Stephen King: Give globalisation a human face

Most economists believe that globalisation is a good thing. By breaking down barriers between nations, globalisation leads to a more efficient allocation of labour and capital. Greater efficiency implies higher output and higher output, in turn, makes us all better off. That, at least, is the theory. Globalisation, however, incorporates a core paradox. It reduces income and wealth inequalities between nations yet it seems to increase these inequalities within nations.

Admittedly, this is a contentious issue. Economists in the US, for example, have yet to make their minds up about the primary causes of growing US income inequality. Some argue, for example, that income inequality has widened because, 30 or 40 years ago, there was a leap in the numbers of students entering higher education. Those who were lucky enough to have benefited from this investment in human capital (as economists charmingly put it) would, in subsequent years, have reaped higher returns, particularly if they were linked to the technology revolution. Those who did not benefit from higher education would have been left behind.

There is probably some truth in this argument, but I doubt it is the whole truth. Most of us will have come across graduates who chose not to cash in on their earnings potential. Equally, non-graduates have often done very well (whatever their faults, Jim Callaghan and John Major made their way all the way to the very top of the political pile). Moreover, some forms of education may be a waste of time, other than through their capacity to signal serious endeavour. How many PhD theses, for example, disappear without trace?

Personally, I find it remarkable that people are prepared to deny the impact on income inequality of globalisation. Efficiency and equality are not always happy bedfellows. Economists talk of efficiency in terms of Pareto optimality, which basically means it is not possible to make one person better off without making someone else worse off.

This, though, is not what society is about. If, for example, one person owned everything and everyone else was starving, this might be a Pareto-optimal outcome because the many could be made better off only by making the one greedy person worse off. It is possible, of course, that the greedy person would feel guilty about his monopoly over resources and choose to give some of his wealth away but, in strict Pareto terms, he would now be better off having assuaged his guilt and, therefore, the starting point would not have been Pareto optimal.

Societies, therefore, do not operate on the basis of efficiency alone. The tax and benefit system is typically designed to redistribute income from the rich to the poor (unless, of course, the government of the day happens to abolish the 10p tax rate). The pursuit of efficiency can easily conflict with individual human rights (I have no doubt that Roman slaves were used efficiently but I am not sure their rights were fully respected).

Efficiency, then, is not a good enough argument on its own in favour of globalisation. Moreover, even if it were possible to support the efficiency argument at the global level, it is a much bigger struggle to do so at the national level. Income inequality and its association with globalisation is, after all, now one of the major themes in the US presidential election. Both the Obama and Clinton camps have dropped hints – credible or otherwise – that they would wave goodbye to the North American Free Trade Agreement, not because it is inefficient but, rather, because it is increasingly being regarded as a threat to American jobs and wages (of course, by rescinding the agreement, poor Mexicans are denied the opportunities they might otherwise have enjoyed but poor Mexicans, unlike poor Americans, will not be voting in November).

Emerging economies are also struggling with ever-rising income inequality. The food price scare increasingly looks like it is an unintended consequence of the emerging markets' dash for growth. The hope was that rapid emerging market growth would drag ever-increasing numbers of people out of poverty by raising average living standards. If, in the process, food price inflation has been unleashed, the very poor will end up poorer still. The resulting social tensions then force governments to adopt policies inimical to globalisation: recent restrictions on rice exports, which contributed to a further upward spike in cereal prices, are but one example.

In Britain, there is also a growing sense that globalisation creates both winners and losers, highlighted by the image last week of road hauliers parking their trucks in swanky Park Lane in protest at the ever-increasing level of fuel prices (and, of course, from the publication of The Sunday Times Rich List).

Admittedly, there are plenty of green reasons for welcoming higher fuel prices, but green reasons do not explain higher prices: the cost of energy (and food) is rising in part because of the extraordinary growth in demand for fuel from China and other emerging economies. Partly reflecting these price increases on life's "necessities", the gap between rich and poor in the UK has been growing, in line with the experience of the majority of other countries.

Growing income inequality may not fatally undermine the case for globalisation, but it certainly threatens political support for it. Democracies have tremendous problems dealing with globalisation. It is all too easy to create institutions designed to protect the nation or region from the onslaught of competition from abroad, in the process leaving the world as a whole worse off.

It is no coincidence that the growth of democracies in the late 19th century was associated with the rise of nationalism. While it is absolutely right to give the people the vote, their choices inevitably will be limited mostly to their country's national interests, with not as much thought given to the interests of people elsewhere (those in the developed world who demand a level health and safety playing field would claim otherwise, but their approach really boils down to protectionism through the back door: health and safety are too often the rich man's preserve).

So where does this all leave globalisation? What is needed is a policy of enlightened globalisation, which accepts that efficiency gains can sometimes come at the expense of distributional losses. After all, people are, not surprisingly, suspicious of market solutions given the recent evolution of the credit crunch. They are less confident that they, individually, will benefit from a process that nevertheless makes the world as a whole a better place. And each individual country increasingly has an incentive to blame others for its woes.

Political leaders have, to date, done little to discuss what needs to be achieved in the form of income redistribution to ensure the losers from globalisation are compensated. That is partly because our leaders don't want to admit that globalisation may have unpleasant side effects. Their refusal to be candid, however, simply increases levels of distrust. By doing so, globalisation becomes even more vulnerable. We might, instead, end up with unenlightened protectionism.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com

News
Shoppers at Selfridges department store in central London
news

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleFormer Newsnight presenter is being touted for a brand new role
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
PROMOTED VIDEO
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game