Do Consumers in Developing Countries Gain or Lose from Globalization?

By James, Jeffrey | Journal of Economic Issues, September 2000 | Go to article overview

Do Consumers in Developing Countries Gain or Lose from Globalization?


James, Jeffrey, Journal of Economic Issues


In this paper, I argue that neoclassical consumption theory cannot serve as a framework for answering the question posed in the title because the theory cannot deal with the features of globalization that bear on consumers in poor countries. The welfare effects of globalization on consumers are especially prone to the forms of uncertainty and disappointment that are assumed away in traditional demand theory. [1] In particular, neoclassical theory unrealistically assumes that consumers are perfectly informed about their own preferences and about the range of available products; that these preferences are exogenously determined and stable over time; that individual satisfaction depends only on one's own consumption; and that consumption occurs at the point of purchase. To describe the actual gains and losses to consumers in developing countries from globalization, it is necessary to replace these assumptions with alternatives that describe reality more accurately. Before setting about this task, however, let u s begin by examining precisely how the assumptions of traditional demand theory preclude the possibility that consumers may experience feelings of frustration and disappointment.

The Exclusion of Frustration and Disappointment in Traditional Consumption Theory

The assumptions of traditional, neoclassical consumption theory are such that there can never be a discrepancy between what the consumer expects to achieve and what is actually realized. That is to say, "there are no surprises with respect to the amount of utility achieved" [Cyert and de Groot 1975, 225].

Perfect knowledge is the most obvious among the assumptions that this conclusion requires. "In accordance with this postulate, people are supposed to calibrate their purchases and time uses by matching their preferences, which are fully known to them, against the equally well-known world of available consumption experiences" [Hirschman 1982, 17]. The immunity of the consumer to possible "surprises" in traditional theory, however, depends not only on the requirement that preferences be known, but also that they be constant. For, once the possibility of preference change is admitted, there is always the possibility that consumers judge themselves to be worse off in the new situation than in the old.

According to James, "Another assumption that has the effect of excluding disappointment from the purview of traditional theory is that individual satisfaction depends only on one's own consumption" [James 1993, 148]. This assumption excludes not only the variety of ways in which the market mechanism is thought to promote "social comparisons rather than self-reference" [Lane 1991, 220], but also and more generally the entire area that modern neoclassical economists refer to as "negative consumption externalities." The externalities are, of course, the products of processes that Thorstein Veblen wrote about 100 years ago in The Theory of the Leisure Class and of processes that John K. Galbraith has written about more recently.

Still another way in which expected and actual utilities are made to converge in traditional theory is that consumption takes place at the point where goods are purchased. This assumption not only excludes the range of factors that make the characteristics derived from the same commodities a highly variable magnitude, but it also has the effect of excluding the variability in the way that characteristics themselves promote human functionings. As Amartya Sen puts it, "For example, if a person has a parasitic disease that makes the absorption of nutrients difficult, then that person may suffer from undernourishment even though he may consume the same amount of food as another person for whom that food is more than adequate" [Sen 1985, 9].

If we assume--as neoclassical consumption theorists do--that preferences are known, fixed, and not changed by the behavior of others, then it is a simple matter to conclude that the increased trade and foreign investment that are part of globalization will have a positive effect on Third-World consumers. …

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Do Consumers in Developing Countries Gain or Lose from Globalization?
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