Capitalism and the roots of discontent

Posted on September 16, 2016

(Photo by Win McNamee/Getty Images)©Getty

When policymakers gather in Washington for next month’s meetings of the International Monetary Fund and World Bank, one topic will dominate discussions: how to respond to the anger of those who feel they have been left behind by globalisation.

Supporters of open markets and liberal values are acutely aware that they are facing a political backlash that threatens the current international order. This week alone, Christine Lagarde, the IMF head, spoke of the “groundswell of discontent” felt in many countries with growing inequality in income, wealth and opportunity. Donald Tusk, president of the European Council, warned EU leaders meeting in Bratislava of the need to restore control over events and processes that “overwhelm, disorientate and sometimes terrify” voters. While Mario Draghi, president of the European Central Bank, stepped outside his technocratic mandate to warn politicians of the intense anxiety felt in a world that had proved “inattentive” to how the benefits of globalisation were shared.

    The political problem — manifest in the vote for Brexit, the appeal of Donald Trump and the rise of xenophobic, protectionist parties across Europe — is incontrovertible. It is underpinned by economic realities: two decades of globalisation have been kind to the world’s very richest, and has brought huge benefits to the growing population of emerging economies. But a distinct set of people, chiefly the lower middle classes of developed economies, has fared far less well.

    However, governments need to acknowledge this without legitimising the narrative advanced by populists, or ceding to their demands to slam the doors on trade and immigration. And in order to frame an effective response, they must first be as clear as possible about the nature of the problem.

    Hence the importance of an otherwise arcane debate that broke out this week over the work of Branko Milanovic and Christoph Lakner, former colleagues at the World Bank, on inequality. Their so-called “elephant chart”, showing the evolution of global income distribution over 20 years, is often cited as evidence for the idea that globalisation has led to stagnating incomes for ordinary people across the developed world.

    Researchers at the Resolution Foundation, a UK think-tank, contend that the data underlying the chart does not support the conclusions that are often drawn for it. In particular, they note that the hit to middle-class incomes in the rich world is neither as severe nor as uniform as is often assumed.

    There are big differences between countries, with growth shared especially unequally in the US, even though its economy is less open to trade than many in the developed world.

    This matters because it suggests that populists are picking the wrong culprits. Globalisation may be the focus of people’s anger, but unequal growth in wealth and income may be as much about the effects of taxation policy, or the distortions of recent monetary policy, or policymakers’ failure to sustain gains in productivity.

    Moreover, it is wrong to suppose that national governments are in some sense helpless in the face of globalisation. The Resolution Foundation has provided a timely reminder that inequality is in large part the result of domestic policy choices, not the “inevitable result of global forces”.

    Policymakers’ renewed focus on the need to tackle inequality, and make capitalism more inclusive, is a welcome one. The optimistic reading of recent experience is that they already have many of the tools they will need to tackle the problem.

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