Bernard Hickey: Global economy slip sliding away
Like any building with concrete cancer, trust in a big idea can seem very solid right up until the moment of collapse.
Trust among the general populace in globalisation has been ebbing away over the past 10 years or so since the Global Financial Crisis, but it never seemed like it was about to collapse – until now.
The election of Donald Trump in the US appears to have been that moment of collapse. Suddenly, it seems, everyone is questioning everything about a 30-year long trend towards ever-freer movement of goods, services, capital and people around an increasingly interconnected world. Trump’s first act as US President will be to tear up the next big act of globalisation – the Trans-Pacific Partnership.
This modern version of globalisation kicked off in the mid-1980s with the reforms unleashed by British PM Margaret Thatcher and the end of communism in 1989. New Zealand’s version was unleashed by the Lange-Douglas Government of 1984 and it has been full steam ahead ever since.
Both sides of politics and the broad populace essentially agreed on a social contract. It goes something like this: controls on imports and exports of goods, services and capital would be removed and currencies would be freed to float. This would generate an extra boost to economic growth and the benefits would be broadly shared around in the form of higher incomes, cheaper stuff and more vibrant and diverse societies.
The idea was the inevitable disruptions would be followed by stability and a better life.
The whole idea got turbo-charged in 2001 when China joined the World Trade Organisation and became the factory of the world. It got some nitrous oxide from our point of view with the 2008 Free Trade Agreement, although New Zealand was not alone in feeling an acceleration as China and North Asia became a lot more enmeshed in the global capital flows, tourism and migration.
The big assumption underpinning this social contract is that most people would be broadly better off because of these massive changes, and the few who weren’t better off would be somehow protected or cushioned or compensated and it would all work out better in the end.
This question of who would benefit from stronger economic growth is a crucial one because it has now been long enough to know the answer.
A chart on incomes between 1988 and 2008 produced by World Bank Economist Branko Milanovic shows real incomes for poor people in emerging countries such as China rose 60-80 per cent, as did incomes for the richest 2 per cent of the globe.
However, the poor-to-middle income groups of America and Europe have not benefited much, or in some cases went backwards. Milanovic calculates more than half of the actual gains in dollar terms (not percentage terms) of the economic growth went to the richest 5 per cent of the world’s population.
The assumption at the beginning of globalisation was a rising tide would lift all boats. That didn’t happen.
The world is demonstrably better off overall but big chunks of the population in the developed democracies of the world missed out.
Now these people are revolting. The GFC was the first sign that something was wrong in the bowels of the globalisation process and the reaction of central banks and Governments simply confirmed the unfairness and flaws in the system for people who were already sceptical.
Bankers were bailed out and given bonuses while benefits for globalisation’s losers were cut.
New Zealand has done a much better job of cushioning the blows and spreading the benefits than America in particular, or even Britain and Europe.
But the same erosion of trust is happening here, even if there is no collapse yet. New Zealand First’s poll ratings are an obvious sign, along with the changing stances of other politicians closer to the centre who can sense the cracks appearing.
The default position for many now is to distrust apparently rootless multinational companies who have played countries off against each other to reduce their tax bills and generate ever-bigger profits for their equally rootless investors.
Prime Minister John Key has his ear close to the ground and this week he told Facebook founder Mark Zuckerberg to win back the trust of the globalised masses by paying its taxes.
“I think if they don’t, the same people who are its users will wake up one day and say, ‘Why do I have to pay my tax if this company is not going to?'” Key said.
It’s a bit late for that now. People are wide awake. Key hopes the social contract supporting globalisation here can be repaired with a few tweaks and some good PR.
The trouble is globalisation is global. It only works when everyone globally believes in that social contract, and that is broken.
President-elect Trump is now acting to tear up that contract. Brexit voters did the same. Italy, France and Germany are set for elections in the next year that will also be votes of confidence over the European version of globalisation.
For many who benefited, this shock seemed to come out of the clear blue sky, but it shouldn’t have. The pressure has been building for years.