As it is, the forces lined up against market opening are increasing in strength. The Doha round of the World Trade Organisation (WTO) talks is virtually comatose, and the recent first round of strategic economic talks between the US and China left both sides mostly empty-handed, despite both negotiating teams being led by cabinet-level heavyweights. The US side was led by Treasury Secretary Henry Paulson and on the Chinese side, the team was headed by Vice-Premier Wu Yi.

The talks gained urgency from the results of the recent US midterm elections. With the Democratic Party now in control of Congress, the issues of outsourcing and employment will be ratcheted up the American agenda, reflecting fears that more and more of the lower value-added jobs will be lost to emerging economies, particularly China. Browbeating China to revalue the Yuan seems to be the preferred way of reducing the trade deficit. This should have the effect of making Chinese exports less enticingly cheap to Americans, at the same time boosting China's purchasing power and thus its ability to buy more American goods. At least, that's what the Americans think; the Chinese think the Americans have too simplistic a view of economic forces.

Nonetheless, the Americans are beginning to reach the limits of tolerance towards the job-security and social inequalities produced by globalisation. Big global corporations (and their owners) are benefiting disproportionately, while the jobs and wages of the ordinary Americans are exposed to competition from China, India and the elsewhere. It shouldn't surprise us that protectionist pressures will grow.

China of course, has benefited a lot from trade opportunities. At the same time, inequality has widened too, and dramatically. The Straits Times recently reported that:

While World Bank figures show that more than 400 million people in China have been brought out of poverty since the 1970s, a new report by the bank shows that the poorest 10 percent of China's 1.3 billion are still hard hit.

The real income of this group fell by 2.4 per cent from 2001 to 2003, a period when the economy was growing by nearly 10 percent a year, it said last month.

During the same period, the richest 10 per cent saw a spike of over 16 percent in salaries.

-- Straits Times, 19 Dec 2006, 
China's middle class gets the jitters

The effect of rising incomes is typically inflation in the cost of goods and services.

Today, second-tier Chinese cities like Shenzhen, Shenyang and Wuhan are more expensive than other major cities in Asia like Kuala Lumpur, Bangkok and Mumbai, a new survey by global human resources organization ECA International has found.

-- ibid

Since not everybody in those cities saw their incomes rise, the inflation must hurt a significant number of people.

But more than that, the new rich and the remnants of the old Communist system are using their economic and political power to wrest even more resources, e.g. land, from the lower strata of Chinese society. This naturally leads to much anger on the part of the losers, thus explaining the 74,000 public protests recorded in 2004 for example. Some of these brought out tens of thousands of demonstrators and even led to pitched battles with police and paramilitary forces, with shots being fired.

From Beijing's perspective, while globalisation has created a sizeable middle class, and lifted even more out of extreme poverty, the rich have gotten richer much faster. The tensions from the resulting inequality create their own social and political risks. To avoid a social and political explosion, the government can only hope that wealth trickles down faster, and the last thing they need is for the Americans to tell them that their exports should be crimped, either directly through quotas or indirectly through currency revaluation. That trickling down is a safety valve for Beijing; to turn off the export spigot may be political suicide.

Thus, both the US and China -- and many other countries -- are suffering from the tendency of globalisation to widen income gaps, albeit in different ways. In rich countries, it's the bottom half that suffers, creating social tensions. In developing countries, it's the richer or politically-connected ones that benefit, but the gap still creates social tensions even as the national average GNP looks better and better year after year.

Yet, we have no well-thought-out solution to the "gap" problem anywhere. One day, we may just look back on this and rue our folly, for it may well be that globalisation can only go so far without addressing its downside.

The rough outline of what is needed is well-known. As Renmin University development expert Kang Xiaoguang told the Straits Times (ibid), "You can't solve the problem of income inequality and rising costs just by relying on the market system. The government should play a role."

Indeed, markets are never perfect. Starting conditions are never equal. Some people are better connected or better-educated than others. Through structural inefficiencies of the system, they can capture assets and engage in anti-competitive behaviour. Nor are all costs always factored in: environmental costs and some social costs (e.g. to the health of workers) are often ignored by those who incur these costs, thus transferring them to others, perhaps to the state, to workers' families or even later generations.

The notion that the market will eventually level everybody up is just wishful thinking. As Kang said, governments must play a role to counter-balance the failings of the market.

We don't have to go very far back in history to see some examples of what happens when governments play too small a role. The mid 1800s saw a booming economy in Britain, but the picture we now have of the time is one of satanic mills and Dickensian horrors. The US economy was booming through the late 1800s and into the early 1900s, but it's a period remembered as that of robber barons. In both countries, factory workers were dreadfully treated, working 14-hour days with no concern for industrial safety and farm workers no better off. If this bears a striking resemblance to the way Chinese factory and farm workers are treated today, it is surely no coincidence.

The US experience of unregulated markets led to a speculative frenzy that eventually imploded in the famous 1929 stock market crash. Not only did the resulting economic depression spread contagiously from one country to another, destituting hundreds of millions of people around the world -- even distant Singapore took a body blow to our economy -- what was worse was that the world economy couldn't boot itself up again; it settled into a funk and stayed there.

It required a massive rethink of the role of government to find a way out of the mess. Much of what we now understand of the social obligations of government -- social welfare, health support, laws regulating working conditions -- came out of that bitter experience. As did the idea of state-led demand creation at the bottom of an economic cycle.

A whole generation learnt from it. When Europe was devastated in the Second World War -- itself an indirect result of the Great Depression -- the Americans knew that it would require enormous aid in the form of the Marshall Plan to rebuild its economy, lest political chaos result.

But a more instructive example to the present problem of globally integrating economies is the building of the European Union. In the half century since 1957, what were once discrete national markets were gradually opened up to each other. It was a kind of globalisation on a regional scale.

At every stage of the way though, European leaders were faced with the task of integrating economies at different levels of development, always acutely aware of the disruptions that would result. Their response was threefold: firstly, to set some common standards, so that all countries would work towards these standards in an attempt to harmonise their economies, secondly, to build supranational institutions so that decisions could be taken that would apply to all, and thirdly, to have in place some program of wealth transfers from the richer regions to the poorer regions.

The development of supra-national institutions ensured that, as markets integrated, so too did the regulators and policies integrate. The expansion of the ambit of supra-national regulators grew in step with the boundaries of the market. Furthermore, while each national government remained responsible for social equity within its own borders, there was a mechanism for social equity across borders through development aid -- more on this later.

No doubt, many European initiatives are controversial, even within Europe itself, e.g. the wastefulness and protectionism of the Common Agricultural Policy, or the migration effects of open borders, but on the whole the European project is a shining example of success, raising standards of living for hundreds of millions, not to mention ensuring that there should never again be war between the member countries of the European Union -- the founding motivation for modern Europe.

It is tempting to say that national governments should the ones sanding down the rough edges of globalised capitalism, but in fact they may be poorly placed to do so. Where are they going to get the resources to fund sufficient social programs if governments are competing against each other to lower taxes? How do they live up to their responsibilities if they dare not insist on better working conditions and wages for fear of investors and employers moving out of their jurisdiction to elsewhere with a more forgiving government?

Which government is going to make the first bold move to preempt climate change, when it fears that the economic costs of doing so will put its country at a disadvantage?

That's why there is a case for including these subjects -- labour conditions, environmental standards, health provisions, etc -- in the agenda of globalisation. If we don't, the dog-eat-dog competition that is produced may lead to utterly vulgar social conditions. There will tend to be, among competing governments, a race to the bottom in terms of tax levels, social and environmental regulation.

But will negotiations between governments be enough to produce these harmonisation points? So far, the experience has been discouraging. Trying to negotiate anything among the 149 members (at last count) of the WTO must be a recipe for madness.

Europe is often laughed at by cheerleaders of American-style capitalism as a sluggish economy. But that's only using one measure -- GNP growth rates. Surely, that measure is not everything. Consciously or not, the Europeans have sacrificed faster growth [1] for a more comprehensive social safety net, and one can argue that in terms of human happiness, it is what people consider a good trade-off.

Furthermore, not only do the European Union (EU) countries tend to have better welfare within each country aimed at narrowing income disparities, the EU has, over the decades, directed development aid to poorer regions from the richer countries. This serves the purpose of narrowing inter-regional income disparities.

The EU budget is funded by various built-in mechanisms, e.g. through import duties, a share of national value-added taxes (VAT) based on pre-agreed formulae and huge dollops of cash transferred from member governments, again based on pre-agreed formulae related to a member country's Gross National Income. The effective result is that richer countries contribute more to the EU budget than poorer countries.

Expenditure-wise, 45% of the EU's annual budget is spent on the Common Agricultural Policy, a form of farm support. Countries with larger agricultural sectors -- usually the poorer ones [2] -- thus tend to benefit disproportionately.

Another 30% of the EU budget is devoted to "regional policy", which is a form of direct aid to less developed regions, including urban areas with declining industries.

Thus, the general pattern involves a significant degree of wealth transfer from the more prosperous parts of Europe to the poorer parts, thus acting as a balancing mechanism against the tendency of merged markets to create wide disparities of income.

It looks like a good example to learn from when faced with the stresses and strains of globalisation, but how do we reproduce this rather successful scheme on a global scale without some kind of institutionalized authority at a supra-national level?

The Europeans understood a simple principle that we, in our present love affair with globalisation, have not: that to counter-balance the excesses of the imperfect market, there should be governmental institutions whose reach is as wide as the market. The EU has a huge bureaucracy based in Brussels (some say too huge), various market regulatory commissions, judicial courts for dispute resolution and a European Parliament in Strasbourg (quite toothless though), among other bodies.

Does this mean that for globalisation to succeed without governments racing to the bottom, without tearing apart our social fabric in various countries, we'll need similar supra-national institutions? A kind of world government?

If that is unthinkable, but yet unrestrained globalisation brings about unbearable social and political costs, then maybe we'll just have to keep an open mind as to how far we want globalisation to go.

© Yawning Bread