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Globalisation is good and will get better

The Economist celebrates the creation of a new world economic order where newly-emerging developing countries dominate. Currently, measured in purchasing power parity, developing countries account for half of world output, use half the world’s energy and have most of the world’s foreign exchange reserves.

Economic power is shifting, in particular towards Asia – the rich countries no longer dominate the world economy. By 2040, according to Goldman Sachs, the world’s 10 biggest economies, at market exchange rates, will include Brazil, Russia, Mexico, India and China. Generally these implications are positive for developed countries because of the greatly expanded markets for exports. Already high rates of developed country growth are being driven by growth in developing countries. Over coming decades there will be the biggest growth in the world economy since the industrial revolution. The difficulties that might thwart this massive promise of global progress are xenophobia and protectionism. There will be real losers in developed countries – returns to capital will grow at the expense of labour – but overall there will be gains if tax and benefit systems are used to redistribute the winnings.

The developing economies are having a good run. Over the past 5 years developing countries GDP per head has grown on average by 5.6% compared to 1.9% in the developed world. In the previous 20 years developing countries grew by an average of only 2.5% – about the same as developed countries. Overall the growth is more evenly spread – even Africa has grown above 5% for the past 3 years.

Workers in developed countries are feeling a fair bit of pain. Income has been redistributed from labour to capital particularly in the US. This has occurred through offshoring, reduced bargaining power by workers because of the option to offshore and increased immigration. Skilled labour has also taken a much larger share of the cake – America’s top earners now receive 16% of all income up from 8% in 1980. In democratic societies where workers constitute a majority there is a threat to globalization unless the benefits from globalization are redistributed to workers. The tax and benefits system needs to adapt to deal with this.

Higher long-term commodity prices and improved environmental standards are the order of the day. Developing countries are moving through a commodity-intensive development phase which has led to skyrocketing commodity prices and huge associated environmental problems – China has 16 of the 20 most polluted cities on the planet. Much higher commodity prices will via market mechanisms tend to deal with these problems.

Finally, competition from developing countries has kept inflation down and rendered useless closed economy models of inflation as markups on wage costs. Interest rates have been kept low because of high savings by Asian and Middle East countries. Some also see excess liquidity driven by high rates of monetary growth around the world as being unable to drive up goods prices because of cheap Chinese goods but instead driving up asset prices hence holding down yields. But the global savings glut will not continue to fund US deficits forever. Indeed the rich world could end up relatively poor if it does not watch its step. In particular the drumbeat of protectionism is growing louder and threatens the benefits developed countries can expect from globalization.

This is a quality survey – much richer than the potted summary above – if the hyperlinks don’t work go out and buy the September 16 Economist. If you are interested in economics you should be subscribing – its an essential part of my reading week!

2 comments to Globalisation is good and will get better

  • sagi

    can you further explain this, with regards to environmental degredation? “Much higher commodity prices will via market mechanisms tend to deal with these problems.”

  • hc

    Pollution is partly associated wiuth the wasteful use of energy resources. Higher energy prices will reduce this.