Don’t reverse globalisation - refine it

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Does globalisation mean corporations should be permitted to indiscriminately ship jobs to lower-income countries? Anyone who believes in global integration and the lifting of living standards everywhere is truly challenged now.

Advanced countries are awakening to an unsavoury truth. There has been a paradigm shift in the world economy, trending towards sluggish or shrinking global demand. It depresses their economic growth and keeps unemployment and underemployment structurally high.

There are several reasons for this. First, most advanced countries are rapidly ageing. Older people consume less. Hence, this depresses demand for goods and services.

This is even true for China, which has the fastest-ageing population. By 2030, the number of Chinese aged 65 and older will be 300 million, or three times the current size of this cohort. Compared with advanced countries, China will be old before it will be rich. All of this puts a floor under global demand.

The second reason is that key countries have succeeded in union busting. After Ronald Reagan in the US and Margaret Thatcher in the UK, the collective bargaining power of labour unions all but collapsed in their countries. Reining in overreach is one thing, achieving an outright collapse quite another.

Other advanced countries have modelled their approach to labour issues in response to these examples. As a result, even the pay for formerly well-paying jobs has fallen in real terms. Those who earn less consume less, further depressing demand.

Third, taxation policies in most advanced countries have become less progressive, either because of lower effective income tax rates or higher consumption taxes. This has eliminated the beneficial effects of income redistribution. In today’s advanced economies, the rich have become richer and the poor poorer. The result is less demand. But more progressive tax rates alone do not boost demand.

This leads us to the fourth reason: globalisation. For more than 30 years, world economies have opened their current and capital accounts, allowing for the free flow of goods, services and capital.

There are undoubtedly benefits from operating such an open world economy. However, for many advanced countries, this meant many well-paying jobs were shipped overseas to allow for greater corporate profits. That is a key cause why income inequality has deepened in advanced countries.

 

Losing well-paying jobs in advanced countries has depressed wages, exacerbating the decline in global demand, while prolonging stagnation.

All of this has been masked by such phenomena as the IT revolution, first fiscal and then monetary stimulus as well as sustained high economic growth in China.

Suddenly, the props are crumbling. Innovation has created huge productivity gains, but its incremental contribution to economic growth is slowing down.

Fiscal and monetary stimulus are effective tools in a cyclical downturn, but unsustainable in addressing structural problems. The Chinese economic slowdown is a cause and effect of sluggish global demand.

And so advanced nations are faced with the fact that structurally depressed global demand has caused high youth and long-term unemployment, growing numbers of part-time employed and those with jobs that do not pay a living wage. While official unemployment rates may be falling, these underlying imbalances are eroding the social fabric of advanced nations.

Social development and greater educational attainment have a permanent effect on birth rates in advanced countries and are the cause for ageing populations. It is not likely – and largely undesirable – for that to change.

Wages can be boosted and taxes on the rich can be redistributed more effectively to those in need, assuming broad-based political consensus. But even then can one prevent the loss of good jobs to lower-income countries without implementing beggar thy neighbour policies and reversing globalisation?

Or is it really that binary? Does globalisation really mean that corporations should be permitted to indiscriminately ship jobs to lower-income countries? Would “onshoring” boost demand in economies with the greatest consumption potential (advanced countries)? And would such a boost in global demand trickle down to emerging countries because their excess labour could meet newly recovered demand growth?

The world is made up of nation states. While we live in a global and interconnected economy, there is no global, elected government. The citizens of many advanced nations look to their politicians to stop what looks like an inevitable slide into broad-based poverty.

Those national policymakers must consider all options – lest they are willing to enter a period of social and political instability. This is the uncomfortable truth.

 

Uwe Bott is the chief economist of The Globalist Research Center



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