The term ´Shifting Wealth´ has been criticised
for conveying a dangerous notion of zero-sum game; dangerous because the rise
of protectionism and nationalism in some OECD countries risks bringing the rise
of emerging countries and the corresponding meltdown of global poverty to an end. ´Shifting
Wealth´ is a shorthand term to describe the gravity shift of the world economy
toward the East and the South, in terms of flows (GDP share, South-South trade
and finance) and of stocks (changes in net foreign assets, built-up of reserves
and SWF assets)[1]. Zero-sum
mentality has it that lower poverty in China and in the developing world causes
poverty to rise in advanced countries, for example in the United States. Rather
than taking satisfaction in global economic development and the unprecedented
business opportunities and new jobs it brings also to the OECD, economic growth
in the South is regarded by some as a threat. The real threat, however, is a global trade war.
What is often missed in analysing globalisation
is that the rise of emerging countries has gone and is still going through
three distinctive phases. Policymakers risk foregoing the benefits of globalisation
because they react to the first opening phase of the 1980/90s while important
wage and price trends are now being reversed as a result of changes in the global
labour supply and of China´s fast transition to a ´New Normal´.
The benefits of ´Shifting Wealth´, including to
the OECD, are well rehearsed. The rising living standards that
came with globalisation initially lent widespread support to the view of trade
as a key engine of economic growth, North and South. The expansion of global value chains (GVCs)
became a strong driver of productivity, boosting intermediate trade – a boon
for OECD producers of equipment and consumer goods. Formerly poor countries used their exports for higher consumption and thus imports, not least for OECD-based
luxury brands. Intensified specialisation meant an improved allocation of
resources also in OECD countries, with capital and jobs shifting away from
their least competitive uses and lowest added value toward higher-income
sectors. Consumers in the OECD benefitted from a higher purchasing power of
wages as low-skilled goods prices dropped. They also enjoyed more product
choice. The deterioration of China´s terms of trade through the mid-2000s
indicated that China´s exports made the world better off[2].
Improvements in the range and quality of exports, greater technological
dynamism, better prospects for doing business, a larger consumption base – all
these factors have created substantial welfare benefits for OECD countries.
Overall, Shifting Wealth is a win-win setting.
The problem is that the benefits of Shifting
Wealth have been unevenly distributed. Many of the major economic trends of our
time - globalisation, digitisation and robotisation - are good for society on
average, but not automatically good for everyone. Especially in the labour
market, they also generate losers. Besides the fear of mass immigration, these globalisation losers can play
a decisive role in the rise of populism. An appropriate policy answer in
advanced countries requires a sound diagnosis that distinguishes three phases of globalisation.
The first phase of Shifting Wealth in the late
20th century went along with low-skill wage pressures and higher
returns to capital in OECD countries, giving impetus to Piketty´s r>w[3].
The opening of China, India and the former Sovjet bloc had effectively doubled
the pool of low-skilled labour. The shape and speed of the newcomers´ integration
into the world economy then depended importantly on the transfer of labour from
mostly rural low-productivity areas to mostly urban high-productivity sectors. A core model of economic development, the Lewis[4]
or surplus labour model, provides the analytical tools: The modern
sector – and by extension the world economy (!) – faced for a while an ´unlimited supply of labour´ at wages not far from the subsistence level. As
predicted by the Stolper-Samuelson
theorem, the labour supply shock led to a drop in the price of
wage-intensive goods that caused a reduction in the equilibrium wage or,
alternatively with low wage flexibility, job losses.
While unemployment in certain sectors or
regions in OECD countries have resulted to a large extent from technological
changes rather than from trade, the two drivers are not always easily
disentangled. In the OECD countries, both globalisation and technological change
affect a middle class that is often marked by industry, which has lost its good
jobs or is afraid of imminent job losses[5].
That it is the middle class in OECD countries
that has been affected by the initial labour-supply shock has theoretical and
empirical support. Krugman (1994) has shown early on that competition will
ensure the ratio of the wage rate in the OECD area to that in China to equal
the ratio of labour productivity in those sectors in which workers in the two
regions compete head to head[6].
Poor countries produce low-tech goods more cheaply, and the fall in the price
of those goods will raises real wages in the OECD. So in the past, surplus
labour in China and elsewhere has benefitted in particular the low-income
segments in the importing countries as low-tech products weigh relatively
heavily in their consumption. The key problem, however, for the middle class is
the structural change that results from trade pressures in intermediate sectors.
Some of these sectors, such as textile, steel and electronics have been
shrinking in the OECD as a result of Shifting Wealth.
The empirical evidence that the distribution
effects of globalisation and technological change have put a strain on the OECD
middle-class has been provided by the “elephant graph” in a paper by Lakner and
Milanovic (2013)[7]. The
graph shows income gains at each point of the global income distribution for
the 20 years spanning the fall of the Berlin Wall to the 2008 financial crisis.
The graph has recently been updated for the World
Inequality Report 2018 by a team of Berkeley and Paris School economists for the period 1980
to 2016. They identify the trough of low growth with the bottom 90 percent in
the United States and Western Europe (the global 50-95 income percentile),
while higher income growth has been appropriated by the Asian middle class and
the global top 1% income group[8].
The affected middle class in the OECD constitutes a lot of
frustrated voters…
The second phase of Shifting Wealth, from 2000
to the 2008 Global Financial Crisis (GFC), saw pervasive convergence of poor
countries largely due to increasingly China-centric growth and higher raw material prices. While oil and metal
producers benefitted, the majority of OECD countries, being net commodity importers, suffered terms of trade losses. Simultaneously,
as a result of reversals in the current account of balances of payment, net
foreign assets positions morphed: China and oil producers extended their net credit whereas the US net foreign debt position bulged. As global trade became increasingly
imbalanced, China became singled out as a currency manipulator and predator. Deindustrialisation
in some OECD countries became wrongly attributed to external deficits. However,
it was not ´Shifting Wealth´ that caused US deficits on its current account. During
the 2000s, current account surpluses of around 100 countries had largely arisen
in response to the US current account deficit – the excess of US investment
over US savings.
As a
result of its external deficits, the US risked losing economic, political and
normative influence on the world stage. In other words, it risked to become a ´normal´ country, frustrating those who claimed its exceptionalism[9]. To be sure, there are some global zero-sum settings. A rebalancing of influence toward China & Co. has seen the relative weight
of the advanced countries diminish; and there are pressures for a redistribution of
the stock of global commons, particular in relation to climate change and
extraction rights for exhaustible resources.
Figure 1: China´s Working-Age Population is
Shrinking
.Source: Source: United Nations, World Population
Prospects: The 2017 Revision
The third phase of
Shifting Wealth has since the 2008 GFC witnessed a reversal of these trends in
the terms of trade as China is transforming its production and trade patterns
toward consumption, away from investment and intermediate GVC trade. As China´s
formerly ´unlimited supply of labour´ has been largely absorbed and its
population is ageing rapidly, and as India´s fertility rate has come down, the
growth of global labour has peaked[10].
China´s working-age population is projected to shrink by 400 million in the 21st
century (see Figure 1). Sub-Saharan Africa and India can numerically offset
these demographic trends for the next couple of decades. Economically, the
offset is much harder. A slowing working-age population will increasingly be
mirrored by a rising middle-class consumer population. This stimulates
´ordinary´ global trade fueled by higher consumption, whereas intermediate
processing trade has started to stagnate (Lemoine and Ünal, 2017)[11].
Asia-driven wage pressures felt in the OECD are probably past, with China´s wages rising
rapidly in both dollar and yuan terms (Figure 2).
Figure 2: China´s
Manufacturing Yuan Wages, 2000-2018
Source: https://tradingeconomics.com/china/wages-in-manufacturing
Longstanding
demographic developments that caused income and wealth inequality will now
change. This is supported by the fact that several trends, which have been
valid for forty years since the entry of post-communist states and emerging
Asian countries into the market-economy organized world economy, have ended. Demographic
prospects have Goodhart and Pradhan (2018) forecast for the coming decades: The
ageing and shrinkage of the world's labour force (outside the Sahel Zone) and
thus a higher share of wages in world income;
the decline in massive outsourcing to China and Eastern Europe, thus
putting an end to price deflation for labour-intensive goods and hence provide
scope for a more restrictive monetary policy in advanced economies, probably
leading to asset price deflation; and the trend reversal in the global
development of factor relations with an increase in the capital ratio in
production and a reduction in returns on capital.
The negative distribution effects of Shifting
Wealth are therefore likely to abate. Protectionist measures by OECD countries
will not only hurt the emerging countries but also OECD countries themselves,
especially if they lead to a global trade war. Cutting off trade is not the
answer: Protectionism hurts those it is supposed to protect. To the contrary, “making
trade work for all” is required[12]:
Compensate the losers, not just with transfers from more progressive taxes.
Active labour market policies, skills upgrading and regional policies (Südekum, 2018, op.cit.) as
distribution tools are important policy tools as well. Rather than see the
“rise of the rest” in terms of the “decline of the west”, policy makers should
recognise that the net gains from increased prosperity in the developing world
can benefit both rich and poor countries alike. Trade unions in the OECD area
will find it easier to negotiate decent wages than they did until recently,
with corresponding benefits for PAYG pension schemes.
[1] OECD (2010), Perspectives on Global
Development 2010: Shifting Wealth, OECD.
[4] Arthur Lewis (1954). "Economic
Development with Unlimited Supplies of Labor". The Manchester School. 22: 139–91. doi:10.1111/j.1467-9957.1954.tb00021.x.
[5] Jens Südekum (2018), „Besser als das Arbeitslosengeld“, Frankfurter
Allgemeine Zeitung, 23 February.
[6] Paul
Krugman (1994), “Does Third World Growth Hurt First
World Prosperity?”, Harvard Business Review, July.
[7] Christoph
Lakner and Branko Milanovic (2013), “Global Income Distribution: From the
Fall of the Berlin Wall to the Great Recession”, World Bank Policy Research
Working Paper 6719
[9] Stephen Cohen and Bradford DeLong (2010), The End of Influence: What Happens When Other Countries Have the Money,
Basic Books.
[10] Charles Goodhart and Manoj Pradhan (2017), “Demographics will reverse three
multi-decade global trends“, BIS Working Paper No. 656, Bank for International
Settlements.
[11] Francoise
Lemoine and Deniz Unal (2017), “China's
Foreign Trade: A “New Normal”, China
& World Economy, 25.2: 1-21. DOI: 10.1111/cwe.12191
