Something interesting has happened at the World Economic Forum in Davos over the past few years. The debates that were taking place more frequently on the fringes – about the weaknesses of global markets, the shortcomings of capitalism and our tolerance of inequality – are now taking place well inside the congress centre itself.
This is more than just the natural introspection that comes at the bottom of the economic cycle. There is a clear sense that collectively we have spent 20 years building a system that can’t really last. Financial market volatility, personal and government debt and rising inequality are not the canaries in the global economic coal mine. They are the coal mine itself.
This week the Institute of Public Policy Research, a British think tank, is publishing the report of a year-long review of globalisation, which I have led. It makes two fundamental points. Firstly, like our model of capitalism itself, globalisation is not working in the way it can and should in progressive societies. Secondly, globalisation remains one of the best tools we have to achieve those progressive goals at the global level as long as we have the right policies to guide it.
That sense of frustrated potential goes to the heart of the problem with globalisation. The term has become shorthand for the ills of economic change, whether job loss as a result of rapid technological change or rising inequality. And the huge challenge of integrating an economy of one billion relatively poor and phenomenally industrious people, such as China, into an economic system.
Undoubtedly, all these and many other changes are being accelerated by globalisation, because international competition is a spur to innovation and productivity. But it would happen anyway, and it is not a bad thing. We lived in a very unequal world before globalisation, so globalisation itself is unlikely to be the cause of inequality.
The problem is how we provide access to opportunity and share the benefits of economic growth. By potentially opening a global marketplace for goods, services, supply chains and ideas, globalisation has been a huge source of both opportunity and growth. We have, however, done a relatively poor job of sharing access to them, especially in the west. Stagnant middle class incomes and growing inequality between top earners and the rest tell their own story.
The consequences of that failure – blue collar anger at lost jobs, white collar anxiety at rising job insecurity and general anger at the way in which a small elite appear to be hoarding the economic gains of the last two decades – is now posing a serious problem for an open global economy. This is especially so in the US, where open trade is often distrusted, and globalisation blamed, with potentially disastrous consequences for the rest of the world.
The only answer is to stop seeing globalisation as a phenomenon, which implies it cannot be stopped or shaped. Of course the shipping container and the internet are genies that can’t go back in the bottle – nor would we want them to. But much of what we call globalisation results from policy choices.
The IPPR report focuses on these choices. It includes recommendations for a move towards a new reserve currency based on the International Monetary Fund’s special drawing rights, a new and open-minded debate on managing speculative financial flows and new approaches to corporate taxation as strategies for reducing excessive imbalances, taking the sharp edge off volatile capital movement and ensuring that states do not depend excessively on income and consumption taxes to fund vital social supports.
New approaches to industrial growth policy, as well as social welfare, are advocated as a way to make western voters feel that the demands to adapt that are placed on them by global economic competition are an invitation to greater opportunity, not simply a source of rising and intolerable insecurity. Again, we see a key role for intelligent government involvement in equipping people for a more uncertain economic world.
The report also warns that the shifting dynamics of economic power will force us to rethink global governance. A world in which the north Atlantic region no longer dictates the terms of global economic governance is not a tragedy. A world in which such rules give way to no rules at all would be. This requires not just expanding the reach of governance bodies, such as the IMF, to emerging economies, but widening the debate within them, to reflect some of the lessons of their twenty-year growth story.
This involves recognising that liberalisation of trade and financial markets requires a careful parallel process of building domestic institutions and capabilities. It is not the absolute level of openness in the global market that matters for growth so much as the fact that it is governed by shared rules and sustainable practice.
Globalisation is a means, not an end. This way of seeing things challenges equally the political right and left. The anti-globalisers of the left have always underplayed or ignored what is good about the expanding reach of global markets by focusing on the (legitimate) grievances of the short-term losers. The right has too often shrugged off the negative social effects of global markets as unavoidable or even a price worth paying for the benefits of ‘liquidity’.
Capitalism’s ability to adapt and reinvent itself is its greatest strength. The same is true of globalisation. Even in Davos there are few who would argue that the status quo ante of the last decade is tenable. Preserving the benefits that come with open global markets for ideas, trade and investment means acting now to reduce the risk in those markets and better share the benefits they bring to our own economies. The IPPR’s case is absolutely right: the complicated reality is that for global prosperity, like capitalism, globalisation is both the problem and the solution. Globalisation is dead. Long live globalisation.
The writer is former UK business secretary. He was EU trade commissioner between 2004 and 2008