[Noah Smith] The left and right stumble on globalization

In a recent article, I presented solid evidence that the global economy has been doing very well for the world’s poor during the past 25 to 35 years. China’s growth has been stellar, India’s has been solid and many smaller poor countries got a boost from demand for natural resources. Now developing-world growth has dipped, thanks to the China slowdown and the resulting slump in commodity prices. But the gains the poor countries made are unlikely to be reversed. And those decades of stellar growth should teach us some big, important lessons about economic policy and ideology.

Basically, the events of 1980 through 2015 call into question some of the bedrock ideas of both the left and the right.

First, let’s review the most important graph in the world. By now, you’ve probably all seen economist Branko Milanovic’s “elephant graph,” but it’s good to have in front of us as we consider global growth:

If you want to play with the data that went into this graph, Milanovic’s frequent coauthor Christopher Lakner has it at his website. The elephant graph shows that in recent decades, the global poor and the rich did extremely well, while the rich-country middle classes suffered and stagnated.

This severely challenges two of the left’s bedrock ideas about global capitalism. First, there is a lingering idea on the left that the global economy is rigged to benefit rich countries at the expense of poor ones -- in other words, that capitalism is just a new form of the imperialism that prevailed before the World Wars.

That idea might have seemed plausible in the 1950s and 1960s, when newly liberated colonies were failing to catch up to their former imperial masters in Europe and Japan. But since about 1990, the relationship has reversed. Rich country growth has slowed, and the developing world has zoomed ahead. Milanovic’s graph shows that, and it’s also made evident by the fall in global inequality.

Economists have long predicted this sort of convergence. Observing how U.S. states tended to have more similar income levels over time, economists such as Robert Solow built models in which fast catch-up growth eventually leads to a more equal world. But the stubborn failure of global incomes to converge defied the theory, and economists were forced to accept the idea that countries’ differing institutions created differences in their long-run economic potential. That was a somewhat unsatisfying explanation, because it relied on the influence of unobservable factors. The leftist alternative -- that the global capitalist game was rigged -- couldn’t be easily dismissed.

But the last few decades show that global convergence is finally happening. Maybe all it took was a period of postimperial institutional hangover for the poor countries to get in gear. After China’s Great Leap Forward and Cultural Revolution, India’s License Raj and other misguided attempts at finding an alternative route to development, poor countries finally decided to open themselves to trade, to promote infrastructure and property rights, and to adopt other policies focused on building a robust capitalist economy. Whatever the reason, it’s no longer easy for people on the left to claim that poor countries are getting the short end of the globalization stick.

The elephant graph also calls into question another of the left’s big ideas. Even as inequality across the globe has fallen, it has risen within nations, including in rich countries like the U.S. Most on the left attribute this rise of in-country inequality to deliberate policy choices -- the weakening of unions, a finance-focused industrial policy, tax loopholes and deregulated markets.

But when we look across the globe, a different story suggests itself. Inequality has risen not just in the U.S., but in more egalitarian places like Europe and Japan. A global phenomenon implies a global cause separate from U.S. policies.

The elephant graph suggests an explanation. Perhaps the rich -- both in the developed and the developing world -- got rich by shifting production from Europe, Japan and the U.S. to China, India and Southeast Asia. The end of the Cold War brought a huge amount of cheap labor onto the global market, and the internet made it easier to outsource.

Those two developments made labor much less scarce relative to capital. Economic theory generally predicts that this will tend to raise capital’s share of income -- in other words, the rich will get richer. But it’s also consistent with strong growth in poor countries, which are the beneficiaries of offshoring. If this is true, then the left’s policy program -- stronger unions, less financialization -- will have less effect on inequality than many expect. It also implies that the sharp rise in Chinese wages will put more bargaining power back into the hands of rich-country working classes, which would be a welcome development.

But the story of global growth doesn’t just challenge ideas on the left. It also calls into question one of the right’s strongest convictions -- that trade is beneficial to all. Looking at the rich-world middle class on the elephant graph, we have to wonder if this was wrong.

An even stronger challenge to the blithe optimism of libertarians comes from the recent work of economists David Autor, David Dorn and Gordon Hanson, who found that Chinese competition severely damaged much of the American working class. That’s consistent with the story in the elephant graph, and it pokes a big hole in the right’s free-trade boosterism.

So the stories routinely told by intellectuals on both the left and the right have trouble explaining the fruits and failings of globalization. We need new ideas to fit the new facts, instead of relying on our old comfortable shibboleths.

By Noah Smith

Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion. -- Ed.

(Bloomberg)