Globalisation for Slow Learners

Vic Duggan06/05/2017

The IMF recently published its updated outlook for the global economy. The good news is that recovery from the crisis seems to be finally picking up some momentum after a decade of sub-par growth. The bad news, as they see it, is that this momentum could be stopped in its tracks if the sword of Damocles that is the threat of protectionism – whether emanating from Trump’s White House, May’s Westminister or elsewhere – falls. This could throw the process of globalisation into reverse, they worry, and slow growth in the size of the economic pie.


Alongside their biannual economic forecasts, the IMF also publishes its latest thinking on various themes. In light of increased focus on the issue of inequality since the global financial crisis, to which the recent rise in political populism has been attributed, the IMF provides a timely chapter on “Understanding the downward trend in labour income shares”. It explores the reasons why the share of wages in GDP has declined markedly – in advanced, emerging and developing economies alike – in recent decades. Between the mid-1970s and its 2006 low, the labour share has declined from around 55% of GDP to around 50% in advanced economies, before recovering only slightly since the financial crisis, while income inequality has increased significantly over the same period.

Essentially, the IMF identifies three main explanatory reasons for this phenomenon, while conceding that these are naturally somewhat inter-linked: 1) technological progress, 2) economic integration (or globalisation), and 3) policies, institutions and regulations. Notable examples in the latter category include declining corporate tax rates, falling trade union membership and weakening employment protection legislation.

In fact, the IMF finds that technological change accounts for about two-thirds of the declining labour income share in advanced economies, with most of the remainder ascribed to globalisation (roughly split half and half between financial integration and trade through global value chains). Interestingly, relatively little of the decline is attributed to policies, institutions or regulations.

Double-edge sword of technology

Technological progress is therefore a double-edged sword: it raises living standards, on average, but puts labour at a disadvantage with respect to capital. Nearly everyone has a mobile phone these days, for example, but many manufacturing jobs have become obsolete due to the rise of the robots. Likewise, trade and free-moving capital can boost growth, but at the cost of undermining the bargaining power of labour. As off-shoring becomes even a threat, it allows management to drive a harder bargain with workers.

If we look at the Irish data, we see that the decline in labour’s share in national income was three times the average in advanced economies, given that it fell from a high of 69% in 1975 to new low of 44% in 2015. Of course, this has coincided with the Celtic Tiger and subsequent crash, with a significant increase in participation in global value chains as production processes become increasingly fractured across borders, and with a decline in both the average corporate tax rate and the unionisation rate. If anything, Ireland appears to be a microcosm for a globalising economy, magnifiying in a small, open, economy trends seen elsewhere (although not universally).

So, on the one hand, the IMF is saying that a slowdown or reverse in the process of globalisation is one of the biggest threats to global economic health. On the other hand, however, they acknowledge that ever-greater global economic integration has been coupled with both rising inequality and workers’ declining share in economic activity in the form of wages.

At the least, such cognitive dissonance is an improvement on the market fundamentalism – the so-called Washington Consensus – that prevailed in the 1990s. In light of the Tequila crisis (Mexico, 1994-1995), the East Asian crisis (1997), the global financial crisis (2008-2009), the Eurozone crisis (2009- ) and now the rise populist demagogues, a less charitable moniker might be “globalisation for slow learners”.

Even this tentative progress of the global elites towards an accurate diagnosis should be welcomed as a step in the right direction. Unfortunately, their prescribed treatment still leaves a lot to be desired. Certainly, all reasonable people agree on the pivotal importance of education and training. This is the path of least resistance, relatively uncontroversial. To be fair, the IMF acknowledges that this is unlikely to be enough on its own, and that more redistribution might also be in order.

Need to go further

But, there is a need to go much further. Where workers’ bargaining power has been undermined in favour of corporate interests, it needs to be rebalanced. In Ireland, for example, we need to make the minimum wage a living wage. We need mandatory trade union recognition, an end to zero-hours contracts and better protections for those who find themselves in the so-called “gig economy”.

Overall, globalisation has been good for Ireland in terms of improving average living standards since the 1990s. But, the last decade has shown us how it leaves us more exposed to the vagaries of the global economy. Moreover, when we scratch below the surface, we see that the ‘average’ improvement hides a polarisation between high-fliers at the top, and those on low-to-modest incomes who are struggling to make ends meet. To mix metaphors, we don’t need to throw the baby out with the bathwater, but we do need refit our boats so that a rising tide lifts all.

This post originally appeared in Liberty newspaper, published by SIPTU. 


Posted in: EconomicsInequalityTechnology

Tagged with: globalisationimf

Vic Duggan     @vicduggan

Duggan, Vic]

Vic Duggan is an independent consultant, economist and public policy specialist catering to international clients across private, public and NGO sectors. Having worked during the early part of his career at the European Commission and the European Investment Fund, he spent the three years until early 2011 as economic adviser to Joan Burton TD. From June 2012, he worked as a consultant economist with the World Bank (first in Jakarta, then in Washington DC), with Oxford Business Group and with the Nevin Economic Research Institute. Having worked for three years as an advisor to the OECD Secretary-General, he moved to the Organisation’s Investment Division in February 2016 to work directly with the Head of Division to support the G20 investment agenda, to service the OECD’s Investment Committee and to manage substantive inputs for use and dissemination by the Secretary-General.

Vic graduated in 2012 from the MPA Programme in Economic Policy Management in the School of International & Public Affairs at Columbia University, New York. 

He writes a monthly column on the Irish, European and global political economy for Liberty, the newspaper of Ireland’s largest trade union, SIPTU. He also writes on his own blog about the political economy and various other matters.



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