The surprising solution to inequality: economic common sense

The forward march of nationalism and protectionism around the world is leaving a trail of disintegration in its wake, with Brexit merely the latest manifestation. How can globalization and openness continue to be harnessed for the global good?

Globalization describes how barriers to markets and human interaction fall away: particularly in terms of markets for goods and services, finance, the movement of people, technology and information. There is much to be gained from breaking down barriers, including specialization, as countries can focus on particular areas of expertise rather than trying to do all things; economies of scale; the transfer of technologies between countries, not to mention greater intercultural understanding.

Globalization expands opportunities. In doing so, it touches not only on the economic but also the political and security aspects of our lives. Throughout human history, despite fits and starts, the world has become increasingly global as we have grown closer to each other. Now we find ourselves as at inflection point where its gains are under threat.

This is hardly the first time that globalization has come under fire. Despite the numerous benefits it brings, in recent decades protests from Seattle to Genoa have decried its unfairness and damage.

This is because while the benefits of globalization tend to be enjoyed by many, including millions of people lifted out of poverty in Asia, while those who lose out from the process are more concentrated, for example in declining industries, regions or jobs, and of course they tend to be more vocal in their opposition. Globalization is blamed for unfair competition, job losses, inequalities, environmental damage, security concerns and many other ills.

And these protesters have a point. Merely from an economic standpoint, recent waves of opening up and liberalization have arguably exacerbated inequalities in many countries, with the middle class hit particularly hard. In the United States, median wages have been stagnant over the last four decades. The same picture holds true across many advanced economies, with middle incomes standing still while the rich grow richer. A critical bedrock of stable societies risks being eroded.

The bottom line is that globalization magnifies all the things that markets can get right as well as wrong. Economic systems around the world are failing their citizens, who are not able to fully participate and benefit from the growth process. Globalization merely accentuates this fact.

But retreating from globalization is a mistake. By closing markets and borders the world risks slowing the pace of growth and development as countries and regions retrench into their corners. Globalization allows for the sorts of transfers of finance, knowledge and trade that make countries more prosperous and that can lift developing countries more quickly to affluence. The catch-up we have seen would be greatly diminished if all countries turn in on themselves.

How can this be avoided? Citizens must be convinced that they stand to gain from globalization so that they support political processes that keep markets and borders open. This requires ensuring that countries have the kinds of environments that allow their citizens to reap the full benefits that the expanded opportunities and competition that globalization ushers in, while protecting those that lose from the greatest shocks. In other words, the kinds of economic policies that make generally good sense.

In our Inclusive Growth and Development Report, the World Economic Forum highlights the many ways that the growth process can be made more inclusive. This will be critical for ensuring that the world can continue to reap the benefits from larger and more competitive markets. There is no silver bullet, but there is a wide spectrum of policy and institutional levers that can foster both growth and social inclusion at the same time. These include obvious things, such as education and a progressive tax policy that spreads wealth, which is particularly important for compensating and retraining those who may lose their jobs in part due to globalization.

And there are many other levers which are less often considered in this context but can be just as critical to a country’s success in advancing living standards and ensuring productive employment for all. These include access to basic services and infrastructure, from healthcare to public transport, support for entrepreneurship, finance for real economy investment, and lack of corruption.

As well as putting a more inclusive system in place, policy-makers must articulate to the public why a more open global environment is so critical for our collective future. Rather than tackling tough social problems head on, it’s too easy to reach for globalization as a convenient scapegoat. Overall, this approach requires jettisoning the politics of the short-term in favour of a long-term perspective and a desire to do what is good for society for this and future generations.

National and global market forces must be harnessed to ensure that the world can continue to benefit from all of its talent and assets. Allowing fear, short-term thinking and nationalist rhetoric to lead countries back to isolationism and autarky would make for a sad future indeed.

Have you read?
Globalization for the 99%: can we make it work for all?
People are angry about globalization. This chart explains why
Watch Nobel Prize-winning economist Joseph Stiglitz explain globalization in three minutes