The Political Economy of Globalization

Department of History, Princeton University, 7 February 2002
Poverty and inequality are increasing globally. Multinationals are able to thwart the power of governments. They axe jobs at home and exploit workers in sweatshops in developing countries. Trade only makes the poor worse off. These effects of globalisation help explain the bitterness in some poor countries which forms the backdrop to the 11/9 attacks.

I¹m sure you¹ll be familiar this picture of the world today. The trouble is it¹s almost entirely incorrect.

For example, the proportion of the world¹s population living below the $1/day poverty line has fallen from 28% in 1987 to 22%, and the number is unchanged at 1.2bn.

Life expectancy at birth has risen in both rich and poor countries since the early 1970s and is less unequal. Likewise with under-5 mortality rates.

Income inequality is high. Everybody was poor in 1800 when the ratio of top to bottom incomes was 2:1 ­ compare 20:1 US to India now. But inequality stopped increasing in c 1975. Yet the modern era of globalisation has seen world income distribution stabilise, compared with previous 200 years, and indeed start to narrow.

Incomes have grown 5% a year in real terms in globalisers, fallen in real terms in non-globalisers.

Multinationals are paying more tax revenues, higher tax rates. The share of governments in national output is climbing. No evidence that government regulation of business is in decline ­ quite the reverse.

The consensus amongst economists is that investment in poorer countries accounts for at the very most one-fourth of job losses in domestic (OECD) manufacturing industry. Technology big part of the reason. Mostly multinationals invest in other rich countries.

Freer trade helps the poor mainly by cutting the price of imports. Most economists think it boosts growth, which is good for the poor. Even the sceptics can only find an absence of evidence that trade makes much difference to growth ­ certainly doesn¹t harm it. No economy has developed successfully by turning its back on the rest of the world. The most dynamic and prosperous have always been the most cosmopolitan.

I think you¹ll have got the message that the usual picture of the world economy is almost wholly mythical. The question is: if technological change and openness transform living standards vastly for the better, why do so many people feel so bad about the recent tech developments and about globalisation.

The answer? In a nutshell, It¹s the politics, stupid. In my book I link the new economy debate with the globalisation debate, & suggest the political economy of technical change in our own countries sheds a lot of light on the positions various people take on globalisation.

Here I concentrate on three areas. First, what does the argument that has been played out on our streets appear to be about? Second, what is it really about and why is it happening now? Third, how can we move forward constructively from the entrenched positions everybody has now taken ­ especially, if you believe as I do, that globalization is enormously beneficial.

So let me start with the basic claims made in the clash between campaigners and most economists. The anti-globalisation campaigners between them make a wide range of claims. Most often they concern poverty and inequality, effect of growth on the environment.

For example, globalisation has brought about the most obscene inequality we have ever seen – favourite facts include: increases in pay of US CEOs compared to the average; inequality in China or Brazil; US living standards compared to sub-Saharan Africa; Microsoft could eat Costa Rica for lunch etc. Or that globalisation causes poverty ­ free trade means US maize gets dumped on African markets, destroying the livelihoods of local farmers. Growth and trade are degrading the environment.

Another cluster of claims concerns multinationals ­ unaccountable and secretive yet gaining power at the expense of governments. Exploiting the poorest of the poor through GM seeds, expensive medicines and so on.

Or that financial markets are inevitably destabilizing, speculate deliberately against vulnerable countries, and are a force for evil – even George Soros says so. There¹s a conspiracy to keep poor countries in debt because that gives the west a lever over them. (Even the most moderate people believe global financial markets are a Bad Thing – this one is very entrenched and few people can understand what problem there could be with a Tobin tax. In reality, it would likely destabilize financial market by reducing liquidity.)

There¹s a real mix of truth, distortion and downright error in this stew. In the book I spend some time on setting out the evidence. That there¹s good news on poverty reduction, life expectancy, that increasing inequality long predates globalisation and may in fact be stabilising, that openness and growth go hand in hand in the sense that no country has ever developed by turning its back on the rest of the world, and so on. Not going to dwell on that here ­ it¹s all documented in print.

What¹s interesting in presenting the complex details of empirical evidence to most audiences is that they don¹t actually care about the facts. People are not open to having their minds changed by rational contemplation of the evidence. What¹s going on is not for the most part a technical debate about the best ways to reduce poverty and narrow the gap between rich and poor countries, which is what you might think if you took at face value the kinds of things said on both sides. The technical debate is important of course but misses the point in terms of political economy.

Which is that it¹s not really about globalisation at all. After all, the campaigners don¹t have an alternative analytical framework for the global economy. They only know what they¹re against, and indeed understand the irony in their being globalised and cosmopolitan themselves.

This is where the issue of new technology in the western economies comes in, and takes me on to my second question, what¹s really happening in this debate and why now?

The clue lies in the fact that the globalisation debate has been pretty much internal to the advanced economies, just as the increase in international linkages has mainly taken place between the rich economies. It¹s about us, not the developing world.

What¹s been changing with us? A number of things including demography and geo-politics, but technology too.

Here I need to say something about the new economy. Some people have always been sceptical, many became so after the bust. I spend a few chapters setting out the evidence on whether or not there has been a tech-related structural change in the US and other economies, and why that¹s separate from the question of stockmarket valuations.

I find the evidence of a deep structural change compelling. Not so much because of growth figures, as these will probably always be disputed ­ after all, economists are still debating how much difference railways made to the economy.

Historical record suggests that lags between better technology and higher productivity are long and variable. Paul David¹s electrification eg suggests a 50 year lag. But growth accounting assumes it¹s almost instantaneous. Also measurement issues ­ measurement of output in services, ie most of the economy, appropriate price indices, does GDP ever capture big qualitative changes (eg shampoo). Cyclical adjustment, measurement of capital stock and should it include intangible assets and so on. So we shouldn¹t get hung up on precise macroeconomic growth figures.

Rather, I¹m persuaded by combination of case studies and other signs of structural breaks in macroeconomic relationships ­ eg drop in the Nairu in US and UK, surge in FDI and trade in intermediate goods, switch in stockmarket valuations to reflect intangible assets. And also social change.

It will be a long while before cynics change their minds. But to me, it¹s Œonly¹ about being able to type faster in the way that trains were only faster horses and electricity only meant being able to read later in the evening. Actually electrification set in chain a series of responses ­ new factories, assembly lines, universal basic education, corporatism ­ which utterly transformed our economies and societies.

Growth accounting shows steam and ICT running neck-and-neck in terms of impact on aggregate growth. Cliometrics famously dismissed railways as not very important in their contribution to growth ­ it depends what you think of urbanisation, made possible by transportation of food from countryside to town.

As a profession we¹re prone to being over-reductive. Relatively few economists, other than historians, have written about the big picture on capitalism and technology.

Karl Marx is one of the exceptions: “The history of all hitherto-existing societies is the history of class struggle.” Is it not possible that the great debate is actually the playing out of conflict between different groups in the economies of the north?

After all, if you¹re talking about big losers as opposed to not-very-big gainers, those groups are unskilled northern workers, middle-ranking professionals delayered from corporations and probably all kinds of workers in bureaucratic institutions like public sector. That depends on the extent to which you buy the argument that ICT will make classic command and control pyramids redundant. I do ­ have the eg of crisis of management in such orgs in UK public sector.

In fact, we¹ve got the same alliance between unions protecting specific sectors of industry and radical middle-class students as characterised the late 1960s. Classic coalition of progressive politics. Can never stretch historical parallels too far, but that was also another era of multinational bashing, and Œgnomes of Zurich¹ being blamed for financial crisis.

Of course steel workers, farmers, textile workers are against more globalisation – even those unlikely to experience the lifelong job stability and progression their parents enjoyed as bureaucratic cadres. Globalization has been bad for them; more will be worse.

But it¹s not effective to campaign on self-interest, and never mind the poor. Political messages have to be more high minded. They square the circle by insisting globalization is bad for the poor too.

So if you say, the world is a terrible and unfair place, and the rich and powerful are still rich and powerful – but actually things have been getting a bit better for the poor, and multinationals are creating jobs and boosting wages in developing countries, this is not popular. Undermining a protest whose roots lie in a different set of issues ­ namely structural change in our own economies.

So to my third question, which was how do we move this debate on constructively? I want to propose that we abolish the third world, forget about the development ghetto and talk instead about the need to build a wealthier and fairer society globally.

There are commonalities of analysis if you compare problems internal to the north and the north-south problems. Poverty and Œtoo much¹ inequality are a problem anywhere even though they are of course profoundly different experiences depending on where they occur.

Analytically, we are moving away from another example of economists¹ reductionism, which is simple solutions to complex problems. That¹s because of the tools that allow the problems to be framed in much greater complexity and depth. It is an analysis drawing in several places on spillovers and increasing returns.

For instance, knowledge spillovers creating increasing returns to investment in knowledge such that social return exceeds private return can create virtuous and vicious circles of low skill and poverty versus high skill and wealth.

This catch-22 applies not just knowledge narrowly-defined but to values and customs ­ important for inner-city clusters of poverty in western cities. Why would you bother to give up drugs and get up for work if nobody else around you has good habits so there are no jobs locally and what¹s more potential employers will judge your attributes by your address?

This is inherently geographical. The exchange of knowledge, however defined, is not a conventional market transaction: (a) Non-excludability means there are large externalities; (b) Success of transaction, or its quality, depends on proximity. Passing on values and all sorts of tacit knowledge is done by personal contact with people you admire.

Theme has been developed in literature on inner city deprivation. Applies more widely: why does wealth creation observe borders, these notional lines on the map?

It makes migration a key issue. This is the great difference from the last era of globalisation. (Percentage of US population foreign born was nearly 15% in 1911, 8.6% in 1990. Migration rates reached 142/1000 from Ireland in 1880s, 102/1000 to US in early C20.) Current debate tends to be about tension between north wanting to allow in only skilled workers ­ agenda of keeping controls tight enough to prevent an inward flood – and concern that this is cherry-picking, a drain on finances and skill base of south. we must open our borders far more to people as well as goods if sincere about helping development process. Anna Lee Saxenian has documented links running from immigrants in Silicon valley to new industries in India and Taiwan ­ brain circulation not brain drain.

John Stuart Mill (Principles of Political Economy): ŒThe economic advantages of commerce are surpassed by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. …… There is no nation which does not need to borrow from others.¹

So it¹s not a new argument, but increasingly important the more economic activity shifts from tangible and easily-monitored goods to intangible goods depending on tacit knowledge. And as the quotation indicates, it¹s two way. We also need different ways of seeing and thinking. Diversity is good in itself. Greater positive knowledge externalities in a diverse group of people. I don¹t think this is anything like the conventional way of thinking about migration.

Add to these human capital spillovers the production linkages between firms causing geographical agglomeration of manufacturing. Each company is part of a network which creates a strong externality for each individual member. Success breeds success in business clusters.

In other words, technology and globalisation are moving the goal posts. Can the laggards catch up? Successful launch of economic growth is like setting off an avalanche. Got to drop several pebbles that will gather enough critical mass fast enough to trigger a surge. But if successful can be big.

So is the outlook good or bad? Hard to co-ordinate policies in the right way at the right time ­ no panaceas. But dramatic results if you get it right. Seen the drama in the egs of countries that have succeeded ­ eg Korea, eg European periphery since 1980. Economies can be transformed within a generation. I¹m optimistic for two reasons. One, to be provocative because gloom is so fashionable. Two, increasing importance of tacit knowledge, experience, human creativity in the economy basically good news for a wider group of people than those who controlled key resources in the past.

Presentation by Diane Coyle at Princeton University, Department of History, 7 February 2002.