Globalisation threatened by protectionism

Based on article from The Economist, 20 January 2007

With most games there are winners and losers. It has been argued that with globalisation there can just be winners - it can be a zero sum game. However, globalisation has created some losers too, which explains the protectionist overtones that seem to threaten the engine of globalisation. Nevertheless, this gives no reason to adopt protectionist policies as I will explain below.

But first, let us look at the background of the justification used for adopting protectionism. Since 2001 in the US, real wages for the ordinary person have remained fairly stagnant where they are growing less than half as fast as productivity. On the contrary, the wages of the richest, such as business executives and managers have seen their wages soar from 40 times larger than the average wage 20 years ago to 110 times bigger than the average wage today. This sense of inequality, that there are very few winners and lots of losers leads to many people feeling outplayed by the game of globalisation.

However, there have been many successes of this global capitalism where the world has seen a "mix of technology and economic integration". The past five years have seen the world economy grow at its fastest pace since the 1970s and also the fact that on general the whole world is better off in terms of the standard of living.

But one can argue that these benefits do not fully filter through to the ordinary working class people in the UK and the US. In particular, Morgan Stanley, has pointed out that the US has adopted 27 anti-China legislations since 2005 showing how much this international competition is disliked in the US, which arguably reflects the views of many Western nation. With barriers of trade being placed all over, the almost complete failure of the Doha trade talks reflects the world's reluctance to uphold the importance of free trade.

Yes, trade does have its losers which in turn place pressure on governments to introduce protectionist policies which would bring about short term benefits as a result of being shielded from foreign competition. However, as Milton Friedman argued, it would only hasten the decline of these entities that demand protection as the slowly lose hold of competitiveness to the ever innovating countries such as China and India.

One of the methods which can be used to ease the pain of inequality is through the redistribution of income through taxes. However, the US has clearly shown the world that an economy driven dynamically, influenced by market forces, and not by equality, is one that generates overall prosperity in the long run. Socialist governments, particularly those of the Soviet Union in the past felt the need to redistribute profits, which takes away the incentive to private investment and innovation, which are so vital to increasing the productive capacity of the economy. Thus, an economy based on free market principles is one that will be more likely to succeed, i.e. one that accepts the consequences of globalisation, which can fuel healthy competition that increases the quality of goods and services provided by private enterprises as they strive to be the best in the market.

Hence, instead of redistributing incomes, nations should instead help to move jobs and make the labour market more flexible so that comparative advantage shifts from one activity to another. This is improving supply side, and in particular the labour market so that people are more occupationally mobile so that in the event that they lose their jobs, will be able to re-train relatively easily and move into higher value-added jobs.

Links:
Rich man, poor man - The Economist