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Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Date: January 9, 2017 Topic: European Macroeconomics & Governance

An important contribution to the debate came this week from Maurice Obstfeld. He argues that countries must protect and expand gains from trade through policies that redistribute them more equitably. Globalisation offers potential economic gains for all. But there is no guarantee that this potential will be realised if governments do not take decisive action to support those who suffer from the side effects.

The political consensus that drove trade policy over much of the postwar period will dissipate without a policy framework to spread the risks of economic openness. Such a framework must ensure flexible labour markets and educated, agile workforces, while supporting job matching. It should improve the functioning of financial markets. And it must directly address inequality of incomes. We face many economic challenges, and trade is unique under the illusion that governments can shut out the rest of the world when it becomes inconvenient. In the 21st century, however, interdependence is not optional.

The question that follows is how this compensation for those who do not gain, or even lose out, through globalisation can be engineered. As Gavyn Davies effectively summarises, the shape of a solution that makes economic sense while also being politically feasible remains embryonic at best.

Antràs et al. (2016) study the welfare implications of trade openness in a world where trade raises aggregate income but also increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. They propose two adjustments to the standard measures of welfare gains from trade: a ‘welfarist’ correction inspired by the Atkinson (1970) index of inequality, and a ‘costly-redistribution’ correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. The quantitative results suggest that both corrections are non-negligible: trade-induced increases in inequality of disposable income erode about 20% of the gains from trade, while the gains from trade would be about 15% larger if redistribution was carried out via non-distortionary means.

Some have proposed that we might consider a form of Universal Basic Income (UBI) as a way to replace earnings from vanishing jobs. Robert Skidelski argues that the explosion of robotics has given the demand for UBI renewed currency. A standard objection to UBI is that it is unaffordable, but Skidelski argues that this is not the main point. The overwhelming evidence is that the lion’s share of productivity gains in the last 30 years has gone to the very rich. Even a partial reversal of this long regressive trend for wealth and income would fund a modest initial basic income, which can be designed to grow in line with the wealth of the economy. Automation is bound to increase profits, because machines that make human labor redundant require no wages and only minimal investment in maintenance. Thus, unless we change our system of income generation, there will be no way to check the concentration of wealth in the hands of the rich and exceptionally entrepreneurial. A UBI that grows in line with capital productivity would ensure that the benefits of automation go to the many, not just to the few.

Danny Leipziger argues that adequate income redistribution ex post depends on public policy, including effective taxation and collection from firms and individuals and efficient use of the funds. This is where globalisation has largely failed, because many highly successful corporations have avoided paying their fair share. Beyond redistribution, however, Leipziger argues that governments, at various levels, need to be in a position to create new jobs.  Effective labour market programs need to be found going forward to deal with future dislocations due to disruptive technology. This can be seen as part of preparedness for the Fourth Industrial Revolution.

Harold James writes that the compensation strategy has many hazards. People who are paid to do meaningless activities will become even more disengaged and alienated. Regions that are subsidised simply because they are losing out may demand more autonomy, and then grow resentful when conditions do not improve. Thus, simple transfers are not enough and we should rethink labour mobility. Europe and the US have long attempted to support “losers” in manufacturing and services through small-scale programs. Many of the dilemmas that confronted nineteenth-century policymakers are confronting their counterparts today.

Earlier generations used emigration as a release valve, and many people today, especially in Eastern and Southern Europe, are responding to poor local economic conditions in a similar fashion. Internal migration into dynamic metropolitan hubs is still a possibility, especially for young people, but this kind of mobility requires skills and initiative. In today’s world, workers must learn to embrace adaptability and flexibility, rather than succumb to resentment and misery. The most important form of mobility is thus not physical; it is social or psychological. Unfortunately, the US and most other industrialised countries, with their rigid education systems, have failed to prepare people for this reality.

Asatryan et al. (2014) look specifically at the EU and argue that compensation policies should target workers in branches exposed to import competition. Rather than subsidising unemployment, compensation policies should strengthen the incentives of displaced workers to seek re-employment and improve their chances of success. In the long run, sound skill and education policies are key instruments both for increasing the benefits of globalisation and for making it more inclusive. Although “one size fits all”-strategies should be avoided given the specific strengths and weaknesses of EU countries’ education systems, a particular focus ought to be set on the early phase of the life cycle. Early childhood education programmes targeted at children from disadvantaged backgrounds are a particularly promising tool for reducing inequality of educational and labour market outcomes.

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