Spring 2004
Globalization's Missing Middle
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Free trade and free capital movement have been good for economic growth in the U.S. and other rich nations. Globalization has allowed these countries to exploit the growing "knowledge economy" (in which workers' education and skills matter most to the quality of products) while importing low-cost standardized goods and services from the developing world. But since not everyone is equipped to participate in the knowledge economy, the gap between rich and poor in the West continues to expand — with workers' education and skills being more important to their life chances than ever before.

In the U.S. and other rich countries, the drumbeat of globalization goes on — because it is always possible to compensate the losers so long as the aggregate benefits are big enough, and they are; and because it is not clear whether the genie of globalization could be put back in the bottle even if governments wanted to do so. But whenever the economy stagnates, globalization will incur the ire of the disaffected and politicians will be sorely tempted to court them with populist rhetoric and actions. This is nothing new, but handling the social dislocations associated with the transition to the knowledge economy will remain a major challenge for politicians in rich countries for decades to come.

Poor countries that have cut their tariffs more have grown faster, with liberalized trade bringing substantial benefits to one-time subsistence farmers who now work in industry, just as the economics textbooks wrote it up. This is the second world of globalization, comprising the roughly half of humanity that lives in countries with per-capita incomes of less than $1,000 a year — including most of sub-Saharan Africa as well as China and India. Poor countries have not benefited much from, and may have been hurt by, global "footloose finance," and legitimate questions about child labor and working conditions remain. Nonetheless, global trade — as manifest in manufacturing "sweatshops" and "offshored" services — really does seem to be creating a path out of poverty for many of the world's poorest people.

The bulk of people in poor countries still work on the land, yet today manufacturing and service exports are far more important to economic growth in poor countries than agricultural ones. The real stakes for these countries is making sure that the rapid diffusion of technology, which has made it possible for poorer societies to catch up to richer ones for centuries, continues. This will be far from easy, however, given the high stakes attached to protecting intellectual property in wealthy countries.

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