Sunday, July 16, 2017
We need more globalisation, not less
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

One of the great disadvantages of being a member of the Bank of England’s monetary policy committee (MPC) is that unless you say something about interest rates, people do not take much notice of your speeches.

That was the fate that befell Ben Broadbent, the Bank’s deputy governor for monetary policy, a few days ago. His interesting and welcome speech on globalisation steered clear of any mention of interest rates, though he offered his views on rates in a subsequent interview (he is not an early hiker).

On globalisation, which it is fair to say has had a terrible press in recent years, and is blamed for the rise of populism in many countries including Britain, he pointed out a simple truth. Yes, there will be losers from globalisation, and before her political implosion Theresa May seemed overly concerned with compensating them, but they are greatly outweighed by the winners. And the gains from globalisation are spread among the population, not confined to a small elite.

This is a frustrating time for economists. It is, as Broadbent point out, nearly 250 years since Adam Smith demolished mercantilism; the idea that trade is a zero-sum game and one country’s gains are another’s losses. It is exactly 200 years since David Ricardo gave us the law of comparative advantage, which explained why countries specialise, or should specialise, in the products and services they are relatively better at doing.

And yet, centuries later, we have an American president whose protectionism is based on a mercantilist view of the world. And globalisation, far from being seen as a route to improved living standards, is blamed for their weakness.

To illustrate his theme, Broadbent used the apparently unhelpful example of textiles and clothing. Since the mid-1970s, when import penetration began to rise sharply under the impact of lower tariffs, employment in the sector has fallen significantly; by around 90%. Then It used to count for one in 30 jobs;, now it is one in 370. So people who were employed in this sector were losers from globalisation.

British consumers were, however, significant winners as a result of falling clothing prices. Household incomes are 3% higher in real terms than they would have been in the absence of the fact that, both in absolute terms and relative to other prices in the economy, clothing is a lot cheaper than it was.

A straight comparison between these two effects results in a £36bn gain for consumers, against a £15bn loss of labour incomes for those who were employed in the clothing sector in Britain.

Even this, however, is likely to understate the gains from globalisation. As he put it: “There’s a big difference between particular jobs and overall employment. Individual jobs are lost continually … Yet aggregate employment has risen – since both the mid-1970s and the mid-1990s – and the rate of unemployment has fallen. In any reasonably flexible labour market new jobs are created as others are destroyed. “

The latest figures, indeed, showed a record employment rate of 74.9%; 32m people in work. That does not stop some people from yearning for the jobs of the past, but you cannot run an economy on nostalgia.

What if the new jobs are of poorer quality than the ones they replace? Does not globalisation then lead to a rise in income inequality? All the evidence, most recently an International Monetary Fund study in April, found that technological progress dwarfs any impact on inequality from globalisation. Technology benefits the highly-skilled at the expense of the low-skilled and unskilled.

The irony is that concerns about globalisation have been mounting as it has been struggling, even before Trump’s election. The era of “hyper” globalisation that began in the early 1990s has gone into partial reverse since the financial crisis. World trade, which once led global growth, has barely kept pace with it in recent years. Had it done so, Britain would have had significantly stronger growth.

This matters, particularly for an economy that has embraced globalisation as much as Britain’s. We aspire to be a great nation of exporters again. We are undoubtedly a formidable nation of importers, without the national ties to domestically-produced products that some other countries have retained.

Globalisation matters. When it has gone into reverse growth, productivity and living standards have suffered, as we saw most dramatically between the two world wars. Stronger growth in world trade in recent years would have been associated with faster economic growth and, most importantly, growing rather than stagnant productivity, and rising real wages. Trade stimulates rising productivity, as Smith and Ricardo taught us. Those blaming globalisation for weak living standards have got it 180 degrees wrong. We needed more of it, not less.

It matters too in the long-term. On Thursday the Office for Budget Responsibility issued its Fiscal risks report, and a sobering document it was. The OBR continues to cling to the assumption that productivity will recover to normal growth rates in the next few years; if not, and recent weak productivity trends are the “new normal”, then taxes and/or government borrowing will need to rise, even if the government sticks to its tight spending plans.

Though the clock is ticking, to coin a phrase, it is too early to say where what the OBR describes as “the risks posed by Brexit” will end up. It is less troubled by a one-off “divorce bill” payment to the EU – which will not affect the public finances in the long run - than by what it describes as “the implications of whatever agreements are reached with the EU and other trading partners for the long-term growth of the UK economy”.

The OBR reminds us that it does not take much for real problems to mount. As it put it: “If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher.”

That is easily possible, or worse. At the G20 meeting in Hamburg last weekend, countries had trouble agreeing on a strong commitment to global free trade. America, as noted, has a protectionist president from whom offers of an early trade deal should be taken with a bucketful of salt. Trade is the key to our prosperity but it is not clear how it can be unlocked.

In or out of the EU, Britain would benefit from a revival of globalisation. Things can change, and quickly, but the omens at present are not good. Aspiring to be a new global champion of free trade is not much use if nobody else is playing.