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In Conversation with Michael Spence: On Globalization

Author(s): Michael Spence

Date: Aug 2, 2016

Theme(s): Finance & Macroeconomics

Insights: In Conversation With

Academic Council Chairman Michael Spence says to vilify globalization may be unfair.

Q: We are seeing a particularly divisive mood prevailing across politics around the world; first in the U.K. and Brexit, now in the U.S. and the rise of Donald Trump. Most of this sentiment appears to be directed at globalization. Does inequality lie at the heart of this anger and discontent and if so, why would this be the case?

Inequality certainly deserves to be high on the list of contributing factors. Immigration and perceived threats from terrorists also figure in the mix of populist and nationalist discontent. Finally, governance issues are also challenging. People want to have a sense of control, but increasingly feel that forces and polices that affect them are far away and not within their control. This is especially true in Europe, and was a contributing factor in Brexit.

Q: Is globalization the villain or victim when discussions about inequality are raised?  

Globalization is frequently linked to inequality. In fact, globalization – meaning the opening of the global economy – has been a major factor in declining global inequality (the result of the growth of developing countries).  But it has also contributed to rising inequality within developed countries themselves. Part of this is transitional, as these economies adapt, but it it is still a challenge that needs to be addressed.

Q: Have governments in developed countries done enough – if anything—to address this inequality? Are there any quick fixes for this dilemma?

Governments, and indeed, economists and policy makers have not done enough. The inequality trends are at least three decades old. European countries have done better in mitigating the forces (global and technological) that have pushed market outcomes in the direction of great inequality. While there are no quick fixes, there are actions that will help in the short and medium term. They depend on achieving some kind of consensus and avoiding polarization and gridlock. Well-designed social security systems, like those in the Nordic countries, do help reduce inequality and maintain social cohesion. Tax systems either help or hurt, depending upon how they are structured. Deficiencies in education and training ad re-training options can be remedied and that would make a substantial difference too.

Q: Have we seen any historic precedents to show that globalization and inequality go hand in hand? Or is the sentiment living very much in the now?

If you take the 200 years before World War II, you saw global inequality rapidly rising, because “western” countries grew and everyone else didn’t. So the past 70 years of globalization have been more inclusive in the broadest sense. In the pre-war version (of globalization) you saw colonies and empires. It was a completely different structure, and there was no modern technology to underpin globalization in its modern form.

Q: If globalization is seen as a villain, how do governments, economies change this perception that inequality and globalization go hand-in-hand?

Globalization hasn’t really been a villain, but it has been more complex in distributional terms than was acknowledged. Economists have contributed to this, as did politicians and other elites. Economists, in particular, held to the belief that the overall net benefits of globalization were positive (probably true) and assumed that somehow the benefits would be distributed equally. But this last point is naïve. There are no mechanisms, for example, for substantial redistribution across national boundaries. And even within countries, distributional issues were largely ignored. This is changing now, but it is a late start, and this late start has unleashed populist and nationalist forces.

One reason for the neglect of distributional issues, especially in the United States, was that in the first three decades after World War II, the early years of globalization, the distributional aspects of growth patterns were quite benign. Distribution seemed to take care of itself. But that pattern shifted in the 1970s and became steadily worse. The post-crisis period highlighted the issues, because adverse distributional trends in low- or no-growth settings are particularly problematic, because lower income segments are actually losing ground in absolute terms.

One way to describe the challenge is that governments and other institutions need to work to restore inclusiveness to growth patterns. That means less extreme income and wealth inequality. But there needs to be more than that. The skills and human capital needed to keep up with the changing demands of work, because globalization and technology have changed the demand side of labor markets very quickly and the response rate on the supply side has come more slowly. Also, until recently, we have seen weak and slow policy responses on the part of governments.