5th May 08 - Rainer Falk, World Economy & Development

So far, only a small minority of top earners has benefited from global integration. Even conservative economists have begun to worry about social inclusion and effective redistribution. As many argue, it is better to prevent protectionist tendencies, which would cut the overall benefits of globalisation, and to share the cake more fairly.

Immanuel Wallerstein and Stephen Roach are miles apart ideologically. But they pretty much agree on one thing: after three decades of globalisation euphoria, the pendulum has begun to swing back.

“The political balance is swinging back,” writes world-system’s analyst Immanuel Wallerstein (2008). “Neoliberal globalisation will be discussed about ten years from now as a cyclical swing in the history of the capitalist world economy. The real question is not whether this phase is over but whether the swing will be able, as in the past, to restore a state of relative equilibrium in the world system.”

Where Wallerstein sees the end of neoliberal globalisation, the chairman of Morgan Stanley Asia, Stephen Roach (2007), sees an about-turn: „What I suspect is that a partial backtracking is probably now at hand, as the collective interests of globalisation succumb to the self-interests of ‚localisation‘. An era of localisation will undoubtedly have some very different characteristics from trends of the recent past. The most obvious: Wages could go up and corporate profits could come under pressure.”

It remains to be seen whether or not “localisation” is the appropriate term to describe current trends. But it is indisputable that more and more people are questioning that globalisation has delivered on its promises and benefits. In a recent survey, 57 % of the people polled in the G7 nations said that globalisation has moved too fast over the past few years (The Washington Post, 2 February 2008). Of those polled in 27 other countries, 64 % thought that the advantages and burdens of globalisation were shared unfairly. Only in a few countries (10 out of 34) did the majority of people consider globalisation a positive factor for local economic development. These countries included, significantly, the catch-up eco­nomies of China and Russia, the beneficiaries of soaring oil prices such as the United Arab Emirates or special cases in the OECD like Canada and Australia.

Globalisation and inequality

Poll results are always easy to challenge. But in this case, they match the latest trends of debate among economists and international development agencies. This debate revolves around the extent to which inequality in and between nations is linked to globalisation and international economic integration. The concern about increasing inequality triggering backlashes against global integration has spread to orthodox economists. Earlier, they only used to discuss the benefits of globalisation.

Economists Kenneth F. Scheve and Matthew J. Slaughter are two examples. The latter served on the Council of Economic Advisers of US President George Bush from 2005 to 2007. In an essay in Foreign Affairs last year, both authors called for a “New Deal” for globalisation, based on new, top-down re-distribution policies, in order to allow the vast majority a share in the benefits of globalisation. It is noteworthy that this debate is not only being conducted with a view to the traditional North-South divide, but rather emphasises domestic trends in rich nations.

Makers of development policy noticed the problems first. Three years ago, three reports by multilateral institutions simultaneously focused on the growing social inequality both within and among the nations of the world. The title of the World Development Report of 2006 was “Equity and development”. In it, the World Bank acknowledged that redistribution of income, as well as growth, is needed to reduce global poverty. Meanwhile, the UN’s Report on the World Social Situation and the UNDP’s Human Development Report highlighted the importance of distribution issues for achieving the Millennium Development Goals (MDGs).

The International Monetary Fund and the OECD have also rediscovered the topic of inequality. In its World Economic Outlook of October last year, the IMF studied the relationship between globalisation and inequality. The OECD’s Employment Outlook concluded last year that the trend of outsourcing and offshoring is increasing the vulnerability of jobs and wages in many developed nations.

In the North-South context, debate previously revolved around the question of whether it is only inequality that is growing, or whether poverty is growing too. Poverty levels can in fact decrease in spite of growing inequality – if all incomes rise, for instance, but the higher income brackets do so faster than the lower ones. If this were the case, then growing inequality would be compatible with the Millennium Goals.

The latest World Bank review of purchasing-power parities (PPP) will, however, add fresh impetus to this debate. The data show that both global inequality and global poverty are vastly greater than previously assumed (Milanovic 2008). It is reported that worldwide income inequality is not 65 Gini points, which would roughly equate to the level of South Africa, but 70 points. The Gini coefficient is a statistical measure of income distribution, whith “0” corresponding to total equality and “100” to total inequality. An inequality level of 70 was never recorded before anywhere.

The new PPP estimates also imply that the number of absolute poor is probably considerably higher than assessed so far. According to the out-dated PPP calculations, 980 million people must do with less than the purchasing power of one dollar per day.

It is difficult to establish causal links between globalisation on the one hand and unemployment and inequality on the other. Many of the approaches used for doing so are questionable. For instance, the IMF Outlook tried to ascertain what impact technological progress, financial globalisation and the international trade in goods have had on inequality. It concluded that technology and financial globalisation have boosted inequality, whereas international trade helped to reduce it by making goods and services cheaper.

Trade and technology

The difficulty, however, is that it is hardly possible to assess these factors separately. Trade globalisation is inconceivable without technical progress, and the reverse is just as true. Technological change expresses itself in new forms of trade – such as the creation of global value chains or the provision of global call-centre services.

Nonetheless, most researchers argue that free trade, one of the central pillars of globalisation, can only be blamed to a minimal extent for inequality and unemployment. For example, Robert Z. Lawrence (2008) argues that while more trade with developing countries caused greater inequality in the USA in the 1980s, its impact was negligible over the past ten years.

According to Lawrence, rising inequality and slow wage expansion – or even decline – are due to dramatic growth in profits and associated advantages for the top one percent of income earners in the USA. Any policy focusing merely on regulating trade would, therefore, be too narrow and unlikely to succeed. Instead, Lawrence calls for a change in taxation regimes and for lending state assistance to those who need to adapt to structural change.

Lawrence’s prominent colleague Paul Krugman (2008), however, warns against under-estimating the trade-related downward pressure on wages and labour relations in the USA. He points out that the USA used to import oil and other raw materials from the Third World and manufactured goods from other industrialised regions like Canada, Europe and Japan. Today, however, the USA imports more manufactured goods from poor nations than from rich ones.

Krugman himself used to warn against exaggerated fears of globalisation. In the early 1990s, he pointed out that the imports of finished goods from the Third World made up a relatively modest share of US gross domestic product (GDP). Today, he claims that the pressure on jobs and wages is probably not quite as modest as it was.

Krugman estimates that the amount of manufactured goods imported from the third world has grown dramatically – from only 2.5 % of US GDP in 1990 to six percent in 2006. Countries with very low wages registered the greatest export boost. As Krugman explains, in South Korea, Taiwan, Hong Kong and Singapore, the first “newly-industrialised countries,” wages in 1990 were about 25 % of the US level.

Since then, however US imports are increasingly being sourced in Mexico, where wages are about 11 % of the US level, and China, where they are only three or four percent. According to Krugman, only a minority of highly-educated US employees has benefited from the growing trade with Third-World economies, greatly outnumbered by the losers.

The vast majority misses out

This last point is crucial. Not only do small minorities have no share in the benefits of globalisation – the vast majority of people misses out. No serious observer will claim that globalisation, trade and international investment are not good for national economies in themselves.

Yet even in the conservative camp, fears are mounting that only a tiny group at the top of society is reaping the benefits. Incidentally, this applies equally to the advanced countries and many developing countries, although details differ, of course. In any case, the question of appropriate counter-strategies and remedies is becoming urgent.
Adjustment assistance for those negatively affected by globalisation is considered a rather conventional remedy in the rich world. The focus can be on reforming labour law, improving social-security systems or new measures for re-training and education. Such programmes are usually sold as “helping people to adapt to globalisation”, although the measures used usually have only an aftercare character, without tackling the underlying roots of unemployment and poverty.

That is precisely why Scheve and Slaughter are demanding drastic re-distribution from the top down. In their above-mentioned article, they suggest abolishing all income tax for workers who earn less than the average national income, and drastically increasing the taxation rate for the top earners.

Lawrence Summers, a former World Bank chief economist and former US treasury secretary, supported their call in the Financial Times by stating that to prevent protectionist tendencies, which would cut the overall benefits of globalisation, it was better to share the cake more fairly.

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