For the success of economic globalization, a quite successful pattern of growth in individual countries. Such dynamics was characteristic for approximately the first 30 years after the Second world war: the growth rate was relatively high in different countries; the benefits of this growth are widely distributed within these countries; with the rise of developing countries has led to a decline in global inequality. This period may be the best days of globalization.
Of course, globalization continued in the 1970-ies, and later. But the underlying growth model has changed. Due to arbitrage transactions in the labor market that have become an integral component of economic globalization, and also due to the revolutionary development of digital technology, jobs in industry, which in developed countries took a middle class began to disappear, the median income began to stagnate, increased polarization of jobs and incomes, and this despite strong growth of GDP. This new model, which has continued in the 1980s and 1990s, and gained acceleration after 2000, led to a sharp increase in inequality, weakened the foundations of globalization.
Different countries reacted in different ways. Some began to take measures aimed at reducing inequality, especially through redistribution of income through the tax system, social protection and education, various forms of social support and facilitate effective professional training. The effectiveness of such a policy is usually determined by cultural norms, institutional negotiating power of workers, level of trust between the employees and the business, the degree of influence of private and corporate wealth on politics.
Jobs in the industry, which in developed countries took a middle class began to disappear
In countries where the damping forces are weak, especially in US and UK, the difference in income, wealth and prospects have reached the most extreme level. The absence of any significant reaction from the authorities, but also the apparent lack of attention on the part of those whose economic power has increased, has caused deep resentment among those who suffered the most.
Apart from problems of income distribution has faced many countries in the world, in Japan, some European countries and in the developing world there is a problem of weak growth and high unemployment. In the case of Europe, these problems are rooted in the system that have too few mechanisms of adaptation and stress reduction.
However, the fact remains: stable ninclusive economic growth has transformed the economy. And in such situations, triggered a political fuse, and often radically. Outside of the developed democratic countries is a chronic shortage of inclusiveness almost always has a devastating effect on the long-term economic growth and development, and often leads to violence and civil strife. This trend has been noted in the “development Report” prepared by the Commission on growth and development a few years ago.
In functioning democracies, the political drama is usually associated with elections and referenda, for example, in a British vote for withdrawal from the European Union or the presidential elections in the United States, which were won by a populist outsider Donald trump. Disgruntled voters are rejecting the system that created problems for them. This is a normal, healthy reaction. And in the absence of tectonic shifts in the dynamics of growth and policy, in the next few years we may see more of such developments in Europe, especially in France, Italy and Germany.
In the US and UK the difference in incomes, wealth and prospects have reached the most extreme level
Maybe it’s too late to try to convince voters not to reject the existing system, but there is still time to build an effective alternative. The potential benefit in the huge uncertainties, many of which are now felt around the world, that we have before us, in essence, a blank slate. Prejudices, biases and taboos are erased, so you can try to create something better.
Take, for example, US. A new growth model and policy can take different forms, it can be the denial of multilateral approaches and the transition to bilateral relations or protectionism; shifts in immigration policy; increasing public investments and fiscal incentives; changes in regulation; tax reform; market-based solutions in education, training and health. In all of these approaches have their risks and their potential benefits, while the final result will depend on what will be the total package.
Although the potential combinations are still at this stage unclear, something that still is clear. Firstly, when it comes to investment, consumer spending and employment growth, it is very important expectations and confidence. The hints that we can expect a more solid, balanced policy, made a clear and positive effect, although it may be temporary and will depend on the implementation of this policy. A surge of positive expectations were reflected in financial markets, although many, including myself, believe that the current valuation of assets is too optimistic.
Second, it seems highly probable that the nominal growth of the US economy will grow, although how this will increase the proportion of inflation and real growth remains to be seen. This is an important factor, as it will depend on the policy of the US Federal reserve that affect the prices of assets in America and not only.
There is a possibility that the growth of public and private investment will cause a reversal of the declining trend in the level of performance, thus, generating real growth. However, the resumption of the deadlocked standoff in Congress could interrupt this trend, positive expectations are not met, but limiting economic growth “secular trends”, such as demographics, will not disappear.
The third element of a new growth model of America will probably be increased pressure on large companies that they have engaged in strengthening its reputation in the United States. Even before the inauguration of the trump began to try to influence the decisions of companies concerning the placement of their industries, in particular, threatened to impose duties on imports of goods produced, say, in Mexico. But though trump has made deals that allowed to save any number of jobs in the United States (for example, the agreement with the Carrier), much more powerful is his tactic of threats to the image of corporate brands, including via Twitter.
Some believe trump’s actions (especially his scolding via Twitter) the more stylistic than substantive, believing that they are unlikely to have any long-term quantitative effect. Maybe they’re right. But, in my opinion, trump sends a more serious message about the mechanism of decision-making in corporations. Despite his business biography, which can specify the opponents trump is full of instances of bankruptcies and non-payments to contractors and their employees, he may be trying now to implement new business and investment culture which to a higher place are the interests of capital, corporations and shareholders, and labor resources are considered expendable.
The fourth trend that we can firmly rely, that the ongoing March of digital technology. Here, however, is clarity over: from the trump still could hear a little, or even no signals about its future approaches to the problem of adaptation of workforce to new conditions.
In the next few months we will be able to learn a lot of new: is the current surge of economic optimism long; will have a long term effect of trump’s efforts in the field of the suppression of the output of production and capital (offshoring) as well as its measures to increase growth and employment; will prevail in the country have a policy of protectionism. Only then can we decide whether or not trump was the right choice for disgruntled workers of America.
Michael Spence is a Nobel laureate in Economics, Professor of Economics in the School of business Leonard stern at new York University, honorary fellow at the Council on foreign relations, senior fellow of the Hoover institution at Stanford University. Spence is the author of “the Future of economic growth in the world, living at different speeds”