View: De-globalisation & what emerging markets should learn from this
Emerging markets have been the biggest beneficiaries of the globalisation making them competitive. As the phenomenon loses its sheen in advanced economies, here's what lessons the emerging economies should draw from it.
A number of mainstream economists argue that the rising trend of de-globalisation led by advanced economies (AEs) like the US makes for bad economics. Trade protection and immigration control is just as damaging to their economies as the strident brand of nativism is to their societies. However, a hard look at the data on the gains from globalisation over the last few decades tells us a somewhat different story. The expansion of North-South economic relations that underpins much of globalisation has been biased against the North.
Some of the solid empirical work on globalisation has come from private research agencies and thinktanks like Capital Economics (CE) that provides some interesting evidence in a series of research notes on the “death of globalisation”. CE economists estimate that roughly a third of global per capita income growth since 1990 has been due to productivity enhancements riding on globalisation. However, the bulk of these benefits have accrued to the emerging markets (EMs) and not to the AEs.
Trade and investment flows with the external world have certainly helped AEs reconfigure their entire structure of production, choosing to retain higher value generating operations and offshoring the lower ends of the supply chain. However, this restructuring has provided a one-off benefit. It has had a minor impact on subsequent productivity gains. Instead, secular gains in per capita income in AEs have depended largely on technological change.
As its pace of change has faltered over the last decade or so, so has per capita income growth. The deceleration in technological change could partly be the effect of low investment and innovation and partly the fading additional gains from the internetcomputer revolution that is yet to be replaced by a decisive upturn in the new cycle driven by machine learning or AI.
The obvious place to look for losses in advanced economies due to globalisation is their labour market, in the death of relatively low skilled but employment rich sectors like textile and the support economies that grew around it. There are varying estimates of the job loss caused by cheaper imports from China. Economists Autor, Dorn and Hanson in their classic paper ‘The China shock: Learning from labour market adjustment to large changes in trade’, estimate that competition from China caused direct manufacturing job losses of 1.5 million between 1999 and 2007.
Including the support economies, the losses would be much higher. They also point out that the re-absorption of this displaced labour has been slow and incomplete. This is reflected in the share of wages to GDP that dropped by a good 5% from 2000 to 2017.
There is a related problem. Technological change has indeed been the driver of average wage and per capita growth. But the average obfuscates the growing difference or the “college premium” between skilled white collar earnings and blue collar earnings. The result has been stagnation of blue collar incomes and rising inequality. The US Census Bureau’s Gini coefficient, a measure of inequality, shows that in 2019 it was the highest in 50 years.
Europe has also seen a rise albeit less than the US, possibly because of its social welfare schemes (though tottering now because of fiscal problems) and the fact it has indeed lagged behind in technological innovation.
The counterargument from globalisation groupies would be that inequality and dropping labour share are all due to technological change; globalisation has little do with it. That is putting the cart before the horse. The strong link between average income growth and technological change in the AEs has emerged because the forces of globalisation have left the AEs with the “high end” sectors where both survival and growth depends on the rapidity of technological change. The dependence would be much less in a more balanced production structure.
Why should this reconfiguration entail a “cost”? For an individual company, say in American IT, a sector that has survived the churn of globalisation, offshoring makes eminent sense. However, at a macroeconomic level both the disappearance of “job-rich” sectors and growing inequality raises the challenge of creating adequate demand that feeds growth.
Researchers have explained the boom in consumer credit in the early 2000s as a bid to keep spending alive. This ultimately precipitated the Great Financial Crisis of 2008. The panacea being discussed currently is a universal basic income to prop up aggregate demand. In the absence of production rebalancing, governments will have to think of these financial and fiscal props that might prove unsustainable.
Then there are the social costs of globalisation that ultimately manifest in economic costs. The intensity of America’s opioid addiction crisis maps directly into regions and demographic groups that have borne the brunt of the contraction of economic opportunities that globalisation has brought. The fight against this epidemic involves large federal and state expenditures on health.
The bottom line is that de-globalisation has a logic and hence momentum of its own, that is unlikely to die down once a Twitter happy president demits office or Brexiteers are booted out of parliament. The agenda of building a more balanced industrial economy with a mix of high- and low-end jobs will remain. The biggest losers from de-globalisation would be the EMs who have benefited the most from globalisation. They better have a coping strategy in place.
(The writer is Chief Economist, HDFC Bank)