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
Ian Thorpe had Rio 2016 in his sights
people
Sport
world cup 2014A history of the third-place play-offs
News
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
Sport
The Mexico chief finally lets rip as his emotions get the better of him
world cup 2014
Voices
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
...and the weight loss industry is rubbing its hands in glee
News
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Arts and Entertainment
'Eminem's recovery from substance abuse has made him a more potent performer, with physical charisma and energy he never had before'
arts + entsReview: Wembley Stadium ***
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice