Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  But this is an arena in which changes were especially inevitable, with or without Trump: tens of thousands of protestors in Europe and America, demonstrating against these seemingly arcane provisions, had shown that the hidden corporate agenda had at last been exposed. In May 2017, the European Court of Justice ruled that at least certain key provisions of investment agreements had to be passed by the parliaments of each of the members of the EU—unlike trade provisions, where the parliament of no single country had the veto power.61

  Geopolitical Implications

  The one thing that the United States and China agree upon is that the structure of economic globalization—the flow of goods and capital, under investment and trade agreements—has geopolitical implications. For Obama, the TPP was part of the “pivot to Asia,” a reassertion of the role of America in that part of the world. So too, China is hoping to get support for its positions— from Tibet, to the South China Sea, to human rights—from those it is helping in the One Belt, One Road initiative.

  If globalization is going to work, there has to be a way to resolve disputes and, in some cases there is: an international court of justice was set up in the Hague by the UN Charter in 1945, and it has ruled on a large number of cases involving cross-country disputes, including boundary disputes. Countries’ affections for this judicial system depend closely on whether they think they will win.62

  THE CHANGING GLOBAL ECONOMIC STRUCTURE

  While a disproportionate fraction of attention in the globalization debates may be paid to industries of the past—agriculture and manufacturing—some of the most difficult issues will arise in sectors of the future, for instance in high tech.

  The Digital Economy

  Already there is a concern that five American firms (Apple, Google, Facebook, Amazon, and Twitter) dominate globally—except in China—their part of the industrial landscape. The fact that in so many sectors of the economy a single firm dominates is an example of a “winner take all economy,” sometimes referred to as the “superstar economy.” In the context of ordinary manufactured goods, not everyone will agree on what is the best—products have many characteristics, and what suits one person may not suit another. There has been an important change, however, especially as we move to a digital economy. Upfront costs, most importantly research, represent an increasingly large fraction of overall costs. Competition in these circumstances, where production constraints are typically of secondary importance, focuses on price. When there is intense competition, competitors successively undercut each other, until price is driven down to that of the firm with the lowest marginal cost. That firm becomes the dominant firm. Over time, that firm is able to extend its advantage over others, as it continues to do research, as it gathers data to make it possible to better meet the needs of particular customers, and as it uses sophisticated marketing and product strategies to “lock in” the customer.

  What is emerging is a far-from-competitive marketplace. The dominant firm can have strong and ever-increasing market power.63 Actions by authorities in Europe and elsewhere to circumscribe their market power—or even make them pay taxes—are greeted with charges of anti-Americanism.

  So too for rightful concerns about privacy and the ownership of data (and the longer-run issue of the market power to which a concentration of data ownership could give rise). Many in Europe are concerned with privacy; many economists are concerned that control over data could increase even further the market power of certain firms. But the U.S. government, reflecting the interests of America’s technology giants, wants the rules for data and data ownership that serve the interests of those firms. In trade negotiations, governments trade off various producer interests. So Europe might be willing to give in to American demands on data if it got something in return, say for its auto industry. But what is sacrificed in this grand bargain are matters of principle and the interests of ordinary citizens. This is the way trade agreements have been done since time immemorial. But globalization with rules made in this way will not only lack legitimacy; they will lack the support of the citizens. They provide fodder for the anti-globalization movement.

  The problem is that with these enterprises exerting undue influence in the United States—and with politics in America taking the tilt that it has—the government has done little to ensure competition or to address issues of privacy. Given the size of these enterprises (Apple’s cash reserves in 2017 exceeded the reserves of Canada and the UK combined), only the governments of the major countries can take them on. If they don’t, the problems of inequality and the broader discontent with globalization will only grow deeper. Not surprisingly, the United States government (in the form of the USTR) has, by and large, represented the interests of American producers here, as they have in other arenas, so the American trade agenda (as they put it, setting the standards for the digital economy) is a monopoly-corporate agenda, paying not only little attention to privacy, but to the dangers of the accumulation of market power that may follow from data ownership.

  Fortunately, in Europe, a combination of economic interests (the dominating American firms and their monopoly practices disadvantage European rivals and entrants)64 and social values (so far, Europeans seem far more concerned about privacy and the inherent dangers of monopolies, at least in this area, than do Americans) means that their trade negotiators have been under enormous pressure not to give in to American demands and, at the very least, to give Europe scope to pursue its own “digital standards.”

  The Gig and Sharing Economy

  Another important development is that of the gig economy, of enterprises like Uber and Airbnb. This has posed difficult regulatory issues all over the world. To some extent, their success is based on innovation, providing services that were not previously available. But they are also successful because they take advantage of their ability to avoid regulation and taxes facing conventional producers of similar services (economists refer to this as regulatory and tax arbitrage). There need to be new regulations (for instance, in the case of Uber, to ensure against excessive congestion, and to ensure rider safety and adequate insurance to compensate in the case of an accident) and new forms of taxation to even the playing field. With investment agreements in place, in principle, these companies could sue for the loss of profits from any such new regulations—an illustration of the rigidity of investment agreements in allowing tax and regulatory regimes to adapt to changing circumstances.

  Broader Implications of Moving to a Service Economy

  The most important structural transformation is the move from manufacturing to a service sector economy, a shift we have often noted in this book. The stresses being expressed by the New Discontents are often as much a result of this shift as they are of globalization itself. Globalization in a service sector economy is different. Most of the growing services are location-specific: for the most part, education and health services are provided where individuals live. Those who manage the provision of services will perform their duties locally, where the services are provided. Of course, some of these services will be globalized: data processing may occur in India, students will come to the United States to get higher education, and medical tourism is likely to continue to grow. But these will be a small fraction of global GDP.

  There are several important implications, one of which I have already noted. The manufacturing export–led growth model, the model that had such phenomenal results in narrowing the gap between Asia and the West, won’t play the same role in coming decades. Asia, though, has learned how to learn, and will continue to close the gap in productivity. It is in Africa, not as far along in its development, that the problems will arise. As I noted, even if all the manufacturing jobs in China were to shift to Africa—which won’t happen—it would not create enough jobs for its burgeoning population, and probably not enough to kick-start the structural transformation that the continent needs. And if the disparity in income levels persists, migration pressures will persist.

  This then is the second implic
ation: a manufacturing-dominated globalization, I noted, provides a strong downward pressure on wages in advanced countries. That force will lessen in coming years. Indeed, since services are labor-intensive, there is the possibility that wages in the advanced country (as a share of GDP) may increase. But that will depend heavily on public policy. Some of the most important growing sectors are health and education, the funds for which understandably come disproportionately from the public. If we prioritize quality care and education for citizens of all ages, we will create more higher-paying jobs. But if we starve these new sectors of funds, the structural transformation will be harder, globalization will more likely be blamed for the lack of jobs, and inequality will be higher.

  There is another reason that inequality may be greater in the “new economy” to which the world is moving. Services are provided locally, and in many areas, that local provision is dominated by a few firms: two or three providers of health insurance in each area in the United States, one firm servicing each brand of car or tractor, one or two Internet providers, one or two cable TV companies, a few providers of finance to small businesses. This means that there may be a higher level of monopoly power than in the manufacturing-dominated economy, unless the government engages in hard-to-manage antitrust policies at the local level—and that in turn implies more inequality, again, unless the government undertakes countervailing measures.

  Yet another implication is that growth, at least as we conventionally measure it, is likely to slow down, especially in the advanced countries. Of course, there may be particular sectors that will do well—while innovation in U.S. tech is celebrated, overall GDP growth has slowed (in 2016, to just 1.6 percent). Historically, the service sectors have experienced low increases in productivity, a phenomenon related to what is referred to as Baumol’s disease.65 It’s partly a measurement problem—our metrics don’t, for instance, take into account the fact that twenty years ago, a heart surgery had a high probability of death and a low probability of long-term recovery, quite different from today. But even then, there’s simply not the innovation we see in manufacturing.66 A barber may be slightly faster with modern clippers, but only slightly so. New technologies have had only minor effects in education.67 We needn’t bemoan this too much. The effect of further increases in income (beyond that of, say, upper-middle-income Americans) on well-being is likely to be limited.68 What should matter now is how the wealth of a country is shared. The possibility, or even likelihood, that inequality will continue to grow, even as the extent of globalization declines, means that stronger government actions, along the lines discussed in chapter 4, are needed.

  The emerging markets will still have ample opportunities for catching up: with, for instance, China’s GDP about one-fifth that of the United States, there is enormous scope for it to increase GDP. But even the process of catching up in the service sector may be harder. A new manufacturing factory in China using advanced technology may be able to achieve close to the same productivity as one in America or Europe. But disseminating knowledge about both technology and business practices to the myriad of small service sector businesses is a far more difficult task.

  The final implication is that the growth in trade relative to GDP will slow down, and again, we needn’t bemoan this. Some have seen recent statistics showing that this has already been happening as suggesting that the retreat from globalization is already under way. Some seeing a correlation between trade and growth will worry that this decline in trade will imply a decrease in growth. This decline will happen, as I have argued, but it’s not because of the slowdown in trade, an important lesson in confused causality. Both the decline in growth in incomes and the decline in the ratio of trade to incomes are caused by the increased role of the service sector in the economy.

  GLOBALIZATION, INEQUALITY, AND MARKET POWER

  This book is about the discontents with globalization in both the developing world and advanced countries, and how that discontent is linked with the growth of inequality. I believe the focus of the debate over globalization in coming years will continue to be over the well-being of workers, both in developed and developing countries, and the effects of globalization on them. As I explained in chapter 1, even if globalization is not the major cause of the growth of inequality and the evisceration of the middle class in the advanced countries, even if the loss of jobs has more to do with technology than globalization, globalization will bear the brunt of the anger: those who suffer see globalization as the one thing that they can do something about. That’s why anyone who believes in keeping markets open should be asking, what can we do to help those at the bottom and middle? While I touched on this in chapter 4, and a full answer would require a more extensive discussion than I can give here, looking at the matter from a global economic perspective may be useful.

  Globally, there seems, at least at the moment, to be a surplus of labor and capital,69 with high unemployment and safe assets (U.S. Treasury bills) yielding a real return close to zero. A natural question is, how can that be? Where is the money going? Part of the answer is that the global economy is not being run well: there is a global deficiency in aggregate demand. This book has been largely about the microeconomics of globalization, about how opening up markets, even if it increases the level of income, can so change the distribution of income as to make large groups worse off. But there is a macroeconomics of globalization. If countries like Germany insist on exporting more than they import, on running a trade surplus, their actions may cause a deficiency of global aggregate demand—imposing a large cost on the rest of the world, because with an insufficiency of global aggregate demand, somewhere in the world there will be unemployment. Some country may protect its jobs, but only by causing jobs elsewhere to be scarce. That is why Keynes suggested that there should be a tax on trade surpluses.70 Taxes are used to discourage countries and individuals from doing things that impose costs on others. The weakening of global aggregate demand caused by surplus countries in the past was offset by other countries (often in the developing world) running unbridled fiscal deficits. But countries have learned the high long-run costs of doing so, and so today there is nothing countervailing to stimulate global aggregate demand. On the contrary, the current wave of austerity has reinforced the weakness in global aggregate demand. It is hard to tell if and when the fads and fashions which have given rise to global austerity will fade: more reasonable minds would have long ago concluded that the current moment of low interest rates is the time government should borrow for long-needed investments in infrastructure, education, and technology.

  Inequality too plays a big role. Those at the top spend a much smaller portion of their income than those down below, so when inequality increases, demand decreases. There is a vicious circle at work: a weak economy leads to lower wages and more inequality, which weakens the economy further. If government responds by stimulating the economy, it can offset these untoward results; but the weaker economy typically leads to lower wages and bigger fiscal deficits. If the government responds by another dose of austerity, the economy is pushed down further.

  But this is only part of the explanation of today’s growing inequality and weak economy: There is a growing consensus that a larger share of the global income pie is being appropriated in monopoly rents, or more broadly, through the exercise of market power.71 This increase in market power diminishes demand in two ways. More of the money goes to the owners of the monopolies. These individuals, typically among the wealthiest of our society, spend less than ordinary citizens, and so aggregate demand is decreased. At the same time, the firms curtail output (from the level that it would be with competition), since they know that increasing output will lead to lower prices and profits. The result is large, highly profitable corporations that sit on hoards of cash, with little incentive to reinvest the money—precisely the situation that has been observed in recent years.

  Alternative Course of Multipolar Globalization

  I want to return to a central theme of this book
: globalization has the potential of increasing standards of living. The insights of Smith and Ricardo that global efficiency could be increased through specialization (taking advantage of economies of scale) and comparative advantage still hold true. Thus, everyone in society could be made better off. But the outcome of unfettered globalization can be just the opposite: a reduction in standards of living for at least large segments of the population.

  There is the possibility that twenty-first-century multipolar globalization will create a more competitive global landscape, circumscribing the market power, for instance, of the multinational corporations of the advanced countries. There is the more remote possibility that domestic political forces in the United States and Europe circumscribe market power. There is the possibility too that with a better managed globalization there will not be extended periods of deficiencies in aggregate demand.

  But there is also the possibility that twenty-first-century multipolar globalization will not work much better for ordinary citizens than it has been working in recent years. True, the China-led rebalancing of globalization will increase overall incomes in many of the countries of the developing world. And multipolarity—the very presence of China in the global landscape—may circumscribe the abuse of market power by the advanced countries and their companies. But it is at least as likely that China’s large companies, as they become more established, will see their interests coincident with those of their compatriots from the West. Profits are higher and life is more comfortable without excessive competition; it is more fun, and more profitable, to find ways of cooperating (a more accurate word might be “colluding.”) The multinational oil companies will be forced to let into their club new members from China, and so too will companies in other areas. But competition will remain limited and prices will remain high. Profits of Western companies will be somewhat lower, but, overall, globalization may look little different under multipolar globalization than it did under American-led globalization.