Ferraris for all

This week’s Economist (20 September) includes a survey on globalisation. Its focus is the growing importance of multinational companies from emerging economy countries.

Labels: development, economics, globalisation

Spiked has published an article by me on how even the most ardent free market economists are losing faith in capitalism.

Labels: economics, environment, globalisation, spiked

Spiegel Online has a substantial article arguing that globalisation, by encouraging overfishing, is destroying the world’s oceans. As it happens even Indur Goklany, an articulate and avid defender of economic development, concedes that overfishing is a problem. But the solution is more systematic farming of the world’s oceans rather than the hunter-gatherer approach that prevails at present.

Labels: consumption, environment, Europe, globalisation, progress

The following review by me appeared in this week’s Fund Strategy.

Robert Reich blames big business and technological progress for the erosion of democracy. But his flawed thesis is self-serving and - worryingly - he calls for a lowering of living standards.

Supercapitalism is about a fundamental schism in contemporary society. Robert Reich, a professor at Berkeley and labor secretary under President Bill Clinton, argues that big business is increasingly undermining democracy. Although people have benefited enormously as consumers and investors from this trend they are losing out in their capacity as citizens. His understated conclusion is that people should be pushed into accepting falls in living standards in return for greater democracy.

Reich's critique of contemporary capitalism is more sophisticated than many. He eschews explanations that simply attack human greed or slate conservative politicians. Reich also acknowledges that the recent era of big business has brought some substantial benefits.

But Reich's confusion of basic categories leads him to serious errors and damaging political conclusions. The key development to understand is the demise of the role of humans as producers rather than the rise of consumption. To the extent that consumption has become more important it is largely through default. The striking trend of the past 30 years is in the reduction in importance attached to humanity's productive role.

This productive side of humanity should not be understood simply in terms of making widgets. It needs to be put more broadly in the context of what might be called "the human subject": the capacity of people to make and remake the world around them. The diminished sense of human subjectivity, rather than the rise in importance of consumption, is the key to understanding the trends identified by Reich.

Reich's notion of supercapitalism has to be set against the "not quite golden age" of 1945-75. That period embodied many of the values that he holds dear: it was an era of relative equality, job security and trust. There was also a compact between labour unions and big business. Yet Reich is balanced enough to acknowledge it was far from perfect. For example, women and minorities suffered severe discrimination.

For Reich this set-up began to break down in the second half of the 1970s. New technology increased competition between corporations. This in turn led to a new era of globalisation, new production techniques and deregulation.

He acknowledges that the new era has brought enormous benefits. Thanks largely to innovations in medical science the average American lives almost 15 years longer than in 1950. Americans are also rich and have a far wider range of consumer choices than in the 1970s. Other countries too have benefited from similar developments.

However, many of the positive features of the not quite golden age have gone too. Societies have become more unequal, job security has diminished and trust in politicians has disappeared. Corporations through their incessant lobbying have, in Reich's view, undermined the democratic process.

Against those who argue that conservative politicians, such as Ronald Reagan in America or Margaret Thatcher in Britain, are to blame for this shift Reich points out (correctly) that the shift predates their time in office. Reagan was president from 1981-89 while Thatcher was prime minister from 1979-1990 yet the shift started in the 1970s. Both leaders simply intensified an attack on the post-War consensus, particularly in relation to unions, that had started before their time in office.

However, in relation to this point Reich seems to be suffering from a temporary memory lapse. The attack on the consensus in America started in earnest under the presidency of Jimmy Carter (1977-81). It was under Carter's presidency that Reich himself was a political appointee at the Federal Trade Commission. Reich does not deny his position but is shy of drawing any conclusions about the role of the Democrats in breaking the consensus. In Britain the Labour government of 1974-9 played a similar role in launching an assault on unions and destroying post-War institutions.

More broadly the way to understand this shift is as a response to the end of the post-War boom. After the second world war the world economy, particularly the developed countries, grew at record rates. But by the early 1970s signs of economic crisis were clear. This lead governments on both sides of the Atlantic to launch an assault on the unions and give much freer rein to business.

This trend in turn meant that ordinary people had much less of a say in their lives. Politics was no longer about competing camps or competing visions of how to organise society. Instead the era of "Tina" - as Thatcher put it "There Is No Alternative" came to the fore. The focus of politics switched to regulating individual behaviour - including such areas as drinking, smoking and even eating - rather than battling over how to organise society.

This is a much more convincing explanation for the shifts that Reich identifies than his focus on technology. Although Reich denies being a technological determinist his explanation exaggerates the role of technology and understates the role of political defeat in creating the current climate.

Reich's outlook also leads to some deeply conservative conclusions despite his reluctance to spell them out in detail. He is in favour of "new rules of the game" (read regulation) particularly in relation to corporate lobbying. Reich seems to lack confidence in the capacity of others to counter the arguments of corporations.

More worryingly, he twice advocates "sacrifice" by ordinary people by which he seems to mean an acceptance of lower living standards. He appears to take the peculiar view that reducing living standards will somehow bolster democracy.

In reality democracy can only be achieved by a revival of politics in the proper sense of the term. This means relaunching a battle of ideas over competing visions of how to organise society. It involves a struggle that is entirely consistent with raising rather than lowering the living standards of the bulk of the population. It is Reich's demand for sacrifice that is the antithesis of democracy.

Labels: book, economics, Fund Strategy, globalisation, review, technology

Harvard’s Dani Rodrik makes the correct point that even staunch defenders of globalisation are becoming nervous about its benefits. Writing for Project Syndicate (reproduced in Britain’s Guardian newspaper) he argues that:

“we have Paul Samuelson, the author of the postwar era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation," musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.” (see original article for links).

He could have added Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard, who recently argued in the Financial Times (29 July) that:

“Of course, today’s mess was many years in the making and there is no easy, painless exit strategy. But the need to introduce more banking discipline is yet another reason why the policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom. For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies.”

As Rodrik argues it is now mainstream economists who pose the most criticisms of globalisation: “The cheerleaders' true sparring partners today are not rock-throwing youths but their fellow intellectuals.”

For Rodrik the key question is to find the appropriate rules for regulating the globalised world. He does not appreciate the dangers that such regulation can bring - particularly if they restrain economic growth.

Labels: economics, globalisation, growth

The following news story by me from Fund Strategy summarises a recent Goldman Sachs paper on the rising middle class.

Another two billion more people could join the global middle class by 2030 according to a new report by Goldman Sachs*. Such an expansion, which would be unprecedented in world history, is based on a definition of middle class as those with incomes of between $6,000 and $30,000 at purchasing power parity (PPP).

At present the group is growing at an unprecedented rate of 70m people a year. Even if China and India are excluded from the growth statistics the figure would be 20m a year.

Overall, there will be a shift to both middle income economies and middle income people. The largest four emerging economies (Brics) and the next 11 down (N11) will dominate.

By 2050 six of the largest seven economies in the world are likely to be emerging with America as the only exception (see table). However, most of them will remain below average in terms of income per head.

The middle three quintiles in terms of country incomes (that is excluding the top and bottom 20 percent) is likely to account for 57 percent of global GDP in PPP terms compared with 31 percent today. In dollar terms the increase will be from 15 percent to 43 percent.

Overall, this trend looks set to lead to a substantial fall in global inequality.

Although inequalities within countries may increase on a global level the world is likely to become more even.

Goldman Sachs acknowledges that its projections may not all materialise. But it regards them as the most likely outcome on the basis of present trends.

* Dominic Wilson and Raluca Dragusanu "The Expanding Middle: the Exploding Middle Class and Falling Global Inequality". Goldman Sachs Global Economics Paper No: 170.

Labels: economics, Fund Strategy, globalisation, inequality

A column by Lawrence Summers, a former US treasury secretary, in today’s Financial Times shows how far the mainstream has gone in taking on “anti-globalisation” arguments. Tackling inequality and raising labour standards are integral to the conventional wisdom:

“The domestic component of a strategy to promote healthy globalisation must rely on strengthening efforts to reduce inequality and insecurity. The international component must focus on the interests of working people in all countries, in addition to the current emphasis on the priorities of global ­corporations.”

Yet, as I have argued elsewhere, this sentiment is not about raising the living standards of ordinary people. On the contrary, it is essentially a demand for greater social regulation to protect society against the alleged disintegrative effects of inequality. It can also be a form of protectionism against developing countries.

Dani Rodrik of Harvard also recognises the mainstream character of anti-globalisation thinking in his blog. He says that much of the Summers column could “have been written by, say, Robert Kuttner or Tom Palley”. He later complains about a student who pigenholes him as an anti-globaliser. The student’s retort was "[Joseph] Stiglitz doesn't think he is an anti-globalizer either."

Labels: corporations, globalisation, inequality

Cheap food is one of the great achievements of humanity. Despite the sneering of environmentalists the available of cheap and abundant food – at least in the developed world – is to be celebrated. Thanks to enormous increases in productivity we no longer live on the edge of starvation.

It is therefore worrying that food prices have started to rise. The Economist, in its lead comment this week (6 December), estimates that food prices have risen by 75% in real terms since 2005. This follows a fall by three-quarters in real terms from 1974-2005.

According to an accompanying briefing in the Economist there are two main reasons for the rise in prices. First, rising incomes in Asia means that people are consuming more meat which in turn bolsters demand for animal feed. Rising meat consumption is closely correlated with economic growth and therefore welcome. However, this is a long-term trend which does not explain the sudden surge in prices. Second, is the increased demand for crops such as maize to be converted into ethanol for fuel. There is nothing wrong with this development in principle but it is necessary to ensure sufficient food is produced as well.

It is clear that the urban poor suffer as a result of the trend to agflation. They have to pay more for their food both in absolute terms and substantially more relative to their incomes.

But it is doubtful that most of the rural poor benefit from higher prices. Those that are landless still have to pay for food. And the main problem facing most third world producers if low productivity rather than low prices.

Recent publications which examine this trend more closely include an article in Finance & Development from the International Monetary Fund (IMF). There are also relevant sections in chapter one (PDF) of the IMF’s most recent World Economic Outlook. More broadly the latest World Development Report from the World Bank is about agriculture and development.

Labels: consumption, economics, food, globalisation

Tessa Mayes has written on Culture Wars about the meeting I spoke at in November at the Institute of Contemporary Art on the global working class.

Labels: Asia, globalisation, speeches, work

Spiked has published an article by me on the global working class. It relates to the debate I am taking part in on the subject at the Institute of Contemporary Art on 20 November.

Labels: Asia, globalisation, inequality, speeches, spiked

On 20 November I will be speaking at an event at the Institute of Contemporary Art in London on the new global working class.

Labels: globalisation, speeches, work

A key chapter (PDF) in the latest World Economic Outlook from the International Monetary Fund (IMF) looks at globalisation and inequality. The chapter concedes that inequality has generally widened over the past 20 years although it also makes the point that living standards have generally risen. In other words the poor are better off in absolute terms but the gap between rich and poor has widened at the same time.

The chapter also uses an econometric model to try to identify the sources of inequality. Contrary to common belief it concludes that increased trade does not lead to wider inequalities. Instead inequality is associated with financial openness – particularly foreign direct investment – and most of all to technology. The reasoning behind the latter is that skilled workers are better able to make use of technology.

I am sceptical about the use of such models. They may help identify correlations – for example, one variable is associated with another – but that is not the same as explaining relationships. To be fair to the IMF it is also cautious about the conclusions that can be drawn from the model.

Labels: finance, globalisation, inequality, technology, trade

There follows a comment by me on the debate about financial globalisation in the latest Fund Strategy (6 August). It refers to a cover story I wrote on the subject

There are more misconceptions about globalisation than most other areas. What is more the key features of the global markets and the global economy are little discussed.

Of course there are heated debates around aspects of globalisation. Some argue it should be welcomed while others see it as largely negative. There are also discussions about the best ways to regulate it.

But the substance of the notion of globalisation is generally left unchallenged. It is almost universally assumed that the increase in cross-border trade and finance inevitably means a decline in the power of the nation state.

Daniel Ben-Ami questions the orthodoxy in this week's cover story. He argues there are several reasons why the conventional view of global finance is flawed. For example, a crude use of statistics can exaggerate the size of the global financial markets relative to nation states. More fundamentally he argues, among other things, that the power of the state has increased at the same time as the world has gone more global.

Confirmation that the state's role is crucial in globalisation was apparent
last week in a new paper (PDF) published by the International Monetary Fund (IMF). Contrary to those who see globalisation as purely a market phenomenon it argues that complementary "institutions" are necessary for its success.

The World Bank has taken a similar view in relation to trade. A report published last year argued that state institutions were a key component of successful globalisation.

Such reports slightly redress the balance in the discussion but they do not go nearly far enough in recognising the state's role in globalisation. It is not a question of more state intervention, or better "institutions", being a desirable policy option. It is, rather, that the state is an inextricable part of the globalisation process.

Just as trade and finance have become more globalised the state has taken on a broader role in economic activity. Old-fashioned forms of intervention, such as exchange controls, have disappeared but new ones have emerged. For instance, financial markets are regulated by far more powerful regulators than in the past. Until the early 1980s the City of London was largely run as an old-fashioned gentlemen's club. Today the Financial Services Authority has enormous regulatory power.

It would be more accurate to describe today's markets and economy as international rather than global. The scale of cross-border trade and finance has become enormous but the state still plays a substantial role in economic activity.

Labels: finance, Fund Strategy, globalisation, trade

Anyone interested in my take on the latest volatility in the financial markets can read my comment in this week’s Fund Strategy (30 July).

Not long ago, any problems in a foreign mortgage market would be of little interest to British investors. The shift to a more global world economy and financial system, where markets have become closely interconnected, has changed all that.

Last week, America's subprime mortgage problems finally hit global equity markets. After months of jitters in the bond markets, the anxiety infected stocks and markets around the world tumbled.

To understand how "contagion" can pass from one market to another, it is worth examining how the problems have spread from subprime. Although the details are complex, the unfolding of the crisis can at least be outlined in schematic terms.

The origin of the crisis can be seen in the surging American house prices running up to 2005. As a result, lenders lowered their underwriting standards for new loans and increased the proportion of lending to subprime borrowers. The process is discussed more fully in last week's cover story by Vanessa Drucker.

When the housing bubble burst, the mortgage market was hit. Delinquencies and foreclosures leaped. Rising interest rates are likely to exacerbate the problem.

In earlier times, the difficulties would probably have remained confined to the mortgage market; perhaps hitting the American economy too. But in the more globalised world, it infected the bond markets.

One of the main transmission mechanisms from the mortgage market to bonds are Collateralised Debt Obligations (CDOs). These are essentially mortgage obligations that are bundled and traded in the market. The problems in the mortgage market have hit CDOs, which in turn have hit institutions, including hedge funds, that hold such debt.

Uncertainty about CDOs has increased risk aversion in the bond markets. Spreads between relatively safe forms of debt and risky bonds have widened.

Last week it was the equity markets' turn to take a hit. The main reason seems to be that until now relatively buoyant bond markets have helped support equities. For example, cheap debt has made it easier for private equity firms to buy company shares. But it appears that the equity markets have realised the days of easy money from bonds could be over.

None of this means globalisation is necessarily bad. On the contrary, the ability to spread risk has many advantages. But the down side is that problems can easily move from one market to another.

Labels: finance, Fund Strategy, globalisation

Branko Milanovic, lead economist in the research unit in the World Bank, is sceptical about the growth of a global middle class. In an interview with the Toronto Globe and Mail he says that even the recent years of strong economic growth will not automatically lead to a larger middle class. In Latin America or the post-Communist countries it might be a case of a middle class re-emerging rather than a new one being created. He also argues that the emerging developing world middle class is based on more casual forms of labour than earlier middle classes.

Despite his current pessimism he is more upbeat than in his 2005 book, Worlds Apart. That argued that the 1980-2000 period was bleak for the creation of a new middle class.

Labels: book, economics, globalisation, inequality, Latin America

I appeared last night on 18 Doughty Street, an internet television channel, discussing a range of topics related to the recent G8 summit of world leaders. The other panellists on the Claire Fox News programme were Deepak Lal and Stuart Simpson. The programme can be watched by clicking: here.

Labels: development, globalisation, media appearances, television

Globalisation needs better public relations according to the Organisation for Economic Cooperation and Development (OECD). Angel Gurria, the secretary general of the OECD, was quoted as saying “the story could be told better” in the Financial Times (FT). This view was endorsed by a leader in the FT itself.

Gurria’s outburst was prompted by the latest annual Employment Outlook (summary in PDF) from the OECD. It made the familiar point that inequality is rising in the rich nations even though real wages are increasing too (see, for example, 19 June post).

Labels: globalisation, inequality, work

A New Deal is needed on globalisation according to an essay in the July / August 2007 issue of Foreign Affairs. Kenneth Scheve and Matthew Slaughter concede that globalisation has brought huge benefits. However, they are worried that the income inequality it has brought to American workers could prompt a protectionist backlash. For them the solution is for policymakers to promote redistribution of income through taxation.

Labels: America, globalisation, inequality

The theme of today’s New York Times magazine is inequality. It includes a piece on whether labour should be globalised, an article on whether equality can be promoted without killing American prosperity and a piece on Larry Summers’ views on the impact of globalisation on the middle class (on the final point see my post of 2 November 2006).

The books section also contain a review by George F Will of Brink Lindsey’s The Age of Abundance (see 27 May post).

Labels: globalisation, inequality

This week’s Fund Strategy included the following comment by me on sovereign wealth funds.

Beijing's recent purchase of a $3bn (£1.5bn) stake in Blackstone, an American private equity group, raises fundamental questions about global finance.

For a start, it signals that China is starting to diversify the holdings in its $1,200bn of foreign exchange reserves. Rather than holding American treasury bonds, it is shifting its portfolio towards other types of assets. Private equity is only one of several asset classes the Chinese are moving into.

More generally, the Blackstone move signals the growing importance of sovereign wealth funds (SWFs). An increasing number of countries are developing substantial SWFs as an endowment for the future.

According to Morgan Stanley estimates quoted in the Financial Times, $2,500bn is invested in SWFs and the amount is growing fast. In comparison, about $1,500bn-$2,000bn in hedge funds and $55,000bn is invested in conventional assets worldwide.

It should be recognised that some amounts overlap. For example, SWFs no doubt invest in both hedge funds and conventional funds. But whatever the exact asset allocation of SWFs, the volume of assets they control is huge and their influence looks set to increase. The average unit trust investor will have their funds affected by the behaviour of SWFs as well, even if they are unaware of their influence.

The secrecy of SWFs means it is hard to work out exactly what effect they are having. It is likely that bond yields are being depressed by SWF purchases, but it is hard to prove. It is also probable that other asset classes, such as shares or private equity, will rise in price as more assets are allocated to them.

The rise of SWFs is another indication of how the rapidly growing developing countries, China in particular, are changing the world. Relatively few people in the West appreciate the scale of this change. But those who work in the financial markets have increasing evidence in front of them.

Labels: china, economics, finance, Fund Strategy, globalisation

The Wall Street Journal has a substantial feature today reviewing the discussion of globalisation and inequality. It argues the standard case that incomes are rising in absolute terms but relative inequalities are growing too. Such widening inequalities are helping populist presidential candidates in Latin America and are worrying Chinese officials. The article cites a piece by Pinelopi Koujianou Goldberg of Yale and Nina Pavcnik of Dartmouth in the March 2007 issue of the Journal of Economic Literature.

Labels: china, globalisation, inequality, Latin America

A bleak view of the world economy by Robert Wade, a professor of political economy at the London School of Economics, in today’s Financial Times. He does not seem to be able to decide whether economic growth is not happening for the mass of the world’s population or whether it is simply undesirable:

• China accounts for the entire fall in the number of extreme poor since the early 1980s.
• In the affluent West people are suffering from over-eating, family breakdown and addiction.
• In developing countries people are becoming disillusioned with economic openness.
• The rise of important new economic states, such as China, brings a risk of war.
• Global oversupply capacity also creates a risk of conflict.

No doubt there are problems and potential problems with the world economy but Wade underestimates the extent to which ordinary people are benefiting from global growth.

Labels: development, economics, globalisation, india

Dani Rodrik, a professor of international political economy at Harvard, has set up a blog. Rodrik is one of the leading thinkers in what could be called the anti-globalisation or global justice movement. That is he is generally in favour of greater regulation of capitalism and supports such initiatives as fair trade.

In my 24 March 2007 post I outlined other useful economics blogs.

Labels: economics, globalisation, trade

Yesterday’s New York Times magazine makes an important point on the key role of migration in the development process. Although much of the piece is about the pain of separated families it points out that:

“Migrants worldwide sent home an estimated $300 billion last year — nearly three times the world’s foreign-aid budgets combined. These sums — “remittances” — bring Morocco more money than tourism does. They bring Sri Lanka more money than tea does.

“The numbers, which have doubled in the past five years, have riveted the attention of development experts who once paid them little mind. One study after another has examined how private money, in the form of remittances, might serve the public good. A growing number of economists see migrants, and the money they send home, as a part of the solution to global poverty.”

This point is alluded to in my 17 April post on the globalisation of labour chapter in the latest World Economic Outlook from the International Monetary Fund. It is examined in more detail in an essay in chapter two (PDF) of the April 2005 World Economic Outlook.

Labels: development, economics, globalisation

My comment from Monday's Fund Strategy on the globalisation of labour is published below. It is based on a chapter in the latest World Economic Outlook from the International Monetary Fund (IMF). As always there is much else in the Outlook for those interested in contemporary trends in the world economy.

One of the most important but least discussed topics in understanding the world economy is the globalisation of labour. It is therefore welcome that the International Monetary Fund has included a chapter on the subject in its key twice-yearly World Economic Outlook.

The IMF estimates that the effective global labour force has risen fourfold over the past quarter century. Most of this increase has taken place since 1990.

There are several channels through which this globalisation process occurs. Increasing trade, offshoring of production and migration all contribute to a more global role for labour.

The objections to this process are unconvincing. Labour's globalisation should be supported as an unqualified good. Many of the objections are based on the common misconception that economics is a zero-sum game. In other words, one person's gain is - erroneously - seen as another person's loss.

In reality the globalisation of labour represents a more efficient allocation of resources in the global economy. The size of the world economic pie can grow larger because labour is distributed where it is needed. Everyone can benefit from the growth this process generates.

Critics who attack globalised labour for resource shortages blame the wrong people for such problems. For instance, it is not immigrants who are to blame for the chronic shortage of reasonable housing in the south east of England. Successive governments have discouraged housebuilding through excessive regulation. Often this takes the form of defending the "green belt" around London and other environmental regulations. In the name of defending the planet both migrant workers and the indigenous population have to rely on a stock of ageing and excessively expensive homes.

Another objection to globalised labour is cultural. The charge is that high levels of migrant labour will undermine the integrity of national cultures. Such views are insufferably parochial. The mixing of people from different backgrounds is a positive development. In any case, the similarities between people are far more important than the differences.

It should also be remembered that the globalisation of labour is immensely beneficial to developing countries. Remittances from overseas workers and the proceeds of international trade play a key role in the development process.

Labels: development, economics, Fund Strategy, globalisation

The lead story of the current (March-April 2007) issue of the Boston Review is a piece by Nancy Birdsall, the founding president of the Center for Global Development in Washington DC, on why inequality matters. Birdsall distinguishes between constructive and destructive inequality. In her view the former creates positive incentives at a micro level while the latter reflects the privileges of the rich and can block development. Her solution is essentially institutional reform to complement the impact of the global market. More of her writings on the topic can be read here.

Labels: economics, globalisation, inequality

Occasionally official financial institutions publish interesting though (metaphorically) dusty documents. Yesterday Ben Bernanke, the chairman of America’s Federal Reserve, gave a speech on economic well-being in America. It examined both absolute rises in wealth and widening inequality over the past three decades or so. The day before Prakash Loungani of the external relations department of the International Monetary Fund gave an address defending globalisation from a free market perspective. He drew on the work of Benjamin Friedman, Thomas Friedman, Joseph Stiglitz and Martin Wolf.

Labels: America, globalisation, inequality

The Economist (20 January) has a comment and several related articles on the raging debate (at least in some quarters) on inequality and wage stagnation. It starts with the common observation that executive pay is growing rapidly while the real wages of American workers are growing much slower than productivity. In the rich world the share of GDP going to labour is at a record low while the share going to capital is soaring.

There are two schools of thought on the cause of this growing divide, according to the Economist. One blames globalisation: from this perspective the growth of trade and the entry of new developing country workers entering the labour market have widened inequality. The other places the responsibility on technology.

From the Economist’s perspective the two factors are inter-twined. But it rejects restrictions on executive pay, is against protectionism and is wary of giving aid to the victims of trade. Instead the magazine argues for greater social mobility. For example, making it easier to move jobs and improving education.

There are at least two important and related factors missing from this discussion. First, the political defeat of organised labour with the end of the Cold War has strengthened capital at the expense of workers. Second, the desire to raise the level of the mass of society as a way of achieving equality has become muted. Instead the dominant view is that consumption growth needs to be curbed.

Labels: globalisation, inequality

Joseph Stiglitz, a Nobel laureate in economics, is one of the high priests of growth scepticism. The former economic adviser to President Bill Clinton and chief economist of the World Bank is also a leading influence on the anti-globalisation “movement”. In today’s Financial Times he argues that economic growth in the developed world may not be beneficial because it could lead to widening inequality:

“Unfettered globalisation actually has the potential to make many people in advanced countries worse off, even if economic growth increases.”

Not an original argument but a powerful one. The counter-argument is the need for even more growth so that everyone can benefit. Inequality should not be used as a justification for restraint on growth.

Stiglitz’s new book, Making Globalization Work, is published in Britain this month by Penguin.

Labels: book, economics, globalisation, growth, inequality