Over the past half-century, globalization has narrowed the gap between rich and poor in the world as a whole. But the gap between rich and poor within Western democracies has widened, posing serious risks to the hard-fought gains of social and democratic reform movements over the past 200 years.
LONDON – Last month, I was invited to speak at the York Festival of Ideas, an annual forum for debating alternative, predominantly progressive policy goals. I talked about my work on asset-price stabilization. Andy Wood of the consultancy Grant Thornton spoke about inclusiveness in business, Neil McInroy of the Center for Local and Economic Strategies discussed local organizing, and Ander Etxeberria of the Mondragon Corporation told us about their employee-owned cooperatives in the Basque Country. But, most importantly, Wanda Wyporska of The Equality Trust gave a fascinating talk about the principle of “equality for all.”
Few on the left or the right nowadays would actively advocate inequality for all. Rather, the divide is between conservatives who promote equality of opportunity and progressives who promote equality of outcomes. This is an important distinction. But whatever your definition of equality, the bigger question is how best to achieve it.
After World War II, the world adopted the Bretton Woods system, whereby countries maintained fixed exchange rates against the dollar, and capital was largely immobile at the international level. When tourists from the United Kingdom traveled to France, Italy, or Spain, they faced restrictions on how many francs, lire, or pesetas they could buy; and international investment was constrained by a pervasive system of capital controls.
With the breakdown of the Bretton Woods system in 1971, the world embarked on a bold new adventure in globalization. The result was a massive reduction in global inequality, as capital flowed to places where wage levels were a tiny fraction of those in Western democracies. Economic theory predicts that when two countries engage in trade, both will emerge better off. But it does not tell us that every inhabitant of those two countries will be better off. On the contrary, it predicts that globalization will generate winners and losers, and decades of experience have borne that out.
The liberalization of international capital markets has been unequivocally good for 800 million unskilled Chinese workers. It has been unequivocally good for Westerners who derive their income primarily from renting their physical and intellectual capital to the highest bidder. But for Westerners whose primary source of income is the sale of their unskilled labor to the marketplace, the era of globalization has coincided with decades of wage stagnation.
Though the nation-state is not a perfect institution, it has provided Western social-democratic parties with the tools to improve living conditions for their fellow citizens. Western democracies did not always provide pensions and health care to their citizens. Laws governing working conditions, prohibiting child labor, providing free education, and granting universal suffrage to all adult men and women did not emerge from nowhere. They were the results of reform movements and political conflict – often violent – over the course of 200 years.
The post-Bretton Woods liberalization of capital controls, in the absence of equivalent protections for workers, led to predictable results. Labor unions that had long protected the rights of workers in Western countries lost their bargaining power, and with it the ability to negotiate for more humane working conditions and higher wages at home.
When opinion-makers in Western democracies promote the free international movement of capital, one could say that they are advancing the cause of global equality by raising the wages of workers in developing countries. But, of course, Western elites also benefit from higher salaries and increased profits when intellectual and physical capital flows to low-wage countries with weaker labor protections. When they promote globalization as a universal leveler, they are generally not thinking about the welfare of unskilled Chinese workers so much as their own self-interest. If Westerners benefit from less expensive Chinese-made cell phones and consumer electronics and South Korean-made automobiles, then so much the better.
But while globalization has narrowed the gap between rich and poor countries, the gap between the rich and the poor within Western democracies has widened, owing to stagnant growth in median income. Economists disagree about the causes of this divergence. Part of it is likely due to new technologies that increasingly replace workers who carry out repetitive tasks. But research by MIT’s David H. Autor and others finds that a large part of the widening income gap reflects increased competition from China.
That finding presents a dilemma to those who seek to promote equality for all. The world as a whole is not a democracy and is unlikely to become one in the foreseeable future. If politicians in Western democracies continue to promote policies that erode the boundaries of the nation-state, they will be voted out of office by working- and middle-class citizens who are in direct competition with low-skilled workers in the developing world. Equality for all is an admirable goal. But in striving to achieve that goal, we must not risk the domestic equality gains that two centuries of social progress have delivered.