Tuesday 23/07/2019

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The elephant in the room

Chief Economist

The recent wave of redundancies in the industrial and financial sector as well as the commotion surrounding CETA have put the challenges that come with automation and globalisation centre stage. These challenges come in addition to the issue of ageing and require urgent policy responses.

A longer professional lifespan, higher infrastructure investments, adapted education and permanent education are obvious measures, yet they are key in counteracting (in part) the demographic headwinds and handling digitisation. As we’ve known for a while, globalisation also comes with great challenges. Not just to the environment, but also to our democracy and the decision-making power of national governments. Harvard economist Dani Rodrik illustrated this elegantly using the political trilemma of the global economy.

Globalisation has been an important factor in the substantial decrease of extreme poverty across the globe over the past forty years. This decrease has been most spectacular since the start of this millennium. And that, in turn, had everything to do with the strong growth we’ve seen in developing countries, particularly China.

Bron: Our World in Data, Branko Milanovic, Degroof Petercam.

The elephant graph

But the globalisation we’ve seen in recent decades has not been an unequivocal success story. In this context, inequality economist Branco Milanovic’s “elephant graph” provides an appropriate illustration. Between 1988 and 2008 - aside from the poorest 5%, those between the 75th and 90th percentile of the global income distribution curve saw smaller increases to their income. This demographic group largely consists of the western middle class. And since the Great Recession, this situation has not fundamentally changed. The absolute top layer on the other hand managed to capitalise on globalisation and technological evolution, thereby increasing its income by leaps and bounds. Globalisation is at the root - at least in part - of the rise in populism in Europe, as well as in the US. The point is not that globalisation is inherently a bad thing - quite the contrary. But letting globalisation proceed without protecting the losing parties is pointless, and will come back around like a boomerang. Governments better don’t make that mistake again now that the process of digitisation is accelerating.

CETA

In the last few weeks a debate erupted about CETA (a free trade deal between the EU and Canada). Although late to the table, this discussion is a good thing. Recent decades have generally seen too little attention to the impact of globalisation on our economy. But the current discussion between proponents and opponents is not always a pretty sight. While the first group invariably overestimates the economic benefits of the free trade deal, the second group’s fear for a significant drop in our product standards and democracy is - in this specific case - strongly exaggerated. And we’re not even talking about purely political positioning.

The conclusion is fairly simple. Under the current economic circumstances, in the context of rising populism in Europe, political policy priorities should lay elsewhere. A sweeping pan-European investment programme can make a real economic difference. On the other hand, even in the best case scenario CETA and other free trade agreements (like TTIP) will only deliver a marginal economic benefit. After all, our economy is already heavily globalised, and there may well be limits to globalisation. A broad social debate is still necessary, as any choice leading to further globalisation will have consequences for the role of our nation state and our democracy.

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