A Recipe For Disaster

Growing anger about economic disparities has skyrocketed Donald Trump and Bernie Sanders’ popularity in US elections. Similarly, in France the anger has produced nationwide nocturnal Occupy-type protests — Nuit Debout. The common villain in both cases is globalisation. The off-shoring of business and the outsourcing of manufacturing are identified as the culprits behind the hollowing out of the middle class and the growing wealth gap.

Now the Panama Papers revealing a massive tax avoidance scheme by the world’s elite have added another black mark to globalisation. Amidst increasing indignation it is often forgotten that economic globalisation is responsible for the rise of formerly poor countries or that poor governance is as responsible for negative consequences of global connectedness as inequality of the capitalist system.

As economists look back at the post-war decades, it is clear that by linking up the world through capital, transportation and communications, globalisation unleashed productive forces that have created winners and losers. While technological advance has seen machines replacing workers — increased productivity and profit — transportation and trade opening up vast labour markets has allowed companies to move their manufacturing to developing countries that have grown their own economies as a result.

Politicians like Trump and Sanders have found populist solutions to the problem. Trump would impose a 45 per cent tax on Chinese imports while Sanders would have free trade only with countries that have the same wages and environmental policies as the US — i.e. rich and developed countries only. These ‘solutions’ would mean that countries should forget about raising their standards of living by exporting to developed nations — the exact opposite of what globalisation has done for China, India and South-east Asia.

Of course, the loss of jobs resulting from outsourcing (Chinese imports have caused two million job losses in the US) is more visible than the low-cost cornucopia available in western supermarkets. Consumers happy to get a bargain never celebrate the role of free trade in making that possible. Perhaps it is this ambivalence about the value of free trade that explains Gallup Poll’s finding that almost half of all Americans see trade as more of a threat than an opportunity. Hardly surprising given that 84 per cent of Americans have seen stagnant incomes since the 2009 crash. America’s middle class no longer occupies the fat big middle band of the country’s income strata. While many have descended into poverty, educated workers have moved up to a comfortable middle class and a tiny portion has become super rich.

This trend is apparent in other countries as well. Unskilled workers have continued to slip down the economic ladder, the college-educated skilled population has moved up, and the entrepreneurs have accumulated unprecedented wealth. Thanks to their wealth and influence, they have been able to rig the system to pay less in taxes than their fellow citizens, and as the Panama Papers show, they take advantage of the globalised financial system to hoard their riches in offshore tax shelters.

From the perspective of globalisation’s losers, the current system looks horribly unfair, designed to exploit the poor and fatten the rich. The protectionist siren calls of Trump and Sanders promise an end to unfair globalisation. But the fact remains that the search for faster ways to produce goods and connect more quickly is unstoppable. Raising barriers may bring temporary relief to a section of the population, but the economy as a whole will suffer. What is needed is a taxation system that ensures equity and a vigilant governance to offer a safety net and new opportunities to those who have lost out. Globalisation without governance is a recipe for disaster.