The losers of globalisation

Brexit, Trump and opposition to trade deals such as CETA and TTIP, demonstrate a growing unease with globalisation. Despite the increase in wealth and standards of living it has brough, economist Branko Milanovic has revealed that globalisation and inequality remain intrinsically linked

‘Hurrah for globalisation. Danish foreign minister Kristian Jensen released a book with this title in 2003, when he was a 32-year-old MP for the ruling Liberal Party (Venstre). It didn’t break ground, either in sentiment or argument, but aptly expressed a worldview that has dominated global affairs since the end of the Cold War: an open world with a free flow of capital and goods increases wealth and makes our lives better.

A Gallup poll conducted the following year showed that of all the Western nations, Danes had the most positive view on globalisation. But that is changing, as Denmark and the West is swept by anti-globalisation sentiment.

In Europe it was best exemplified by the shocking referendum this summer in which a majority of Brits voted to leave the EU. Many analysts agree that the vote to leave, which shocked the financial and political establishment, was largely driven by anti-immigration and globalisation sentiments.

The referendum brought to light a growing divide between social classes. Generally speaking, wealthy and highly educated voters voted to remain, while the working class wanted to leave.

Branko Milanovic, a Professor of Economics at the Stone Center on Socio-Economic Inequality at University of New York, claims this divide should come as no surprise. He argues that we are witnessing an ideological schism between the highly educated cosmopolitan citizens, who have benefitted from globalisation, and the lower middle and working classes, who have lost out.

“There is a schism and it stems from some groups having had a very good period over the last 25 years. These groups are in general highly educated, mobile and can take advantage of changes in technology and globalisation,” he says. “The other groups are those that have had to bear the brunt of globalisation.”

Branko Milanovic. Illustration by Peter Berke.

Branko Milanovic. Illustration by Peter Berke.

The elephant graph
Last summer, Milanovic released the book Global Inequality: A New Approach for the Age of Globalization. By combining historical accounts and data, Milanovic compared inequality across the globe and found that while global income inequality is falling, increasing inequality in the West poses a serious problem.

In 2012, while acting as head researcher of the World Bank, Milanovic produced a graph that, due to its shape, has popularly become known as ‘the elephant graph’. It depicts changes to real income globally from 1988 to 2008 and shows that while most of the world’s population had achieved sizeable gains, especially in emerging markets like China, the income of working and middle classes in the West had actually decreased. At the same time, the richest one percent had experienced a considerable increase in their share of wealth. In other words, the spoils of globalisation were being unequally distributed.

Following Brexit, as analysts and politicians around the world tried to grapple with rising populism and anti-globalisation, the graph came to prominence, with Bloomberg calling it “the graph of the decade”. Decades of globalisation may have benefitted the world as a whole, but that provides scant comfort for its losers.

“I do not believe it makes political sense to tell the lower middle class in rich countries to be happy about emerging incomes in China and India. People everywhere primarily look at themselves and their families,” says Milanovic.

The 2008 fallout
Since the Great Recession in 2008, countries across Western Europe have been slashing welfare in an attempt to balance budgets and stimulate growth. But as Milanovic explains, austerity measures have a multiplying effect on anti-globalisation sentiments and populism.

“I think it exacerbates the problem in the long run. Especially when we are dealing with policies around crucial public goods such as education, health or infrastructure. It will make it more difficult for the children of those that have lost or fallen behind. It is hard to get people who are middle aged and older to adjust to a changing world, so we should be thinking about their children, as we need to make sure they don’t get left behind.”

Inequality is not just an economic issue, but a political and societal one as well, he argues, adding that there are three main reasons for why we need to be concerned about inequality.

Firstly, there is empirical evidence that inequality impedes growth as a result of hindering people from achieving their highest potential due to lack of affordable education, and through the rich being unwilling to finance infrastructure such as public education and transport.

Secondly, it harms social mobility and creates an inequality of opportunity, as current levels of income or wealth inequality negatively impact future generations.

Thirdly, inequality leads to plutocracy, where an increasingly small number of people end up in a position to manipulate the electoral process and taxes to their benefit.

“We can address inequality by, for instance, helping children get educated, or through direct transfers of wealth. But if we don’t deal with it, then that can lead to less than desirable outcomes.”

Frustrations with globalisation can also lead to bad policy, as exemplified by Donald Trump’s proposal for a wall on the Mexican border.

“Brexit is also a very clear example of a sort of rejection of globalisation. It was based on huge concerns about mobility of labour. Places like London and the south, potentially the whole of England, have benefitted from the free movement of capital, but I don’t think you can have that without the free movement of labour. Politically, the debate about inequality and globalisation can easily turn towards keeping out migrant workers.”

READ MORE: A bleak and violent future

Worst case scenario
In his book, Milanovic sets out an argument for how inequality may have played an important role in creating the environment that sparked World War I. Resentment was high and nationalistic populism soared. And just like then, modern populism could just as easily lead to war.

“I am somewhat pessimistic about the future. The kind of populism and nationalism we are witnessing is very dangerous. The soil can be ripe for conflict when you consider the possibilities,” he says. “We have to fear similar kinds of populism today. When we talk about populism, we are mostly talking about Western Europe and the US, but I don’t think the situation in Russia and China is significantly different.”

The end of World War II marked the beginning of a period that Milanovic refers to in his book as the ‘Great Levelling’. Inequality in the West decreased significantly and remained low up until the 1980s. The emergence of strong trade unions and large investment in mass public education played a significant role in the levelling of income. However, in a globalised world, Milanovic argues, we need more innovative solutions. Trade unions are on the wane, and he thinks it is doubtful they will strengthen, while the free movement of capital has made higher taxes less feasible.

“The ways to tackle inequality today will not be the same as back then, the economy has changed. Instead we should think about giving strong incentives to the middle class to get access to assets they currently don’t have. For instance, we have had a lot of incentives for the rich to decrease their taxes, but there hasn’t really been any help for the middle class to become shareholders, or owners of stocks in the companies they work for.”

Milanovic argues that one way to tackle the issue is by people becoming what Margret Thatcher called ‘people’s capitalists’. This would make working people less dependent on income from wages, and more on investment returns.

“Theoretically each of us has two endowments. Firstly, there’s labour endowments, which are influenced by education, skills and so forth. And secondly, there are capital endowments, which are all kinds of property that give returns. The problem is that a lot of people have zero returns because they own little or no property. Other ways would be to implement a citizens’ grant or wage, increasing the inheritance tax, and placing a tax on wealth.”

Milanovic believes that there are tools available to prevent the nightmare scenario of another global conflict. And he claims that the re-emergence of the debate about inequality shows that there is a possibility of countering the situation.

“Reversing this situation will require a very long political process. We need two things: dissolution of the status quo, and ideas about what to do. And as we see now, the greater interest in recent years has brought forth many ideas. The taxation of wealth might seem utopian now, but if in the future we could implement a global registry of wealth that allows us to know how much each individual owns, then we could do it. And, actually, the Nordic countries are good example of such a possibility, as the data available there is extremely good.” M

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By Elias Thorsson

Managing editor. @Eliasthorsson

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