Inclusive growth – only possible if we focus on the “growth”.
An emerging consensus on the need to manage the impact of globalisation…
As global business and political leaders meet at the World Economic Forum in Davos, the future of globalisation will be high on their list of issues to discuss. Strongly held views on the costs and adverse impact of trade, immigration and offshoring were very prominent in both the UK‘s EU referendum campaign and the Presidential election campaign in the USA in 2016, and we can expect more of the same as France and Germany go to the polls in 2017.
This increasing trend to question the benefits of globalisation has not gone unnoticed by the global elite. There has been a flurry of analysis seeking to understand the relationship between the effects of globalisation and behaviour at the polls in the UK and USA. The emerging consensus is that there is a need to mitigate the adverse impacts of globalisation and that this will require an increased amount of redistribution from the winners of globalisation to the losers. At Davos, the theme of “responsive and responsible” leadership will focus on these issues, but will it turn the anti-globalisation tide?
…which has created winners and losers…
World trade has grown much faster than GDP over the last half-century or so, accelerating after 1990 and then surging after China joined the WTO in 2000. As Richard Baldwin sets out in fascinating detail in his book “The Great Convergence”, this has been driven by the emergence of Global Value Chains (GVCs). This new structure of trade has increased the importance of corporates in shaping the nature of trade relative to nation states which previously formed the basis for trade competition.
As Baldwin shows, the result of GVC based trade has been to shift more and more activity from developed to developing markets with countries such as China, India, Korea, Indonesia, Thailand and Poland all benefiting significantly.
Branko Milanovic’s book “Global Inequality: A New Approach for the Age of Globalization” focuses on global rather than on national income inequality, a contrast to Piketty’s focus on wealth, and paints a more nuanced picture of the impact of globalisation. Milanovic concludes that while inequality is rising within most countries, notably the high-income ones, global inequality of incomes, though huge, has been falling, particularly since 2000.
But global averages do not shape opinion in individual countries. When Milanovic looked at real incomes per head across the global income distribution between 1988 and 2008, he found that the global middle classes have prospered: those between the 45th and 65th global percentiles (from the bottom) doubled their real incomes between 1988 and 2011 but those between the 80th and 95th percentiles have suffered stagnant real incomes. This latter group are the middle classes of the high-income countries. Finally, the global top one per cent has done far better than those immediately below it, with real income increases of around 40 per cent.
…but redistribution alone is not the answer…
Globalisation has created winners and losers and hence policy to help address the resulting imbalances within a country seem to make sense. However, new analysis by the IFS in the UK suggests that this may not be sufficient to win hearts and minds. After reviewing 20 years of UK data, the IFS noted:
“Looking at working households, inequality in their pre-tax pay is higher than it was 20 years ago. At the 10th percentile, household pre-tax pay rose by 20% between 1994–95 and 2014–15, while at the 90th percentile it rose by 32%. This is primarily due to the rise in inequality in male earnings, which remain the largest source of income for working households. However, inequality in their net income – that is, after direct taxes have been paid and state benefits received – did not rise. This was partly the result of deliberate policy decisions, and in particular the large expansion of tax credits in the late 1990s and 2000s, which boosted the income of low-income working households. Another factor was the stabilising effect of the tax and benefit system when pay fell during the Great Recession: the lowest-earning households found that a substantial portion of their income was protected from this (as it came from the state, so was indexed at least to prices), and entitlements to means-tested payments tend to rise when earnings fall.”
The UK experience shows us that redistribution can be an effective tool in helping mitigate the adverse impacts of changing economic circumstances but recent political developments in the UK suggest that this may not be sufficient to curb anti-globalisation sentiment. Possibly a higher level of redistribution might have a greater impact but as the existing levels of welfare have come under political challenge and are now being reduced, it seems unlikely that the UK electorate would support higher levels of redistribution. We also have to recognise that redistribution creates new winners and losers. It is clear that re-distributive policy can mitigate the impact of trade but it is unlikely to provide a complete solution.
…we need a plan to grow the cake…
The UK sought to provide a patch for the adverse impact of globalisation but this has not proved sufficient to persuade the population of the benefits of globalisation. In my view, we need faster growth to be able to make a significant impact on the public mood. It is true that redistribution could help boost overall growth if it transfers resources to people more likely to spend their incremental income, but an even greater boost to output is required to make people feel they have a real stake in society. This requires an aggressive strategy for growth.
The failure of redistribution to win people over hints at the solution. People don’t want to be reliant on the state for what are sometimes described as “handouts”, but want the opportunity to work, to develop their skills and to earn enough to fund their chosen lifestyle. This suggests that there ought to be at least some scope to allocate resources from mitigation of the impacts of change to more positive transformational activity. Over time, this could be self-supporting as growth increases the resources available for further investment.
…across the UK.
We need to allocate more resources to growth creating initiatives. In the UK, the Government continues to promise an “industrial strategy”. This is a sensible response to the need to drive growth, it is clear that an unmanaged reliance on market forces alone delivers outcomes that are inequitable, and will ideally provide a framework for effective resource allocation decisions. The details of the strategy will be critical and the analysis of globalisation provides a number of important pointers to design.
Firstly, the strategy needs to have clear co-ordination across the national and regional dimensions. Scale does matter and hence national level plans are important. As Mark Carney demonstrated, many of the most severe adverse impacts have been felt in areas where heavy industry dominated in the UK cities and regions furthest from London.
In all of EY’s investor research, skills and infrastructure are top of the list of factors which most significantly impact the attractiveness of the UK’s regions from an investment perspective. Business leaders continually tell us that the lack of skills and the challenges of travelling and moving goods and information limit their levels of investment. It will be critical for the Government to identify the priority areas for skills, infrastructure and other areas.
This means that the UK’s industrial strategy will have to make choices – it will need to identify the priority areas in which to invest resources. This will require national and local policy-makers engaging with businesses to understand the growth opportunities for the UK. Drawing on Baldwins’ work, we need to identify those Global Value Chains we can play in and the requirements in terms of skills, research, incentives and supporting infrastructure that can make these plans a reality.
Redistribution may make us feel better but it won’t be enough.
Recent UK history provides a clear illustration of the fact that while redistribution can help mitigate the adverse impact of globalisation on certain groups, the scale of politically feasible redistribution is never likely to be sufficient to appease the majority of the people in affected groups. Government has to work to reshape the economy to improve the outlook in affected areas and to create more resources which allows redistribution to continue.