In 2006, Israel fought a war with Hezbollah. Israeli Jets bombed encampments in Lebanon, while Hezbollah rained rockets on northern Israel. Yet, in spite of an all out war with much destruction, the Israel economy grew 5% and its currency soared. Why so little harm to the country's economy amidst so much destructive violence? As Greg Ip pointed out (The Little Book Of Economics) it was because of globalization. Israel's economy is led by advanced tech companies whose markets are the rest of the world. But in 2009, Israel went into recession with the rest of the globe. Israel didn't have a banking crisis, but because its major trading partners did, it was hit with the collateral damage.
Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it. In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP. The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products. That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies. Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die. The consumer is the winner with superior products at a lower price.
Of course politics often conflicts with economic reality. When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm. But politicians rarely look at the big picture. How was Mankiw right? If a company outsources some of the basic programming to India, US consumers of that software are better off. And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).
Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries. But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US. And because of the lower price, sales boom creating more demand and more US jobs. So the winners are Apple shareholders, employees, and, of course, consumers.
Of course there will always be losers. Some domestic employment in high wage labor intensive manufacturing will take a hit. It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.
