Wednesday, September 28, 2016

Continued globalisation requires more 'inclusive' growth

Remember globalisation? It was big news some years back. Now, however, the leaders of the global economy worry that public opinion is turning against it, pressuring governments to reverse it.

Globalisation is the process by which the barriers separating nations and their economies have been broken down by international co-operation and deregulation, but mainly by advances in technology.

We now have much more telecommunications, travel, trade, investment, money flows and migration between countries. News now travels around the world almost in real time.

Just how worried leaders have become about a reversal of this trend is revealed by a speech Christine Lagarde, managing director of the International Monetary Fund, gave in Canada this month.

She began by asserting the benefits of the process. The ability of countries to rise above narrow self-interest over the 70 years since World War II has brought unprecedented economic progress, she argues.

"Conflicts have diminished, diseases have been eradicated, poverty has been reduced and life expectancy has increased around the world."

The prime beneficiaries of economic integration and openness have been the developing countries, she says, a point the critics of globalisation rarely want to admit.

One of the most important developments was the entry of China, India and the former communist countries into the world trading system in the early 1990s.

According to the World Bank, international trade has helped reduce by half the proportion of the global population living in extreme poverty.

China, for instance, saw its rate of extreme poverty drop from 36 per cent at the end of the 1990s to 6 per cent in 2011.

In a single generation, Vietnam has moved from being one of the world's poorest nations to middle-income status, which has allowed increased investment in health and education.

But the rich economies have also benefited through higher living standards, caused by a more efficient allocation of capital between countries, improved productivity and lower prices for consumers.

"Research on the consumer benefits suggest trade has roughly doubled the real incomes for a typical [rich-country] household. And for the poorest households, trade has raised real incomes by more than 150 per cent," she says.

So what's the problem? Well, for a start, the opening up of world trade effectively doubled the size of the global workforce, putting downward pressure on the wages of lower-skilled workers in the advanced economies.

In the US, competition from low-wage countries has been one of the factors contributing to a decline in manufacturing employment, along with a wave of automation.

This decline has not been spread evenly across the economy, but concentrated in some states and towns that have faced deep and long-lasting effects from overseas competition, she says.

Similarly, the benefits from economic growth have not been spread evenly. In the major advanced economies, incomes for the top 10 per cent increased by 40 per cent in the past two decades, while growing only modestly at the bottom.

Then there is the globalisation of capital. Between 1980 and 2007 there was an eight-fold expansion in global trade, but a 25-fold increase in flows of financial capital.

This has greatly increased investment in developing countries. But much of the flows have been short-term and speculative, opening the door to financial contagion – sudden outflows sweeping from country to country – leading to concerns about the stability of financial systems.

"Growing inequality in wealth, income and opportunity in many countries has added to a groundswell of discontent, especially in the industrialised world – a growing sense among some citizens that they 'lack control', that the system is somehow against them," she says.

"Financial institutions are being seen as unaccountable to society. Tax systems allow multinational companies and wealthy individuals not to pay what many would consider a fair share."

Couldn't happen here, could it.

"And there is the challenge from uncontrolled migration flows, contributing to economic and cultural anxieties."

So what should we do? The goal should be to maintain the benefits from globalisation while sharing them more widely, she says.

Governments need to do more to encourage economic growth, but make it more inclusive, to "benefit workers across all economic sectors". (The need for growth to be "inclusive" is something leaders are talking about everywhere but here.)

We need to "step up direct support for lower-skilled workers" by greater public investment in education, retraining and by facilitating occupational and geographic mobility.

We need to "strengthen social safety nets" by providing appropriate unemployment insurance, health benefits and portable pensions. The US, for instance, could cushion labour market dislocations by increasing the federal minimum wage.

We need to "address the lack of vigorous competition in key areas. Think of major industries – from banking to pharmaceuticals to social media – where some advanced economies are facing large increases in market concentration."

Not here, of course.

"Boosting fairness also means clamping down on tax evasion and preventing the artificial shifting of business profits to low-tax locations," she says.

These measures can create a positive feedback loop: stronger, more inclusive growth reduces economic inequality and increases support for further reforms and openness.

But we must resist the temptation offered by "politicians seeking office by promising to 'get tough' with foreign trade partners through ... restrictions on trade".

We tried that in the 1930s as a solution to the Great Depression, and made things a lot worse for everyone.