Global Policy Forum

By Rainer Falk

In its most recent World Economic Outlook even the International Monetary Fund (IMF) dealt with the issue of "globalisation and inequality". In the last two decades, according to the IMF, income inequality has increased in most regions and in most countries worldwide. At the same time, however, per capita incomes rose as well, even for the poorest. Since the income of the well-to-do rose much faster inequality increased. The IMF pinpoints technological progress - and financial globalisation - as major factors in this development. Contrary to popular belief, the IMF says, trade globalisation triggered a reduction in inequality thus partially offsetting the negative effects of technology and financial globalisation (for example by making globally traded products and services cheaper).

IMF: Welcome to the club

The IMF's strange line of argumentation can be easily discarded as Mark Weisbrot shows in a comment in the International Herald Tribune (18.10.2007) by exposing the selective perception of the fund's authors: They simply overlook the extensive processes of change in world economy, caused for example by the IMF's own reform agenda. Case in point: The drastic slow-down in per capita income growth in most middle- and low-income countries. Moreover, one can hardly separate globalisation and technological innovation the way the IMF authors try to do. Indeed, globalisation processes are inconceivable without technical progress and vice versa.

After all, the IMF demands that in the future the fruits of globalisation and economic progress be distributed more evenly among the people. The suggested instruments - more education, better access to financing, more trade liberalisation for example for agricultural products from developing countries - are not particularly original but they demonstrate that the IMF has finally joined the wing of the international economics establishment which is busy trying to find out how to fend off the anticipated "globalisation backlash".

Academic doubts

Firstly, academic economists - and not only unconventional thinkers such as Paul Krugman or Joseph Stiglitz - are getting increasingly fidgety. This summer, the former US government advisor Matthew Slaughter and Kenneth F. Scheve published their call for a "New Deal for Globalization" in Foreign Affairs (Jul-Aug 2007). They say: "Globalization has brought huge overall benefits, but earnings for most US workers - even those with college degrees - have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income."

The authors draw clear links between globalisation and living standards: "US policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor."

Taxing globalisation's winners

Secondly, renowned and internationally read papers that in the past have fiercely defended the advantages of free trade and globalisation are now looking at how the other half lives. In the Wall Street Journal ("The Case for Taxing Globalization's Big Winners"; 14.6.2007), David Wessell arrived at the following conclusion: "What to do? To preserve political support for the globalization dividend, spread the benefits more broadly by taxing winners more and losers less... Counting on the inevitability of globalization is imprudent; politics and policy can interfere. Expecting market forces to reverse the recent trend toward ever-bigger winnings for those at the top is unwise; the forces are too strong. Taxing winners isn't without risk; as Mr. Summers says, globalization makes it easier for them to 'pick up their marbles and go somewhere else.' But using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple."

In a Financial Times editorial entitled "Globalisation needs more than PR to be sold to its losers" we are told: "Many people do not mind that Bill Gates or Warren Buffett are worth billions. Both earned their wealth under the set of rules that apply to most others in rich countries. But the worry is that the global market system works to the disadvantage of people in already low-paid, low-skilled jobs in developed economies. So government policies should focus on enabling the individual to feel as confident as possible within the global system. This could be through funding additional training or other means to help those who have lost their jobs to re-enter the market quickly. It might also imply a more progressive tax system, partial wage insurance, and untying social benefits such as basic healthcare from jobs to avoid undue fears of unemployment."

From Pascal Lamy to Angel Gurria

Thirdly, even the orthodox international defenders of the faith begin to voice doubts as the IMF example above shows. The IMF is neither the first nor the only one. In a speech held in Peking, WTO director Pascal Lamy dealt with the dark side of globalisation: "The speed of globalisation is affecting our social fabric in a much harsher way than in previous stages of globalisation. If globalisation has benefited some individuals, it has also weakened the position of many others, in particular the weakest and poorest among us, whether in developed or developing countries. Hence, one of the most important challenges of our generation is to ensure that the benefits of globalisation are more fairly and widely shared, and in particular that they reach more people in developing countries."

Along the same line the most recent OECD employment outlook (see reference) contained a chapter "OECD workers in the global economy: increasingly vulnerable?". In a press release, the OECD elaborated: "Rather than seeing globalisation as a threat, OECD governments should focus on improving labour regulations and social protection systems to help people adapt to changing job markets." The report examines in detail how offshoring weakens the bargaining power of less qualified workers: "Whether real or threatened, the prospect of offshoring may be increasing the vulnerability of jobs and wages in developed countries."

The OECD report praises the so-called Flexicurity, a concept practised in Denmark and Austria: "In Austria, for example, workers have individual savings accounts, instead of traditional severance pay schemes, that move with them as they move jobs. If they lose their job, they can choose to withdraw funds from the account or save the entitlements built up towards a future pension." The authors concede that in the course of globalisation job insecurity may increase permanently while employers become ever more vulnerable to external shocks. OECD Secretary General Angel Gurria tries to immediately placate the worriers by pointing out that the job loss threat is highly overestimated. He urged politicians to present the advantages and disadvantages of globalization in a more balanced way: "The story has to be told better".

This recommendation did not impress the Financial Times. In an editorial the paper agreed that better PR might do some good, but insisted that above all governments need to do more to help the globalization losers. Which in turn prompted US economist Dani Rodrik to comment: "You know something is going on when the FT berates globalization's cheerleaders for their complacency."