Globalization's Missing Middle

SQUEEZED

The polarized debate over the effects of free trade and international capital flows has become a fixture of world politics. Boosters of globalization assert that it is a win-win proposition for the rich and the poor, developed and developing countries alike. President George W. Bush has said that "a world that trades in freedom ... grows in prosperity," reiterating a theme Bill Clinton championed in the 1990s. But critics see a small global elite lining its pockets at the expense of everyone else. John Kerry's decrying of outsourcing by "Benedict Arnold CEOs" is this year's version of Ross Perot's 1992 forecast that the North American Free Trade Agreement (NAFTA) would make a "giant sucking sound" by drawing jobs out of the United States.

All this good-versus-evil rhetoric obscures one key fact: while globalization has benefited many, it has squeezed the middle class, both within societies and in the international system. In today's global markets, there are only two ways to get ahead. People and countries must be competitive in either the knowledge economy, which rewards skills and institutions that promote cutting-edge technological innovation, or the low-wage economy, which uses widely available technology to do routine tasks at the lowest possible cost. Those who cannot compete in either include not only the erstwhile industrial middle class in wealthy nations, but also most countries in the middle of the worldwide distribution of income, notably in Latin America and eastern and central Europe.