Do Not Blame Globalization for Every Economic Ailment in SIght

Context: New studies suggest that attributing the declining labour share of national income to globalization and automation would be hasty and possibly erroneous.

Arguments Suggesting Link between Globalization and rising Inequality

• Study on Evolution of Incomes: Conducted by Thomas Piketty’s Capital in the Twenty-First Century. Piketty’s focused on incomes of the top 10%, 1% and 0.5%, using tax data.

• He concluded that the top 1% benefitted enormously relative to the rest.

• Decline in the national income share of labour relative to capital: 

• Labour’s share (income that accrues to workers rather than investors) has been falling in all major economies for the last 40 years or so, while it had remained constant prior to that.

• Withdrawal of initial successes: After the initial decades of positive trends after World War II, much has gone wrong with the practice of market capitalism. For E.g. In recent years-

• Social mobility has been falling, 
• Equality of opportunity has remained elusive, 
• Superpower companies (in developed countries) and superpower entrepreneurs (in the developing world) have accumulated market power that distorts competition, 
• Housing, health care and some lifestyle aspects like live entertainment have become expensive.

Counter Evidence to the above findings:

• No change in the wealth of high-income groups:

• Studies have now concluded that the incomes of the top 1% have not changed materially for the last six decades

• Decline in labour’s share is due to many following factors with majorly dependent on Boom Bust cycles.

• Boom-bust cycles: This is the most important cause of the decline in labour’s share, particularly in extractive industries and the real-estate sector

• Rising and faster depreciation
• Superstar effects related to market dominance
• Capital substitution/deepening and automation
• Globalization and labour bargaining power.

• Political Misuse: Populists around the world have risen to power by using economic Inequality as a political plank.

• Over time, as populist leaders become the establishment, it seems likely that the economic basis of that plank will be questioned.

Way Forward: While de-globalization, or some form of “slowbalization”, will probably remain with us for many years, globalization’s link will be better understood with other factors.

• For Developed Countries: this would imply a need to turn away from knee-jerk “nationalism” and focus instead on reducing the disruption caused by a range of factors responsible for middle-income stagnation.

• For India: the lessons are manifold

• Draw appropriate conclusions for policy action: For this, we need to track whole- economy statistics in a much more transparent, objective and rigorous way.

• Enable economy-wide growth: Most effective way of lifting the entire population rather than attempting to focus on one group or another, which dissipates energy and lacks effectiveness.

• Widen the tax base: This should be the focus, rather than inventing new forms of taxation or increasing taxes.

• India benefits greatly from globalization: Global capital and technology and international talent have a role to play in India’s future prosperity.

• Fight crony capitalism: Don’t allow  powerful businesses from distorting competition in any sector

• Reallocation of resources: Try to reallocate the fruits of a fair-play economy and globalization more inclusively through the use of innovative, modern and time-defined welfare programmes.

Conclusion: Erroneous attribution of Inequality to the Globalization can distract us from the policies needed to solve it.

P.S: “Things are not always what they seem; the first appearance deceives many,” said Plato in Phaedrus.