The Shifting Power Equation of Globalization
Jonathan Schmidt, former Director, Head of Global Agenda, World Economic Forum & Howard Davies, Director, London School of Economics and Political Science

A few short years ago an anti-globalisation coalition severely disrupted a WTO summit in Seattle and began a wave of demonstrations against the institutions seen as being ‘responsible’ for globalization. At the time, most of the protests centred around the perceived inequities between North-South economies.  Western corporations were thought to gaining a disproportionate share of benefits of globalization. That kind of disruption seems less likely in 2007. And full frontal attacks on globalisation seem distant memories.

But this relative calm on the streets does not mean that all the arguments are over - they have just changed character.  While most people may accept that the trend towards greater interconnectedness between the world’s major economies is unlikely to be reversed, there is increasing focus on the resulting winners and losers. In the long run, the economic theory of comparative advantage tells us that globalisation should result in a net increase in human welfare; however, it is not likely that all boats will rise at the same time or to the same extent on this incoming tide, and some may be shipwrecked.  Indeed ‘The Shifting Power Equation’ will be the overarching theme of the Annual Meeting of the World Economic Forum in Davos later this month (24th –28th January). There participants will try to make sense of the various ways that power is being transferred and re-distributed in our ever more connected global polity.

One dimension of this debate is geographical. Over the coming decades there could well be a massive transfer of wealth from the industrialised western economies to the fast-growing countries of South and East Asia in particular.  This argument is most loudly advanced in what Donald Rumsfeld used to call “Old Europe”. That is surprising, in a sense, since recent figures show that in fact the European Union has maintained its share of world trade over the last decade. Taking the averages for 1998-2003 over the previous five year period, the EU marginally increased its share of world trade in goods (from 15.4% to 15.5%), while the US share fell from 12.8 to 12.0. The big winner was China, up from 2.8 to 4.4%, with Japan the biggest loser.  And in services Europe did better than hold its own.

But perhaps the bigger question, and the one with increasing political resonance, concerns the winners and losers within countries. It is increasingly clear that the rewards of globalisation are heavily skewed. That is seen most sharply in the US, where in the last 5 years real incomes have risen on average by only 1.4% a year, only half the rate of productivity growth. Only the top 10% of earners have seen their rewards rise more rapidly than productivity, while pay to those on Wall Street, and at the top of major corporations, has escalated dramatically. Middle and lower incomes have stagnated.

British Trade Unions have illustrated the point starkly with their claim that for every GBP100 earned by the average employee in 2000, he or she now earns GBP106, while company directors pay has doubled in the same period.

What will the consequences of these changes be? In democratic societies it is hard to imagine they will pass unnoticed.  We are already beginning to see a reaction.  Left-wing coalitions have taken power in Spain and Italy.  In France Segolene Royal is developing the theme; in the UK many expect Gordon Brown will be more sympathetic to the claims of organised labour than Tony Blair has been.  And of course we have seen a wave of populist governments elected in Latin America while in the US trade and economic issues are expected to play a major role in defining the upcoming presidential election.

The distribution of the globalisation dividend may turn out to be the biggest item on the economic agenda of the Western democracies in the next few years. There will be pressure for protection and for punitive taxation. There is a perception that the response of the globalisers has so far not been sensitive enough to the concerns of those who are losing out from low-wage competition. It has amounted to little more than an assertion that there is no turning back. More selected and sophisticated means of compensating and re-equipping the casualties of enhanced competition will soon be needed if we are to avoid a trip down the slippery slope of national protectionism.