Making Globalization Work for All
IMF News, September 13, 2016
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- Authors: Christine Lagarde
- Published: September 13, 2016
Globalization — the balance sheet
- Real benefits
- Emerging and developing economies have been the prime beneficiaries of economic openness: World Bank figures show trade helped reduce by half the proportion of the global population living in extreme poverty (1990-2010).
- China’s extreme poverty rate fell from 36 percent at the end of the 1990s to 6 percent in 2011.
- Vietnam moved from one of the world’s poorest nations to middle-income status in a single generation; its overall score in the latest OECD survey of 15-year olds was higher than that of France, Germany, the UK, and the US.
- Research suggests trade has roughly doubled the real incomes for a typical household; for the poorest households, trade has raised real incomes by more than 150 percent.
- In the US, workers in export-intensive industries earn a premium perhaps as high as 15 percent over other industries.
- In the European Union, more than 30 million jobs—that is, one in every seven—depend on exports to the rest of the world.
- In Canada, international trade makes up two-thirds of GDP.
- Canada welcomes about a quarter million migrants per year, supporting growth, rejuvenating the workforce, and adding to societal diversity.
- Real side effects
- The integration of China, India, and the former communist countries into the global trading system in the early 1990s effectively doubled the size of the global workforce, putting downward pressure on wages, especially for lower-skilled workers in advanced economies.
- In the US, competition from low-wage countries contributed to a decline in manufacturing employment, alongside a wave of automation.
- Adverse effects have been concentrated in some local labor markets facing deep, long-lasting adjustments.
- Between 1980 and 2007 global capital flows increased more than 25-fold, compared with an eight-fold expansion in global trade—underpinning investment but also increasing risks of financial contagion.
- Growing inequality in wealth, income, and opportunity has contributed to social discontent and perceptions that institutions and tax systems are not delivering fairness; corruption and uncontrolled migration flows add to economic and cultural anxieties.
What can governments do?
- Macroeconomic and growth context
- 2016 is set to be the fifth consecutive year with global GDP growth below 3.7 percent, the average for nearly two decades before the 2008 financial crisis.
- In major advanced economies, incomes for the top 10 percent increased by 40 percent in the past two decades, while incomes at the bottom grew only modestly.
- Policy prescriptions (IMF recommendations and examples)
- Use sound macroeconomic policies and reforms tailored to raise productivity and potential growth; combine structural reforms with fiscal and monetary policy (a three-pronged approach).
- Example: Euro Area countries can lift productivity by lowering barriers to entry in services (including professional services) and stepping up research and development.
- Example: Netherlands in the mid-1990s combined labor tax cuts with major labor and product market reforms, resulting in strong growth.
- Example: Canada is increasing infrastructure investment and transfers to families with children.
- Step up direct support for lower-skilled workers:
- Greater public investment in education, re-training, and facilitating occupational and geographic mobility.
- German apprenticeship system cited as a model; expanding vocational training partnerships recommended for countries such as Canada, France, and the United Kingdom.
- Strengthen social safety nets:
- Provide appropriate unemployment insurance, health benefits, and portable pensions; step up tax and income policies.
- Examples: US could increase the federal minimum wage and expand the earned income tax credit; Nordic countries combine limited job protection with generous unemployment insurance that requires jobseekers to find new positions.
- Boost economic fairness:
- Address lack of vigorous competition where market concentration is rising (banking, pharmaceuticals, social media).
- Clamp down on tax evasion and prevent artificial profit shifting to low-tax locations (IMF working closely with OECD, United Nations, and World Bank).
- Complementary non-economic measures:
- Facilitate equal access to education and health care, reduce ethnic and gender discrimination, and foster greater mobility—policies that are country-specific and socially sensitive.
Step up global cooperation
- Trade dynamics and risks
- For two decades before the 2000’s, global trade regularly grew by 7 percent, or twice the rate of the world economy; today trade growth is below that of the global economy—at about 2 percent.
- There is growing political risk of punitive tariffs or restrictions on trade.
- Trade drives competitive industries, innovation diffusion, and lower consumer prices; example comparisons show many products are significantly cheaper today than in 1971 after adjusting for inflation.
- Example: a three-speed air conditioner advertised at $139.95 in 1971 would come to more than $820 adjusted for inflation; a comparable modern Frigidaire model is $139.99.
- Result: the average American worker today works only about 17 weeks to live at the annual income level of the average worker in 1915.
- New trade opportunities and approaches
- Trade in services already worth $5 trillion a year, or two-thirds of global GDP, but barriers to trade in services are extremely high—equivalent to tariffs of some 30 to 50 percent.
- Proposals to rebuild trade momentum:
- Better communicate trade benefits and pair trade openness with policies that deliver stronger and more equitable growth.
- Explore plurilateral trade agreements among like-minded countries within the WTO framework, open on the same terms to all WTO members.
- Boost trade in digital products by establishing freedom of data flows to realize global e-commerce potential.
Conclusion
- The challenge: make globalization work for all by combining openness with policies that share benefits widely, rebuild trust through fairness, and strengthen global cooperation.
- The IMF will continue using its analytical and financial resources to promote economic openness and collaboration as tools to create a global village on a human scale where people can find a safe and prosperous home.
Speech by Christine Lagarde, Sylvia Ostry Lecture, Toronto, September 13, 2016.