11 Responses to “We must act to share the gains with globalisation’s losers”

Comments

1. Brad DeLong: Ben Bernanke said that the world will move forward with globalization only if policy makers “ensure that the benefits of integration are sufficiently widely shared.” He is wrong: just making the benefits of integration widely shared isn’t enough. After all, the benefits of globalization and increased economic integration are widely shared today–and yet forward progress on further globalization still hangs in the balance for politico-economic and politico-security reasons.

   In the United States, at least, the problem is that most beneficiaries from globalization don’t really know that they are beneficiaries, or how much they benefit. Feckless congressmen and congresswomen don’t understand that the American economy is cushioned from their fiscal policy stupidities by the ability of the U.S. government to sell bonds internationally on a jaw-droppingly unbelievable scale. Home sellers in California don’t realize that they got such a good price because of financing from across the Pacific. Walmart shoppers see the “made in China” stickers, but don’t understand what a good deal they are getting because the rulers of the PRC are desperate to sell the products that their workers make at always low prices in order to stay as close as possible to full employment.

   The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality.

   Posted by: Brad DeLong | September 6th, 2006 at 3:46 am | Report this comment
   

2. O von Rein: Basically, globalisation increases returns on capital (in the developed countries) and gains are thus channeled towards shareholders. This readily ties back into recent studies showing the growing wedge in income growth between top earners and the average population in the US. If we then feel the need to “share the gains with globalisation’s losers”, I wonder what remedy follows? Here your commentary falls silent. Was that because you dare not mention the ‘T’ word? Progressive taxation almost imposes itself. Somewhat counter to the policies implemented by the present US administration.

   Posted by: O von Rein | September 6th, 2006 at 11:42 am | Report this comment
   

3. Martin Wolf: Brad is right, of course. The question is how to do this. There are four points here. First, as Mancur Olson would have said, ignorance is rational for the individual voter. Putting in the effort required to understand how trade and capital flows work is hard. Second, as Olson would also have said, there are concentrated interests against globalisation, while the interests in favour of it are generally more diffuse. Third, the adverse effects of job losses are visible, while the benefits of greater trade are not. Finally, patriotism is the last refuge of the scoundrel and the first refuge of the protectionist.

   So perceptions do matter. They are also difficult to shift. But if the government were seen to be concerned about the fate of apparent losers from this process, globalisation might also be politically more palatable. This, too, is a matter of perceptions.

   Posted by: FT Forum - Martin Wolf | September 6th, 2006 at 12:52 pm | Report this comment
   

4. Sharing the Gains from Globalization

   Martin Wolf’s column this week is abut how to share the benefits of globalization: Share gains with globalisation’s losers, by Martin Wolf , Commentary, Financial Times: Globalisation remains the great economic story of our era. It is also the great

   Posted by: Economist's View | September 6th, 2006 at 5:27 pm | Report this comment
   

5. Paul Seabright: The elephant in the living-room that Martin hasn’t mentioned is migration. Distance matters much less than it did for the products of human ingenuity, most of which can now be sent across the world at a fraction of their former cost, but the capacities that underlie that human ingenuity still need proximity to others to be productive. If Tony Venables is right that “moving from a city of 100,000 to one of 10m raises the productivity of all factors of production by 40 per cent”, the gains from moving labour into the world’s leading cities dwarf any of the remaining gains from moving more goods and services around the globe. And labour is going to want to move every bit as much as the other factors do. Yet in all rich countries opinion seems to be hardening against migration. What can be done to realize the benefits from migration in a politically sustainable way, and in the meantime what can Martin say to those restless spirits in poor countries who don’t see why we should preach to them about opening goods markets while our labour markets remain firmly closed?

   Posted by: FT Forum - Paul Seabright | September 6th, 2006 at 6:26 pm | Report this comment
   

6. Charles Wyplosz: Martin Wolf’s article well illustrates two things: 1) the globalisation process is highly complex and we barely begin to understand it; 2) as any economic transformation, it creates winners and losers. This is a toxic mix. The problem is that public opinions and most policymakers do not think in general equilibrium terms, the sharpest get the partial equilibrium analysis right and there is no simple truths to dispell the fallacies that float around. Telling people that things are more complicated than you think barely turns them off. The winners conclude that globalisation is beautiful, the losers are determined to bring it to an end. We went through that with the industrialisation process, which saw those who saw themselves as losers unite under the banner of communism.

   Martin is right that globalisation is a non-zero sum game. He should add that, in this case, (Pareto) transfers can, in principle, compensate the losers and buy them in. The problem, of course, is that this is a difficult undertaking. Developed economies are full of transfers, many of which have nothing to do with Pareto redistribution and all of which add up to substantial shares of already heavy public outlays. In addition, ideally transfers should be taking place at the world level because this is where the game is taking place. Since we do not have a world government, it will have to be done at the national level, but most developing countries are not equipped to do so, most of which don’t even have the means. Designing adequate transfers is bound to be technically difficult and politically loaded, but there is no alternative.

   Posted by: Charles Wyplosz | September 6th, 2006 at 7:04 pm | Report this comment
   

7. Edmund Phelps: It is increasingly proposed that a nation must “share the gains” of globalization with the losers from globalization. But what does such “sharing” mean? Understood one way, sharing could create an unwelcome precedent. Understood another way, it could trigger an overdue improvement in economic policy.

   The sympathy felt for the “losers” from globalization has been understood as providing popular support for government action to compensate them – possibly through a “hand up” in the form of retraining or interim allowances. For the staid economist, though, this is unfamiliar thinking. As a general proposition, the idea that a nation ought to share with the losers the gains headed for the winners was clearly rejected in the standard welfare economics of Hicks, Kaldor, Samuelson and Arrow. Those losing from foreign trade, it was pointed out, don’t have a monopoly on suffering. In that framework, those with the best claim to any windfall increase in the government’s taxable capacity that globalization’s gains might bring are those who would get the most from extra state aid (the greatest “marginal utility”) – thus those having low income, not in general those whose income has recently fallen.

   Moreover, not all of the gains, if any, from globalization yield an increase in taxable capacity: Globalization makes our imports cheaper, so the same old tax revenues are blessed with greater buying power. But, absent gains in wages and profits in terms of domestic product, thus a gain in productivity, there will not result an increase in potential tax revenue out of which increased subsidies and transfers could be made to losers. In contrast, outsourcing may boost productivity in the long run. However, when a U.S. firm moves work to foreign workers and capital, the immediate impact may be a fall of GDP and potential tax revenue, not a boost.

   Yet the founders of standard welfare economics, in resting it on the “utilities” of people, left it open to the thesis of Daniel Kahneman that the pain from a loss of income is intense next to the joy of an equal gain in income. So, in the utilitarian view, those suffering a loss from globalization might well derive the greatest utility gain from an extra dollar of government benefits.

   Rawls would have objected to the utilitarian premise from which this argument started. For him, economic justice is all about a structure of rewards, after taxes and subsidies, that encourages the gains from collaboration among a nation’s people in such a way as to bring the largest possible gain to those who are least rewarded. Utility and pain were not part of his terminology.

   Rawlsians, of whom I am one, would make the point that any sharing of the gains from globalization would have to come, wholly or partially, at the expense of subsidies or earned-income tax credits that would have or could have gone instead to Rawls’s “least rewarded.” In this perspective, justifying retraining and allowances for those who have lost a middle-income job would require an argument that ultimately the rewards of the least advantaged will be served by diverting state outlays to address these job losses.

   Another objection to retraining and allowances is that it might send us down a slippery slope, as Hayek would have put it, to many more such interventions. It is not just globalization that brings losers along with gainers in the home country. If the principle of sharing the globalization’s gains with losers were accepted, why not agree next to compensate the losers from the next thing that comes along? One can imagine the losers from the next wave of innovation demanding to be indemnified for job losses, no matter how many more jobs may have been created and how many other benefits may have resulted. If this sort of economic policy came to be anticipated, it might have a chilling effect on the willingness of financiers to venture the capital required.

   From a Rawlsian view, the proposal for “sharing” misidentifies the injustice from globalization. Rich nation like the U.S. or the U.K are unjust when they pocket a sizeable chunk of the terms-of-trade gain from trading with the third world. To be just, the rich countries would write checks to the third world to return to it their gains from the better terms of trade, leaving the third world with the whole of the gain from their trade with the rich.

   Yet “sharing the gains” can evidently be understood in another way. It could mean, as Martin Wolf now suggests, low-wage employment subsidies, which I pleaded for throughout the 1990s. That may seem odd, since the working poor are not new. One way to make sense of endorsing such subsidies now, not before, is to say that the situation of low-wage earners was an injustice but the effect was not acute prior to globalization – at least they were not suffering, though hardly experiencing much of Rawls’s self-realization; but now, with masses of Chinese and Indians lowering wage rates at the low-end, the effects of such inattention would become acute.

   There is another way to explain the heightened interest in subsidies. Once our economic policy is seen to be addressing low-end work with the about the largest subsidy the nation can afford, workers generally will feel well treated again and there will be more willingness to accept the ups and downs of the market. Then our countries can globalize full speed ahead.

   Posted by: Edmund Phelps | September 6th, 2006 at 7:06 pm | Report this comment
   

8. Akio Mikuni I would argue that there are gains in world trade as Asian countries have been willing to exchange their manufactured goods for mass-produced dollar notes.

   Here in Japan, we have seen many efficiently made high-tech products turned into commodities. However, Japanese farmers now nurture intensively peaches, melons, cherries, tomatos and so on with their individual names attached as brands. We choose and buy most tasty “commodities” directly from individual farmers, perhaps at much higher prices than at supermarkets. Nevertheless, we enjoy them. I also understand that Japanese “expensive” fruits are exported successfully.

   Posted by: Akio Mikuni | September 7th, 2006 at 7:27 am | Report this comment
   

9. C. Fred Bergsten: Martin Wolf’s analysis of today applies forcefully to the United States. An Institute for International Economics team led by Gary Hufbauer recently quantified the impact of trade globalization on the United States(1). Using four different methodologies, it concluded that the US economy is about $1 trillion per year richer as a result of its integration with the global trading system over the past 60 years. This equates to about 10% of GDP or $10,000 per household.

   At the same time, annual adjustment costs are estimated at $50 billion. About 200,000 workers are dislocated by trade flows each year and experience lifetime earnings losses that can range as high as 30-40%. The benefit : cost ratio for the country as a whole is a lopsided 20:1 but the costs are heavily concentrated and many more workers than are actually affected fear that “there but for the grace of God go I”.

   Another set of Institute studies has thus found that public attitudes toward further globalization are almost evenly split between favorable and unfavorable views.(2) There was a single decisive variable: the level of education of the respondent. College graduates, and even those with only partial college training, welcome the opportunities afforded by globalization. But those with a high school education or less, which still account for almost half the US labor force, resist it due to their fears of being unable to compete. Hence there is at present a very unstable domestic political foundation for further globalization of the US economy despite its huge aggregate benefits (which we found could add $500 billion of further annual income benefits if the world could move to totally free trade).
   Our studies suggest two clear remedies for the economic downsides of, and thus political backlash against, globalization. The longer-run response is of course better education. Every additional year of education for the labor force as a whole translates into an additional 10 percentage points of support for globalization. The politics of the issue could be decisively altered if the average worker could become a community college graduate rather than a high school graduate.
   The more immediate response is adjustment assistance for displaced workers. The 50-50 split in public attitudes swings to 70-30 support for globalization if the government is seen as providing effective support for losers from the process. The United States has been very slow and inadequate to implement policies such as those recommended by Martin Wolf in today’s column and will thus remain an uncertain partner in all international economic agreements until such domestic measures are put in place.

   (1)Scott Bradford, Paul Grieco, and Gary C. Hufbauer, “The Payoff to America from Global Integration”, in C. Fred Bergsten, editor, The United States and the World Economy: Foreign Economic Policy for the Next Decade (Washington, DC, the Institute for International Economics, January 2005).
   (2)See especially Kenneth Scheve and Matthew Slaughter, Globalization and the Perceptions of American Workers (Washington, DC, Institute for International Economics, March 2001).

   Posted by: C. Fred Bergsten | September 7th, 2006 at 5:08 pm | Report this comment
   

10. Andrew Smithers: Martin is eloquent as well as correct in emphasising the gains from globalisation and the need to preserve them. I particularly liked his comment that “…the offshoring of tasks is the equivalent of technological progress”.
    It is, however, impossible in a short article to cover everything that matters and I think it is important that we should be alert to some of the temporary impacts that have resulted from the rise in globalisation and which have encouraged unsuitable policy responses.
    One example is the impact of developing economies on world inflation.
    Rapidly growing economies have naturally rising real exchange rates (Balassa-Samuelson). This can be effected either by inflation rates which are above average, or by rising nominal exchange rates. The choice is, however, important.
    If, as China has chosen so far, the nominal exchange rate is pegged, then the route will be via higher inflation. The transmission mechanism is a rapid build up in foreign exchange reserves, which cannot be fully immunised and leads to rising inflation. The process is not without frictions and delays, so that the temporary impact is to lower inflation everywhere, improve the terms of trade of mature economies and increase liquidity.
    The alternative, which is to allow the nominal exchange rate to appreciate, will generally produce a less risky and more even adjustment.
    One unnecessary, but important, impact of the way globalisation has actually developed has thus been to depress inflation on a temporary basis. Another has been to increase world liquidity both directly, through the need to finance rising exchange reserves and indirectly, by encouraging easy monetary policies in response to the temporary impact on inflation.
    The risks involved have been multiplied by two biases for which the Federal Reserve has been criticised, even by other central bankers. One is the belief that asset price inflation can safely be ignored; the other comes from the asymmetry of developing economies’ influence on the inflation rates of mature ones. If their development pushes up raw material prices, including oil, relative to goods’ prices, inflation indices which ignore one but allow for the other will underrate the risks of inflation.
    Whatever the reasons, it seems clear that asset prices have moved out of line with incomes. Either nominal asset prices must fall or incomes must inflate. If the second is unacceptable to the Fed, its ability to manage the US economy as nominal asset prices fall will be a severe test. If they are successful, it will provide good evidence that ignoring asset prices and concentrating on “core inflation” are the correct policy guides for central bankers. If not, then contrariwise.

    Posted by: FT Forums | September 8th, 2006 at 1:30 pm | Report this comment
    

11. I will not comment on all the interesting and important issues made in these comments. In particular, I do not want to get involved in discussions of global macroeconomics at this stage. So I will make just three points.

    First, it is indeed clear that many of the most important questions concerning the distribution of the gains are global. They are also complex. China’s entry as a low-cost supplier of labour-intensive manufactures has, for example, damaged the position of other developing countries that had previously specialised in this area of activity. Mexico is a good example. At the same time, it has benefited suppliers of raw materials. But the institutions do not exist to make compensation in such cases. Political processes remain national and so does the framework for political redistribution.

    Second, the arguments for redistribution or compensation at the national level are either political or ethical. Fred Bergsten makes the political argument, while Ned Phelps makes the ethical argument. I have always felt that the argument for compensating those who are not necessarily particularly poor for suffering the consequences of a specific change (such as cheaper imports) is one of expedience rather than morality. Moreover, among the high-income countries only in the US is it politically necessary (or even practically feasible, given the still relatively closed economy) to identify and help those people adversely affected by trade, rather than other sources of change. So my view is close to Ned’s. As it happens many of the losers are low skilled. Provided one accepts some role for distributional policy inside countries (as I do), these are the obvious beneficiaries of such a policy. So I would argue that the losses inflicted by import competition strengthen the general case for assisting the unskilled. Moreover, wage subsidies seem a good way of doing this. In practice, retraining of adult unskilled people can achieve relatively little.

    Finally, this brings up the issue raised by Paul Seabright: migration. I have no doubt that world welfare would increase if migration were completely free. But I also think it could have devastating effects on the high-income countries. Just think of the shanty-towns one might see around London or New York, before people stopped coming. I think countries have a right to defend their internal cohesion against such an inflow. So there has to be some management of migration. So how is that to be done? That will be a subject of a future column. But I do agree with Paul that this is one of the world’s biggest policy challenges in coming decades.

    Posted by: FT Forum - Martin Wolf | September 10th, 2006 at 11:42 pm | Report this comment
    

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