Reviving the new era of globalisation
by Juan Carlos Martinez Oliva
We are living through the deepest and most widespread process of interconnection ever experienced in the world economy. Market liberalisation and advances in technology, have created a network encompassing every economic and social activity.
The main features are the emergence of new international powers and the role of technology. Globalisation defined two other periods of recent history, at the end of the 19th century and in the decades after the second world war. In the latest phase, income and wealth inequality in advanced economies have risen at levels not seen since the late 1800s. In the US, inequality in the run-up to the 2008 financial crisis was almost identical to the peak preceding the 1929 Wall Street crash and subsequent depression. This is in striking contrast with the post-war period, characterised by generous welfare systems in almost all advanced countries.
Three eras of globalisation
When the latest era of globalisation started, many economists warned that an intensification of international trade and finance liberalisation would entail risks of increased inequality. Their prediction proved to be correct. A general conclusion from trade theory is that if imported goods are also produced domestically, trade liberalisation will profit some actors at the expense of others in the global value chain. Financial globalisation may likewise have negative distributional effects. Globalised financial markets may make domestic institutions weaker, and hamper debt-enforcing mechanisms. Capital movements induce boom-and-bust patterns, with damaging consequences for the weakest parts of societies.
The connection between financial globalisation and distributional issues is undeniable in the light of the varied mobility of capital and labour in an economy. When a crisis strikes, capital will move elsewhere, while labour is more likely to stay and absorb the shock at its own expenses, through lower salaries or unemployment. Moreover, capital may easily avoid taxation and look for more favourable treatment across the world. This is more difficult for labour, with obvious distributional effects. The ability of multinational enterprises to locate production where labour is cheaper may reinforce bargaining power with regard to labour organisation, and therefore exert a downward pressure on salaries in the domestic economy.
There are some conventional answers to issues of inequality arising from a major economic change such as trade liberalisation. If overall incomes have increased, ‘winners’ may compensate the ‘losers’, to leave everyone better off. But compensation schemes have not operated equally across developed countries. In the US, consistent action did not follow on from wide-ranging debates on how to remedy the negative impact of free trade agreements on labour. In the European Union, governments maintain a more comprehensive social safety net, despite the enduring strains from crises in the region.
Post-war international order
Globalisation has created great opportunities for traders, multinationals and investors. It has provided growth opportunities for large emerging economies like China, which accomplished a quick sectoral shift from agriculture to manufacturing. This boosted GDP growth and reduced poverty overall.
But, at the same time, globalisation has broadened the divide between skilled and unskilled workers; employers and employees; rural and urban workers; and in general between the elites and ordinary people.
Those on the right place the responsibility for the negative consequences of globalisation on large emerging economies and immigration. On the left, resentment is mostly reserved for international institutions and corporates. The emphasis is on the need for more redistributive tax policies, better social security, more transparent corporate balance sheets, and less severe fiscal consolidation programmes. A feature which both the left and right share, however, is strong criticism of the political system for its perceived inability or unwillingness to respond to the social impact of globalisation on the weak and the poor.
The post-war Bretton Woods system emphasised discretionary policies, countercyclical devices and the protection of national economies. It encouraged capital controls, tolerated tariffs and protection, and promoted Keynesian expansionary policies.
Due to the alarming weakness of the world economy outside the US in the post-war years, global recovery was the highest priority. Achieving economic prosperity was viewed as politically crucial in an international setting dominated by the cold war. The perceived superiority of the free market economy after the collapse of the Soviet Union invigorated ‘neoliberal’ economic policies, and the global economy became fully open to market forces. Technological advancements contributed to the rapid expansion of a growing network of trade and financial relations.
Curbing economic nationalism
Compensation schemes should be created, or reinforced where they already exist. Achieving a better balance of pay-offs globally will require abundant coordination.
Everyone likes the litany of opportunities that globalisation opens. But the rise of economic nationalism and political populism across the world is a warning that globalisation’s imbalances must be corrected.
Juan Carlos Martinez Oliva is Senior Director in the Economics, Research, and International Relations Department of Banca d’Italia. He writes in a personal capacity. Back