Major public investments and the redistribution ofwealth are the possible bulwarks against nationalist tendencies.
As the US primaries continue to be dominated by anti-establishment candidates and Europe continues to struggle with a unified response to the refugee crisis, we are reminded on a daily basis of the drastic shift in public opinion away from the political middle towards populist candidates and extreme political parties. This is a serious concern for many reasons. As an economist, you worry because history shows that measures advocated by these groups lead to less growth, increasingly unfair income distribution, or worse.
While populist movements now enjoy extra wind in their sails, the seeds of the smouldering dissatisfaction and anger in parts of our societies have been in the ground for some time. They have been placed there by insufficient policy measures introduced during the recent decades of globalization and unprecedented technological developments – events which have delivered so much good to so many.
The present spell of globalization started about 35 years ago when China, most of the rest of Asia, South America and Central Europe began to shift towards market-based economic policies. By doing so, in effect, the global labour force engaged in producing goods for the global market expanded by 1-1.5 billion people, or by 20-30%.
The availability of incredibly cheap labour (originally with limited skills but which soon developed top-level capabilities) boosted investments in emerging markets by the world’s wealthier countries, and a sizable share of global manufacturing began to move there from the US and Europe. As a result, as these goods were shipped back to wealthy consumers, global trade, which used to increase by only slightly more than global GDP, began to grow 2-3 times faster than global GDP. Nothing of the sort had ever happened before.
This process helped contain inflation in the OECD area, supporting a multi-decade decline in global interest rates. With no inflation danger on the horizon, the world’s major central banks didn’t bother worrying about the decline in interest rates and what turned out to be excessive credit expansion, which in turn sowed the seeds for what eventually became the 2007 global financial crisis.
Globalization lifted an unprecedented number of people in emerging markets out of poverty, lending legitimacy to governments otherwise short on democratic credentials. Meanwhile, the US and Europe lost low skilled jobs, particularly in sectors where production was easily moved to countries where the cheaper labour had become available. Over time, pressure on wages moved to middleincome workers whose income growth stagnated, while those who could take advantage of the opportunities offered by globalization did better than ever before.
Two other important events took place at the same time, compounding the effects of this process. First, the Thatcher-era’s market liberalization now allowed capital to roam the world freely in search of the best return – and the lowest taxation. As a result, owners of capital have experienced 30 very good years indeed.
Second, we were blessed with some of the most amazing technological innovations, which benefitted all, whether in the form of cheap communication or progress in medical sciences. But in terms of job opportunities, technological developments increased the premium for the better educated sections of society.
This all led to a huge skewing of the income distribution in the OECD area, which has now reached its most extreme level in more than 50 years. For example, the average income of the richest 10% of the population in OECD countries is now about nine times that of the poorest 10%, up from seven times, which was the ratio 25 years ago. The Gini coefficients have grown accordingly.
This situation is further illustrated by the fact that the share of total income going to labour, as opposed to capital, is now at an all-time low. This long-term trend that spans many countries has been documented by Thomas Piketty in his 2014 book: Capital in the Twenty-First Century. More specifically, according to Loukas Karabarbounis and Brent Neiman of the University of Chicago and the National Bureau of Economic Research, the share of total income earned by labour in the world’s wealthiest countries has dropped by an unprecedented five percentage points over the last 35 years.
So, with capital taking an ever bigger slice of the pie and income growth increasingly concentrated in the hands of a small minority at the top, a larger number of people feel left behind. Some of them – looking for 140 character answers – turn to simple solutions and easy scapegoats, and thus feel represented by statements such as “it’s not your fault, it’s them foreigners, so let’s keep them and their products out”.
In most OECD countries, this group has typically expanded from 5-10% of the population 10-20 years ago to 20-25% now. It is a group dominated by older white men. Younger people, struggling to get into the labour market and onto the housing ladder, are also leaving the political middle, but unlike their parents’ generation, they tend to move left, rather than right. The appeal garnered by US Senator Bernie Sanders, the candidate for the Democratic Party nomination, is a case in point.
The political middle urgently needs to respond, and not by replicating policy measures dreamt up by populists. Rather, the answer lies in a substantial boost in public investment. More money for – and greater priorities awarded to – education and a greater redistribution of income and wealth from the top 20% to help – if not, cynically speaking, to appease – those struggling to learn the skills our now globalized world calls for.
Unless we move in this direction, nationalisms may prevail and end up scuttling globalization. A scenario in which we all stand to lose out.
Major public investments and the redistribution ofwealth are the possible bulwarks against nationalist tendencies.
