Food for Thought

Stephen Roach provides some food for thought after his session at Davos.

Serious challenges to globalization are now being openly aired in the rooms and corridors of Davos’s fabled Congress Centre. The reasons behind this shift are not hard to fathom.   One of the “wins” in the win-win of globalization has failed to materialize.  Job creation and real wages in the mature, industrialized economies have seriously lagged historical norms.  It is now commonplace for recoveries in the developed world to be either jobless, or wageless -- or both. That this shortfall has occurred in the midst of accelerating globalization and surging global trade is all the more disconcerting.
... It was win-win because rich countries would be able to buy cheaper things from poor countries, thereby expanding the purchasing power of an increasingly knowledge-based workforce.  And as producers in the developing world turn into consumers, a proliferation of new markets would provide nothing but opportunity for the industrial world.  This positive-sum outcome was the true hope of globalization.

Those hopes have now been dashed.   The old fears of the zero-sum outcome have crept back into the discussions at Davos.  Gains in the developing world are increasingly feared to come at the expense of the developed world.  This has taken the world to the brink of a very slippery slope -- the blame game.  Middle-class workers and their political representatives are up in arms.  The pressures bearing down on a productivity-led  US economy are the final straw for the body politic.  Witness the outbreak of China bashing in the US Congress.

Roach is referring in part to statements like these. Note that these are not restricted to the US.
 

Globalisation, she (German chancellor Merkel) said, had sparked fears throughout the developed world. “If we cannot find a conclusive answer to this question, very serious social disorder and troubles may develop, the consequences of which we will be responsible for.”

Nouriel Roubini summarizes the tone at Davos quite nicely.

... (Laura)Tyson warned of the potentially negative implications of the emergence of China and India for unskilled labor in the advanced economies. With two billion plus workers in China and India joining the global economy this increase in the global supply of labor  should lead, based on simple trade theory, to a long run reduction in the relative equilibrium real wage for unskilled workers in advanced economies. This reduction in real wages and increase in income inequality such as the once observed in the US in the last few years is a source of fraying of the "social contract" that, in exchange for accepting globalization and freer trade guaranteed to manufacturing workers good wages and good benefits; for auto workers and other blue collar workers such manufacturing jobs were the ticket to entry in the middle class but both employment, real wages and benefits are being significanttly erored by globalization.

Summers echoed the concerns of Tyson when he said that we have a serious problem when globalization is associated with "local disintegration" in places such as Flint (home of former now closed down US auto plants), with the emergence of failed states and with with struggling middle classes. To be successful globalization needs to lead to local integration not local disintegration.

Thus, in some sense the issues that globalization and the emergence of China, India and other BRICs pose to employment, growth and the social contract in advanced economies have taken a greater importance together with global imbalances in this year's World Economic Forum at Davos.

Meanwhile, I am irritated by Tom Ashbrook of On Point.