Krugman on Globalization

Paul Krugman recently admitted that in some limited cases free trade is not a good idea. This an interesting admission from an economist who in the 90s was a strong proponent of globalization and free trade.

I’ve thought for some time that free trade, and free flow of capital, without free immigration, leads to a race to the bottom. The country whose people are willing to work for the least amount of money, including the least amount of required regulation, will tend to attract factories. Since manufacturers are well aware that it may be economical to move to another country soon, they minimize the investment in the country and the people. Money does flow in, but not very much. If the workers start to demand higher wages, the factories move. Other countries have a strong incentive to ask for even less money, so that they will at least get something rather than nothing. The general trend is that wages go down and prices go down. This is good for the customers, but not good for the workers.

Since the factory workers are not the customers–in fact, they live in different countries–this cycle is difficult to break. The only ways I see to break it are global labor regulation, or global labor organization (which requires support from local governments), or customer demand for global fair labor practices. There is some of the latter, but not much as yet–there is fair trade coffee, but no fair trade toys.

Unfortunately I suspect that Krugman has lost his credibility with the people who need to listen to him on globalization.