Globalization is good & it should be better regulated.

“The benefits of globalisation are widely dispersed, often unseen and thus all too easily taken for granted

– The Economist

Globalization has become a buzzword used to describe the international exchange of ideas, products, political movements, music and many other aspects of culture. While the world has changed dramatically as a result of this phenomena, disentangling what that means and how good it is, is an overwhelming feat.

The Economist took this challenge and tackled the pros and cons of globalization in its “Special report: The world economy”. Through a series of articles the magazine argues that globalization, on the whole, is a positive force that must be embraced but that must also be managed with better policy.

Specifically, the magazine proposes a “three-pronged agenda” for the course of globalization including  demand management, active labor-market policies, and competition.

Demand Management.

The magazine proposes that workforce retraining and adequate immigrant integration are critical to fortifying dynamic economies.

Workforce retraining

  • “Too little effort and money has been expended on taking care of those who have been hurt by the opening up of markets. America in particular makes little attempt to assist people find new jobs to replace lost ones.”
  • “Members of the OECD…set aside an average of 0.6% of GDP a year for…job centres, retraining schemes and employment subsidies—to ease the transition to new types of work. America spends just 0.1% of GDP”
  • “Jobs and pay have been greatly affected by technological change. Much of the increase in wage inequality in rich countries stems from new technologies that make college-educated workers more valuable.” Government-led retraining must support less educated workers left with fewer employment opportunities.

Immigrants

  • “Along with trade, migration is one of the two main sources of public anxiety about globalisation” however, it’s important to remember that immigration enriches the workforce [by raising] average productivity and living standards”.
  • “To deal with the tension between immigration and the welfare state, three rules suggest themselves. First, make benefits conditional on having paid into the system. Second, tie the funding of local public services to local tax revenues to ensure an automatic response to an influx of migrants. Third, restrict migration to prime-age, skilled workers who are more likely to get jobs and less likely to lose them in a recession”
  • A lesson from America’s engagement with Mexico is that a formal system for low-skilled immigration, perhaps with fewer entitlements than for skilled workers, is far preferable to turning a blind eye to informal migration.

Active labor-market policies.

Politicians should work together to end imprudent international corporate tax breaks and should understand that creating trade barriers would hurt the poorest.

Capital

“For developing economies, capital mobility is a conduit for new technology, management know-how and business networks. It also allows investors to vote with their feet, encouraging governments to follow prudent regulatory, monetary and fiscal policies.” However, “rather than imposing discipline, access to foreign capital seemed to allow countries to get into bigger messes. Whereas academics argue about the pros and cons of free movement of goods or people, they now mostly agree that liberalising capital flows can sometimes do more harm than good”

 

The growing practice of using offshore investment to avoid corporate tax might make capital mobility the target of popular anger, alongside trade and immigration.

“Many people see footloose global companies and deregulation as the handmaidens of the worst kind of corporate practice. Yet economic ills such as weak real incomes, inequality and immobile workers may be partly due to a failure to liberalise product markets further…Deregulation is almost always a difficult task. Those whose interests are hurt by such reforms protest noisily. The political costs quickly become apparent, whereas the gains may not become clear before the next polling day…. In an age of insecurity, it is hard to persuade anyone that they should give up such protections for the greater good”

 

“A study…suggests that in an average country, people on high incomes would lose 28% of their purchasing power if borders were closed to trade. But the poorest 10% of consumers would lose 63% of their spending power, because they buy relatively more imported goods”

Market

 

Factory jobs peaked in the 1970s, but manufacturing output has continued to increase. Indeed, America’s share of world manufacturing output, on a value-added basis, has been fairly stable at a bit under a fifth for the past four decades. Thanks to advances in technology, fewer workers are needed to produce the same quantity of goods. But since trade with lower-cost countries and technological change have similar effects on labour-intensive production in the rich world, it is hard to disentangle their effects.

“America has run a trade deficit every year since 1976. But this does not mean that America is ‘losing’ at trade, as Mr Trump suggests…a trade surplus is not a virility symbol”

“In most rich countries, particularly America, the trade deficit widens when GDP growth is strong, and shrinks during recessions. To balance trade, Americans would have to invest less or save more. Neither would create jobs”

“Almost two-thirds of the new jobs that will be added to America’s economy in the next decade will be low-skilled or mid-skilled jobs, according to a projection by the country’s Bureau of Labour Statistics. Such demand may not easily be met by indigenous workers, even at higher wages”

Competition. 

“Competition policy needs to become more vigorous” to break with current industry concentration.

“A landmark Supreme Court judgment in 2004 said monopoly profits were the just reward for innovation. That has made it harder for trustbusters to root out rent-seeking or block mergers”

 

There must be greater competition with large firms so that “startups can thrive and incumbent firms are kept on their toes…the growing habit of big tech firms to swallow startups that might become rivals is worrying. Such deals often suit both sides—the buyer gets the innovation and the startup makes a lucrative exit—but the practice saps dynamism from the economy”

Without competition, there is “less chance of the dynamism that boosts productivity (and earnings) and creates new job opportunities”

The article goes on to make the following recommendations:

  • As borders have been steadily opened up, policies needed to complement globalisation have not kept pace, particularly in America. They need to catch up.
  • Dani Rodrik, of Harvard University, argues that a good way to build public support for globalisation would be to link trade pacts with agreements on, for instance, the taxation of multinational companies. Such a deal would give national governments more rather than less policy autonomy.
  • In America and Britain, a strong case can be made for locking in low-cost long-term funding to finance a programme to fix potholed roads and smarten up public spaces. Private pension funds with expertise in infrastructure have a role to play in such schemes.
  • Skeptics say that those who stand to lose from globalization are given little thought when trade deals are signed. That is a fair point. But there is also a risk of the opposite error: that the enormous good that free trade has done for the bulk of humanity in both rich and poor countries over several decades is forgotten at times when people are feeling anxious about it.

A wave of anti-establishment and anti-globalization parties across Europe are on the rise. Many have called for referendums on their membership to the European Union following suit with Brexit. Before any (further) reckless decisions are taken, politicians, policy-makers, and citizens should consider that “closing borders to trade, capital and people would cause great harm and do very little to tackle inequities in the economy” in fact, “blocking imports would only entrench the market power of rent-seeking firms, further harming the prospects for higher productivity and pay.”

** The primary source is The Economist’s “Special report: The world economy”. All quotes have been taken from the report.

Read original article: http://www.economist.com/news/special-report/21707837-how-make-economic-liberalism-fairer-and-more-effective-reset-button

 

Not intended to be a comprehensive study of globalization, rather a quick read of The Economist’s take on this global matter.

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