivity is high, then the US will maintain a high standard of living. By spurring economic development in nations such as India, U.S. companies will have bigger foreign markets for their goods and services. Robert Z. Lawrence, a Harvard University economist and prominent free-trade advocate is not quite as certain. I still have faith that globalization will make us better off, but its no more than faith (Engardio). As the United States dives into the dark pool of globalization, there are some things that must be kept in constant consideration. The sovereignty of the US must remain intact and strong. The US must accept the responsibility that comes from being the strongest national force in the world. Helping weaker and more vulnerable countries improve the condition of the impoverished becomes more than a social obligation, it is a responsibility.

References 1. Anderson, Kym. Discussion Paper No. 2003/25. Trade Liberalization, Agriculture, and Poverty in Low-income Countries. United Nations University. March 2003. 2. Economic Research Service. (2004, April 15).USDA. U.S. Agricultural Trade Update/FAU-88. Retrieved from www.ers.usda.gov 3. Engardio, Pete, Bernstein, Aaron, and Kripalani Manjeet, et.al. Business Week. (2003, Feb. 3) The New Global Job Shift. Retrieved May 18, 2004 from www.businessweek.com:/print/magazine/content/03_05/b3818001.htm?mz. 4. Kearney, A.T. (2004, March/April) Measuring globalization: Economic reversals, forward momentum. Foreign Policy. Retrieved May 20, 2004 from www.foreignpolicy.com/story/cms.php?story_id=2493&print=1 5. Nichols, John. (2004, May 18). Voters in India say no to globalization. Madison Capital Times. Wisconsin. Retrieved May 20, 2004 from www.commondreams.org/cgibin/print.cgi?file=/views04/0518-08.htm 6. www.theledger.com/apps/pbcs.dll/article?Date=20031026&Category=NEWS&. Retrieved May 17, 2004 7. www.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20195240~isC. Retrieved May 17, 2004.