Critics of Globalisation

Your anger is justified; your position is not

In my previous post, I outlined the similarities between the last 15 years, and 100 years ago, with the most recent parallel being between post-Depression protectionism and trade wars, and current events and groups. Across Europe, a rising new nationalism is threatening to pull apart the EU, evidenced by the rising popularity of groups such as:
·         UKIP in Britain and the resultant Brexit decision
·         Freedom Party in Austria
·         ELAM in Cyprus
·         Golden Dawn in Greece
·         Danish People’s Party in Denmark
·         Finns Party in Finland
·         National Front in France
·         Alternative for Germany in Germany
·         Jobbik in Hungary
·         Northern League in Italy
·         Party for Freedom in the Netherlands
·         People’s Party – Our Slovakia in Slovakia
·         Sweden Democrats in Sweden
·         Swiss People’s Party in Switzerland

Many of these groups appear to focus on immigration issues but if a desire to regain control of their borders (whether they can or not) results in countries leaving the EU entirely, this can easily affect not just immigration but also trade and foreign investment – as will be the impact of Brexit on Britain. And this can be seriously detrimental to an economy’s prosperity, especially ones heavily reliant on export markets, imported goods and foreign capital.

Donald Trump’s rhetoric regarding China, Mexico, NAFTA and the TPP has a similar potential to unwind international relations and integration. And Pauline Hanson’s crusade against Islamic Banking also has the potential to prevent a significant amount of valuable infrastructure investment in Australia.

It is my position that a retreat from globalisation is, at best, a second-best option, and at worst, could undo decades of wealth-creation, international relations, and global poverty-reduction success. I also concede that part of the blame belongs with how globalisation has been sold to the world.

The goal of globalisation has been to generate wealth – by giving producers access to a larger global (rather than just local) market, it would encourage them to specialise in the tasks at which they had greatest advantage, becoming as efficient as possible.

For example, massive iron ore and natural gas operations in Australia are possible because, even though they produce far too much iron ore and gas for Australia alone to consume, globalisation allows much of it to be exported (at higher-than-local prices too). In an insular society, such operations wouldn’t exist in Australia.

Globalisation, in very simple terms, allows individual people, businesses, industries and countries to produce more than they individually consume, and export the rest in exchange for things they ordinarily wouldn’t produce for themselves (or wouldn’t produce as efficiently). Consequently, a gloablised world should produce much more wealth than an insular world.

And from this perspective, globalisation has been a spectacular success. As illustrated below, since 1961, the world economy has expanded 6.40-fold (in terms of real GDP). Moreover, over the same period, world population increased only 2.39-fold.

The first graph below illustrates some well-known countries that out-performed the world as a whole. Most of these are developing countries, as to be expected (developing countries inherently have greater growth potential than developed countries). Some surprises were Iceland, Luxembourg and Australia, which marginally out-performed the world over this period. But the real stand-out was China, which expanded 95.86-fold in real GDP and only 2.10-fold in population! For perspective, that is like a childless couple on a $50,000 combined annual salary in 1961, having two children and earning a combined $4.8 million annual salary now.

The second graph below illustrates some countries that under-performed the world economy – mostly developed countries, as to be expected. But even Switzerland, the slowest, expanded its real GDP 3.06-fold since 1961, and its population only 1.54-fold. Furthermore, of all 48 countries above and below, Zimbabwe is the only country whose population out-grew its real GDP over this period.

This appears to be spectacular wealth-generation over and above population growth. Moreover, beyond mere growth, the percentage of the global population considered to be living in poverty (poverty being someone who lives on under $1.90 a day, as defined by the OECD) has fallen from 42.15% to 10.68% in just over 30 years (1981-2013). This is real progress and one would have to be quite bold to assert that globalisation had nothing to do with this, or that this progress was made despite globalisation.

The problem was not in globalisation’s ability to generate wealth, but in how that wealth was subsequently distributed. It didn’t particularly care who generated it and where it went – just that the total amount of wealth was as high as possible given limited resources. It was then government’s job to redistribute this wealth ‘fairly’. But the failure of governments to do this resulted in blame being levelled at globalisation.

Because largely, governments have been pursuing globalisation-friendly policies for decades now. Global trade increased 30-fold between 1950 and 2007 (between WWII and the GFC). Consequently, enormous amounts of wealth were generated. But some governments failed to redistribute it properly. Ill-conceived notions of ‘trickle-down economics’ perpetuated the idea that giving tax breaks and concessions to the wealthy will cause them to hire more people and invest more productively than the government could ever do, thereby trickling down to the rest of the economy and stimulating growth. But this is something that has been shown time and time again to be ineffective – even slowing down economic growth – especially when compared to investment in infrastructure, or even just tax concessions to the low end of the socio-economic spectrum.

Consequently, this will cause the rich to get richer, the poor to get poorer, and the middle class to disappear. As illustrated below, there appears to be a very clear relationship whereby countries that do not adequately tax the top end and redistribute to the middle and lower ends have higher income inequality. For all OECD countries (except Lithuania, for which data was unavailable), there is quite a strong negative relationship between each country’s Gini coefficient (a measure of income inequality) and its tax revenue as a percentage of GDP. Put simply, it is probably not a coincidence that the US, Chile and Mexico have the highest income inequality, as well as some of the lowest rates of taxation in the OECD, while Finland, Belgium, Norway and Denmark have some of the lowest income inequality while also having some of the highest rates of taxation in the OECD. There are exceptions, of course: Korea has a below-average income inequality while also having one of the lowest rates of taxation in the OECD; conversely, Italy has one of the highest rates of taxation and an above-average income inequality. But the trend is quite clear – higher tax rates are likely to improve income inequality in countries such as the US, Chile and Mexico.

Note: tax rates in the above graphs are calculated using a 10-year average and a 3-year lag, and compared to the latest Gini coefficient data available for each country so that any changes in tax rates over time are properly absorbed into the economy without causing too many statistical anomalies

But instead of blaming government and demanding their fair share of the ‘pie’, the victims of this inequality are blaming globalisation. What they don’t realise is that to wind back globalisation will reduce the overall size of the ‘pie’ without any guarantee that the smaller ‘pie’ will be shared any more fairly.
John Maynard Keynes observed a similar trend following the Great Depression in the 1930s. Economies such as Britain were pegged to the Gold Standard at the time. Consequently, when the Depression hit, exchange rates couldn’t fall to absorb some of the shock, and Central Banks couldn’t sufficiently drop interest rates and flood the market with liquidity, lest they break their ‘pegging’. Keynes, an ardent free-trade supporter, realised that the solution was to devalue the pound (or ideally, abandon the Gold Standard altogether and allow the pound to float), not retreat from globalisation and enact protectionist measures. History has shown quite well that countries that abandoned the Gold Standard earliest in the Depression had the fastest recoveries. Keynes knew that the solution was to make globalisation work properly via a more efficient monetary system, not retreat from globalisation.

The situation now is quite reminiscent of this insight - the solution is for people to demand of their governments their fair share of the globalisation ‘pie’, not throw half of it out the window and hope that the smaller ‘pie’ will somehow get shared more fairly. The difference is, this time, it’s the tax system that needs improving, rather than the monetary system – though I’m sure we could debate about some improvements to the latter too.