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Thursday,August11,2016

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TowardsaPostGlobalizationWorld

AdvisorPerspectives
BenBernanke
BradDeLongGraspingReality

Britain,Brexit,andaNewEconomicDirection

JohnRossKeyTrendsinGlobalisation
TylerCowenMarginalRevolution

InarecentNewYorkTimesarticle,a
reportervisitedWiganinthenorthof
Englandtotrytounderstandwhy
BritainvotedtoleavetheEuropean
Union.Hespoketoa61yearoldpro
Brexitvoter,aworkeratacanned
foodfactorynamedColinwhose
weeklyincomehadfallenby52%in
thelastthreeyears,from$665(443)
to$318(212).ForColin,thatwas
painful.Stillworse,hetoldthe
newspaper,wasthatthefactoryhad
movedfromstandardfulltime
contractstozerohourcontracts
wherethecompanydecideseachday
howmanyhoursColinisneeded.Itis
basicallyslavelabor,Colintoldthe
Times.Thisdeclineinwagesandlaborrelationsforsemiskilledandunskilledworkersispartly
duetoincreasedcompetitionfromeasternEuropeanworkers.Thereporterintervieweda
PakistaniandaPolishimmigrantinWigan,eachofwhomexpressedstrongviewsinfavorof
restrictingimmigrationtobenefitcurrentresidentsaccesstojobsandsocialservices.Another
interestingreport,avideointheGuardianmadethesamecase,interviewingvotersinseven
differentcitieswhoattributedeconomicandsocialserviceproblemstoimmigrantsfromeastern
Europe.Anotherpowerfulstoryinthe(London)Timesvisitedtheformercoalminingvillageof
GrimethorpeinYorkshiretofindvotersangryaboutthelocalwarehousefirmrecruitingunskilled
laborinPolandtoworkinGrimethorpewhileturningdownlocalresidentswhoappliedforjobs.
Onewomansaidthatonpollingday,shewentaroundthevillageurgingatleast50friendsand
familytoremembertovoteandvoteOut.ThesearenotirrationalvotersasLondon
commentators,wholatelyliketocallthemselvesthecosmopolitanelitesuggest.Votersare
acutelyrationalandawarewhenitcomestoeffectsontheirownlivelihoods.

YanisVaroufakisthoughtsforthepost2008
world

AboutMe

JeffFerry
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2016(4)
August(1)
TowardsaPostGlobalizationWorld<![if
gtemso9...
May(1)
April(1)
March(1)
2015(1)

Asmallbutgrowingnumberof
economistsarecomingtorealizethat
globalizationisitselfthekeypartof
theproblemcausingeconomic
stagnationincertainnations.While
globalizationcaninverybroadterms
bedescribedasaprocessthatmakes
theworldeconomymoreefficientby
shiftingproductiontolowcostnations,
itsbynomeansclearthatsuch
efficiencyleadstohighergrowthrates
forallnations.Infact,lookingatFigure1,youcanseethatgrowthratesinthe21stcenturyare
lowerthantheywereinthe19902000periodforeverymajornationinthetable,withthe
exceptionofSwitzerland.(TheWorldBankdataisbasedonGDPperpersonadjustedfor
purchasingpowerparity,soastomakeinternationalcomparisonsfair.)Globalizationas
implementedsince2000ishighlyadvantageoustothoseeconomiesthatwereproperlyprepared
toexploittheopportunity,buthighlydisadvantageoustothoseeconomiesthatwerenotprepared,
fortworeasons:Thehighwagelosersfacegrowingcompetitionfromlowwagecompetitors,and
theireconomieswereorientedtowardsmeetingdomesticdemandratherthaninternational
demand.ThoselosershavebecometheturkeysattheglobalizationChristmasdinner.Three
majoreconomiesfitthatdescriptionwell:theU.S.,theU.K.,andFrance.Toputitanotherway:
youdontjointhePremierLeaguewithoutastrategy.Or:thosewhofailtoplanareplanningto
fail.

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Figure1showsthattheU.S.lost1.3percentagepointsofannualgrowthinthe21stcenturyas
comparedtothe19902000period.IntheU.K.thelosswas1pointandinFrance1.2points.
Bearinginmindthepowerofcompoundgrowth,thesearesignificantandsubstantiallossesin
nationalincomethataddupovertime.Theyimpactthoseinthelowerportionsoftheincome
distributionfarmorethanthoseintheupper.Thecriticalchallengeforthosethreeeconomiesis
torestoregrowthto20thcenturylevels.Ibelievethatsachievable.Onehassimplytolearnfrom
thecountriesthathavebenefitedfromglobalization.

Figure1:MajorEconomyGrowthBefore&AfterGlobalizationAcceleration

WorldClassandWorldScaleIndustries
Inaglobalizedworld,industriestendtoconcentrateinfewercountrieswithlargerproduction
facilities.Wehaveseenthistrendinautomobilesforsome40years.Afteritssuccessinautos,
Japanwentontoachievealargepositioninsemiconductormanufacture.Asaresult,
semiconductorproductionintheU.S.begantodecline.(Thepresentwriterworkedfortheonly
U.S.companytobuildanewgreenfieldsemiconductorfabricationfacilityinSiliconValleyinthe
21stcentury,InfineraCorporation.)Globalizationtrulytookoffaroundtheyear2000inthewake
oftwodevelopments:ChinasaccessiontotheWorldTradeOrganization,andtheseriesof
eventsfromtheMaastrichtTreatyof1992,totheentryoflowincomeeasternEuropean
economiesintotheEU,andfinallythecreationoftheEurozonein1999.Eventhoughitdidnot
jointheeuro,BritainwasimpactedbyEUdevelopments,throughthefreemovementofEU
citizensandfrominvestmentstrategiesbasedonageneralbeliefthattheEuropeaneconomy
washeadedformuchtighterintegrationthaneverbefore.
Theresultwasanunprecedentedmigrationofproduction,andlatelyservices,tolargerfacilities
infewercountries.Thesmartphoneisoftendescribedasthedefiningconsumerproductofthe
21stcentury.Ingeneral,thesmartphoneinyourpocketconsistsofchipsbuiltinJapan,Korea,
andTaiwan,assembledontoacircuitcardinChina,andcoveredwithalayerofhardenedglass
madeinChina.ItmaybetruethatthesoftwarerunningthesmartphonewaswritteninCupertino,
California,andonekeychipwasdesignedinCambridge,England,butthosefunctionsinvolve
far,farfewerjobsthantheproductionjobsinAsia.Anotherexample:theInternetisadefining
institutionofthe21stcentury.Halfacenturyago,weallhadtomakedowithtelephones.In
Britain,thosephonesweremanufacturedinBritainandcommunicatedoveranetworkof
switchesdesignedandbuiltinBritainbyBritishworkers.Today,theInternetinBritainconsistsof
anetworkofswitches,routers,andopticalsystems,largelydesignedintheU.S.butbuiltin
China,Malaysia,Thailand,andSingapore.Increasingly,thosenetworkelementsarenotjust
manufactured,butdesignedinChinatoo.
Whydoesthismatter,somewillprotest.IfBritishindustrygivesuponelectronics,companieswill
surelybefoundedandjobscreatedinotherindustries.Unfortunately,thisarchaicpieceof
homespuneconomicwisdom(sometimescalledthetheoryofcomparativeadvantage)doesnot
applytoour21stcenturyworld.AsMichaelSpencehaswritten:manyjobopportunitiesinthe
UnitedStatesareshiftingawayfromthesectorsthatareexperiencingthemostgrowthandto
thosethatareexperiencingless.(1)ThisblogreliespartlyontheanalysisofProfessorSpence,
whowontheNobelPrizeforEconomicsin2001.HoweverIamapplyingitinthisarticletoBritain,
becauseIthinkBritainistodaybetterplacedthantheU.S.todevelopapostglobalization
economicstrategy.
Figure2showstheevolutionofemploymentinthreekeysectorsinBritainsince1998.Inthelast
18years,themanufacturingsectorhaslost30%ofitsemployment,whilethehealth,socialwork,
educationandpublicadministrationsectors(letscallitHSWEPA)havegained42%or2.75
millionjobs.Theproblemfortheeconomyisthatmanufacturingjobsarehigherpaidthan
HSWEPAjobs,andmanufacturingpaytendstogrowatfasterrates.Figure3showstherecent
averageweeklyearningsofeachsector.Thedifferentialbetweenthetwosectorsisabout160a
week.Thesearelargenumbers:inthose18years,theBritisheconomygainedabout5million
newjobs,butmorethanhalfofthemwereintherelativelylowpaid,lowpaygrowthHSWEPA
sectors.Itlost1.3millionjobsinthehigherpaid,highgrowthmanufacturingsector.Itsalsoclear
thattheinformation&communicationandfinance&insurancesectorsgrewrapidly(by24%),but
those482,000newjobsaresimplynotenoughtomakeaseriousdentinthenationaltrend
towardslowerpaidjobs.

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Figure2:Publicsectorjobssoarwhilemanufacturingjobsdecline

Figure3:UK19982015:aneconomymovingstronglytorelativelylowwageemployment

Publiccommentators,includingpoliticians,wavetheirflagsformanyissueswhicharesecondary
tothemainissue,whichisIbelievethisquestionoftheindustryandemploymentcompositionof
theeconomy.MuchhasbeenwrittenaboutproductivityandwhyBritainslaborproductivity
growthhasremainedsolow.Itisaresultofthismassiveshiftoflaborfromhighproductivity
growthemployment(mainlymanufacturing)tolowproductivitygrowthemployment.Andtheshift
continues.Commentatorsalsofretabouttheslowrecoveryfromthe2008financialcrisis.Inspite
ofrecovery,manufacturingemploymenthasbeenflatsince2008,anunprecedented
phenomenoninaneconomicrecovery.Manufacturingcontinuestomovetothosenationsthat
haveestablishedthemselvesasleadersinthemostimportantmanufacturingsectors.Howcan
Britainenjoyastrongeconomicrecoverywhenthemostvaluableandthemostprocyclical
sectorisinseculardeclinebecauseitispackingitsbagsandheadingtoAsia?
IndustrialStrategy
Sowhatistobedone?First,threeobservations:first,toexpresssuchviewsisnotracistor
isolationist.UnlikepresidentialcandidateDonaldTrump,Iamaninternationalist.Ibelievethe
U.S.andtheU.K.playvitalrolesinmaintainingworldpeace,andmustcontinuetodoso.ButI
believetheycanonlycontinuetodosofromapositionofeconomicstrength,notweakness.
Secondly,withinanationaleconomy,economicgrowthismoreimportantthanredistribution.
Redistributionisseverelylimitedinaneconomythatisonlygrowingby1%ayear.Voterswill
rebelagainsttaxincreases.Thesocialservices(asorepointwithproBrexitvoters)cannotbe
fundedmoreaggressivelythantheyalreadyare,becausethenationalincomepotisnotgrowing
fastenough.Ontheotherhand,moregrowthwillmakemoreredistributionpossible.Thirdly,

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growthcannotbeachievedsimplybyinvestingininfrastructureoreducation.Thesepoliciesare
valuable,buttheywillnotbythemselvesproducetheprofitableindustriesandhighpayingjobs
thatareessentialtosucceedinginapostglobalizationworld.
OneglanceatFigure4issufficienttoshowthattheoutstandingeconomicsuccessstoryofthe
last40yearshasbeenSingapore.UnderLeeKuanYewsleadership(19651990),Singapore
rosetobecomethenumberonenationintheworldinpercapitalivingstandards,asmeasured
bytheWorldBank.Thisisabreathtakingachievementforacountrysodeprivedofnatural
resourcesitneedstoimportwater.Koreaisalsoclimbingsteadilyuptheeconomicgrowthleague
table,fromapositionofabjectpovertyinthe1950s.Withapopulationof50million,itrecently
surpassedSpainandItalyinpercapitalivingstandards.ThesocalledAsianTigers(Singapore,
Korea,HongKong,Taiwan)haverecentlybeenjoinedbyChina,andtoalesserextentother
Asiancountries.Allarepursuingvariationsofthestrategyofexportledgrowththatwasinvented
afterWWIIbyJapan.ThemostsuccessfulEuropeaneconomies,suchasGermanyand
Switzerland,havealsopursuedexportledgrowthstrategies,notsomuchasaconscious
strategicdecisionasinAsia,butasareactiontothepressuresofthecompetitivelandscapethey
foundinEuropewhentheyfirstbegantoindustrialize.

Figure4:SingaporeandHongKongovertakeUSAinreallivingstandards(Source:WorldBank)

Britainneedsanindustrialstrategythatidentifiesandthentargetssectorswhereitcanbuild
worldwideleadership.Thisneedstobeapublicprivatepartnership,butitmustnotinvolvethe
industriesofthepast(coal,steel,etc.)ashaveallindustrialpoliciesforthelast100years.Itmust
identifysectorswhereBritainissmalltodaybuthasthepotentialtobeaglobalplayerbased
perhapsonmidsizedcompanieswhohaveestablishedauniquetechnologyorotheradvantage.
Itshouldinvolveprivatebusinesspeoplenotfromtheworldofthestockmarketbutwhohave
demonstratedlongtermvisionandpersistencepeoplelikeRichardBransonandJamesDyson.
Theirreputationsshouldbehitchedtothesuccessofthestrategy,becausetodaytheir
reputationsaremoreimportanttothemthanmoney.Itshouldbebackedupwithpublic
investmentfundstoinvestintechnologyandotherpotentialcompetitivedifferentiators,while
enablingprivatecompaniestoinvestandbuildaglobalposition.TheU.S.becametheleaderin
designingtheInternet,andChinainbuildingtheInternet,throughmultibilliondollargovernment
investment.Focus,persistence,andscalematter.CountrieslikeKorea,Switzerland,Sweden,
Singaporehaveshownthatfromarelativelymodestsize,onecanbuildworldclasspositions.
Throughaformofthemultipliereffect,theseindustriesthenhaveanoutsizeimpactontheentire
nationaleconomy.
Butpolicymakersshouldbeclearonthegoal:itisnotproliferatinglowwage,slavelaborjobs
voterstoldusonJune23rdthatisnotwhattheywant.Norisitcreatinghighprofitcompanieslike
ApplethatareincentivizedtomovethebulkoftheirjobstoAsia.Thegoalistocreatehighwage,
highproductivitygrowthjobswithinBritain.InhisarticleontheU.S.situation,ProfessorSpence
calledfor:anagreementthatrestoringrewardingemploymentopportunitiesforafullspectrum
ofAmericansshouldbeafundamentalgoal.Companiesshouldbeincentivized,i.e.rewarded,
forhowwelltheymeetthatgoal.
Theyshouldalsobedisincentivizedfromunderminingthatgoal.Partofincreasingnational
incomeandhighwagejobsisavoidingthereductionofwages.Anexample:itwasrecently

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reportedthatIBMUKhasaconfidentialgoalofmoving80%ofitsUKjobstoIndia.(IBMhas
neitherconfirmednordeniedthisreport.)IBMslogicisobviousthiswillcutcostsandraise
profitabilityatthestrugglingcomputercompany.NotonlyareIndianengineerslesscostlythan
British(orAmerican)engineerstheyareingeneralhighlyqualified.However,thispolicyis
inimicaltoBritainseconomicgrowth.Incentivesneedtobeputinplacethatfavorcompanies
employingBritishengineersforBritishwork.SomewillprotestthatEUrulesandWTOrulesforbid
that.WelltheEUisabouttobecomehistory,andasfortheWTO,SingaporeandKoreahave
practicedsuchpoliciesfordecadesandtheyaremembersingoodstandingoftheWTO.Henry
HigginsdictumonEdwardiansocietyapplieswelltointernationalrelations:itisnotwhatyoudo
thatmatters,buthowwellyoupronounceit.
AsindustrialstrategyidentifiesindustrieswhereBritaincanachieveworldleadership,controls
andincentivesneedtobeputinplacetoenablethoseindustriestogrowontheBritishIsles,until
theyachievethenecessarycriticalmass.Iwouldnotcallthisprotectionism.Iwouldcallthispost
globalizationeconomicpolicy.Singaporeloudlysupportsglobalizationwhileignoringthehalf
centuryofSingaporeaneconomicpolicythatfavorsdomesticcompanies.Britainshoulddothe
same.ToquoteProfessorSpenceonceagain:Conditioningaccesstothedomesticmarketon
domesticproductionisaformofprotectionismandawaytolimitthemovementoutofthecountry
ofjobsandofvalueaddedcomponentsinthesupplychain.Thisismorecommonthanmightbe
supposed.
ThereasonwhythesepolicieshavenotbeenpursuedintheU.S.ortheU.K.forthelast100
yearsispartlybecausesocalledfreetradewassuccessfulinthelastcentury,butalsobecause
bothcountrieshavelarge,highlyinfluentialfinancesectorsthatprofitgreatlyfromtradeand
crossborderinvestmentandacquisitionactivity.IntheU.S.,Ibelievethesituationisevenworse.
Bypursuinganantiemploymentstrategy(i.e.exportingjobstoAsia),theU.S.techindustryhas
cutitselfofffromitsmostimportantsourceofsupport,itsownemployeebase.Theindustrythen
hadnochoicebuttoinvestheavilyinlobbying,sincevotershavelittleinterestinthegoalsofthe
techindustry.Thisisalreadybackfiring,asvotersturnedthisyeartoDonaldTrumpandBernie
Sanders,becausetheysawthatthebenefitsofAmericasmuchvauntedtechnologyrevolution
wereaccruingtoatinysliverofthepopulation.
Afteracenturyofrelativeindustrialdecline,and40yearsofabsolutedeclineinkey
manufacturingsectors,theBritishpeoplearereadytoembraceaneweconomicpolicy,toadmit
ineffectthatthepolicyofahighlydiversifiedeconomygovernedbytheshorttermincentivesof
thestockmarketisnolongersuitableforaglobalizedworld.TheresaMayhasalreadyindicated
thatsheisopentosomeoftheseideas.SomewillsayBritaincannotdoit,becausefree
enterprisecultureistoodeeplyembeddedinthenationalpsyche.Yetalargeandgrowing
numberofAsiannationshavemadethattransition.Chinasculturewasforsixcenturiesoneof
bureaucraticossificationandrelativebackwardness.UnderDeng,Chinashamelesslystoleideas
fromJapanandSingapore.Oncurrenttrends,itissettobecometheworldslargesteconomyin
tenyears.Practicalrealitieshaveawayofmakinguschangewhatonceseemedimmutable.The
questionishowmuchmoredecline,howmuchmorepoverty,dowehavetoendurebeforewe
acknowledgethatthesolutionwasthereallthetime,staringusinthefacefromitsperchonthe
shoresofthePacific?
Notes
(1)Spence,Michael,GlobalizationandUnemployment,TheDownsideofIntegratingMarkets,
ForeignAffairs,July/August2011.
PostedbyJeffFerryat11:54AM

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