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Deglobalisation: The Answer to Inequality? - Outside View by Nitin Gregory

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Deglobalisation: The Answer to Inequality?
Jan 18, 2017

We have already discussed the tell-tale signs of deglobalisation. The anti-free trade outlook in US politics, Brexit, the non-ratification of TPP - the barriers to trade are becoming evident in developed countries.

The key components of growth - labour, goods and capital - are being affected by deglobalisation. Among these economic components, the effect on labour is most visible. The recession has hurt business and consumer confidence. This is weighing on the global economy in general and developed countries in specific.

Throughout history, whenever opportunities diminish, countries start to question the benefits of integration. The Brexit vote was a thumbs-down to free movement of labour within the EU. The prevailing view is that safety of citizens is being compromised by the influx of 'undesirables'. The recent flood of immigrants into Europe and the spate of terror attacks will drive countries like France and Germany to become more insular. The 'refugee' influx is a key political debate in Germany

Even supra-national institutions are not being spared by the onslaught of deglobalisation. The EU is now under the shadow of Brexit. And we're beginning to hear rumblings in other key European nations. NATO no longer seems above reproach. Will the UN go the way of the League of Nations?

The Elephant in the Room and on the Chart

Branko Milanovic's 'elephant chart' from his 2012 policy research paper has become a popular visual to explain the unequal effects of globalisation. The richest 1% and the emerging markets' middle class have seen spectacular gains, while the developed markets' middle class (the world's 80th percentile) have remained stagnant for more than two decades.

Figure 4. Change in real income between 1988 and 2008 at various percentiles of global income distribution (calculated in 2005 international dollars)

The elephant chart neatly fits into the rhetoric today of the disadvantaged middle class. It almost looks like a case of confirmation bias! There are, of course, criticisms of the graph calculations, but we'll have to save those for another day.

Another popular statistic is the Gini Coefficient, a measure of inequality. A reading of zero implies perfect equality and a reading of one implies perfect inequality. The World Bank estimates that the Gini Coefficient for the US has risen from 0.37 to 0.41 between 1986 and 2013. The period of global integration and trade coincides with a period of rising inequality within many countries. This inequality is pronounced in the developed market middle class. This inequality is a cause of frustration and has found expression in the recent polls (referendum in UK and election in the US). Is inequality an outcome of globalisation? Is the cause and effect relationship a given?

Similar arguments have been used in the past by anti-capitalism intellectuals! Capitalism and free markets allow for a degree of competition. Competition, by nature, will result in inequality. Prominent intellectuals like Marx argued that capitalism would benefit capital owners and oppress the workers. Economic equality in a capitalistic system remains an elusive ideal.

Global integration has created a more competitive environment for labour and investment. The integration of Asia - especially China and India - has added a large low-cost workforce. Trade integration has also resulted in more competition for capital. Capital has more opportunities than ever to get the best returns. This has resulted in a rising living standards across the globe. Cheaper and better products for the consumer coupled with distributional effects of wealth for the poorer countries.

In a competitive landscape, productivity and investment are key factors of growth. A household or country that sacrifices productivity or investment is bound to fall behind. It is estimated that in the last decade (post the great financial crisis), the world has seen almost no productivity growth. What explains this missing productivity? Is the bogeyman free markets or free trade?

Globalisation is an easy target for the perceived inequality. Capitalism will also find itself under scrutiny (a la Bernie Sanders). The culling mechanism of the market can be harsh and unpalatable. But as mentioned by Bill Bonner, even to stand still we need to expend energy. You can shelter the economy from competitive forces, but it will still require savings and investment to maintain status quo...

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

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1 Responses to "Deglobalisation: The Answer to Inequality?"

KD

Jan 18, 2017

I do not understand, why do not India open their labour markets to world. Indians can hire cheaper engineers from Bangladesh. Most of the Government jobs in India require state domacil certificate. You guys are talking about globalisation. Wow.

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